CHAPTER XI

CORPORATION-CASES

CASE NO. 1

Republic of the Philippines

SUPREME COURT
Manila

SECOND DIVISION

G.R. No. 168266 March 15, 2010

CARGILL, INC., Petitioner,

vs.
INTRA STRATA ASSURANCE CORPORATION, Respondent.

DECISION

CARPIO, J.:

The Case

This petition for review1 assails the 26 May 2005 Decision2 of the Court of Appeals in CA-G.R.
CV No. 48447.

The Facts

Petitioner Cargill, Inc. (petitioner) is a corporation organized and existing under the laws of the
State of Delaware, United States of America. Petitioner and Northern Mindanao Corporation
(NMC) executed a contract dated 16 August 1989 whereby NMC agreed to sell to petitioner
20,000 to 24,000 metric tons of molasses, to be delivered from 1 January to 30 June 1990 at
the price of $44 per metric ton. The contract provides that petitioner would open a Letter of
Credit with the Bank of Philippine Islands. Under the "red clause" of the Letter of Credit, NMC
was permitted to draw up to $500,000 representing the minimum price of the contract upon
presentation of some documents.

The contract was amended three times: first, on 11 January 1990, increasing the purchase
price of the molasses to $47.50 per metric ton;3 second, on 18 June 1990, reducing the quantity
of the molasses to 10,500 metric tons and increasing the price to $55 per metric ton;4 and third,
on 22 August 1990, providing for the shipment of 5,250 metric tons of molasses on the last
half of December 1990 through the first half of January 1991, and the balance of 5,250 metric
tons on the last half of January 1991 through the first half of February 1991.5 The third
amendment also required NMC to put up a performance bond equivalent to $451,500, which
represents the value of 10,500 metric tons of molasses computed at $43 per metric ton. The
performance bond was intended to guarantee NMC’s performance to deliver the molasses
during the prescribed shipment periods according to the terms of the amended contract.

In compliance with the terms of the third amendment of the contract, respondent Intra Strata
Assurance Corporation (respondent) issued on 10 October 1990 a performance bond6 in the
sum of ₱11,287,500 to guarantee NMC’s delivery of the 10,500 tons of molasses, and a surety
bond7 in the sum of ₱9,978,125 to guarantee the repayment of downpayment as provided in
the contract.

NMC was only able to deliver 219.551 metric tons of molasses out of the agreed 10,500 metric
tons. Thus, petitioner sent demand letters to respondent claiming payment under the
performance and surety bonds. When respondent refused to pay, petitioner filed on 12 April
1991 a complaint8 for sum of money against NMC and respondent.

Petitioner, NMC, and respondent entered into a compromise agreement,9 which the trial court
approved in its Decision10 dated 13 December 1991. The compromise agreement provides
that NMC would pay petitioner ₱3,000,000 upon signing of the compromise agreement and
would deliver to petitioner 6,991 metric tons of molasses from 16-31 December 1991.
However, NMC still failed to comply with its obligation under the compromise agreement.
Hence, trial proceeded against respondent.

On 23 November 1994, the trial court rendered a decision, the dispositive portion of which
reads:

WHEREFORE, judgment is rendered in favor of plaintiff [Cargill, Inc.], ordering defendant

INTRA STRATA ASSURANCE CORPORATION to solidarily pay plaintiff the total amount of
SIXTEEN MILLION NINE HUNDRED NINETY-THREE THOUSAND AND TWO HUNDRED
PESOS (₱16,993,200.00), Philippine Currency, with interest at the legal rate from October 10,
1990 until fully paid, plus attorney’s fees in the sum of TWO HUNDRED THOUSAND PESOS
(₱200,000.00), Philippine Currency and the costs of the suit.

The Counterclaim of Intra Strata Assurance Corporation is hereby dismissed for lack of
merit.

SO ORDERED.11

On appeal, the Court of Appeals reversed the trial court’s decision and dismissed the
complaint. Hence, this petition.

The Court of Appeals’ Ruling

The Court of Appeals held that petitioner does not have the capacity to file this suit since it is
a foreign corporation doing business in the Philippines without the requisite license. The Court
of Appeals held that petitioner’s purchases of molasses were in pursuance of its basic
business and not just mere isolated and incidental transactions.

The Issues

Petitioner raises the following issues:

1. Whether petitioner is doing or transacting business in the Philippines in

contemplation of the law and established jurisprudence;

2. Whether respondent is estopped from invoking the defense that petitioner has no
legal capacity to sue in the Philippines;

3. Whether petitioner is seeking a review of the findings of fact of the Court of

Appeals; and

4. Whether the advance payment of $500,000 was released to NMC without the
submission of the supporting documents required in the contract and the "red clause"
Letter of Credit from which said amount was drawn.12

The Ruling of the Court

We find the petition meritorious.

Doing Business in the Philippines and Capacity to Sue

The principal issue in this case is whether petitioner, an unlicensed foreign corporation, has
legal capacity to sue before Philippine courts. Under Article 12313 of the Corporation Code, a
foreign corporation must first obtain a license and a certificate from the appropriate
government agency before it can transact business in the Philippines. Where a foreign
corporation does business in the Philippines without the proper license, it cannot maintain any
action or proceeding before Philippine courts as provided under Section 133 of the Corporation
Code:

Sec. 133. Doing business without a license. – No foreign corporation transacting business in
the Philippines without a license, or its successors or assigns, shall be permitted to maintain
or intervene in any action, suit or proceeding in any court or administrative agency of the
Philippines; but such corporation may be sued or proceeded against before Philippine courts
or administrative tribunals on any valid cause of action recognized under Philippine laws.

Thus, the threshold question in this case is whether petitioner was doing business in the
Philippines. The Corporation Code provides no definition for the phrase "doing business."
Nevertheless, Section 1 of Republic Act No. 5455 (RA 5455),14 provides that:

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

This is also the exact definition provided under Article 44 of the Omnibus Investments Code
of 1987.

Republic Act No. 7042 (RA 7042), otherwise known as the Foreign Investments Act of 1991,
which repealed Articles 44-56 of Book II of the Omnibus Investments Code of 1987,
enumerated not only the acts or activities which constitute "doing business" but also those
activities which are not deemed "doing business." Section 3(d) of RA 7042 states:

[T]he phrase "doing business" shall include "soliciting orders, service contracts, opening
offices, whether called ‘liaison’ offices or branches; appointing representatives or distributors
domiciled in the Philippines or who in any calendar year stay in the country for a period or
periods totalling one hundred eighty (180) days or more; participating in the management,
supervision or control of any domestic business, firm, entity or corporation in the Philippines;
and any other act or acts that imply a continuity of commercial dealings or arrangements, and
contemplate to that extent the performance of acts or works, or the exercise of some of the
functions normally incident to, and in progressive prosecution of, commercial gain or of the
purpose and object of the business organization: Provided, however, That the phrase ‘doing
business’ shall not be deemed to include mere investment as a shareholder by a foreign entity
in domestic corporations duly registered to do business, and/or the exercise of rights as such
investor; nor having a nominee director or officer to represent its interests in such corporation;
nor appointing a representative or distributor domiciled in the Philippines which transacts
business in its own name and for its own account.

Since respondent is relying on Section 133 of the Corporation Code to bar petitioner from
maintaining an action in Philippine courts, respondent bears the burden of proving that
petitioner’s business activities in the Philippines were not just casual or occasional, but so
systematic and regular as to manifest continuity and permanence of activity to constitute doing
business in the Philippines. In this case, we find that respondent failed to prove that petitioner’s
activities in the Philippines constitute doing business as would prevent it from bringing an
action.

The determination of whether a foreign corporation is doing business in the Philippines must
be based on the facts of each case.15 In the case of Antam Consolidated, Inc. v. CA,16 in which
a foreign corporation filed an action for collection of sum of money against petitioners therein
for damages and loss sustained for the latter’s failure to deliver coconut crude oil, the Court
emphasized the importance of the element of continuity of commercial activities to constitute
doing business in the Philippines. The Court held:

In the case at bar, the transactions entered into by the respondent with the petitioners are not
a series of commercial dealings which signify an intent on the part of the respondent to do
business in the Philippines but constitute an isolated one which does not fall under the category
of "doing business." The records show that the only reason why the respondent entered into
the second and third transactions with the petitioners was because it wanted to recover the
loss it sustained from the failure of the petitioners to deliver the crude coconut oil under the
first transaction and in order to give the latter a chance to make good on their obligation. x x x
x x x The three seemingly different transactions were entered into by the parties only in an
effort to fulfill the basic agreement and in no way indicate an intent on the part of the
respondent to engage in a continuity of transactions with petitioners which will categorize it as
a foreign corporation doing business in the Philippines.17

Similarly, in this case, petitioner and NMC amended their contract three times to give a chance
to NMC to deliver to petitioner the molasses, considering that NMC already received the
minimum price of the contract. There is no showing that the transactions between petitioner
and NMC signify the intent of petitioner to establish a continuous business or extend its
operations in the Philippines.

The Implementing Rules and Regulations of RA 7042 provide under Section 1(f), Rule I, that
"doing business" does not include the following acts:

1. Mere investment as a shareholder by a foreign entity in domestic corporations duly

registered to do business, and/or the exercise of rights as such investor;

2. Having a nominee director or officer to represent its interests in such corporation;

3. Appointing a representative or distributor domiciled in the Philippines which

transacts business in the representative's or distributor's own name and account;

4. The publication of a general advertisement through any print or broadcast media;

5. Maintaining a stock of goods in the Philippines solely for the purpose of having the
same processed by another entity in the Philippines;

6. Consignment by a foreign entity of equipment with a local company to be used in

the processing of products for export;

7. Collecting information in the Philippines; and

8. Performing services auxiliary to an existing isolated contract of sale which are not
on a continuing basis, such as installing in the Philippines machinery it has
manufactured or exported to the Philippines, servicing the same, training domestic
workers to operate it, and similar incidental services.

Most of these activities do not bring any direct receipts or profits to the foreign corporation,
consistent with the ruling of this Court in National Sugar Trading Corp. v. CA 18 that activities
within Philippine jurisdiction that do not create earnings or profits to the foreign corporation do
not constitute doing business in the Philippines.19 In that case, the Court held that it would be
inequitable for the National Sugar Trading Corporation, a state-owned corporation, to evade
payment of a legitimate indebtedness owing to the foreign corporation on the plea that the
latter should have obtained a license first before perfecting a contract with the Philippine
government. The Court emphasized that the foreign corporation did not sell sugar and derive
income from the Philippines, but merely purchased sugar from the Philippine government and
allegedly paid for it in full.

In this case, the contract between petitioner and NMC involved the purchase of molasses by
petitioner from NMC. It was NMC, the domestic corporation, which derived income from the
transaction and not petitioner. To constitute "doing business," the activity undertaken in the
Philippines should involve profit-making.20 Besides, under Section 3(d) of RA 7042, "soliciting
purchases" has been deleted from the enumeration of acts or activities which constitute "doing
business."

Other factors which support the finding that petitioner is not doing business in the Philippines
are: (1) petitioner does not have an office in the Philippines; (2) petitioner imports products
from the Philippines through its non-exclusive local broker, whose authority to act on behalf of
petitioner is limited to soliciting purchases of products from suppliers engaged in the sugar
trade in the Philippines; and (3) the local broker is an independent contractor and not an agent
of petitioner.21

As explained by the Court in B. Van Zuiden Bros., Ltd. v. GTVL Marketing Industries, Inc.:22
An exporter in one country may export its products to many foreign importing countries without
performing in the importing countries specific commercial acts that would constitute doing
business in the importing countries. The mere act of exporting from one’s own country, without
doing any specific commercial act within the territory of the importing country, cannot be
deemed as doing business in the importing country. The importing country does not require
jurisdiction over the foreign exporter who has not yet performed any specific commercial act
within the territory of the importing country. Without jurisdiction over the foreign exporter, the
importing country cannot compel the foreign exporter to secure a license to do business in the
importing country.

Otherwise, Philippine exporters, by the mere act alone of exporting their products, could be
considered by the importing countries to be doing business in those countries. This will require
Philippine exporters to secure a business license in every foreign country where they usually
export their products, even if they do not perform any specific commercial act within the
territory of such importing countries. Such a legal concept will have deleterious effect not only
on Philippine exports, but also on global trade. 1avvphi1

To be doing or "transacting business in the Philippines" for purposes of Section 133 of the
Corporation Code, the foreign corporation must actually transact business in the Philippines,
that is, perform specific business transactions within the Philippine territory on a continuing
basis in its own name and for its own account. Actual transaction of business within the
Philippine territory is an essential requisite for the Philippines to to acquire jurisdiction over a
foreign corporation and thus require the foreign corporation to secure a Philippine business
license. If a foreign corporation does not transact such kind of business in the Philippines,
even if it exports its products to the Philippines, the Philippines has no jurisdiction to require
such foreign corporation to secure a Philippine business license.23 (Emphasis supplied)

In the present case, petitioner is a foreign company merely importing molasses from a Philipine
exporter. A foreign company that merely imports goods from a Philippine exporter, without
opening an office or appointing an agent in the Philippines, is not doing business in the
Philippines.

Review of Findings of Fact

The Supreme Court may review the findings of fact of the Court of Appeals which are in conflict
with the findings of the trial court.24 We find that the Court of Appeals’ finding that petitioner
was doing business is not supported by evidence.

Furthermore, a review of the records shows that the trial court was correct in holding that the
advance payment of $500,000 was released to NMC in accordance with the conditions
provided under the "red clause" Letter of Credit from which said amount was drawn. The Head
of the International Operations Department of the Bank of Philippine Islands testified that the
bank would not have paid the beneficiary if the required documents were not complete. It is a
requisite in a documentary credit transaction that the documents should conform to the terms
and conditions of the letter of credit; otherwise, the bank will not pay. The Head of the
International Operations Department of the Bank of Philippine Islands also testified that they
received reimbursement from the issuing bank for the $500,000 withdrawn by NMC.25 Thus,
respondent had no legitimate reason to refuse payment under the performance and surety
bonds when NMC failed to perform its part under its contract with petitioner.

WHEREFORE , we GRANT the petition. We REVERSE the Decision dated 26 May 2005 of
the Court of Appeals in CA-G.R. CV No. 48447. We REINSTATE the Decision dated 23
November 1994 of the trial court.

SO ORDERED.
CASE NO. 2

Republic of the Philippines

SUPREME COURT
Baguio

THIRD DIVISION

G.R. No. 171995 April 18, 2012

STEELCASE, INC., Petitioner,

vs.
DESIGN INTERNATIONAL SELECTIONS, INC., Respondent.

DECISION

MENDOZA, J.:

This is a petition for review on certiorari under Rule 45 assailing the March 31, 2005 Decision 1
of the Court of Appeals (CA) which affirmed the May 29, 2000 Order2 of the Regional Trial
Court, Branch 60, Makati City (RTC), dismissing the complaint for sum of money in Civil Case
No. 99-122 entitled "Steelcase, Inc. v. Design International Selections, Inc."

The Facts

Petitioner Steelcase, Inc. (Steelcase) is a foreign corporation existing under the laws of
Michigan, United States of America (U.S.A.), and engaged in the manufacture of office
furniture with dealers worldwide.3 Respondent Design International Selections, Inc. (DISI) is a
corporation existing under Philippine Laws and engaged in the furniture business, including
the distribution of furniture.4

Sometime in 1986 or 1987, Steelcase and DISI orally entered into a dealership agreement
whereby Steelcase granted DISI the right to market, sell, distribute, install, and service its
products to end-user customers within the Philippines. The business relationship continued
smoothly until it was terminated sometime in January 1999 after the agreement was breached
with neither party admitting any fault.5

On January 18, 1999, Steelcase filed a complaint6 for sum of money against DISI alleging,
among others, that DISI had an unpaid account of US$600,000.00. Steelcase prayed that DISI
be ordered to pay actual or compensatory damages, exemplary damages, attorney’s fees, and
costs of suit.

In its Answer with Compulsory Counterclaims7 dated February 4, 1999, DISI sought the
following: (1) the issuance of a temporary restraining order (TRO) and a writ of preliminary
injunction to enjoin Steelcase from selling its products in the Philippines except through DISI;
(2) the dismissal of the complaint for lack of merit; and (3) the payment of actual, moral and
exemplary damages together with attorney’s fees and expenses of litigation. DISI alleged that
the complaint failed to state a cause of action and to contain the required allegations on
Steelcase’s capacity to sue in the Philippines despite the fact that it (Steelcase) was doing
business in the Philippines without the required license to do so. Consequently, it posited that
the complaint should be dismissed because of Steelcase’s lack of legal capacity to sue in
Philippine courts.

On March 3, 1999, Steelcase filed its Motion to Admit Amended Complaint8 which was granted
by the RTC, through then Acting Presiding Judge Roberto C. Diokno, in its Order 9 dated April
26, 1999. However, Steelcase sought to further amend its complaint by filing a Motion to Admit
Second Amended Complaint10 on March 13, 1999.

In his Order11 dated November 15, 1999, Acting Presiding Judge Bonifacio Sanz Maceda
dismissed the complaint, granted the TRO prayed for by DISI, set aside the April 26, 1999
Order of the RTC admitting the Amended Complaint, and denied Steelcase’s Motion to Admit
Second Amended Complaint. The RTC stated that in requiring DISI to meet the Dealer
Performance Expectation and in terminating the dealership agreement with DISI based on its
failure to improve its performance in the areas of business planning, organizational structure,
operational effectiveness, and efficiency, Steelcase unwittingly revealed that it participated in
the operations of DISI. It then concluded that Steelcase was "doing business" in the
Philippines, as contemplated by Republic Act (R.A.) No. 7042 (The Foreign Investments Act
of 1991), and since it did not have the license to do business in the country, it was barred from
seeking redress from our courts until it obtained the requisite license to do so. Its determination
was further bolstered by the appointment by Steelcase of a representative in the Philippines.
Finally, despite a showing that DISI transacted with the local customers in its own name and
for its own account, it was of the opinion that any doubt in the factual environment should be
resolved in favor of a pronouncement that a foreign corporation was doing business in the
Philippines, considering the twelve-year period that DISI had been distributing Steelcase
products in the Philippines.

Steelcase moved for the reconsideration of the questioned Order but the motion was denied
by the RTC in its May 29, 2000 Order.12

Aggrieved, Steelcase elevated the case to the CA by way of appeal, assailing the November
15, 1999 and May 29, 2000 Orders of the RTC. On March 31, 2005, the CA rendered its
Decision affirming the RTC orders, ruling that Steelcase was a foreign corporation doing or
transacting business in the Philippines without a license. The CA stated that the following acts
of Steelcase showed its intention to pursue and continue the conduct of its business in the
Philippines: (1) sending a letter to Phinma, informing the latter that the distribution rights for its
products would be established in the near future and directing other questions about orders
for Steelcase products to Steelcase International; (2) cancelling orders from DISI’s customers,
particularly Visteon, Phils., Inc. (Visteon); (3) continuing to send its products to the Philippines
through Modernform Group Company Limited (Modernform), as evidenced by an Ocean Bill
of Lading; and (4) going beyond the mere appointment of DISI as a dealer by making several
impositions on management and operations of DISI. Thus, the CA ruled that Steelcase was
barred from access to our courts for being a foreign corporation doing business here without
the requisite license to do so.

Steelcase filed a motion for reconsideration but it was denied by the CA in its Resolution dated
March 23, 2006.13

Hence, this petition.

The Issues

Steelcase filed the present petition relying on the following grounds:

THE COURT OF APPEALS COMMITTED REVERSIBLE ERROR WHEN IT FOUND THAT

STEELCASE HAD BEEN "DOING BUSINESS" IN THE PHILIPPINES WITHOUT A
LICENSE.

II

THE COURT OF APPEALS COMMITTED REVERSIBLE ERROR IN NOT FINDING THAT

RESPONDENT WAS ESTOPPED FROM CHALLENGING STEELCASE’S LEGAL
CAPACITY TO SUE, AS AN AFFIRMATIVE DEFENSE IN ITS ANSWER.

The issues to be resolved in this case are:

(1) Whether or not Steelcase is doing business in the Philippines without a license;
and

(2) Whether or not DISI is estopped from challenging the Steelcase’s legal capacity
to sue.

The Court’s Ruling

The Court rules in favor of the petitioner.

Steelcase is an unlicensed foreign corporation NOT doing business in the Philippines

Anent the first issue, Steelcase argues that Section 3(d) of R.A. No. 7042 or the Foreign
Investments Act of 1991 (FIA) expressly states that the phrase "doing business" excludes the
appointment by a foreign corporation of a local distributor domiciled in the Philippines which
transacts business in its own name and for its own account. Steelcase claims that it was not
doing business in the Philippines when it entered into a dealership agreement with DISI where
the latter, acting as the former’s appointed local distributor, transacted business in its own
name and for its own account. Specifically, Steelcase contends that it was DISI that sold
Steelcase’s furniture directly to the end-users or customers who, in turn, directly paid DISI for
the furniture they bought. Steelcase further claims that DISI, as a non-exclusive dealer in the
Philippines, had the right to market, sell, distribute and service Steelcase products in its own
name and for its own account. Hence, DISI was an independent distributor of Steelcase
products, and not a mere agent or conduit of Steelcase.

On the other hand, DISI argues that it was appointed by Steelcase as the latter’s exclusive
distributor of Steelcase products. DISI likewise asserts that it was not allowed by Steelcase to
transact business in its own name and for its own account as Steelcase dictated the manner
by which it was to conduct its business, including the management and solicitation of orders
from customers, thereby assuming control of its operations. DISI further insists that Steelcase
treated and considered DISI as a mere conduit, as evidenced by the fact that Steelcase itself
directly sold its products to customers located in the Philippines who were classified as part of
their "global accounts." DISI cited other established circumstances which prove that Steelcase
was doing business in the Philippines including the following: (1) the sale and delivery by
Steelcase of furniture to Regus, a Philippine client, through Modernform, a Thai corporation
allegedly controlled by Steelcase; (2) the imposition by Steelcase of certain requirements over
the management and operations of DISI; (3) the representations made by Steven Husak as
Country Manager of Steelcase; (4) the cancellation by Steelcase of orders placed by Philippine
clients; and (5) the expression by Steelcase of its desire to maintain its business in the
Philippines. Thus, Steelcase has no legal capacity to sue in Philippine Courts because it was
doing business in the Philippines without a license to do so.

The Court agrees with the petitioner.

The rule that an unlicensed foreign corporations doing business in the Philippine do not have
the capacity to sue before the local courts is well-established. Section 133 of the Corporation
Code of the Philippines explicitly states:

Sec. 133. Doing business without a license. - No foreign corporation transacting business in
the Philippines without a license, or its successors or assigns, shall be permitted to maintain
or intervene in any action, suit or proceeding in any court or administrative agency of the
Philippines; but such corporation may be sued or proceeded against before Philippine courts
or administrative tribunals on any valid cause of action recognized under Philippine laws.

The phrase "doing business" is clearly defined in Section 3(d) of R.A. No. 7042 (Foreign
Investments Act of 1991), to wit:

d) The phrase "doing business" shall include soliciting orders, service contracts, opening
offices, whether called "liaison" offices or branches; appointing representatives or distributors
domiciled in the Philippines or who in any calendar year stay in the country for a period or
periods totalling one hundred eighty (180) days or more; participating in the management,
supervision or control of any domestic business, firm, entity or corporation in the Philippines;
and any other act or acts that imply a continuity of commercial dealings or arrangements, and
contemplate to that extent the performance of acts or works, or the exercise of some of the
functions normally incident to, and in progressive prosecution of, commercial gain or of the
purpose and object of the business organization: Provided, however, That the phrase "doing
business" shall not be deemed to include mere investment as a shareholder by a foreign entity
in domestic corporations duly registered to do business, and/or the exercise of rights as such
investor; nor having a nominee director or officer to represent its interests in such corporation;
nor appointing a representative or distributor domiciled in the Philippines which transacts
business in its own name and for its own account; (Emphases supplied)

This definition is supplemented by its Implementing Rules and Regulations, Rule I, Section
1(f) which elaborates on the meaning of the same phrase:
f. "Doing business" shall include soliciting orders, service contracts, opening offices, whether
liaison offices or branches; appointing representatives or distributors, operating under full
control of the foreign corporation, domiciled in the Philippines or who in any calendar year stay
in the country for a period totalling one hundred eighty [180] days or more; participating in the
management, supervision or control of any domestic business, firm, entity or corporation in
the Philippines; and any other act or acts that imply a continuity of commercial dealings or
arrangements, and contemplate to that extent the performance of acts or works, or the
exercise of some of the functions normally incident to and in progressive prosecution of
commercial gain or of the purpose and object of the business organization.

The following acts shall not be deemed "doing business" in the Philippines:

1. Mere investment as a shareholder by a foreign entity in domestic corporations duly

registered to do business, and/or the exercise of rights as such investor;

2. Having a nominee director or officer to represent its interest in such corporation;

3. Appointing a representative or distributor domiciled in the Philippines which

transacts business in the representative's or distributor's own name and account;

4. The publication of a general advertisement through any print or broadcast media;

5. Maintaining a stock of goods in the Philippines solely for the purpose of having the
same processed by another entity in the Philippines;

6. Consignment by a foreign entity of equipment with a local company to be used in

the processing of products for export;

7. Collecting information in the Philippines; and

8. Performing services auxiliary to an existing isolated contract of sale which are not
on a continuing basis, such as installing in the Philippines machinery it has
manufactured or exported to the Philippines, servicing the same, training domestic
workers to operate it, and similar incidental services. (Emphases supplied)

From the preceding citations, the appointment of a distributor in the Philippines is not sufficient
to constitute "doing business" unless it is under the full control of the foreign corporation. On
the other hand, if the distributor is an independent entity which buys and distributes products,
other than those of the foreign corporation, for its own name and its own account, the latter
cannot be considered to be doing business in the Philippines.14 It should be kept in mind that
the determination of whether a foreign corporation is doing business in the Philippines must
be judged in light of the attendant circumstances.15

In the case at bench, it is undisputed that DISI was founded in 1979 and is independently
owned and managed by the spouses Leandro and Josephine Bantug.16 In addition to Steelcase
products, DISI also distributed products of other companies including carpet tiles, relocatable
walls and theater settings.17 The dealership agreement between Steelcase and DISI had been
described by the owner himself as:

xxx basically a buy and sell arrangement whereby we would inform Steelcase of the volume
of the products needed for a particular project and Steelcase would, in turn, give ‘special
quotations’ or discounts after considering the value of the entire package. In making the bid of
the project, we would then add out profit margin over Steelcase’s prices. After the approval of
the bid by the client, we would thereafter place the orders to Steelcase. The latter, upon our
payment, would then ship the goods to the Philippines, with us shouldering the freight charges
and taxes.18 [Emphasis supplied]

This clearly belies DISI’s assertion that it was a mere conduit through which Steelcase
conducted its business in the country. From the preceding facts, the only reasonable
conclusion that can be reached is that DISI was an independent contractor, distributing various
products of Steelcase and of other companies, acting in its own name and for its own account.
The CA, in finding Steelcase to be unlawfully engaged in business in the Philippines, took into
consideration the delivery by Steelcase of a letter to Phinma informing the latter that the
distribution rights for its products would be established in the near future, and also its
cancellation of orders placed by Visteon. The foregoing acts were apparently misinterpreted
by the CA. Instead of supporting the claim that Steelcase was doing business in the country,
the said acts prove otherwise. It should be pointed out that no sale was concluded as a result
of these communications. Had Steelcase indeed been doing business in the Philippines, it
would have readily accepted and serviced the orders from the abovementioned Philippine
companies. Its decision to voluntarily cease to sell its products in the absence of a local
distributor indicates its refusal to engage in activities which might be construed as "doing
business."

Another point being raised by DISI is the delivery and sale of Steelcase products to a Philippine
client by Modernform allegedly an agent of Steelcase. Basic is the rule in corporation law that
a corporation has a separate and distinct personality from its stockholders and from other
corporations with which it may be connected.19 Thus, despite the admission by Steelcase that
it owns 25% of Modernform, with the remaining 75% being owned and controlled by Thai
stockholders,20 it is grossly insufficient to justify piercing the veil of corporate fiction and declare
that Modernform acted as the alter ego of Steelcase to enable it to improperly conduct
business in the Philippines. The records are bereft of any evidence which might lend even a
hint of credence to DISI’s assertions. As such, Steelcase cannot be deemed to have been
doing business in the Philippines through Modernform.

Finally, both the CA and DISI rely heavily on the Dealer Performance Expectation required by
Steelcase of its distributors to prove that DISI was not functioning independently from
Steelcase because the same imposed certain conditions pertaining to business planning,
organizational structure, operational effectiveness and efficiency, and financial stability. It is
actually logical to expect that Steelcase, being one of the major manufacturers of office
systems furniture, would require its dealers to meet several conditions for the grant and
continuation of a distributorship agreement. The imposition of minimum standards concerning
sales, marketing, finance and operations is nothing more than an exercise of sound business
practice to increase sales and maximize profits for the benefit of both Steelcase and its
distributors. For as long as these requirements do not impinge on a distributor’s independence,
then there is nothing wrong with placing reasonable expectations on them.

All things considered, it has been sufficiently demonstrated that DISI was an independent
contractor which sold Steelcase products in its own name and for its own account. As a result,
Steelcase cannot be considered to be doing business in the Philippines by its act of appointing
a distributor as it falls under one of the exceptions under R.A. No. 7042.

DISI is estopped from challenging Steelcase’s legal capacity to sue

Regarding the second issue, Steelcase argues that assuming arguendo that it had been "doing
business" in the Philippines without a license, DISI was nonetheless estopped from
challenging Steelcase’s capacity to sue in the Philippines. Steelcase claims that since DISI
was aware that it was doing business in the Philippines without a license and had benefited
from such business, then DISI should be estopped from raising the defense that Steelcase
lacks the capacity to sue in the Philippines by reason of its doing business without a license.

On the other hand, DISI argues that the doctrine of estoppel cannot give Steelcase the license
to do business in the Philippines or permission to file suit in the Philippines. DISI claims that
when Steelcase entered into a dealership agreement with DISI in 1986, it was not doing
business in the Philippines. It was after such dealership was put in place that it started to do
business without first obtaining the necessary license. Hence, estoppel cannot work against it.
Moreover, DISI claims that it suffered as a result of Steelcase’s "doing business" and that it
never benefited from the dealership and, as such, it cannot be estopped from raising the issue
of lack of capacity to sue on the part of Steelcase.

The argument of Steelcase is meritorious.

If indeed Steelcase had been doing business in the Philippines without a license, DISI would
nonetheless be estopped from challenging the former’s legal capacity to sue.
It cannot be denied that DISI entered into a dealership agreement with Steelcase and profited
from it for 12 years from 1987 until 1999. DISI admits that it complied with its obligations under
the dealership agreement by exerting more effort and making substantial investments in the
promotion of Steelcase products. It also claims that it was able to establish a very good
reputation and goodwill for Steelcase and its products, resulting in the establishment and
development of a strong market for Steelcase products in the Philippines. Because of this,
DISI was very proud to be awarded the "Steelcase International Performance Award" for
meeting sales objectives, satisfying customer needs, managing an effective company and
making a profit.21

Unquestionably, entering into a dealership agreement with Steelcase charged DISI with the
knowledge that Steelcase was not licensed to engage in business activities in the Philippines.
This Court has carefully combed the records and found no proof that, from the inception of the
dealership agreement in 1986 until September 1998, DISI even brought to Steelcase’s
attention that it was improperly doing business in the Philippines without a license. It was only
towards the latter part of 1998 that DISI deemed it necessary to inform Steelcase of the
impropriety of the conduct of its business without the requisite Philippine license. It should,
however, be noted that DISI only raised the issue of the absence of a license with Steelcase
after it was informed that it owed the latter US$600,000.00 for the sale and delivery of its
products under their special credit arrangement.

By acknowledging the corporate entity of Steelcase and entering into a dealership agreement
with it and even benefiting from it, DISI is estopped from questioning Steelcase’s existence
and capacity to sue. This is consistent with the Court’s ruling in Communication Materials and
Design, Inc. v. Court of Appeals22 where it was written:

Notwithstanding such finding that ITEC is doing business in the country, petitioner is
nonetheless estopped from raising this fact to bar ITEC from instituting this injunction case
against it.

A foreign corporation doing business in the Philippines may sue in Philippine Courts although
not authorized to do business here against a Philippine citizen or entity who had contracted
with and benefited by said corporation. To put it in another way, a party is estopped to
challenge the personality of a corporation after having acknowledged the same by entering
into a contract with it. And the doctrine of estoppel to deny corporate existence applies to a
foreign as well as to domestic corporations. One who has dealt with a corporation of foreign
origin as a corporate entity is estopped to deny its corporate existence and capacity: The
principle will be applied to prevent a person contracting with a foreign corporation from later
taking advantage of its noncompliance with the statutes chiefly in cases where such person
has received the benefits of the contract.

The rule is deeply rooted in the time-honored axiom of Commodum ex injuria sua non habere
debet — no person ought to derive any advantage of his own wrong. This is as it should be for
as mandated by law, "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."

Concededly, corporations act through agents, like directors and officers. Corporate dealings
must be characterized by utmost good faith and fairness. Corporations cannot just feign
ignorance of the legal rules as in most cases, they are manned by sophisticated officers with
tried management skills and legal experts with practiced eye on legal problems. Each party to
a corporate transaction is expected to act with utmost candor and fairness and, thereby allow
a reasonable proportion between benefits and expected burdens. This is a norm which should
be observed where one or the other is a foreign entity venturing in a global market.

xxx

By entering into the "Representative Agreement" with ITEC, petitioner is charged with
knowledge that ITEC was not licensed to engage in business activities in the country, and is
thus estopped from raising in defense such incapacity of ITEC, having chosen to ignore or
even presumptively take advantage of the same.23 (Emphases supplied)

The case of Rimbunan Hijau Group of Companies v. Oriental Wood Processing Corporation 24
is likewise instructive:
Respondent’s unequivocal admission of the transaction which gave rise to the complaint
establishes the applicability of estoppel against it. Rule 129, Section 4 of the Rules on
Evidence provides that a written admission made by a party in the course of the proceedings
in the same case does not require proof. We held in the case of Elayda v. Court of Appeals,
that an admission made in the pleadings cannot be controverted by the party making such
admission and are conclusive as to him. Thus, our consistent pronouncement, as held in cases
such as Merril Lynch Futures v. Court of Appeals, is apropos:

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

All things considered, respondent can no longer invoke petitioner’s lack of capacity to sue in
this jurisdiction. Considerations of fair play dictate that after having contracted and benefitted
1âwphi1

from its business transaction with Rimbunan, respondent should be barred from questioning
the latter’s lack of license to transact business in the Philippines.

In the case of Antam Consolidated, Inc. v. CA, this Court noted that it is a common ploy of
defaulting local companies which are sued by unlicensed foreign corporations not engaged in
business in the Philippines to invoke the latter’s lack of capacity to sue. This practice of
domestic corporations is particularly reprehensible considering that in requiring a license, the
law never intended to prevent foreign corporations from performing single or isolated acts in
this country, or to favor domestic corporations who renege on their obligations to foreign firms
unwary enough to engage in solitary transactions with them. Rather, the law was intended to
bar foreign corporations from acquiring a domicile for the purpose of business without first
taking the steps necessary to render them amenable to suits in the local courts. It was to
prevent the foreign companies from enjoying the good while disregarding the bad.

As a matter of principle, this Court will not step in to shield defaulting local companies from the
repercussions of their business dealings. While the doctrine of lack of capacity to sue based
on failure to first acquire a local license may be resorted to in meritorious cases, it is not a
magic incantation. It cannot be called upon when no evidence exists to support its invocation
or the facts do not warrant its application. In this case, that the respondent is estopped from
challenging the petitioners’ capacity to sue has been conclusively established, and the
forthcoming trial before the lower court should weigh instead on the other defenses raised by
the respondent.25 (Emphases supplied)

As shown in the previously cited cases, this Court has time and again upheld the principle that
a foreign corporation doing business in the Philippines without a license may still sue before
the Philippine courts a Filipino or a Philippine entity that had derived some benefit from their
contractual arrangement because the latter is considered to be estopped from challenging the
personality of a corporation after it had acknowledged the said corporation by entering into a
contract with it.26

In Antam Consolidated, Inc. v. Court of Appeals,27 this Court had the occasion to draw attention
to the common ploy of invoking the incapacity to sue of an unlicensed foreign corporation
utilized by defaulting domestic companies which seek to avoid the suit by the former. The
Court cannot allow this to continue by always ruling in favor of local companies, despite the
injustice to the overseas corporation which is left with no available remedy.

