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I. ATTRIBUTES OF A CORPORATION
A. Artificial Being

Sec. 2. Corporation defined. - A corporation is an artificial being created by

operation of law, having the right of succession and the powers, attributes
and properties expressly authorized by law or incident to its existence.
(Corporation Code)

Art. 44. The following are juridical persons:

XXX

(3) Corporations, partnerships and associations for private interest or purpose

to which the law grants a juridical personality, separate and distinct from that
of each shareholder, partner or member. (NCC)

Article III, Section 8. The right of the people, including those employed in the
public and private sectors, to form unions, associations, or societies for
purposes not contrary to law shall not be abridged. (1987 Consti)

ANITA MANGILA vs. COURT OF APPEALS and LORETA GUINA

G.R. No. 125027; August 12, 2002

Facts: Petitioner Mangila is an exporter of sea foods and doing business

under the name and style of Seafoods Products. Private respondent Guina is
the President and General Manager of Air Swift International, a single
registered proprietorship engaged in the freight forwarding business.

In January 1988, petitioner contracted the services of private respondent for

shipment of her products to Guam with an agreement to pay on COD. On the
first shipment, petitioner requested for seven days within which to pay
however she failed to do so on the next 3 shipments.

A case for collection of money was filed before the RTC of Pasay but
summons was not received since petitioner changed residence and also went
to Guam.

Construing petitioner’s departure from the Philippines as done with intent to

defraud her creditors, private respondent filed a Motion for Preliminary
Attachment. On September 26, 1988, the trial court issued an Order of
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Preliminary Attachment against petitioner. The following day, the trial court
issued a Writ of Preliminary Attachment.

Subsequently, a Notice of Levy was served upon the help of the petitioner.

On November 7, 1988, the petitioner filed an Urgent Motion to Discharge

Attachment without submitting herself to the jurisdiction of the trial court. She
pointed out that up to then, she had not been served a copy of the Complaint
and the summons. Hence, petitioner claimed the court had not acquired
jurisdiction over her person. The court granted her motion for Discharge of
Attachment upon her filing of a counter-bond. However, the Court did not rule
on its jurisdiction or the writ of preliminary attachment.

On December 26, 1988, private respondent applied for an alias summons,

which the trial court issued on January 19, 1988. It was only on January 26,
1989 that summons was finally served on petitioner.

The RTC ruled in favor of the respondent which was eventually affirmed by
the CA.

On appeal to the SC, the petitioner raised one of the issues of improper
venue since it was stipulated in the contract that in case of suit the proper
venue would be the RTC Makati.

Issue: Whether or not the venue was improper.

Held: Yes. Under the 1997 Rules of Civil Procedure, the general rule is venue
in personal actions is "where the defendant or any of the defendants resides
or may be found, or where the plaintiff or any of the plaintiffs resides, at the
election of the plaintiff." The exception to this rule is when the parties agree
on an exclusive venue other than the places mentioned in the rules. But, as
we have discussed, this exception is not applicable in this case. Hence,
following the general rule, the instant case may be brought in the place of
residence of the plaintiff or defendant, at the election of the plaintiff (private
respondent herein).

In the instant case, the residence of private respondent (plaintiff in the lower
court) was not alleged in the complaint. Rather, what was alleged was the
postal address of her sole proprietorship, Air Swift International. It was only
when private respondent testified in court, after petitioner was declared in
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default, that she mentioned her residence to be in Better Living Subdivision,

Parañaque City.

In the instant case, it was established in the lower court that petitioner resides
in San Fernando, Pampanga while private respondent resides in Parañaque
City. However, this case was brought in Pasay City, where the business of
private respondent is found. This would have been permissible had private
respondent’s business been a corporation.

A sole proprietorship does not possess a juridical personality separate and

distinct from the personality of the owner of the enterprise. The law merely
recognizes the existence of a sole proprietorship as a form of business
organization conducted for profit by a single individual and requires its
proprietor or owner to secure licenses and permits, register its business
name, and pay taxes to the national government. The law does not vest a
separate legal personality on the sole proprietorship or empower it to file or
defend an action in court. (LAMIGO)

Art. 46. Juridical persons may acquire and possess property of all kinds, as
well as incur obligations and bring civil or criminal actions, in conformity with
the laws and regulations of their organization. (NCC)

Art. III 1987 Constitution

Section 1. No person shall be deprived of life, liberty, or property without due

process of law, nor shall any person be denied the equal protection of the
laws.

Section 2. The right of the people to be secure in their persons, houses,

papers, and effects against unreasonable searches and seizures of whatever
nature and for any purpose shall be inviolable, and no search warrant or
warrant of arrest shall issue except upon probable cause to be determined
personally by the judge after examination under oath or affirmation of the
complainant and the witnesses he may produce, and particularly describing
the place to be searched and the persons or things to be seized.

Section 11. Free access to the courts and quasi-judicial bodies and adequate
legal assistance shall not be denied to any person by reason of poverty.
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RE: QUERY OF MR. ROGER C. PRIORESCHI RE EXEMPTION FROM

LEGAL AND FILING FEES OF THE GOOD SHEPHERD FOUNDATION,
INC.
A. M. No. 09-6-9-SC; August 19, 2009

Facts: Mr. Roger C. Prioreschi, administrator of the Good Shepherd

Foundation, Inc. sent a letter addressed to the Chief Justice Puno asking for
the same grant of privilege provided in OCA Circular No. 42-2005 and Rule
141on the ground that it has been reaching out to the poorest among the poor
ever since as indicated in their Article of Incorporation.

Held: The Courts cannot grant to foundations like the Good Shepherd
Foundation, Inc. the same exemption from payment of legal fees granted to
indigent litigants even if the foundations are working for indigent and
underprivileged people. The basis for the exemption from legal and filing fees
is the free access clause, embodied in Sec. 11, Art. III of the 1987
Constitution, thus:

Sec. 11. Free access to the courts and quasi judicial bodies and
adequate legal assistance shall not be denied to any person by reason of
poverty.

The importance of the right to free access to the courts and quasi judicial
bodies and to adequate legal assistance cannot be denied. A move to remove
the provision on free access from the Constitution on the ground that it was
already covered by the equal protection clause was defeated by the desire to
give constitutional stature to such specific protection of the poor.

The clear intent and precise language of the aforequoted provisions of the
Rules of Court (Sec. 21, Rule 3; Sec. 19, Rule 141) indicate that only a
natural party litigant may be regarded as an indigent litigant. The Good
Shepherd Foundation, Inc., being a corporation invested by the State with a
juridical personality separate and distinct from that of its members,[4] is a
juridical person. Among others, it has the power to acquire and possess
property of all kinds as well as incur obligations and bring civil or criminal
actions, in conformity with the laws and regulations of their organization. As a
juridical person, therefore, it cannot be accorded the exemption from legal
and filing fees granted to indigent litigants.
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That the Good Shepherd Foundation, Inc. is working for indigent and
underprivileged people is of no moment. Clearly, the Constitution has
explicitly premised the free access clause on a person’s poverty, a condition
that only a natural person can suffer. LAMIGO

ALFREDO CHING vs. THE SECRETARY OF JUSTICE, ASST. CITY

PROSECUTOR ECILYN BURGOS-VILLAVERT, JUDGE EDGARDO
SUDIAM of the Regional Trial Court, Manila, Branch 52; RIZAL
COMMERCIAL BANKING CORP. and THE PEOPLE OF THE PHILIPPINES
G. R. No. 164317; February 6, 2006

Facts: Petitioner was the Senior Vice-President of Philippine Blooming Mills,

Inc. (PBMI). Sometime in September to October 1980, PBMI, through
petitioner, applied with the Rizal Commercial Banking Corporation
(respondent bank) for the issuance of commercial letters of credit to finance
its importation of assorted goods.

Respondent bank approved the application, and irrevocable letters of credit

were issued in favor of petitioner. The goods were purchased and delivered in
trust to PBMI. Petitioner signed 13 trust receipts4 as surety, acknowledging
delivery of the goods.

Under the receipts, petitioner agreed to hold the goods in trust for the said
bank, with authority to sell but not by way of conditional sale, pledge or
otherwise; and in case such goods were sold, to turn over the proceeds
thereof as soon as received, to apply against the relative acceptances and
payment of other indebtedness to respondent bank. In case the goods
remained unsold within the specified period, the goods were to be returned to
respondent bank without any need of demand. Thus, said "goods,
manufactured products or proceeds thereof, whether in the form of money or
bills, receivables, or accounts separate and capable of identification" were
respondent bank’s property.

When the trust receipts matured, petitioner failed to return the goods to
respondent bank, or to return their value despite demands. The City
Prosecutor found probable cause estafa. Petitioner appealed to the Minister
of Justice which was dismissed. The RTC, for its part, granted the Motion to
Quash the Informations filed by petitioner on the ground that the material
allegations therein did not amount to estafa.
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The bank refiled the criminal complaint but the City Prosecutor ruled that
there was no probable cause to charge petitioner with violating P.D. No. 115,
as petitioner’s liability was only civil, not criminal, having signed the trust
receipts as surety. The Secretary of Justice however reversed the resolution
stating that respondent bound himself under the terms of the trust receipts not
only as a corporate official of PBMI but also as its surety; hence, he could be
proceeded against in two (2) ways: first, as surety as determined by the
Supreme Court in its decision in Rizal Commercial Banking Corporation v.
Court of Appeals; and second, as the corporate official responsible for the
offense under P.D. No. 115, via criminal prosecution.

Petitioner filed a petition for certiorari, prohibition and mandamus with the CA
which dismissed the same for lack of merit.

Issue: Whether or not Ching should be held liable for estafa in relation to
Trust Receipts Law.

Held: Yes. There is no dispute that it was the respondent, who as senior vice-
president of PBM, executed the thirteen (13) trust receipts. As such, the law
points to him as the official responsible for the offense. Since a corporation
cannot be proceeded against criminally because it cannot commit crime in
which personal violence or malicious intent is required, criminal action is
limited to the corporate agents guilty of an act amounting to a crime and
never against the corporation itself (West Coast Life Ins. Co. vs. Hurd, 27
Phil. 401; Times, [I]nc. v. Reyes, 39 SCRA 303).

Thus, the execution by respondent of said receipts is enough to indict him as

the official responsible for violation of PD 115.Though the entrustee is a
corporation, nevertheless, the law specifically makes the officers, employees
or other officers or persons responsible for the offense, without prejudice to
the civil liabilities of such corporation and/or board of directors, officers, or
other officials or employees responsible for the offense. The rationale is that
such officers or employees are vested with the authority and responsibility to
devise means necessary to ensure compliance with the law and, if they fail to
do so, are held criminally accountable; thus, they have a responsible share in
the violations of the law.

If the crime is committed by a corporation or other juridical entity, the

directors, officers, employees or other officers thereof responsible for the
offense shall be charged and penalized for the crime, precisely because of
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the nature of the crime and the penalty therefor. A corporation cannot be
arrested and imprisoned; hence, cannot be penalized for a crime punishable
by imprisonment. However, a corporation may be charged and prosecuted for
a crime if the imposable penalty is fine. Even if the statute prescribes both
fine and imprisonment as penalty, a corporation may be prosecuted and, if
found guilty, may be fined.

A crime is the doing of that which the penal code forbids to be done, or
omitting to do what it commands. A necessary part of the definition of every
crime is the designation of the author of the crime upon whom the penalty is
to be inflicted. When a criminal statute designates an act of a corporation or a
crime and prescribes punishment therefor, it creates a criminal offense which,
otherwise, would not exist and such can be committed only by the
corporation. But when a penal statute does not expressly apply to
corporations, it does not create an offense for which a corporation may be
punished. On the other hand, if the State, by statute, defines a crime that may
be committed by a corporation but prescribes the penalty therefor to be
suffered by the officers, directors, or employees of such corporation or other
persons responsible for the offense, only such individuals will suffer such
penalty. Corporate officers or employees, through whose act, default or
omission the corporation commits a crime, are themselves individually guilty
of the crime. LAMIGO

HERMAN C. CRYSTAL, LAMBERTO C. CRYSTAL, ANN GEORGIA C.

SOLANTE, and DORIS C. MAGLASANG, as Heirs of Deceased SPOUSES
RAYMUNDO I. CRYSTAL and DESAMPARADOS C. CRYSTAL vs. BANK
OF THE PHILIPPINE ISLANDS
G.R. No. 172428; November 28, 2008

Facts: On 28 March 1978, spouses Raymundo and Desamparados Crystal

obtained a P300,000.00 loan in behalf of the Cebu Contractors Consortium
Co. from BPI-Butuan and was secured by a chattel mortgage on heavy
equipment and machinery of CCCC. On the same date, the spouses
executed in favor of BPI-Butuan a Continuing Suretyship where they bound
themselves as surety of CCCC in the aggregate principal sum of not
exceeding P300,000.00. Thereafter, or on 29 March 1979, Raymundo Crystal
executed a promissory note for the amount of P300,000.00, also in favor of
BPI-Butuan.
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CCCC renewed a previous loan, this time from BPI, Cebu City. The
promissory note states that the spouses are jointly and severally liable with
CCCC. It appears that before the original loan could be granted, BPI-Cebu
City required CCCC to put up a security. However, CCCC had no real
property to offer as security for the loan; hence, the spouses executed a real
estate mortgage over their own real property on 22 September 1977.

CCCC failed to pay its loans to both BPI-Butuan and BPI-Cebu City when
they became due. CCCC, as well as the spouses, failed to pay their
obligations despite demands. Thus, BPI resorted to the foreclosure of the
chattel mortgage and the real estate mortgage.

BPI filed a complaint for sum of money against CCCC and the spouses
before the RTC Butuan, seeking to recover the deficiency of the loan. The
trial court ruled in favor of BPI. Pursuant to the decision, BPI instituted
extrajudicial foreclosure of the spouses’ mortgaged property.

On 10 April 1985, the spouses filed an action for Injunction With Damages,
With A Prayer For A Restraining Order and/ or Writ of Preliminary Injunction.
The spouses claimed that the foreclosure of the real estate mortgages is
illegal because BPI should have exhausted CCCC’s properties first, stressing
that they are mere guarantors of the renewed loans. They also prayed that
they be awarded moral and exemplary damages, attorney’s fees, litigation
expenses and cost of suit.

The trial court dismissed the spouses’ complaint and ordered them to pay
moral and exemplary damages and attorney’s fees to BPI.

The case was raised to the CA but the the same was denied. The heirs of the
spouses now come to the SC questioning the trial courts decision in awarding
moral damages in favor of BPI.

Issue: Whether or not BPI being a corporation is entitled to moral damages.

Held: No. A juridical person is generally not entitled to moral damages

because, unlike a natural person, it cannot experience physical suffering or
such sentiments as wounded feelings, serious anxiety, mental anguish or
moral shock. An artificial person like herein appellant corporation cannot
experience physical sufferings, mental anguish, fright, serious anxiety,
wounded feelings, moral shock or social humiliation which are basis of moral
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damages. A corporation may have good reputation which, if besmirched may

also be a ground for the award of moral damages.

The spouses’ complaint against BPI proved to be unfounded, but it does not
automatically entitle BPI to moral damages. LAMIGO

Filipinas Broadcasting Network Inc. vs. Ago Medical and Educational

Center-Bicol Christian College of Medicine (AMEC-BCCM)
GR 141994, 17 January 2005

Facts: “Exposé” is a radio documentary program hosted by Carmelo ‘Mel’

Rima (“Rima”) and Hermogenes ‘Jun’ Alegre (“Alegre”). Exposé is aired every
morning over DZRC-AM which is owned by Filipinas Broadcasting Network,
Inc. (“FBNI”). “Exposé” is heard over Legazpi City, the Albay municipalities
and other Bicol areas. In the morning of 14 and 15 December 1989, Rima and
Alegre exposed various alleged complaints from students, teachers and
parents against Ago Medical and Educational Center-Bicol Christian College
of Medicine (“AMEC”) and its administrators. Claiming that the broadcasts
were defamatory, AMEC and Angelita Ago (“Ago”), as Dean of AMEC’s
College of Medicine, filed a complaint for damages against FBNI, Rima and
Alegre on 27 February 1990. The complaint further alleged that AMEC is a
reputable learning institution. With the supposed exposés, FBNI, Rima and
Alegre “transmitted malicious imputations, and as such, destroyed plaintiffs’
(AMEC and Ago) reputation.” AMEC and Ago included FBNI as defendant for
allegedly failing to exercise due diligence in the selection and supervision of
its employees, particularly Rima and Alegre. On 18 June 1990, FBNI, Rima
and Alegre, through Atty. Rozil Lozares, filed an Answer alleging that the
broadcasts against AMEC were fair and true. FBNI, Rima and Alegre claimed
that they were plainly impelled by a sense of public duty to report the “goings-
on in AMEC, [which is] an institution imbued with public interest.” Thereafter,
trial ensued. During the presentation of the evidence for the defense, Atty.
Edmundo Cea, collaborating counsel of Atty. Lozares, filed a Motion to
Dismiss on FBNI’s behalf. The trial court denied the motion to dismiss.

Consequently, FBNI filed a separate Answer claiming that it exercised due

diligence in the selection and supervision of Rima and Alegre. FBNI claimed
that before hiring a broadcaster, the broadcaster should (1) file an application;
(2) be interviewed; and (3) undergo an apprenticeship and training program
after passing the interview. FBNI likewise claimed that it always reminds its
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broadcasters to “observe truth, fairness and objectivity in their broadcasts and

to refrain from using libelous and indecent language.” Moreover, FBNI
requires all broadcasters to pass the Kapisanan ng mga Brodkaster sa
Pilipinas (“KBP”) accreditation test and to secure a KBP permit.

On 14 December 1992, the trial court rendered a Decision finding FBNI and
Alegre liable for libel except Rima. The trial court held that the broadcasts are
libelous per se. The trial court rejected the broadcasters’ claim that their
utterances were the result of straight reporting because it had no factual
basis. The broadcasters did not even verify their reports before airing them to
show good faith. In holding FBNI liable for libel, the trial court found that FBNI
failed to exercise diligence in the selection and supervision of its employees.
In absolving Rima from the charge, the trial court ruled that Rima’s only
participation was when he agreed with Alegre’s exposé. The trial court found
Rima’s statement within the “bounds of freedom of speech, expression, and
of the press.” Both parties, namely, FBNI, Rima and Alegre, on one hand, and
AMEC and Ago ,on the other, appealed the decision to the Court of Appeals.
The Court of Appeals affirmed the trial court’s judgment with modification. The
appellate court made Rima solidarily liable with FBNI and Alegre. The
appellate court denied Ago’s claim for damages and attorney’s fees because
the broadcasts were directed against AMEC, and not against her. FBNI, Rima
and Alegre filed a motion for reconsideration which the Court of Appeals
denied in its 26 January 2000 Resolution. Hence, FBNI filed the petition for
review.

Issue: Whether or not AMEC is entitled to moral damages.

Held: Yes. A juridical person is generally not entitled to moral damages

because, unlike a natural person, it cannot experience physical suffering or
such sentiments as wounded feelings, serious anxiety, mental anguish or
moral shock. The Court of Appeals cites Mambulao Lumber Co. v. PNB, et al.
to justify the award of moral damages. However, the Court’s statement in
Mambulao that “a corporation may have a good reputation which, if
besmirched, may also be a ground for the award of moral damages” is an
obiter dictum.

Nevertheless, AMEC’s claim for moral damages falls under item 7 of Article
2219 of the Civil Code. This provision expressly authorizes the recovery of
moral damages in cases of libel, slander or any other form of defamation.
Article2219(7) does not qualify whether the plaintiff is a natural or juridical
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person. Therefore, a juridical person such as a corporation can validly

complain for libel or any other form of defamation and claim for moral
damages. Moreover, where the broadcast is libelous per se, the law implies
damages. In such a case, evidence of an honest mistake or the want of
character or reputation of the party libeled goes only in mitigation of damages.

Moreover, where the broadcast is libelous per se, the law implies damages. In
such a case, evidence of an honest mistake or the want of character or
reputation of the party libeled goes only in mitigation of damages. Neither in
such a case is the plaintiff required to introduce evidence of actual damages
as a condition precedent to the recovery of some damages.47 In this case,
the broadcasts are libelous per se. Thus, AMEC is entitled to moral damages.

ABS-CBN BROADCASTING CORPORATION vs. HONORABLE COURT

OF APPEALS, REPUBLIC BROADCASTING CORP, VIVA PRODUCTION,
INC., and VICENTE DEL ROSARIO
G.R. No. 128690 January 21, 1999

Facts: In 1990, ABS CBN and Viva executed a Film Exhibition Agreement
whereby Viva gave ABS CBN an exclusive right to exhibit some Viva films.
Said agreement contained a stipulation that ABS shall have the right of first
refusal to the next 24 Viva films for TV telecast, provided that such right shall
be exercised by ABS from the actual offer in writing.

Hence, through this agreement, Viva offered ABS a list of 36 films from which
ABS may exercise its right of first refusal. ABS however, through VP Concio,
did not accept the list since she could only tick off 10 films. This rejection was
embodied in a letter.
In 1992, Viva again approached ABS with a list consisting of 52 original films
where Viva proposed to sell these airing rights for P60M.

Viva’s Vic del Rosario and ABS’ general manager Eugenio Lopez III met at
the Tamarind Grill to discuss this package proposal. What transcribed at that
meeting was subject to conflicting versions.
According to Lopez, he and del Rosario agreed that ABS was granted
exclusive film rights to 14 films for P36M, and that this was put in writing in a
napkin, signed by Lopez and given to del Rosario. On the other hand, del
Rosario denied the existence of the napkin in which Lopez wrote something,
and insisted that what he and Lopez discussed was Viva’s film package of the
52 original films for P60M stated above, and that Lopez refused said offer,
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allegedly signifying his intent to send a counter proposal. When the counter
proposal arrived, Viva’s BoD rejected it, hence, he sold the rights to the 52
original films to RBS.

Thus, ABS filed before RTC a complaint for specific performance with prayer
for TRO against RBS and Viva. RTC issued the TRO enjoining the airing of
the films subject of controversy. After hearing, RTC rendered its decision in
favor of RBS and Viva contending that there was no meeting of minds on the
price and terms of the offer. The agreement between Lopez and del Rosario
was subject to Viva BoD approval, and since this was rejected by the board,
then, there was no basis for ABS’ demand that a contract was entered into
between them. That the 1990 Agreement with the right of first refusal was
already exercised by Ms. Concio when it rejected the offer, and such 1990
Agreement was an entirely new contract other than the 1992 alleged
agreement at the Tamarind Grill. CA affirmed. Hence, this petition for
certiorari with SC.

Lopez claims that it had not fully exercised its right of first refusal over 24
films since it only chose 10. He insists that SC give credence to his testimony
that he and del Rosario discussed the airing of the remaining 14 films under
the right of first refusal agreement in Tamarind Grill where there was a
contract written in the alleged napkin.

Issue: Whether or not RBS is entitled to moral damages.

Held: No. Moral damages are in the category of an award designed to

compensate the claimant for actual injury suffered. and not to impose a
penalty on the wrongdoer. The award is not meant to enrich the complainant
at the expense of the defendant, but to enable the injured party to obtain
means, diversion, or amusements that will serve to obviate then moral
suffering he has undergone. It is aimed at the restoration, within the limits of
the possible, of the spiritual status quo ante, and should be proportionate to
the suffering inflicted. Trial courts must then guard against the award of
exorbitant damages; they should exercise balanced restrained and measured
objectivity to avoid suspicion that it was due to passion, prejudice, or
corruption on the part of the trial court.