During this period of financial difficulty, our nation greatly needs to attract more foreign
investments and encourage trade between the Philippines and other countries in order to
rebuild and strengthen our economy. While it is essential to uphold the sound public policy
behind the rule that denies unlicensed foreign corporations doing business in the Philippines
access to our courts, it must never be used to frustrate the ends of justice by becoming an all-
encompassing shield to protect unscrupulous domestic enterprises from foreign entities
seeking redress in our country. To do otherwise could seriously jeopardize the desirability of
the Philippines as an investment site and would possibly have the deleterious effect of
hindering trade between Philippine companies and international corporations.
WHEREFORE, the March 31, 2005 Decision of the Court of Appeals and its March 23, 2006
Resolution are hereby REVERSED and SET ASIDE. The dismissal order of the Regional Trial
Court dated November 15, 1999 is hereby set aside. Steelcase’s Amended Complaint is
hereby ordered REINSTATED and the case is REMANDED to the RTC for appropriate action.

SO ORDERED.
CASE NO. 3

Republic of the Philippines

SUPREME COURT
Manila

FIRST DIVISION

G.R. Nos. 79926-27 October 17, 1991

STATE INVESTMENT HOUSE, INC. and STATE FINANCING CENTER, INC., petitioners,
vs.
CITIBANK, N.A., BANK OF AMERICA, NT & SA, HONGKONG & SHANGHAI BANKING
CORPORATION, and the COURT OF APPEALS, respondents.

Roco, Bunag, Kapunan & Migallos for petitioners.

Agcaoili & Associates for Citibank, N.A, and Bank of America NT & SA.

Belo, Abiera & Associates for Hongkong & Shanghai Banking Corp.

NARVASA, J.:

The chief question in the appeal at bar is whether or not foreign banks licensed to do business
in the Philippines, may be considered "residents of the Philippine Islands" within the meaning
of Section 20 of the Insolvency Law (Act No. 1956, as amended, eff. May 20, 1909) reading in
part as follows: 1

An adjudication of insolvency may be made on the petition of three or more creditors,

residents of the Philippine Islands, whose credits or demands accrued in the Philippine
Islands, and the amount of which credits or demands are in the aggregate not less
than one thousand pesos: Provided, that none of said creditors has become a creditor
by assignment, however made, within thirty days prior to the filing of said petition. Such
petition must be filed in the Court of First Instance of the province or city in which the
debtor resides or has his principal place of business, and must be verified by at least
three (3) of the petitioners. . . .

The foreign banks involved in the controversy are Bank of America NT and SA, Citibank N.A. and Hongkong and Shanghai Banking Corporation. On December 11, 1981, they jointly filed with the Court of First Instance

of Rizal a petition for involuntary insolvency of Consolidated Mines, Inc. (CMI), which they amended four days later. 2
The case was docketed as Sp. Proc. No.
9263 and assigned to Branch 28 of the Court.

The petition for involuntary insolvency alleged:

1) that CMI had obtained loans from the three petitioning banks, and that as of
November/December, 1981, its outstanding obligations were as follows:

a) In favor of Bank of America (BA) P15,297,367.67

(as of December 10, 1981) US$ 4,175,831.88

(b) In favor of Citibank US$ 4,920,548.85

(as of December 10, 1981)

 c) In favor of Hongkong & Shanghai Bank US$ 5,389,434.12

(as of November 30, 1981); P6,233,969.24

2) that in November, 1981, State Investment House, Inc. (SIHI) and State Financing Center,
Inc. (SFCI) had separately instituted actions for collection of sums of money and damages in
the Court of First Instance of Rizal against CMI, docketed respectively as Civil Cases
Numbered 43588 and 43677; and that on application of said plaintiffs, writs of preliminary
attachment had been issued which were executed on "the royalty/profit sharing payments due
CMI from Benguet Consolidated Mining, Inc;" and

3) that CMI had "committed specific acts of insolvency as provided in Section 20 of the
Insolvency Law, to wit:

xxx xxx xxx

5. that he (CMI) has suffered his (CMI's) property to remain under attachment or legal
process for three days for the purpose of hindering or delaying or defrauding his
(CMI's) creditors;

xxx xxx xxx

11. that being a merchant or tradesman he (CMI) has generally defaulted in the
payment of his (CMI's) current obligations for a period of thirty days; . . .

The petition was opposed by State Investment House, Inc. (SIHI) and State Financing Center,
Inc. (SFCI). 3 It claimed that:

1) the three petitioner banks had come to court with unclean hands in that they filed the petition
for insolvency — alleging the CMI was defrauding its creditors, and they wished all creditors
to share in its assets — although a few days earlier, they had "received for the account of CMI
substantial payments aggregating P10,800,000.00;"

2) the Court had no jurisdiction because the alleged acts of insolvency were false: the writs of
attachment against CMI had remained in force because there were "just, valid and lawful
grounds for the(ir) issuance," and CMI was not a "merchant or tradesman" nor had it "generally
defaulted in the payment of (its) obligations for a period of thirty days . . . ;"

3) the Court had no jurisdiction to take cognizance of the petition for insolvency because
petitioners are not resident creditors of CMI in contemplation of the Insolvency Law; and

4) the Court has no power to set aside the attachment issued in favor of intervenors-oppositors
SIHI and SFCI.

CMI filed its Answer to the petition for insolvency, asserting in the main that it was not insolvent,
4
and later filed a "Motion to Dismiss Based on Affirmative Defense of Petitioner's Lack of
Capacity to Sue," echoing the theory of SIHI and SFCI that the petitioner banks are not
"Philippine residents." 5 Resolution on the motion was "deferred until after hearing of the case
on the merits" it appearing to the Court that the grounds therefor did not appear to be
indubitable. 6

and served on the three petitioner banks requests for admission of

SIHI and SFCI filed their own Answer-in-Intervention, 7

certain facts in accordance with Rule 26 of the Rules of Court, 8 receiving a response only from
Hongkong & Shanghai Bank. 9

SIHI and SFCI then filed a Motion for Summary Judgment dated May 23, 1983 "on the ground
that, based on the pleadings and admissions on record, the trial court had no jurisdiction to
adjudicate CMI insolvent since the petitioners (respondent foreign banks) are not "resident
creditors" of CMI as required under the Insolvency Law." 10 Oppositions to the motion were
filed, 11 to which a reply was submitted. 12

found merit in the motion for summary judgment. By Order dated October 10,
The Regional Trial Court 13

1983, it rendered "summary judgment dismissing the . . . petition for lack of jurisdiction over
the subject matter, with costs against petitioners." 14 It ruled that on the basis of the "facts on
record, as shown in the pleadings, motions and admissions of the parties, an insolvency court
could "not acquire jurisdiction to adjudicate the debtor as insolvent if the creditors petitioning
for adjudication of insolvency are not "residents" of the Philippines" — citing a decision of the
California Supreme Court which it declared "squarely applicable especially considering that
one of the sources of our Insolvency Law is the Insolvency Act of California of 1895 . . . " And
it declared that since petitioners had been merely licensed to do business in the Philippines,
they could not be deemed residents thereof.

The three foreign banks sought to take an appeal from the Order of October 10, 1983. They
filed a notice of appeal and a record on appeal. 15 SIHI and SFCI moved to dismiss their appeal
claiming it was attempted out of time. The Trial Court denied the motion.

SIHI and SFCI filed with this Court a petition for certiorari and prohibition (G.R. NO. 66449),
impugning that denial. The Court dismissed the petition and instead required the three banks
to file a petition for review in accordance with Rule 45 of the Rules of Court. 16 This the banks
did (their petition was docketed as G.R. No. 66804). However, by Resolution dated May 16,
1984, the court referred the petition for review to the Intermediate Appellate Court, where it
was docketed as AC SP-03674. 17

In the meantime, the Trial Court approved on May 3, 1985 the banks' record on appeal and transmitted it to this Court, where it was recorded
as UDK-6866. As might have been expected, this Court required the banks to file a petition for review under Rule 45, but they asked to be
excused from doing so since they had already filed such a petition, which had been referred to the Intermediate Appellate Court and was
there pending as AC-G.R. No. SP 03674, supra. This Court then also referred UDK-6866 to the Intermediate Appellate Court where it was
docketed as AC-G.R. No. CV 07830.

Both referred cases, AC-G.R. No. SP 03674 and AC-G.R. No. CV 07830, were consolidated by Resolution of the Court of Appeals dated April 9, 1986, and Decision thereon was promulgated on July 14, 1987 by the
Fifteenth Division of said Court. 18

The Appellate Court reversed the Trial Court's Order of October 10, 1983 and remanded the case to it for further proceedings. It ruled:

1) that the purpose of the Insolvency Law was "to convert the assets of the bankrupt in cash for distribution among creditors, and then to relieve the honest debtor from the weight of oppressive indebtedness and permit

and that it was "crystal clear" that the law was

him to start life anew, free from the obligations and responsibilities consequent upon business misfortunes;" 19

"designed not only for the benefit of the creditors but more importantly for the benefit of the
debtor himself," the object being "to provide not only for the suspension of payments and the
protection of creditors but also the discharge of insolvent honest debtors to enable them to
have a fresh start;"

2) that the Trial Court had placed "a very strained and restrictive interpretation of the term
"resident," as to exclude foreign banks which have been operating in this country since the
early part of the century," and "the better approach . . . would have been to harmonize the
provisions . . . (of the Insolvency Law) with similar provisions of other succeeding laws, like
the Corporation Code of the Philippines, the General Banking Act, the Offshore Banking Law
and the National Internal Revenue Code in connection with or related to their doing business
in the Philippines;"

3) that in light of said statutes, the three banks "are in truth and in fact considered as "residents"
of the Philippines for purposes of doing business in the Philippines and even for taxation
matters;"

4) that the banks had "complied with all the laws, rules and regulations (for doing business in
the country) and have been doing business in the Philippines for many years now;" that the
authority granted to them by the Securities and Exchange Commission upon orders of the
Monetary Board "covers not only transacting banking business . . . but likewise maintaining
suits "for recovery of any debt, claims or demand whatsoever," and that their petition for
involuntary insolvency was "nothing more than a suit aimed at recovering a debt granted by
them to Consolidated Mines, Inc., or at least a portion thereof;"

4) that to deprive the foreign banks of their right to proceed against their debtors through
insolvency proceedings would "contravene the basic standards of equity and fair play, . . .
would discourage their operations in economic development projects that create not only jobs
for our people but also opportunities for advancement as a nation;" and

5) that the terms "residence" and "domicile" do not mean the same thing, and that as regards
a corporation, it is generally deemed an "inhabitant" of the state under whose law it is
incorporated, and has a "residence" wherever it conducts its ordinary business, and may have
its legal "domicile" in one place and "residence" in another.

SIHI and SFCI moved for reconsideration and then, when rebuffed, took an appeal to this
Court. Here, they argue that the Appellate Court's judgment should be reversed because it
failed to declare that —

1) the failure of the three foreign banks to allege under oath in their petition for involuntary
insolvency that they are Philippine residents, wishing only to "be considered Philippine
residents," is fatal to their cause;

2) also fatal to their cause is their failure to prove, much less allege, that under the domiciliary
laws of the foreign banks, a Philippine corporation is allowed the reciprocal right to petition for
a debtor's involuntary insolvency;

3) in fact and in law, the three banks are not Philippine residents because:

a) corporations have domicile and residence only in the state of their incorporation or
in the place designated by law, although for limited and exclusive purposes, other
states may consider them as residents;

b) juridical persons may not have residence separate from their domicile;

4) actually, the non-resident status of the banks within the context of the Insolvency Law is
confirmed by other laws;

5) the license granted to the banks to do business in the Philippines does not make them
residents;

6) no substantive law explicitly grants foreign banks the power to petition for the adjudication
of the Philippine corporation as a bankrupt;

7) the Monetary Board can not appoint a conservator or receiver for a foreign bank or orders
its liquidation having only the power to revoke its license, subject to such proceedings as the
Solicitor General may thereafter deem proper to protect its creditors;

8) the foreign banks are not denied the right to collect their credits against Philippine debtors,
only the right to "petition for the harsh remedy of involuntary insolvency" not being conceded
to them;

9) said banks have come to court with unclean hands, their filing of the petition for involuntary
insolvency being an attempt to defeat validly acquired rights of domestic corporations.

The concept of a foreign corporation under Section 123 of the Corporation Code is of "one
formed, organized or existing under laws other than those of the Philippines and . . . (which)
laws allow Filipino citizens and corporations to do business . . . ." There is no question that the
three banks are foreign corporations in this sence, with principal offices situated outside of the
Philippines. There is no question either that said banks have been licensed to do business in
this country and have in fact been doing business here for many years, through branch offices
or agencies, including "foreign currency deposit units;" in fact, one of them, Hongkong &
Shanghai Bank has been doing business in the Philippines since as early as 1875.
The issue is whether these Philippine branches or units may be considered "residents of the
Philippine Islands" as that term is used in Section 20 of the Insolvency Law, supra, 20 or
residents of the state under the laws of which they were respectively incorporated. The answer
cannot be found in the Insolvency Law itself, which contains no definition of the term, resident,
or any clear indication of its meaning. There are however other statutes, albeit of subsequent
enactment and effectivity, from which enlightening notions of the term may be derived.

The National Internal Revenue Code declares that the term "'resident foreign corporation'
applies to a foreign corporation engaged in trade or business within the Philippines," as
distinguished from a " "non-resident foreign corporation" . . . (which is one) not engaged in
trade or business within the Philippines." 21
The Offshore Banking Law, Presidential Decree No. 1034, states "that branches, subsidiaries, affiliation, extension offices or any other units of corporation or juridical person organized under the laws of any foreign
country operating in the Philippines shall be considered residents of the Philippines." 22

The General Banking Act, Republic Act No. 337, places "branches and agencies in the Philippines of foreign banks . . . (which are) called Philippine branches," in the same category as "commercial banks, savings
associations, mortgage banks, development banks, rural banks, stock savings and loan associations" (which have been formed and organized under Philippine laws), making no distinction between the former and the

declaring on the contrary that in "all matters not specifically

later in so far, as the terms "banking institutions" and "bank" are used in the Act, 23

covered by special provisions applicable only to foreign banks, or their branches and agencies
in the Philippines, said foreign banks or their branches and agencies lawfully doing business
in the Philippines "shall be bound by all laws, rules, and regulations applicable to domestic
banking corporations of the same class, except such laws, rules and regulations as provided
for the creation, formation, organization, or dissolution of corporations or as fix the relation,
liabilities, responsibilities, or duties of members, stockholders or officers or corporations." 24

that a foreign corporation licitly doing business in the Philippines, which

This Court itself has already had occasion to hold 25

is a defendant in a civil suit, may not be considered a non-resident within the scope of the legal
provision authorizing attachment against a defendant not residing in the Philippine Islands;" 26
in other words, a preliminary attachment may not be applied for and granted solely on the
asserted fact that the defendant is a foreign corporation authorized to do business in the
Philippines — and is consequently and necessarily, "a party who resides out of the
Philippines." Parenthetically, if it may not be considered as a party not residing in the
Philippines, or as a party who resides out of the country, then, logically, it must be considered
a party who does reside in the Philippines, who is a resident of the country. Be this as it may,
this Court pointed out that:

. . . Our laws and jurisprudence indicate a purpose to assimilate foreign corporations,

duly licensed to do business here, to the status of domestic corporations. (Cf. Section
73, Act No. 1459, and Marshall Wells Co. vs. Henry W. Elser & Co., 46 Phil. 70, 76;
Yu; Cong Eng vs. Trinidad, 47 Phil. 385, 411) We think it would be entirely out of line
with this policy should we make a discrimination against a foreign corporation, like the
petitioner, and subject its property to the harsh writ of seizure by attachment when it
has complied not only with every requirement of law made specially of foreign
corporations, but in addition with every requirement of law made of domestic
corporations. . . . .

Obviously, the assimilation of foreign corporations authorized to do business in the Philippines

"to the status of domestic corporations," subsumes their being found and operating as
corporations, hence, residing, in the country.

The same principle is recognized in American law: that the "residence of a corporation, if it can
be said to have a residence, is necessarily where it exercises corporate functions . . . ;" that it
is .considered as dwelling "in the place where its business is done . . . ," as being "located
where its franchises are exercised . . . ," and as being "present where it is engaged in the
prosecution of the corporate enterprise;" that a "foreign corporation licensed to do business in
a state is a resident of any country where it maintains an office or agent for transaction of its
usual and customary business for venue purposes;" and that the "necessary element in its
signification is locality of existence." 27 Courts have held that "a domestic corporation is
regarded as having a residence within the state at any place where it is engaged in the
particulars of the corporate enterprise, and not only at its chief place or home office;" 28 that "a
corporation may be domiciled in one state and resident in another; its legal domicil in the state
of its creation presents no impediment to its residence in a real and practical sense in the state
of its business activities." 29
The foregoing propositions are in accord with the dictionary concept of residence as applied to juridical persons, a term which appears to
comprehend permanent as well as temporary residence.

The Court cannot thus accept the petitioners' theory that corporations may not have a residence (i.e., the place where they operate and
transact business) separate from their domicile (i.e., the state of their formation or organization), and that they may be considered by other
states as residents only for limited and exclusive purposes. Of course, as petitioners correctly aver, it is not really the grant of a license to a
foreign corporation to do business in this country that makes it a resident; the license merely gives legitimacy to its doing business here. What
effectively makes such a foreign corporation a resident corporation in the Philippines is its actually being in the Philippines and licitly doing
business here, "locality of existence" being, to repeat, the "necessary element in . . . (the) signification" of the term, resident corporation.

Neither can the Court accept the theory that the omission by the banks in their petition for involuntary insolvency of an explicit and categorical
statement that they are "residents of the Philippine Islands," is fatal to their cause. In truth, in light of the concept of resident foreign
corporations just expounded, when they alleged in that petition that they are foreign banking corporations, licensed to do business in the
Philippines, and actually doing business in this Country through branch offices or agencies, they were in effect stating that they are resident
foreign corporations in the Philippines.

There is, of course, as petitioners argue, no substantive law explicitly granting foreign banks the power to petition for the adjudication of a
Philippine corporation as a bankrupt. This is inconsequential, for neither is there any legal provision expressly giving domestic banks the
same power, although their capacity to petition for insolvency can scarcely be disputed and is not in truth disputed by petitioners. The law
plainly grants to a juridical person, whether it be a bank or not or it be a foreign or domestic corporation, as to natural persons as well, such
a power to petition for the adjudication of bankruptcy of any person, natural or juridical, provided that it is a resident corporation and joins at
least two other residents in presenting the petition to the Bankruptcy Court.

The petitioners next argue that "Philippine law is emphatic that only foreign corporations whose own laws give Philippine nationals reciprocal
rights may do business in the Philippines." As basis for the argument they invoke Section 123 of the Corporation Code which, however, does
not formulate the proposition in the same way. Section 123 does not say, as petitioners assert, that it is required that the laws under which
foreign corporations are formed "give Philippine nationals, reciprocal rights." What it does say is that the laws of the country or state under
which a foreign corporation is "formed, organized or existing . . . allow Filipino citizens and corporations to do business in its own country or
state," which is not quite the same thing. Now, it seems to the Court that there can be no serious debate about the fact that the laws of the
countries under which the three (3) respondent banks were formed or organized (Hongkong and the United States) do "allow Filipino citizens
and corporations to do business" in their own territory and jurisdiction. It also seems to the Court quite apparent that the Insolvency Law
contains no requirement that the laws of the state under which a foreign corporation has been formed or organized should grant reciprocal
rights to Philippine citizens to apply for involuntary insolvency of a resident or citizen thereof. The petitioners' point is thus not well taken and
need not be belabored.

That the Monetary Board can not appoint a conservator or receiver for a foreign bank or order its liquidation having only the power to revoke
its license, subject to such proceedings as the Solicitor General may thereafter deem proper to protect its creditors, which is another point
that petitioners seek to make, is of no moment. It has no logical connection to the matter of whether or not the foreign bank may properly ask
for a judicial declaration of the involuntary insolvency of a domestic corporation, which is the issue at hand. The fact is, in any event, that the
law is not lacking in sanctions against foreign banks or powerless to protect the latter's creditors.

The petitioners contend, too, that the respondent banks have come to court with unclean hands, their filing of the petition for involuntary
insolvency being an attempt to defeat validly acquired rights of domestic corporations. The Court wishes to simply point out that the effects
of the institution of bankruptcy proceedings on all the creditors of the alleged bankrupt are clearly spelled out by the law, and will be observed
by the Insolvency Court regardless of whatever motives — apart from the desire to share in the assets of the insolvent in satisfying its credits
— that the party instituting the proceedings might have.

Still another argument put forth by the petitioners is that the three banks' failure to incorporate their branches in the Philippines into new banks
in accordance with said Section 68 of the General Banking Act connotes an intention on their part to continue as residents of their respective
states of incorporation and not to be regarded as residents of the Philippines. The argument is based on an incomplete and inaccurate
quotation of the cited Section. What Section 68 required of a "foreign bank presently having branches and agencies in the Philippines, . . .
within one year from the effectivity" of the General Banking Act, was to comply with any of three (3) options, not merely with one sole
requirement. These three (3) options are the following:

1) (that singled out and quoted by the petitioners, i.e.:) "incorporate its branch or
branches into a new bank in accordance with Philippine laws . . . ; or

2) "assign capital permanently to the local branch with the concurrent maintenance of
a 'net due to' head office account which shall include all net amounts due to other
branches outside the Philippines in an amount which when added to the assigned
capital shall at all times be not less than the minimum amount of capital accounts
required for domestic commercial banks under section twenty-two of this Act;" or
 3) "maintain a "net due to" head office account which shall include all net amounts due
to other branches outside the Philippines, in an amount which shall not be less than
the minimum amount of capital accounts required for domestic commercial banks
under section twenty-two of this Act."

The less said about this argument then, the better.

The petitioners allege that three days before respondent banks filed their petition for involuntary insolvency against CMI, they received from the latter substantial
payments on account in the aggregate amount of P6,010,800.00, with the result that they were "preferred in the distribution of CMI's assets thereby defrauding other
creditors of CMI." Non sequitur. It is in any case a circumstance that the Bankruptcy Court may well take into consideration in determining the manner and
proportion by which the assets of the insolvent company shall be distributed among its creditors; but it should not be considered a ground for giving the petition for
insolvency short shrift. Moreover, the payment adverted to does not appear to be all that large. The total liabilities of CMI to the three respondent banks as of
December, 1981 was P21,531,336.91, and US$14,485,814.85. Converted into Philippine currency at the rate of P7.899 to the dollar, the average rate of exchange

the dollar account would be P114,423,451.50. Thus, the aggregate liabilities

during December, 1981, 30

of CMI to the banks, expressed in Philippine currency, was P135,954,788.41 as of December,

1981, and therefore the payment to them of P6,010,800.00 constituted only some 4.42% of
the total indebtedness.

WHEREFORE, the petition is DENIED and the challenged Decision of the Court of Appeals is
AFFIRMED in toto, with costs against the petitioners.

SO ORDERED.
CASE NO. 4

288 U.S. 123 (1933)

ROGERS
v.
GUARANTY TRUST COMPANY OF NEW YORK ET. AL.

No. 227.

Supreme Court of United States.

Argued December 15, 16, 1932.

Decided January 23, 1933.

CERTIORARI TO THE CIRCUIT COURT OF APPEALS FOR THE SECOND CIRCUIT.

124*124 Mr. Richard Reid Rogers pro se. Mr. Evan Shelby was on the brief.

Mr. John W. Davis, with whom Mr. Nathan L. Miller was on the brief, for respondents.

MR. JUSTICE BUTLER delivered the opinion of the Court.

Petitioner, plaintiff below, owns 200 shares of the common stock of The American
Tobacco Company which he acquired prior to the passage of c. 175, New Jersey
Laws, 1920, that is here involved. He also owns 400 shares of common stock B. He
brought two suits in the supreme court of New York: one against the tobacco
company and some of its directors, the other against the trust company, Junius
Parker and others. On application of defendants both were removed to the
federal court for the southern district of that State. The first was discontinued as to
some defendants and the cases were consolidated. The defendants before the
court are the two companies, Parker, and five of the 17 directors of the tobacco
company including its president, one of its vice presidents and its secretary.

The tobacco company was organized under the laws of New Jersey, and in that
State maintains its "principal 125*125 and registered office" as designated in its
charter, holds the stockholders' meetings and does a substantial amount of
business. It is authorized by the laws of New York to do business there and has in
New York City its principal place of business where its directors usually meet, its
executives have their offices and most of its records are kept. It carries on business
in that and many other States and also in a number of foreign countries.

The grievances alleged by plaintiff concern the issue, allotment and sale of stock
of the tobacco company. June 25, 1930, the board of directors adopted a
resolution recommending the reduction by one-half of the par value and the
doubling of the number of shares of its common stock and common stock B. It had
outstanding 526,997 shares of preferred stock, and, as a result of action in
accordance with that recommendation, 1,609,696 shares of common and
3,077,320 shares of common B. And by another resolution the board advised
approval by the stockholders of a plan for the issue and sale of common stock B
to employees pursuant to c. 175, New Jersey Laws, 1920.[1] The plan submitted
accords to such employees 126*126 and others actively engaged in the conduct
of the business as may be selected an opportunity to purchase stock "by way of
additional compensation for services to be rendered," and allots for subscription
shares of unissued stock. The board may offer stock to such persons in the service
at prices not less than par and upon other terms and conditions determined by
the president pursuant to authority granted him for that purpose by the board. No
employee or person actively engaged in the conduct of the business of the
corporation or its subsidiaries shall be deemed ineligible to its benefits by reason
of being also a director of the corporation or of any of its subsidiaries or of holding
any office therein.

On July 28, 1930, the stockholders adopted the plan. And January 28, 1931, the
board authorized a sale of 56,712 shares of common stock B at par value of $25
per share. It directed that there be furnished to the president, to be considered in
determining to whom the stock should be allotted for purchase, a list showing the
services rendered and, having regard to the value of the same, the rating on a
percentage basis given to each together with the total amount of his
compensation for 1930. It recommended that the basis of distribution should be
the number of shares having par value equal to one-third of that year's
compensation to each allottee rated at 100 per cent. and correspondingly less to
those having lower ratings. And there was accorded to each of 535 employees,
including directors and others active in the business, the right to subscribe for the
new stock on that basis. All 127*127 the shares allotted were sold at $25 for cash
to the trust company. The trust company allowed each allottee to subscribe at
the same price. At that time it was worth $112. The agreement stated that this was
by way of additional compensation for service to be rendered between January
31 and December 31, 1931, that until the end of the year no allottee could take
up his stock, that he was entitled to have dividends applied on the purchase price
and that if he should terminate his employment before the end of the year the
trustees were to decide whether he should have his allotment.

The complaint attacked the transaction upon the following grounds: The directors
being disqualified by reason of their interest as allottees, the plan was not passed
by a valid vote or adopted as required by c. 175. The subsequent vote of the
stockholders required by the statute to be predicated upon action by the board,
was likewise invalid. The plan was ultra vires in that the allotment "by way of
additional compensation for services to be rendered" violated c. 195, New Jersey
Laws, 1917. Under the company's charter and the statutes of New Jersey — § 224,
General Corporation Law as added by § 16 of c. 318, Laws 1926 — every
stockholder had the right according to the number of his shares to have pro rata
distribution of the stock in question. And the complaint prayed decree that the
defendants be enjoined from carrying out the plan, that the stock be declared
void and canceled, and that the defendants, other than the tobacco company,
be held for costs and damages sustained by that company.

Four defenses were set up: Plaintiff failed to comply with Equity Rule 27. The
stockholders including plaintiff ratified the allotments to the directors. The suit is an
attempt to regulate the internal affairs of a corporation foreign to New York, and
the United States district court sitting therein should decline to take jurisdiction. The
128*128 allotments were fair and reasonable and were made in accordance with
the company's by-laws and the statutes of New Jersey. Plaintiff moved for an order
striking out the defenses as insufficient and for a decree in accordance with the
prayer of the complaint or, in the alternative, for an injunction pendente lite
preventing the carrying out of the plan.

The district court filed an opinion [60 F. (2d) 106] in which it said:

"In the present case, the validity of the shares sought to be cancelled depends
primarily upon the interpretation and effect of the act of 1920. The directors cited
this statute as their authority for the plan when they formulated it and have all
along insisted that the plan is in conformity with the statute. The plaintiff takes the
position that the statute is not applicable and has been used by the directors
merely as a cover for a raid upon the corporate treasury for their own profit. In
addition; plaintiff submits that two other statutes, that of 1917 and that of 1926,
must be taken as limiting the operation of the 1920 act. It is obvious that the case
presents not merely questions of fact but questions of some complexity under the
New Jersey laws. There seem to be no decisions of the New Jersey courts to serve
as a guide in the proper construction and possible interrelation of these statutes.
The legality of the corporate proceedings which resulted in the issuance of this
stock is peculiarly a matter for determination in the first instance by the New Jersey
courts. It may be noted that the American Tobacco Company is not a local
enterprise. While its chief office is said to be here and it unquestionably carries on
business here, its activities are known to be world-wide. It has a New Jersey charter;
it refers to the New Jersey office as its principal office; it holds its stockholders'
meetings there. It is not a resident corporation in any sense of the word."

129*129 And it entered judgment denying the motion and that "in the exercise of
this Court's discretion, each of the bills of complaint herein be and the same are
hereby dismissed, without prejudice to the enforcement of the rights of plaintiff, if
any, in the courts of New Jersey."

The Circuit Court of Appeals, 60 F. (2d) 114, dealing with plaintiff's contentions
before it, held that the plan was authorized, that the stock was lawfully issued
under New Jersey statutes, and that for the reasons given in the opinion the bill
was properly dismissed. A dissenting opinion suggests that the plan was not
sufficiently in detail to comply with the New Jersey statute. The court affirmed the
judgment appealed from, and upon its mandate the district court entered a
decree that the bills of complaint be dismissed with costs.

Among the points and contentions raised and pressed by plaintiff in his petition for
certiorari and argument here are the following: The plan is not definite and
formulated as required by c. 175. That chapter as construed below is repugnant
to the contract clause of the federal Constitution. The decision that the plaintiff
failed to comply with Equity Rule 27 is contrary to c. 175. Chapter 195, New Jersey
Laws 1917, does not permit the issue of stock to employees for services to be
rendered. The decree of the district court declining to exercise jurisdiction is
contrary to decisions of this court and in conflict with the decision of the Circuit
Court of Appeals for the Seventh Circuit in Williamson v. Missouri-Kansas Pipe Line
Co., 56 F. (2d) 503.

The authorization, allotment and sale of the shares in question involved the
proportionate ownership of stockholders and their rights inter sese. Unquestionably
the steps taken and proposed to formulate and carry out the plan constitute the
conduct and management of the internal affairs of the tobacco company. The
controversy is solely between the plaintiff and other stockholders not 130*130
participating in the distribution on one side and the purchasers of the new stock,
the corporation, its directors and officers on the other. When, by acquisition of his
stock, plaintiff became a member of the corporation, he, like every other
shareholder, impliedly agreed that in respect of its internal affairs the company
was to be governed by the laws of the State in which it was organized. His rights,
whatever the tribunal chosen for their vindication, are to be determined upon the
ascertainment and proper application of New Jersey law.

It has long been settled doctrine that a court — state or federal — sitting in one
State will as a general rule decline to interfere with or control by injunction or
otherwise the management of the internal affairs of a corporation organized
under the laws of another State but will leave controversies as to such matters to
the courts of the State of the domicile. Wallace v. Motor Products Corp., 25 F. (2d)
655, 658. Chicago Title & Trust Co. v. Newman, 187 Fed. 573, 576. Eberhard v.
Northwestern Mutual Life Ins. Co., 210 Fed. 520, 522. Powell v. United Association,
240 N.Y. 616; 148 N.E. 728. Sauerbrunn v. Hartford Life Ins. Co., 220 N.Y. 363, 371; 115
N.E. 1001. Jackson v. Hooper, 76 N.J. Eq. 592, 604; 75 Atl. 568. Guilford v. Western
Union Telegraph Co., 59 Minn. 332, 340; 61 N.W. 324. Kimball v. St. Louis & S.F. Ry.
Co., 157 Mass. 7; 31 N.E. 697. Hogue v. American Steel Foundries, 247 Pa. 12, 15; 92
Atl. 1073. Babcock v. Farwell, 245 Ill. 14, 33, et seq.; 91 N.E. 683. Clark v. Life
Association, 14 App. D.C. 154, 179-180. North State Copper & Gold Mining Co. v.
Field, 64 Md. 151; 20 Atl. 1039. Cf. Burnrite Coal Co. v. Riggs, 274 U.S. 208, 212-213.
While the district court had jurisdiction to adjudge the rights of the parties, it does
not follow that it was bound to exert that power. Canada Malting Co. v. Paterson
Co., 285 U.S. 413, 422, and authorities cited. It was free in the 131*131 exercise of a
sound discretion to decline to pass upon the merits of the controversy and to
relegate plaintiff to an appropriate forum. Langnes v. Green, 282 U.S. 531, 535, 541.
Heine v. New York Life Ins. Co., 50 F. (2d) 382. Obviously no definite rule of general
application can be formulated by which it may be determined under what
circumstances a court will assume jurisdiction of stockholders' suits relating to the
conduct of internal affairs of foreign corporations. But it safely may be said that
jurisdiction will be declined whenever considerations of convenience, efficiency
and justice point to the courts of the State of the domicile as appropriate tribunals
for the determination of the particular case. Cohn v. Mishkoff Costello Co., 256
N.Y. 102, 105; 175 N.E. 529. Travis v. Knox Terpezone Co., 215 N.Y. 259, 263; 109 N.E.
250. Kimball v. St. Louis & S.F. Ry. Co., supra.

The complaint shows that as of its date seven directors of the tobacco company
were not residents of New York. Only six allottees are before the court. The others,
over 525, are not mentioned in the complaint. It appears from the answer that
many of them are outside New York, and it may be inferred that a large number
of them reside in the other States and countries in which the company does
business. At the time, February 23, 1932, of the dismissal of the bill the services of
the employees, for which the allotments constitute part compensation, had been
fully performed and they were entitled to have and presumably they, or at least
some of them, had secured the delivery of the shares so allotted to them. As the
tobacco company, in addition to its registered office, has property, operates
directly or through subsidiaries branch factories in New Jersey and carries on
business there and in other States and countries, it may not be deemed to have
been organized in that State as a mere matter of convenience for the purpose of
carrying on all its business in another State 132*132 or be deemed in New York to
be a local concern. This case is wholly unlike Williamson v. Missouri-Kansas Pipe Line
Co., supra, relied on by plaintiff.

The determination of plaintiff's contentions requires not only the ascertainment of

the true meaning and intent of c. 175 of New Jersey Laws, 1920, but also its
constitutional validity. Its provisions have never been construed by the New Jersey
courts and they or their like are not familiar in the statute law governing
corporations organized in other States. And other New Jersey statutes among
which are c. 195, Laws of 1917, and c. 318, § 16, Laws of 1926, are claimed by
plaintiff to have an important bearing upon this case. But the courts of that State
have had no occasion to consider the interrelation, if any, between them and c.
175 pursuant to which the stock in question purports to have been issued to
employees. A mere inspection of the New Jersey statutes directly involved
suggests grave doubts as to their proper application to the facts in this case and
the difference of opinion expressed below confirms that impression.

So far as concerns the cancellation of the allotted shares, and other relief sought
by plaintiff, the situs of the stock is in New Jersey and all questions relating to the
validity of the plan, authorization, issue, allotment and sale of the same may be
conveniently and effectively determined in New Jersey courts, the authoritative
and final interpreters of the statutes of that State. A proceeding in rem is
authorized, process therein may be served by publication and a decree, final and
binding upon all, canceling or sustaining the stock may readily be enforced. New
Jersey Practice Act of 1903, § 84. Jellenik v. Huron Copper Co., 177 U.S. 1, 13.
Andrews v. Guayaquil & Quito Ry. Co., 69 N.J. Eq. 211; 60 Atl. 568. Holmes v. Camp,
219 N.Y. 359; 114 N.E. 841. The facts and circumstances disclosed by the record
clearly bring this case within the general rule and abundantly justify the exercise
133*133 of discretion on the part of the district court in dismissing the bills of
complaint without prejudice. As the Circuit Court of Appeals considered and
decided the merits of the case, its judgment is reversed, the judgment of the
district court entered upon its mandate is vacated and the case will be remanded
to the district court with directions to reinstate the earlier judgment dismissing the
bills of complaint without prejudice.

Reversed.

MR. JUSTICE ROBERTS took no part in the consideration or decision of this case.

MR. JUSTICE STONE, dissenting.

I think the Court should decide this case on its merits in favor of the petitioner.

Respondent, the American Tobacco Company, organized under the laws of New
Jersey, is a large and prosperous corporation, engaged in the manufacture and
distribution of cigarettes and other forms of tobacco. It has upwards of 40,000
stockholders. At the commencement of this suit it had a board of 16 directors,
including a president, five vice presidents, a secretary and a treasurer, all actively
engaged in its management. For many years these officers have received large
annual fixed salaries, as well as large annual cash profit-sharing bonuses paid
under a by-law of the company, adopted in 1912. See Rogers v. Hill, 60 F. (2d) 109.
In the year 1930, the profit-sharing bonus of the president, added to his fixed salary
of $168,000, gave him a total compensation of over $1,010,000, which was further
augmented by a special "credit" of $273,470. In the same year, four of the five vice
presidents received an aggregate annual salary and bonus of more than
$2,077,000. In addition, a number of stock subscription plans have from time to
time been put into operation by the directors, without authority of the charter or
by-laws of the corporation, or the knowledge or approval 134*134 of its
stockholders, by which they largely benefited. In that of 1926, the respondent Hill,
the president and also a director of the company, acquired 8,000 shares of
common stock, and other directors, who are respondents here, received
substantial amounts. In that of 1929, one year before the transactions now
complained of, 46,500 of 51,750 shares of common stock, purchased by the
corporation and set aside for the purpose, were sold to the corporate directors at
$47 per share less than market value. Convenient arrangements were made for
postponed payment of the purchase price. Respondents received 23,050 shares,
of which the president received 15,050.

On January 28, 1931, a new allotment of stock was made, which is the subject of
this litigation. On that day, the Board of Directors (the president and officers
constituting a majority of those in attendance) considered and passed upon the
adequacy of the compensation which its members were then receiving for their
services to the corporation, and the necessity of conferring further benefits on
themselves in order to insure the continuance of those services. Having resolved
these questions in their own favor, they proceeded to award additional benefits
in the form of the privilege to subscribe to unissued common stock B of the
corporation, at a small fraction of its market value. By resolution of that date, they
put into effect a stock subscription plan by which 56,712 shares of unissued
common stock B of the corporation were distributed in accordance with
recommendations made by the president. Of this number 32,370, more than half,
were allotted to the directors, of which 13,440 were allotted to the president. The
remaining 24,342 shares were allotted in relatively small amounts to 525
employees. None of the recipients was of lower rank than factory subassistant.
Four hundred and seventy-three received allotments of less than 100 shares each,
the great majority receiving from 15 to 50 shares. The stated consideration for issue
135*135 of the stock was a subscription price of $25 per share, the par value, and
the services of the allottee, not specifically described, to be rendered to the
American Tobacco Company for the remainder of the year.

The certificates of stock were to be delivered to the respondents, the Guaranty

Trust Company of New York and an individual, as trustees. They were authorized
to borrow money upon them to the extent of $25 per share, in order to effect
immediate payment of the subscription price to the Tobacco Company, to apply
dividends received on account of the purchase price to be paid by the allottees
and to deliver the certificates to them after the close of the year, upon payment
in full of their subscriptions. They were given discretion to waive performance of
the stipulated service by any allottee and in the event that the subscriber was
discharged or resigned from the employ of the company within the year, to
cancel the subscription agreement or not, as they pleased.

On the day of the resolution allotting the stock, its market price was $112 per share,
more than four times the subscription price. It was then paying, and has ever since
paid, dividends at the rate of $5 per year, sufficient to pay the subscription price
in five years. Valuing the subscription privilege by the difference between the
subscription price and the market value of the shares, the president received by
the allotment the equivalent of $1,169,280, in addition to his annual compensation
of more than $1,000,000. The stock subscription rights awarded the five vice-
presidents, similarly valued, amounted to $1,451,595. That the subscription
privilege, accorded for the avowed purpose of assuring the continuance of these
executives in the company's employ, was then and has been ever since of great
value, upon any theory of valuation, is not questioned.

Conceiving himself aggrieved by this transaction, petitioner, a non-assenting

stockholder, brought two suits in 136*136 the Supreme Court of New York, the state
in which he resides, joining as defendants the American Tobacco Company, the
trustees of the allotted stock, and certain of the directors, including the president,
secretary, treasurer and five vice presidents, one of whom has since died and two
of whom were not served with process. Included in the relief sought was a decree
that the corporation, its officers and directors be enjoined from carrying out the
stock allotments and that the stock allotted to the directors be surrendered to the
Company. On motion of defendants, the Tobacco Company and a non-resident
director, the causes were removed to the District Court for Southern New York, on
grounds of diversity of citizenship of the parties to a separable controversy, and
there consolidated.

Thus called upon in this suit to account for their stewardship and to justify their
action, the defendants, the respondents here, place their whole reliance upon a
statute of New Jersey in conformity with which, they contend, they secured, in
advance, the authorization of the stockholders to make the challenged
allotments of stock.

Section 1, c. 175, of the New Jersey Laws for 1920, authorizes any New Jersey
corporation to provide and carry out a plan for "(a) the issue or the purchase and
sale of its capital stock to any or all of its employees and those actively engaged
in the conduct of its business or to trustees on their behalf . . . and for aiding any
such employees or said other persons in paying for such stock by contribution,
compensation for services or otherwise, . . ." Section 2 (b) provides that where, as
in this case, the corporation has been formed without charter or by-law provisions
authorizing the issuance or the purchase and sale of stock for such purposes, "the
board of directors shall first formulate such plan or plans and pass a resolution
declaring that in its opinion the adoption thereof is advisable and shall call a
meeting of the stockholders to 137*137 take action thereon . . ." It requires an
affirmative vote of two-thirds in interest of each class of stockholders, present at
the meeting, for the adoption of the plan.

In June, 1930, the directors, purporting to act under this statute, presented to the
stockholders, by notice of a special meeting, a so-called "plan" under which the
employees of the corporation and those actively engaged in its business were to
be permitted to subscribe to unissued shares of its common stock B. The notice of
the meeting was accompanied by a document designated "Employees' Stock
Subscription Plan," and by a copy of resolutions of the board of directors
authorizing the submission of the plan to the stockholders, proposing a reduction
in the par value of the common stock and the non-voting common stock B from
$50 to $25 per share, and an increase of the authorized common stock from
1,000,000 to 2,000,000 shares, and of the authorized common stock B from
2,000,000 to 4,000,000 shares, each stockholder to receive two shares of the new
stock for one of the old. By thus increasing the authorized, unissued shares of
common B, stock was to be made available for subscription by employees.

The Employees' Stock Subscription Plan proposed "to allot for subscription . . . by
way of additional compensation for services to be rendered, shares of unissued
common stock B . . . to such employees of the corporation and/or its subsidiaries
and those actively engaged in the conduct of its or their business as may be
selected . . ." The prescribed method of execution of the plan was that "the Board
of Directors may, at such time or times as it may determine . . . offer and allot such
stock for subscription .. . in such amounts and proportions, to such persons, at such
prices, not less than the par value of the shares allotted, payable in full or in such
installments, and upon such other terms and conditions, all as shall be determined
with respect to each offering of 138*138 stock to each individual pursuant to
authority to be granted by the Board of Directors to the President for such
purpose."

Accompanying the notice of the meeting was a circular letter by the president to
stockholders, in which they were told of the prosperous condition of the company,
that the purpose of the stock allotment plan was to encourage those who had
made the company's success possible to continue in its employ, and that it was
the expectation of the Board of Directors, if the program set forth in the notice of
the meeting and accompanying documents should be approved by
stockholders, to declare an extra dividend of $4 per share on the common stock
and common stock B, and to initiate regular quarterly dividends on the newly
authorized shares of common stock and common stock B at the increased annual
rate of $5 per share. The letter closed with a request to sign and return the
enclosed proxy, thereby indicating "your approval of the proposed steps and your
support of your Company's management."

Moved, perhaps, by these inducements, the proposal was approved at the

meeting by vote of the requisite number of shares of each class.
No disclosure was made to the stockholders by the officers and directors of the
stock subscription plans previously put into operation by them, without authority of
the charter or by-laws or the knowledge and approval of the stockholders. No
disclosure was made of the number or amounts of the annual cash bonuses which
had been paid to the president and vice presidents of the company, under the
by-law adopted in 1912, and never, so far as appears, subsequently mentioned to
the stockholders until after the stock allotments here involved. The only hint of the
intention of the management to participate in the proposed Employees' Stock
Subscription Plan was contained in a single sentence appearing in the Plan:
139*139 "No employee, or person actively engaged in the conduct of the business
of the Corporation, or its subsidiaries, shall be deemed ineligible to the benefits of
the Plan by reason of being also a director of the Corporation or of any of its
subsidiaries or of holding any office therein."

With all these facts presented by the pleadings, the district court, acknowledging
its jurisdiction both as a federal court and a court of equity to decide the cause
on its merits, nevertheless, held that as the suit concerns the internal affairs of a
New Jersey corporation, discretion should be exercised to dismiss it without
prejudice to its maintenance in the courts of New Jersey. On appeal, the Circuit
Court of Appeals for the Second Circuit, Judge Swan dissenting, considered the
merits and upheld the legality of the stock allotments. The decree of dismissal was
affirmed on the merits and the trial court has entered a final decree accordingly.
This Court now reverses that judgment, reestablishing the original decree of the
trial Court, on the ground that a proper exercise of judicial discretion requires that
the cause should not be heard. Thus after approximately two years of litigation in
state and federal courts, all of which could, and I think should, have decided the
case on the merits, the plaintiff must now start the litigation afresh in the courts of
New Jersey.

In determining whether the federal courts should decline to exercise the

jurisdiction conferred on them by removal, the nature of this controversy and its
merits cannot be ignored. I do not stop to consider numerous objections to the
stock allotments, urged by petitioner, which are not without weight. It suffices for
present purposes that no plan of sufficient definiteness to comply with the New
Jersey statute was ever submitted to the stockholders for their approval; and that
even if it be conceded that a "plan" was approved, the action of the directors in
alloting the stock to themselves, in violation of their duty as fiduciaries, exceeded
the authority conferred 140*140 upon them by the stockholders, and was,
therefore, ultra vires.

The statute directs that the board of directors shall "first formulate such plan,"
declare it "advisable," and call a meeting of stockholders to act on it. Without
presenting for the consideration of the stockholders any workable plan of stock
allotment, the directors, in effect asked the stockholders to confer plenary
authority on them to formulate a plan and to carry it into execution without any
disclosure of its provisions. After the meeting, as before, no stockholder, not in the
confidence of the directors, knew in what the plan consisted, who were the
persons to participate in it, what principle was to control their selection or
determine the amount of stock they were to receive, or the price they were to
pay. It is a misuse of words of plain meaning to speak of such a proposal as a
"plan," much less a formulated plan for stock allotment to employees, or as one
which, in the form presented to the stockholders, the directors could have
pronounced advisable or have carried into operation. It was no more than an
invitation to stockholders to abrogate the discretion which the statute vested in
them to approve a formulated plan, having at least some aspects of definiteness,
and vest in the directors powers which could be conferred on them only by
charter amendment in the manner prescribed by the statute. The invitation was
accompanied by a skillfully phrased suggestion that it was necessary to accept it
in order to hold the services of employees, and that, if accepted, the directors
would cause new benefits to flow into the pockets of stockholders in the form of
extra and increased dividends. Such a maneuver cannot rightly be regarded as
a compliance with the plain language of the statute, which requires the directors
first to formulate a plan for stock allotment and declare it advisable, and then to
submit it to the stockholders for 141*141 their approval. If it were, it would be
difficult to suggest any conceivable purpose of the statute which could not be
thwarted by a similar procedure.

The respondents stand in no better position, even if we assume that the proposal
submitted to the stockholders was a formulated plan, within the meaning of the
New Jersey statute. For in that case, authority for the directors' action must be
found in the stockholders' approval of the proposal which they submitted, and we
must interpret the proposal and the action taken by the stockholders in terms of
their legitimate expectation that the directors were complying with their duty as
fiduciaries and not dealing with them at arm's length. They were entitled to read
the proposal in the light of the fundamental duty of directors to derive no profit
from their own official action, without the consent of the stockholders, obtained
after full and fair revelation of every circumstance which might reasonably
influence them to withhold their consent. Wardell v. Railroad Co., 103 U.S. 651;
General Investment Co. v. American Hide & Leather Co., 97 N.J. Eq. 230, 233; 127
Atl. 659; see United States Steel Corp. v. Hodge, 64 N.J. Eq. 807, 813; 54 Atl. 1; Globe
Woolen Co. v. Utica Gas & Electric Co., 224 N.Y. 483, 489; 121 N.E. 378; compare
Meinhard v. Salmon, 249 N.Y. 458; 164 N.E. 545; Wendt v. Fischer, 243 N.Y. 439; 154
N.E. 303. They were entitled to assume that the proposal involved nothing which
did not fairly appear on its face and above all that it was not a cloak for a scheme
by which the directors were to enrich themselves in great amounts at the expense
of the corporation, of whose interests they were the legal guardians.

The respondents must, therefore, rest their case on the bare statement in their
proposal to the stockholders that no employee or person actively engaged in the
business of the company "shall be deemed ineligible to the benefits 142*142 of the
plan," because a director or officer. But it would be extravagant to say that these
words, addressed by men in the position of trustees to their beneficiaries, gave
warning of the wholesale gratuities which the directors subsequently bestowed
upon themselves. No more extensive authority could be derived from this
language than the disclosure which it made. By consenting that the directors
should be "eligible" to share in a plan avowedly for the benefit of employees, the
stockholders did not consent that they should be the chief beneficiaries of their
own unrestrained munificence, or that they should add any new bounties to the
unrevealed stock allotments and bonuses which the directors had previously
enjoyed in secrecy. Even if the stockholders consented that some of the directors
should be eligible to benefit from action taken by other disinterested directors,
they certainly did not consent that the allotments should be made by a group of
directors who, because of the magnitude of the benefits they anticipated for
themselves, were obviously incapable of passing an independent and unbiased
judgment upon the propriety of the distribution which they cooperated in making
to each other. Respondents' contention that if the directors were unable to vote
on each other's participation no plan could be put into effect under which a
majority of the directors were to participate, is without weight, for it obviously could
be if the statute were followed and the plan revealed in its entirety to the
stockholders.
To surmount these difficulties, respondents point to the fact that a representative
of petitioner stated at the stockholders' meeting that favorable action on the
proposal might result in the issuance of a large amount of stock to employees,
including officers and directors, without adequate consideration, and that this did
not induce the stockholders to express their disapproval. It is unnecessary 143*143
to speculate whether this outcome is to be attributed to the fact that those
present, being without the aid of prevision, regarded the prediction as too
improbable to be credited, or to the fact that those who attended the meeting
were not, for the most part, the stockholders, but the recipients of their proxies
selected by the management of the corporation for the occasion. A statement
made to them would, as a New Jersey court has said, fall "upon ears not allowed
to hear and minds not permitted to judge; upon automatons, whose principals are
uninformed of their own injury." See Berendt v. Bethlehem Steel Corp., 108 N.J. Eq.
148, 151; 154 Atl. 321. In any event it is enough that neither in the notice of meeting
and accompanying documents, which the stockholders saw and on which they
relied, nor at the meeting itself, did the officers and directors disclose that such
was their purpose.

We need not conjecture whether, if the directors had had the hardihood to
disclose in advance the benefits which they were to award to themselves, the
stockholders would nevertheless have given their approval. Nor is it important that
these directors have successfully managed the corporation and that under their
direction it has earned large profits for its stockholders. Their business competence
did not confer on them the privilege of making concealed or unauthorized profits
or relieve them of the elementary obligation which the law imposes on all
corporate directors to deal frankly and openly with stockholders in seeking their
consent to benefit personally by reason of their relationship to the corporation.

The directors, having failed to comply with petitioner's seasonable demand that
they exercise their authority to bring this suit in the name of the corporation,
petitioner was not required by general equitable principles or by Equity Rule 27 to
appeal to the stockholders before bringing it, as the action complained of here
was not one which 144*144 the stockholders could ratify. Continental Securities
Co. v. Belmont, 206 N.Y. 7, 17; 99 N.E. 138; cf. Delaware & Hudson Co. v. Albany &
Susquehanna R. Co., 213 U.S. 435. Authority of the directors to bestow gratuities
upon themselves in the form of subscription rights must be found in a plan
approved in advance as the statute provides, by two-thirds of each class of stock.
If no plan was presented to stockholders, as I think was the case, the entire stock
issue was ultra vires and cannot be ratified any more than any other unauthorized
disposition of corporate assets. If the proposal to the stockholders is regarded as a
plan, so far as ordinary employees are concerned, as it plainly does not embrace
authority to the directors to confer such extravagant benefits upon themselves,
the result is the same, as to the stock allotted to the directors.

I cannot agree that a proper exercise of discretion requires us to deny to the

petitioner the relief to which he is so clearly entitled. This is the first time that this
Court has held that a federal court should decline to hear a case on the ground
that it concerns the internal affairs of a corporation foreign to the state in which it
sits. We may assume, without deciding, that neither a federal nor a state court of
equity will, as a general rule, undertake to administer the internal affairs of a
foreign corporation. But the case before us is, in this respect, unlike a suit to dissolve
the corporation and wind up its affairs, Wallace v. Motor Products Corp., 25 F. (2d)
655, 658; Pearce v. Sutherland, 164 Fed. 609; Maguire v. Mortgage Co. of America,
203 Fed. 858; cf. Burnrite Coal Co. v. Riggs, 274 U.S. 208, 212; or compel the
declaration of a dividend, Cohn v. Mishkoff Costello Co., 256 N.Y. 102; 175 N.E. 529,
or interfere with the election of officers or the meetings of shareholders or directors.
Wason v. Buzzell, 181 Mass. 338; 63 N.E. 909; State 145*145 ex rel. Lake Shore Tel. &
Tel. Co. v. De Groat, 109 Minn. 168; 123 N.W. 417; see Travis v. Knox Terpezone Co.,
215 N.Y. 259, 263; 109 N.E. 250.

We are presented with no problem of administration. The only relief which the
petitioner merits on the record before us or which he asks here is a decree that
certain directors, now before the Court, restore to the treasury of the corporation,
also before the Court, certain shares of stock alleged to have been illegally issued
to them, and that certificates for the stock now in possession of the trustees, who
are likewise before the Court, be surrendered. There are no more obstacles to the
rendition of an effective decree than in any other case in which a stockholder
seeks reparation for depredations upon the corporate property committed by
directors, some of whom only are before the Court. Compare Wineburgh v. U.S.
Steam & Street Ry. Advertising Co., 173 Mass. 60; 53 N.E. 145; Ernst v. Rutherford &
B.S. Gas Co., 38 App. Div. 388; 56 N.Y.S. 403; Corry v. Barre Granite & Quarry Co.,
91 Vt. 413; 101 Atl. 38; Ganzer v. Rosenfeld, 153 Wis. 442; 141 N.W. 121. The decree
will be completely satisfied by delivery of the certificates, properly endorsed, to
the corporation. There is and can be no suggestion that such a decree cannot be
pronounced and enforced as effectively by the courts in New York as it could be
by those in New Jersey. Cf. American Creosote Works v. Powell, 298 Fed. 417, 419;
see Babcock v. Farwell, 245 Ill. 14, 34; 91 N.E. 683.

The opinion of the Court concedes, as, indeed, the authorities which it cites show,
that the decision does not rest upon any definite rule of general application. It is
said that jurisdiction will be declined whenever considerations of convenience,
efficiency and justice point to the courts of the state of the corporate domicile as
appropriate tribunals for the determination of the particular 146*146 case. Such
considerations are said to require that this suit be dismissed though the petitioner
is thereby subjected to all the hazards of starting his action anew, in the courts of
New Jersey.

To support this conclusion, only two objections to the maintenance of the suit are
suggested in the opinion of this Court or in that of the district court below. One is
that numerous beneficiaries of the stock allotment, most of whom are not officers
or directors of the corporation, are not made parties to this suit and presumably
can be reached as a group only by suit in New Jersey. Hence, the intimation is, if
we decide this case and other suits should subsequently be brought in other
jurisdictions, different results may be reached on the same questions, a possibility
which can be avoided by forcing the petitioner to bring a single suit in New Jersey.
The other objection is that the Court would be called upon to decide a novel
question of New Jersey law.

As petitioner has chosen to assert demands necessarily restricted to the stock

issued by the directors to themselves, he had no occasion to join as parties the
several hundred lesser employees, the great preponderance of whom received
allotments of less than fifty shares of stock. Indeed, as the unconscionable
conduct of the participating directors, a major factor in this case, would afford no
basis for proceeding against the other allottees, it is by no means certain that the
suit would be cast in any different form if brought in New Jersey.

The somewhat speculative possibility that those of the participating directors who
have not been served with process in this suit may be called to answer in some
other court and exonerated is of slight importance compared to the
considerations favoring the exercise of jurisdiction. Petitioner has chosen to bring
his suit in New York. He and all but one of the individual defendants reside there.
147*147 The principal office of the American Tobacco Company is in New York
City and it is there that its books and records are found, its board of directors meets
and the acts complained of took place. There the respondent, Guaranty Trust
Company, is located, and its co-trustee resides. Before the decree can be
enforced it must be obtained and the litigation must be brought to a successful
conclusion. That involves the production in court of the necessary evidence. Of
the parties to this case none but the American Tobacco Company is amenable
to process in New Jersey; all are amenable in the Southern District of New York. In
New York, petitioner can compel them and others connected with the
corporation to attend as witnesses; all can be ordered to make complete
discovery; and petitioner can compel the production at the trial of the records of
both corporate defendants. We cannot assume that compulsion will not be
necessary. The Tobacco Company carried to the highest court of the state its
resistance to petitioner's preliminary application to inspect its books, (Matter of
Rogers v. American Tobacco Co., 143 Misc. Rep. 306, 257 N.Y.S. 321; aff'd 233 App.
Div. 708, 249 N.Y.S. 993, leave to appeal denied). In New York also the individual
defendants and the trust company can be reached by injunction pendente lite,
restraining the transfer to innocent purchasers of the stock, certificates for which
are already issued and in the hands of the trust company. Under the
circumstances of this case, only considerations of more compelling force than the
possibility of inconsistent decrees should lead a forum, convenient in so many
respects, to decline jurisdiction.

I come then to the only ground which can plausibly be urged for declining the
jurisdiction — that in one, but not necessarily a conclusive aspect of the case, the
Court may be called on to decide questions of New Jersey law which, although
novel, can hardly be said to be complicated or 148*148 difficult. If there were any
principle of federal jurisprudence, generally applicable, that in cases between
private parties federal courts of equity may, in their discretion, decline jurisdiction
because called upon to decide an unsettled question of state law, I would willingly
acquiesce in declining it here. But this Court has not declared such a principle and
does not recognize it now. On the contrary, whether jurisdiction rests on diversity
of citizenship or on a substantial constitutional question, this Court has consistently
ruled that it is the duty of a federal court of original jurisdiction, and of this Court
on appeal from its decree, to pass on any state question necessarily involved,
however novel, and that the decision may be rested on that ground alone. Siler
v. Louisville & Nashville R. Co., 213 U.S. 175; Risty v. Chicago, R.I. & P. Ry. Co., 270
U.S. 378.

Unless we are now to abandon that long settled practice, I can see much more
reason for passing on this question than upon many others which this Court has
decided. Our judgment would conflict with no local decisions, compare Black &
White Taxi Co. v. Brown & Yellow Taxi Co., 276 U.S. 518; Burgess v. Seligman, 107
U.S. 20; nor apply an alien policy to matters which are the subject of delicate
feeling in the state. Compare Gelpcke v. Dubuque, 1 Wall. 175; Railroad
Commission of California v. Los Angeles Ry. Corp., 280 U.S. 145. Indeed, we may
not even avoid deciding the question of state law by sending the case to New
Jersey, for it is not suggested that if petitioner should elect to sue in the federal
court for New Jersey, or if the suit should be properly brought there by removal
from the state court, either that court or this may decline jurisdiction. Thus we
should do no more in deciding the question of New Jersey law now than if the
case were brought to us from the federal courts in New Jersey.

149*149 Even if decision of the question of New Jersey law were more
embarrassing than it appears to be here, a proper exercise of discretion would
seem to require that the bill be retained, and that an interlocutory injunction
restraining any disposition of the stock by respondents be granted as prayed,
pending the diligent prosecution by petitioner of a suit in New Jersey. Compare
Mallow v. Hinde, 12 Wheat. 193; Dunn v. Clarke, 8 Pet. 1; Stover v. Wood, 28 N.J.
Eq. 253.

If federal courts are to continue the general practice of deciding novel questions
of state law whenever they are necessary or convenient grounds for the
disposition of cases pending before them, there are peculiarly cogent reasons
why there should be no departure from the practice in cases like the present. While
a corporation in legal theory has only one domicile, in practice its activities are
often nationwide and the legal domicile of the corporation, as in this case, is
neither the place of its real corporate life nor the home of its officers and directors.
Hence, if stockholders' suits, such as the present, are to be maintained with any
hope of success, the practical necessities of making parties, securing evidence,
obtaining the production of documents and relief by injunction against individual
wrongdoers, justify, if they do not compel, their prosecution in the particular
jurisdiction where necessary parties and witnesses may be found, rather than in
the place of the technical corporate domicile.

Extension of corporate activities, distribution of corporate personnel, stockholders

and directors through many states, and the diffusion of corporate ownership,
separated from corporate management, make the integrity of the conduct of
large business corporations increasingly a matter of national rather than local
concern (cf. A.A. Berle, Jr. and Gardiner C. Means, The Modern Corporation and
Private Property, 1932), to which the federal 150*150 courts should be quick to
respond when their jurisdiction is rightly invoked. We should be slow, indeed, to
make a reluctance to decide questions of state law, not exhibited in other classes
of cases, the ground for declining to decide this one.

MR. JUSTICE BRANDEIS concurs in this opinion.

MR. JUSTICE CARDOZO, dissenting.

Viewing the suit as one to reclaim the shares received by the directors in breach
of their fiduciary duties to the corporation and the shareholders, I find no
adequate reason for the refusal to exercise jurisdiction, and this though a different
conclusion might be thought to be necessary if relief were to be given upon
grounds affecting the validity of the issue as a whole.

In the circumstances of this case, the certificates allotted to the directors may be
charged with a constructive trust, and surrendered to the corporation to be held
in its treasury, without impeaching a single certificate other than their own.

There is no need to consider whether the "plan" as proposed is insufficient on its

face, with the result that the innocent employees as well as the culpable directors
will be deprived of its benefits. If it be taken as sufficient, the shareholders who
voted for it are not chargeable with notice that fiduciary powers would later be
perverted by the award to the fiduciary of extraordinary benefits. Consent will not
protect if reason and moderation are not made to mark the boundaries of what
is done under its shelter.

I leave the question open whether in other circumstances or with other

consequences there may be a cancellation of the shares of a foreign corporation
in the absence of an adjudication by the courts of the domicile. Here the organic
151*151 structure of the corporation, if affected by the decree at all, will not be
changed in such a way as to work substantial detriment to any stranger to the suit,
but the fruits of an unjust enrichment will be put back into the treasury. I think we
are at liberty to do so much, if nothing more, without waiting upon the judgment
of any other court.

The doctrine of forum non conveniens is an instrument of justice. Courts must be

slow to apply it at the instance of directors charged as personal wrongdoers, when
justice will be delayed, even though not thwarted altogether, if jurisdiction is
refused. At least that must be so when the wrong is clearly proved. The
overmastering necessity of rebuking fraud or breach of trust will outweigh
competing policies and shift the balance of convenience. Equity, it is said, will not
be over-nice in balancing the efficacy of one remedy against the efficacy of
another when action will baffle, and inaction may confirm, the purpose of the
wrongdoer. Falk v. Hoffman, 233 N.Y. 199, 203; 135 N.E. 243. Of the shares allotted
to directors as contrasted with those allotted to other employees, most are owned
by the defendants sued. Whatever shares belong to others will be untouched by
the decree. With all the procedural complexities possible hereafter if jurisdiction
be declined, the hazard of inconsistent judgments affecting the directors inter se
will not avail without more to halt the processes of justice and the award of such
relief as the court is competent to give against those subject to its power.

I agree with MR. JUSTICE STONE for the reasons stated in his opinion that a breach
of the fiduciary duties of the directors is a legitimate inference from the allegations
of the bill, and agree with his conclusion that the cause should be remanded to
the District Court for a determination of the merits.

[1] Section 1 of that Act provides for the participation of employees in purchase
of stock, profits, welfare work and management of any corporation organized
under the laws of the State, and declares: "Any stock corporation . . . may, upon
such terms and conditions as may be determined in the manner hereinafter
designated, provide and carry out a plan or plans for any or all of the following
purposes: (a) The issue or the purchase and sale of its capital stock to any or all of
its employees and those actively engaged in the conduct of its business or to
trustees on their behalf, and the payment for such stock in installments or at one
time with or without the right to vote thereon pending payment therefor in full, and
for aiding any such employees and said other persons in paying for such stock by
contributions, compensation for services, or otherwise." And § 2 (b) provides: ". . .
the board of directors shall first formulate such plan or plans and pass a resolution
declaring that in its opinion the adoption thereof is advisable, and shall call a
meeting of the stockholders to take action thereon. . . . If two-thirds in interest of
each class of stockholders present at said meeting and voting shall vote in favor
of any such plan or any modification thereof, the said plan shall thereupon
become operative." And that section gives to any dissenting stockholder the right
upon surrender to receive from the company the appraised value of any stock
that was acquired before the passage of the Act.
CASE NO. 5

191 Cal.App.2d 399 (1961)

12 Cal. Rptr. 719

WESTERN AIR LINES, INC. (a Corporation), Respondent,

v.
JOHN G. SOBIESKI, as Commissioner of Corporations, Appellant.

Docket No. 24018.

Court of Appeals of California, Second District, Division Two.

April 20, 1961.

400*400 Stanley Mosk, Attorney General, Lee B. Stanton, Deputy Attorney General,
and Richard W. Jennings for Appellant.

Darling, Shattuck & Edmonds, Hugh W. Darling, O'Melveny & Myers and Pierce
Works for Respondent.

McMURRAY, J. pro tem.[*]

This is an appeal by the Commissioner of Corporations of the State of California

from a judgment of the superior court in an action brought by Western Air Lines,
Inc., for a writ of mandate to review a final order rendered by the commissioner.
By its judgment, the superior court, in substance, determined that the
commissioner had exceeded his jurisdiction in purporting to act on a change in
voting rights of its shareholders attempted by Western Air Lines, Inc., by means of
amending its articles of incorporation.

Western, as the respondent herein will be called, is a Delaware corporation with

its principal place of business in California. Western's original predecessor was
incorporated in California in 1925; thereafter, in 1928, a Delaware incorporation
was effected. This Delaware corporation, under a permit 401*401 applied for and
granted by the California Corporations Commissioner, exchanged its shares for all
of the outstanding shares of the California corporation in 1929, and the California
corporation then became a wholly owned subsidiary of the Delaware
corporation. This wholly owned subsidiary was dissolved in 1934. The certificates of
incorporation of both of these corporations contain provisions for cumulative
voting.

On April 19, 1956, a group of Western's minority shareholders voted their shares
cumulatively and elected two of Western's 13 directors. The board of directors
thereafter met and, by amendment of the by-laws, increased the number of
directors from 13 to 15. On July 12 and 13, 1956, the board resolved to eliminate
cumulative voting for directors and began proceedings in compliance with the
relevant Delaware laws to amend the certificate of incorporation with a view to
the elimination of cumulative voting rights.

A proxy statement and proxy form for voting against cumulative voting were sent
to each shareholder on July 31, 1956. The commissioner, by letter on August 28,
1956, advised counsel for Western that in his opinion the proposed amendment of
the articles of incorporation would constitute a "sale" of securities within the
provisions of section 25009, subdivision (a), of the Corporations Code,[1] and,
further, that pursuant to section 25500[2] of the same code Western should not
engage in the solicitation of proxies or hold a shareholders meeting for the
purpose of amending the articles until Western had applied for and received a
permit authorizing such action from the commissioner.
Western applied for such a permit, reserving, however, the right to question the
jurisdiction of the commissioner to require such a permit. The commissioner
granted a negotiating permit, but expressly reserved the issue of "fairness" under
Corporations Code, section 25510,[3] and conditioned the issuance 402*402 of the
permit upon nonfiling of the proposed amendment with the Secretary of State of
Delaware until a further permit had been obtained from the commissioner. The
negotiating permit granted further authorized the use of any proxies received by
management before its issuance, provided that such proxies were not thereafter
revoked. Western so advised its shareholders and clarified certain matters
contained in the original solicitation which had been objected to by the Securities
and Exchange Commission as misleading. It did not forward any new proxy forms
and subsequently voted those proxies which had been received before the
objection of the commissioner and the Securities and Exchange Commission,
except those proxies expressly revoked.

On October 10, 1956, at a shareholders' meeting, 442,780 shares voted in favor of

eliminating cumulative voting and 199,810 voted against such change.
Outstanding shares then numbered 743,963 shares, requiring a vote of 371,982 to
abolish cumulative voting. Included in the voting were 194,278 proxies obtained
prior to sending the explanatory letter and the obtaining of the negotiating permit.
On October 15, 1956, Western applied for a supplemental permit to effect the
elimination of the provision for cumulative voting from its articles. After notice to
all shareholders, a hearing on the fairness of the proposed amendment was held
by the commissioner. Upon conclusion of the hearing, the commissioner made
detailed findings of unfair, unjust and inequitable actions and conduct by Western
and its management. Among the findings made by the commissioner were
specific findings that indicated that Western's business in California was of a
substantial nature and that California residents were the holders of over 30 per
cent of the outstanding shares in Western.

Western's certificate of incorporation, as permitted by the laws of Delaware,

contained an article providing for cumulative voting and an article reserving the
right to "amend, alter, change or repeal any provision" in the certificate. The stock
certificates issued by Western also contained a written provision to the effect that
by acceptance thereof the holder "assents to and agrees to be bound" by all the
provisions of the certificate of incorporation. The final step to effect amendment
of the articles of incorporation under Delaware law is the filing of such amendment
with the Delaware Secretary of State.

What the commissioner described as his "terminal findings" were, in essence, that
Western's management was determined 403*403 not to relinquish control, nor to
tolerate any interference from minority shareholders, or directors representing
them, and that the resolution enacted to eliminate the minority's right to
cumulative voting would be "... unfair, unjust and inequitable to the great number
of security holders residing in California." On the basis of the findings, the
commissioner concluded that he had jurisdiction under Corporations Code,
sections 25009, 25500, 25510, supra, and 22507,[4] and that the change in the right
and privilege of the shares from cumulative to straight voting would constitute a
"sale" and an "exchange" within the meaning of section 25009, subdivision (a), and
section 25510 of the Corporate Securities Law. The commissioner further found that
the solicitation materials of respondent were prepared and mailed from California;
that both shareholders of record and beneficial owners of shares of Western,
resident in California, were solicited in California in order to accomplish such
change in voting rights; that the shareholders' meeting on October 10, 1956, and
the vote of the shareholders on the amendment occurred in California, and that
the filing of the certificate of amendment in Delaware would result in a change in
the contract rights between the corporation and its California shareholder
residents, over both of whom the commissioner had jurisdiction, and as to which a
prior definitive permit under California law was and is necessary.

The commissioner further found that for the purpose of considering the application
for a permit and to achieve overall fair play and substantial justice, the fiction of
Delaware residence should yield to the totality of California contacts so as to
require, in addition to compliance with the Delaware law, the approval of the
California Corporations Commissioner as a condition to eliminating the right of
cumulative voting by the shareholders. Upon the commissioner's denial of the
definitive permit, Western applied for a rehearing, 404*404 which was denied.
Western then filed a mandamus action, which resulted in a remand upon
stipulation on April 12, 1957. Hearings were again held as a consequence of the
remand in June 1957. On February 5, 1958, the commissioner issued his findings
and again denied Western's application. It is the findings and denial of February
5, 1958, that are here in issue.

After being denied a rehearing, Western filed its complaint for administrative
review and for writ of mandate on February 28, 1958. The superior court made
findings of fact and conclusions of law and gave judgment issuing the peremptory
writ of mandate. In a memorandum opinion that court properly stated that
mandamus was the proper action under the circumstances. (Corp. Code, §§
25317, 25318; Code Civ. Proc., §§ 1085 through 1094.5.) In its opinion, the court
relied upon Moran v. Board of Medical Examiners, 32 Cal.2d 301, 308-309 [196 P.2d
20] and Tringham v. State Board of Education, 50 Cal.2d 507, 508 [326 P.2d 850].
The court did not reject commissioner's argument that Code of Civil Procedure,
section 1094.5,[5] provides that judicial review of proceedings before the
commissioner is limited to the determination of whether there is substantial
evidence in the light of the entire record to support his findings and order, but
rather determined that the court had the specific power under Code of Civil
Procedure, section 1094.5, subdivision (b), to extend its review inquiry to the
question of whether the commissioner proceeded in excess of his jurisdiction. The
court then indicated that it felt that there was but one issue for determination,
which was whether the commissioner proceeded 405*405 "`without, or in excess
of jurisdiction'" as a matter of law, and then the court concluded that under the
facts before it, the commissioner acted beyond his jurisdiction. The court
indicated, in dealing with the Corporations Code and the Corporate Securities
Law of the State of California, that such laws could only have application to
transactions occurring within the State of California, that the amendment of the
articles of incorporation was not a "sale" or "exchange" of stock and that the
amendment of the articles of incorporation was an internal affair of Western and
its shareholders. The court further stated that any changes in the "rights,
preferences, privileges, or restrictions" of the outstanding stock would be "...
accomplished outside the State of California" by the filing and recording of the
certificate of amendment in the appropriate offices in Delaware. The trial court
made some 50 findings of fact and 10 conclusions of law with main emphasis upon
Western's extra-California activities.