The award of moral damages cannot be granted in favor of a corporation

because, being an artificial person and having existence only in legal
contemplation, it has no feelings, no emotions, no senses, It cannot,
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therefore, experience physical suffering and mental anguish, which call be

experienced only by one having a nervous system. The statement in People
v. Manero and Mambulao Lumber Co. v. PNB that a corporation may recover
moral damages if it "has a good reputation that is debased, resulting in social
humiliation" is an obiter dictum. On this score alone the award for damages
must be set aside, since RBS is a corporation.

The basic law on exemplary damages is Section 5, Chapter 3, Title XVIII,

Book IV of the Civil Code. These are imposed by way of example or
correction for the public good, in addition to moral, temperate, liquidated or
compensatory damages. They are recoverable in criminal cases as part of
the civil liability when the crime was committed with one or more aggravating
circumstances; in quasi-contracts, if the defendant acted with gross
negligence; and in contracts and quasi-contracts, if the defendant acted in a
wanton, fraudulent, reckless, oppressive, or malevolent manner.

It may be reiterated that the claim of RBS against ABS-CBN is not based on
contract, quasi-contract, delict, or quasi-delict, Hence, the claims for moral
and exemplary damages can only be based on Articles 19, 20, and 21 of the
Civil Code. Malice or bad faith is at the core of Articles 19, 20, and 21. Malice
or bad faith implies a conscious and intentional design to do a wrongful act for
a dishonest purpose or moral obliquity. 73 Such must be substantiated by
evidence. There is no adequate proof that ABS-CBN was inspired by malice
or bad faith. LAMIGO

JARDINE DAVIES INC. vs. COURT OF APPEALS and FAR EAST MILLS
SUPPLY CORPORATION
G.R. No. 128066; June 19, 2000

Facts: Facts: In 1992, at the height of the power crisis which the country was
then experiencing, and to remedy and
curtail further losses due to the series of power failures, Pure Foods
Corporation decided to install two (2) 1500 KW generators in its food
processing plant in San Roque, Marikina City. Sometime in November 1992 a
bidding for the supply and installation of the generators was held. Several
suppliers and dealers were invited to attend a pre-bidding conference to
discuss the conditions, propose scheme and specifications that would best
suit the needs of PUREFOODS. Out of the 8 prospective bidders who
attended the pre-bidding conference, only 3 bidders, namely, Far East Mills
Supply Corporation (FEMSCO), Monark and Advance Power submitted bid
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proposals and gave bid bonds equivalent to 5% of their respective bids, as

required.

Thereafter, in a letter dated 12 December 1992 addressed to FEMSCO

President Alfonso Po, PUREFOODS confirmed the award of the contract to
FEMSCO. Immediately, FEMSCO submitted the required performance bond
in the amount of P1,841,187.90 and contractor's all-risk insurance policy in
the amount of P6,137,293.00 which PUREFOODS through its Vice President
Benedicto G. Tope acknowledged in a letter dated 18 December 1992.
FEMSCO also made arrangements with its principal and started the
PUREFOODS project by purchasing the necessary materials. PUREFOODS
on the other hand returned FEMSCO's Bidder's Bond in the amount of
P1,000,000.00, as requested. Later, however, in a letter dated 22 December
1992, PUREFOODS through its Senior Vice President Teodoro L. Dimayuga
unilaterally cancelled the award as "significant factors were uncovered and
brought to (their) attention which dictate (the) cancellation and warrant a total
review and re-bid of (the) project." Consequently, FEMSCO protested the
cancellation of the award and sought a meeting with PUREFOODS. However,
on 26 March 1993, before the matter could be resolved, PUREFOODS
already awarded the project and entered into a contract with JARDINE NELL,
a division of Jardine Davies, Inc. (JARDINE), which incidentally was not one
of the bidders. FEMSCO thus wrote PUREFOODS to honor its contract with
the former, and to JARDINE to cease and desist from delivering and installing
the 2 generators at PUREFOODS. Its demand letters unheeded, FEMSCO
sued both PUREFOODS and JARDINE: PUREFOODS for reneging on its
contract, and JARDINE for its unwarranted interference and inducement. Trial
ensued. After FEMSCO presented its evidence, JARDINE filed a Demurrer to
Evidence. On 27 June 1994 the Regional Trial Court of Pasig, Branch 68,
granted JARDINE's Demurrer to Evidence. On 28 July 1994 the trial court
rendered a decision ordering PUREFOODS: (a) to indemnify FEMSCO the
sum of P2,300,000.00 representing the value of engineering services it
rendered; (b) to pay FEMSCO the sum of US$14,000.00 or its peso
equivalent, and P900,000.00 representing contractor's mark-up on installation
work, considering that it would be impossible to compel PUREFOODS to
honor, perform and fulfill its contractual obligations in view of PUREFOOD's
contract with JARDINE and noting that construction had already started
thereon; (c) to pay attorney's fees in an amount equivalent to 20% of the total
amount due; and, (d) to pay the costs. The trial court dismissed the
counterclaim filed by PUREFOODS for lack of factual and legal basis. Both
FEMSCO and PUREFOODS appealed to the Court of Appeals.
 15

FEMSCO appealed the 27 June 1994 Resolution of the trial court which
granted the Demurrer to Evidence filed by JARDINE resulting in the dismissal
of the complaint against it, while PUREFOODS appealed the 28 July 1994
Decision of the same court which ordered it to pay FEMSCO. On 14 August
1996 the Court of Appeals affirmed in toto the 28 July 1994 Decision of the
trial court. It also reversed the 27 June 1994 Resolution of the lower court and
ordered JARDINE to pay FEMSCO damages for inducing PUREFOODS to
violate the latter's contract with FEMSCO. As such, JARDINE was ordered to
pay FEMSCO P2,000,000.00 for moral damages. In addition, PUREFOODS
was also directed to pay FEMSCO P2,000,000.00 as moral damages and
P1,000,000.00 as exemplary damages as well as 20% of the total amount
due as attorney's fees. On 31 January 1997 the Court of Appeals denied for
lack of merit the separate motions for reconsideration filed by PUREFOODS
and JARDINE. Hence, 2 petitions for review filed were by PUREFOODS and
JARDINE which were subsequently consolidated.

Issue: Whether FEMSCO is entitled to an award for moral damages.

Held: By the unilateral cancellation of the contract, PURE FOODS has acted
with bad faith and this was further aggravated by the subsequent inking of a
contract between Purefoods and Jardine. It is very evident that Purefoods
thought that by the expedient means of merely writing a letter would
automatically cancel or nullify the existing contract entered into by both
parties after a process of bidding. This is a flagrant violation of the express
provisions of the law and is contrary to fair and just dealings to which every
man is due. The Court has awarded in the past moral damages to a
corporation whose reputation has been besmirched. Herein, FEMSCO has
sufficiently shown that its reputation was tarnished after it immediately
ordered equipment from its suppliers on account of the urgency of the project,
only to be canceled later. The Court thus sustain the appellate court's award
of moral damages. The Court however reduced the award from
P2,000,000.00 to P1,000,000.00, as moral damages are never intended to
enrich the recipient. Likewise, the award of exemplary damages by way of
example for the public good is excessive and should be reduced to
P100,000.00. On the other hand, the appellate court erred in ordering
JARDINE to pay moral damages to
FEMSCO as it supposedly induced PUREFOODS to violate the contract with
FEMSCO. While it may seem that PUREFOODS and JARDINE connived to
deceive FEMSCO, there is no specific evidence on record to support such
 16

perception. Likewise, there is no showing whatsoever that JARDINE induced

PUREFOODS. The similarity in the design submitted to PUREFOODS by
both JARDINE and FEMSCO, and the tender of a lower quotation by
JARDINE are insufficient to show that JARDINE indeed induced
PUREFOODS to violate its contract with FEMSCO.

Mambulao Lumber Company vs. Philippine National Bank

G.R. No. L-22973, January 30, 1968

Facts: On May 5, 1956 the plaintiff applied for an industrial loan of P155,000
with the PNB Naga and offered real estate, machinery, logging and
transportation equipments as collaterals. It was approved but for a loan of
P100,000 only. To secure the payment of the loan, the plaintiff mortgaged to
PNB a parcel of land, together with the buildings and improvements existing
thereon, situated in the poblacion of Jose Panganiban (formerly Mambulao),
province of Camarines Norte, and covered by Transfer Certificate of Title No.
381 of the land records of said province, as well as various sawmill
equipment, rolling unit and other fixed assets of the plaintiff, all situated in its
compound in the aforementioned municipality.

On August 2, 1956, the PNB released from the approved loan the sum of
P27,500, for which the plaintiff signed a promissory note wherein it promised
to pay to the PNB the said sum in five equal yearly installments at the rate of
P6,528.40 beginning July 31, 1957, and every year thereafter, the last of
which would be on July 31, 1961.

On October 19, 1956, the PNB made another release of P15,500 as part of
the approved loan granted to the plaintiff and so on the said date, the latter
executed another promissory note wherein it agreed to pay to the former the
said sum in five equal yearly installments at the rate of P3,679.64 beginning
July 31, 1957, and ending on July 31, 1961.

The plaintiff failed to pay the amortization on the amounts released to and
received by it. Repeated demands were made upon the plaintiff to pay its
obligation but it failed or otherwise refused to do so. Upon inspection and
verification made by employees of the PNB, it was found that the plaintiff had
already stopped operation about the end of 1957 or early part of 1958.

PNB requested the sheriff for the foreclosure of the said properties and the
latter took possession of the chattels and a foreclosure sale was done.
 17

On May 24, 1962, several employees of the PNB arrived in the compound of
the plaintiff in Jose Panganiban, Camarines Norte, and they informed Luis
Salgado, Chief Security Guard of the premises, that the properties therein
had been auctioned and bought by the PNB, which in turn sold them to
Mariano Bundok. Upon being advised that the purchaser would take delivery
of the things he bought, Salgado was at first reluctant to allow any piece of
property to be taken out of the compound of the plaintiff. The employees of
the PNB explained that should Salgado refuse, he would be exposing himself
to a litigation wherein he could be held liable to pay big sum of money by way
of damages. Apprehensive of the risk that he would take, Salgado
immediately sent a wire to the President of the plaintiff in Manila, asking
advice as to what he should do. In the meantime, Mariano Bundok was able
to take out from the plaintiff's compound two truckloads of equipment.

In the afternoon of the same day, Salgado received a telegram from plaintiff's
President directing him not to deliver the "chattels" without court order, with
the information that the company was then filing an action for damages
against the PNB. On the following day, May 25, 1962, two trucks and men of
Mariano Bundok arrived but Salgado did not permit them to take out any
equipment from inside the compound of the plaintiff. Thru the intervention,
however, of the local police and PC soldiers, the trucks of Mariano Bundok
were able finally to haul the properties originally mortgaged by the plaintiff to
the PNB, which were bought by it at the foreclosure sale and subsequently
sold to Mariano Bundok.

Upon the foregoing facts, the trial court rendered the decision appealed from
which, as stated in the first paragraph of this opinion, sentenced the
Mambulao Lumber Company to pay to the defendant PNB the sum of
P3,582.52 with interest thereon at the rate of 6% per annum from December
22, 1961 (day following the date of the questioned foreclosure of plaintiff's
chattels) until fully paid, and the costs. Mambulao Lumber Company
interposed the instant appeal.

Issue: Whether Mambulao Lumber is entitled to moral damages.

Held: No. Herein appellant's claim for moral damages, however, seems to
have no legal or factual basis. Obviously, an artificial person like herein
appellant corporation cannot experience physical sufferings, mental anguish,
fright, serious anxiety, wounded feelings, moral shock or social humiliation
 18

which are basis of moral damages. 21 A corporation may have a good

reputation which, if besmirched, may also be a ground for the award of moral
damages. The same cannot be considered under the facts of this case,
however, not only because it is admitted that herein appellant had already
ceased in its business operation at the time of the foreclosure sale of the
chattels, but also for the reason that whatever adverse effects of the
foreclosure sale of the chattels could have upon its reputation or business
standing would undoubtedly be the same whether the sale was conducted at
Jose Panganiban, Camarines Norte, or in Manila which is the place agreed
upon by the parties in the mortgage contract. LAMIGO

PEOPLE OF THE PHILIPPINES vs. NORBERTO MANERO, JR.,

EDILBERTO MANERO, ELPIDIO MANERO, SEVERINO LINES, RUDY
LINES, EFREN PLEÑAGO, ROGER BEDAÑO, RODRIGO ESPIA,
ARSENIO VILLAMOR, JR., JOHN DOE and PETER DOE, accused.
SEVERINO LINES, RUDY LINES, EFREN PLEÑAGO and ROGER
BENDAÑO, accused-appellants.
G.R. Nos. 86883-85 January 29, 1993

Facts: Fr. Tulio Favali was murdered by the herein accused. Informations for
Murder, Attempted Murder and Arson were accordingly filed against those
responsible for the frenzied orgy of violence that fateful day of 11 April 1985.
As these cases arose from the same occasion, they were all consolidated in
Branch 17 of the Regional Trial Court of Kidapawan, Cotabato. The court
found the accused guilty and the judgment included to pay the Pontifical
Institute of Foreign Mission (PIME) Brothers, the congregation to which
Father Tulio Favali belonged, moral damages of P100,000.00.

Issue: Whether the PIME is entitled to such damages.

Held: No. The award of moral damages in the amount of P100,000.00 to the
congregation, the Pontifical Institute of Foreign Mission (PIME) Brothers, is
not proper. There is nothing on record which indicates that the deceased
effectively severed his civil relations with his family, or that he disinherited any
member thereof, when he joined his religious congregation. As a matter of
fact, Fr. Peter Geremias of the same congregation, who was then a parish
priest of Kidapawan, testified that "the religious family belongs to the natural
family of origin."Besides, as We already held, a juridical person is not entitled
to moral damages because, not being a natural person, it cannot experience
physical suffering or such sentiments as wounded feelings, serious anxiety,
 19

mental anguish or moral shock. It is only when a juridical person has a good
reputation that is debased, resulting in social humiliation, that moral damages
may be awarded. LAMIGO

B. Creation

Article XII 1987 Constitution

Section 16. The Congress shall not, except by general law, provide for the
formation, organization, or regulation of private corporations. Government-
owned or controlled corporations may be created or established by special
charters in the interest of the common good and subject to the test of
economic viability.

C. Powers of Corporation

Corporation Code

Sec. 36. Corporate powers and capacity. - Every corporation incorporated

under this Code has the power and capacity:
1. To sue and be sued in its corporate name;
2. Of succession by its corporate name for the period of time stated in the
articles of incorporation and the certificate of incorporation;
3. To adopt and use a corporate seal;
4. To amend its articles of incorporation in accordance with the provisions of
this Code;
5. To adopt by-laws, not contrary to law, morals, or public policy, and to
amend or repeal the same in accordance with this Code;
6. In case of stock corporations, to issue or sell stocks to subscribers and to
sell stocks to subscribers and to sell treasury stocks in accordance with the
provisions of this Code; and to admit members to the corporation if it be a
non-stock corporation;
7. To purchase, receive, take or grant, hold, convey, sell, lease, pledge,
mortgage and otherwise deal with such real and personal property, including
securities and bonds of other corporations, as the transaction of the lawful
business of the corporation may reasonably and necessarily require, subject
to the limitations prescribed by law and the Constitution;
8. To enter into merger or consolidation with other corporations as provided in
this Code;
 20

9. To make reasonable donations, including those for the public welfare or for
hospital, charitable, cultural, scientific, civic, or similar purposes: Provided,
That no corporation, domestic or foreign, shall give donations in aid of any
political party or candidate or for purposes of partisan political activity;
10. To establish pension, retirement, and other plans for the benefit of its
directors, trustees, officers and employees; and
11. To exercise such other powers as may be essential or necessary to carry
out its purpose or purposes as stated in the articles of incorporation.

Sec. 37. Power to extend or shorten corporate term. - A private

corporation may extend or shorten its term as stated in the articles of
incorporation when approved by a majority vote of the board of directors or
trustees and ratified at a meeting by the stockholders representing at least
two-thirds (2/3) of the outstanding capital stock or by at least two-thirds (2/3)
of the members in case of non-stock corporations. Written notice of the
proposed action and of the time and place of the meeting shall be addressed
to each stockholder or member at his place of residence as shown on the
books of the corporation and deposited to the addressee in the post office
with postage prepaid, or served personally: Provided, That in case of
extension of corporate term, any dissenting stockholder may exercise his
appraisal right under the conditions provided in this code. (n)

Sec. 38. Power to increase or decrease capital stock; incur, create or

increase bonded indebtedness. - No corporation shall increase or decrease
its capital stock or incur, create or increase any bonded indebtedness unless
approved by a majority vote of the board of directors and, at a stockholder's
meeting duly called for the purpose, two-thirds (2/3) of the outstanding capital
stock shall favor the increase or diminution of the capital stock, or the
incurring, creating or increasing of any bonded indebtedness. Written notice
of the proposed increase or diminution of the capital stock or of the incurring,
creating, or increasing of any bonded indebtedness and of the time and place
of the stockholder's meeting at which the proposed increase or diminution of
the capital stock or the incurring or increasing of any bonded indebtedness is
to be considered, must be addressed to each stockholder at his place of
residence as shown on the books of the corporation and deposited to the
addressee in the post office with postage prepaid, or served personally.
A certificate in duplicate must be signed by a majority of the directors of the
corporation and countersigned by the chairman and the secretary of the
stockholders' meeting, setting forth:
(1) That the requirements of this section have been complied with;
 21

(2) The amount of the increase or diminution of the capital stock;

(3) If an increase of the capital stock, the amount of capital stock or number of
shares of no-par stock thereof actually subscribed, the names, nationalities
and residences of the persons subscribing, the amount of capital stock or
number of no-par stock subscribed by each, and the amount paid by each on
his subscription in cash or property, or the amount of capital stock or number
of shares of no-par stock allotted to each stock-holder if such increase is for
the purpose of making effective stock dividend therefor authorized;
(4) Any bonded indebtedness to be incurred, created or increased;
(5) The actual indebtedness of the corporation on the day of the meeting;
(6) The amount of stock represented at the meeting; and
(7) The vote authorizing the increase or diminution of the capital stock, or the
incurring, creating or increasing of any bonded indebtedness.

Any increase or decrease in the capital stock or the incurring, creating or

increasing of any bonded indebtedness shall require prior approval of the
Securities and Exchange Commission.
One of the duplicate certificates shall be kept on file in the office of the
corporation and the other shall be filed with the Securities and Exchange
Commission and attached to the original articles of incorporation. From and
after approval by the Securities and Exchange Commission and the issuance
by the Commission of its certificate of filing, the capital stock shall stand
increased or decreased and the incurring, creating or increasing of any
bonded indebtedness authorized, as the certificate of filing may declare:
Provided, That the Securities and Exchange Commission shall not accept for
filing any certificate of increase of capital stock unless accompanied by the
sworn statement of the treasurer of the corporation lawfully holding office at
the time of the filing of the certificate, showing that at least twenty-five (25%)
percent of such increased capital stock has been subscribed and that at least
twenty-five (25%) percent of the amount subscribed has been paid either in
actual cash to the corporation or that there has been transferred to the
corporation property the valuation of which is equal to twenty-five (25%)
percent of the subscription: Provided, further, That no decrease of the capital
stock shall be approved by the Commission if its effect shall prejudice the
rights of corporate creditors.

Non-stock corporations may incur or create bonded indebtedness, or increase

the same, with the approval by a majority vote of the board of trustees and of
at least two-thirds (2/3) of the members in a meeting duly called for the
purpose.
 22

Bonds issued by a corporation shall be registered with the Securities and

Exchange Commission, which shall have the authority to determine the
sufficiency of the terms thereof. (17a)

Sec. 39. Power to deny pre-emptive right. - All stockholders of a stock

corporation shall enjoy pre-emptive right to subscribe to all issues or
disposition of shares of any class, in proportion to their respective
shareholdings, unless such right is denied by the articles of incorporation or
an amendment thereto: Provided, That such pre-emptive right shall not
extend to shares to be issued in compliance with laws requiring stock
offerings or minimum stock ownership by the public; or to shares to be issued
in good faith with the approval of the stockholders representing two-thirds
(2/3) of the outstanding capital stock, in exchange for property needed for
corporate purposes or in payment of a previously contracted debt.

Sec. 40. Sale or other disposition of assets. - Subject to the provisions of

existing laws on illegal combinations and monopolies, a corporation may, by a
majority vote of its board of directors or trustees, sell, lease, exchange,
mortgage, pledge or otherwise dispose of all or substantially all of its property
and assets, including its goodwill, upon such terms and conditions and for
such consideration, which may be money, stocks, bonds or other instruments
for the payment of money or other property or consideration, as its board of
directors or trustees may deem expedient, when authorized by the vote of the
stockholders representing at least two-thirds (2/3) of the outstanding capital
stock, or in case of non-stock corporation, by the vote of at least to two-thirds
(2/3) of the members, in a stockholder's or member's meeting duly called for
the purpose. Written notice of the proposed action and of the time and place
of the meeting shall be addressed to each stockholder or member at his place
of residence as shown on the books of the corporation and deposited to the
addressee in the post office with postage prepaid, or served personally:
Provided, That any dissenting stockholder may exercise his appraisal right
under the conditions provided in this Code.

A sale or other disposition shall be deemed to cover substantially all the

corporate property and assets if thereby the corporation would be rendered
incapable of continuing the business or accomplishing the purpose for which
it was incorporated.
 23

After such authorization or approval by the stockholders or members, the

board of directors or trustees may, nevertheless, in its discretion, abandon
such sale, lease, exchange, mortgage, pledge or other disposition of property
and assets, subject to the rights of third parties under any contract relating
thereto, without further action or approval by the stockholders or members.