On this appeal, the commissioner vigorously contends that his findings of fact must
be accepted as the controlling facts of the case, and respondent, as staunchly,
contends that the court's findings of fact must be accepted as controlling. The rule
set forth in Code of Civil Procedure, section 1094.5, subdivision (b), is supported by
the language in Allen v. Railroad Commission, 179 Cal. 68, 74-75 [175 P. 466, 8 A.L.R.
249], where in considering a similar problem with relation to jurisdictional findings
by a commission, it is said: "`It is plain, and indeed it has in effect been decided,
that the declaration in that section that "findings and conclusions of the
commission on questions shall be final and not be subject to review, has to do with
the commission's determination upon questions of fact within its jurisdiction. When
the question, ever one of mixed law and fact, goes, as here, to the jurisdiction
itself, when the whole controversy revolves around the inquiry as to whether or not
the corporation is a public utility, to say that the determination of the commission
upon this matter is final and conclusive and is not subject to review, is the
equivalent of denying to a petitioner a hearing upon a right carefully preserved
to him by the language of section 67 itself....'"

"`Thus we are brought to a consideration of the evidence upon which the

commission acted in holding this plaintiff to be in toto a public service
corporation.'"

[1] People v. Lang Transportation Co., 217 Cal. 166, 171 [17 P.2d 721], sets forth the
proper rule as follows: 406*406 "... the determination of the board on the question
whether the facts existing were sufficient to bring the case within the scope of its
powers is subject to review in so far as they do, as here, present a question of law
bearing upon the subject. In other words, the finding of the board is not conclusive
as to the facts necessary to the existence of the board's jurisdiction." (Emphasis
added.) (See also Witkin, Summary of California Law, vol. 3, Constitutional Law, §
204, p. 2017.)

[2] Insofar as the findings of the commissioner and the court pertain to the question
of commissioner's jurisdiction to hold a hearing in circumstances such as those here
disclosed, it would appear that the plain language of section 25009 [subd. (a)] of
the Corporations Code providing that "`[s]ale' or `sell' includes every disposition, or
attempt to dispose, of a security or interest in a security for value. `Sale' or `sell'
includes all of the following ... an exchange; any change in the rights, preferences,
privileges, or restrictions on outstanding securities" persuades us that the court
below erred in finding that the commission had no jurisdiction to act in this matter.
Many cases hold that where the Corporate Securities Act is violated by solicitation
of sales of stock in California, the Corporate Securities Act applies even though
issuance of the stock and the transfer of title are to take place in a foreign state.
(People v. Sears, 138 Cal. App.2d 773, 791 [292 P.2d 663].) Furthermore, even
criminal sanctions may properly be imposed under the above-stated rule where
the main effectuation of a sale or transfer of stock takes place in California
although the ultimate act may take place extra-territorially. (People v. Alison, 189
Cal. App.2d 201, 205 [10 Cal. Rptr. 859].)

People v. Rankin, 169 Cal. App.2d 150 [337 P.2d 182], specifically holds that even
though the last act necessary to the issuance of a security such as the signing of
documents occurs outside of California, the Corporations Commissioner is not
thereby deprived of jurisdiction over the subject matter.

Respondent cites Robbins v. Pacific Eastern Corp., 8 Cal.2d 241 [65 P.2d 42]; B.C.
Turf & Country Club v. Dougherty, 94 Cal. App.2d 320 [210 P.2d 760] and Jones v.
Re-Mine Oil Co., 47 Cal. App.2d 832 [119 P.2d 219], to the effect that the
commissioner has no extraterritorial jurisdiction, and that such jurisdiction as he has
is limited to acts done or proposed to be done in California. The Robbins case,
supra, on page 284, contains the following language: "It, therefore, follows that
even if it be assumed that the negotiations in 407*407 California were illegal,
nevertheless the validity of the sale in New York was not affected. This conclusion
makes it unnecessary to pass upon the contention of respondents, that the
Corporate Securities Act, properly interpreted, has no application at all to
negotiations had in California that contemplate the issuance and sale of stock in
a foreign jurisdiction." (Emphasis added.)

B.C. Turf & Country Club v. Daugherty, supra, dealt with a state of facts which the
court felt did not amount to the solicitation or the type of preliminary negotiation
requiring a permit under California law. On page 332 of that opinion, it is expressly
stated: "... the discussions had in California by Fraser during his short visit in
September, did not amount to solicitation or the type of preliminary negotiation
requiring a permit under California law." The opinion further contains the following
language relative to the Corporate Securities Act (p. 329): "From a standpoint of
interpretation, there can be no reasonable doubt but that these provisions of the
statute require a foreign corporation to secure a permit to solicit a sale of its stock
in this state, or to engage in preliminary negotiations looking towards such sale,
even though the issuance of the securities and the transfer of their title will, in good
faith, be completed in a foreign state. The sections quoted clearly prohibit a
foreign corporation from soliciting in this state a sale of stock of its own issue without
first securing a permit, even though in good faith the issuance of the stock and
transfer of title are to take place in the foreign state. We also have no doubt that,
although such a regulation may impose some restraint on interstate commerce
and place some restriction on free speech, it is a valid exercise of the state's police
power, and is not unconstitutional. It is true that in the Robbins case, supra, these
problems were expressly left open and not decided, and that no other California
case seems to have expressly determined these questions, but the suggested
construction is so clear that reasonable minds cannot differ thereon, and the
question of constitutionality has been so long settled that citation of authority
would be superfluous."

As we interpret Jones v. Re-Mine Oil Co., supra, 47 Cal. App.2d 832, that case,
insofar as it relates to the Corporate Securities Act, appears to rely upon the
Robbins case, supra, and states at page 840: "All the parties here did go in person
to Nevada; they there organized a corporation; they there paid for and had
issued shares of stock in that corporation, 408*408 and they there made an
agreement regarding the conditions on which they would hold the shares. No
suggestion is made that any of these acts were invalid under Nevada law.
California law can have no application to them and they must be regarded as
valid here." The instant case shows no such substantial extraterritorial dealing.

The case of Transportation Building Co. v. Daugherty, 74 Cal. App.2d 604 [169 P.2d
470], relied upon by Western, was one wherein a corporation requested approval
of the amendment of its articles of incorporation to change its stock structure. The
appellate court upheld a trial court's determination that the commissioner had
acted improperly in denying such permit since such reorganization was an internal
affair of the corporation. It appears that at the hearing held by the corporations
commissioner, stockholders were invited to attend but none did; and the court
based its opinion upon the ground that the commissioner did not find that the plan
was unfair, unjust, or inequitable, nor that a fraud would be worked upon those
who would acquire the new stock. On page 615 it is said: "There was no dispute
whatever as to the facts, and there was no failure to disclose any facts in
connection with the proposal. It is a fair, just, and equitable plan unless it is the
reverse. It is an honest plan if it is not dishonest. There is no middle ground. The
deputy commissioner evidently thought there was, and that without any finding or
evidence to support a finding that the plan was unfair, unjust or inequitable, it was
his duty to refuse the permit because of his opinion that the shareholders should
be able to work out a better deal for themselves." The quoted language clearly
distinguishes the instant case where proper findings were made under the relevant
Corporate Securities Act sections.

Western earnestly insists that under the authority of Southern Sierras Power Co. v.
Railroad Com., 205 Cal. 479 [271 P. 747], the commissioner had no jurisdiction to
act upon the amendment of the articles here proposed, again contending that
such amendment is essentially an internal affair of the corporation. The Southern
Sierras case was considered in Gillis v. Pan American Western Petroleum Co., 3
Cal.2d 249 [44 P.2d 311], where it is put in its proper framework. In the last cited
case, on page 252, it is said with reference to the Southern Sierras case: "The court
held that the commission was without jurisdiction, for the reason that it was never
intended by the Public Utilities Act of this state `to subject 409*409 foreign
corporations to regulation concerning the exercise of the inherent corporate
powers conferred upon them by the legislative power of the incorporating state.'
It was largely grounded upon the Fryeburg case, which was very similar in
character. The Fryeburg Water Company was a Maine corporation doing business
in both Maine and New Hampshire. It sought to compel the public service
commission to approve that portion of a stock dividend which was represented
by its capital investment in New Hampshire. The court refused the writ upon the
statement that while the language of the act conferring authority upon the
commission was quite broad it would not be `presumed that the legislature
intended to give the commission power to regulate the internal affairs of such
corporations.' We have no criticism of these authorities. Indeed, in Commonwealth
Acceptance Corp v. Jordan, 198 Cal. 618 [246 P. 796], this court called attention
to the well-known fact that the laws of the several states authorize different capital
stock structures for corporations, and under the doctrine of comity they are
allowed, in the absence of express constitutional or statutory inhibitions, to enter
other states for the purpose of doing business, regardless of whether a corporation
with like structure is permitted to be formed in the latter states. However, these
authorities are far from holding that the issuance and sale of the stock in a state
other than that in which the corporation is formed is not a proper subject for
legislative action. A number of authorities by their conclusions confirm the right of
the state to protect its citizens, by legislative interposition, against the issuance or
sale of stock in the state. Among these we cite, Hohn v. Peters, 216 Cal. 406 [14
P.2d 519]; Hayden Plan Co. v. Friedlander, 97 Cal. App. 12-16 [275 P. 248, 253]; In
re Flesher, 81 Cal. App. 128 [252 P. 1057]. In the case of London, Paris & American
Bank v. Aronstein, 117 F. 601-609, it is said: `It is true that the courts in California
cannot control the internal affairs of any foreign corporation. Such matters are to
be conducted in pursuance of and in compliance with the provisions of the
charter of the foreign corporation, and the laws of the country where it was
created; but in the management and method of its business affairs in California
with the citizens and residents thereof, in the sale or disposition or transfer of the
shares of stock, it must conform to the laws of California in relation to such matters,
and is bound thereby. In the recent case of Williams v. Gaylord, supra, 186 U.S. 157
[22 S.Ct. 798, 46 L.Ed. 1102], the Supreme Court of the United States said: 410*410
"When a corporation sells or encumbers its property, incurs debts, or gives
securities, it does business; and a statute regulating such transactions does not
regulate the internal affairs of the corporation."' (Italics ours.) In Hall v. Geiger-
Jones Co., 242 U.S. 539-550 [37 S.Ct. 217, 61 L.Ed. 480, Ann. Cas. 1917C 643, L.R.A.
1917F 514], we find a similar statement of the purpose of legislation similar to that
we are considering which is helpful in arriving at a sound conclusion. It is as follows:
`It will be observed, therefore, that the law is a regulation of business, constrains
conduct only to that end, the purpose being to protect the public against the
imposition of unsubstantial schemes and the securities based upon them.
Whatever prohibition there is, is a means to the same purpose, made necessary, it
may be supposed, by the persistence of evil and its insidious forms and the
experience of the inadequacy of penalties or other repressive measures.' To like
effect is Merrick v. N.W. Halsey & Co., 242 U.S. 568 [37 S.Ct. 227, 61 L.Ed. 498]. The
case of Biddle v. Smith, 148 Tenn. 489-494 [256 S.W. 453], is authority for the
proposition that in order `to protect residents of the state against the imposition of
worthless investments offered by domestic and foreign investment companies
under whatsoever guise presented,' the legislature is empowered to restrict valid
issues to those which are in accordance with a permit therefor and to declare
void other issues. To the same effect is Edward v. Ioor, 205 Mich. 617 [172 N.W. 620,
15 A.L.R. 256]. Conceding, therefore, the premise of respondents' argument that
ordinarily speaking the issuance of capital stock or the stock structure of a
corporation is an internal affair, yet the issuance and sale of stock within a state
other than that of its organization may be regulated in order to protect the
residents and citizens of the former state."

Western also urges that the case of Order of United Commercial Travelers of
America v. Wolfe, 331 U.S. 586 [67 S.Ct. 1355, 91 L.Ed. 1687, 173 A.L.R. 1107], sustains
the proposition that the commissioner had no jurisdiction to act as he did here. A
reading of that case persuades us that its holdings are necessarily restricted by the
facts therein to fraternal insurance associations. There were a number of such
cases before the United States Supreme Court before the decision in Wolfe, and
the court seems to have treated these cases as unique and to have established
rules of law applicable only thereto.

411*411 The case of Watson v. Employers Liability Assurance Corp., 348 U.S. 66 [75
S.Ct. 166, 99 L.Ed. 74] was one wherein it was contended that no action might lie
against an insurer, where that insurance company was a foreign corporation
qualified to do business in Louisiana, until after the insured's liability to pay
damages had been finally determined either by judgment or agreement. The
Supreme Court dealt with a Louisiana statute which provided for direct actions for
injuries occurring in Louisiana (regardless of whether the insurance policy was
written or delivered in that state), and which conditioned the right of a foreign
liability insurer to do business in Louisiana upon the consent to allow suits under
such statute. The court rejected the argument that such statute was violative of
the equal protection, contract, due process and full faith and credit clauses of the
federal Constitution and realistically recognized that a state has a legitimate
interest in safeguarding the rights of persons injured there even though certain of
the activities affected occurred beyond its boundaries.

It would appear that the provisions of the Corporate Securities Act here before us
are a proper exercise of legislative discretion in requiring that corporate dealings
with residents of this state be authorized by the Commissioner of Corporations,
particularly where such corporation does a substantial amount of business within
the state, and the act is not violative of the constitutional clauses of equal
protection, contract, due process and full faith and credit if such legislative
enactments operate equally upon such foreign corporations and domestic
corporations in this state.

Furthermore, it appears here that since 1929 Western has recognized and
submitted to the continuing jurisdiction of the California Corporations
Commissioner. At that early date Western applied for and was granted a permit
by the commissioner to allow the exchange of its shares for those of its California
predecessor. At that time, the permittee represented to the commissioner that the
shareholders of the California corporation would not be hurt in any way by the
exchange. If the exchange had not taken place, the shareholders could not now
be deprived of their right to cumulative voting, for a California corporation, by
legislative act (Corp. Code, § 2235) must provide its shareholders with the right to
vote cumulatively for directors. Thus it is apparent that the condition agreed to by
Western as a basis for the original exchange of stock now tacitly prevents the
company from 412*412 depriving its shareholders of a right which they would now
have had if the 1929 exchange had not taken place.

Western complains that the commissioner, since the institution of this action, has
created a new class of foreign corporation called a pseudo-foreign corporation,
and urges that such definition of such corporation is mere fiat; that the
commissioner has usurped the function of the Legislature which has seen fit to
divide corporations into only two classes — domestic and foreign; and that the
commissioner has seen fit by his arbitrary definition to create a third. Western's
position in this respect is not well taken. The commissioner did not create any new
class of corporation. He merely named a class of corporation which has, in effect,
existed for many years, one with its technical domicile outside of this state but one
which exercises most of its corporate vitality within this state. Unless it can be said
that the Corporations Commissioner's characterization of such corporation as
"pseudo-foreign" is arbitrary, it would appear to be a matter well within his
administrative discretion. The concept of a pseudo-foreign corporation as defined
by the commissioner and the well established concept of "commercial domicile"
of a corporation appear to us to be founded upon reality.

There appears to be little difference in difficulty of concept between that of

commercial domicile and that of pseudo-foreign existence. Each would appear
to be descriptive of a particular type entity and neither would appear to have
been created by a fiat or definition but rather by the nature, operation and
establishment of certain corporations and the transaction of corporate business.
For an interesting discussion of the concept of commercial domicile, see the case
of Southern Pacific Co. v. McColgan, 68 Cal. App.2d 48 [156 P.2d 81].

The fact that since the commencement of this action the commissioner has seen
fit to enunciate certain administrative rules which will be applied when dealing
with a pseudo-foreign corporation does not indicate any abuse of his discretion.
Such corporations have existed for many years, and naming them does not
change their nature. Contrariwise, it would appear to be a just and fair
administrative step to preinform those interested in such corporations as to the
standards which will be applied by the commissioner in considering various
applications and granting various permits.

Western properly contends that there is nothing basically evil in provisions giving
shareholders the right of straight voting instead of giving them the right of
cumulative voting. 413*413 This does not mean, however, that the commissioner's
announced policy, that insofar as a pseudo-foreign corporation's coming into this
state is concerned, the lack of provision for cumulative voting in its charter will be
considered by him as a negative factor, is any abuse of his discretion. The
argument that the commissioner has created another class of corporation is not
persuasive, nor is the argument that legislative history relative to foreign
corporations indicates that the Legislature, by eliminating earlier provisions
requiring cumulative voting to be provided by all corporations and associations
doing business in this state, declared an affirmative public policy allowing foreign
corporations to provide whatever form of voting they wished persuasive.

It is certainly equally likely that the Legislature, by eliminating and failing later to
reenact the sections requiring foreign corporations to provide for cumulative
voting, intended to allow the appraisal of the fairness of the corporate structures
of foreign corporations to be examined and appraised by the commissioner within
reasonable limits of discretion, as it is that such legislative action was a declaration
of public policy. It seems patent that if the Legislature may provide that all
domestic corporations shall have cumulative voting, the commissioner may well,
in his discretion, look askance upon any corporate scheme of voting which does
not contain such rights. This is not to say that under certain circumstances the
commissioner, in the exercise of sound discretion, could not approve the issuance
of securities in a corporation which did not provide for such cumulative voting.

When we consider the complexity of present-day corporate structure and

operation, and the far-flung area of corporate activities where transportation or
nation-wide distribution of products may be involved, we are persuaded that the
commissioner has this discretion. To hold otherwise, and to follow the argument of
Western to its conclusion, would be to say that the commissioner might have the
power in the first instance to require certain rights to be guaranteed to
shareholders before he would permit the sale or issuance of a foreign corporation's
stock in this state, but that immediately thereafter, by the device of amending the
charter of such corporation in another state, the entire structure of that
corporation, even to substantial changes in the rights of shareholders in California,
might be legally effected. Such a holding would enable a foreign corporation to
destroy the 414*414 rights which the State of California has deemed worthy of
protection by the enactment of the Corporate Securities Act.

This position is not without support in other jurisdictions. The mere fact that the last
act here necessary to effectuate the change in the voting rights of the numerous
California residents who are shareholders of Western will take place in Delaware
does not of itself necessitate a finding that the commissioner for that reason was
without jurisdiction in this matter. Also, a fair and impartial reading of the pertinent
Corporations Code sections convinces us that the amendment here sought is a
"change in the rights, preferences, privileges, or restrictions on outstanding
securities" (Corp. Code, § 25009, subd. (a), supra) of such nature as to be within
the contemplation of the Legislature upon enactment of those sections.

Numerous arguments relative to comity between states are advanced by

Western, but none of these appear to be sufficiently cogent to invalidate the
above interpretations of the Corporate Securities Act sections here involved. It
would seem too evident to require protracted dissertation that the right of
cumulative voting is a substantial right, and one which the Legislature may well
have had in mind when it enacted the code sections here under consideration.

While not binding upon the courts of this state, the reasoning and result reached
in State ex rel. Weede v. Iowa Southern Utilities Co. of Delaware, 231 Iowa 784 [2
N.W.2d 372], (State ex rel. Weede v. Bechtel, 239 Iowa 1298 [31 N.W.2d 853], cert.
den. 337 U.S. 918 [69 S.Ct. 1159, 63 L.Ed. 1727] [same case on merits]) are
persuasive of the above result. That case, at 2 N.W.2d 395, succinctly states:
"Simply because that State [Delaware] chartered the appellee [corporation] does
not require Iowa to admit it to transact business within its border unconditionally"
in a case where the directors of the corporation proposed an amendment to the
certificate which would change the value of outstanding stock.

Because of the foregoing the judgment of the superior court must be reversed.

[3] This, however, raises another disagreement between the parties, the
commissioner contending that this court has before it the entire record of the
proceedings before the Corporations Commissioner and must therefore review
the entire record, citing Code of Civil Procedure, section 1094.5, supra. Western,
however, argues that since the trial court never appraised the commissioner's
findings from either the standpoint 415*415 of substantial evidence or, as it
contends should have been done, an independent review of the evidence, the
matter must be remanded to the superior court for trial. Western's position in this
regard appears to be correct. The superior court's determination was confined to
establishing whether or not the commissioner had jurisdiction. In so examining the
record, the full review contemplated by section 1094.5 of the Code of Civil
Procedure was not made. The court below determined there was no jurisdiction,
and thus made no determination of the merits of the case, that is, whether there
was substantial evidence to support the commissioner's findings. (See Martin v.
Alcoholic Beverage etc. Appeals Board, 52 Cal.2d 259, 264-265 [341 P.2d 291].)

There is no express grant of the right of an appellate court to conduct a review in

such a case without remand, and it would appear to be of doubtful wisdom to
attempt such review in a court which is constituted as an appellate court when
trial courts are established for that very purpose.

Reversed and remanded.

Fox, P.J., and Ashburn, J., concurred.

A petition for a rehearing was denied May 17, 1961, and respondent's petition for
a hearing by the Supreme Court was denied June 14, 1961. Schauer, J., and Peters,
J., were of the opinion that the petition should be granted.

[*] Assigned by Chairman of Judicial Council.

[1] Section 25009: "(a) `Sale' or `sell' includes every disposition, or attempt to
dispose, of a security or interest in a security for value.

"`Sale' or `sell' includes all of the following ... an exchange; any change in the rights,
preferences, privileges, or restrictions on outstanding securities."

[2] Section 25500: "No company shall sell any security of its own issue ... until it has
first applied for and secured from the commissioner a permit authorizing it so to
do."

[3] Section 25510: "When application is made for a permit to issue securities ... the
commissioner is ... authorized to approve ... the fairness of such terms and
conditions.... After such hearing the commissioner may refuse to issue the permit
authorizing such exchange if in his opinion the plan is not fair, just, or equitable to
all security holders affected."

[4] Section 25507: "If the commissioner finds that the proposed plan of business of
the applicant and the proposed issuance of securities are fair, just, and equitable,
that the applicant intends to transact its business fairly and honestly, and that the
securities that it proposes to issue and the method to be used by it in issuing or
disposing of them are not such as, in his opinion, will work a fraud upon the
purchaser thereof, the commissioner shall issue to the applicant a permit
authorizing it to issue and dispose of securities, as therein provided, in this State, in
such amounts and for such considerations and upon such terms and conditions as
the commissioner may provide in the permit. Otherwise, he shall deny the
application and refuse the permit, and notify the applicant in writing of his
decision."

[5] That section in part provides: "(a) Where the writ is issued for the purpose of
inquiring into the validity of any final administrative order or decision made as the
result of a proceeding in which by law a hearing is required to be given, evidence
is required to be taken and discretion in the determination of facts is vested in the
inferior tribunal, corporation, board or officer, the case shall be heard by the court
sitting without a jury. All or part of the record of the proceedings before the inferior
tribunal, corporation, board or officer may be filed with the petition, may be filed
with respondent's points and authorities or may be ordered to be filed by the court.
If the expense of preparing all or any part of the record has been borne by the
prevailing party, such expense shall be taxable as costs.

"(b) The inquiry in such a case shall extend to the question whether the respondent
has proceeded without, or in excess of jurisdiction; whether there was a fair trial;
and whether there was any prejudicial abuse of discretion. Abuse of discretion is
established if the respondent has not proceeded in the manner required by law,
the order or decision is not supported by the findings, or the findings are not
supported by the evidence."
CASE NO. 6

268 F.2d 317 (1959)

MANSFIELD HARDWOOD LUMBER COMPANY, Appellant,

v.
Hattie A. JOHNSON et al., Appellees.

No. 17299.

United States Court of Appeals Fifth Circuit.

June 16, 1959.

318*318 Charles D. Egan, Benjamin C. King, Sidney M. Cook, Frank M. Cook,

Shreveport, La., for appellant.

John M. Madison, Vernon W. Woods, Shreveport, La., Ned A. Stewart, Texarkana,

Ark., J. W. Patton, Jr., Lewisville, Ark., for appellee.

Before RIVES, TUTTLE and BROWN, Circuit Judges.

PER CURIAM.

Interpreting the opinion as being based on a breach of fiduciary relationship owed

by appellant's officers and directors and majority stockholders to the appellees as
minority stockholders, appellant insists that such a decision must fail in law
because: (1) the existence vel non of such a fiduciary relationship must be
determined by the laws of the state of incorporation, viz., Delaware, which
imposes no such fiduciary relationship; (2) the Civil Law of Louisiana prohibits the
imposition of the remedy of "constructive trust" or "equitable lien" on real or
personal property; and (3) Article 1847, LSA-Civil Code,[1] requires that there be an
element of "intent" or "design" for an action to be based on fraud; and liability
predicated on "constructive fraud" is unknown in Louisiana Civil Law.

Upon further consideration, we agree that the opinion is at least misleading,

particularly to Louisiana jurists who practice under that State's unique concepts of
equity jurisprudence. We will attempt to clarify and correct the basis for our
holding.

We initially expressed doubt that the defendant's officers were guilty of fraud per
se because of our doubt that the naked "intent to deceive" element was
adequately established. We next held that a "growing minority" of jurisdictions,
including Louisiana, recognize a fiduciary relationship or a position of confidence
existing between the directors and officers of a corporation and the individual
stockholders, especially when the former purchase shares of stock from the
319*319 latter. And we held that, when this fiduciary duty is violated, it is

"* * * immaterial whether its breach is described as constructive fraud, unjust

enrichment, fraudulent breach of trust, breach of fiduciary obligation, gross
negligence, or otherwise, and whether the remedy is given by a constructive trust,
restitution, or accounting. These are all relative terms describing broad equitable
concepts. The standard of a fiduciary's duty to his beneficiary, depending upon
the instant relation and the facts of the particular case, lies somewhere between
simple negligence and willful misconduct or fraud with the intent to deceive. The
actual intent to deceive is not required where one party is so placed in such an
advantageous position to the other. Actual fraud will afford redress in the absence
of the special relationship."
We concluded by holding that Louisiana has long recognized the fiduciary
relationship in situations like the present case, and that these Louisiana decisions
"fully answer appellant's contentions that Louisiana's limited equity jurisprudence
will prevent our imposition of a `constructive trust' or `equitable lien' or `right of
restitution' for the breach of the fiduciary duty owed to the plaintiffs by defendant's
officers." Then, we listed the ways in which this confidential relationship was
violated.

We believe that all of what was said above is good law, both in common-law
States and in Louisiana, except for the possible misleading construction which
could be placed on the statements which describe the breach of this duty and
the remedy in broad equitable concepts as applying literally to Louisiana law. We
agree with appellant that the Louisiana Civil Law prohibits the imposition of a
constructive trust or equitable lien on property.[2]

We stated that a "growing minority" of jurisdictions recognize the existence of a

fiduciary relationship inuring from the officers or directors or majority stockholders
to the individual or minority stockholders, particularly concerning the purchase of
stock from a shareholder.[3] The next question presented is which law should
determine this relationship — that of Delaware or Louisiana?

It is well settled that a federal court in a diversity case must apply the conflict-of-
laws rule of the state in which it sits.[4] While Louisiana conflict-of-laws is silent on
which law determines whether such a fiduciary relationship exists in a foreign
corporation, its various conflict-of-laws rules are generally the same as in other
states.[5] Therefore, we must look to the general law.

320*320 A number of cases have held that the conflict-of-laws rules of the forum
require that court to refer to the "law of the State of incorporation to determine
the extent and nature of relationship between corporation and stockholder,
corporate officer or director and stockholder and between stockholders inter
sese,"[6] while the law of the place of the wrong determines the quantum of the
breach of duty.[7] Apparently, Delaware imposes no fiduciary duty on the part of
officers or directors or majority stockholders in buying stock from the minority or
individual stockholders.[8] In strict logic, a strong case is made that, if this Court's
321*321 opinion is based exclusively on the breach of fiduciary obligations owed
by directors and majority stockholders of a foreign corporation to minority
stockholders, and if literal compliance is given to those decisions holding that the
State of incorporation sets the standards for all personal relationships between
persons connected with the corporation, the opinion is faulty.

Those decisions (listed in footnote 6, supra) are, however, in our opinion, either
inapplicable or unsound where the only contact point with the incorporating state
is the naked fact of incorporation, and where all other contact points, such as,
residence of parties and actors, situs of property, lex loci delicti or contractus,
place where corporation is conducting its only or principal place of business, et
cetera, are found in another jurisdiction. Certainly, in such a situation the charter
of the corporation and even non-repugnant statutory laws of the state of
incorporation limiting corporate powers should govern the internal affairs of the
corporation.[9] When, however, the situation is such as here, where neither the
charter nor the statutory laws of the incorporating state are applicable, and all
contact points are in the forum, we believe that the laws of the forum should
govern.[10]

This was precisely the situation in Blazer v. Black, supra, note 6, 196 F.2d 139,
involving a suit by a former stockholder of a dissolved corporation against its
former president for damages for the alleged fraudulent conversion of the
stockholders' stock before dissolution. The corporation was organized under the
laws of Illinois but all other contacts were in Kansas. The court reversed the lower
court's judgment for defendant, holding that, under the minority view of Kansas,
the director was a fiduciary when negotiating with a stockholder for purchases of
shares. The court did not discuss the law of Illinois.

In the case of Mayflower Hotel Stockholders Protective Committee v. Mayflower

Hotel Corp., supra, note 6, 193 F.2d 666, the District of Columbia Circuit had held
in a prior appeal (84 U.S. App.D.C. 275, 173 F.2d 416) that the directors or majority
stockholders occupy a fiduciary relation toward the minority stockholders when
selling stock control, relying on Supreme Court decisions which arose under federal
statutes or which were diversity cases prior to Erie R. Co. v. Tompkins, 1938, 304 U.S.
64, 58 S.Ct. 817, 82 L.Ed. 1188. On the second appeal, after the defendants
presented the question that Delaware law should control such fiduciary relations,
the court declined to consider whether the "law of the case" applied to second
appeal matters determined on a first appeal (193 F.2d at page 669) and held, as
a concurrent ground for imposing these high standards, that the District of
Columbia and Delaware law is in substantial accord in imposing a fiduciary
relationship on a majority stockholder regarding transactions between
corporations with interlocking directorates. 193 F.2d at page 671.

322*322 Most of the other cases listed in footnote 6, supra, involve situations where
the courts were seeking to impose the fiduciary rule of the state of incorporation
in order to escape the inequitable rule of the forum (generally Delaware).

However, in view of our holding hereinafter that the district judge was not clearly
erroneous in holding that the actions of appellant through its officers constituted
actionable fraud under Article 1847, LSA-Civil Code, what has been said
concerning the choice of laws to determine the duty owed by officers, directors,
or majority stockholders to the minority stockholders may not be necessary for the
disposition of this case. That is true because, as will be seen, the broad scope of
fraud in Louisiana covers situations where the law imposes an obligation on the
party with superior knowledge to disclose facts within his knowledge to the other
and to deal in an atmosphere of trust and confidence. Since appellant's officers
had such superior knowledge, Louisiana fraud rules demanded open and
disclosed dealings with utmost fairness.

As stated earlier, the equitable remedies of constructive trust or equitable lien are
alien to the civil law. Without these remedies and with the rule that "constructive
fraud," found in the law of fiduciaries and characterized by the lack of the "intent
to defraud,"[11] is impossible under Article 1847,[12] Louisiana courts have an
awkward time imposing liability for the breach of a fiduciary's duty to disclose or
the breach of other fiduciary relations.[13] In some cases involving a relationship of
confidence between the parties, the Louisiana courts have used the terms of
common-law equity, ordinarily obnoxious to the civil law, to describe the breach
and remedy for breach of fiduciary duty, such as, "breach of trust" and
"constructive trust."[14] Normally, however, the Louisiana 323*323 courts, in finding
liability for a breach of a fiduciary duty, have based such liability on "fraud" as
encompassed in Article 1847 of the LSA-Civil Code. This is true in cases involving
both corporate fiduciaries[15] and other fiduciaries[16] 324*324 Therefore, the
breach of the relationship is called fraud and the remedy is, of course, a rescission
of the contract or damages.[17] By bringing such relationship 325*325 under the
broad heading of fraud, the Louisiana courts have, in effect, reached the same
results as would be reached under the common-law — results 326*326 which seem
to common-law lawyers hard to obtain under a literal interpretation of the Civil
Code.[18]
It is also apparent that these same results are achieved when the Louisiana courts
hold:

"In determining whether or not fraud has been proved, the situation of the parties
and the circumstances surrounding the transaction may be taken into
consideration," Winzey v. Louisiana Industrial Life Ins. Co., La.Ct.App., 1940, 195 So.
67, 69;

and when they hold:

"Considerable stress is laid by counsel for plaintiff on the question of the proof that
is generally required to show that fraud exists. Whilst it is true that in Article 1848 of
the [LSA-] Civil Code it is provided that fraud, like every other allegation, must be
proved by him who alleges it, however, that same article further provides that `it
may be proved by simple presumptions, or by legal presumptions as well as by
other evidence. The maxim that fraud is not to be presumed, means no more than
that it is not to be imputed without legal evidence.' Courts have always
acknowledged how difficult it is for one to prove fraud by positive and direct
testimony, realizing full well that those who indulge in it generally prepare
themselves in such a manner as to cover up and leave no traces of their practice
behind them. In an early case, Simon-Gregory Dry Goods Co. v. Newman, 50
La.Ann. 338, 23 So. 329, the Court stated that: `While fraud is never to be presumed,
courts of justice "recognize the cunning concealment in which it shrouds its
devious practices and the difficulty of tracing it by direct proof."' We can well
conceive of such a situation in this case where such practices may well have been
indulged in and it becomes next to impossible to put our finger on any particular
piece of direct testimony to show actual fraud on the part of Griffing. As a matter
of fact his fraud wasn't active but rather of a passive nature in that he failed to
disclose the information which he was in justice and in equity bound to disclose to
the other party to the contract who was not on an equal footing with him. He
suppressed the truth, and therefore the case comes within the rules laid down in
our Civil Code," Griffing v. Atkins, supra, 1 So.2d 445, 450;

and when they hold:

"* * * `Fraud,' as the word is used in our Code and in courts of equity, as relates to
contracts, `comprises all acts, omissions and concealments involving a breach of
legal or equitable duty and resulting in damage to another'," Thieme v. Collier,
1930, 13 La.App. 661, 128 So. 730, 731;

and when they hold:

"* * * While a purchaser is under no obligation to inform a prospective vendor as

to the value, the title or the condition of the property involved, he, individually, or
as agent for his principal, having made representations and statements as to the
value, the title or the condition of the property, knowing them to be false or
reckless or without 327*327 knowledge of their truth or falsity, is under the solemn
obligation to make correct representations and tell the whole truth, without
concealment or suppression of any material facts, especially if there exists an
inequality of knowledge, as where the seller does not reside near the land and the
purchaser does and is familiar with it," American Guaranty Co. v. Sunset Realty &
Planting Co., 1945, 208 La. 772, 23 So.2d 409, 449;

and when they hold:

"`Two things are necessary to constitute fraud: the intention to defraud, and actual
loss or damage, or such strong probability of it as will induce a court to interfere.'
(Slocomb v. Real Estate Bank of Ark., 2 Rob. 92)," Buxton v. McKendrick, 1953, 223
La. 62, 64 So.2d 844, 846;

and when they hold:

"The rule of equity, briefly stated, is that a purchase by a trustee or agent per
interpositam personam carries fraud on its face. Michoud's Case, [Michoud v.
Girod] 45 U.S. (4 How.) [503] 552, 11 L.Ed. 1076." Cuggy v. Zeller, 1913, 132 La. 222,
61 So. 209, 212.

We have not overlooked the matters pretermitted on pages 753 and 754 of 263
F.2d, but we think that those matters have been sufficiently covered in the opinions
of the district court and of this Court and that the contentions there pretermitted
are without merit.

In our original opinion we wrote too much in the language of the traditional equity
jurisprudence familiar to lawyers in common-law states. The evidence viewed in
the light of the civil law, including the principles just discussed, removes the doubt
which we held "that the `intent' element necessary as the basis for actual fraud
was adequately established." In view of the confidential relationship existing
between the parties, and considering the circumstances surrounding the
transactions, we now hold that the district court was not clearly erroneous in
holding that the necessary "intent" had been established to constitute actionable
fraud in Louisiana. The petition for rehearing is therefore,

Denied.

[1] Article 1847, LSA-Civil Code, reads in part:

"Fraud, as applied to contracts, is the cause of an error bearing on a material part

of the contract, created or continued by artifice, with design to obtain some unjust
advantages to the one party, or to cause an inconvenience or loss to the other. *
* *" (Emphasis supplied.)