Nothing in this section is intended to restrict the power of any corporation,

without the authorization by the stockholders or members, to sell, lease,
exchange, mortgage, pledge or otherwise dispose of any of its property and
assets if the same is necessary in the usual and regular course of business of
said corporation or if the proceeds of the sale or other disposition of such
property and assets be appropriated for the conduct of its remaining
business.
In non-stock corporations where there are no members with voting rights, the
vote of at least a majority of the trustees in office will be sufficient
authorization for the corporation to enter into any transaction authorized by
this section. (28 1/2a)

Sec. 41. Power to acquire own shares. - A stock corporation shall have the
power to purchase or acquire its own shares for a legitimate corporate
purpose or purposes, including but not limited to the following cases:
Provided, That the corporation has unrestricted retained earnings in its books
to cover the shares to be purchased or acquired:
1. To eliminate fractional shares arising out of stock dividends;
2. To collect or compromise an indebtedness to the corporation, arising out of
unpaid subscription, in a delinquency sale, and to purchase delinquent shares
sold during said sale; and
3. To pay dissenting or withdrawing stockholders entitled to payment for their
shares under the provisions of this Code. (n)

Sec. 42. Power to invest corporate funds in another corporation or

business or for any other purpose. - Subject to the provisions of this Code,
a private corporation may invest its funds in any other corporation or business
or for any purpose other than the primary purpose for which it was organized
when approved by a majority of the board of directors or trustees and ratified
by the stockholders representing at least two-thirds (2/3) of the outstanding
capital stock, or by at least two thirds (2/3) of the members in the case of non-
stock corporations, at a stockholder's or member's meeting duly called for the
purpose. Written notice of the proposed investment and the time and place of
the meeting shall be addressed to each stockholder or member at his place of
 24

residence as shown on the books of the corporation and deposited to the

addressee in the post office with postage prepaid, or served personally:
Provided, That any dissenting stockholder shall have appraisal right as
provided in this Code: Provided, however, That where the investment by the
corporation is reasonably necessary to accomplish its primary purpose as
stated in the articles of incorporation, the approval of the stockholders or
members shall not be necessary. (17 1/2a)

Sec. 43. Power to declare dividends. - The board of directors of a stock

corporation may declare dividends out of the unrestricted retained earnings
which shall be payable in cash, in property, or in stock to all stockholders on
the basis of outstanding stock held by them: Provided, That any cash
dividends due on delinquent stock shall first be applied to the unpaid balance
on the subscription plus costs and expenses, while stock dividends shall be
withheld from the delinquent stockholder until his unpaid subscription is fully
paid: Provided, further, That no stock dividend shall be issued without the
approval of stockholders representing not less than two-thirds (2/3) of the
outstanding capital stock at a regular or special meeting duly called for the
purpose. (16a)
Stock corporations are prohibited from retaining surplus profits in excess of
one hundred (100%) percent of their paid-in capital stock, except: (1) when
justified by definite corporate expansion projects or programs approved by the
board of directors; or (2) when the corporation is prohibited under any loan
agreement with any financial institution or creditor, whether local or foreign,
from declaring dividends without its/his consent, and such consent has not yet
been secured; or (3) when it can be clearly shown that such retention is
necessary under special circumstances obtaining in the corporation, such as
when there is need for special reserve for probable contingencies. (n)

Sec. 44. Power to enter into management contract. - No corporation shall

conclude a management contract with another corporation unless such
contract shall have been approved by the board of directors and by
stockholders owning at least the majority of the outstanding capital stock, or
by at least a majority of the members in the case of a non-stock corporation,
of both the managing and the managed corporation, at a meeting duly called
for the purpose: Provided, That (1) where a stockholder or stockholders
representing the same interest of both the managing and the managed
corporations own or control more than one-third (1/3) of the total outstanding
capital stock entitled to vote of the managing corporation; or (2) where a
majority of the members of the board of directors of the managing corporation
 25

also constitute a majority of the members of the board of directors of the

managed corporation, then the management contract must be approved by
the stockholders of the managed corporation owning at least two-thirds (2/3)
of the total outstanding capital stock entitled to vote, or by at least two-thirds
(2/3) of the members in the case of a non-stock corporation. No management
contract shall be entered into for a period longer than five years for any one
term.

The provisions of the next preceding paragraph shall apply to any contract
whereby a corporation undertakes to manage or operate all or substantially all
of the business of another corporation, whether such contracts are called
service contracts, operating agreements or otherwise: Provided, however,
That such service contracts or operating agreements which relate to the
exploration, development, exploitation or utilization of natural resources may
be entered into for such periods as may be provided by the pertinent laws or
regulations. (n)

Sec. 45. Ultra vires acts of corporations. - No corporation under this Code
shall possess or exercise any corporate powers except those conferred by
this Code or by its articles of incorporation and except such as are necessary
or incidental to the exercise of the powers so conferred. (n)

D. Interim Rules of Procedure for Intra-Corporate Matters (w/ the RTC)

RULES OF PROCEDURE ON CORPORATE REHABILITATION

A.M. No. 00-8-10-SC; December 2, 2008

Rule 3 General Provisions

Section 14. Fees and Expenses. - The rehabilitation receiver and the persons
hired by him shall be entitled to reasonable professional fees and
reimbursement of expenses which shall be considered as administrative
expenses.

Securities Regulation Code

SEC. 5. Powers and Functions of the Commission.- 5.1. The Commission

shall act with transparency and shall have the powers and functions provided
by this Code, Presidential Decree No. 902-A, the Corporation Code, the
Investment Houses Law, the Financing Company Act and other existing laws.
 26

Pursuant thereto the Commission shall have, among others, the following
powers and functions:

(a) Have jurisdiction and supervision over all corporations, partnerships or

associations who are the grantees of primary franchises and/or a license or
permit issued by the Government;

(b) Formulate policies and recommendations on issues concerning the

securities market, advise Congress and other government agencies on all
aspects of the securities market and propose legislation and amendments
thereto;

(c) Approve, reject, suspend, revoke or require amendments to registration

statements, and registration and licensing applications;

(d) Regulate, investigate or supervise the activities of persons to ensure

compliance;

(e) Supervise, monitor, suspend or take over the activities of exchanges,

clearing agencies and other SROs;

(f) Impose sanctions for the violation of laws and the rules, regulations and
orders issued pursuant thereto;

(g) Prepare, approve, amend or repeal rules, regulations and orders, and
issue opinions and provide guidance on and supervise compliance with such
rules, regulations and orders;

(h) Enlist the aid and support of and/or deputize any and all enforcement
agencies of the Government, civil or military as well as any private institution,
corporation, firm, association or person in the implementation of its powers
and functions under this Code;

(i) Issue cease and desist orders to prevent fraud or injury to the investing
public;

(j) Punish for contempt of the Commission, both direct and indirect, in
accordance with the pertinent provisions of and penalties prescribed by the
Rules of Court;
 27

(k) Compel the officers of any registered corporation or association to call

meetings of stockholders or members thereof under its supervision;

(l) Issue subpoena duces tecum and summon witnesses to appear in any
proceedings of the Commission and in appropriate cases, order the
examination, search and seizure of all documents, papers, files and records,
tax returns, and books of accounts of any entity or person under investigation
as may be necessary for the proper disposition of the cases before it, subject
to the provisions of existing laws;

(m) 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; and

RENATO REAL vs. SANGU PHILIPPINES, INC. and/ or KIICHI ABE

G.R. No. 168757; January 19, 2011

Facts: Renato Real was the Manager of respondent corporation Sangu

Philippines, Inc. which is engaged in the business of providing manpower for
general services. He filed a complaint for illegal dismissal against the
respondents stating that he was neither notified of the Board meeting during
which his removal was discussed nor was he formally charged with any
infraction.

Respondents, on the other hand, said that Real committed gross acts of
misconduct detrimental to the company since 2000. The LA declared
petitioner as having been illegally dismissed. Sangu appealed to NLRC and
established petitioner’s status as a stockholder and as a corporate officer and
hence, his action against respondent corporation is an intra-corporate
controversy over which the Labor Arbiter has no jurisdiction. NLRC modified
the LA’s decision. On appeal, the CA affirmed the decision of NLRC.
Hence, this petition.

Issue: Whether or not petitioner’s complaint for illegal dismissal constitutes

an intra-corporate controversy.

Held: To determine whether a case involves an intra-corporate controversy,

and is to be heard and decided by the branches of the RTC specifically
designated by the Court to try and decide such cases, two elements must
 28

concur: (a) the status or relationship of the parties, and (2) the nature of the
question that is the subject of their controversy.

The first element requires that the controversy must arise out of intra-
corporate or partnership relations between any or all of the parties and the
corporation x x . The second element requires that the dispute among the
parties be intrinsically connected with the regulation of the corporation. If the
nature of the controversy involves matters that are purely civil in character,
necessarily, the case does not involve an intra-corporate controversy.

Guided by this recent jurisprudence, we thus find no merit in respondents’

contention that the fact alone that petitioner is a stockholder and director of
respondent corporation automatically classifies this case as an intra-corporate
controversy. To reiterate, not all conflicts between the stockholders and the
corporation are classified as intra-corporate. There are other factors to
consider in determining whether the dispute involves corporate matters as to
consider them as intra-corporate controversies.
(n) Exercise such other powers as may be provided by law as well as those
which may be implied from, or which are necessary or incidental to the
carrying out of, the express powers granted the Commission to achieve the
objectives and purposes of these laws.
5.2. The Commission’s jurisdiction over all cases enumerated under Section 5
of Presidential Decree No. 902-A is hereby transferred to the Courts of
general jurisdiction or the appropriate Regional Trial Court: Provided, that the
Supreme Court in the exercise of its authority may designate the Regional
Trial Court branches that shall exercise jurisdiction over these cases. The
Commission shall retain jurisdiction over pending cases involving intra-
corporate disputes submitted for final resolution which should be resolved
within one (1) year from the enactment of this Code. The Commission shall
retain jurisdiction over pending suspension of payments/rehabilitation cases
filed as of 30 June 2000 until finally disposed.

STRATEGIC ALLIANCE DEVELOPMENT CORPORATION vs.

STAR INFRASTRUCTURE DEVELOPMENT CORPORATION ET AL.,
G.R. No. 187872; November 17, 2010

(sorry antok na)

Held: An intra-corporate dispute is understood as a suit arising from intra-

corporate relations29 or between or among stockholders or between any or
 29

all of them and the corporation.30 Applying what has come to be known as
the relationship test, it has been held that the types of actions embraced by
the foregoing definition include the following suits: (a) between the
corporation, partnership or association and the public; (b) between the
corporation, partnership or association and its stockholders, partners,
members, or officers; (c) between the corporation, partnership or association
and the State insofar as its franchise, permit or license to operate is
concerned; and, (d) among the stockholders, partners or associates
themselves.31 As the definition is broad enough to cover all kinds of
controversies between stockholders and corporations, the traditional
interpretation was to the effect that the relationship test brooked no
distinction, qualification or any exemption whatsoever.32

However, the unqualified application of the relationship test has been

modified on the ground that the same effectively divests regular courts of
jurisdiction over cases for the sole reason that the suit is between the
corporation and/or its corporators. It was held that the better policy in
determining which body has jurisdiction over a case would be to consider not
only the status or relationship of the parties but also the nature of the question
that is the subject of their controversy. Under the nature of the controversy
test, the dispute must not only be rooted in the existence of an intra-corporate
relationship, but must also refer to the enforcement of the parties' correlative
rights and obligations under the Corporation Code as well as the internal and
intra-corporate regulatory rules of the corporation.The combined application
of the relationship test and the nature of the controversy test has,
consequently, become the norm in determining whether a case is an intra-
corporate controversy or is purely civil in character.

In the case at bench, STRADEC’s first and second causes of action seek the
nullification of the loan and pledge over its SIDC shareholding contracted by
respondents Yujuico, Sumbilla and Wong as well the avoidance of the notarial
sale of said shares conducted by respondent Caraos.

Applying the relationship test, we find that STRADEC’s first and second
causes of action qualify as intra-corporate disputes since said corporation and
respondent Wong are incorporators and/or stockholders of SIDC. Having
acquired STRADEC’s shares thru the impugned notarial sale conducted by
respondent Caraos, respondent Wong appears to have further transferred
said shares in favor of CTCII, a corporation he allegedly formed with
members of his own family. By reason of said transfer, CTCII became a
 30

stockholder of SIDC and was, in fact, alleged to have been recognized as

such by the latter and its corporate officers.
 31

II. CORPORATE ENTITY

A. DOCTRINE/EFFECTS

1. GALLAGHER VS. GERMANIA BREWING CO.

54 N.W. 115 (1893)

FACTS:
Plaintiff, as assignee of Westphal, brought this action to recover goods sold and
delivered by his assignor (Westphal), to the defendant corporation. However, Barge
and Vander Horck intervened, and stated that they could intervene because they owned
all the capital stock of the defendant, and that no other person but themselves had an
interest in the stock and property of Germania Brewing Co. They also contended that
they had a COA against Westphal which accrued before the assignment to the plaintiff,
and that Westphal was utterly insolvent. The relief they were seeking was that to
equitably set-off their claims against Westphal from those that Gallagher (as Westphal’s
assignee) has against the defendant corp. Gallagher states that Barge and Vander had
no such interest in the litigation as to entitle them to intervene and that their claims
cannot be set off against a claim against the corporation, since a corporation is a legal
entity, entirely distinct from its stockholders.

ISSUE:
WON the claims of Barge and Vander Horck can be equitable set-off against the
claims of Gallagher as against Germania Brewin Corp.

HELD:
No. Their claims against Westphal (Gallagher’s assignor) are not subjects of
equitable set-off to a claim against the defendant corporation.
To allow the set-off in the case at bar, it will be tantamount to totally ignoring the
legal doctrine, or fiction, that a corporation is an entity separate and distinct from the
body of its stockholders. It has been absolutely essential, for the administration of
justice, to treat a corporation as a collective entity, without regard to its individual
shareholders. If the rights or liabilities of a corporation could be affected by the acts of
the stockholders, except when acting in the corporate name, it can easily be seen into
what confusion and chaos corporate affairs would inevitably fall. In as much as the 2
intervenors own all the stock of this corporation (Germania), the facts of this case seem
comparatively free from embarrassments, and the contention of the respondent quite
plausible. But suppose there were 50 other stock holders, what would be the result?
Could interveners then interpose their claims as set-offs, and if so, could they do so to
the full amount of their claims? No. Illustration might be multiplied indefinitely to show
that to recognize any such right would result in the worst sort of complications, and that
the only safe or sound rule is to adhere strictly to the doctrine of a corporate entity
distinct from the individual stockholders.

2. G.R. No. 58168 December 19, 1989

 32

CONCEPCION MAGSAYSAY-LABRADOR, SOLEDAD MAGSAYSAY-CABRERA,

LUISA MAGSAYSAY-CORPUZ, assisted be her husband, Dr. Jose Corpuz,
FELICIDAD P. MAGSAYSAY, and MERCEDES MAGSAYSAY-DIAZ, petitioners,
vs.
THE COURT OF APPEALS and ADELAIDA RODRIGUEZ-MAGSAYSAY, Special
Administratrix of the Estate of the late Genaro F. Magsaysay respondents.
FERNAN, C.J.:

FACTS:
Private respondent Adelaida Rodriguez Magsaysay filed an action against Subic
Land Corporation (SUBIC), among others, to annul the deed of assignment and deed of
mortgage executed in favor of the latter by her late husband. Private respondent alleged
that the subject land of the two deeds was acquired through conjugal funds. Since her
consent to the disposition of the same was not obtained, she claimed that the acts of
assignment and mortgage were done to defraud the conjugal partnership. She further
contended that the same were done without consideration and hence null and void.
Petitioners, sisters of the deceased husband of the private respondent, filed a motion for
intervention on the ground that their brother conveyed to them one-half of his
shareholdings in SUBIC, or about 41%. The trial court denied the motion for intervention
ruling that petitioners have no legal interest because SUBIC has a personality separate
and distinct from its stockholders. The CA confirmed the denial on appeal. Hence, this
petition.

ISSUE:
Whether petitioners, as stockholders of SUBIC, have a legal interest in the action
for annulment of the deed of assignment and deed of mortgage in favor of the
corporation.

HELD:
NO. The Court noted that the interest which entitles person to intervene in a suit
between other parties must be in the matter in litigation and of such direct and
immediate character that the intervenor will either gain or lose by the direct legal
operation and effect of the judgment. In the instant petition, it was said that the interest,
if it exists at all, of petitionersmovants is indirect, contingent, remote, conjectural,
consequential and collateral. At the very least, their interest is purely inchoate, or in
sheer expectancy of a right in the management of the corporation and to share in the
profits thereof and in the properties and assets thereof on dissolution, after payment of
the corporate debts and obligations. While a share of stock represents a proportionate
or aliquot interest in the property of the corporation, it does not vest the owner thereof
with any legal right or title to any of the property, his interest in the corporate property
being equitable or beneficial in nature. Shareholders are in no legal sense the owners of
corporate property, which is owned by the corporation as a distinct legal person.

3. G.R. No. L-18216 October 30, 1962

 33

STOCKHOLDERS OF F. GUANZON AND SONS, INC., petitioners-appellants,

vs.
REGISTER OF DEEDS OF MANILA, respondent-appellee.
BAUTISTA ANGELO, J.

FACTS:
The five stockholders of F. Guanzon and Sons, Inc. (Guanzon) executed an
Affidavit of Liquidation of the assets of the corporation. By virtue of the dissolution, they
have distributed amongst themselves, in proportion to their shareholdings, the assets of
the corporation, including real properties located in Manila. the Certificate of Liquidation
was presented to the Register of Deeds but was denied registration on seven grounds,
which were disputed by the stockholders: (3) The number of parcels of land not certified
in the acknowledgment (5) Registration fees were not paid (6) Documentary stamps
need to be attached to the instrument (7) The judgment of the court approving the
dissolution needs to be presented.
The Consulta, which was elevated to the Commissioner of Land Registration
overruled ground number seven - judgment of court needs to be presented - and
sustained the others.

ISSUE:
Whether or not the Certificate of Liquidation is a conveyance of transfer

HELD:
Properties registered in the name of the corporation are owned by it as an entity
separate and distinct from its members. While shares of stock constitute personal
property, they do not represent property of the corporation. A share of stock only typifies
an aliquot part of the corporation's property or the right to share in its proceeds to that
extent when distributed according to law and equity, but its holder is not the owner of
any part of the capital of the corporation. Nor is he entitled to the possession of any
definite portion of its property or assets.
The act of liquidation made by the stockholders of the corporation of the latter's
assets is not and cannot be considered a partition of community property, but rather a
transfer or conveyance of the title of its assets to the individual stockholders. Since the
purpose of the liquidation, as well as the distribution of the assets, is to transfer their title
from the corporation to the stockholders in proportion to their shareholdings, that
transfer cannot be effected without the corresponding deed of conveyance from the
corporation to the stockholders. It is therefore fair and logical to consider the liquidation
as one in the nature of a transfer or conveyance.

4. G.R. No. L-48627 June 30, 1987

FERMIN Z. CARAM, JR. and ROSA O. DE CARAM, petitioners 

vs.

THE HONORABLE COURT OF APPEALS and ALBERTO V. ARELLANO,
respondents.
CRUZ, J.
 34

FACTS:
Petitioners claim that the Court of Appeals erred in holding them jointly and
severally liable to private respondent. Private respondent was the one responsible for
the preparation of a project study and the one who performed technical services that led
to the organization of the Filipinas Orient Airways. Petitioners justify their claim by
stating that they had no contract with the private respondent. Their position is that as
mere subsequent investors in the corporation that was later created, they should not be
held solidarily liable with the Filipinas Orient Airways, a separate juridical entity, and
with Barretto and Garcia, their co-defendants in the lower court, who were the ones who
requested the said services from the private respondent.

ISSUE:
Whether or not the petitioners are personally liable to private respondent.

HELD:
No. Petitioners were not really involved in the initial steps that finally led to the
incorporation of the Filipinas Orient Airways. The project study was undertaken by the
private respondent at the request of Barretto and Garcia who, upon its completion,
presented it to the petitioners to induce them to invest in the proposed airline. The study
could have been presented to other prospective investors. At any rate, the airline was
eventually organized on the basis of the project study with the petitioners as major
stockholders and, together with Barretto and Garcia, as principal officers.
Petitioners were not involved in the initial stages of the organization of the airline, which
were being directed by Barretto as the main promoter. The petitioners were merely
among the financiers whose interest was to be invited and who were in fact persuaded,
on the strength of the project study, to invest in the proposed airline.
As a bona fide corporation, the Filipinas Orient Airways should alone be liable for
its corporate acts as duly authorized by its officers and directors.
The most that can be said is that petitioners benefited from private respondent’s
services, but that surely is no justification to hold them personally liable therefor.
Otherwise, all the other stockholders of the corporation, including those who came in
later, and regardless of the amount of their share holdings, would be equally and
personally liable also with the petitioners for the claims of the private respondent.
Petition is granted.

5. G.R. No. L-56076 September 21, 1983

PALAY, INC. and ALBERT ONSTOTT, petitioner,
vs.
JACOBO C. CLAVE, Presidential Executive Assistant NATIONAL HOUSING
AUTHORITY and NAZARIO DUMPIT respondents.
MELENCIO-HERRERA, J.

FACTS:
Palay, Inc., through its President, Albert Onstott executed in favor of Nazario
Dumpit, a Contract to Sell a parcel of Land of the Crestview Heights Subdivision in
Antipolo, Rizal, owned by said corporation. The sale price was P23,300.00 with 9%
 35

interest per annum, payable with a downpayment of P4,660.00 and monthly

installments of P246.42 until fully paid. Paragraph 6 of the contract provided for
automatic extrajudicial rescission upon default in payment of any monthly installment
after the lapse of 90 days from the expiration of the grace period of one month, without
need of notice and with forfeiture of all installments paid.
Dumpit paid the downpayment and several installments amounting to
P13,722.50. The last payment was made on December 5, 1967 for installments up to
September 1967.
Almost 6 years later, Dumpit wrote petitioner offering to update all his overdue
accounts with interest, and seeking its written consent to the assignment of his rights to
a certain Lourdes Dizon. Replying petitioners informed respondent that his Contract to
Sell had long been rescinded pursuant to paragraph 6 of the contract, and that the lot
had already been resold. Dumpit questioned the validity of the rescission of the contract
with the NHA. NHA found the rescission void in the absence of either judicial or notarial
demand, ordered Palay, Inc. and Alberto Onstott in his capacity as President of the
corporation, jointly and severally, to refund immediately to Nazario Dumpit the amount
of P13,722.50 .

ISSUE:
WON Onstott, as the President, should be solidarily liable with Palay Inc to
refund the amount.

HELD:
No. Only Palay Inc should refund the payment made by Dumpit
It is important to note that even though there has been a stipulation of automatic
rescission of the contract in case of default of payment of installments, still, a notice
should be given. This was not done in the case at bar.
It is basic that a corporation is invested by law with a personality separate and
distinct from those of the persons composing it as when as from that of any other legal
entity to which it may be related. As a general rule, a corporation may not be made to
answer for acts or liabilities of its stockholders or those of the legal entities to which it
may be connected and vice versa. However, the veil of corporate fiction may be pierced
when it is used as a shield to further an end subversive of justice; or for purposes that
could not have been intended by the law that created it; or to defeat public convenience,
justify wrong, protect fraud, or defend crime or to perpetuate fraud or confuse legitimate
issues; or to circumvent the law or perpetuate deception; or as an alter ego, adjunct or
business conduit for the sole benefit of the stockholders.
We find no badges of fraud on petitioners' part. They had literally relied, albeit
mistakenly, on paragraph 6 of its contract with private respondent when it rescinded the
contract to sell extrajudicially and had sold it to a third person.
In this case, petitioner Onstott was made liable because he was then the
President of the corporation and he was the controlling stockholder. No sufficient proof
exists on record that said petitioner used the corporation to defraud private respondent.
He cannot, therefore, be made personally liable just because he "appears to be the
controlling stockholder". Mere ownership by a single stockholder or by another
 36

corporation is not of itself sufficient ground for disregarding the separate corporate
personality.

6. G.R. No. 91889 August 27, 1993

MANUEL R. DULAY ENTERPRISES, INC., VIRGILIO E. DULAY AND NEPOMUCENO
REDOVAN, petitioners,
vs.
THE HONORABLE COURT OF APPEALS, EDGARDO D. PABALAN, MANUEL A.
TORRES, JR., MARIA THERESA V. VELOSO AND CASTRENSE C. VELOSO,
respondents.
NOCON, J.:

FACTS:
Petitioner Manuel R. Dulay Enterprises, Inc, a domestic corporation with the
following as members of its Board of Directors: Manuel R. Dulay with 19,960 shares and
designated as president, treasurer and general manager, Atty. Virgilio E. Dulay with 10
shares and designated as vice-president and others.
Petitioner corporation through its president, Manuel Dulay, obtained various
loans for the construction of its hotel project, Dulay Continental Hotel (now Frederick
Hotel). It even had to borrow money from petitioner Virgilio Dulay to be able to continue
the hotel project. As a result of said loan, petitioner Virgilio Dulay occupied one of the
unit apartments of the subject property since property since 1973.
On December 23, 1976, Manuel Dulay by virtue of Board Resolution No. 18 of
petitioner corporation sold the subject property to private respondents spouses Maria
Theresa and Castrense Veloso in the amount of P300,000.00 as evidenced by the Deed
of Absolute Sale.
On December 24, 1976, private respondent Maria Veloso, without the knowledge
of Manuel Dulay, mortgaged the subject property to private respondent Manuel A. Torres
for a loan of P250,000.00 which was duly annotated as Entry No. 68139 in TCT No.
23225.
Upon the failure of private respondent Maria Veloso to pay private respondent
Torres, the subject property was sold on April 5, 1978 to private respondent Torres as
the highest bidder in an extrajudicial foreclosure sale as evidenced by the Certificate of
Sheriff's Sale issued on April 20, 1978.
On July 20, 1978, private respondent Maria Veloso executed a Deed of Absolute
Assignment of the Right to Redeem in favor of Manuel Dulay assigning her right to
repurchase the subject property from private respondent Torres as a result of the extra
sale held on April 25, 1978.
As neither private respondent Maria Veloso nor her assignee Manuel Dulay was
able to redeem the subject property within the one year statutory period for redemption,
private respondent Torres filed an Affidavit of Consolidation of Ownership.
On July 21, 1980, petitioner corporation filed an action against private
respondents spouses Veloso and Torres for the cancellation of the Certificate of Sheriff's
Sale.
Metropolitan Trial Court of Pasay City which rendered a decision on April 25,
1985, dispositive portion of which reads, as follows:
 37

Wherefore, judgment is hereby rendered in favor of the plaintiff (herein

private respondents) and against the defendants:
1. Ordering the defendants and all persons claiming possession under them
to vacate the premises.
2. Ordering the defendants to pay the rents in the sum of P500.000 a month
from May, 1979 until they shall have vacated the premises with interest at
the legal rate;
3. Ordering the defendants to pay attorney's fees in the sum of P2,000.00
and P1,000.00 as other expenses of litigation and for them to pay the
costs of the suit.
Not satisfied with said decision, petitioners appealed to the Court of Appeals
which rendered a decision on October 23, 1989, the dispositive portion of which reads,
as follows:
PREMISES CONSIDERED, the decision being appealed should be as it is
hereby AFFIRMED in full.
On November 8, 1989, petitioners filed a Motion for Reconsideration which was
denied on January 26, 1990.
Hence, this petition.

HELD:
Petitioners contend that the respondent court had acted with grave abuse of
discretion when it applied the doctrine of piercing the veil of corporate entity in the
instant case considering that the sale of the subject property between private
respondents spouses Veloso and Manuel Dulay has no binding effect on petitioner
corporation as Board Resolution No. 18 which authorized the sale of the subject
property was resolved without the approval of all the members of the board of directors
and said Board Resolution was prepared by a person not designated by the corporation
to be its secretary.
We do not agree.

Section 101 of the Corporation Code of the Philippines provides:

Sec. 101. When board meeting is unnecessary or improperly held. Unless

the by-laws provide otherwise, any action by the directors of a close corporation
without a meeting shall nevertheless be deemed valid if:
1. Before or after such action is taken, written consent thereto is
signed by all the directors, or
2. All the stockholders have actual or implied knowledge of the action
and make no prompt objection thereto in writing; or
3. The directors are accustomed to take informal action with the
express or implied acquiese of all the stockholders, or
4. All the directors have express or implied knowledge of the action in
question and none of them makes prompt objection thereto in writing.
If a directors' meeting is held without call or notice, an action taken therein
within the corporate powers is deemed ratified by a director who failed to attend,
 38

unless he promptly files his written objection with the secretary of the corporation
after having knowledge thereof.
In the instant case, petitioner corporation is classified as a close corporation and
consequently a board resolution authorizing the sale or mortgage of the subject property
is not necessary to bind the corporation for the action of its president. At any rate,
corporate action taken at a board meeting without proper call or notice in a close
corporation is deemed ratified by the absent director unless the latter promptly files his
written objection with the secretary of the corporation after having knowledge of the
meeting which, in his case, petitioner Virgilio Dulay failed to do.
It is relevant to note that although a corporation is an entity which has a
personality distinct and separate from its individual stockholders or members, the veil of
corporate fiction may be pierced when it is used to defeat public convenience justify
wrong, protect fraud or defend crime. The privilege of being treated as an entity distinct
and separate from its stockholder or members is therefore confined to its legitimate
uses and is subject to certain limitations to prevent the commission of fraud or other
illegal or unfair act. When the corporation is used merely as an alter ego or business
conduit of a person, the law will regard the corporation as the act of that person. The
Supreme Court had repeatedly disregarded the separate personality of the corporation
where the corporate entity was used to annul a valid contract executed by one of its
members.
Consequently, petitioner corporation is liable for the act of Manuel Dulay and the
sale of the subject property to private respondents by Manuel Dulay is valid and binding.
As stated by the trial court:
. . . the sale between Manuel R. Dulay Enterprises, Inc. and the spouses
Maria Theresa V. Veloso and Castrense C. Veloso, was a corporate act of the
former and not a personal transaction of Manuel R. Dulay. This is so because
Manuel R. Dulay was not only president and treasurer but also the general
manager of the corporation. The corporation was a closed family corporation and
the only non-relative in the board of directors was Atty. Plaridel C. Jose who
appeared on paper as the secretary. There is no denying the fact, however, that
Maria Socorro R. Dulay at times acted as secretary. . . ., the Court can not lose
sight of the fact that the Manuel R. Dulay Enterprises, Inc. is a closed family
corporation where the incorporators and directors belong to one single family. It
cannot be concealed that Manuel R. Dulay as president, treasurer and general
manager almost had absolute control over the business and affairs of the
corporation.

7. G.R. No. 129459 September 29, 1998

SAN JUAN STRUCTURAL AND STEEL FABRICATORS, INC., petitioner,
vs.
COURT OF APPEALS, MOTORICH SALES CORPORATION, NENITA LEE
GRUENBERG, ACL DEVELOPMENT CORP. and JNM REALTY AND
DEVELOPMENT CORP., respondents.
PANGANIBAN, J.

FACTS:
 39

San Juan Structural and Steel Fabricators entered into an agreement with
Motorich Sales Corporation through Nenita Gruenberg, corporate treasurer of Motorich,
for the transfer to the former a parcel of land upon a P100,000 earnest money, balance
to be payable within March 2, 1989. Upon payment of the earnest money, and on
March 1, 1989, San Juan allegedly asked to be submitted a computation of the balance
due to Motorich. The latter, despite repeated demands, refused to execute the Deed of
Assignment of the land. San Juan discovered that Motorich entered into a Deed of
Absolute Sale of the land to ACL Development Corporation. Hence, San Juan filed a
complaint with the RTC.
On the other hand, Motorich contends that since Nenita Gruenberg was only the
treasurer of said corporation, and that its president, Reynaldo Gruenberg, did not sign
the agreement entered into by San Juan and Motorich, the treasurer’s signature was
inadequate to bind Motorich to the agreement. Furthermore, Nenita contended that
since San Juan was not able to pay within the stipulated period, no deed of assignment
could be made. The deed was agreed to be executed only after receipt of the cash
payment, and since according to Nenita, no cash payment was made on the due date,
no deed could have been executed.
RTC dismissed the case holding that Nenita Gruenberg was not authorized by
Motorich to enter into said contract with San Juan, and that a majority vote of the BoD
was necessary to sell assets of the corporation in accordance with Sec. 40 of the
Corporation Code. CA affirmed this decision. Hence, this petition with SC.

ISSUES:
(1) Whether or not there was a valid contract existing between San Juan and
Motorich.
(2) Whether or not the veil of corporate fiction could be pierced.

HELD:
(1) No. The contract entered into between Nenita and San Juan cannot bind
Motorich, because the latter never authorized nor ratified such sale. A corporation is a
juridical person separate and distinct from its stockholders or members. Accordingly,
the property of the corporation is not the property of its stockholders and may not be
sold by them without express authorization from the corporation’s BoD. This is in
accordance with Sec. 23 of the Corporation Code.
Indubitably, a corporation can only act through its BoD or, when authorized either
by its by laws or by its board resolution, through its officers or agents in the normal
course of business. The general principles of agency govern the relation between the
corporation and its officers or agents, subject to the AoI, by laws, or relevant provisions
of law. A corporate officer or agent may represent and bind the corporation in
transactions with 3rd persons to the extent that the authority to do so has been
conferred upon him, and this includes powers which have been intentionally conferred,
and also such powers as, in the usual course of the particular business, are incidental
to, or may be implied from, the powers intentionally conferred, powers added by custom
and usage, as usually pertaining to the particular officer or agent, and such apparent
powers as the corporation has caused persons dealing with the officer or agent to
believe that it has conferred. Furthermore, persons dealing with an assumed agent,
 40

whether the assumed agency be a general or special one, are bound at their peril, if
they would hold the principal liable, to ascertain not only the fact of agency but also the
nature and extent of authority, and in case either is controverted, the burden of proof is
upon them to establish it. Unless duly authorized, a treasurer, whose powers are
limited, cannot bind the corporation in a sale of its assets.
In the case at bar, San Juan had the responsibility of ascertaining the extent of
Nenita’s authority to represent the corporation. Selling is obviously foreign to a
corporate treasurer’s function. Neither was real estate sale shown to be a normal
business activity of Motorich. The primary purpose of said corporation is marketing,
distribution, import and export relating to a general merchandising
business. Unmistakably, its treasurer is not cloaked with actual or apparent authority to
buy or sell real property, an activity which falls way beyond the scope of her general
authority.
Acts of corporate officers within the scope of their authority are binding on the
corporation. But when these officers exceed their authority, their actions cannot bind
the corporation, unless it has ratified such acts or is estopped from disclaiming them.

(2) No. San Juan argues that the veil of corporate fiction should be pierced
because the spouses Reynaldo and Nenita Gruenberg own 99.96% of the subscribed
capital stock, they needed no authorization from the BoD to enter into the said contract.
The veil can only be disregarded when it is utilized as a shield to commit fraud,
illegality or inequity, defeat public convenience, confuse legitimate issues, or serve as a
mere alter ego or business conduit of a person or an instrumentality, agency or adjunct
of another corporation. Hence, the question of piercing the veil becomes a matter of
proof. In the case at bar, SC found no reason to pierce the veil. San Juan failed to
establish that said corporation was formed for the purpose of shielding any fraudulent
act of its officers and stockholders.

8. G.R. No. 111008 November 7, 1994

TRAMAT MERCANTILE, INC. AND DAVID ONG
vs.
HON. COURT OF APPEALS AND MELCHOR DE LA CUESTA
VITUG, J.

FACTS:
Melchor de la Cuesta, doing business under the name and style of "Farmers
Machineries," sold to Tramat Mercantile, Inc. ("Tramat"), one (1) unit HINOMOTO
TRACTOR Model MB 1100D. In payment, David Ong, Tramat's president and manager,
issued a check (apparently replacing an earlier postdated check). Tramat, in turn, sold
the tractor, together with an attached lawn mower fabricated by it, to the Metropolitan
Waterworks and Sewerage System ("NAWASA"). David Ong caused a "stop payment"
of the check when NAWASA refused to pay the tractor and lawn mower after
discovering that, aside from some stated defects of the attached lawn mower, the
engine (sold by de la Cuesta) was a reconditioned unit.
Thereafter, de la Cuesta filed an action for the recovery of P33,500.00, as well as
attorney's fees of P10,000.00, and the costs of suit. Ong, in his answer, averred, among
 41

other things, that de la Cuesta had no cause of action; that the questioned transaction
was between plaintiff and Tramat Mercantile, Inc., and not with Ong in his personal
capacity; and that the payment of the check was stopped because the subject tractor
had been priced as a brand new, not as a reconditioned unit.
The RTC ruled in favor of dela cuesta which was affirmed in Toto by the CA

ISSUE:
Whether or not Ong should be held severally liable with Tramat Mercantile Inc.

HELD:
It was, nevertheless, an error to hold David Ong jointly and severally liable with
TRAMAT to de la Cuesta under the questioned transaction. Ong had there so acted, not
in his personal capacity, but as an officer of a corporation, TRAMAT, with a distinct and
separate personality. As such, it should only be the corporation, not the person acting
for and on its behalf, that properly could be made liable thereon. 3
Personal liability of a corporate director, trustee or officer along (although not
necessarily) with the corporation may so validly attach, as a rule, only when —
1. He assents (a) to a patently unlawful act of the corporation, or (b) for bad faith,
or gross negligence in directing its affairs, or (c) for conflict of interest, resulting in
damages to the corporation, its stockholders or other persons;
2. He consents to the issuance of watered stocks or who, having knowledge
thereof, does not forthwith file with the corporate secretary his written objection
thereto;
3. He agrees to hold himself personally and solidarily liable with the corporation;
or
4. He is made, by a specific provision of law, to personally answer for his
corporate action.
In the case at bench, there is no indication that petitioner David Ong could be
held personally accountable under any of the abovementioned cases.
WHEREFORE, the petition is given DUE COURSE and the decision of the trial
court, affirmed by the appellate court, is MODIFIED insofar as it holds petitioner David
Ong jointly and severally liable with Tramat Mercantile, Inc., which portion of the
questioned judgment is SET ASIDE. In all other respects, the decision appealed from is
AFFIRMED. No costs.

9. G.R. No. 80043 June 6, 1991

ROBERTO A. JACINTO, petitioner,
vs.
HONORABLE COURT OF APPEALS and METROPOLITAN BANK AND TRUST
COMPANY, respondents.
DAVIDE, JR., J.

FACTS:
Jacinto is the President and General Manager of Inland Industries and under the
Trust ReceipTs, applied for a Letter of Credit and paid this loan under the Bills of
Exchange to Metropolitan Bank and Trust Co. The company failed to pay thus the
 42

charge against him and the company to pay jointly and severally the plaintiff. In the
reconsideration, Inland chose not to join him in this appeal.
The allegation of the bank is that Inland and Jacinto are one and the same.
There was nothing in the transactions that states that he was doing the transactions in
his official capacity.
RTC: He is in fact the corporation itself. No mention that he did transactions in
his official capacity.
CA: dismissed Jacinto’s appeal. Although Jacinto asserted that the principles
of piercing the fiction of corporate entity should be applied with great caution and not
precipitately, because a dual personality by a corporation and its stockholders would
defeat the principal purpose which a corporation is formed. It is not undisputed
that Jacinto and his wife own the major shares of stocks which is 52%. Jacinto even
asserts that he is not the President of the Corporation and that there are different
officers. But in the evidence, he was the one who signed the trust receipts as president
and manager.

ISSUE:
WON the piercing of the veil was valid even when it was not alleged in the
complaint.

HELD:
Yes. While on the face of the complaint, there is no specific allegation that the
corporation is a mere alter ego of petitioner, subsequent developments, from the
stipulation of facts up to the present of evidence and the examination of witnesses,
unequivocably prove that petitioner and the corporation are one of that he is the
corporation.
No serious objection was heard from petitioner.
Sec. 5 or Rule 10 of Rules of Court states that when evidence is presented by one
party with the express or implied consent of the adverse party, as to issues not alleged
in the pleadings, judgment may be rendered validly as regards those issues ,which shall
be considered as if they have been raised in the pleadings. There is implied consent to
the evidence thus presented when the adverse party fails to object thereto

10. G.R. No. 124293, November 20, 2000

J.G. SUMMIT HOLDINGS, INC., petitioner,
vs.
COURT OF APPEALS; COMMITTEE ON PRIVATIZATION, its Chairman and
Members; ASSET PRIVATIZATION TRUST; and PHILYARDS HOLDINGS, INC.,
respondents.
PUNO, J.:

FACTS:
The National Investment and Development Corporation (NIDC), a government
corporation, entered into a Joint Venture Agreement (JVA) with Kawasaki Heavy
Industries, Ltd. for the construction, operation and management of the Subic National
Shipyard, Inc., later became the Philippine Shipyard and Engineering Corporation
 43

(PHILSECO). Under the JVA, NIDC and Kawasaki would maintain a shareholding
proportion of 60%-40% and that the parties have the right of first refusal in case of a
sale.
Through a series of transfers, NIDC’s rights, title and interest in PHILSECO
eventually went to the National Government. In the interest of national economy, it was
decided that PHILSECO should be privatized by selling 87.67% of its total outstanding
capital stock to private entities. After negotiations, it was agreed that Kawasaki’s right of
first refusal under the JVA be “exchanged” for the right to top by five percent the highest
bid for said shares. Kawasaki that Philyards Holdings, Inc. (PHI), in which it was a
stockholder, would exercise this right in its stead.
During bidding, Kawasaki/PHI Consortium is the losing bidder. Even so, because
of the right to top by 5% percent the highest bid, it was able to top JG Summit’s bid. JG
Summit protested, contending that PHILSECO, as a shipyard is a public utility and,
hence, must observe the 60%-40% Filipino-foreign capitalization. By buying 87.67% of
PHILSECO’s capital stock at bidding, Kawasaki/PHI in effect now owns more than 40%
of the stock.

ISSUE:
* Whether or not PHILSECO is a public utility
* Whether or not Kawasaki/PHI can purchase beyond 40% of PHILSECO’s
stocks
HELD:
YES. A shipyard such as PHILSECO being a public utility as provided by law is
therefore required to comply with the 60%-40% capitalization under the Constitution.
Likewise, the JVA between NIDC and Kawasaki manifests an intention of the parties to
abide by this constitutional mandate. Thus, under the JVA, should the NIDC opt to sell
its shares of stock to a third party, Kawasaki could only exercise its right of first refusal
to the extent that its total shares of stock would not exceed 40% of the entire shares of
stock. The NIDC, on the other hand, may purchase even beyond 60% of the total
shares. As a government corporation and necessarily a 100% Filipino-owned
corporation, there is nothing to prevent its purchase of stocks even beyond 60% of the
capitalization as the Constitution clearly limits only foreign capitalization.
Kawasaki was bound by its contractual obligation under the JVA that limits its right of
first refusal to 40% of the total capitalization of PHILSECO. Thus, Kawasaki cannot
purchase beyond 40% of the capitalization of the joint venture on account of both
constitutional and contractual proscriptions.

B. PIERCING THE CORPORATE VEIL

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

VILLA REY TRANSIT, INC., plaintiff-appellant,
vs.
EUSEBIO E. FERRER, PANGASINAN TRANSPORTATION CO., INC. and PUBLIC
SERVICE COMMISSION,defendants.
 44

EUSEBIO E. FERRER and PANGASINAN TRANSPORTATION CO.,

INC., defendants-appellants.
PANGASINAN TRANSPORTATION CO., INC., third-party plaintiff-appellant,
vs.
JOSE M. VILLARAMA, third-party defendant-appellee.
ANGELES, J.:

FACTS:
Jose M. Villarama was an operator of a bus transportation, under the business
name of Villa Rey Transit, pursuant to certificates of public convenience granted him by
the Public Service Commission (PSC) which authorized him to operate a total of thirty-
two (32) units on various routes or lines from Pangasinan to Manila, and vice-versa. On
January 8, 1959, he sold the aforementioned two certificates of public convenience to
Pantranco with the condition, among others, that the seller Villarama "shall not for a
period of 10 years from the date of this sale, apply for any TPU service identical or
competing with the buyer."
Barely three months thereafter, a corporation called Villa Rey Transit, Inc. The
Corporation bought five certificates of public convenience, forty-nine buses, tools and
equipment from Valentin Fernando. The Sheriff of Manila, levied on two of the five
certificates of public convenience involved therein, pursuant to a writ of execution
issued by the Court of First Instance of Pangasinan in favor of Eusebio Ferrer, plaintiff,
judgment creditor, against Valentin Fernando, defendant, judgment debtor. The Sheriff
made and entered the levy in the records of the PSC. On July 16, 1959, a public sale
was conducted by the Sheriff of the said two certificates of public convenience. Ferrer
was the highest bidder, and a certificate of sale was issued in his name.
The Corporation filed in the Court of First Instance of Manila, a complaint for the
annulment of the sheriff's sale of the aforesaid two certificates of public convenience
(PSC Cases Nos. 59494 and 63780) in favor of the defendant Ferrer, and the
subsequent sale thereof by the latter to Pantranco, against Ferrer, Pantranco and the
PSC.
In separate answers, the defendants Ferrer and Pantranco averred that the
plaintiff Corporation had no valid title to the certificates in question because the contract
pursuant to which it acquired them from Fernando was subject to a suspensive
condition — the approval of the PSC — which has not yet been fulfilled, and, therefore,
the Sheriff's levy and the consequent sale at public auction of the certificates referred to,
as well as the sale of the same by Ferrer to Pantranco, were valid and regular, and
vested unto Pantranco, a superior right thereto.
Pantranco, on its part, filed a third-party complaint against Jose M. Villarama,
alleging that Villarama and the Corporation, are one and the same; that Villarama
and/or the Corporation was disqualified from operating the two certificates in question
by virtue of the aforementioned agreement between said Villarama and Pantranco,
which stipulated that Villarama "shall not for a period of 10 years from the date of this
sale, apply for any TPU service identical or competing with the buyer."

ISSUE:
 45

WON the stipulation between Villarama and Pantranco, as contained in the deed
of sale, that the former "SHALL NOT FOR A PERIOD OF 10 YEARS FROM THE DATE
OF THIS SALE, APPLY FOR ANY TPU SERVICE IDENTICAL OR COMPETING WITH
THE BUYER bind the Corporation?

HELD:
The evidence has disclosed that Villarama, albeit was not an incorporator or
stockholder of the Corporation, alleging that he did not become such, because he did
not have sufficient funds to invest, his wife, however, was an incorporator with the least
subscribed number of shares, and was elected treasurer of the Corporation. The
finances of the Corporation which, under all concepts in the law, are supposed to be
under the control and administration of the treasurer keeping them as trust fund for the
Corporation, were, nonetheless, manipulated and disbursed as if they were the private
funds of Villarama, in such a way and extent that Villarama appeared to be the actual
owner-treasurer of the business without regard to the rights of the stockholders. The
following testimony of Villarama, together with the other evidence on record, attests to
that effect.
Villarama supplied the organization expenses and the assets of the Corporation,
such as trucks and equipment; there was no actual payment by the original subscribers
of the amounts of P95,000.00 and P100,000.00 as appearing in the books; Villarama
made use of the money of the Corporation and deposited them to his private
accounts; and the Corporation paid his personal accounts.
Villarama himself admitted that he mingled the corporate funds with his own
money. He also admitted that gasoline purchases of the Corporation were made in his
name because "he had existing account with Stanvac which was properly secured and
he wanted the Corporation to benefit from the rebates that he received.”
The foregoing circumstances are strong persuasive evidence showing that
Villarama has been too much involved in the affairs of the Corporation to altogether
negative the claim that he was only a part-time general manager. They show beyond
doubt that the Corporation is his alter ego.
The doctrine that a corporation is a legal entity distinct and separate from the
members and stockholders who compose it is recognized and respected in all cases
which are within reason and the law. When the fiction is urged as a means of
perpetrating a fraud or an illegal act or as a vehicle for the evasion of an existing
obligation, the circumvention of statutes, the achievement or perfection of a monopoly
or generally the perpetration of knavery or crime, the veil with which the law covers and
isolates the corporation from the members or stockholders who compose it will be lifted
to allow for its consideration merely as an aggregation of individuals.
Upon the foregoing considerations, We are of the opinion, and so hold, that the
preponderance of evidence have shown that the Villa Rey Transit, Inc. is an alter ego of
Jose M. Villarama, and that the restrictive clause in the contract entered into by the
latter and Pantranco is also enforceable and binding against the said Corporation. For
the rule is that a seller or promisor may not make use of a corporate entity as a means
of evading the obligation of his covenant.31 Where the Corporation is substantially
the alter ego of the covenantor to the restrictive agreement, it can be enjoined from
competing with the covenantee.
 46

2. G.R. No. L-5081 February 24, 1954

MARVEL BUILDING CORPORATION, ET AL., plaintiffs-appellees,
vs.
SATURNINO DAVID, in his capacity as Collector, Bureau of Internal Revenue,
defendant-appellant.
LABRADOR, J.