Article 1848, LSA-Civil Code, reads:

"Fraud, like every other allegation, must be proved by him who alleges it, but it
may be proved by simple presumptions or by legal presumptions, as well as by
other evidence. The maxim that fraud is not to be presumed, means no more than
that it is not to be imputed without legal evidence."

[2] E.g., Succession of Onorato, 1951, 219 La. 1, 51 So.2d 804, 810, 24 A.L.R.2d 656.

[3] Fletcher, Cyclopedia Corporations, perm.ed., §§ 1168-1171. It is noted that

"there has been a growing tendency to break down the harsh majority rule that
the purchasing director (or officer) owes no affirmative fiduciary duty to disclose
to the shareholders by finding exceptions in special circumstances giving rise to a
duty to make disclosure, where otherwise there would be a great and unfair
inequality of bargaining position by the use of inside information * * *. The opinion
has been expressed that this special circumstances doctrine seems likely to
supersede both of the older views." Ballantine, Law of Corporations (Rev. ed.), pp.
213-216, as quoted in Fletcher, op.cit. supra, § 1174. This special circumstances or
facts doctrine, as crystallized in the landmark case of Strong v. Repide, 1909, 213
U.S. 419, 29 S.Ct. 521, 53 L.Ed. 853, has been followed by many jurisdictions.
Fletcher, op.cit., supra, § 1171.

The "special facts" and the minority view are also found in Rule X-10B-5 of the
Securities Exchange Commission to supplement Section 10(b) of the Act (15
U.S.C.A. § 78j).
[4] Klaxon Co. v. Stentor Elec. Mfg. Co., 1941, 313 U.S. 487, 496, 61 S.Ct. 1020, 85
L.Ed. 1477; Palmer v. Chamberlin, 5 Cir., 1951, 191 F.2d 532, 536, 27 A.L.R. 2d 416.

[5] For instance, the law governing the right of action in tort is the lex loci delicti
(Matney v. Blue Ribbon, 1943, 202 La. 505, 12 So.2d 253, affirming La. App., 12 So.2d
249; Mock v. Maryland Casualty Co., La.App., 1942, 6 So.2d 199), the law
governing the performance of contracts is the place of performance (Vidal v.
Thompson, 1822, 11 Mart., O.S., 23; Palmer v. Chamberlin, supra), and the law of
the forum governs matters of procedure (Macomber v. De Bardeleben Coal Co.,
La.App., 1941, 4 So.2d 483, vacating 200 La. 633, 8 So.2d 624.

[6] Zahn v. Transamerica Corporation, 3 Cir., 1947, 162 F.2d 36, 40, 172 A.L.R. 495.
See also, Rogers v. Guaranty Trust Co., 1933, 288 U.S. 123, 130, 53 S.Ct. 295, 77 L.Ed.
512; Perlman v. Feldmann, 2 Cir., 1955, 219 F.2d 173, 175, 50 A.L.R. 2d 1134;
Mayflower Hotel Stockholders Protective Committee v. Mayflower Hotel Corp.,
1951, 89 U.S.App.D.C. 171, 193 F.2d 666, 668; Maxwell v. Enterprise Wall Paper Mfg.
Co., 3 Cir., 1942, 131 F.2d 400, 402; Geller v. Transamerica Corp., D.C.Del.1943, 53
F.Supp. 625, 629-630; affirmed 151 F.2d 534; Hirshhorn v. Mine Safety Appliances
Co., D.C. W.D.Pa.1952, 106 F.Supp. 594, 600; affirmed 203 F.2d 279; Fayes, Inc. v.
Kline, D.C.S.D.N.Y.1955, 136 F.Supp. 871, 872.

However, in Blazer v. Black, 10 Cir., 1952, 196 F.2d 139, the court applied Kansas
law to determine the fiduciary nature of the parties of an Illinois corporation where
all the operative facts occurred in Kansas.

[7] Zahn v. Transamerica Corporation, Geller v. Transamerica Corp., and Hirshhorn

v. Mine Safety Appliances Co., supra.

[8] Cahall v. Lofland, 1921, 12 Del.Ch. 299, 114 A. 224, 228. This case contained the
following quote from Du Pont v. Du Pont, D.C., 242 F. 98, 136:

"The duties of a director or other officer of a corporation in transactions where he

is representing his company are governed by well-established and familiar rules of
equity. A director of a corporation may freely purchase its stock, and occupies no
relation of trust to an individual stockholder which prohibits his using whatever
advantage his position may afford him through knowledge of its business and
condition superior to that of the stockholder with whom he deals. He is not
accountable to the stockholder for withholding information from him which affects
the value of the stock, but to the corporation, the whole body of stockholders, he
stands in a fiduciary relation which requires him to exercise the utmost good faith
in managing the business affairs of the company with a view to promote, not his
own interests, but the common interests, and he cannot directly or indirectly derive
any personal benefit or advantage by reason of his position distinct from the
coshareholders * * *" (114 A. 224, 228.) Cahall v. Lofland, supra, actually involved
the fiduciary duty of directors to the corporation and was affirmed on that premise
at 13 Del.Ch. 384, 118 A. 1.

Another Delaware authority is the case of Allied Chemical & Dye Corporation v.
Steel & Tube Co., 1923, 14 Del.Ch. 1, 120 A. 486, 491. This case involved the sale of
assets and franchises of the corporation under the auspices of 29 Del. Laws, c. 113,
§ 64A, and the validity of the sale was challenged by the minority shareholders.
The Chancellor stated:

"* * * An examination of the cases to which special attention is directed by the

complainants in this connection will disclose that the personal advantage
accruing to the majority is in some way derived from, or intimately associated with,
the corporate assets themselves." 120 A. 491.
See, also, Brophy v. Cities Service Co., 31 Del.Ch. 241, 70 A.2d 5, in which an
employee of a corporation, acquiring knowledge in the course of his employment
that the corporation secretly intended to purchase large blocks of its capital stock
in the market, cannot use such information for his personal gain.

Delaware also places a high fiduciary duty upon interlocking directorates

regarding transactions between the corporations. Keenan v. Eshleman, 1938, 23
Del.Ch. 234, 2 A.2d 904, 120 A.L.R. 227.

However, Cahall v. Lofland, supra, has been followed uniformly by federal courts
in interpreting the Delaware law on this subject. See Zahn v. Transamerica Corp.,
supra, 162 F.2d 36, 40, and cases there cited; Mayflower Hotel Stockholders
Protective Committee v. Mayflower Hotel Corp., supra, 193 F.2d 666, 668, 669, 671.

[9] 17 Fletcher, Cyclopedia Corporation §§ 8318, 8326. For visitatorial powers of a

state over foreign corporations, see Sections 8425-8445.

[10] Shares of stock are much like other chattels. Apparently, when the action
attacks a transfer of a chattel on the ground of fraud, the law of the state where
the chattel is at the time of transfer determines the substantial validity of the
transfer. Restatement, Conflict of Laws, § 257 and Comment a, provide:

"Whether a conveyance of a chattel which is in due form and is made by a party

who has capacity to convey it is in other respects valid, is determined by the law
of the state where the chattel is at the time of the conveyance.

"Comment:

"a. Illegality and fraud. The validity of a conveyance of an interest in a chattel

alleged to be void between the parties for such reasons as illegality of the transfer
or illegality of the consideration or other reasons, or alleged to be voidable
between the parties for fraud or other cause which affects its substantial validity,
is determined by the law of the state where the chattel is at the time of
conveyance."

[11] The doctrine of "constructive fraud" at common law, being the breach of a
legal or equitable duty which, irrespective of moral guilt, the law declares
fraudulent, is well discussed in Hornaday v. First National Bank of Birmingham, Inc.,
1952, 259 Ala. 26, 65 So.2d 678, 687.

[12] In Buxton v. McKendrick, 223 La. 62, 64 So.2d 844, 846, the Louisiana Supreme
Court (quoting from Slocomb v. Real Estate Bank of Ark., 2 Rob. 92) said:

"`Two things are necessary to constitute fraud: the intention to defraud, and actual
loss or damage, or such strong probability of it as will induce a court to interfere.'"

In Garnier v. Aetna Insurance Co., 181 La. 426, 159 So. 705, 707, the Louisiana
Supreme Court said:

"The defendant (one alleging fraud) therefore carried the burden of proving, not
only that plaintiff made misrepresentations, but also that they were knowingly
made with fraudulent intent."

In Poitevent & Favre Lumber Co. v. Standard Planing Mill & Manufacturing Co., 49
La.Ann. 72, 78, 21 So. 194, 196, the Louisiana Supreme Court said:

"Our predecessors have frequently employed, in this connection, such emphatic

language as this, viz.: `To constitute fraud, there must be an intention of defrauding
consilium fraudis, and an actual loss, eventus damni.'"
[13] See the difficulties confronting the courts in Succession of Onorato, supra, note
1, 51 So.2d 804, 810, 816, and in Griffing v. Atkins, La.App., 1941, 1 So. 2d 445, as
discussed in note 16, infra.

[14] For instance, in Watkins v. North American Land & Timber Co., 1902, 107 La.
107, 31 So. 683, 685, the court reversed a lower court judgment for defendants and
remanded the case for trial where:

"The contention of the defendants is that the petition exhibits nothing more than
an attempt by a stockholder to control, with the aid of the court, the action of the
managing agents of the corporation, representing the majority of the
stockholders, and that this cannot be done in the absence of allegations of fraud,
ultra vires, breach of trust, or gross negligence or misconduct, none of which, are
alleged * * *."

In Haynesville Oil Co. v. Beach, 1925, 159 La. 615, 105 So. 790, 791, the court held:

"* * * The fact is, however, that defendant, whilst commissioned to purchase the
rig in the name of plaintiff, nevertheless purchased it in his own name, using
plaintiff's money for that purpose. This was a breach of trust, and the title which
defendant obtained to said rig inured to the benefit of plaintiff, whom he
represented. McClendon v. Bradford, 42 La.Ann. 160, 7 So. 78, 8 So. 256.

******

"We hold that the drilling rig is the property of plaintiff."

And in Succession of Bienvenu, 1901, 106 La. 595, 31 So. 193, 194, the court stated:

"* * * The company signed its name to the deed really as her agent and
representative. In observing the form of selling the property to her, as relates to the
land it held and which had been bought with her money in compliance with
agreement, it only placed her in possession of her property. The company, from
the date of the deed to it, held the property in trust. * * *

"* * * We have seen that the parties to the agreement had created a constructive
trust, under which the homestead company held temporarily for the real owner.
Improvements placed on property held in trust with the consent of the owner must
be accounted for when the property is delivered to the owner. * * *"

And in McClendon v. Bradford, 1890, 42 La.Ann. 160, 7 So. 78, 79, where an agent
acquired an interest adverse to his principal, the court stated:

"* * * The title they obtained to said Rosanna Harris land claim, and through which
they had obtained patent, issued to them as the owners of the same, must inure
to the benefit of the parties whom they represented. It was a constructive trust,
which they held for the benefit of their principal. * * *"

To the same effect, see Assunto v. Coleman, 1925, 158 La. 537, 104 So. 318, 319.

See also, Jansen v. Bellamore, 1920, 147 La. 900, 86 So. 324, 327-329.

[15] In Markey v. Hibernia Homestead Ass'n, La.App., 1939, 186 So. 757, 758, 764, a
case relied on by this Court in its prior opinion, the plaintiff sued "to recover the
damages she claims to have sustained as the result of a scheme allegedly
concocted by the defendants by which she charges that she was fraudulently
induced to sell to the homestead 17 shares of its capital stock (par value $100 per
share) for $50 per share." After fully discussing the fiduciary duty owed by
defendant directors to the plaintiff, the court stated:
"It is to be observed here that the defendant directors were not purchasing
plaintiff's stock with their own funds. On the contrary, they were using the assets of
the corporation for that purpose. It seems too plain for extended argument that,
under such circumstances, they became trustees for all of the stockholders and
that, if they concealed in bad faith any facts from any one of the persons affected
by the plan they devised, they should be made to respond for their deceit."

And the court concluded:

"A careful analysis of plaintiff's petition and the exhibits attached thereto justifies
the conclusion that she states a case of actionable fraud."

The case was reversed for trial and after judgment for defendants, plaintiff
prosecuted her second appeal. The court in Markey v. Hibernia Homestead Ass'n,
La.App., 1943, 13 So.2d 791, 795, states:

"* * * In other words, the complaint is that the defendants fraudulently devised a
scheme to unjustly enrich themselves at plaintiff's expense. It was because of these
charges that we, in our first opinion (see La.App. 186 So. 757), reversed the
judgment of the court below and sustained plaintiff's cause of action. Later, in a
similar case (but where no allegations of actionable fraud were set forth), the
Supreme Court maintained an exception of no cause of action in a suit by a
stockholder of a homestead to have a sale of her stock to the homestead
rescinded. See Wessel v. Union Savings & Loan Ass'n, 198 La. 219, 3 So.2d 594.

"The evidence in the case discloses, beyond question, that there is no foundation
in fact for plaintiff's charge that the Directors of the homestead conspired to
recapture her stock for their own benefit * * *."

While the court had presented the question of whether or not "bad faith" needs to
be shown when misrepresentations are made by a defendant in a fiduciary
capacity, the court held that no misrepresentations were made, and did not
decide this question:

"Counsel for plaintiff contends that, in spite of the fact that the Board of Directors
had no intention of enriching themselves at plaintiff's expense, the defendants are,
nevertheless, responsible because, — (1) they misrepresented to her the sound, or
book value, of her stock * * *. And it is further argued that, in view of the fiduciary
relationship existing between the defendants and the stockholders of the
homestead, it is immaterial whether the alleged misrepresentations were made by
the defendants in bad faith or not.

"The first contention, that the defendants misrepresented the value of the
homestead stock, is wholly without merit. The various communications mailed to
the shareholders exhibit that the defendants made no representations with
respect to the value of the stock * * *." (13 So.2d 791, 796.)

In Pool v. Pool, La.App., 1943, 16 So.2d 132, 133, also cited in the first opinion, the
suit was against the directors individually to recover for the individual liability
imposed on plaintiff after the liquidation of the corporation, "all of which was
caused by the ineptness, lack of skill, malfeasance, neglect, actionable deceit
and fraud on the part of the defendants." After setting out the liability of directors
to individual stockholders for "wilful neglect of duty, gross negligence on their
fraudulent breach of trust" and after holding that the prescription of ten years
would apply "for the reason that the relation between the defendants as directors
and plaintiff as a stockholder was a fiduciary relationship and their duty to him was
a special duty and not one which they owed to the general public," the court
reversed the case and allowed plaintiff to amend his petition.
In Commercial Nat. Bank in Shreveport v. Parsons, 5 Cir., 1944, 144 F.2d 231, 238-
239, the court stated that "a hard bargain driven by fiduciaries in such
circumstances is presumed to be fraudulent and void."

In the case of Wessel v. Union Savings & Loan Ass'n, 1941, 198 La. 219, 3 So.2d 594,
595, 598, 599, not cited in the first opinion, the plaintiff alleged that defendant was
guilty of fraud because it induced her to sell her stock at a price which was less
than its book value or its value on the open market. The plaintiff alleged that:

"* * * the association and its officers knew or should have known that the stock had
a greater value than that which they represented in the circular letter, and that
by means of this letter the president and secretary of the association conspired to
conceal and did conceal the true value of the shares of stock, and thereby took
an unfair advantage of their fiduciary relation and of the trust and confidence
which the plaintiff and other shareholders had and were entitled to have in the
officers and directors of the association." 3 So.2d 594, 595.

The court, in holding for the defendant homestead association, stated:

"It is declared in the third paragraph of article 1847 of the [LSA-]Civil Code that a
false statement made by a party to a contract of sale, as to the value of the object
of the sale, is not such a fraud, `such an artifice', as will give to the other party the
right to annul the sale, if the object was of such a nature and in such a situation
that he who was induced by the false statement to enter into the contract `might
with ordinary attention have detected the falsehood'. Therefore, if the statement
in the circular letter which induced the plaintiff to sell her shares of stock for $50
per share, that the listing of the stock would be reduced to $38 on the nineteenth
day after the date of the circular letter, should be regarded as a false statement,
it was not a false statement of which the plaintiff may complain, because `with
ordinary attention' she could have learned all that any one else could know about
the value of her shares of stock. On account of the fiduciary relation of the officers
and directors to the stockholders of a corporation, the third paragraph of article
1847 of the [LSA-] Civil Code might not be deemed applicable to this case if the
president and secretary of the Union Homestead Association had withheld from
the plaintiff any information concerning the value of her shares; but that is not the
case." 3 So.2d 594, 598-599.

[16] See cases in note 14, supra.

In Succession of Onorato, 1951, 219 La. 1, 51 So.2d 804, 807, 810, the plaintiffs
attempted to recover the net proceeds of life policies made payable to the
deceased's executors for the reason, inter alia, that, while deceased was acting
as their agent in maintaining their properties, the premiums paid to maintain these
policies in force were paid from rental revenues collected by him in his fiduciary
capacity, "and that accordingly a constructive trust or equitable lien has been
impressed upon the insurance proceeds in their favor." The court stated this
contention as follows:

"We now come to appellants' fourth and last contention, that the premiums paid
to maintain these insurance policies in force while deceased was acting as their
agent were paid from rental revenues collected by him in his fiduciary capacity
and misappropriated to his own use, and that under these circumstances they are
entitled to recover the net proceeds realized from these policies.

******

"Appellants base the contention now being considered on fraud, and this fraud is
the more reprehensible because committed by the deceased in breach of a
fiduciary relationship against those to whom he owed the utmost sincerity and
fidelity." 51 So.2d 804, 810.

After holding that the legislature did not intend for the statutory provision
exempting the proceeds of life insurance from debt to apply to proceeds
received as a result of a fraudulent act, the court allowed recovery.

Justice McCaleb, dissenting in part, stated:

"* * * For my part, I see no difference, insofar as the application of the legal
exemption is concerned, between debts which emanate from legitimate causes
and those resulting from a breach of trust. Surely, the statute makes no distinction
in this regard and it is not our function to write such an exception into the law.
Nulsen v. Herndon, 176 La. 1097, 147 So. 359, 88 A.L.R. 236. True enough, a majority
of the common law states provide authority for the prevailing opinion but those
pronouncements are founded on the constructive trust or equitable lien doctrine,
which is unknown in Louisiana; albeit, the antithesis of the provisions of our Code
dealing with privileges." 51 So.2d 815-816.

In Griffing v. Atkins, La.App., 1941, 1 So.2d 445, 449, 450, an ignorant Negro
intervened in the suit seeking to rescind a sale of a $1250 diamond ring, which he
had found, and which was purchased from him by a jeweler for $130.00. The court
held:

"The ground on which Sims, the intervenor, seeks to set aside the sale is of course
one arising out of the Articles of our [LSA-]Civil Code relating to error and fraud.
Under Art. 1819, there are four defects of consent which will invalidate any
contract entered into by the parties, viz.: `Error; Fraud; Violence; Threats.' We are
concerned with the first two, but in reality this case involves the second thereof for
the reason that Art. 1832 provides that: `In all cases, however, when the
information, which would have destroyed the error, has been withheld by the
other party to the contract, it comes under the head of fraud, and invalidates the
contract.' The article relative to the nullity of contracts from fraud is Art. 1847. The
preliminary statement of that article is the most important as it defines fraud, as it
applies to contracts, as `the cause of an error bearing on a material part of the
contract, created or continued by artifice, with design to obtain some unjust
advantages to the one party, or to cause an inconvenience or loss to the other'
(italics scoring ours). From this definition, the article then lays down twelve certain
rules which it says are drawn therefrom. In rule 4, we find particular reference to
false assertions constituting an artifice regarding objects that require particular skill
or habit, or any difficult or inconvenient operation to discover the truth or falsity of
the assertion; examples are given therein but they are not exclusive. Rule 5
provides that fraud arises from some false assertions made as to the value or
quality of the object forming the subject of the contract or by the suppression of
what is true regarding the same. Rule 6 provides that: `The assertion and
suppression, mentioned in the last preceding rule, mean not only an affirmation or
negation by words either written or spoken, but any other means calculated to
produce a belief of what is false, or an ignorance or disbelief of what is true.' These
rules contemplate that in a contract of sale of the very nature of the one with
which we are now concerned that where the parties are on an unequal footing,
and not dealing at arms length, the one possessing the superior knowledge
regarding the value or the quality of the object is held to the exercise of the
greatest care and caution in conducting himself and must not take undue
advantage of the other party, who, as it happens in this case, is one totally
ignorant of the value or quality of the object and who was attempting to obtain
information relative thereto.
"In this case, Sims went to Roumain's store upon the solicitation of one of the
employees where he had the right to expect a full and complete disclosure of the
facts and of the truth regarding the ring. He did not know Roumain, Collins or
Griffing. He went there for technical advice as to the character and value of the
ring. All of these, in our opinion, were in a fiduciary or quasi-fiduciary relationship
towards him, and Sims had a right to expect, in fair dealing, the true information
which he had been invited to seek there; and no one, especially under the
circumstances as we view them, where all of them had the knowledge of the ring's
true character and value, should have taken advantage of him and attempted
to buy the ring at a price which was so much out of proportion to its true value."

[17] The remedy given by the district court as affirmed by this Court is a rescission
of the sales of plaintiffs' stock to defendant, a recognition of the plaintiffs as the
owners of said stock, and an order for accounting following judgment for plaintiffs
"against defendant for their pro rata portion of the assets of defendant distributed
in liquidation, said portions to be credited with the amount each plaintiff received
for his stock."

[18] See the cases in notes 14, 15 and 16, supra.

CASE NO. 7

Republic of the Philippines

SUPREME COURT

THIRD DIVISION

G.R. No. 161026 October 24, 2005

HYATT ELEVATORS AND ESCALATORS CORPORATION, Petitioner,

vs.
GOLDSTAR ELEVATORS, PHILS., INC.,* Respondent.

DECISION

PANGANIBAN, J.:

ell established in our jurisprudence is the rule that the residence of a corporation is the place
where its principal office is located, as stated in its Articles of Incorporation.

The Case

Before us is a Petition for Review1 on Certiorari, under Rule 45 of the Rules of Court, assailing
the June 26, 2003 Decision2 and the November 27, 2003 Resolution3 of the Court of Appeals
(CA) in CA-GR SP No. 74319. The decretal portion of the Decision reads as follows:

"WHEREFORE, in view of the foregoing, the assailed Orders dated May 27, 2002 and October
1, 2002 of the RTC, Branch 213, Mandaluyong City in Civil Case No. 99-600, are hereby SET
ASIDE. The said case is hereby ordered DISMISSED on the ground of improper venue."4

The assailed Resolution denied petitioner’s Motion for Reconsideration.

The Facts

The relevant facts of the case are summarized by the CA in this wise:

"Petitioner [herein Respondent] Goldstar Elevator Philippines, Inc. (GOLDSTAR for brevity) is
a domestic corporation primarily engaged in the business of marketing, distributing, selling,
importing, installing, and maintaining elevators and escalators, with address at 6th Floor,
Jacinta II Building, 64 EDSA, Guadalupe, Makati City.

"On the other hand, private respondent [herein petitioner] Hyatt Elevators and Escalators
Company (HYATT for brevity) is a domestic corporation similarly engaged in the business of
selling, installing and maintaining/servicing elevators, escalators and parking equipment, with
address at the 6th Floor, Dao I Condominium, Salcedo St., Legaspi Village, Makati, as stated
in its Articles of Incorporation.

"On February 23, 1999, HYATT filed a Complaint for unfair trade practices and damages under
Articles 19, 20 and 21 of the Civil Code of the Philippines against LG Industrial Systems Co.
Ltd. (LGISC) and LG International Corporation (LGIC), alleging among others, that: in 1988, it
was appointed by LGIC and LGISC as the exclusive distributor of LG elevators and escalators
in the Philippines under a ‘Distributorship Agreement’; x x x LGISC, in the latter part of 1996,
made a proposal to change the exclusive distributorship agency to that of a joint venture
partnership; while it looked forward to a healthy and fruitful negotiation for a joint venture,
however, the various meetings it had with LGISC and LGIC, through the latter’s
representatives, were conducted in utmost bad faith and with malevolent intentions; in the
middle of the negotiations, in order to put pressures upon it, LGISC and LGIC terminated the
Exclusive Distributorship Agreement; x x x [A]s a consequence, [HYATT] suffered
₱120,000,000.00 as actual damages, representing loss of earnings and business
opportunities, ₱20,000,000.00 as damages for its reputation and goodwill, ₱1,000,000.00 as
and by way of exemplary damages, and ₱500,000.00 as and by way of attorney’s fees.
"On March 17, 1999, LGISC and LGIC filed a Motion to Dismiss raising the following grounds:
(1) lack of jurisdiction over the persons of defendants, summons not having been served on
its resident agent; (2) improper venue; and (3) failure to state a cause of action. The [trial] court
denied the said motion in an Order dated January 7, 2000.

"On March 6, 2000, LGISC and LGIC filed an Answer with Compulsory Counterclaim ex
abundante cautela. Thereafter, they filed a ‘Motion for Reconsideration and to Expunge
Complaint’ which was denied.

"On December 4, 2000, HYATT filed a motion for leave of court to amend the complaint,
alleging that subsequent to the filing of the complaint, it learned that LGISC transferred all its
organization, assets and goodwill, as a consequence of a joint venture agreement with Otis
Elevator Company of the USA, to LG Otis Elevator Company (LG OTIS, for brevity). Thus,
LGISC was to be substituted or changed to LG OTIS, its successor-in-interest. Likewise, the
motion averred that x x x GOLDSTAR was being utilized by LG OTIS and LGIC in perpetrating
their unlawful and unjustified acts against HYATT. Consequently, in order to afford complete
relief, GOLDSTAR was to be additionally impleaded as a party-defendant. Hence, in the
Amended Complaint, HYATT impleaded x x x GOLDSTAR as a party-defendant, and all
references to LGISC were correspondingly replaced with LG OTIS.

"On December 18, 2000, LG OTIS (LGISC) and LGIC filed their opposition to HYATT’s motion
to amend the complaint. It argued that: (1) the inclusion of GOLDSTAR as party-defendant
would lead to a change in the theory of the case since the latter took no part in the negotiations
which led to the alleged unfair trade practices subject of the case; and (b) HYATT’s move to
amend the complaint at that time was dilatory, considering that HYATT was aware of the
existence of GOLDSTAR for almost two years before it sought its inclusion as party-defendant.

"On January 8, 2001, the [trial] court admitted the Amended Complaint. LG OTIS (LGISC) and
LGIC filed a motion for reconsideration thereto but was similarly rebuffed on October 4, 2001.

"On April 12, 2002, x x x GOLDSTAR filed a Motion to Dismiss the amended complaint, raising
the following grounds: (1) the venue was improperly laid, as neither HYATT nor defendants
reside in Mandaluyong City, where the original case was filed; and (2) failure to state a cause
of action against [respondent], since the amended complaint fails to allege with certainty what
specific ultimate acts x x x Goldstar performed in violation of x x x Hyatt’s rights. In the Order
dated May 27, 2002, which is the main subject of the present petition, the [trial] court denied
the motion to dismiss, ratiocinating as follows:

‘Upon perusal of the factual and legal arguments raised by the movants-defendants, the court
finds that these are substantially the same issues posed by the then defendant LG Industrial
System Co. particularly the matter dealing [with] the issues of improper venue, failure to state
cause of action as well as this court’s lack of jurisdiction. Under the circumstances obtaining,
the court resolves to rule that the complaint sufficiently states a cause of action and that the
venue is properly laid. It is significant to note that in the amended complaint, the same
allegations are adopted as in the original complaint with respect to the Goldstar Philippines to
enable this court to adjudicate a complete determination or settlement of the claim subject of
the action it appearing preliminarily as sufficiently alleged in the plaintiff’s pleading that said
Goldstar Elevator Philippines Inc., is being managed and operated by the same Korean
officers of defendants LG-OTIS Elevator Company and LG International Corporation.’

"On June 11, 2002, [Respondent] GOLDSTAR filed a motion for reconsideration thereto. On
June 18, 2002, without waiving the grounds it raised in its motion to dismiss, [it] also filed an
‘Answer Ad Cautelam’. On October 1, 2002, [its] motion for reconsideration was denied.

"From the aforesaid Order denying x x x Goldstar’s motion for reconsideration, it filed the x x
x petition for certiorari [before the CA] alleging grave abuse of discretion amounting to lack or
excess of jurisdiction on the part of the [trial] court in issuing the assailed Orders dated May
27, 2002 and October 1, 2002."5

Ruling of the Court of Appeals

The CA ruled that the trial court had committed palpable error amounting to grave abuse of
discretion when the latter denied respondent’s Motion to Dismiss. The appellate court held that
the venue was clearly improper, because none of the litigants "resided" in Mandaluyong City,
where the case was filed.

According to the appellate court, since Makati was the principal place of business of both
respondent and petitioner, as stated in the latter’s Articles of Incorporation, that place was
controlling for purposes of determining the proper venue. The fact that petitioner had
abandoned its principal office in Makati years prior to the filing of the original case did not affect
the venue where personal actions could be commenced and tried.

Hence, this Petition.6

The Issue

In its Memorandum, petitioner submits this sole issue for our consideration:

"Whether or not the Court of Appeals, in reversing the ruling of the Regional Trial Court, erred
as a matter of law and jurisprudence, as well as committed grave abuse of discretion, in holding
that in the light of the peculiar facts of this case, venue was improper[.]"7

This Court’s Ruling

The Petition has no merit.

Sole Issue:

Venue

The resolution of this case rests upon a proper understanding of Section 2 of Rule 4 of the
1997 Revised Rules of Court:

"Sec. 2. Venue of personal actions. – All other actions may be commenced and tried where
the plaintiff or any of the principal plaintiff resides, or where the defendant or any of the principal
defendant resides, or in the case of a non-resident defendant where he may be found, at the
election of the plaintiff."

Since both parties to this case are corporations, there is a need to clarify the meaning of
"residence." The law recognizes two types of persons: (1) natural and (2) juridical.
Corporations come under the latter in accordance with Article 44(3) of the Civil Code.8

Residence is the permanent home -- the place to which, whenever absent for business or
pleasure, one intends to return.9 Residence is vital when dealing with venue.10 A corporation,
however, has no residence in the same sense in which this term is applied to a natural person.
This is precisely the reason why the Court in Young Auto Supply Company v. Court of
Appeals11 ruled that "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." 12
Even before this ruling, it has already been established that the residence of a corporation is
the place where its principal office is established.13

This Court has also definitively ruled that for purposes of venue, the term "residence" is
synonymous with "domicile."14 Correspondingly, the Civil Code provides:

"Art. 51. When the law creating or recognizing them, or any other provision does not fix the
domicile of juridical persons, the same shall be understood to be the place where their legal
representation is established or where they exercise their principal functions."15

It now becomes apparent that the residence or domicile of a juridical person is fixed by "the
law creating or recognizing" it. Under Section 14(3) of the Corporation Code, the place where
the principal office of the corporation is to be located is one of the required contents of the
articles of incorporation, which shall be filed with the Securities and Exchange Commission
(SEC).
In the present case, there is no question as to the residence of respondent. What needs to be
examined is that of petitioner. Admittedly,16 the latter’s principal place of business is Makati,
as indicated in its Articles of Incorporation. Since the principal place of business of a
corporation determines its residence or domicile, then the place indicated in petitioner’s articles
of incorporation becomes controlling in determining the venue for this case.

Petitioner argues that the Rules of Court do not provide that when the plaintiff is a corporation,
the complaint should be filed in the location of its principal office as indicated in its articles of
incorporation.17 Jurisprudence has, however, settled that the place where the principal office
of a corporation is located, as stated in the articles, indeed establishes its residence.18 This
ruling is important in determining the venue of an action by or against a corporation,19 as in the
present case.

Without merit is the argument of petitioner that the locality stated in its Articles of Incorporation
does not conclusively indicate that its principal office is still in the same place. We agree with
the appellate court in its observation that the requirement to state in the articles the place
where the principal office of the corporation is to be located "is not a meaningless requirement.
That proviso would be rendered nugatory if corporations were to be allowed to simply disregard
what is expressly stated in their Articles of Incorporation."20

Inconclusive are the bare allegations of petitioner that it had closed its Makati office and
relocated to Mandaluyong City, and that respondent was well aware of those circumstances.
Assuming arguendo that they transacted business with each other in the Mandaluyong office
of petitioner, the fact remains that, in law, the latter’s residence was still the place indicated in
its Articles of Incorporation. Further unacceptable is its faulty reasoning that the ground for the
CA’s dismissal of its Complaint was its failure to amend its Articles of Incorporation so as to
reflect its actual and present principal office. The appellate court was clear enough in its ruling
that the Complaint was dismissed because the venue had been improperly laid, not because
of the failure of petitioner to amend the latter’s Articles of Incorporation.

Indeed, it is a legal truism that the rules on the venue of personal actions are fixed for the
convenience of the plaintiffs and their witnesses. Equally settled, however, is the principle that
choosing the venue of an action is not left to a plaintiff’s caprice; the matter is regulated by the
Rules of Court.21 Allowing petitioner’s arguments may lead precisely to what this Court was
trying to avoid in Young Auto Supply Company v. CA:22 the creation of confusion and untold
inconveniences to party litigants. Thus enunciated the CA:

"x x x. To insist that the proper venue is the actual principal office and not that stated in its
Articles of Incorporation would indeed create confusion and work untold inconvenience.
Enterprising litigants may, out of some ulterior motives, easily circumvent the rules on venue
by the simple expedient of closing old offices and opening new ones in another place that they
may find well to suit their needs."23

We find it necessary to remind party litigants, especially corporations, as follows:

"The rules on venue, like the other procedural rules, are designed to insure a just and orderly
administration of justice or the impartial and evenhanded determination of every action and
proceeding. Obviously, this objective will not be attained if the plaintiff is given unrestricted
freedom to choose the court where he may file his complaint or petition.

"The choice of venue should not be left to the plaintiff’s whim or caprice. He may be impelled
by some ulterior motivation in choosing to file a case in a particular court even if not allowed
by the rules on venue."24

WHEREFORE, the Petition is hereby DENIED, and the assailed Decision and Resolution
AFFIRMED. Costs against petitioner.

SO ORDERED.
CASE NO. 8

Republic of the Philippines

SUPREME COURT
Manila

EN BANC

G.R. No. L-22238 February 18, 1967

CLAVECILLIA RADIO SYSTEM, petitioner-appellant,

vs.
HON. AGUSTIN ANTILLON, as City Judge of the Municipal Court of Cagayan de Oro
City
and NEW CAGAYAN GROCERY, respondents-appellees.

B. C. Padua for petitioner and appellant.

Pablo S. Reyes for respondents and appellees.

REGALA, J.:

This is an appeal from an order of the Court of First Instance of Misamis Oriental dismissing
the petition of the Clavecilla Radio System to prohibit the City Judge of Cagayan de Oro from
taking cognizance of Civil Case No. 1048 for damages.

It appears that on June 22, 1963, the New Cagayan Grocery filed a complaint against the
Clavecilla Radio System alleging, in effect, that on March 12, 1963, the following message,
addressed to the former, was filed at the latter's Bacolod Branch Office for transmittal thru its
branch office at Cagayan de Oro:

NECAGRO CAGAYAN DE ORO (CLAVECILLA)

REURTEL WASHED NOT AVAILABLE REFINED TWENTY FIFTY IF AGREEABLE

SHALL SHIP LATER REPLY POHANG

The Cagayan de Oro branch office having received the said message omitted, in
delivering the same to the New Cagayan Grocery, the word "NOT" between the
words "WASHED" and "AVAILABLE," thus changing entirely the contents and
purport of the same and causing the said addressee to suffer damages. After service
of summons, the Clavecilla Radio System filed a motion to dismiss the complaint on
the grounds that it states no cause of action and that the venue is improperly laid.
The New Cagayan Grocery interposed an opposition to which the Clavecilla Radio
System filed its rejoinder. Thereafter, the City Judge, on September 18, 1963, denied
the motion to dismiss for lack of merit and set the case for hearing.
1äwphï1.ñët

Hence, the Clavecilla Radio System filed a petition for prohibition with preliminary injunction
with the Court of First Instance praying that the City Judge, Honorable Agustin Antillon, be
enjoined from further proceeding with the case on the ground of improper venue. The
respondents filed a motion to dismiss the petition but this was opposed by the petitioner. Later,
the motion was submitted for resolution on the pleadings.

In dismissing the case, the lower court held that the Clavecilla Radio System may be sued
either in Manila where it has its principal office or in Cagayan de Oro City where it may be
served, as in fact it was served, with summons through the Manager of its branch office in said
city. In other words, the court upheld the authority of the city court to take cognizance of the
case.1äwphï1.ñët

In appealing, the Clavecilla Radio System contends that the suit against it should be filed in
Manila where it holds its principal office.