FACTS:
(happened around 1950)
Plaintiffs brought this action as stockholders of Marvel enjoining the CIR from
selling at public auction various properties, three lands with buildings, which were under
the name of the corporation.
Seized by CIR and detained for the collection of war profits taxes assessed
against Maria Castro. Plaintiffs assert that these properties belong to the corpo and not
to Maria.
RTC: CIR failed to prove that Maria is the true owner of all the stock certificates
of the corpo. An evidence susceptible of two interpretations, the interpretation which
would deprive one of property without the due process of the law should not be made.
Sec. of Finance: considered the report of a special committee assigned to study
the war profit taxes of Mrs. Castro recommended the collection of war profits taxes and
instructed the CIR to collect the same.

ISSUE:
WON the properties were owned by the corporation or by Maria? (Why does
Maria want to assert the existence of a corporation? Because of the limited liability
which shall be the shares of the relatives and not all).

HELD:
Not the corpo’s but Maria’s as the true sole owner.
Evidence:
1) Endorsement in blank of the shares of stock issued in the name of the other
incorporators, and the possession thereof by Maria. All of the certificates EXCEPT that
in the name of Maria were endorsed in blank by the subscribers. (witnesses Aquino as
IR examiner, Mariano as examiner, and Llamado, USec of Finance).
Plaintiffs are claiming that these endorsement could have been superimposed
however the court said that it is a mere possibility and the circumstances prove that they
were not superimposed.
2) The stockholders did not have incomes in such amounts during the time of the
organization or immediately thereto as to enable them to pay in full for their supposed
subscriptions. Proved by their tax return or the absence thereof. There was a prima
facie case that Castro had furnished all the money that the Marvel Building Corpo had.
3)If they really wanted to prove that they paid for the subscription, they could
have just showed receipts to testify their payments. But they refused to do so. There
was evidence that there were 25 certificates which were signed by the president.
There is evidence of the motive of Castro to evade taxes.
 47

IF YOU ARE THE TRUE OWNERS OF THE SHARES, YOU WILL ALWAYS
ASK FOR RECEIPTS AS PROOF OF PAYMENT FOR YOUR SUBSCRIPTION.

3. G.R. No. L-33172 October 18, 1979

ERNESTO CEASE, CECILIA CEASE, MARION CEASE, TERESA CEASE-LACEBAL
and the F.L. CEASE PLANTATION CO., INC. as Trustee of properties of the defunct
TIAONG MILLING & PLANTATION CO., petitioners,
vs.
HONORABLE COURT OF APPEALS, (Special Seventh Division), HON. MANOLO L.
MADDELA, Presiding Judge, Court of First Instance of Quezon, BENJAMIN
CEASE and FLORENCE CEASE, respondents.
GUERRERO, J.

FACTS:
Sometime in June 1908, one Forrest L. Cease with 5 other American citizens
organized the Tiaong Milling and Plantation Company, which acquired various
properties in the course of its corporate existence the company. Forrest with his
children bought out all the other original incorporators. The charter of the company
lapsed in June 1958, but there was no mention whether there were steps to liquidate it.
On 13 August 1959, Forrest died and by extrajudicial partition of his shares, among the
children; but Benjamin and Florence wanted an actual division while the other children,
wanting reincorporation, proceeded to incorporate themselves into the F.L. Cease
Plantation Company and registered it with the SEC. Benjamin and Florence for their
part initiated a Special Proceeding with the CFI of Tayabas for the settlement of the
estate of Forrest Cease and likewise filed a Civil Case asking that the Tiaong Milling
and be declared identical to Forrest and that its properties be divided among his
children as his intestate heirs. On the eve of the expiry of the 3 year period provided
by the law for the liquidation of corporations, the board of liquidators of Tiaong
Milling executed an assignment and conveyance of properties and trust agreement in
favor of F.L. Cease Plantation Co. Inc. as trustee of the Tiaong Milling.
Both aforementioned cases were assigned to Hon. Maddela of the CFI of
Quezon, who adjudicated the partition of the estate, concluding that the assets or
properties of the defunct company is also the estate of the deceased proprietor.
Petitioners opposed It was arguing that no evidence has been found to support the
conclusion that the registered properties of Tiaong Milling are also properties of the
estate of Forrest L. Cease; that on the contrary, said properties are registered under Act
No. 496 in the name of Tiaong Milling as lawful owner and possessor for the last 50
years of its corporate existence.

ISSUE:
Are the registered properties of Tiaong Milling also that of the estate of Forrest L.
Cease?

HELD:
YES. When Tiaong Milling adduced its defense and raised the issue of
ownership, its corporate existence already terminated through the expiration of its
 48

charter. It is clear in Section 77 of Act No. 1459 (Corporation Law) that upon the
expiration of the charter period, the corporation ceases to exist and is dissolved ipso
facto except for purposes connected with the winding up and liquidation. The provision
allows a three year, period from expiration of the charter within which the entity
gradually settles and closes its affairs, disposes and convey its property and to divide its
capital stock, but not for the purpose of continuing the business for which it was
established. At this terminal stage of its existence, Tiaong Milling may no longer persist
to maintain adverse title and ownership of the corporate assets as against the
prospective distributees when at this time it merely holds the property in trust, its
assertion of ownership is not only a legal contradiction, but more so, to allow it to
maintain adverse interest would certainly thwart the very purpose of liquidation and the
final distribute loll of the assets to the proper parties.
The trial court did aptly apply the familiar exception to the general rule by
disregarding the legal fiction of distinct and separate corporate personality and
regarding the corporation and the individual member one and the same, shredding the
fictitious corporate veil.
While the records showed that originally its incorporators were aliens, friends or
third-parties in relation of one to another, in the course of its existence, it developed into
a close family corporation. The Board of Directors and stockholders belong to one
family the head of which Forrest always retained the majority stocks and hence the
control and management of its affairs. As his children increase or perhaps become of
age, he continued distributing his shares among them adding Florence, Teresa and
Marion until at the time of his death only 190 were left to his name. Definitely, only the
members of his family benefited from the Corporation.
The accounts of the corporation and therefore its operation, as well as that of the
family appears to be indistinguishable and apparently joined together. The corporation
'never' had any account with any banking institution or if any account was carried in a
bank on its behalf, it was in the name of Forrest. In brief, the operation of the
Corporation is merged with those of the majority stockholders, the latter using the
former as his instrumentality and for the exclusive benefits of all his family. From the
foregoing indication, therefore, there is truth in plaintiff's allegation that the corporation is
only a business conduit of his father and an extension of his personality, they are one
and the same thing. Thus, the assets of the corporation are also the estate of Forrest L.
Cease, the father of the parties herein who are all legitimate children of full blood.
DOCTRINE OF DISREGARDING OR PIERCING THE VEIL OF CORPORATE
FICTION:
GENERAL RULE: A corporation is invested by law with a personality separate
and distinct from that of the persons composing it as well as from that of any other legal
entity to which it may be related. By virtue of this attribute, a corporation may not be
made to answer for acts or liabilities of its stockholders or those of the legal entities to
which it may be connected, and vice versa. This separate and distinct personality is,
however, merely a fiction created by law for convenience and to promote the ends of
justice.
EXCEPTION: This rule may not be used or invoked for ends subversive of the
policy and purpose behind its creation or which could not have been intended by law to
which it owes its being. This is particularly true where the fiction is used to defeat public
 49

convenience, justify wrong, protect fraud, defend crime, confuse legitimate legal or
judicial issues, perpetrate deception or otherwise circumvent the law. This is likewise
true where the corporate entity is being used as an alter ego, adjunct, or business
conduit for the sole benefit of the stockholders or of another corporate entity.
The notion of corporate entity will be pierced or disregarded, and the
corporation will be treated merely as an association of persons or, where there
are two corporations, they will be merged as one, the one being merely regarded
as part or the instrumentality of the other.
An indubitable deduction from the findings of the trial court cannot but lead to the
conclusion that the business of the corporation is largely, if not wholly, the personal
venture of Forrest. There is not even a shadow of a showing that his children were
subscribers or purchasers of the stocks they own. Their participation as nominal
shareholders emanated solely from Forrest's gratuitous dole out of his own shares to
the benefit of his children and ultimately his family.
Were the theory of petitioners based on the assumption that the assets and
properties of Tiaong Milling now appearing under the name of F. L. Cease Plantation
Co. as Trustee are distinct and separate from the estate of Forrest L. Cease to which
petitioners and respondents as legal heirs are equally entitled share and share alike is
sustained, then that legal fiction of separate corporate personality shall have been used
to delay and ultimately deprive and defraud the respondents of their successional rights
to the estate of their deceased father. Tiaong Milling shall have been able to extend its
corporate existence beyond the period of its charter which lapsed, under the guise and
cover of F. L. Cease Plantation Co., Inc. as Trustee which would be against the law, and
as Trustee shall have been able to use the assets and properties for the benefit of the
petitioners, to the great prejudice and defraudation of private respondents. Hence, it
becomes necessary and imperative to pierce that corporate veil.

4. G.R. No. 160039 June 29, 2004

RAYMUNDO ODANI SECOSA, EL BUENASENSO SY and DASSAD
WAREHOUSING and PORT SERVICES, INCORPORATED, petitioners,
vs.
HEIRS OF ERWIN SUAREZ FRANCISCO, respondents.
YNARES-SANTIAGO, J.

FACTS:

On June 27, 1996, at around 4:00 p.m., Erwin Suarez Francisco was riding a
motorcycle along Radial 10 Avenue, near the Veteran Shipyard Gate in the City of
Manila. At the same time, petitioner, Raymundo Odani Secosa, was driving an Isuzu
cargo truck on the same road. The truck was owned by petitioner, Dassad Warehousing
and Port Services, Inc.
Traveling behind the motorcycle driven by Francisco was a sand and gravel
truck, which in turn was being tailed by the Isuzu truck driven by Secosa. The three
vehicles were traversing the southbound lane at a fairly high speed. When Secosa
overtook the sand and gravel truck, he bumped the motorcycle causing Francisco to fall.
The rear wheels of the Isuzu truck then ran over Francisco, which resulted in his
 50

instantaneous death. Fearing for his life, petitioner Secosa left his truck and fled the
scene of the collision.
Respondents, the parents of Erwin Francisco, thus filed an action for damages
against Raymond Odani Secosa, Dassad Warehousing and Port Services, Inc. and
Dassad’s president, El Buenasucenso Sy.
On June 19, 1998, after a full-blown trial, the court a quo rendered a decision in
favor of herein respondents which was affirmed by the Court of Appeals.
ISSUE:
Whether or not Buenasucenso Sy is solidarily liable with his co-petitioners
HELD:
Petitioner El Buenasenso Sy cannot be held solidarily liable with his co-
petitioners. While it may be true that Sy is the president of petitioner Dassad
Warehousing and Port Services, Inc., such fact is not by itself sufficient to hold him
solidarily liable for the liabilities adjudged against his co-petitioners.
It is a settled precept in this jurisdiction that a corporation is invested by law with
a personality separate from that of its stockholders or members. It has a personality
separate and distinct from those of the persons composing it as well as from that of any
other entity to which it may be related. Mere ownership by a single stockholder or by
another corporation of all or nearly all of the capital stock of a corporation is not in itself
sufficient ground for disregarding the separate corporate personality. A corporation’s
authority to act and its liability for its actions are separate and apart from the individuals
who own it.
The so-called veil of corporation fiction treats as separate and distinct the affairs
of a corporation and its officers and stockholders. As a general rule, a corporation will
be looked upon as a legal entity, unless and until sufficient reason to the contrary
appears. When the notion of legal entity is used to defeat public convenience, justify
wrong, protect fraud, or defend crime, the law will regard the corporation as an
association of persons. Also, the corporate entity may be disregarded in the interest of
justice in such cases as fraud that may work inequities among members of the
corporation internally, involving no rights of the public or third persons. In both
instances, there must have been fraud and proof of it. For the separate juridical
personality of a corporation to be disregarded, the wrongdoing must be clearly and
convincingly established. It cannot be presumed.
The records of this case are bereft of any evidence tending to show the presence
of any grounds enumerated above that will justify the piercing of the veil of corporate
fiction such as to hold the president of Dassad Warehousing and Port Services, Inc.
solidarily liable with it.
The Isuzu cargo truck which ran over Erwin Francisco was registered in the name of
Dassad Warehousing and Port Services, Inc., and not in the name of El Buenasenso
Sy. Raymundo Secosa is an employee of Dassad Warehousing and Port Services, Inc.
and not of El Buenasenso Sy. All these things, when taken collectively, point toward El
Buenasenso Sy’s exclusion from liability for damages arising from the death of Erwin
Francisco.

5. G.R. No. 108734. May 29, 1996

CONCEPT BUILDERS, INC., petitioner,
 51

vs.
THE NATIONAL LABOR RELATIONS COMMISSION, (First Division); and Norberto
Marabe, Rodolfo Raquel, Cristobal Riego, Manuel Gillego, Palcronio Giducos,
Pedro Aboigar, Norberto Comendador, Rogello Salut, Emilio Garcia, Jr., Mariano
Rio, Paulina Basea, Aifredo Albera, Paquito Salut, Domingo Guarino, Romeo
Galve, Dominador Sabina, Felipe Radiana, Gavino Sualibio, Moreno Escares,
Ferdinand Torres, Felipe Basilan, and Ruben Robalos, respondents.
HERMOSISIMA, JR., J.

FACTS:
Petitioner Concept Builders, Inc., a domestic corporation, is engaged in the
construction business. Private respondents were employed by said company as
laborers, carpenters and riggers. Private respondents were served individual written
notices of termination of employment by petitioner which states that their contracts of
employment had expired and the project in which they were hired had been completed.
Public respondent found it to be, the fact, however, that at the time of the
termination of private respondent’s employment, the project in which they were hired
had not yet been finished and completed. Petitioner had to engage the services of sub-
contractors whose workers performed the functions of private respondents.
Aggrieved, private respondents filed a complaint for illegal dismissal, unfair labor
practice and non-payment of their legal holiday pay, overtime pay and thirteenth-month
pay against petitioner.
The Labor Arbiter rendered judgment ordering petitioner to reinstate private
respondents and to pay them back wages equivalent to one year or three hundred
working days. The NLRC Research and Information Department made the finding that
private respondents’ backwages amounted to P199,800.00. Labor Arbiter issued a writ
of execution directing the sheriff to execute the Decision.
An Alias Writ of Execution was issued by the Labor Arbiter directing the sheriff to
collect from herein petitioner the sum of P117,414.76, representing the balance of the
judgment award, and to reinstate private respondents to their former positions.
The sheriff issued a report stating that he tried to serve the alias writ of execution
on petitioner through the security guard on duty but the service was refused on the
ground that petitioner no longer occupied the premises.
The said special sheriff recommended that a “break-open order” be issued to
enable him to enter petitioner’s premises so that he could proceed with the public
auction sale of the aforesaid personal properties.
A certain Dennis Cuyegkeng filed a third-party claim with the Labor Arbiter
alleging that the properties sought to be levied upon by the sheriff were owned by Hydro
(Phils.), Inc. (HPPI) of which he is the Vice-President.
Private respondents filed a “Motion for Issuance of a Break-Open Order,” alleging
that HPPI and petitioner corporation were owned by the same incorporator!
stockholders. They also alleged that petitioner temporarily suspended its business
operations in order to evade its legal obligations to them and that private respondents
were willing to post an indemnity bond to answer for any damages which petitioner and
HPPI may suffer because of the issuance of the break-open order.
 52

HPPI filed an Opposition to private respondents’ motion for issuance of a break-

open order, contending that HPPI is a corporation which is separate and distinct from
petitioner. HPPI also alleged that the two corporations are engaged in two different
kinds of businesses, i.e., HPPI is a manufacturing firm while petitioner was then
engaged in construction.
Labor Arbiter issued an Order which denied private respondents’ motion for
break-open order.
Private respondents then appealed to the NLRC. On April 23, 1992, the NLRC
set aside the order of the Labor Arbiter, issued a break-open order and directed private
respondents to file a bond. Thereafter, it directed the sheriff to proceed with the auction
sale of the properties already levied upon. It dismissed the third-party claim for lack of
merit.
Petitioner moved for reconsideration but the motion was denied by the NLRC in a
Resolution, dated December 3, 1992.
Hence, the resort to the present petition.

ISSUE:
Whether or not the doctrine of piercing the corporate veil should be applied in this
case in the absence of any showing that it created HPPI in order to evade its liability to
private respondents.

HELD:
Yes.
It is a fundamental principle of corporation law that a corporation is an entity
separate and distinct from its stockholders and from other corporations to which it may
be connected. But, this separate and distinct personality of a corporation is merely a
fiction created by law for convenience and to promote justice. So, when the notion of
separate juridical personality is used to defeat public convenience, justify wrong, protect
fraud or defend crime, or is used as a device to defeat the labor laws, this separate
personality of the corporation may be disregarded or the veil of corporate fiction pierced.
This is true likewise when the corporation is merely an adjunct, a business conduit or an
alter ego of another corporation.
The conditions under which the juridical entity may be disregarded vary
according to the peculiar facts and circumstances of each case. No hard and fast rule
can be accurately laid down, but certainly, there are some probative factors of identity
that will justify the application of the doctrine of piercing the corporate veil, to wit:
“1. Stock ownership by one or common ownership of both corporations.
2. Identity of directors and officers.
3. The manner of keeping corporate books and records.
4. Methods of conducting the business."
The test in determining the applicability of the doctrine of piercing the veil of
corporate fiction is as follows:
“1. Control, not mere majority or complete stock control, but complete
domination, not only of finances but of policy and business practice in respect to
the transaction attacked so that the corporate entity as to this transaction had at
the time no separate mind, will or existence of its own;
 53

2. Such control must have been used by the defendant to commit fraud or
wrong, to perpetuate the violation of a statutory or other positive legal duty, or
dishonest and unjust act in contravention of plaintiff’s legal rights; and
3. The aforesaid control and breach of duty must proximately cause the
injury or unjust loss complained of.
The absence of any one of these elements prevents ‘piercing the corporate veil. ‘
in applying the ‘instrumentality’ or ‘alter ego’ doctrine, the courts are concerned with
reality and not form, with how the corporation operated and the individual defendant’s
relationship to that operation. “
Thus, the question of whether a corporation is a mere alter ego, a mere sheet or
paper corporation, a sham or a subterfuge is purely one of fact.
In this case, the NLRC noted that, while petitioner claimed that it ceased its
business operations on April 29, 1986, it filed an Information Sheet with the Securities
and Exchange Commission on May 15, 1987, stating that its office address is at 355
Maysan Road, Valenzuela, Metro Manila. On the other hand, HPPI, the third-party
claimant, submitted on the same day, a similar information sheet stating that its office
address is at 355 Maysan Road, Valenzuela, Metro Manila.
Furthermore, the NLRC stated that:
“Both information sheets were filed by the same Virgilio O. Casino as the
corporate secretary of both corporations. It would also not be amiss to note that both
corporations had the same president, the same board of directors, the same corporate
officers, and substantially the same subscribers.
From the foregoing, it appears that, among other things, the respondent (herein
petitioner) and the third-party claimant shared the same address and/or premises.
Under this circumstances, (sic) it cannot be said that the property levied upon by the
sheriff were not of respondents.
Clearly, petitioner ceased its business operations in order to evade the payment
to private respondents of backwages and to bar their reinstatement to their former
positions. HPPI is obviously a business conduit of petitioner corporation and its
emergence was skillfully orchestrated to avoid the financial liability that already attached
to petitioner corporation.
It is very obvious that the second corporation seeks the protective shield of a
corporate fiction whose veil in the present case could, and should, be pierced as it was
deliberately and maliciously designed to evade its financial obligation to its employees.”

6. G.R. No. L-30822 July 31, 1975

EDUARDO CLAPAROLS, ROMULO AGSAM and/or CLAPAROLS STEEL AND NAIL
PLANT, petitioners,
vs.
COURT OF INDUSTRIAL RELATIONS, ALLIED WORKERS' ASSOCIATION and/or
DEMETRIO GARLITOS, ALFREDO ONGSUCO, JORGE SEMILLANO, SALVADOR
DOROTEO, ROSENDO ESPINOSA, LUDOVICO BALOPENOS, ASER AMANCIO,
MAXIMO QUIOYO, GAUDENCIO QUIOYO, and IGNACIO QUIOYO, respondents.
MAKASIAR, J.
 54

FACTS:
It appears that on August 6, 1957, a complaint for unfair labor practice was filed
by herein private respondent Allied Workers' Association, respondent Demetrio Garlitos
and ten (10) respondent workers against herein petitioners on account of the dismissal
of respondent workers from petitioner Claparols Steel and Nail Plant.
On September 16, 1963, respondent Court rendered its decision finding "Mr.
Claparols guilty of union busting and" of having "dismissed said complainants because
of their union activities," and ordering respondents "(1) To cease and desist from
committing unfair labor practices against their employees and laborers; (2) To reinstate
said complainants to their former or equivalent jobs, as soon as possible, with back
wages from the date of their dismissal up to their actual reinstatement"
A motion to reconsider the above decision was filed by herein petitioners, which
respondent Court, sitting en banc, denied in a resolution dated January 27, 1964.
On March 30, 1964, counsel for herein respondent workers (complainants in the
ULP case) filed a motion for execution of respondent Court's September 16, 1963
decision.
However, the petitioners resist the execution of the said judgment because
allegedly Claparols Steel and Nail Plant was succeeded by Claparols Steel Corporation.

ISSUE:
Is the successor company liable for the execution of the judgment in this case?

HELD:
Petitioners insist that We adopt the ruling in the Sta. Cecilia Sawmills case
wherein the recoverable back wages were limited to only three (3) months; because as
in the Sta. Cecilia Sawmills case, the Claparols Steel and Nail Plant ceased operations
due to enormous business reverses.
Respondent Court's findings that indeed the Claparols Steel and Nail Plant,
which ceased operation of June 30, 1957, was SUCCEEDED by the Claparols Steel
Corporation effective the next day, July 1, 1957 up to December 7, 1962, when the
latter finally ceased to operate, were not disputed by petitioners. It is very clear that the
latter corporation was a continuation and successor of the first entity, and its emergence
was skillfully timed to avoid the financial liability that already attached to its predecessor,
the Claparols Steel and Nail Plant. Both predecessors and successor were owned and
controlled by the petitioner Eduardo Claparols and there was no break in the succession
and continuity of the same business. This "avoiding-the-liability" scheme is very patent,
considering that 90% of the subscribed shares of stocks of the Claparols Steel
Corporation (the second corporation) was owned by respondent (herein petitioner)
Claparols himself, and all the assets of the dissolved Claparols Steel and Nail Plant
were turned over to the emerging Claparols Steel Corporation.
It is very obvious that the second corporation seeks the protective shield of a
corporate fiction whose veil in the present case could, and should, be pierced as it was
deliberately and maliciously designed to evade its financial obligation to its employees.
It is well remembering that in Yutivo & Sons Hardware Company vs. Court of Tax
Appeals (L-13203, Jan. 28, 1961, 1 SCRA 160), We held that when the notion of legal
 55

entity is used to defeat public convenience, justify wrong, protect fraud, or defend crime,
the law will regard the corporation as an association or persons, or, in the case of two
corporations, will merge them into one.

7. G.R. No. L-11938 May 18, 1962

LA CAMPANA STARCH & COFFEE FACTORY, ET AL., petitioners,
vs.
KAISAHAN NG MGA MANGGAGAWA SA LA CAMPANA (KKM), ET AL.,
respondents.
DIZON, J.

FACTS:
Tan Tong has been engage in the business of buying and selling guagua under
the trade name La Campana Guagua Packing. Later he and his family organized a
family corporation known as La Camapana Coffee Factiry, Inc, with its principal office
located in the same place as that of La Camapana Guagua Packing.
A year before the formation of the corporation, Tan Tong had entered into a CBA
with the Phil. Legion of Organized Workers (PLOW) to which the union of Tan Tong’s
employees was affiliated. Said employees later formed their organization known as
Kaisahan ng mga Manggagawa sa La Camapana and applied for registration in the
DOLE as an independent entity.
The Kaisahan ng mga Manggagawa sa La Campana, composed if 66 memebers
consisting of bith members of LCGP and LCCE, presented a demand for higer wages
and more privileges addressed to La Campana Starch and COfffee Factory, by which
namae they sought to designate the LCGP and LCCF. The demand was not granted.
Mediation having failed, the DOLE certified the dispute with the Court of Industrial
Relations.
The 2 corporations as combined and the PLOW moved for the dismissal which
include the ground, among others, that the action is directed against 2 different entities
with distinct personalities – the La Campana Starch Factory and the La Camapna
Coffee Factory, Inc. CIR DENIED. Motion for Reconsideration filed on the ground of CIR
having no jurisdiction for the reason that the petitioner La CAmpana Coffee Factory has
only 14 members, of which, 5 of whom are members of the respondent union and
therefore the absence of the jurisdictional number of 30.

ISSUE:
Whether the CIR has jurisdiction.

HELD: YES.
The CIR has jurisdiction because the number of employees of the La Campana
Gaugau Packing involved in the case is more than the jurisdictional number of 31 as
required by law.
La Campana Gaugau Packing and petitioner are operating under one single mgt,
as one business though with 2 tradenames. It is true that the coffee factory is a
corporation, and by legal fiction, an entity existing separate and apart from the persons
composing it, that is, Tan Tong and his family. But it is settled that this fiction of law,
 56

which has been introduced as a matter of convenience and to subserved the ends of
justice cannot be invoked to further an end subversive of that purpose.
In the present case, Tan Tong appears to be the owner of gaugau factory. And
the coffee factory, though an incorporated business, is in reality owned exclusively by
Tan Tong and his family. As found by the CIR:
 The two factories have only one office, one management, and one payroll
 The laborers of the gaugau factory and the coffee factory were interchangeable –
laborers from the gaugau factory were sometimes transferred to the coffee
factory and vice-versa
Thus, the attempt to make the two factories appear to be two separate businesses,
when in reality they are but one, is but a device to defeat the ends of the law (the Act
governing capital and labor relations) and should not be permitted to prevail.

8. G.R. No. 159121. February 3, 2005

PAMPLONA PLANTATION COMPANY, INC. and/or JOSE LUIS BONDOC,
petitioners,
vs.
RODEL TINGHIL, respondents.
PANGANIBAN, J.

FACTS:
Sometime in 1993, [Petitioner] Pamplona Plantations Company, Inc. was
organized for the purpose of taking over the operations of the coconut and sugar
plantation of Hacienda Pamplona located in Negros Oriental. It did not absorb all the
workers of Hacienda Pamplona. Some, however, were hired by the company during
harvest season as coconut hookers, coconut filers, haulers, scoopers and charcoal
makers. In 1995, Pamplona Plantation Leisure Corporation was established for the
purpose of engaging in the business of operating tourist resorts, hotels, inns and other
sports and leisure facilities. On 15 December 1996, the Pamplona Plantation Labor
Independent Union conducted an organizational meeting wherein several respondents
participated in said meeting. Upon learning that some of the [respondents] attended the
said meeting, [Petitioner] Jose Luis Bondoc, manager of the company, did not allow
[respondents] to work anymore in the plantation. Respondents filed their respective
complaints with the NLRC against [petitioners] for unfair labor practice, illegal dismissal,
damages, attorney's fees and 13th month pay. On 09 October 1997, [respondent]
Carlito Tinghil amended his complaint to implead Pamplona Plantation Leisure
Corporation . Labor Arbiter Jose G. Gutierrez rendered a decision finding [respondents],
except Bacubac, Cañolas and Torres entitled to separation pay. In the assailed decision
dated 19 July 2000, the NLRC's Fourth Division reversed the Labor Arbiter, ruling that
[respondents], except Tinghil, failed to implead Pamplona Plantation Leisure
Corporation, an indispensable party and that 'there exist no employer-employee relation
between the parties. Respondents elevated the case to the CA via a Petition for
Certiorari under Rule 65 of the Rules of Court.
CA held that respondents were employees of petitioner-company. CA ruled that
petitioners necessarily exercised control over the work they performed, since the latter
were working within the premises of the plantation and also held that respondents were
 57

regular employees, because the tasks they performed were necessary and
indispensable to the operation of the company. Since there was no compliance with the
twin requirements of a valid and/or authorized cause and of procedural due process,
their dismissal was illegal.

ISSUE:
Whether or not the case should be dismissed for the non-joinder of the Pamplona
Plantation Leisure Corporation.

HELD:
The Petition lacks merit.
Normally, the Supreme Court is not a trier of facts. However, since the findings
of the CA and the NLRC on the facts of the case were conflicting, SC waded through
the records to find out if there was basis for the former's reversal of the NLRC's
Decision. Petitioners contend that the CA should have dismissed the case for the failure
of respondents (except Carlito Tinghil) to implead the Pamplona Plantation Leisure
Corporation, an indispensable party, for being the true and real employer. Petitioners
claim that, as a sugar and coconut plantation company separate and distinct from the
Pamplona Plantation Leisure Corporation, the petitioner-company is not the real party in
interest.
The principle requiring the piercing of the corporate veil mandates courts to see
through the protective shroud that distinguishes one corporation from a seemingly
separate one. The corporate mask may be removed and the corporate veil pierced
when a corporation is the mere alter ego of another. Where badges of fraud exist,
where public convenience is defeated, where a wrong is sought to be justified thereby,
or where a separate corporate identity is used to evade financial obligations to
employees or to third parties, the notion of separate legal entity should be set aside and
the factual truth upheld. In the present case, the corporations have basically the same
incorporators and directors and are headed by the same official. Both use only one
office and one payroll and are under one management. In their individual Affidavits,
respondents allege that they worked under the supervision and control of Petitioner
Bondoc — the common managing director of both the petitioner-company and the
leisure corporation. The defense of separate corporate identity was not raised during
the proceedings before the labor arbiter. The main argument therein raised by
petitioners was their alleged lack of employer-employee relationship. Neither was the
issue of non-joinder of indispensable parties raised in petitioners' appeal before the
NLRC. As cited above, the NLRC dismissed the Complaints because of the alleged
admission of respondents in their Affidavits that they had been working at the golf
course. Contrary to the NLRC's findings, some respondents indicated that their
employer was the Pamplona Plantation Leisure Corporation, while others said that it
was the Pamplona Plantation Co., Inc. But in all these Affidavits, both the leisure
corporation and petitioner-company were identified or described as entities engaged in
the development and operation of sugar and coconut plantations, as well as recreational
facilities such as a golf course. The non-joinder of indispensable parties is not a ground
for the dismissal of an action. At any stage of a judicial proceeding and/or at such times
as are just, parties may be added on the motion of a party or on the initiative of the
 58

tribunal concerned. If the plaintiff refuses to implead an indispensable party despite the
order of the court, that court may dismiss the complaint. In this case, the NLRC did not
require respondents to implead the Pamplona Plantation Leisure Corporation as
respondent; instead, the Commission summarily dismissed the Complaints. There is no
need to implead the leisure corporation because, insofar as respondents are concerned,
the leisure corporation and petitioner-company are one and the same entity.

9. G.R. Nos. 111810-11 June 16, 1995

JAMES YU and WILSON YOUNG, petitioners,
vs
THE NATIONAL LABOR RELATIONS COMMISSION, LABOR ARBITER DANIEL C.
CUETO, TANDUAY DISTILLERY INC., FERNANDO DURAN, EDUARDO PALIWAN,
ROQUE ESTOCE AND RODRIGO SANTOS, respondents.

FACTS:
Private respondents-employees Fernando Duran, Eduardo Paliwan, Roque
Estoce, and Rodrigo Santos were employees of respondent corporation Tanduay
Distillery, Inc, (TDI) who were among the 22 employees who received a memorandum
from TDI terminating their services. for reasons of retrenchment, effective 30 days from
receipt thereof or not later than the close of business hours on April 28, 1988.
The 22 employees filed a TRO however, due to the 20-day lifetime of the
temporary restraining order, and because of the on-going negotiations for the sale of
TDI the retrenchment pushed through. Out of the 22 employees who were retrenched,
the instant petition involves only the 4 individual respondents herein.
On June 1, 1988, or after respondents-employees had ceased as such
employees, a new buyer of TDI's assets, Twin Ace Holdings, Inc. took over the
business. Twin Ace assumed the business name Tanduay Distillers.
On August 8, 1988, the employees filed a motion to implead herein petitioners
James Yu and Wilson Young, doing business under the name and style of Tanduay
Distillers, as party respondents in said cases. Petitioners filed an opposition thereto,
asserting that they are representatives of Tanduay Distillers an entity distinct and
separate from TDI, the previous owner, and that there is no employer-employee
relationship between Tanduay Distillers and private respondents. Respondents-
employees filed a reply to the opposition stating that petitioner James Yu as officer-in-
charge of Tanduay Distillers had informed the president of TDI labor union of Tanduay
Distillers' decision to hire everybody with a clean slate on a probation basis.
On May 24, 1989, the Labor arbiter rendered a decision declaring the
retrenchment illegal and ordering the respondent Tanduay Distillery, Inc., to
reinstate the complainants to their former position wth backwages up to the time
of change of ownership, if one has taken place. And 'That in the event of change
in management it (Tanduay Distillery, Inc.,) is hereby ordered to pay the
complainants their respective separation benefits computed at the rate of one (1)
month for every year of service. This is without prejudice to the letter of Mr.
James Yu as officer-in-charge of Tanduay Distillers dated June 17, 1988 to the
President of the Tanduay Distillery, Inc., Labor Union.'
 59

Thereupon, private respondents-employees on September 16, 1991 filed a

motion for execution praying that NLRC through the labor arbiter, "[i]ssue the necessary
writ for the execution of the entire decision dated May 24, 1989, including the actual
reinstatement of the complainants to their former position without loss of seniority and
benefits against Tanduay Distillery, Inc., and/or Tanduay Distillers, James Yu and
Wilson Young." This was opposed by the petitioners on the ground that "the Motion for
Execution is without any basis in so far as it prays for the issuance of a writ of
execution against respondent Tanduay Distillers, which is an entity separate and
distinct from respondent Tanduay Distillery, Inc., and respondents James Yu and
Wilson Young."

ISSUE:
Whether or not the respondent NLRC committed grave abuse of discretion in
holding petitioners Yu and Young liable under the decision dated May 24, 1989.

HELD:
Yes. Petitioners, for a number of reasons which we shall discuss below,
may not be held answerable and liable under the final judgment of Labor Arbiter
Cauton-Barcelona.
1. An examination of the aforequoted dispositive portion of the decision
shows that the same does not in any manner obligate Tanduay Distillers, or even
petitioners Yu and Young for that matter, to reinstate respondents. Only TDI was
held liable to reinstate respondents up to the time of change of ownership, and
for separation benefits.
However, Labor Arbiter Cueto went beyond what was disposed by the decision
and issued an order dated November 17, 1992 which required". . . Tanduay Distillers,
Inc., Wilson Young and James Yu to immediately reinstate complainants Fernando
Duran, Rodrigo Santos, Roque Estoce and Eduardo Daliwan to heir respective
positions." The order of execution dated November 17, 1992 in effect amended the
decision dated May 24, 1989 for the former orders petitioners and Tanduay Distillers to
reinstate private respondents employees whereas the decision dated May 24, 1989, as
we have discussed above, does not so decree, This cannot be done. It is beyond the
power and competence of Labor Arbiter Cueto to amend a final decision, The writ of
execution must not go beyond the scope of the judgment.
2. Neither may be said that petitioners and Tanduay Distillers are one and
the same as TDI, as seems to be the impression of respondents when they
impleaded petitioners as party respondents in their compliant for unfair labor
practice, illegal lay off, and separation benefits.
Such a stance is not supported by the facts. The name of the company for whom
the petitioners are working is Twin Ace Holdings Corporation, As stated by the Solicitor
General, Twin Ace is part of the Allied Bank Group although it conducts the rum
business under the name of Tanduay Distillers. The use of a similar sounding or almost
identical name is an obvious device to capitalize on the goodwill which Tanduay Rum
has built over the years. Twin Ace or Tanduay Distillers, on one hand, and Tanduay
Distillery Inc. (TDI), on the other, are distinct and separate corporations. There is
 60

nothing to suggest that the owners of TDI, have any common relationship as to identify
it with Allied Bank Group which runs Tanduay Distillers.
It is basic that a corporation is invested by law with a personality separate and
distinct from those of the persons composing it as well as from that of any other legal
entity to which it may be related (Palay, Inc. et al. vs. Clave, et al., 124 SCRA 641
[1983]).
The genuine nature of the sale to Twin Ace is evidenced by the fact that Twin
Ace was only a subsequent interested buyer. At the time when termination notices were
sent to its employees, TDI was negotiating with the First Pacific Metro Corporation for
the sale of its assets. Only after First Pacific gave up its efforts to acquire the assets did
Twin Ace or Tanduay Distillers come into the picture. Respondents-employees have not
presented any proof as to communality of ownership and management to support their
contention that the two companies are one firm or closely related. The doctrine of
piercing the veil of corporate entity applies when the corporate fiction is used to defeat
public convenience, justify wrong, protect fraud, or defend crime or where a corporation
is the mere alter ego or business conduit of a person (Indophil Textile Mill Workers
Union vs. Calica, 205 SCRA 697, 703 (1992]). To disregard the separate juridical
personality of a corporation, the wrong-doing must be clearly and convincingly
established. It cannot be presumed (Del Rosario vs. NLRC, 187 SCRA 777, 7809
[1990]).
Another factor to consider is that TDI as a corporation or its shares of stock
were not purchased by Twin Ace. The buyer limited itself to purchasing most of the
assets, equipment, and machinery of TDI. Thus, Twin Ace or Tanduay Distillers did not
take over the corporate personality of DTI although they manufacture the same product
at the same plant with the same equipment and machinery. Obviously, the trade name
"Tanduay" went with the sale because the new firm does business as Tanduay Distillers
and its main product of rum is sold as Tanduay Rum. There is no showing, however,
that TDI itself was absorbed by Twin Ace or that it ceased to exist as a separate
corporation, In point of fact TDI is now herein a party respondent represented by its own
counsel.
- the fiction of separate and distinct corporate entities cannot, in the instant case,
be disregarded and brushed aside, there being not the least indication that the second
corporation is a dummy or serves as a client of the first corporate entity.
3. Nor could the order and writ to reinstate be anchored on the vague and
seemingly uncalled for alternative disposition in the Barcelona decision that —
". . . This is without prejudice to the letter of Mr. James Yu as officer-in-charge of
Tanduay Distillers dated June 16, 1988 to the President of the Tanduay Distillery, Inc.
labor Union."
The letter of James Yu does not mention any reinstatement. It assures the
president of the labor union that Tanduay Distillers stood firm on its decision to hire
employees with a clean slate on a probationary basis. The fact that the employees of
the former employer (TDI) would be hired on a probationary basis shows that there was
no employer-employee relationship between individual respondents and Twin Ace.
Anyone who joins the buyer corporation comes in as an outsider who is newly hired and
who starts on a probationary basis until he proves he deserves to be on a permanent
status. His application can be rejected in the exercise of the hiring authority's discretion.
 61

4. Another factor which militates against the claim for reinstatement of the
individual respondents is their having received separation pay as part of a
compromise agreement in the course of their litigation with TDI. PAMATIAN

10. G.R. No. 96490 February 3, 1992

INDOPHIL TEXTILE MILL WORKERS UNION-PTGWO
vs.
VOLUNTARY ARBITRATOR TEODORICO P. CALICA and INDOPHIL TEXTILE
MILLS, INC..
MEDIALDEA, J.:

FACTS:
Petitioner Indophil Textile Mill Workers Union-PTGWO is a legitimate labor
organization duly registered with the Department of Labor and Employment and the
exclusive bargaining agent of all the rank-and-file employees of Indophil Textile Mills,
Incorporated. Respondent Teodorico P. Calica is impleaded in his official capacity as
the Voluntary Arbitrator of the National Conciliation and Mediation Board of the
Department of Labor and Employment, while private respondent Indophil Textile Mills,
Inc. is a corporation engaged in the manufacture, sale and export of yarns of various
counts and kinds and of materials of kindred character and has its plants at Barrio
Lambakin. Marilao, Bulacan.
In April, 1987, petitioner Indophil Textile Mill Workers Union-PTGWO and private
respondent Indophil Textile Mills, Inc. executed a collective bargaining agreement
effective from April 1, 1987 to March 31, 1990.
On November 3, 1967 Indophil Acrylic Manufacturing Corporation was formed
and registered with the Securities and Exchange Commission. Subsequently, Acrylic
applied for registration with the Board of Investments for incentives under the 1987
Omnibus Investments Code. The application was approved on a preferred non-pioneer
status.
In 1988, Acrylic became operational and hired workers according to its own
criteria and standards. Sometime in July, 1989, the workers of Acrylic unionized and a
duly certified collective bargaining agreement was executed.
In 1990 or a year after the workers of Acrylic have been unionized and a CBA
executed, the petitioner union claimed that the plant facilities built and set up by Acrylic
should be considered as an extension or expansion of the facilities of private
respondent Company pursuant to Section 1(c), Article I of the CBA, to wit:
“c) This Agreement shall apply to the Company's plant facilities and
installations and to any extension and expansion thereat.”
In other words, it is the petitioner's contention that Acrylic is part of the Indophil
bargaining unit.
The petitioner's contention was opposed by private respondent which submits
that it is a juridical entity separate and distinct from Acrylic.

ISSUE:
 62

WHETHER OR NOT INDOPHIL ACRYLIC IS A SEPARATE AND DISTINCT

ENTITY FROM RESPONDENT COMPANY FOR PURPOSES OF UNION
REPRESENTATION.
The central issue submitted for arbitration is whether or not the operations in
Indophil Acrylic Corporation are an extension or expansion of private respondent
Company. Corollary to the aforementioned issue is the question of whether or not the
rank-and-file employees working at Indophil Acrylic should be recognized as part of,
and/or within the scope of the bargaining unit.

HELD:
In the case at bar, petitioner seeks to pierce the veil of corporate entity of Acrylic,
alleging that the creation of the corporation is a devise to evade the application of the
CBA between petitioner Union and private respondent Company. While we do not
discount the possibility of the similarities of the businesses of private respondent and
Acrylic, neither are we inclined to apply the doctrine invoked by petitioner in granting the
relief sought. The fact that the businesses of private respondent and Acrylic are related,
that some of the employees of the private respondent are the same persons manning
and providing for auxilliary services to the units of Acrylic, and that the physical plants,
offices and facilities are situated in the same compound, it is our considered opinion that
these facts are not sufficient to justify the piercing of the corporate veil of Acrylic.
In the case of Umali, et al. v. Court of Appeals, We already emphasized that "the
legal corporate entity is disregarded only if it is sought to hold the officers and
stockholders directly liable for a corporate debt or obligation." In the instant case,
petitioner does not seek to impose a claim against the members of the Acrylic.
Furthermore, We already ruled in the case of Diatagon Labor Federation Local
110 of the ULGWP v. Ople that it is grave abuse of discretion to treat two companies as
a single bargaining unit when these companies are indubitably distinct entities with
separate juridical personalities.
Hence, the Acrylic not being an extension or expansion of private respondent,
the rank-and-file employees working at Acrylic should not be recognized as part of,
and/or within the scope of the petitioner, as the bargaining representative of private
respondent.