It is clear that the case for damages filed with the city court is based upon tort and not upon a
written contract. Section 1 of Rule 4 of the New Rules of Court, governing venue of actions in
inferior courts, provides in its paragraph (b) (3) that when "the action is not upon a written
contract, then in the municipality where the defendant or any of the defendants resides or may
be served with summons." (Emphasis supplied)

Settled is the principle in corporation law that the residence of a corporation is the place where
its principal office is established. Since it is not disputed that the Clavecilla Radio System has
its principal office in Manila, it follows that the suit against it may properly be filed in the City of
Manila.

The appellee maintain, however, that with the filing of the action in Cagayan de Oro City, venue
was properly laid on the principle that the appellant may also be served with summons in that
city where it maintains a branch office. This Court has already held in the case of Cohen vs.
Benguet Commercial Co., Ltd., 34 Phil. 526; that the term "may be served with summons"
does not apply when the defendant resides in the Philippines for, in such case, he may be
sued only in the municipality of his residence, regardless of the place where he may be found
and served with summons. As any other corporation, the Clavecilla Radio System maintains
a residence which is Manila in this case, and a person can have only one residence at a time
(See Alcantara vs. Secretary of the Interior, 61 Phil. 459; Evangelists vs. Santos, 86 Phil. 387).
The fact that it maintains branch offices in some parts of the country does not mean that it can
be sued in any of these places. To allow an action to be instituted in any place where a
corporate entity has its branch offices would create confusion and work untold inconvenience
to the corporation.

It is important to remember, as was stated by this Court in Evangelista vs. Santos, et al., supra,
that the laying of the venue of an action is not left to plaintiff's caprice because the matter is
regulated by the Rules of Court. Applying the provision of the Rules of Court, the venue in this
case was improperly laid.

The order appealed from is therefore reversed, but without prejudice to the filing of the action
in Which the venue shall be laid properly. With costs against the respondents-appellees.
CASE NO. 9

Republic of the Philippines

SUPREME COURT
Manila

EN BANC

G.R. No. L-23145 November 29, 1968

TESTATE ESTATE OF IDONAH SLADE PERKINS, deceased. RENATO D. TAYAG,

ancillary administrator-appellee,
vs.
BENGUET CONSOLIDATED, INC., oppositor-appellant.

Cirilo F. Asperillo, Jr., for ancillary administrator-appellee.

Ross, Salcedo, Del Rosario, Bito and Misa for oppositor-appellant.

FERNANDO, J.:

Confronted by an obstinate and adamant refusal of the domiciliary administrator, the County
Trust Company of New York, United States of America, of the estate of the deceased Idonah
Slade Perkins, who died in New York City on March 27, 1960, to surrender to the ancillary
administrator in the Philippines the stock certificates owned by her in a Philippine corporation,
Benguet Consolidated, Inc., to satisfy the legitimate claims of local creditors, the lower court,
then presided by the Honorable Arsenio Santos, now retired, issued on May 18, 1964, an order
of this tenor: "After considering the motion of the ancillary administrator, dated February 11,
1964, as well as the opposition filed by the Benguet Consolidated, Inc., the Court hereby (1)
considers as lost for all purposes in connection with the administration and liquidation of the
Philippine estate of Idonah Slade Perkins the stock certificates covering the 33,002 shares of
stock standing in her name in the books of the Benguet Consolidated, Inc., (2) orders said
certificates cancelled, and (3) directs said corporation to issue new certificates in lieu thereof,
the same to be delivered by said corporation to either the incumbent ancillary administrator or
to the Probate Division of this Court."1

From such an order, an appeal was taken to this Court not by the domiciliary administrator,
the County Trust Company of New York, but by the Philippine corporation, the Benguet
Consolidated, Inc. The appeal cannot possibly prosper. The challenged order represents a
response and expresses a policy, to paraphrase Frankfurter, arising out of a specific problem,
addressed to the attainment of specific ends by the use of specific remedies, with full and
ample support from legal doctrines of weight and significance.

The facts will explain why. As set forth in the brief of appellant Benguet Consolidated, Inc.,
Idonah Slade Perkins, who died on March 27, 1960 in New York City, left among others, two
stock certificates covering 33,002 shares of appellant, the certificates being in the possession
of the County Trust Company of New York, which as noted, is the domiciliary administrator of
the estate of the deceased.2 Then came this portion of the appellant's brief: "On August 12,
1960, Prospero Sanidad instituted ancillary administration proceedings in the Court of First
Instance of Manila; Lazaro A. Marquez was appointed ancillary administrator, and on January
22, 1963, he was substituted by the appellee Renato D. Tayag. A dispute arose between the
domiciary administrator in New York and the ancillary administrator in the Philippines as to
which of them was entitled to the possession of the stock certificates in question. On January
27, 1964, the Court of First Instance of Manila ordered the domiciliary administrator, County
Trust Company, to "produce and deposit" them with the ancillary administrator or with the Clerk
of Court. The domiciliary administrator did not comply with the order, and on February 11,
1964, the ancillary administrator petitioned the court to "issue an order declaring the certificate
or certificates of stocks covering the 33,002 shares issued in the name of Idonah Slade Perkins
by Benguet Consolidated, Inc., be declared [or] considered as lost."3

It is to be noted further that appellant Benguet Consolidated, Inc. admits that "it is immaterial"
as far as it is concerned as to "who is entitled to the possession of the stock certificates in
question; appellant opposed the petition of the ancillary administrator because the said stock
certificates are in existence, they are today in the possession of the domiciliary administrator,
the County Trust Company, in New York, U.S.A...."4

It is its view, therefore, that under the circumstances, the stock certificates cannot be declared
or considered as lost. Moreover, it would allege that there was a failure to observe certain
requirements of its by-laws before new stock certificates could be issued. Hence, its appeal.

As was made clear at the outset of this opinion, the appeal lacks merit. The challenged order
constitutes an emphatic affirmation of judicial authority sought to be emasculated by the wilful
conduct of the domiciliary administrator in refusing to accord obedience to a court decree.
How, then, can this order be stigmatized as illegal?

As is true of many problems confronting the judiciary, such a response was called for by the
realities of the situation. What cannot be ignored is that conduct bordering on wilful defiance,
if it had not actually reached it, cannot without undue loss of judicial prestige, be condoned or
tolerated. For the law is not so lacking in flexibility and resourcefulness as to preclude such a
solution, the more so as deeper reflection would make clear its being buttressed by
indisputable principles and supported by the strongest policy considerations.

It can truly be said then that the result arrived at upheld and vindicated the honor of the judiciary
no less than that of the country. Through this challenged order, there is thus dispelled the
atmosphere of contingent frustration brought about by the persistence of the domiciliary
administrator to hold on to the stock certificates after it had, as admitted, voluntarily submitted
itself to the jurisdiction of the lower court by entering its appearance through counsel on June
27, 1963, and filing a petition for relief from a previous order of March 15, 1963.

Thus did the lower court, in the order now on appeal, impart vitality and effectiveness to what
was decreed. For without it, what it had been decided would be set at naught and nullified.
Unless such a blatant disregard by the domiciliary administrator, with residence abroad, of
what was previously ordained by a court order could be thus remedied, it would have entailed,
insofar as this matter was concerned, not a partial but a well-nigh complete paralysis of judicial
authority.

1. Appellant Benguet Consolidated, Inc. did not dispute the power of the appellee ancillary
administrator to gain control and possession of all assets of the decedent within the jurisdiction
of the Philippines. Nor could it. Such a power is inherent in his duty to settle her estate and
satisfy the claims of local creditors.5 As Justice Tuason speaking for this Court made clear, it
is a "general rule universally recognized" that administration, whether principal or ancillary,
certainly "extends to the assets of a decedent found within the state or country where it was
granted," the corollary being "that an administrator appointed in one state or country has no
power over property in another state or country."6

It is to be noted that the scope of the power of the ancillary administrator was, in an earlier
case, set forth by Justice Malcolm. Thus: "It is often necessary to have more than one
administration of an estate. When a person dies intestate owning property in the country of his
domicile as well as in a foreign country, administration is had in both countries. That which is
granted in the jurisdiction of decedent's last domicile is termed the principal administration,
while any other administration is termed the ancillary administration. The reason for the latter
is because a grant of administration does not ex proprio vigore have any effect beyond the
limits of the country in which it is granted. Hence, an administrator appointed in a foreign state
has no authority in the [Philippines]. The ancillary administration is proper, whenever a person
dies, leaving in a country other than that of his last domicile, property to be administered in the
nature of assets of the deceased liable for his individual debts or to be distributed among his
heirs."7

It would follow then that the authority of the probate court to require that ancillary
administrator's right to "the stock certificates covering the 33,002 shares ... standing in her
name in the books of [appellant] Benguet Consolidated, Inc...." be respected is equally beyond
question. For appellant is a Philippine corporation owing full allegiance and subject to the
unrestricted jurisdiction of local courts. Its shares of stock cannot therefore be considered in
any wise as immune from lawful court orders.

Our holding in Wells Fargo Bank and Union v. Collector of Internal Revenue8 finds application.
"In the instant case, the actual situs of the shares of stock is in the Philippines, the corporation
being domiciled [here]." To the force of the above undeniable proposition, not even appellant
is insensible. It does not dispute it. Nor could it successfully do so even if it were so minded.

2. In the face of such incontrovertible doctrines that argue in a rather conclusive fashion for
the legality of the challenged order, how does appellant, Benguet Consolidated, Inc. propose
to carry the extremely heavy burden of persuasion of precisely demonstrating the contrary? It
would assign as the basic error allegedly committed by the lower court its "considering as lost
the stock certificates covering 33,002 shares of Benguet belonging to the deceased Idonah
Slade Perkins, ..."9 More specifically, appellant would stress that the "lower court could not
"consider as lost" the stock certificates in question when, as a matter of fact, his Honor the trial
Judge knew, and does know, and it is admitted by the appellee, that the said stock certificates
are in existence and are today in the possession of the domiciliary administrator in New York."10

There may be an element of fiction in the above view of the lower court. That certainly does
not suffice to call for the reversal of the appealed order. Since there is a refusal, persistently
adhered to by the domiciliary administrator in New York, to deliver the shares of stocks of
appellant corporation owned by the decedent to the ancillary administrator in the Philippines,
there was nothing unreasonable or arbitrary in considering them as lost and requiring the
appellant to issue new certificates in lieu thereof. Thereby, the task incumbent under the law
on the ancillary administrator could be discharged and his responsibility fulfilled.

Any other view would result in the compliance to a valid judicial order being made to depend
on the uncontrolled discretion of the party or entity, in this case domiciled abroad, which thus
far has shown the utmost persistence in refusing to yield obedience. Certainly, appellant would
not be heard to contend in all seriousness that a judicial decree could be treated as a mere
scrap of paper, the court issuing it being powerless to remedy its flagrant disregard.

It may be admitted of course that such alleged loss as found by the lower court did not
correspond exactly with the facts. To be more blunt, the quality of truth may be lacking in such
a conclusion arrived at. It is to be remembered however, again to borrow from Frankfurter,
"that fictions which the law may rely upon in the pursuit of legitimate ends have played an
important part in its development."11

Speaking of the common law in its earlier period, Cardozo could state fictions "were devices
to advance the ends of justice, [even if] clumsy and at times offensive."12 Some of them have
persisted even to the present, that eminent jurist, noting "the quasi contract, the adopted child,
the constructive trust, all of flourishing vitality, to attest the empire of "as if" today."13 He likewise
noted "a class of fictions of another order, the fiction which is a working tool of thought, but
which at times hides itself from view till reflection and analysis have brought it to the light."14

What cannot be disputed, therefore, is the at times indispensable role that fictions as such
played in the law. There should be then on the part of the appellant a further refinement in the
catholicity of its condemnation of such judicial technique. If ever an occasion did call for the
employment of a legal fiction to put an end to the anomalous situation of a valid judicial order
being disregarded with apparent impunity, this is it. What is thus most obvious is that this
particular alleged error does not carry persuasion.

3. Appellant Benguet Consolidated, Inc. would seek to bolster the above contention by its
invoking one of the provisions of its by-laws which would set forth the procedure to be followed
in case of a lost, stolen or destroyed stock certificate; it would stress that in the event of a
contest or the pendency of an action regarding ownership of such certificate or certificates of
stock allegedly lost, stolen or destroyed, the issuance of a new certificate or certificates would
await the "final decision by [a] court regarding the ownership [thereof]."15

Such reliance is misplaced. In the first place, there is no such occasion to apply such by-law.
It is admitted that the foreign domiciliary administrator did not appeal from the order now in
question. Moreover, there is likewise the express admission of appellant that as far as it is
concerned, "it is immaterial ... who is entitled to the possession of the stock certificates ..."
Even if such were not the case, it would be a legal absurdity to impart to such a provision
conclusiveness and finality. Assuming that a contrariety exists between the above by-law and
the command of a court decree, the latter is to be followed.

It is understandable, as Cardozo pointed out, that the Constitution overrides a statute, to which,
however, the judiciary must yield deference, when appropriately invoked and deemed
applicable. It would be most highly unorthodox, however, if a corporate by-law would be
accorded such a high estate in the jural order that a court must not only take note of it but yield
to its alleged controlling force.

The fear of appellant of a contingent liability with which it could be saddled unless the appealed
order be set aside for its inconsistency with one of its by-laws does not impress us. Its
obedience to a lawful court order certainly constitutes a valid defense, assuming that such
apprehension of a possible court action against it could possibly materialize. Thus far, nothing
in the circumstances as they have developed gives substance to such a fear. Gossamer
possibilities of a future prejudice to appellant do not suffice to nullify the lawful exercise of
judicial authority.

4. What is more the view adopted by appellant Benguet Consolidated, Inc. is fraught with
implications at war with the basic postulates of corporate theory.

We start with the undeniable premise that, "a corporation is an artificial being created by
operation of law...."16 It owes its life to the state, its birth being purely dependent on its will. As
Berle so aptly stated: "Classically, a corporation was conceived as an artificial person, owing
its existence through creation by a sovereign power."17 As a matter of fact, the statutory
language employed owes much to Chief Justice Marshall, who in the Dartmouth College
decision defined a corporation precisely as "an artificial being, invisible, intangible, and existing
only in contemplation of law."18

The well-known authority Fletcher could summarize the matter thus: "A corporation is not in
fact and in reality a person, but the law treats it as though it were a person by process of fiction,
or by regarding it as an artificial person distinct and separate from its individual stockholders....
It owes its existence to law. It is an artificial person created by law for certain specific purposes,
the extent of whose existence, powers and liberties is fixed by its charter."19 Dean Pound's
terse summary, a juristic person, resulting from an association of human beings granted legal
personality by the state, puts the matter neatly.20

There is thus a rejection of Gierke's genossenchaft theory, the basic theme of which to quote
from Friedmann, "is the reality of the group as a social and legal entity, independent of state
recognition and concession."21 A corporation as known to Philippine jurisprudence is a creature
without any existence until it has received the imprimatur of the state according to law. It is
logically inconceivable therefore that it will have rights and privileges of a higher priority than
that of its creator. More than that, it cannot legitimately refuse to yield obedience to acts of its
state organs, certainly not excluding the judiciary, whenever called upon to do so.

As a matter of fact, a corporation once it comes into being, following American law still of
persuasive authority in our jurisdiction, comes more often within the ken of the judiciary than
the other two coordinate branches. It institutes the appropriate court action to enforce its right.
Correlatively, it is not immune from judicial control in those instances, where a duty under the
law as ascertained in an appropriate legal proceeding is cast upon it.

To assert that it can choose which court order to follow and which to disregard is to confer
upon it not autonomy which may be conceded but license which cannot be tolerated. It is to
argue that it may, when so minded, overrule the state, the source of its very existence; it is to
contend that what any of its governmental organs may lawfully require could be ignored at will.
So extravagant a claim cannot possibly merit approval.

5. One last point. In Viloria v. Administrator of Veterans Affairs,22 it was shown that in a
guardianship proceedings then pending in a lower court, the United States Veterans
Administration filed a motion for the refund of a certain sum of money paid to the minor under
guardianship, alleging that the lower court had previously granted its petition to consider the
deceased father as not entitled to guerilla benefits according to a determination arrived at by
its main office in the United States. The motion was denied. In seeking a reconsideration of
such order, the Administrator relied on an American federal statute making his decisions "final
and conclusive on all questions of law or fact" precluding any other American official to
examine the matter anew, "except a judge or judges of the United States court."23
Reconsideration was denied, and the Administrator appealed.

In an opinion by Justice J.B.L. Reyes, we sustained the lower court. Thus: "We are of the
opinion that the appeal should be rejected. The provisions of the U.S. Code, invoked by the
appellant, make the decisions of the U.S. Veterans' Administrator final and conclusive when
made on claims property submitted to him for resolution; but they are not applicable to the
present case, where the Administrator is not acting as a judge but as a litigant. There is a great
difference between actions against the Administrator (which must be filed strictly in accordance
with the conditions that are imposed by the Veterans' Act, including the exclusive review by
United States courts), and those actions where the Veterans' Administrator seeks a remedy
from our courts and submits to their jurisdiction by filing actions therein. Our attention has not
been called to any law or treaty that would make the findings of the Veterans' Administrator,
in actions where he is a party, conclusive on our courts. That, in effect, would deprive our
tribunals of judicial discretion and render them mere subordinate instrumentalities of the
Veterans' Administrator."

It is bad enough as the Viloria decision made patent for our judiciary to accept as final and
conclusive, determinations made by foreign governmental agencies. It is infinitely worse if
through the absence of any coercive power by our courts over juridical persons within our
jurisdiction, the force and effectivity of their orders could be made to depend on the whim or
caprice of alien entities. It is difficult to imagine of a situation more offensive to the dignity of
the bench or the honor of the country.

Yet that would be the effect, even if unintended, of the proposition to which appellant Benguet
Consolidated seems to be firmly committed as shown by its failure to accept the validity of the
order complained of; it seeks its reversal. Certainly we must at all pains see to it that it does
not succeed. The deplorable consequences attendant on appellant prevailing attest to the
necessity of negative response from us. That is what appellant will get.

That is all then that this case presents. It is obvious why the appeal cannot succeed. It is
always easy to conjure extreme and even oppressive possibilities. That is not decisive. It does
not settle the issue. What carries weight and conviction is the result arrived at, the just solution
obtained, grounded in the soundest of legal doctrines and distinguished by its correspondence
with what a sense of realism requires. For through the appealed order, the imperative
requirement of justice according to law is satisfied and national dignity and honor maintained.

WHEREFORE, the appealed order of the Honorable Arsenio Santos, the Judge of the Court
of First Instance, dated May 18, 1964, is affirmed. With costs against oppositor-appelant
Benguet Consolidated, Inc.
 CASE NO. 10

Republic of the Philippines

SUPREME COURT
Baguio City

THIRD DIVISION

G.R. No. 195580 April 21, 2014

NARRA NICKEL MINING AND DEVELOPMENT CORP., TESORO MINING AND DEVELOPMENT, INC.,
and MCARTHUR MINING, INC., Petitioners,
vs.
REDMONT CONSOLIDATED MINES CORP., Respondent.

DECISION

VELASCO, JR., J.:

Before this Court is a Petition for Review on Certiorari under Rule 45 filed by Narra Nickel and
Mining Development Corp. (Narra), Tesoro Mining and Development, Inc. (Tesoro), and McArthur
Mining Inc. (McArthur), which seeks to reverse the October 1, 2010 Decision 1 and the February
15, 2011 Resolution of the Court of Appeals (CA).

The Facts

Sometime in December 2006, respondent Redmont Consolidated Mines Corp. (Redmont), a

domestic corporation organized and existing under Philippine laws, took interest in mining and
exploring certain areas of the province of Palawan. After inquiring with the Department of
Environment and Natural Resources (DENR), it learned that the areas where it wanted to
undertake exploration and mining activities where already covered by Mineral Production
Sharing Agreement (MPSA) applications of petitioners Narra, Tesoro and McArthur.

Petitioner McArthur, through its predecessor-in-interest Sara Marie Mining, Inc. (SMMI), filed an
application for an MPSA and Exploration Permit (EP) with the Mines and Geo-Sciences Bureau
(MGB), Region IV-B, Office of the Department of Environment and Natural Resources (DENR).

Subsequently, SMMI was issued MPSA-AMA-IVB-153 covering an area of over 1,782 hectares in
Barangay Sumbiling, Municipality of Bataraza, Province of Palawan and EPA-IVB-44 which
includes an area of 3,720 hectares in Barangay Malatagao, Bataraza, Palawan. The MPSA and
EP were then transferred to Madridejos Mining Corporation (MMC) and, on November 6, 2006,
assigned to petitioner McArthur.2

Petitioner Narra acquired its MPSA from Alpha Resources and Development Corporation and
Patricia Louise Mining & Development Corporation (PLMDC) which previously filed an
application for an MPSA with the MGB, Region IV-B, DENR on January 6, 1992. Through the said
application, the DENR issued MPSA-IV-1-12 covering an area of 3.277 hectares in barangays
Calategas and San Isidro, Municipality of Narra, Palawan. Subsequently, PLMDC conveyed,
transferred and/or assigned its rights and interests over the MPSA application in favor of Narra.

Another MPSA application of SMMI was filed with the DENR Region IV-B, labeled as MPSA-AMA-
IVB-154 (formerly EPA-IVB-47) over 3,402 hectares in Barangays Malinao and Princesa Urduja,
Municipality of Narra, Province of Palawan. SMMI subsequently conveyed, transferred and
assigned its rights and interest over the said MPSA application to Tesoro.

On January 2, 2007, Redmont filed before the Panel of Arbitrators (POA) of the DENR three (3)
separate petitions for the denial of petitioners’ applications for MPSA designated as AMA-IVB-
153, AMA-IVB-154 and MPSA IV-1-12.

In the petitions, Redmont alleged that at least 60% of the capital stock of McArthur, Tesoro and
Narra are owned and controlled by MBMI Resources, Inc. (MBMI), a 100% Canadian corporation.
Redmont reasoned that since MBMI is a considerable stockholder of petitioners, it was the driving
force behind petitioners’ filing of the MPSAs over the areas covered by applications since it knows
that it can only participate in mining activities through corporations which are deemed Filipino
citizens. Redmont argued that given that petitioners’ capital stocks were mostly owned by MBMI,
they were likewise disqualified from engaging in mining activities through MPSAs, which are
reserved only for Filipino citizens.

In their Answers, petitioners averred that they were qualified persons under Section 3(aq) of
Republic Act No. (RA) 7942 or the Philippine Mining Act of 1995 which provided:

Sec. 3 Definition of Terms. As used in and for purposes of this Act, the following terms, whether in
singular or plural, shall mean:

xxxx

(aq) "Qualified person" means any citizen of the Philippines with capacity to contract, or a
corporation, partnership, association, or cooperative organized or authorized for the purpose of
engaging in mining, with technical and financial capability to undertake mineral resources
development and duly registered in accordance with law at least sixty per cent (60%) of the
capital of which is owned by citizens of the Philippines: Provided, That a legally organized foreign-
owned corporation shall be deemed a qualified person for purposes of granting an exploration
permit, financial or technical assistance agreement or mineral processing permit.

Additionally, they stated that their nationality as applicants is immaterial because they also
applied for Financial or Technical Assistance Agreements (FTAA) denominated as AFTA-IVB-09
for McArthur, AFTA-IVB-08 for Tesoro and AFTA-IVB-07 for Narra, which are granted to foreign-
owned corporations. Nevertheless, they claimed that the issue on nationality should not be raised
since McArthur, Tesoro and Narra are in fact Philippine Nationals as 60% of their capital is owned
by citizens of the Philippines. They asserted that though MBMI owns 40% of the shares of PLMC
(which owns 5,997 shares of Narra),3 40% of the shares of MMC (which owns 5,997 shares of
McArthur)4 and 40% of the shares of SLMC (which, in turn, owns 5,997 shares of Tesoro),5 the shares
of MBMI will not make it the owner of at least 60% of the capital stock of each of petitioners. They
added that the best tool used in determining the nationality of a corporation is the "control test,"
embodied in Sec. 3 of RA 7042 or the Foreign Investments Act of 1991. They also claimed that the
POA of DENR did not have jurisdiction over the issues in Redmont’s petition since they are not
enumerated in Sec. 77 of RA 7942. Finally, they stressed that Redmont has no personality to sue
them because it has no pending claim or application over the areas applied for by petitioners.

On December 14, 2007, the POA issued a Resolution disqualifying petitioners from gaining MPSAs.
It held:

[I]t is clearly established that respondents are not qualified applicants to engage in mining
activities. On the other hand, [Redmont] having filed its own applications for an EPA over the
areas earlier covered by the MPSA application of respondents may be considered if and when
they are qualified under the law. The violation of the requirements for the issuance and/or grant
of permits over mining areas is clearly established thus, there is reason to believe that the
cancellation and/or revocation of permits already issued under the premises is in order and open
the areas covered to other qualified applicants.

xxxx

WHEREFORE, the Panel of Arbitrators finds the Respondents, McArthur Mining Inc., Tesoro Mining
and Development, Inc., and Narra Nickel Mining and Development Corp. as, DISQUALIFIED for
being considered as Foreign Corporations. Their Mineral Production Sharing Agreement (MPSA)
are hereby x x x DECLARED NULL AND VOID.6

The POA considered petitioners as foreign corporations being "effectively controlled" by MBMI, a
100% Canadian company and declared their MPSAs null and void. In the same Resolution, it
gave due course to Redmont’s EPAs. Thereafter, on February 7, 2008, the POA issued an Order7
denying the Motion for Reconsideration filed by petitioners.

Aggrieved by the Resolution and Order of the POA, McArthur and Tesoro filed a joint Notice of
Appeal8 and Memorandum of Appeal9 with the Mines Adjudication Board (MAB) while Narra
separately filed its Notice of Appeal10 and Memorandum of Appeal.11

In their respective memorandum, petitioners emphasized that they are qualified persons under
the law. Also, through a letter, they informed the MAB that they had their individual MPSA
applications converted to FTAAs. McArthur’s FTAA was denominated as AFTA-IVB-0912 on May
2007, while Tesoro’s MPSA application was converted to AFTA-IVB-0813 on May 28, 2007, and
Narra’s FTAA was converted to AFTA-IVB-0714 on March 30, 2006.

Pending the resolution of the appeal filed by petitioners with the MAB, Redmont filed a
Complaint15 with the Securities and Exchange Commission (SEC), seeking the revocation of the
certificates for registration of petitioners on the ground that they are foreign-owned or controlled
corporations engaged in mining in violation of Philippine laws. Thereafter, Redmont filed on
September 1, 2008 a Manifestation and Motion to Suspend Proceeding before the MAB praying
for the suspension of the proceedings on the appeals filed by McArthur, Tesoro and Narra.

Subsequently, on September 8, 2008, Redmont filed before the Regional Trial Court of Quezon
City, Branch 92 (RTC) a Complaint16 for injunction with application for issuance of a temporary
restraining order (TRO) and/or writ of preliminary injunction, docketed as Civil Case No. 08-63379.
Redmont prayed for the deferral of the MAB proceedings pending the resolution of the
Complaint before the SEC.

But before the RTC can resolve Redmont’s Complaint and applications for injunctive reliefs, the
MAB issued an Order on September 10, 2008, finding the appeal meritorious. It held:

WHEREFORE, in view of the foregoing, the Mines Adjudication Board hereby REVERSES and SETS
ASIDE the Resolution dated 14 December 2007 of the Panel of Arbitrators of Region IV-B
(MIMAROPA) in POA-DENR Case Nos. 2001-01, 2007-02 and 2007-03, and its Order dated 07
February 2008 denying the Motions for Reconsideration of the Appellants. The Petition filed by
Redmont Consolidated Mines Corporation on 02 January 2007 is hereby ordered DISMISSED.17

Belatedly, on September 16, 2008, the RTC issued an Order18 granting Redmont’s application for
a TRO and setting the case for hearing the prayer for the issuance of a writ of preliminary
injunction on September 19, 2008.

Meanwhile, on September 22, 2008, Redmont filed a Motion for Reconsideration19 of the
September 10, 2008 Order of the MAB. Subsequently, it filed a Supplemental Motion for
Reconsideration20 on September 29, 2008.

Before the MAB could resolve Redmont’s Motion for Reconsideration and Supplemental Motion
for Reconsideration, Redmont filed before the RTC a Supplemental Complaint21 in Civil Case No.
08-63379.

On October 6, 2008, the RTC issued an Order22 granting the issuance of a writ of preliminary
injunction enjoining the MAB from finally disposing of the appeals of petitioners and from resolving
Redmont’s Motion for Reconsideration and Supplement Motion for Reconsideration of the MAB’s
September 10, 2008 Resolution.

On July 1, 2009, however, the MAB issued a second Order denying Redmont’s Motion for
Reconsideration and Supplemental Motion for Reconsideration and resolving the appeals filed
by petitioners.

Hence, the petition for review filed by Redmont before the CA, assailing the Orders issued by the
MAB. On October 1, 2010, the CA rendered a Decision, the dispositive of which reads:
WHEREFORE, the Petition is PARTIALLY GRANTED. The assailed Orders, dated September 10, 2008
and July 1, 2009 of the Mining Adjudication Board are reversed and set aside. The findings of the
Panel of Arbitrators of the Department of Environment and Natural Resources that respondents
McArthur, Tesoro and Narra are foreign corporations is upheld and, therefore, the rejection of
their applications for Mineral Product Sharing Agreement should be recommended to the
Secretary of the DENR.

With respect to the applications of respondents McArthur, Tesoro and Narra for Financial or
Technical Assistance Agreement (FTAA) or conversion of their MPSA applications to FTAA, the
matter for its rejection or approval is left for determination by the Secretary of the DENR and the
President of the Republic of the Philippines.

SO ORDERED.23

In a Resolution dated February 15, 2011, the CA denied the Motion for Reconsideration filed by
petitioners.

After a careful review of the records, the CA found that there was doubt as to the nationality of
petitioners when it realized that petitioners had a common major investor, MBMI, a corporation
composed of 100% Canadians. Pursuant to the first sentence of paragraph 7 of Department of
Justice (DOJ) Opinion No. 020, Series of 2005, adopting the 1967 SEC Rules which implemented
the requirement of the Constitution and other laws pertaining to the exploitation of natural
resources, the CA used the "grandfather rule" to determine the nationality of petitioners. It
provided:

Shares belonging to corporations or partnerships at least 60% of the capital of which is owned by
Filipino citizens shall be considered as of Philippine nationality, but if the percentage of Filipino
ownership in the corporation or partnership is less than 60%, only the number of shares
corresponding to such percentage shall be counted as of Philippine nationality. Thus, if 100,000
shares are registered in the name of a corporation or partnership at least 60% of the capital stock
or capital, respectively, of which belong to Filipino citizens, all of the shares shall be recorded as
owned by Filipinos. But if less than 60%, or say, 50% of the capital stock or capital of the
corporation or partnership, respectively, belongs to Filipino citizens, only 50,000 shares shall be
recorded as belonging to aliens.24 (emphasis supplied)

In determining the nationality of petitioners, the CA looked into their corporate structures and
their corresponding common shareholders. Using the grandfather rule, the CA discovered that
MBMI in effect owned majority of the common stocks of the petitioners as well as at least 60%
equity interest of other majority shareholders of petitioners through joint venture agreements. The
CA found that through a "web of corporate layering, it is clear that one common controlling
investor in all mining corporations involved x x x is MBMI."25 Thus, it concluded that petitioners
McArthur, Tesoro and Narra are also in partnership with, or privies-in-interest of, MBMI.

Furthermore, the CA viewed the conversion of the MPSA applications of petitioners into FTAA
applications suspicious in nature and, as a consequence, it recommended the rejection of
petitioners’ MPSA applications by the Secretary of the DENR.

With regard to the settlement of disputes over rights to mining areas, the CA pointed out that the
POA has jurisdiction over them and that it also has the power to determine the of nationality of
petitioners as a prerequisite of the Constitution prior the conferring of rights to "co-production,
joint venture or production-sharing agreements" of the state to mining rights. However, it also
stated that the POA’s jurisdiction is limited only to the resolution of the dispute and not on the
approval or rejection of the MPSAs. It stipulated that only the Secretary of the DENR is vested with
the power to approve or reject applications for MPSA.

Finally, the CA upheld the findings of the POA in its December 14, 2007 Resolution which
considered petitioners McArthur, Tesoro and Narra as foreign corporations. Nevertheless, the CA
determined that the POA’s declaration that the MPSAs of McArthur, Tesoro and Narra are void is
highly improper.

While the petition was pending with the CA, Redmont filed with the Office of the President (OP)
a petition dated May 7, 2010 seeking the cancellation of petitioners’ FTAAs. The OP rendered a
Decision26 on April 6, 2011, wherein it canceled and revoked petitioners’ FTAAs for violating and
circumventing the "Constitution x x x[,] the Small Scale Mining Law and Environmental
Compliance Certificate as well as Sections 3 and 8 of the Foreign Investment Act and E.O. 584."27
The OP, in affirming the cancellation of the issued FTAAs, agreed with Redmont stating that
petitioners committed violations against the abovementioned laws and failed to submit
evidence to negate them. The Decision further quoted the December 14, 2007 Order of the POA
focusing on the alleged misrepresentation and claims made by petitioners of being domestic or
Filipino corporations and the admitted continued mining operation of PMDC using their locally
secured Small Scale Mining Permit inside the area earlier applied for an MPSA application which
was eventually transferred to Narra. It also agreed with the POA’s estimation that the filing of the
FTAA applications by petitioners is a clear admission that they are "not capable of conducting a
large scale mining operation and that they need the financial and technical assistance of a
foreign entity in their operation, that is why they sought the participation of MBMI Resources,
Inc."28 The Decision further quoted:

The filing of the FTAA application on June 15, 2007, during the pendency of the case only
demonstrate the violations and lack of qualification of the respondent corporations to engage
in mining. The filing of the FTAA application conversion which is allowed foreign corporation of
the earlier MPSA is an admission that indeed the respondent is not Filipino but rather of foreign
nationality who is disqualified under the laws. Corporate documents of MBMI Resources, Inc.
furnished its stockholders in their head office in Canada suggest that they are conducting
operation only through their local counterparts.29

The Motion for Reconsideration of the Decision was further denied by the OP in a Resolution 30
dated July 6, 2011. Petitioners then filed a Petition for Review on Certiorari of the OP’s Decision
and Resolution with the CA, docketed as CA-G.R. SP No. 120409. In the CA Decision dated
February 29, 2012, the CA affirmed the Decision and Resolution of the OP. Thereafter, petitioners
appealed the same CA decision to this Court which is now pending with a different division.

Thus, the instant petition for review against the October 1, 2010 Decision of the CA. Petitioners
put forth the following errors of the CA:

I.

The Court of Appeals erred when it did not dismiss the case for mootness despite the fact that
the subject matter of the controversy, the MPSA Applications, have already been converted into
FTAA applications and that the same have already been granted.

II.

The Court of Appeals erred when it did not dismiss the case for lack of jurisdiction considering
that the Panel of Arbitrators has no jurisdiction to determine the nationality of Narra, Tesoro and
McArthur.

III.

The Court of Appeals erred when it did not dismiss the case on account of Redmont’s willful forum
shopping.

IV.

The Court of Appeals’ ruling that Narra, Tesoro and McArthur are foreign corporations based on
the "Grandfather Rule" is contrary to law, particularly the express mandate of the Foreign
Investments Act of 1991, as amended, and the FIA Rules.
V.

The Court of Appeals erred when it applied the exceptions to the res inter alios acta rule.

VI.

The Court of Appeals erred when it concluded that the conversion of the MPSA Applications into
FTAA Applications were of "suspicious nature" as the same is based on mere conjectures and
surmises without any shred of evidence to show the same.31

We find the petition to be without merit.

This case not moot and academic

The claim of petitioners that the CA erred in not rendering the instant case as moot is without
merit.

Basically, a case is said to be moot and/or academic when it "ceases to present a justiciable
controversy by virtue of supervening events, so that a declaration thereon would be of no
practical use or value."32 Thus, the courts "generally decline jurisdiction over the case or dismiss it
on the ground of mootness."33

The "mootness" principle, however, does accept certain exceptions and the mere raising of an
issue of "mootness" will not deter the courts from trying a case when there is a valid reason to do
so. In David v. Macapagal-Arroyo (David), the Court provided four instances where courts can
decide an otherwise moot case, thus:

1.) There is a grave violation of the Constitution;

2.) The exceptional character of the situation and paramount public interest is involved;

3.) When constitutional issue raised requires formulation of controlling principles to guide the
bench, the bar, and the public; and

4.) The case is capable of repetition yet evading review.34

All of the exceptions stated above are present in the instant case. We of this Court note that a
grave violation of the Constitution, specifically Section 2 of Article XII, is being committed by a
foreign corporation right under our country’s nose through a myriad of corporate layering under
different, allegedly, Filipino corporations. The intricate corporate layering utilized by the
Canadian company, MBMI, is of exceptional character and involves paramount public interest
since it undeniably affects the exploitation of our Country’s natural resources. The corresponding
actions of petitioners during the lifetime and existence of the instant case raise questions as what
principle is to be applied to cases with similar issues. No definite ruling on such principle has been
pronounced by the Court; hence, the disposition of the issues or errors in the instant case will
serve as a guide "to the bench, the bar and the public."35 Finally, the instant case is capable of
repetition yet evading review, since the Canadian company, MBMI, can keep on utilizing dummy
Filipino corporations through various schemes of corporate layering and conversion of
applications to skirt the constitutional prohibition against foreign mining in Philippine soil.