11. G.R. No. 89561 September 13, 1990

BUENAFLOR C. UMALI, MAURICIA M. VDA. DE CASTILLO, VICTORIA M.
CASTILLO, BERTILLA C. RADA, MARIETTA C. ABAÑEZ, LEOVINA C. JALBUENA
and SANTIAGO M. RIVERA, petitioners,
vs.
COURT OF APPEALS, BORMAHECO, INC. and PHILIPPINE MACHINERY PARTS
MANUFACTURING CO., INC., respondents.
REGALADO, J.:

FACTS:
Plaintiff Santiago Rivera is the nephew of plaintiff Mauricia Meer Vda. de Castillo.
The Castillo family are the owners of a parcel of land located in Lucena City which was
given as security for a loan from the Development Bank of the Philippines. For their
 63

failure to pay the amortization, foreclosure of the said property was about to be initiated.
This problem was made known to Santiago Rivera, who proposed to them the
conversion into subdivision of the four (4) parcels of land adjacent to the mortgaged
property to raise the necessary fund. The Idea was accepted by the Castillo family and
to carry out the project, a Memorandum of Agreement was executed by and between
Slobec Realty and Development, Inc., represented by its President Santiago Rivera and
the Castillo family. In this agreement, Santiago Rivera obliged himself to pay the Castillo
family the sum of P70,000.00 immediately after the execution of the agreement and to
pay the additional amount of P400,000.00 after the property has been converted into a
subdivision.
Bormaheco, Inc. and Slobec Realty and Development, Inc., represented by its
President, Santiago Rivera, executed a Sales Agreement over one unit of Caterpillar
Tractor D-7. As shown by the contract, the price was P230,000.00 of which P50,000.00
was to constitute a down payment, and the balance of P180,000.00 payable in eighteen
monthly installments. On the same date, Slobec, through Rivera, executed in favor of
Bormaheco a Chattel Mortgage over the said equipment as security for the payment of
the aforesaid balance of P180,000.00. As further security of the aforementioned unpaid
balance, Slobec obtained from Insurance Corporation of the Phil. a Surety Bond, with
ICP (Insurance Corporation of the Phil.) as surety and Slobec as principal, in favor of
Bormaheco. The aforesaid surety bond was in turn secured by an Agreement of
Counter-Guaranty with Real Estate Mortgage executed by Rivera as president of
Slobec and Mauricia Meer Vda. de Castillo, Buenaflor Castillo Umali, Bertilla Castillo-
Rada, Victoria Castillo, Marietta Castillo and Leovina Castillo Jalbuena, as mortgagors
and Insurance Corporation of the Philippines (ICP) as mortgagee. In this agreement,
ICP guaranteed the obligation of Slobec with Bormaheco in the amount of P180,000.00.
In giving the bond, ICP required that the Castillos mortgage to them the properties in
question, namely, four parcels of land covered by TCTs in the name of the
aforementioned mortgagors, namely TCT Nos. 13114, 13115, 13116 and 13117 all of
the Register of Deeds for Lucena City.
On the occasion of the execution of the Sales Agreement, Slobec, represented
by Rivera received from Bormaheco the subject matter of the said Sales Agreement.
Meanwhile, for violation of the terms and conditions of the Counter-Guaranty
Agreement, the properties of the Castillos were foreclosed by ICP. As the highest
bidder, a Certificate of Sale was issued by the Provincial Sheriff of Lucena City and
Transfer Certificates of Title over the subject parcels of land were issued by the
Register of Deeds of Lucena City in favor of ICP namely. The mortgagors failed to
redeem the property. Consequently, ICP consolidated its ownership over the subject
parcels of land and a Deed of Sale of Real Estate covering the subject properties was
issued in favor of ICP.
The Insurance Corporation of the Phil. (ICP) sold to Phil. Machinery Parts
Manufacturing Co. (PM Parts) the four (4) parcels of land and by virtue of said
conveyance, PM Parts transferred unto itself the titles over the lots in dispute.
Thereafter, PM Parts, through its President, Mr. Modesto Cervantes, sent a letter
addressed to plaintiff Mrs. Mauricia Meer Castillo requesting her and her children to
vacate the subject property, who (Mrs. Castillo) in turn sent her reply expressing her
refusal to comply with his demands.
 64

The heirs of the late Felipe Castillo filed an action for annulment of title before the
then Court of First Instance of Quezon. They contended that all the aforementioned
transactions starting with the Agreement of Counter-Guaranty with Real Estate
Mortgage, Certificate of Sale and the Deeds of Authority to Sell, Sale and the Affidavit of
Consolidation of Ownership as well as the Deed of Sale are void for being entered into
in fraud and without the consent and approval of the Court of First Instance of Quezon
before whom the administration proceedings has been pending. Plaintiffs pray that the
four (4) parcels of land subject hereof be declared as owned by the estate of the late
Felipe Castillo and that all Transfer Certificates of Titles as well as those appearing as
encumbrances at the back of the certificates of title be declared as a nullity and
defendants to pay damages and attorney's fees.

ISSUE:
Whether the CA erred in setting aside the finding of the lower court that there
was necessity to pierce the veil of corporate existence;

RULING:
Under the doctrine of piercing the veil of corporate entity, when valid grounds
therefore exist, the legal fiction that a corporation is an entity with a juridical personality
separate and distinct from its members or stockholders may be disregarded. In such
cases, the corporation will be considered as a mere association of persons. The
members or stockholders of the corporation will be considered as the corporation, that
is, liability will attach directly to the officers and stockholders. The doctrine applies when
the corporate fiction is used to defeat public convenience, justify wrong, protect fraud, or
defend crime, or when it is made as a shield to confuse the legitimate issues or where a
corporation is the mere alter ego or business conduit of a person, or where the
corporation is so organized and controlled and its affairs are so conducted as to make it
merely an instrumentality, agency, conduit or adjunct of another corporation.
In the case at bar, petitioners seek to pierce the veil of corporate entity of
Bormaheco, ICP and PM Parts, alleging that these corporations employed fraud in
causing the foreclosure and subsequent sale of the real properties belonging to
petitioners. While we do not discount the possibility of the existence of fraud in the
foreclosure proceeding, neither are we inclined to apply the doctrine invoked by
petitioners in granting the relief sought. It is our considered opinion that piercing the veil
of corporate entity is not the proper remedy in order that the foreclosure proceeding
may be declared a nullity under the circumstances obtaining in the legal case at bar.
In the first place, the legal corporate entity is disregarded only if it is sought to
hold the officers and stockholders directly liable for a corporate debt or obligation. In the
instant case, petitioners do not seek to impose a claim against the individual members
of the three corporations involved; on the contrary, it is these corporations which desire
to enforce an alleged right against petitioners. Assuming that petitioners were indeed
defrauded by private respondents in the foreclosure of the mortgaged properties, this
fact alone is not, under the circumstances, sufficient to justify the piercing of the
corporate fiction, since petitioners do not intend to hold the officers and/or members of
respondent corporations personally liable therefor. Petitioners are merely seeking the
declaration of the nullity of the foreclosure sale, which relief may be obtained without
 65

having to disregard the aforesaid corporate fiction attaching to respondent corporations.

Secondly, petitioners failed to establish by clear and convincing evidence that private
respondents were purposely formed and operated, and thereafter transacted with
petitioners, with the sole intention of defrauding the latter.
The mere fact, therefore, that the businesses of two or more corporations are
interrelated is not a justification for disregarding their separate personalities, absent
sufficient showing that the corporate entity was purposely used as a shield to defraud
creditors and third persons of their rights.

C. PARENT-SUBSIDIARY RELATIONSHIP

1. G.R. No. L-13203 January 28, 1961

YUTIVO SONS HARDWARE COMPANY, petitioner, vs. COURT OF TAX APPEALS
and COLLECTOR OF INTERNAL REVENUE, respondents.
GUTIERREZ DAVID, J.:

FACTS:
Yutivo, a domestic corporation incorporated in 1916 under Philippine laws, was
engaged in the importation and sale of hardware supplies and equipment. After the first
world war, it resumed its business and bought a number of cars and trucks from
General Motors (GM), an American Corporation licensed to do business in the
Philippines.
On June 13, 1946, the Southern Motors Inc. (SM) was organized to engage in
the business of selling cars, trucks and spare parts. One of the subscribers of stocks
during its incorporation was Yu Khe Thai, Yu Khe Siong and Hu Kho Jin, who are sons
of Yu Tiong Yee, one of Yutivo’s founders.
After SM’s incorporation and until the withdrawal of GM from the Philippines, the
cars and trucks purchased by Yutivo from GM were sold by Yutivo to SM which the
latter sold to the public.
Yutivo was appointed importer for Visayas and Mindanao by the US
manufacturer of cars and trucks sold by GM. Yutivo paid the sales tax prescribed on the
basis of selling price to SM. SM paid no sales tax on its sales to the public.
An assessment was made upon Yutivo for deficiency sales tax. The Collector of
Internal Revenue, contends that the taxable sales were the retail sales by SM to the
public and not the sales at wholesale made by Yutivo to the latter inasmuch as SM and
Yutivo were one and the same corporation, the former being a subsidiary of the latter.
The assessment was disputed by petitioner. After reinvestigation, a second
assessment was made, sustaining the validity of the first assessment. Yutivo contested
the second assessment, alleging that there is no valid ground to disregard the corporate
personality of SM and to hold that it is an adjunct of petitioner.

ISSUE:
Whether or not SM is a separate corporate entity.
HELD:
 66

SM being but a mere instrumentality, or adjunct of Yutivo, the Court of Tax

Appeals correctly disregarded the technical defense of separate corporate entity in
order to arrive at the true tax liability of Yutivo.
Consideration of various circumstances indicate that Yutivo treated SM merely as
its department or adjunct:
a. The founders of the corporation are closely related to each other by blood and
affinity.
b. The object and purpose of the business is the same; both are engaged in
sale of vehicles, spare parts, hardware supplies and equipment.
c. The accounting system maintained by Yutivo shows that it maintained high
degree of control over SM accounts.
d. Several correspondences have reference to Yutivo as the head office of SM.
SM may even freely use forms or stationery of Yutivo.
e. All cash collections of SM’s branches are remitted directly to Yutivo.
f. The controlling majority of the Board of Directors of Yutivo is also the
controlling majority of SM.
g. The principal officers of both corporations are identical. Both corporations
have a common comptroller in the person of Simeon Sy, who is a brother-in-
law of Yutivo’s president, Yu Khe Thai.
h. Yutivo, financed principally the business of SM and actually extended all the
credit to the latter not only in the form of starting capital but also in the form of
credits extended for the cars and vehicles allegedly sold by Yutivo to SM.
Furthermore, although the sales made by SM are in substance by Yutivo this
does not necessarily establish fraud nor the willful filing of a false or fraudulent return.
When GM was the importer and Yutivo, the wholesaler, of the cars and trucks, the sales
tax was paid only once and on the original sales by the former and neither the latter nor
SM paid taxes on their subsequent sales. Yutivo might have, therefore, honestly
believed that the payment by it, as importer, of the sales tax was enough as in the case
of GM Consequently, in filing its return on the basis of its sales to SM and not on those
by the latter to the public, it cannot be said that Yutivo deliberately made a false return
for the purpose of defrauding the government of its revenues which will justify the
imposition of the surcharge penalty.

2. G.R. No. L-47673 October 10, 1946

KOPPEL (PHILIPPINES), INC.
vs.
ALFREDO L. YATCO, Collector of Internal Revenue
HILADO, J.

FACTS:
Herein plaintiff, Koppel Philippines (K-Phil) is a corporation duly organized
and existing under and by virtue of the laws of the Philippines, with principal office
therein at the City of Manila. It was duly licensed to engage in business as a merchant
and commercial broker in the Philippines; and was the holder of the corresponding
merchant's and commercial broker's privilege tax receipts. While the Koppel Industrial
Car and Equipment Company (K-USA) is a corporation organized and existing under
 67

the laws of the State of Pennsylvania, United States of America, and not licensed to do
business in the Philippines.
Sometime in 1929, Ossorio, of Manila, Philippines, placed an option with Koppel
Industrial Car and Equipment Company through plaintiff K-Phil, to purchase a pair of
Atlas-Diesel Marine Engines. However, Koppel could not ship to Ossorio, it in turn drew
another draft on plaintiff for the same amount at six months sight, with the
understanding that Koppel Industrial Car and Equipment Company would reimburse
plaintiff when said engines were disposed of. On the year 1930, a new local buyer, Mr.
Barrios in Philippines was found and the same engines were sold to him. The engines
were shipped to Hongkong and a draft was drawn by Koppel on Mr. Barrios. After the
draft was fully paid, reimbursed plaintiff and credited it as its share of the profit on the
transaction. The defendant demanded of the plaintiff K-Phil the sum of P64,122.51 as
the merchants' sales tax of 1% per cent on the amount of the total gross value of the
sales. Koppel Philippines Inc. filed a complaint under protest to the Collector of Internal
Revenue.
The Court of First Instance did not deny legal personality to Koppel (Philippines),
Inc. for any and all purposes, it dismissed the complaint saying that in the transactions
involved in the case, the public interest and convenience would be defeated and would
amount to a perpetration of tax evasion unless resort was had to the doctrine of
"disregard of the corporate fiction.

ISSUE:
Whether or not the trial court erred in not holding that Koppel-Philippines (K-Phil)
is a domestic corporation distinct and separate from and not a mere branch of Koppel
Industrial Car and Equipment Company.

HELD:
No. The facts show that 99.5% of the shares of stocks of K-Phil were owned by
K-USA. K-Phil. acted as a representative of K-USA and not as an agent. K-Phil. also
bore alone its own incidental expenses like Cable expenses and also those of its
“principal”. Moreover, K-Phil’s share in the profits was left in the hands of K-
USA. Clearly, K-Phil was a mere branch or dummy of K-USA, and was therefore liable
for merchant sales tax. To allow otherwise would be to sanction a circumvention of our
tax laws and permit a tax evasion of no mean proportion and the consequent
commission of a grave injustice to the Government. Moreover, it would allow the
taxpayer to do by indirection what the tax laws prohibit to be done directly.
In looking through the corporate form to the ultimate person or corporation
behind that form, in the particular transactions which were involved in the case
submitted to its determination and judgment, the court did so in order to prevent the
contravention of the local internal revenue laws, and the perpetration of what would
amount to a tax evasion, inasmuch as it considered — and in the opinion of the Court,
correctly — that appellant Koppel (Philippines), Inc. was a mere branch or agency or
dummy ("hechura") of Koppel Industrial Car and Equipment Co. The court did not hold
that the corporate personality of Koppel (Philippines), Inc., would also be disregarded in
other cases or for other purposes. It would have had no power to so hold. The courts'
action in this regard must be confined to the transactions involved in the case at bar "for
 68

the purpose of adjudging the rights and liabilities of the parties in the case. They have
no jurisdiction to do more." A corporation will be looked upon as a legal entity as a
general rule, and until sufficient reason to the contrary appears; but, when the
notion of legal entity is used to defeat public convenience, justify wrong, protect
fraud, or defend crime, the law will regard the corporation as an association of
persons.
Another rule is that, when the corporation is the mere alter ego, or business
conduit of a person, it may be disregarded. Where it appears that two business
enterprises are owned, conducted and controlled by the same parties, both law and
equity will, when necessary to protect the rights of third persons, disregard the legal
fiction that two corporations are distinct entities, and treat them as identical. The legal
fiction of distinct corporate existence will be disregarded in a case where a corporation
is so organized and controlled and its affairs are so conducted, as to make it merely an
instrumentality or adjunct of another corporation.
The act of one corporation crediting or debiting the other for certain items,
expenses or even merchandise sold or disposed of, is perfectly compatible with
the idea of the domestic entity being or acting as a mere branch, agency or
subsidiary of the parent organization.

3. G.R. No. L-9687 June 30, 1961

LIDDELL & CO., INC., petitioner-appellant,
vs.
THE COLLECTOR OF INTERNAL REVENUE, respondent-appellee.
BENGZON, C.J.

FACTS:
Liddell & Co was engaged in importing and retailing cars and trucks. Frank
Liddell owned 98% of the stocks. Later Liddell Motors Inc. was organized to do retailing
for Liddell & Co. Frank’s wife owned almost all of that corporation’s stocks. Since then,
Liddell & Co paid sales tax on the basis of its sales to Liddell Motors. But the CIR
considered the sales by Liddell Motors to the public as the basis for the original sales
tax.

HELD:
The Court, agreeing with the CIR, held that Frank Liddell owned both
corporations as his wife could not have had the money to pay her subscriptions. Such
fact alone though not sufficient to warrant piercing, but under the proven facts alone,
Liddel Motors was the medium created by Liddel & Co to reduce its tax liability. A
taxpayer has the legal right to decrease, by means which the law permits, the amount of
what otherwise would be his taxes or altogether avoid them; but a dummy corporation
serving no business purposes other than as a blind, will be disregarded. A taxpayer may
gain advantage of doing business thru a corporation if he pleases, but the revenue
officers in the proper cases may disregard the separate corporate entity where it serves
but as a shield for tax evasion and treat the person who actually may take the benefits
of the transaction as the person accordingly taxable. Mere ownership by a single
stockholder or by another corporation of all or nearly all capital stocks of the corporation
 69

is not by itself a sufficient ground for disregarding the separate corporate personality.
Substantial ownership in the capital stock of a corporation entitling the shareholder a
significant vote in the corporate affairs allows them no standing or claims pertaining to
corporate affairs. Where a corporation is a dummy and serves no business purpose and
is intended only as a blind, the corporate fiction may be ignored. Substantial ownership
in the capital stock of a corporation entitling the SH to a significant vote in corporate
affairs allows then no standing or claims pertaining to corporate affairs. Mere ownership
by a single SH or by another corporation of all or nearly all capital stock of a corporation
is not of itself sufficient ground for disregarding the separate corporate personality.

4. G.R. No. 151438 July 15, 2005

JARDINE DAVIES INC., petitioner,
vs.
JRB REALTY, respondents.
CALLEJO, SR., J.:

Facts:
In 1979-1980, respondent JRB Realty, Inc. built a nine-storey building, named
Blanco Center, on its parcel of land located at 119 Alfaro St., Salcedo Village, Makati
City. An air conditioning system was needed for the Blanco Law Firm housed at the
second floor of the building. On March 13, 1980, the respondent’s Executive Vice-
President, Jose R. Blanco, accepted the contract quotation of Mr. A.G. Morrison,
President of Aircon and Refrigeration Industries, Inc. (Aircon), for two (2) sets of
Fedders Adaptomatic 30,000 kcal (Code: 10-TR) air conditioning equipment with a net
total selling price ofP99,586.00.[2] Thereafter, two (2) brand new packaged air
conditioners of 10 tons capacity each to deliver 30,000 kcal or 120,000 BTUH were
installed by Aircon. When the units with rotary compressors were installed, they could
not deliver the desired cooling temperature. Despite several adjustments and corrective
measures, the respondent conceded that Fedders Air Conditioning USA’s technology
for rotary compressors for big capacity conditioners like those installed at the Blanco
Center had not yet been perfected. The parties thereby agreed to replace the units with
reciprocating/semi-hermetic compressors instead. In a Letter dated March 26,
1981, Aircon stated that it would be replacing the units currently installed with new ones
using rotary compressors, at the earliest possible time. Regrettably, however, it could
not specify a date when delivery could be effected.
TempControl Systems, Inc. (a subsidiary of Aircon until 1987) undertook the
maintenance of the units, inclusive of parts and services. In October 1987, the
respondent learned, through newspaper ads,[5]that Maxim Industrial and Merchandising
Corporation (Maxim, for short) was the new and exclusive licensee of Fedders Air
Conditioning USA in the Philippines for the manufacture, distribution, sale, installation
and maintenance of Fedders air conditioners. The respondent requested that Maxim
honor the obligation of Aircon, but the latter refused. Considering that the ten-year
period of prescription was fast approaching, to expire on March 13, 1990, the
respondent then instituted, on January 29, 1990, an action for specific performance with
 70

damages against Aircon & Refrigeration Industries, Inc., Fedders Air Conditioning USA,
Inc., Maxim Industrial & Merchandising Corporation and petitioner Jardine Davies,
Inc. The latter was impleaded as defendant, considering that Aircon was a subsidiary of
the petitioner.
Applying the doctrine of piercing the veil of corporate fiction, both the respondent
and trial courts conveniently held the petitioner liable for the alleged omissions of
Aircon, considering that the latter was its instrumentality or corporate alter ego. The
petitioner is now before us, reiterating its defense of separateness, and the fact that it is
not a party to the contract.

Issue:

Whether or not petitioner should be held liable in the instant case considering the
petitioner was a subsidiary of Aircon.

Held:

Negative. It is an elementary and fundamental principle of corporation law that a

corporation is an artificial being invested by law with a personality separate and distinct
from its stockholders and from other corporations to which it may be connected. While
a corporation is allowed to exist solely for a lawful purpose, the law will regard it as an
association of persons or in case of two corporations, merge them into one, when this
corporate legal entity is used as a cloak for fraud or illegality. This is the doctrine of
piercing the veil of corporate fiction which applies only when such corporate fiction is
used to defeat public convenience, justify wrong, protect fraud or defend crime.] The
rationale behind piercing a corporation’s identity is to remove the barrier between the
corporation from the persons comprising it to thwart the fraudulent and illegal schemes
of those who use the corporate personality as a shield for undertaking certain
proscribed activities.
While it is true that Aircon is a subsidiary of the petitioner, it does not necessarily
follow that Aircon’s corporate legal existence can just be disregarded. In Velarde v.
Lopez, Inc.,[ the Court categorically held that a subsidiary has an independent and
separate juridical personality, distinct from that of its parent company; hence, any claim
or suit against the latter does not bind the former, and vice versa. In applying the
doctrine, the following requisites must be established: (1) control, not merely majority or
complete stock control; (2) such control must have been used by the defendant to
commit fraud or wrong, to perpetuate the violation of a statutory or other positive legal
duty, or dishonest acts in contravention of plaintiff’s legal rights; and (3) the aforesaid
control and breach of duty must proximately cause the injury or unjust loss complained
of.
The records bear out that Aircon is a subsidiary of the petitioner only because the
latter acquired Aircon’s majority of capital stock. It, however, does not exercise
complete control over Aircon; nowhere can it be gathered that the petitioner manages
the business affairs of Aircon. Indeed, no management agreement exists between the
petitioner and Aircon, and the latter is an entirely different entity from the petitioner.
 71

In the instant case, there is no evidence that Aircon was formed or utilized with
the intention of defrauding its creditors or evading its contracts and obligations. There
was nothing fraudulent in the acts of Aircon in this case. Aircon, as a manufacturing firm
of air conditioners, complied with its obligation of providing two air conditioning units for
the second floor of the Blanco Center in good faith, pursuant to its contract with the
respondent. Unfortunately, the performance of the air conditioning units did not satisfy
the respondent despite several adjustments and corrective measures. In a Letter[ dated
October 22, 1980, the respondent even conceded that Fedders Air Conditioning USA
has not yet perhaps perfected its technology of rotary compressors, and agreed to
change the compressors with the semi-hermetic type. Thus, Aircon substituted the units
with serviceable ones which delivered the cooling temperature needed for the law office.
After enjoying ten (10) years of its cooling power, respondent cannot now complain
about the performance of these units, nor can it demand a replacement thereof.
We sustain the petitioner’s separateness from that of Aircon in this case. It bears
stressing that the petitioner was never a party to the contract. Privity of contracts take
effect only between parties, their successors-in-interest, heirs and assigns.[32] The
petitioner, which has a separate and distinct legal personality from that of Aircon,
cannot, therefore, be held liable. SO ORDERED.

5. G.R. No. 142616 July 31, 2001

PHILIPPINE NATIONAL BANK, petitioner,
vs.
RITRATTO GROUP INC., RIATTO INTERNATIONAL, INC., and DADASAN
GENERAL MERCHANDISE, respondents.
KAPUNAN, J.:

FACTS:
PNB-IFL, a subsidiary company of PNB extended credit to Ritratto in the amount
$300,000 secured by the real estate mortgages on two parcels of land located in
Makati. Said credit was increased until April 1998. Respondent’s outstanding obligations
up to that time stood at $1,497,274.40. Pursuant to the terms of the mortgage, PNB-IFL
thru PNB, foreclosed the property and were subject to public auction.
Respondents filed a complaint for injunction with prayer for the issuance of a writ of
preliminary injunction and/or temporary restraining order. PNB filed a motion to dismiss
on the grounds of failure to state a cause of action and the absence of any privity
between respondents and petitioner. Trial Court issued the writ of preliminary injunction
and denied PNB’s motion to dismiss. In the impugned decision, the CA dismissed the
petition for certiorari and prohibition.
ISSUE:
Whether or not PNB is privy to the loan contracts entered into by respondent &
PNB-IFL.

HELD:
The contract questioned is one entered into between responded and PNB-IFL.
Petitioner was admittedly an agent of the latter who acted as an agent with limited
authority and specific duties under a special power of attorney incorporated in the real
 72

estate mortgage. It is not privy to the loan contracts entered into by them. Yet, despite
the recognition that PNB is a mere agent, the respondents, in their complaint, prayed
that PNB be ordered to recompute the scheduling accordance with the terms and
conditions in the documents evidencing the credit facilities, and crediting the amount
previously paid to PNB by respondent.
The mere fact that a corporation owns all of the stocks of another corporation,
taken alone is not sufficient to justify their being treated as one entity. If used to perform
legitimate functions, a subsidiary’s separate existence may be respected, and the
liability of the parent corporation as well as the subsidiary will be confined to those
arising in their respective business. The courts may, in the exercise of judicial
discretion, step in to prevent the abuses of separate entity privilege and pierce the veil
of corporate entity.