Conversion of MPSA applications to FTAA applications

We shall discuss the first error in conjunction with the sixth error presented by petitioners since both
involve the conversion of MPSA applications to FTAA applications. Petitioners propound that the
CA erred in ruling against them since the questioned MPSA applications were already converted
into FTAA applications; thus, the issue on the prohibition relating to MPSA applications of foreign
mining corporations is academic. Also, petitioners would want us to correct the CA’s finding
which deemed the aforementioned conversions of applications as suspicious in nature, since it
is based on mere conjectures and surmises and not supported with evidence.

We disagree.
The CA’s analysis of the actions of petitioners after the case was filed against them by respondent
is on point. The changing of applications by petitioners from one type to another just because a
case was filed against them, in truth, would raise not a few sceptics’ eyebrows. What is the reason
for such conversion? Did the said conversion not stem from the case challenging their citizenship
and to have the case dismissed against them for being "moot"? It is quite obvious that it is
petitioners’ strategy to have the case dismissed against them for being "moot."

Consider the history of this case and how petitioners responded to every action done by the
court or appropriate government agency: on January 2, 2007, Redmont filed three separate
petitions for denial of the MPSA applications of petitioners before the POA. On June 15, 2007,
petitioners filed a conversion of their MPSA applications to FTAAs. The POA, in its December 14,
2007 Resolution, observed this suspect change of applications while the case was pending
before it and held:

The filing of the Financial or Technical Assistance Agreement application is a clear admission that
the respondents are not capable of conducting a large scale mining operation and that they
need the financial and technical assistance of a foreign entity in their operation that is why they
sought the participation of MBMI Resources, Inc. The participation of MBMI in the corporation
only proves the fact that it is the Canadian company that will provide the finances and the
resources to operate the mining areas for the greater benefit and interest of the same and not
the Filipino stockholders who only have a less substantial financial stake in the corporation.

xxxx

x x x The filing of the FTAA application on June 15, 2007, during the pendency of the case only
demonstrate the violations and lack of qualification of the respondent corporations to engage
in mining. The filing of the FTAA application conversion which is allowed foreign corporation of
the earlier MPSA is an admission that indeed the respondent is not Filipino but rather of foreign
nationality who is disqualified under the laws. Corporate documents of MBMI Resources, Inc.
furnished its stockholders in their head office in Canada suggest that they are conducting
operation only through their local counterparts.36

On October 1, 2010, the CA rendered a Decision which partially granted the petition, reversing
and setting aside the September 10, 2008 and July 1, 2009 Orders of the MAB. In the said Decision,
the CA upheld the findings of the POA of the DENR that the herein petitioners are in fact foreign
corporations thus a recommendation of the rejection of their MPSA applications were
recommended to the Secretary of the DENR. With respect to the FTAA applications or conversion
of the MPSA applications to FTAAs, the CA deferred the matter for the determination of the
Secretary of the DENR and the President of the Republic of the Philippines.37

In their Motion for Reconsideration dated October 26, 2010, petitioners prayed for the dismissal
of the petition asserting that on April 5, 2010, then President Gloria Macapagal-Arroyo signed
and issued in their favor FTAA No. 05-2010-IVB, which rendered the petition moot and academic.
However, the CA, in a Resolution dated February 15, 2011 denied their motion for being a mere
"rehash of their claims and defenses."38 Standing firm on its Decision, the CA affirmed the ruling
that petitioners are, in fact, foreign corporations. On April 5, 2011, petitioners elevated the case
to us via a Petition for Review on Certiorari under Rule 45, questioning the Decision of the CA.
Interestingly, the OP rendered a Decision dated April 6, 2011, a day after this petition for review
was filed, cancelling and revoking the FTAAs, quoting the Order of the POA and stating that
petitioners are foreign corporations since they needed the financial strength of MBMI, Inc. in
order to conduct large scale mining operations. The OP Decision also based the cancellation on
the misrepresentation of facts and the violation of the "Small Scale Mining Law and Environmental
Compliance Certificate as well as Sections 3 and 8 of the Foreign Investment Act and E.O. 584."39
On July 6, 2011, the OP issued a Resolution, denying the Motion for Reconsideration filed by the
petitioners.
Respondent Redmont, in its Comment dated October 10, 2011, made known to the Court the
fact of the OP’s Decision and Resolution. In their Reply, petitioners chose to ignore the OP
Decision and continued to reuse their old arguments claiming that they were granted FTAAs and,
thus, the case was moot. Petitioners filed a Manifestation and Submission dated October 19,
2012,40 wherein they asserted that the present petition is moot since, in a remarkable turn of
events, MBMI was able to sell/assign all its shares/interest in the "holding companies" to DMCI
Mining Corporation (DMCI), a Filipino corporation and, in effect, making their respective
corporations fully-Filipino owned.

Again, it is quite evident that petitioners have been trying to have this case dismissed for being
"moot." Their final act, wherein MBMI was able to allegedly sell/assign all its shares and interest in
the petitioner "holding companies" to DMCI, only proves that they were in fact not Filipino
corporations from the start. The recent divesting of interest by MBMI will not change the stand of
this Court with respect to the nationality of petitioners prior the suspicious change in their
corporate structures. The new documents filed by petitioners are factual evidence that this Court
has no power to verify.

The only thing clear and proved in this Court is the fact that the OP declared that petitioner
corporations have violated several mining laws and made misrepresentations and falsehood in
their applications for FTAA which lead to the revocation of the said FTAAs, demonstrating that
petitioners are not beyond going against or around the law using shifty actions and strategies.
Thus, in this instance, we can say that their claim of mootness is moot in itself because their
defense of conversion of MPSAs to FTAAs has been discredited by the OP Decision.

Grandfather test

The main issue in this case is centered on the issue of petitioners’ nationality, whether Filipino or
foreign. In their previous petitions, they had been adamant in insisting that they were Filipino
corporations, until they submitted their Manifestation and Submission dated October 19, 2012
where they stated the alleged change of corporate ownership to reflect their Filipino ownership.
Thus, there is a need to determine the nationality of petitioner corporations.

Basically, there are two acknowledged tests in determining the nationality of a corporation: the
control test and the grandfather rule. Paragraph 7 of DOJ Opinion No. 020, Series of 2005,
adopting the 1967 SEC Rules which implemented the requirement of the Constitution and other
laws pertaining to the controlling interests in enterprises engaged in the exploitation of natural
resources owned by Filipino citizens, provides:

Shares belonging to corporations or partnerships at least 60% of the capital of which is owned by
Filipino citizens shall be considered as of Philippine nationality, but if the percentage of Filipino
ownership in the corporation or partnership is less than 60%, only the number of shares
corresponding to such percentage shall be counted as of Philippine nationality. Thus, if 100,000
shares are registered in the name of a corporation or partnership at least 60% of the capital stock
or capital, respectively, of which belong to Filipino citizens, all of the shares shall be recorded as
owned by Filipinos. But if less than 60%, or say, 50% of the capital stock or capital of the
corporation or partnership, respectively, belongs to Filipino citizens, only 50,000 shares shall be
counted as owned by Filipinos and the other 50,000 shall be recorded as belonging to aliens.

The first part of paragraph 7, DOJ Opinion No. 020, stating "shares belonging to corporations or
partnerships at least 60% of the capital of which is owned by Filipino citizens shall be considered
as of Philippine nationality," pertains to the control test or the liberal rule. On the other hand, the
second part of the DOJ Opinion which provides, "if the percentage of the Filipino ownership in
the corporation or partnership is less than 60%, only the number of shares corresponding to such
percentage shall be counted as Philippine nationality," pertains to the stricter, more stringent
grandfather rule.

Prior to this recent change of events, petitioners were constant in advocating the application of
the "control test" under RA 7042, as amended by RA 8179, otherwise known as the Foreign
Investments Act (FIA), rather than using the stricter grandfather rule. The pertinent provision under
Sec. 3 of the FIA provides:

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

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

The grandfather rule, petitioners reasoned, has no leg to stand on in the instant case since the
definition of a "Philippine National" under Sec. 3 of the FIA does not provide for it. They further
claim that the grandfather rule "has been abandoned and is no longer the applicable rule." 41
They also opined that the last portion of Sec. 3 of the FIA admits the application of a "corporate
layering" scheme of corporations. Petitioners claim that the clear and unambiguous wordings of
the statute preclude the court from construing it and prevent the court’s use of discretion in
applying the law. They said that the plain, literal meaning of the statute meant the application
of the control test is obligatory.

We disagree. "Corporate layering" is admittedly allowed by the FIA; but if it is used to circumvent
the Constitution and pertinent laws, then it becomes illegal. Further, the pronouncement of
petitioners that the grandfather rule has already been abandoned must be discredited for lack
of basis.

Art. XII, Sec. 2 of the Constitution provides:

Sec. 2. All lands of the public domain, waters, minerals, coal, petroleum and other mineral oils,
all forces of potential energy, fisheries, forests or timber, wildlife, flora and fauna, and other
natural resources are owned by the State. With the exception of agricultural lands, all other
natural resources shall not be alienated. The exploration, development, and utilization of natural
resources shall be under the full control and supervision of the State. The State may directly
undertake such activities, or it may enter into co-production, joint venture or production-sharing
agreements with Filipino citizens, or corporations or associations at least sixty per centum of
whose capital is owned by such citizens. Such agreements may be for a period not exceeding
twenty-five years, renewable for not more than twenty-five years, and under such terms and
conditions as may be provided by law.

xxxx

The President may enter into agreements with Foreign-owned corporations involving either
technical or financial assistance for large-scale exploration, development, and utilization of
minerals, petroleum, and other mineral oils according to the general terms and conditions
provided by law, based on real contributions to the economic growth and general welfare of
the country. In such agreements, the State shall promote the development and use of local
scientific and technical resources. (emphasis supplied)

The emphasized portion of Sec. 2 which focuses on the State entering into different types of
agreements for the exploration, development, and utilization of natural resources with entities
who are deemed Filipino due to 60 percent ownership of capital is pertinent to this case, since
the issues are centered on the utilization of our country’s natural resources or specifically, mining.
Thus, there is a need to ascertain the nationality of petitioners since, as the Constitution so
provides, such agreements are only allowed corporations or associations "at least 60 percent of
such capital is owned by such citizens." The deliberations in the Records of the 1986 Constitutional
Commission shed light on how a citizenship of a corporation will be determined:

Mr. BENNAGEN: Did I hear right that the Chairman’s interpretation of an independent national
economy is freedom from undue foreign control? What is the meaning of undue foreign control?

MR. VILLEGAS: Undue foreign control is foreign control which sacrifices national sovereignty and
the welfare of the Filipino in the economic sphere.

MR. BENNAGEN: Why does it have to be qualified still with the word "undue"? Why not simply
freedom from foreign control? I think that is the meaning of independence, because as phrased,
it still allows for foreign control.

MR. VILLEGAS: It will now depend on the interpretation because if, for example, we retain the
60/40 possibility in the cultivation of natural resources, 40 percent involves some control; not total
control, but some control.

MR. BENNAGEN: In any case, I think in due time we will propose some amendments.

MR. VILLEGAS: Yes. But we will be open to improvement of the phraseology.

Mr. BENNAGEN: Yes.

Thank you, Mr. Vice-President.

xxxx

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

MR. VILLEGAS: That is right.

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

MR. VILLEGAS: We have just had a long discussion with the members of the team from the UP
Law Center who provided us with a draft. The phrase that is contained here which we adopted
from the UP draft is ‘60 percent of the voting stock.’

MR. NOLLEDO: That must be based on the subscribed capital stock, because unless declared
delinquent, unpaid capital stock shall be entitled to vote.

MR. VILLEGAS: That is right.

MR. NOLLEDO: Thank you.

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

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

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

MR. VILLEGAS: Yes.42 (emphasis supplied)

It is apparent that it is the intention of the framers of the Constitution to apply the grandfather
rule in cases where corporate layering is present.

Elementary in statutory construction is when there is conflict between the Constitution and a
statute, the Constitution will prevail. In this instance, specifically pertaining to the provisions under
Art. XII of the Constitution on National Economy and Patrimony, Sec. 3 of the FIA will have no
place of application. As decreed by the honorable framers of our Constitution, the grandfather
rule prevails and must be applied.

Likewise, paragraph 7, DOJ Opinion No. 020, Series of 2005 provides:

The above-quoted SEC Rules provide for the manner of calculating the Filipino interest in a
corporation for purposes, among others, of determining compliance with nationality
requirements (the ‘Investee Corporation’). Such manner of computation is necessary since the
shares in the Investee Corporation may be owned both by individual stockholders (‘Investing
Individuals’) and by corporations and partnerships (‘Investing Corporation’). The said rules thus
provide for the determination of nationality depending on the ownership of the Investee
Corporation and, in certain instances, the Investing Corporation.

Under the above-quoted SEC Rules, there are two cases in determining the nationality of the
Investee Corporation. The first case is the ‘liberal rule’, later coined by the SEC as the Control Test
in its 30 May 1990 Opinion, and pertains to the portion in said Paragraph 7 of the 1967 SEC Rules
which states, ‘(s)hares belonging to corporations or partnerships at least 60% of the capital of
which is owned by Filipino citizens shall be considered as of Philippine nationality.’ Under the
liberal Control Test, there is no need to further trace the ownership of the 60% (or more) Filipino
stockholdings of the Investing Corporation since a corporation which is at least 60% Filipino-
owned is considered as Filipino.

The second case is the Strict Rule or the Grandfather Rule Proper and pertains to the portion in
said Paragraph 7 of the 1967 SEC Rules which states, "but if the percentage of Filipino ownership
in the corporation or partnership is less than 60%, only the number of shares corresponding to
such percentage shall be counted as of Philippine nationality." Under the Strict Rule or
Grandfather Rule Proper, the combined totals in the Investing Corporation and the Investee
Corporation must be traced (i.e., "grandfathered") to determine the total percentage of Filipino
ownership.

Moreover, the ultimate Filipino ownership of the shares must first be traced to the level of the
Investing Corporation and added to the shares directly owned in the Investee Corporation x x x.

xxxx

In other words, based on the said SEC Rule and DOJ Opinion, the Grandfather Rule or the second
part of the SEC Rule applies only when the 60-40 Filipino-foreign equity ownership is in doubt (i.e.,
in cases where the joint venture corporation with Filipino and foreign stockholders with less than
60% Filipino stockholdings [or 59%] invests in other joint venture corporation which is either 60-40%
Filipino-alien or the 59% less Filipino). Stated differently, where the 60-40 Filipino- foreign equity
ownership is not in doubt, the Grandfather Rule will not apply. (emphasis supplied)

After a scrutiny of the evidence extant on record, the Court finds that this case calls for the
application of the grandfather rule since, as ruled by the POA and affirmed by the OP, doubt
prevails and persists in the corporate ownership of petitioners. Also, as found by the CA, doubt is
present in the 60-40 Filipino equity ownership of petitioners Narra, McArthur and Tesoro, since their
common investor, the 100% Canadian corporation––MBMI, funded them. However, petitioners
also claim that there is "doubt" only when the stockholdings of Filipinos are less than 60%.43

The assertion of petitioners that "doubt" only exists when the stockholdings are less than 60% fails
to convince this Court. DOJ Opinion No. 20, which petitioners quoted in their petition, only made
an example of an instance where "doubt" as to the ownership of the corporation exists. It would
be ludicrous to limit the application of the said word only to the instances where the
stockholdings of non-Filipino stockholders are more than 40% of the total stockholdings in a
corporation. The corporations interested in circumventing our laws would clearly strive to have
"60% Filipino Ownership" at face value. It would be senseless for these applying corporations to
state in their respective articles of incorporation that they have less than 60% Filipino stockholders
since the applications will be denied instantly. Thus, various corporate schemes and layerings are
utilized to circumvent the application of the Constitution.

Obviously, the instant case presents a situation which exhibits a scheme employed by
stockholders to circumvent the law, creating a cloud of doubt in the Court’s mind. To determine,
therefore, the actual participation, direct or indirect, of MBMI, the grandfather rule must be used.

McArthur Mining, Inc.

To establish the actual ownership, interest or participation of MBMI in each of petitioners’

corporate structure, they have to be "grandfathered."

As previously discussed, McArthur acquired its MPSA application from MMC, which acquired its
application from SMMI. McArthur has a capital stock of ten million pesos (PhP 10,000,000) divided
into 10,000 common shares at one thousand pesos (PhP 1,000) per share, subscribed to by the
following:44

Name Nationality Number of Amount Amount Paid

Shares Subscribed

Madridejos Filipino 5,997 PhP 5,997,000.00 PhP 825,000.00

Mining
Corporation

MBMI Resources, Canadian 3,998 PhP 3,998,000.0 PhP 1,878,174.60

Inc.

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

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

Esguerra

Manuel A. Filipino 1 PhP 1,000.00 PhP 1,000.00

Agcaoili

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

Mason

Kenneth Cawkell Canadian 1 PhP 1,000.00 PhP 1,000.00

Total 10,000 PhP PhP 2,708,174.60

10,000,000.00 (emphasis
supplied)

Interestingly, looking at the corporate structure of MMC, we take note that it has a similar
structure and composition as McArthur. In fact, it would seem that MBMI is also a major investor
and "controls"45 MBMI and also, similar nominal shareholders were present, i.e. Fernando B.
Esguerra (Esguerra), Lauro L. Salazar (Salazar), Michael T. Mason (Mason) and Kenneth Cawkell
(Cawkell):

Madridejos Mining Corporation

Noticeably, Olympic Mines & Development Corporation (Olympic) did not pay any amount with
respect to the number of shares they subscribed to in the corporation, which is quite absurd since
Olympic is the major stockholder in MMC. MBMI’s 2006 Annual Report sheds light on why Olympic
failed to pay any amount with respect to the number of shares it subscribed to. It states that
Olympic entered into joint venture agreements with several Philippine companies, wherein it
holds directly and indirectly a 60% effective equity interest in the Olympic Properties. 46 Quoting
the said Annual report:

On September 9, 2004, the Company and Olympic Mines & Development Corporation
("Olympic") entered into a series of agreements including a Property Purchase and Development
Agreement (the Transaction Documents) with respect to three nickel laterite properties in
Palawan, Philippines (the "Olympic Properties"). The Transaction Documents effectively establish
a joint venture between the Company and Olympic for purposes of developing the Olympic
Properties. The Company holds directly and indirectly an initial 60% interest in the joint venture.
Under certain circumstances and upon achieving certain milestones, the Company may earn
up to a 100% interest, subject to a 2.5% net revenue royalty.47 (emphasis supplied)

Thus, as demonstrated in this first corporation, McArthur, when it is "grandfathered," company

layering was utilized by MBMI to gain control over McArthur. It is apparent that MBMI has more
than 60% or more equity interest in McArthur, making the latter a foreign corporation.

Tesoro Mining and Development, Inc.

Tesoro, which acquired its MPSA application from SMMI, has a capital stock of ten million pesos
(PhP 10,000,000) divided into ten thousand (10,000) common shares at PhP 1,000 per share, as
demonstrated below:

[[reference =
http://sc.judiciary.gov.ph/pdf/web/viewer.html?file=/jurisprudence/2014/april2014/195580.pdf]]

Name Nationality Number Amount Amount Paid

of
Subscribed
Shares

Sara Marie Filipino 5,997 PhP PhP 825,000.00

5,997,000.00
Mining, Inc.

MBMI Canadian 3,998 PhP PhP 1,878,174.60

3,998,000.00
Resources, Inc.

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

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

Esguerra

Manuel A. Filipino 1 PhP 1,000.00 PhP 1,000.00

Agcaoili

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

Mason
 Kenneth Canadian 1 PhP 1,000.00 PhP 1,000.00
Cawkell

Total 10,000 PhP PhP 2,708,174.60

10,000,000.00
(emphasis
supplied)

Except for the name "Sara Marie Mining, Inc.," the table above shows exactly the same figures
as the corporate structure of petitioner McArthur, down to the last centavo. All the other
shareholders are the same: MBMI, Salazar, Esguerra, Agcaoili, Mason and Cawkell. The figures
under "Nationality," "Number of Shares," "Amount Subscribed," and "Amount Paid" are exactly the
same. Delving deeper, we scrutinize SMMI’s corporate structure:

Sara Marie Mining, Inc.

[[reference =
http://sc.judiciary.gov.ph/pdf/web/viewer.html?file=/jurisprudence/2014/april2014/195580.pdf]]

Name Nationality Number Amount Amount Paid

of
Subscribed
Shares

Olympic Mines & Filipino 6,663 PhP PhP 0

6,663,000.00
Development

Corp.

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

3,331,000.00
Inc.

Amanti Limson Filipino 1 PhP 1,000.00 PhP 1,000.00

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

Esguerra

Lauro Salazar Filipino 1 PhP 1,000.00 PhP 1,000.00

Emmanuel G. Filipino 1 PhP 1,000.00 PhP 1,000.00

Hernando

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

Mason

Kenneth Canadian 1 PhP 1,000.00 PhP 1,000.00

Cawkell
 Total 10,000 PhP PhP 2,809,900.00
10,000,000.00
(emphasis
supplied)

After subsequently studying SMMI’s corporate structure, it is not farfetched for us to spot the
glaring similarity between SMMI and MMC’s corporate structure. Again, the presence of identical
stockholders, namely: Olympic, MBMI, Amanti Limson (Limson), Esguerra, Salazar, Hernando,
Mason and Cawkell. The figures under the headings "Nationality," "Number of Shares," "Amount
Subscribed," and "Amount Paid" are exactly the same except for the amount paid by MBMI
which now reflects the amount of two million seven hundred ninety four thousand pesos (PhP
2,794,000). Oddly, the total value of the amount paid is two million eight hundred nine thousand
nine hundred pesos (PhP 2,809,900).

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

SMMI’s corporate structure, it is clear that MBMI is in control of Tesoro and owns 60% or more
equity interest in Tesoro. This makes petitioner Tesoro a non-Filipino corporation and, thus,
disqualifies it to participate in the exploitation, utilization and development of our natural
resources.

Narra Nickel Mining and Development Corporation

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

[[reference =
http://sc.judiciary.gov.ph/pdf/web/viewer.html?file=/jurisprudence/2014/april2014/195580.pdf]]

Name Nationality Number Amount Amount Paid

of
Subscribed
Shares

Patricia Louise Filipino 5,997 PhP PhP 1,677,000.00

5,997,000.00
Mining &

Development

Corp.

MBMI Canadian 3,998 PhP PhP 1,116,000.00

3,996,000.00
Resources, Inc.

Higinio C. Filipino 1 PhP 1,000.00 PhP 1,000.00

Mendoza, Jr.

Henry E. Filipino 1 PhP 1,000.00 PhP 1,000.00

Fernandez
 Manuel A. Filipino 1 PhP 1,000.00 PhP 1,000.00

Agcaoili

Ma. Elena A. Filipino 1 PhP 1,000.00 PhP 1,000.00

Bocalan

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

Agabin

Robert L. American 1 PhP 1,000.00 PhP 1,000.00

McCurdy

Kenneth Canadian 1 PhP 1,000.00 PhP 1,000.00

Cawkell

Total 10,000 PhP PhP 2,800,000.00

10,000,000.00 (emphasis
supplied)

Again, MBMI, along with other nominal stockholders, i.e., Mason, Agcaoili and Esguerra, is present
in this corporate structure.

Patricia Louise Mining & Development Corporation

Using the grandfather method, we further look and examine PLMDC’s corporate structure:

Name Nationality Number of Amount Amount Paid

Shares Subscribed

Palawan Alpha South Filipino 6,596 PhP PhP 0

Resources Development 6,596,000.00
Corporation

MBMI Resources, Canadian 3,396 PhP PhP

3,396,000.00 2,796,000.00
Inc.

Higinio C. Mendoza, Jr. Filipino 1 PhP 1,000.00 PhP 1,000.00

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

Henry E. Fernandez Filipino 1 PhP 1,000.00 PhP 1,000.00

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

Manuel A. Agcaoili Filipino 1 PhP 1,000.00 PhP 1,000.00

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

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

Kenneth Cawkell Canadian 1 PhP 1,000.00 PhP 1,000.00

Total 10,000 PhP PhP

10,000,000.00 2,708,174.60
(emphasis
supplied)

Yet again, the usual players in petitioners’ corporate structures are present. Similarly, the amount
of money paid by the 2nd tier majority stock holder, in this case, Palawan Alpha South Resources
and Development Corp. (PASRDC), is zero.

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

JOINT VENTURES The Company’s ownership interests in various mining ventures engaged in the
acquisition, exploration and development of mineral properties in the Philippines is described as
follows:

(a) Olympic Group

The Philippine companies holding the Olympic Property, and the ownership and interests therein,
are as follows:

Olympic- Philippines (the "Olympic Group")

Sara Marie Mining Properties Ltd. ("Sara Marie") 33.3%

Tesoro Mining & Development, Inc. (Tesoro) 60.0%

Pursuant to the Olympic joint venture agreement the Company holds directly and indirectly an
effective equity interest in the Olympic Property of 60.0%. Pursuant to a shareholders’ agreement,
the Company exercises joint control over the companies in the Olympic Group.

(b) Alpha Group

The Philippine companies holding the Alpha Property, and the ownership interests therein, are as
follows:

Alpha- Philippines (the "Alpha Group")

Patricia Louise Mining Development Inc. ("Patricia") 34.0%

Narra Nickel Mining & Development Corporation (Narra) 60.4%

Under a joint venture agreement the Company holds directly and indirectly an effective equity
interest in the Alpha Property of 60.4%. Pursuant to a shareholders’ agreement, the Company
exercises joint control over the companies in the Alpha Group.48 (emphasis supplied)

Concluding from the above-stated facts, it is quite safe to say that petitioners McArthur, Tesoro
and Narra are not Filipino since MBMI, a 100% Canadian corporation, owns 60% or more of their
equity interests. Such conclusion is derived from grandfathering petitioners’ corporate owners,
namely: MMI, SMMI and PLMDC. Going further and adding to the picture, MBMI’s Summary of
Significant Accounting Policies statement– –regarding the "joint venture" agreements that it
entered into with the "Olympic" and "Alpha" groups––involves SMMI, Tesoro, PLMDC and Narra.
Noticeably, the ownership of the "layered" corporations boils down to MBMI, Olympic or
corporations under the "Alpha" group wherein MBMI has joint venture agreements with,
practically exercising majority control over the corporations mentioned. In effect, whether
looking at the capital structure or the underlying relationships between and among the
corporations, petitioners are NOT Filipino nationals and must be considered foreign since 60% or
more of their capital stocks or equity interests are owned by MBMI.

Application of the res inter alios acta rule

Petitioners question the CA’s use of the exception of the res inter alios acta or the "admission by
co-partner or agent" rule and "admission by privies" under the Rules of Court in the instant case,
by pointing out that statements made by MBMI should not be admitted in this case since it is not
a party to the case and that it is not a "partner" of petitioners.

Secs. 29 and 31, Rule 130 of the Revised Rules of Court provide:

Sec. 29. Admission by co-partner or agent.- The act or declaration of a partner or agent of the
party within the scope of his authority and during the existence of the partnership or agency,
may be given in evidence against such party after the partnership or agency is shown by
evidence other than such act or declaration itself. The same rule applies to the act or declaration
of a joint owner, joint debtor, or other person jointly interested with the party.

Sec. 31. Admission by privies.- Where one derives title to property from another, the act,
declaration, or omission of the latter, while holding the title, in relation to the property, is evidence
against the former.

Petitioners claim that before the above-mentioned Rule can be applied to a case, "the
partnership relation must be shown, and that proof of the fact must be made by evidence other
than the admission itself."49 Thus, petitioners assert that the CA erred in finding that a partnership
relationship exists between them and MBMI because, in fact, no such partnership exists.

Partnerships vs. joint venture agreements

Petitioners claim that the CA erred in applying Sec. 29, Rule 130 of the Rules by stating that "by
entering into a joint venture, MBMI have a joint interest" with Narra, Tesoro and McArthur. They
challenged the conclusion of the CA which pertains to the close characteristics of

"partnerships" and "joint venture agreements." Further, they asserted that before this particular
partnership can be formed, it should have been formally reduced into writing since the capital
involved is more than three thousand pesos (PhP 3,000). Being that there is no evidence of written
agreement to form a partnership between petitioners and MBMI, no partnership was created.

We disagree.

A partnership is defined as two or more persons who bind themselves to contribute money,
property, or industry to a common fund with the intention of dividing the profits among
themselves.50 On the other hand, joint ventures have been deemed to be "akin" to partnerships
since it is difficult to distinguish between joint ventures and partnerships. Thus:

[T]he relations of the parties to a joint venture and the nature of their association are so similar
and closely akin to a partnership that it is ordinarily held that their rights, duties, and liabilities are
to be tested by rules which are closely analogous to and substantially the same, if not exactly
the same, as those which govern partnership. In fact, it has been said that the trend in the law
has been to blur the distinctions between a partnership and a joint venture, very little law being
found applicable to one that does not apply to the other.51

Though some claim that partnerships and joint ventures are totally different animals, there are
very few rules that differentiate one from the other; thus, joint ventures are deemed "akin" or
similar to a partnership. In fact, in joint venture agreements, rules and legal incidents governing
partnerships are applied.52

Accordingly, culled from the incidents and records of this case, it can be assumed that the
relationships entered between and among petitioners and MBMI are no simple "joint venture
agreements." As a rule, corporations are prohibited from entering into partnership agreements;
consequently, corporations enter into joint venture agreements with other corporations or
partnerships for certain transactions in order to form "pseudo partnerships."

Obviously, as the intricate web of "ventures" entered into by and among petitioners and MBMI
was executed to circumvent the legal prohibition against corporations entering into partnerships,
then the relationship created should be deemed as "partnerships," and the laws on partnership
should be applied. Thus, a joint venture agreement between and among corporations may be
seen as similar to partnerships since the elements of partnership are present.

Considering that the relationships found between petitioners and MBMI are considered to be
partnerships, then the CA is justified in applying Sec. 29, Rule 130 of the Rules by stating that "by
entering into a joint venture, MBMI have a joint interest" with Narra, Tesoro and McArthur.

Panel of Arbitrators’ jurisdiction

We affirm the ruling of the CA in declaring that the POA has jurisdiction over the instant case. The
POA has jurisdiction to settle disputes over rights to mining areas which definitely involve the
petitions filed by Redmont against petitioners Narra, McArthur and Tesoro. Redmont, by filing its
petition against petitioners, is asserting the right of Filipinos over mining areas in the Philippines
against alleged foreign-owned mining corporations. Such claim constitutes a "dispute" found in
Sec. 77 of RA 7942:

Within thirty (30) days, after the submission of the case by the parties for the decision, the panel
shall have exclusive and original jurisdiction to hear and decide the following:

(a) Disputes involving rights to mining areas

(b) Disputes involving mineral agreements or permits

We held in Celestial Nickel Mining Exploration Corporation v. Macroasia Corp.:53

The phrase "disputes involving rights to mining areas" refers to any adverse claim, protest, or
opposition to an application for mineral agreement. The POA therefore has the jurisdiction to
resolve any adverse claim, protest, or opposition to a pending application for a mineral
agreement filed with the concerned Regional Office of the MGB. This is clear from Secs. 38 and
41 of the DENR AO 96-40, which provide:

Sec. 38.

xxxx

Within thirty (30) calendar days from the last date of publication/posting/radio announcements,
the authorized officer(s) of the concerned office(s) shall issue a certification(s) that the
publication/posting/radio announcement have been complied with. Any adverse claim,
protest, opposition shall be filed directly, within thirty (30) calendar days from the last date of
publication/posting/radio announcement, with the concerned Regional Office or through any
concerned PENRO or CENRO for filing in the concerned Regional Office for purposes of its
resolution by the Panel of Arbitrators pursuant to the provisions of this Act and these implementing
rules and regulations. Upon final resolution of any adverse claim, protest or opposition, the Panel
of Arbitrators shall likewise issue a certification to that effect within five (5) working days from the
date of finality of resolution thereof. Where there is no adverse claim, protest or opposition, the
Panel of Arbitrators shall likewise issue a Certification to that effect within five working days
therefrom.

xxxx

No Mineral Agreement shall be approved unless the requirements under this Section are fully
complied with and any adverse claim/protest/opposition is finally resolved by the Panel of
Arbitrators.
Sec. 41.

xxxx

Within fifteen (15) working days form the receipt of the Certification issued by the Panel of
Arbitrators as provided in Section 38 hereof, the concerned Regional Director shall initially
evaluate the Mineral Agreement applications in areas outside Mineral reservations. He/She shall
thereafter endorse his/her findings to the Bureau for further evaluation by the Director within
fifteen (15) working days from receipt of forwarded documents. Thereafter, the Director shall
endorse the same to the secretary for consideration/approval within fifteen working days from
receipt of such endorsement.

In case of Mineral Agreement applications in areas with Mineral Reservations, within fifteen (15)
working days from receipt of the Certification issued by the Panel of Arbitrators as provided for in
Section 38 hereof, the same shall be evaluated and endorsed by the Director to the Secretary
for consideration/approval within fifteen days from receipt of such endorsement. (emphasis
supplied)

It has been made clear from the aforecited provisions that the "disputes involving rights to mining
areas" under Sec. 77(a) specifically refer only to those disputes relative to the applications for a
mineral agreement or conferment of mining rights.

The jurisdiction of the POA over adverse claims, protest, or oppositions to a mining right
application is further elucidated by Secs. 219 and 43 of DENR AO 95-936, which read:

Sec. 219. Filing of Adverse Claims/Conflicts/Oppositions.- Notwithstanding the provisions of

Sections 28, 43 and 57 above, any adverse claim, protest or opposition specified in said sections
may also be filed directly with the Panel of Arbitrators within the concerned periods for filing such
claim, protest or opposition as specified in said Sections.

Sec. 43. Publication/Posting of Mineral Agreement.-

xxxx

The Regional Director or concerned Regional Director shall also cause the posting of the
application on the bulletin boards of the Bureau, concerned Regional office(s) and in the
concerned province(s) and municipality(ies), copy furnished the barangays where the proposed
contract area is located once a week for two (2) consecutive weeks in a language generally
understood in the locality. After forty-five (45) days from the last date of publication/posting has
been made and no adverse claim, protest or opposition was filed within the said forty-five (45)
days, the concerned offices shall issue a certification that publication/posting has been made
and that no adverse claim, protest or opposition of whatever nature has been filed. On the other
hand, if there be any adverse claim, protest or opposition, the same shall be filed within forty-five
(45) days from the last date of publication/posting, with the Regional Offices concerned, or
through the Department’s Community Environment and Natural Resources Officers (CENRO) or
Provincial Environment and Natural Resources Officers (PENRO), to be filed at the Regional Office
for resolution of the Panel of Arbitrators. However previously published valid and subsisting mining
claims are exempted from posted/posting required under this Section.

No mineral agreement shall be approved unless the requirements under this section are fully
complied with and any opposition/adverse claim is dealt with in writing by the Director and
resolved by the Panel of Arbitrators. (Emphasis supplied.)

It has been made clear from the aforecited provisions that the "disputes involving rights to mining
areas" under Sec. 77(a) specifically refer only to those disputes relative to the applications for a
mineral agreement or conferment of mining rights.

The jurisdiction of the POA over adverse claims, protest, or oppositions to a mining right
application is further elucidated by Secs. 219 and 43 of DENRO AO 95-936, which reads:
Sec. 219. Filing of Adverse Claims/Conflicts/Oppositions.- Notwithstanding the provisions of
Sections 28, 43 and 57 above, any adverse claim, protest or opposition specified in said sections
may also be filed directly with the Panel of Arbitrators within the concerned periods for filing such
claim, protest or opposition as specified in said Sections.

Sec. 43. Publication/Posting of Mineral Agreement Application.-

xxxx

The Regional Director or concerned Regional Director shall also cause the posting of the
application on the bulletin boards of the Bureau, concerned Regional office(s) and in the
concerned province(s) and municipality(ies), copy furnished the barangays where the proposed
contract area is located once a week for two (2) consecutive weeks in a language generally
understood in the locality. After forty-five (45) days from the last date of publication/posting has
been made and no adverse claim, protest or opposition was filed within the said forty-five (45)
days, the concerned offices shall issue a certification that publication/posting has been made
and that no adverse claim, protest or opposition of whatever nature has been filed. On the other
hand, if there be any adverse claim, protest or opposition, the same shall be filed within forty-five
(45) days from the last date of publication/posting, with the Regional offices concerned, or
through the Department’s Community Environment and Natural Resources Officers (CENRO) or
Provincial Environment and Natural Resources Officers (PENRO), to be filed at the Regional Office
for resolution of the Panel of Arbitrators. However, previously published valid and subsisting mining
claims are exempted from posted/posting required under this Section.

No mineral agreement shall be approved unless the requirements under this section are fully
complied with and any opposition/adverse claim is dealt with in writing by the Director and
resolved by the Panel of Arbitrators. (Emphasis supplied.)

These provisions lead us to conclude that the power of the POA to resolve any adverse claim,
opposition, or protest relative to mining rights under Sec. 77(a) of RA 7942 is confined only to
adverse claims, conflicts and oppositions relating to applications for the grant of mineral rights.

POA’s jurisdiction is confined only to resolutions of such adverse claims, conflicts and oppositions
and it has no authority to approve or reject said applications. Such power is vested in the DENR
Secretary upon recommendation of the MGB Director. Clearly, POA’s jurisdiction over "disputes
involving rights to mining areas" has nothing to do with the cancellation of existing mineral
agreements. (emphasis ours)

Accordingly, as we enunciated in Celestial, the POA unquestionably has jurisdiction to resolve

disputes over MPSA applications subject of Redmont’s petitions. However, said jurisdiction does
not include either the approval or rejection of the MPSA applications, which is vested only upon
the Secretary of the DENR. Thus, the finding of the POA, with respect to the rejection of
petitioners’ MPSA applications being that they are foreign corporation, is valid.

Justice Marvic Mario Victor F. Leonen, in his Dissent, asserts that it is the regular courts, not the
POA, that has jurisdiction over the MPSA applications of petitioners.

This postulation is incorrect.

It is basic that the jurisdiction of the court is determined by the statute in force at the time of the
commencement of the action.54

Sec. 19, Batas Pambansa Blg. 129 or "The Judiciary Reorganization

Act of 1980" reads:

Sec. 19. Jurisdiction in Civil Cases.—Regional Trial Courts shall exercise exclusive original
jurisdiction:

1. In all civil actions in which the subject of the litigation is incapable of pecuniary estimation.
On the other hand, the jurisdiction of POA is unequivocal from Sec. 77 of RA 7942:

Section 77. Panel of Arbitrators.—

x x x Within thirty (30) days, after the submission of the case by the parties for the decision, the
panel shall have exclusive and original jurisdiction to hear and decide the following:

(c) Disputes involving rights to mining areas

(d) Disputes involving mineral agreements or permits

It is clear that POA has exclusive and original jurisdiction over any and all disputes involving rights
to mining areas. One such dispute is an MPSA application to which an adverse claim, protest or
opposition is filed by another interested applicant.1âwphi1 In the case at bar, the dispute arose
or originated from MPSA applications where petitioners are asserting their rights to mining areas
subject of their respective MPSA applications. Since respondent filed 3 separate petitions for the
denial of said applications, then a controversy has developed between the parties and it is POA’s
jurisdiction to resolve said disputes.

Moreover, the jurisdiction of the RTC involves civil actions while what petitioners filed with the
DENR Regional Office or any concerned DENRE or CENRO are MPSA applications. Thus POA has
jurisdiction.

Furthermore, the POA has jurisdiction over the MPSA applications under the doctrine of primary
jurisdiction. Euro-med Laboratories v. Province of Batangas55 elucidates:

The doctrine of primary jurisdiction holds that if a case is such that its determination requires the
expertise, specialized training and knowledge of an administrative body, relief must first be
obtained in an administrative proceeding before resort to the courts is had even if the matter
may well be within their proper jurisdiction.

Whatever may be the decision of the POA will eventually reach the court system via a resort to
the CA and to this Court as a last recourse.

Selling of MBMI’s shares to DMCI

As stated before, petitioners’ Manifestation and Submission dated October 19, 2012 would want
us to declare the instant petition moot and academic due to the transfer and conveyance of
all the shareholdings and interests of MBMI to DMCI, a corporation duly organized and existing
under Philippine laws and is at least 60% Philippine-owned.56 Petitioners reasoned that they now
cannot be considered as foreign-owned; the transfer of their shares supposedly cured the
"defect" of their previous nationality. They claimed that their current FTAA contract with the State
should stand since "even wholly-owned foreign corporations can enter into an FTAA with the
State."57 Petitioners stress that there should no longer be any issue left as regards their qualification
to enter into FTAA contracts since they are qualified to engage in mining activities in the
Philippines. Thus, whether the "grandfather rule" or the "control test" is used, the nationalities of
petitioners cannot be doubted since it would pass both tests.

The sale of the MBMI shareholdings to DMCI does not have any bearing in the instant case and
said fact should be disregarded. The manifestation can no longer be considered by us since it is
being tackled in G.R. No. 202877 pending before this Court.1âwphi1 Thus, the question of
whether petitioners, allegedly a Philippine-owned corporation due to the sale of MBMI's
shareholdings to DMCI, are allowed to enter into FTAAs with the State is a non-issue in this case.

In ending, the "control test" is still the prevailing mode of determining whether or not a corporation
is a Filipino corporation, within the ambit of Sec. 2, Art. II of the 1987 Constitution, entitled to
undertake the exploration, development and utilization of the natural resources of the
Philippines. When in the mind of the Court there is doubt, based on the attendant facts and
 Name Nationality Number of Amount Amount Paid
Shares Subscribed

Olympic Mines Filipino 6,663 PhP 6,663,000.00 PhP 0

&

Development

Corp.

MBMI Canadian 3,331 PhP 3,331,000.00 PhP 2,803,900.00

Resources,

Inc.

Amanti Limson Filipino 1 PhP 1,000.00 PhP 1,000.00

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

Esguerra

Lauro Salazar Filipino 1 PhP 1,000.00 PhP 1,000.00

Emmanuel G. Filipino 1 PhP 1,000.00 PhP 1,000.00

Hernando

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

Mason

Kenneth Canadian 1 PhP 1,000.00 PhP 1,000.00

Cawkell

Total 10,000 PhP PhP 2,809,900.00

10,000,000.00
(emphasis
supplied)

circumstances of the case, in the 60-40 Filipino-equity ownership in the corporation, then it may
apply the "grandfather rule."

WHEREFORE, premises considered, the instant petition is DENIED. The assailed Court of Appeals
Decision dated October 1, 2010 and Resolution dated February 15, 2011 are hereby AFFIRMED.

SO ORDERED.
CASE NO. 11

Republic of the Philippines

SUPREME COURT
Manila

EN BANC

G.R. No. 176579 June 28, 2011

WILSON P. GAMBOA, Petitioner,

vs.
FINANCE SECRETARY MARGARITO B. TEVES, FINANCE
UNDERSECRETARY JOHN P. SEVILLA, AND COMMISSIONER RICARDO
ABCEDE OF THE PRESIDENTIAL COMMISSION ON GOOD GOVERNMENT
(PCGG) IN THEIR CAPACITIES AS CHAIR AND MEMBERS,
RESPECTIVELY, OF THE PRIVATIZATION COUNCIL, CHAIRMAN
ANTHONI SALIM OF FIRST PACIFIC CO., LTD. IN HIS CAPACITY AS
DIRECTOR OF METRO PACIFIC ASSET HOLDINGS INC., CHAIRMAN
MANUEL V. PANGILINAN OF PHILIPPINE LONG DISTANCE TELEPHONE
COMPANY (PLDT) IN HIS CAPACITY AS MANAGING DIRECTOR OF FIRST
PACIFIC CO., LTD., PRESIDENT NAPOLEON L. NAZARENO OF PHILIPPINE
LONG DISTANCE TELEPHONE COMPANY, CHAIR FE BARIN OF THE
SECURITIES EXCHANGE COMMISSION, and PRESIDENT FRANCIS LIM OF
THE PHILIPPINE STOCK EXCHANGE, Respondents.
PABLITO V. SANIDAD and ARNO V. SANIDAD, Petitioners-in-Intervention.

DECISION

CARPIO, J.:

The Case

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

The Antecedents

The facts, according to petitioner Wilson P. Gamboa, a stockholder of Philippine Long

Distance Telephone Company (PLDT), are as follows:1

On 28 November 1928, the Philippine Legislature enacted Act No. 3436 which granted
PLDT a franchise and the right to engage in telecommunications business. In 1969, General
Telephone and Electronics Corporation (GTE), an American company and a major PLDT
stockholder, sold 26 percent of the outstanding common shares of PLDT to PTIC. In 1977,
Prime Holdings, Inc. (PHI) was incorporated by several persons, including Roland Gapud
and Jose Campos, Jr. Subsequently, PHI became the owner of 111,415 shares of stock of
PTIC by virtue of three Deeds of Assignment executed by PTIC stockholders Ramon
Cojuangco and Luis Tirso Rivilla. In 1986, the 111,415 shares of stock of PTIC held by
PHI were sequestered by the Presidential Commission on Good Government (PCGG). The
111,415 PTIC shares, which represent about 46.125 percent of the outstanding capital stock
of PTIC, were later declared by this Court to be owned by the Republic of the Philippines.2
In 1999, First Pacific, a Bermuda-registered, Hong Kong-based investment firm, acquired
the remaining 54 percent of the outstanding capital stock of PTIC. On 20 November 2006,
the Inter-Agency Privatization Council (IPC) of the Philippine Government announced that
it would sell the 111,415 PTIC shares, or 46.125 percent of the outstanding capital stock
of PTIC, through a public bidding to be conducted on 4 December 2006. Subsequently, the
public bidding was reset to 8 December 2006, and only two bidders, Parallax Venture Fund
XXVII (Parallax) and Pan-Asia Presidio Capital, submitted their bids. Parallax won with a
bid of ₱25.6 billion or US$510 million.

Thereafter, First Pacific announced that it would exercise its right of first refusal as a PTIC
stockholder and buy the 111,415 PTIC shares by matching the bid price of Parallax.
However, First Pacific failed to do so by the 1 February 2007 deadline set by IPC and
instead, yielded its right to PTIC itself which was then given by IPC until 2 March 2007 to
buy the PTIC shares. On 14 February 2007, First Pacific, through its subsidiary, MPAH,
entered into a Conditional Sale and Purchase Agreement of the 111,415 PTIC shares, or
46.125 percent of the outstanding capital stock of PTIC, with the Philippine Government
for the price of ₱25,217,556,000 or US$510,580,189. The sale was completed on 28
February 2007.

Since PTIC is a stockholder of PLDT, the sale by the Philippine Government of 46.125
percent of PTIC shares is actually an indirect sale of 12 million shares or about 6.3 percent
of the outstanding common shares of PLDT. With the sale, First Pacific’s common
shareholdings in PLDT increased from 30.7 percent to 37 percent, thereby increasing
the common shareholdings of foreigners in PLDT to about 81.47 percent. This violates
Section 11, Article XII of the 1987 Philippine Constitution which limits foreign ownership
of the capital of a public utility to not more than 40 percent.3

On the other hand, public respondents Finance Secretary Margarito B. Teves,

Undersecretary John P. Sevilla, and PCGG Commissioner Ricardo Abcede allege the
following relevant facts:

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

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

During the 8 December 2006 bidding, Parallax Capital Management LP emerged as the
highest bidder with a bid of ₱25,217,556,000. The government notified First Pacific, the
majority owner of PTIC shares, of the bidding results and gave First Pacific until 1
February 2007 to exercise its right of first refusal in accordance with PTIC’s Articles of
Incorporation. First Pacific announced its intention to match Parallax’s bid.
On 31 January 2007, the House of Representatives (HR) Committee on Good Government
conducted a public hearing on the particulars of the then impending sale of the 111,415
PTIC shares. Respondents Teves and Sevilla were among those who attended the public
hearing. The HR Committee Report No. 2270 concluded that: (a) the auction of the
government’s 111,415 PTIC shares bore due diligence, transparency and conformity with
existing legal procedures; and (b) First Pacific’s intended acquisition of the
government’s 111,415 PTIC shares resulting in First Pacific’s 100% ownership of
PTIC will not violate the 40 percent constitutional limit on foreign ownership of a
public utility since PTIC holds only 13.847 percent of the total outstanding common
shares of PLDT.5 On 28 February 2007, First Pacific completed the acquisition of the
111,415 shares of stock of PTIC.

Respondent Manuel V. Pangilinan admits the following facts: (a) the IPC conducted a
public bidding for the sale of 111,415 PTIC shares or 46 percent of the outstanding capital
stock of PTIC (the remaining 54 percent of PTIC shares was already owned by First Pacific
and its affiliates); (b) Parallax offered the highest bid amounting to ₱25,217,556,000; (c)
pursuant to the right of first refusal in favor of PTIC and its shareholders granted in PTIC’s
Articles of Incorporation, MPAH, a First Pacific affiliate, exercised its right of first refusal
by matching the highest bid offered for PTIC shares on 13 February 2007; and (d) on 28
February 2007, the sale was consummated when MPAH paid IPC ₱25,217,556,000 and
the government delivered the certificates for the 111,415 PTIC shares. Respondent
Pangilinan denies the other allegations of facts of petitioner.

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

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

x x x as the annual disclosure reports, also referred to as Form 20-K reports x x x which
PLDT submitted to the New York Stock Exchange for the period 2003-2005, revealed that
First Pacific and several other foreign entities breached the constitutional limit of 40
percent ownership as early as 2003. x x x"7

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

On 13 August 2007, Pablito V. Sanidad and Arno V. Sanidad filed a Motion for Leave to
Intervene and Admit Attached Petition-in-Intervention. In the Resolution of 28 August
2007, the Court granted the motion and noted the Petition-in-Intervention.
Petitioners-in-intervention "join petitioner Wilson Gamboa x x x in seeking, among others,
to enjoin and/or nullify the sale by respondents of the 111,415 PTIC shares to First Pacific
or assignee." Petitioners-in-intervention claim that, as PLDT subscribers, they have a
"stake in the outcome of the controversy x x x where the Philippine Government is
completing the sale of government owned assets in [PLDT], unquestionably a public
utility, in violation of the nationality restrictions of the Philippine Constitution."

The Issue

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

The Ruling of the Court

The petition is partly meritorious.

Petition for declaratory relief treated as petition for mandamus

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

While direct resort to this Court may be justified in a petition for prohibition,11 the Court
shall nevertheless refrain from discussing the grounds in support of the petition for
prohibition since on 28 February 2007, the questioned sale was consummated when MPAH
paid IPC ₱25,217,556,000 and the government delivered the certificates for the 111,415
PTIC shares.

However, since the threshold and purely legal issue on the definition of the term "capital"
in Section 11, Article XII of the Constitution has far-reaching implications to the national
economy, the Court treats the petition for declaratory relief as one for mandamus.12

In Salvacion v. Central Bank of the Philippines,13 the Court treated the petition for
declaratory relief as one for mandamus considering the grave injustice that would result in
the interpretation of a banking law. In that case, which involved the crime of rape
committed by a foreign tourist against a Filipino minor and the execution of the final
judgment in the civil case for damages on the tourist’s dollar deposit with a local bank, the
Court declared Section 113 of Central Bank Circular No. 960, exempting foreign currency
deposits from attachment, garnishment or any other order or process of any court,
inapplicable due to the peculiar circumstances of the case. The Court held that "injustice
would result especially to a citizen aggrieved by a foreign guest like accused x x x" that
would "negate Article 10 of the Civil Code which provides that ‘in case of doubt in the
interpretation or application of laws, it is presumed that the lawmaking body intended right
and justice to prevail.’" The Court therefore required respondents Central Bank of the
Philippines, the local bank, and the accused to comply with the writ of execution issued in
the civil case for damages and to release the dollar deposit of the accused to satisfy the
judgment.
In Alliance of Government Workers v. Minister of Labor,14 the Court similarly brushed
aside the procedural infirmity of the petition for declaratory relief and treated the same as
one for mandamus. In Alliance, the issue was whether the government unlawfully excluded
petitioners, who were government employees, from the enjoyment of rights to which they
were entitled under the law. Specifically, the question was: "Are the branches, agencies,
subdivisions, and instrumentalities of the Government, including government owned or
controlled corporations included among the four ‘employers’ under Presidential Decree
No. 851 which are required to pay their employees x x x a thirteenth (13th) month pay x x
x ?" The Constitutional principle involved therein affected all government employees,
clearly justifying a relaxation of the technical rules of procedure, and certainly requiring
the interpretation of the assailed presidential decree.

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

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

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

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

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

The instant petition therefore presents the Court with another opportunity to finally settle
this purely legal issue which is of transcendental importance to the national economy and
a fundamental requirement to a faithful adherence to our Constitution. The Court must
forthwith seize such opportunity, not only for the benefit of the litigants, but more
significantly for the benefit of the entire Filipino people, to ensure, in the words of the
Constitution, "a self-reliant and independent national economy effectively controlled by
Filipinos."18 Besides, in the light of vague and confusing positions taken by government
agencies on this purely legal issue, present and future foreign investors in this country
deserve, as a matter of basic fairness, a categorical ruling from this Court on the extent of
their participation in the capital of public utilities and other nationalized businesses.
Despite its far-reaching implications to the national economy, this purely legal issue has
remained unresolved for over 75 years since the 1935 Constitution. There is no reason for
this Court to evade this ever recurring fundamental issue and delay again defining the term
"capital," which appears not only in Section 11, Article XII of the Constitution, but also in
Section 2, Article XII on co-production and joint venture agreements for the development
of our natural resources,19 in Section 7, Article XII on ownership of private lands,20 in
Section 10, Article XII on the reservation of certain investments to Filipino citizens, 21 in
Section 4(2), Article XIV on the ownership of educational institutions,22 and in Section
11(2), Article XVI on the ownership of advertising companies.23

Petitioner has locus standi

There is no dispute that petitioner is a stockholder of PLDT. As such, he has the right to
question the subject sale, which he claims to violate the nationality requirement prescribed
in Section 11, Article XII of the Constitution. If the sale indeed violates the Constitution,
then there is a possibility that PLDT’s franchise could be revoked, a dire consequence
directly affecting petitioner’s interest as a stockholder.

More importantly, there is no question that the instant petition raises matters of
transcendental importance to the public. The fundamental and threshold legal issue in this
case, involving the national economy and the economic welfare of the Filipino people, far
outweighs any perceived impediment in the legal personality of the petitioner to bring this
action.

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

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

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

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

Clearly, since the instant petition, brought by a citizen, involves matters of transcendental
public importance, the petitioner has the requisite locus standi.
Definition of the Term "Capital" in
Section 11, Article XII of the 1987 Constitution

Section 11, Article XII (National Economy and Patrimony) of the 1987 Constitution
mandates the Filipinization of public utilities, to wit:

Section 11. No franchise, certificate, or any other form of authorization for the
operation of a public utility shall be granted except to citizens of the Philippines or to
corporations or associations organized under the laws of the Philippines, at least sixty
per centum of whose capital is owned by such citizens; nor shall such franchise,
certificate, or authorization be exclusive in character or for a longer period than fifty years.
Neither shall any such franchise or right be granted except under the condition that it shall
be subject to amendment, alteration, or repeal by the Congress when the common good so
requires. The State shall encourage equity participation in public utilities by the general
public. The participation of foreign investors in the governing body of any public utility
enterprise shall be limited to their proportionate share in its capital, and all the executive
and managing officers of such corporation or association must be citizens of the
Philippines. (Emphasis supplied)

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

Section 5. No franchise, certificate, or any other form of authorization for the

operation of a public utility shall be granted except to citizens of the Philippines or to
corporations or associations organized under the laws of the Philippines at least sixty
per centum of the capital of which is owned by such citizens, nor shall such franchise,
certificate, or authorization be exclusive in character or for a longer period than fifty years.
Neither shall any such franchise or right be granted except under the condition that it shall
be subject to amendment, alteration, or repeal by the National Assembly when the public
interest so requires. The State shall encourage equity participation in public utilities by the
general public. The participation of foreign investors in the governing body of any public
utility enterprise shall be limited to their proportionate share in the capital thereof.
(Emphasis supplied)

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

Section 8. No franchise, certificate, or any other form of authorization for the

operation of a public utility shall be granted except to citizens of the Philippines or to
corporations or other entities organized under the laws of the Philippines sixty per
centum of the capital of which is owned by citizens of the Philippines, nor shall such
franchise, certificate, or authorization be exclusive in character or for a longer period than
fifty years. No franchise or right shall be granted to any individual, firm, or corporation,
except under the condition that it shall be subject to amendment, alteration, or repeal by
the Congress when the public interest so requires. (Emphasis supplied)

Father Joaquin G. Bernas, S.J., a leading member of the 1986 Constitutional Commission,
reminds us that the Filipinization provision in the 1987 Constitution is one of the products
of the spirit of nationalism which gripped the 1935 Constitutional Convention.25 The 1987
Constitution "provides for the Filipinization of public utilities by requiring that any form
of authorization for the operation of public utilities should be granted only to ‘citizens of
the Philippines or to corporations or associations organized under the laws of the
Philippines at least sixty per centum of whose capital is owned by such citizens.’ The
provision is [an express] recognition of the sensitive and vital position of public
utilities both in the national economy and for national security."26 The evident purpose
of the citizenship requirement is to prevent aliens from assuming control of public utilities,
which may be inimical to the national interest.27 This specific provision explicitly reserves
to Filipino citizens control of public utilities, pursuant to an overriding economic goal of
the 1987 Constitution: to "conserve and develop our patrimony"28 and ensure "a self-reliant
and independent national economy effectively controlled by Filipinos."29

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

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

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

Petitioners-in-intervention basically reiterate petitioner’s arguments and adopt petitioner’s

definition of the term "capital."33 Petitioners-in-intervention allege that "the approximate
foreign ownership of common capital stock of PLDT x x x already amounts to at least
63.54% of the total outstanding common stock," which means that foreigners exercise
significant control over PLDT, patently violating the 40 percent foreign equity limitation
in public utilities prescribed by the Constitution.

Respondents, on the other hand, do not offer any definition of the term "capital" in Section
11, Article XII of the Constitution. More importantly, private respondents Nazareno and
Pangilinan of PLDT do not dispute that more than 40 percent of the common shares of
PLDT are held by foreigners.

In particular, respondent Nazareno’s Memorandum, consisting of 73 pages, harps mainly

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

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

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

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

The OSG, representing public respondents Secretary Margarito Teves, Undersecretary

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

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

In the earlier case of Fernandez v. Cojuangco, petitioner Fernandez who claimed to be a

stockholder of record of PLDT, contended that the term "capital" in the 1987 Constitution
refers to shares entitled to vote or the common shares. Fernandez explained thus:

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

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

xxxx

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

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

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

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

On the other hand, respondents therein, Antonio O. Cojuangco, Manuel V. Pangilinan,

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

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

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

Section 137. Outstanding capital stock defined. – The term "outstanding capital stock", as
used in this Code, means the total shares of stock issued under binding subscription
agreements to subscribers or stockholders, whether or not fully or partially paid, except
treasury shares.

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

xxxx

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

xxxx

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

We agree with petitioner and petitioners-in-intervention. The term "capital" in Section 11,
Article XII of the Constitution refers only to shares of stock entitled to vote in the election
of directors, and thus in the present case only to common shares,41 and not to the total
outstanding capital stock comprising both common and non-voting preferred shares.

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

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

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

Shares of capital stock issued without par value shall be deemed fully paid and non-
assessable and the holder of such shares shall not be liable to the corporation or to its
creditors in respect thereto: Provided; That shares without par value may not be issued for
a consideration less than the value of five (₱5.00) pesos per share: Provided, further, That
the entire consideration received by the corporation for its no-par value shares shall be
treated as capital and shall not be available for distribution as dividends.

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

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

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

1. Amendment of the articles of incorporation;

 2. Adoption and amendment of by-laws;

3. Sale, lease, exchange, mortgage, pledge or other disposition of all or substantially

all of the corporate property;

4. Incurring, creating or increasing bonded indebtedness;

5. Increase or decrease of capital stock;

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

corporations;

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

with this Code; and

8. Dissolution of the corporation.

Except as provided in the immediately preceding paragraph, the vote necessary to approve
a particular corporate act as provided in this Code shall be deemed to refer only to stocks
with voting rights.

Indisputably, one of the rights of a stockholder is the right to participate in the control or
management of the corporation.43 This is exercised through his vote in the election of
directors because it is the board of directors that controls or manages the corporation.44 In
the absence of provisions in the articles of incorporation denying voting rights to preferred
shares, preferred shares have the same voting rights as common shares. However, preferred
shareholders are often excluded from any control, that is, deprived of the right to vote in
the election of directors and on other matters, on the theory that the preferred shareholders
are merely investors in the corporation for income in the same manner as bondholders.45 In
fact, under the Corporation Code only preferred or redeemable shares can be deprived of
the right to vote.46 Common shares cannot be deprived of the right to vote in any corporate
meeting, and any provision in the articles of incorporation restricting the right of common
shareholders to vote is invalid.47

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

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

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

MR. VILLEGAS. That is right.

MR. NOLLEDO. In teaching law, we are always faced with this question: "Where do we
base the equity requirement, is it on the authorized capital stock, on the subscribed capital
stock, or on the paid-up capital stock of a corporation"? Will the Committee please
enlighten me on this?
MR. VILLEGAS. We have just had a long discussion with the members of the team from
the UP Law Center who provided us a draft. The phrase that is contained here which we
adopted from the UP draft is "60 percent of voting stock."

MR. NOLLEDO. That must be based on the subscribed capital stock, because unless
declared delinquent, unpaid capital stock shall be entitled to vote.

MR. VILLEGAS. That is right.

MR. NOLLEDO. Thank you.

With respect to an investment by one corporation in another corporation, say, a corporation

with 60-40 percent equity invests in another corporation which is permitted by the
Corporation Code, does the Committee adopt the grandfather rule?

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

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

MR. VILLEGAS. Yes.48

xxxx

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

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

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

MR. VILLEGAS. Yes.

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

MR. VILLEGAS. That is right.

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

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

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

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

Thus, 60 percent of the "capital" assumes, or should result in, "controlling interest" in the
corporation. Reinforcing this interpretation of the term "capital," as referring to controlling
interest or shares entitled to vote, is the definition of a "Philippine national" in the Foreign
Investments Act of 1991,50 to wit:
SEC. 3. Definitions. - As used in this Act:

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

In explaining the definition of a "Philippine national," the Implementing Rules and

Regulations of the Foreign Investments Act of 1991 provide:

b. "Philippine national" shall mean a citizen of the Philippines or a domestic partnership

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

Compliance with the required Filipino ownership of a corporation shall be

determined on the basis of outstanding capital stock whether fully paid or not, but
only such stocks which are generally entitled to vote are considered.

For stocks to be deemed owned and held by Philippine citizens or Philippine

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

Individuals or juridical entities not meeting the aforementioned qualifications are

considered as non-Philippine nationals. (Emphasis supplied)

Mere legal title is insufficient to meet the 60 percent Filipino-owned "capital" required in
the Constitution. Full beneficial ownership of 60 percent of the outstanding capital stock,
coupled with 60 percent of the voting rights, is required. The legal and beneficial ownership
of 60 percent of the outstanding capital stock must rest in the hands of Filipino nationals
in accordance with the constitutional mandate. Otherwise, the corporation is "considered
as non-Philippine national[s]."
Under Section 10, Article XII of the Constitution, Congress may "reserve to citizens of the
Philippines or to corporations or associations at least sixty per centum of whose capital is
owned by such citizens, or such higher percentage as Congress may prescribe, certain areas
of investments." Thus, in numerous laws Congress has reserved certain areas of
investments to Filipino citizens or to corporations at least sixty percent of the "capital" of
which is owned by Filipino citizens. Some of these laws are: (1) Regulation of Award of
Government Contracts or R.A. No. 5183; (2) Philippine Inventors Incentives Act or R.A.
No. 3850; (3) Magna Carta for Micro, Small and Medium Enterprises or R.A. No. 6977;
(4) Philippine Overseas Shipping Development Act or R.A. No. 7471; (5) Domestic
Shipping Development Act of 2004 or R.A. No. 9295; (6) Philippine Technology Transfer
Act of 2009 or R.A. No. 10055; and (7) Ship Mortgage Decree or P.D. No. 1521. Hence,
the term "capital" in Section 11, Article XII of the Constitution is also used in the same
context in numerous laws reserving certain areas of investments to Filipino citizens.

To construe broadly the term "capital" as the total outstanding capital stock, including both
common and non-voting preferred shares, grossly contravenes the intent and letter of the
Constitution that the "State shall develop a self-reliant and independent national economy
effectively controlled by Filipinos." A broad definition unjustifiably disregards who owns
the all-important voting stock, which necessarily equates to control of the public utility.

We shall illustrate the glaring anomaly in giving a broad definition to the term "capital."
Let us assume that a corporation has 100 common shares owned by foreigners and
1,000,000 non-voting preferred shares owned by Filipinos, with both classes of share
having a par value of one peso (₱1.00) per share. Under the broad definition of the term
"capital," such corporation would be considered compliant with the 40 percent
constitutional limit on foreign equity of public utilities since the overwhelming majority,
or more than 99.999 percent, of the total outstanding capital stock is Filipino owned. This
is obviously absurd.

In the example given, only the foreigners holding the common shares have voting rights in
the election of directors, even if they hold only 100 shares. The foreigners, with a minuscule
equity of less than 0.001 percent, exercise control over the public utility. On the other hand,
the Filipinos, holding more than 99.999 percent of the equity, cannot vote in the election
of directors and hence, have no control over the public utility. This starkly circumvents the
intent of the framers of the Constitution, as well as the clear language of the Constitution,
to place the control of public utilities in the hands of Filipinos. It also renders illusory the
State policy of an independent national economy effectively controlled by Filipinos.

The example given is not theoretical but can be found in the real world, and in fact exists
in the present case.

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

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

In short, only holders of common shares can vote in the election of directors, meaning only
common shareholders exercise control over PLDT. Conversely, holders of preferred
shares, who have no voting rights in the election of directors, do not have any control over
PLDT. In fact, under PLDT’s Articles of Incorporation, holders of common shares have
voting rights for all purposes, while holders of preferred shares have no voting right for
any purpose whatsoever.

It must be stressed, and respondents do not dispute, that foreigners hold a majority of the
common shares of PLDT. In fact, based on PLDT’s 2010 General Information Sheet
(GIS),54 which is a document required to be submitted annually to the Securities and
Exchange Commission,55 foreigners hold 120,046,690 common shares of PLDT whereas
Filipinos hold only 66,750,622 common shares.56 In other words, foreigners hold 64.27%
of the total number of PLDT’s common shares, while Filipinos hold only 35.73%. Since
holding a majority of the common shares equates to control, it is clear that foreigners
exercise control over PLDT. Such amount of control unmistakably exceeds the allowable
40 percent limit on foreign ownership of public utilities expressly mandated in Section 11,
Article XII of the Constitution.

Moreover, the Dividend Declarations of PLDT for 2009,57 as submitted to the SEC, shows
that per share the SIP58 preferred shares earn a pittance in dividends compared to the
common shares. PLDT declared dividends for the common shares at ₱70.00 per share,
while the declared dividends for the preferred shares amounted to a measly ₱1.00 per
share.59 So the preferred shares not only cannot vote in the election of directors, they also
have very little and obviously negligible dividend earning capacity compared to common
shares.

As shown in PLDT’s 2010 GIS,60 as submitted to the SEC, the par value of PLDT common
shares is ₱5.00 per share, whereas the par value of preferred shares is ₱10.00 per share. In
other words, preferred shares have twice the par value of common shares but cannot elect
directors and have only 1/70 of the dividends of common shares. Moreover, 99.44% of the
preferred shares are owned by Filipinos while foreigners own only a minuscule 0.56% of
the preferred shares.61 Worse, preferred shares constitute 77.85% of the authorized capital
stock of PLDT while common shares constitute only 22.15%.62 This undeniably shows that
beneficial interest in PLDT is not with the non-voting preferred shares but with the
common shares, blatantly violating the constitutional requirement of 60 percent Filipino
control and Filipino beneficial ownership in a public utility.

The legal and beneficial ownership of 60 percent of the outstanding capital stock must rest
in the hands of Filipinos in accordance with the constitutional mandate. Full beneficial
ownership of 60 percent of the outstanding capital stock, coupled with 60 percent of the
voting rights, is constitutionally required for the State’s grant of authority to operate a
public utility. The undisputed fact that the PLDT preferred shares, 99.44% owned by
Filipinos, are non-voting and earn only 1/70 of the dividends that PLDT common shares
earn, grossly violates the constitutional requirement of 60 percent Filipino control and
Filipino beneficial ownership of a public utility.

In short, Filipinos hold less than 60 percent of the voting stock, and earn less than 60
percent of the dividends, of PLDT. This directly contravenes the express command in
Section 11, Article XII of the Constitution that "[n]o franchise, certificate, or any other
form of authorization for the operation of a public utility shall be granted except to x x x
corporations x x x organized under the laws of the Philippines, at least sixty per centum
of whose capital is owned by such citizens x x x."

To repeat, (1) foreigners own 64.27% of the common shares of PLDT, which class of shares
exercises the sole right to vote in the election of directors, and thus exercise control over
PLDT; (2) Filipinos own only 35.73% of PLDT’s common shares, constituting a minority
of the voting stock, and thus do not exercise control over PLDT; (3) preferred shares,
99.44% owned by Filipinos, have no voting rights; (4) preferred shares earn only 1/70 of
the dividends that common shares earn;63 (5) preferred shares have twice the par value of
common shares; and (6) preferred shares constitute 77.85% of the authorized capital stock
of PLDT and common shares only 22.15%. This kind of ownership and control of a public
utility is a mockery of the Constitution.

Incidentally, the fact that PLDT common shares with a par value of ₱5.00 have a current
stock market value of ₱2,328.00 per share,64 while PLDT preferred shares with a par value
of ₱10.00 per share have a current stock market value ranging from only ₱10.92 to ₱11.06
per share,65 is a glaring confirmation by the market that control and beneficial ownership
of PLDT rest with the common shares, not with the preferred shares.

Indisputably, construing the term "capital" in Section 11, Article XII of the Constitution to
include both voting and non-voting shares will result in the abject surrender of our
telecommunications industry to foreigners, amounting to a clear abdication of the State’s
constitutional duty to limit control of public utilities to Filipino citizens. Such an
interpretation certainly runs counter to the constitutional provision reserving certain areas
of investment to Filipino citizens, such as the exploitation of natural resources as well as
the ownership of land, educational institutions and advertising businesses. The Court
should never open to foreign control what the Constitution has expressly reserved to
Filipinos for that would be a betrayal of the Constitution and of the national interest. The
Court must perform its solemn duty to defend and uphold the intent and letter of the
Constitution to ensure, in the words of the Constitution, "a self-reliant and independent
national economy effectively controlled by Filipinos."

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

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

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

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

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

Courts as a rule consider the provisions of the Constitution as self-executing, rather than
as requiring future legislation for their enforcement. The reason is not difficult to discern.
For if they are not treated as self-executing, the mandate of the fundamental law
ratified by the sovereign people can be easily ignored and nullified by Congress.
Suffused with wisdom of the ages is the unyielding rule that legislative actions may
give breath to constitutional rights but congressional inaction should not suffocate
them.
Thus, we have treated as self-executing the provisions in the Bill of Rights on arrests,
searches and seizures, the rights of a person under custodial investigation, the rights of an
accused, and the privilege against self-incrimination. It is recognized that legislation is
unnecessary to enable courts to effectuate constitutional provisions guaranteeing the
fundamental rights of life, liberty and the protection of property. The same treatment is
accorded to constitutional provisions forbidding the taking or damaging of property for
public use without just compensation. (Emphasis supplied)

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

x x x As the Constitution is silent as to the effects or consequences of a sale by a citizen of

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

To treat Section 11, Article XII of the Constitution as not self-executing would mean that
since the 1935 Constitution, or over the last 75 years, not one of the constitutional
provisions expressly reserving specific areas of investments to corporations, at least 60
percent of the "capital" of which is owned by Filipinos, was enforceable. In short, the
framers of the 1935, 1973 and 1987 Constitutions miserably failed to effectively reserve to
Filipinos specific areas of investment, like the operation by corporations of public utilities,
the exploitation by corporations of mineral resources, the ownership by corporations of
real estate, and the ownership of educational institutions. All the legislatures that convened
since 1935 also miserably failed to enact legislations to implement these vital constitutional
provisions that determine who will effectively control the national economy, Filipinos or
foreigners. This Court cannot allow such an absurd interpretation of the Constitution.

This Court has held that the SEC "has both regulatory and adjudicative functions."69 Under
its regulatory functions, the SEC can be compelled by mandamus to perform its statutory
duty when it unlawfully neglects to perform the same. Under its adjudicative or quasi-
judicial functions, the SEC can be also be compelled by mandamus to hear and decide a
possible violation of any law it administers or enforces when it is mandated by law to
investigate such violation.1awphi1

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

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

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

SO ORDERED.