6. G.R. No. 170689 March 17, 2009

PANTRANCO EMPLOYEES ASSOCIATION (PEA-PTGWO) and PANTRANCO
RETRENCHED EMPLOYEES ASSOCIATION (PANREA), Petitioners,
vs.
NATIONAL LABOR RELATIONS COMMISSION (NLRC), PANTRANCO NORTH
EXPRESS, INC. (PNEI), PHILIPPINE NATIONAL BANK (PNB), PHILIPPINE
NATIONAL BANK-MANAGEMENT AND DEVELOPMENT CORPORATION (PNB-
MADECOR), and MEGA PRIME REALTY AND HOLDINGS CORPORATION (MEGA
PRIME), Respondents.
x - - - - - - - - - - - - - - - - - - - - - - -x
G.R. No. 170705 March 17, 2009
PHILIPPINE NATIONAL BANK, Petitioner,
vs.
PANTRANCO EMPLOYEES ASSOCIATION, INC. (PEA-PTGWO), PANTRANCO
RETRENCHED EMPLOYEES ASSOCIATION (PANREA) AND PANTRANCO
ASSOCIATION OF CONCERNED EMPLOYEES (PACE), ET AL., PHILIPPINE
NATIONAL BANK-MANAGEMENT DEVELOPMENT CORPORATION (PNB-
MADECOR), and MEGA PRIME REALTY HOLDINGS, INC., Respondents.
NACHURA, J.:

FACTS:
The Gonzales family owned two corporations, PNEI & MACRIS. PNEI provided
transportation services to the public, and had its bus terminal at the corner of Quezon
and Roosevelt Avenues in Quezon City. The terminal stood on four valuable pieces of
real estate (known as Pantranco properties) registered under the name of Macris. The
Gonzales family later incurred huge financial losses despite attempts of rehabilitation
and loan infusion.
 March 1975, their creditors took over the management of PNEI and Macris.
 1978, full ownership was transferred to one of their creditors, the National
Investment Development Corporation (NIDC), a subsidiary of the PNB.
Macris was later renamed as the National Realty Development Corporation
(Naredeco) and eventually merged with the National Warehousing Corporation
(Nawaco) to form the new PNB subsidiary, the PNB-Madecor
 73

 1985, NIDC sold PNEI to North Express Transport, Inc. (NETI), a company
owned by Gregorio Araneta III.
 1992, PNEI applied with the Securities and Exchange Commission (SEC) for
suspension of payments. A management committee was thereafter created
which recommended to the SEC the sale of the company through privatization.
Eventually, PNEI ceased its operation. Along with the cessation of business
came the various labor claims commenced by the former employees of PNEI where the
latter obtained favorable decisions. The sheriffs were likewise instructed to proceed
against PNB, PNB-Madecor and Mega Prime. In implementing the writ, the sheriffs
levied upon the four valuable pieces of real estate located at the corner of Quezon and
Roosevelt Avenues, on which the former Pantranco Bus Terminal stood. Having been
notified of the auction sale, motions to quash the writ were separately filed by PNB-
Madecor and Mega Prime, and PNB.
In its Third-Party Claim, PNB alleged that PNB-Madecor was indebted to the
former and that the Pantranco properties would anser for such debt. Labor Arbiter
declared that the subject Pantranco properties were owned by PNB-Madecor. It being a
corporation with a distinct and separate personality, its assets could not answer for the
liabilities of PNEI. On appeal to the NLRC, the same was denied and the Labor
Arbiter’s disposition was affirmed

ISSUE:
Whether or not they can attach the properties (specifically the Pantranco
properties) of PNB, PNB-Madecor and Mega Prime to satisfy their unpaid labor claims
against PNEI.

RULING:
No. First, the subject property is not owned by the judgment debtor, that is,
PNEI. Nowhere in the records was it shown that PNEI owned the Pantranco properties.
Petitioners, in fact, never alleged in any of their pleadings the fact of such
ownership. What was established, instead, in PNB MADECOR v. Uy andPNB v. Mega
Prime Realty and Holdings Corporation/Mega Prime Realty and Holdings Corporation v.
PNB was that the properties were owned by Macris, the predecessor of PNB-
Madecor. Hence, they cannot be pursued against by the creditors of PNEI.
Second, PNB, PNB-Madecor and Mega Prime are corporations with personalities
separate and distinct from that of PNEI. PNB is sought to be held liable because it
acquired PNEI through NIDC at the time when PNEI was suffering financial
reverses. PNB-Madecor is being made to answer for petitioners’ labor claims as the
owner of the subject Pantranco properties and as a subsidiary of PNB. Mega Prime is
also included for having acquired PNB’s shares over PNB-Madecor.
The general rule is that a corporation has a personality separate and distinct from
those of its stockholders and other corporations to which it may be connected. This is a
fiction created by law for convenience and to prevent injustice. Obviously, PNB, PNB-
Madecor, Mega Prime, and PNEI are corporations with their own personalities.
Neither can we merge the personality of PNEI with PNB simply because the
latter acquired the former. Settled is the rule that where one corporation sells or
 74

otherwise transfers all its assets to another corporation for value, the latter is not, by
that fact alone, liable for the debts and liabilities of the transferor.
Lastly, while we recognize that there are peculiar circumstances or valid grounds
that may exist to warrant the piercing of the corporate veil, [43] none applies in the
present case whether between PNB and PNEI; or PNB and PNB-Madecor.
Under the doctrine of “piercing the veil of corporate fiction,” the court looks at the
corporation as a mere collection of individuals or an aggregation of persons undertaking
business as a group, disregarding the separate juridical personality of the corporation
unifying the group. Another formulation of this doctrine is that when two business
enterprises are owned, conducted and controlled by the same parties, both law and
equity will, when necessary to protect the rights of third parties, disregard the legal
fiction that two corporations are distinct entities and treat them as identical or as one
and the same.
This reliance fails to persuade. We find the aforesaid decisions inapplicable to
the instant case.
For one, in the said cases, the persons made liable after the company’s
cessation of operations were the officers and agents of the corporation. The rationale is
that, since the corporation is an artificial person, it must have an officer who can be
presumed to be the employer, being the person acting in the interest of the
employer. The corporation, only in the technical sense, is the employer. In the instant
case, what is being made liable is another corporation (PNB) which acquired the debtor
corporation (PNEI).
The doctrine of piercing the corporate veil applies only in three (3) basic areas,
namely: 1) defeat of public convenience as when the corporate fiction is used as a
vehicle for the evasion of an existing obligation; 2) fraud cases or when the corporate
entity is used to justify a wrong, protect fraud, or defend a crime; or 3) alter ego cases,
where a corporation is merely a farce since it is a mere alter ego or business conduit of
a person, or where the corporation is so organized and controlled and its affairs are so
conducted as to make it merely an instrumentality, agency, conduit or adjunct of another
corporation. In the absence of malice, bad faith, or a specific provision of law making a
corporate officer liable, such corporate officer cannot be made personally liable for
corporate liabilities
 75

3E 2012-2013 Cases for Corpo:

1. Municipality of Malabang v. Benito – 27 SCRA 533

2. International Express Travel & Tour Sevices, Inc. v. CA – 343 SCRA 674
3. Pantranco Employees Association (PEA-PTGWO) v. NLRC – 581 SCRA 598
4. Lim Tong Lim v. Philippine Fishing Gear Industries, Inc. – 317 SCRA 728
5. Yutivo Sons Hardware Co. v. CA – 1 SCRA 160
6. Lidell & Co., Inc. v. CIR – 2 SCRA 632
7. Young Auto Supply Co. v. CA – 223 SCRA 670
8. Chiang Kai Shek School v. CA – 172 SCRA 389
9. Lyceum of the Philippines, Inc. v. CA – 219 SCRA 610
10. Philips Export B.V. v. CA – 206 SCRA 457
11. Jardine Davies, Inc. v. JRB Realty, Inc. – 463 SCRA 555
12. Salafranca v. Philamlife (Pamplona) Village Homeowners Assoc., Inc. – 300 SCRA
469
13. Loyola Grand Villas Homeowners (South) Association, Inc. v. CA – 276 SCRA 681
14. Armco Steel Corporation of the Phils. v. SEC – 156 SCRA 822
15. Government of the Phil. Island v. Avila – 46 Phil 146

16. Vda. de Salvatierra v. Hon. Garlitos and Refuerzo – 103 Phil 757
17. Koppel (Phil), Inc. v. Yatco – 77 Phil 496
18. National Bank v. De Poli and Wise & Co. – 44 Phil 763
19. Philippine Trust Co. v. Rivera – 44 Phil 469
20. Fleischer v. Botica Nolasco Co. – 47 Phil 583
21. La Campana Coffee Factory, Inc. v. Kaisahan ng mga Manggagawa sa La
Campana (KKM) – 93 Phil 160
22. People v. Bayona – 61 Phil 181
23. Government of Philippine Island v. El Hogar Filipino – 50 Phil 399
24. National Exchange Co. v. Dexter – 51 Phil 601
25. Lingayen Gulf Electric Power Company, Inc. v. Baltazar – 93 Phil 404
26. Lumanlan v. Cura – 59 Phil 746
27. De Silva v. Aboitiz & Co. – 44 Phil 755

1.MUNICIPALITY OF MALABANG vs. BONITO

G.R. No. L-28113 March 28, 1969
EN BANC
Facts:
 Petitioner Balindong is the mayor of Malabang, Lanao del Sur.
 Respondent Bonito is the mayor, and the rest of the respondents are the
councilors, of the municipality of Balabagan of the same province.
 Balabagan was formerly a part of the municipality of Malabang, having been
created by Executive Order 386 of the then President C.P. Garcia
 Petitioners brought this action for prohibition to nullify Executive Order 386 and to
restrain the respondent municipal officials from performing the functions of their
 76

respective office relying on the ruling of this Court in Pelaez v. Auditor General
and Municipality of San Joaquin v. Siva.
 PELAEZ RULING: That section 68 of the Administrative Code, insofar as it gives
the President the power to create municipalities, is unconstitutional (a) because it
constitutes an undue delegation of legislative power and (b) because it offends
against section 10 (1) of article VII of the Constitution, which limits the
President’s power over local governments to mere supervision
 CONTENTION OF RESPONDENT: The municipality of Balabagan is at least a
de facto corporation, having been organized under color of a statute before this
was declared unconstitutional. That as a de facto corporation, its existence
cannot be collaterally attacked, although it may be inquired into directly in an
action for quo warranto at the instance of the State and not of an individual like
the petitioner Balindong.
Issue:
 Whether the municipality of Balabagan is a de facto corporation

 Whether a statute can lend color of validity to an attempted organization of a

municipality despite the fact that such statute is subsequently declared
unconstitutional.
Held:
 No.
 I. The color of authority requisite to the organization of a de facto municipal
corporation may be:
1. A valid law enacted by the legislature.
2. An unconstitutional law, valid on its face, which has either (a) been upheld for
a time by the courts or (b) not yet been declared void; provided that a warrant for
its creation can be found in some other valid law or in the recognition of its
potential existence by the general laws or constitution of the state.

II. There can be no de facto municipal corporation unless either directly or

potentially, such a de jure corporation is authorized by some legislative fiat.

III. There can be no color of authority in an unconstitutional statute alone, the

invalidity of which is apparent on its face.

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

 In the cases where a de facto municipal corporation was recognized as such

despite the fact that the statute creating it was later invalidated, the decisions
could fairly be made to rest on the consideration that there was some other valid
law giving corporate vitality to the organization. Hence, in the case at bar, the
mere fact that Balabagan was organized at a time when the statute had not been
invalidated cannot conceivably make it a de facto corporation, as, independently
of the Administrative Code provision in question, there is no other valid statute to
give color of authority to its creation.
 77

 Executive Order 386 “created no office

 ACCORDINGLY, the petition is granted, Executive Order 386 is declared void,
and the respondents are hereby permanently restrained from performing the
duties and functions of their respective office.

2. G.R. No. 119002 October 19, 2000

INTERNATIONAL EXPRESS TRAVEL & TOUR SERVICES, INC., petitioner,

vs.
HON. COURT OF APPEALS, HENRI KAHN, PHILIPPINE FOOTBALL FEDERATION,
respondents.
KAPUNAN, J.:

FACTS: On June 30 1989, petitioner International Express Travel and Tour Services,
Inc. wrote a letter to the Philippine Football Federation (Federation), through its
president private respondent Henri Kahn, wherein the former offered its services as a
travel agency to the latter. The offer was accepted and petitioner secured the airline
tickets for the trips of the athletes and officials of the Federation.

On 4 October 1989, petitioner wrote the Federation, through the private respondent a
demand letter requesting for the amount of P265,894.33.

Henri Kahn issued a personal check in the amount of P50,000 as partial payment for
the outstanding balance of the Federation. Thereafter, no further payments were made
despite repeated demands.

This prompted petitioner to file a civil case before the RTC of Manila. Petitioner sued
Henri Kahn in his personal capacity and as President of the Federation and impleaded
the Federation as an alternative defendant. Petitioner sought to hold Henri Kahn liable
for the unpaid balance for the tickets purchased by the Federation on the ground that
Henri Kahn allegedly guaranteed the said obligation.

Henri Kahn averred that the petitioner has no cause of action against him either in his
personal capacity or in his official capacity as president of the Federation. He
maintained that he did not guarantee payment but merely acted as an agent of the
Federation which has a separate and distinct juridical personality.

In due course, the trial court rendered judgment and ruled in favor of the petitioner and
declared Henri Kahn personally liable for the unpaid obligation of the Federation:

Defendant Henri Kahn would have been correct in his contentions had it been duly
established that defendant Federation is a corporation. The trouble, however, is that
neither the plaintiff nor the defendant Henri Kahn has adduced any evidence proving the
corporate existence of the defendant Federation.
 78

A voluntary unincorporated association, like defendant Federation has no power to

enter into, or to ratify, a contract. The contract entered into by its officers or agents on
behalf of such association is not binding on, or enforceable against it. The officers or
agents are themselves personally liable.

In finding for Henri Kahn, the Court of Appeals recognized the juridical existence of the
Federation. It rationalized that since petitioner failed to prove that Henri Kahn
guaranteed the obligation of the Federation, he should not be held liable for the same
as said entity has a separate and distinct personality from its officers.

ISSUE: Whether or not Philippine Football Federation is a juridical person.

HELD: As correctly observed by the appellate court, both R.A. 3135 and P.D. No. 604
recognized the juridical existence of national sports associations. This may be gleaned
from the powers and functions granted to these associations.

The powers and functions granted to national sports associations clearly indicate that
these entities may acquire a juridical personality. The power to purchase, sell, lease and
encumber property are acts which may only be done by persons, whether natural or
artificial, with juridical capacity. However, while we agree with the appellate court that
national sports associations may be accorded corporate status, such does not
automatically take place by the mere passage of these laws.

It is a basic postulate that before a corporation may acquire juridical personality, the
State must give its consent either in the form of a special law or a general enabling act.

Clearly the above cited provisions require that before an entity may be considered as a
national sports association, such entity must be recognized by the accrediting
organization. This fact of recognition, however, Henri Kahn failed to substantiate. In
attempting to prove the juridical existence of the Federation, Henri Kahn attached to his
motion for reconsideration before the trial court a copy of the constitution and by-laws of
the Philippine Football Federation. Unfortunately, the same does not prove that said
Federation has indeed been recognized and accredited. Accordingly, we rule that the
Philippine Football Federation is not a national sports association within the purview of
the aforementioned laws and does not have corporate existence of its own.

Thus being said, it follows that private respondent Henry Kahn should be held liable for
the unpaid obligations of the unincorporated Philippine Football Federation. It is a
settled principal in corporation law that any person acting or purporting to act on behalf
of a corporation which has no valid existence assumes such privileges and becomes
personally liable for contract entered into or for other acts performed as such agent. As
president of the Federation, Henri Kahn is presumed to have known about the corporate
existence or non-existence of the Federation.

4. THIRD DIVISION
[G.R. No. 136448. November 3, 1999]
 79

LIM TONG LIM, petitioner, vs. PHILIPPINE FISHING GEAR INDUSTRIES, INC.,
respondent.
DECISION
PANGANIBAN, J.:
The Facts

On behalf of "Ocean Quest Fishing Corporation," Antonio Chua and Peter Yao entered
into a Contract dated for the purchase of fishing nets of various sizes from the Philippine
Fishing Gear Industries, Inc. (herein respondent). They claimed that they were
engaged in a business venture with Petitioner Lim Tong Lim, who however was not a
signatory to the agreement. Nets and Four hundred pieces of floats were also sold to
the Corporation.
The buyers, however, failed to pay for the fishing nets and the floats; hence, private
respondent filed a collection suit against Chua, Yao and Petitioner Lim Tong Lim with a
prayer for a writ of preliminary attachment. The suit was brought against the three in
their capacities as general partners, on the allegation that “Ocean Quest Fishing
Corporation” was a nonexistent corporation as shown by a Certification from the
Securities and Exchange Commission. The lower court issued a Writ of Preliminary
Attachment, which the sheriff enforced by attaching the fishing nets on board F/B
Lourdes which was then docked at the Fisheries Port, Navotas, Metro Manila.
Instead of answering the Complaint, Chua filed a Manifestation admitting his liability and
requesting a reasonable time within which to pay. He also turned over to respondent
some of the nets which were in his possession. Peter Yao filed an Answer, after which
he was deemed to have waived his right to cross-examine witnesses and to present
evidence on his behalf, because of his failure to appear in subsequent hearings. Lim
Tong Lim, on the other hand, filed an Answer with Counterclaim and Cross claim and
moved for the lifting of the Writ of Attachment. The trial court maintained the Writ, and
upon motion of private respondent, ordered the sale of the fishing nets at a public
auction. Philippine Fishing Gear Industries won the bidding and deposited with the said
court the sales proceeds.
The trial court rendered its Decision, ruling that Philippine Fishing Gear Industries was
entitled to the Writ of Attachment and that Chua, Yao and Lim, as general partners,
were jointly liable to pay respondent.
The trial court ruled that a partnership among Lim, Chua and Yao existed based (1) on
the testimonies of the witnesses presented and (2) on a Compromise Agreement
executed by the three The trial court noted that the Compromise Agreement was silent
as to the nature of their obligations, but that joint liability could be presumed from the
equal distribution of the profit and loss. The CA affirmed the decision of the trial court.
This Court’s Ruling

The Petition is devoid of merit.

Issue:
Whether Lim should be held jointly liable with Chua and Yao.

Chua, Yao and Lim had decided to engage in a fishing business, which they started by
buying boats worth P3.35 million, financed by a loan secured from Jesus Lim who was
 80

Lim Tong Lim's brother. In their Compromise Agreement, they subsequently revealed
their intention to pay the loan with the proceeds of the sale of the boats, and to divide
equally among them the excess or loss. These boats, the purchase and the repair of
which were financed with borrowed money, fell under the term "common fund" under
Article 1767.The contribution to such fund need not be cash or fixed assets; it could be
an intangible like credit or industry. That the parties agreed that any loss or profit from
the sale and operation of the boats would be divided equally among them also shows
that they had indeed formed a partnership. The partnership extended not only to the
purchase of the boat, but also to that of the nets and the floats. The fishing nets and the
floats, both essential to fishing, were obviously acquired in furtherance of their business.
It would have been inconceivable for Lim to involve himself so much in buying the boat
but not in the acquisition of the aforesaid equipment, without which the business could
not have proceeded. The sale of the boats, as well as the division among the three of
the balance remaining after the payment of their loans, proves beyond cavil that
F/Lourdes, though registered in his name, was not his own property but an asset of the
partnership. It is not uncommon to register the properties acquired from a loan in the
name of the person the lender trusts, who in this case is Lim Tong Lim himself. After all,
he is the brother of the creditor, Jesus Lim. It is unreasonable ² indeed; it is absurd ² for
petitioner to sell his property to pay a debt he did not incur, if the relationship among the
three of them was merely that of lessor-lessee, instead of partners. As to Lim's
argument that under the doctrine of corporation by estoppel, liability can be imputed
only to Chua and Yao, and not to him; Section 21 of the Corporation Code of the
Philippines provides that "All persons who assume to act as a corporation knowing it to
be without authority to do so shall be liable as general partners for all debts, liabilities
and damages incurred or arising as a result thereof: Provided however, That when any
such ostensible corporation is sued on any transaction entered by it as a corporation or
on any tort committed by it as such, it shall not be allowed to use as a defense its lack
of corporate personality. One, who assumes an obligation to an ostensible corporation
as such, cannot resist performance thereof on the ground that there was in fact no
corporation." Thus, even if the ostensible corporate entity is proven to be legally
nonexistent, a party may be estopped from denying its corporate existence. "The reason
behind this doctrine is obvious ² an unincorporated association has no personality and
would be incompetent to act and appropriate for itself the power and attributes of a
corporation as provided by law; it cannot create agents or confer authority on another to
act in its behalf; thus, those who act or purport to act as its representatives or agents do
so without authority and at their own risk. And as it is an elementary principle of law that
a person who acts as an agent without authority or without a principal is himself
regarded as the principal, possessed of all the right and subject to all the liabilities of a
principal, a person acting or purporting to act on behalf of a corporation which has no
valid existence assumes such privileges and obligations and becomes personally liable
for contracts entered into or for other acts performed as such agent." The doctrine of
corporation by estoppel may apply to the alleged corporation and to a third party. In the
first instance, an unincorporated association, which represented it to be a corporation,
will be estopped from denying its corporate capacity in a suit against it by a third person
who relied in good faith on such representation. It cannot allege lack of personality to be
sued to evade its responsibility for a contract it entered into and by virtue of which it
 81

received advantages and benefits. On the other hand, a third party who, knowing an
association to be unincorporated, nonetheless treated it as a corporation and received
benefits from it, may be barred from denying its corporate existence in a suit brought
against the alleged corporation. In such case, all those who benefited from the
transaction made by the ostensible corporation, despite knowledge of its legal defects,
may be held liable for contracts they impliedly assented to or took advantage of. There
is no dispute that PFGI is entitled to be paid for the nets its old. The only question here
is whether Lim should be held jointly liable with Chua and Yao. Lim contests such
liability, insisting that only those who dealt in the name of the ostensible corporation
should be held liable. Although technically it is true that Lim did not directly act on behalf
of the corporation; however, having reaped the benefits of the contract entered into by
persons with whom he previously had an existing relationship, he is deemed to be part
of said association and is covered by the scope of the doctrine of corporation by
estoppel.

WHEREFORE, the Petition is DENIED and the assailed Decision AFFIRMED. Costs
against petitioner.
SO ORDERED.

6. LIDDELL & CO., INC., petitioner-appellant,

vs.
THE COLLECTOR OF INTERNAL REVENUE, respondent-appellee.

BENGZON, C.J.:

Facts:
Liddell & Co, of which Frank Liddell owned 98% of the stocks, was engaged in
importing and retailing cars and trucks. Later Liddell Motors Inc. was organized to do
retailing for Liddell & Co. Frank’s wife owned almost all of that corporation’s stocks.
Since then, Liddell & Co paid sales tax on the basis of its sales to Liddell Motors. But
the CIR considered the sales by Liddell Motors to the public as the basis for the original
sales tax.

Issue:
WON Liddell & Co. Inc., and the Liddell Motors, Inc. are (practically) identical
corporations, the latter being merely .the alter ego of the former.

Held:
Yes, they are. While it was made to appear that it was Irene Liddell, the wife, who
owned Liddell Motors, it was also shown in evidence that it was Frank Liddell who
supplied the original capital funds. Besides, there was no evidence that Irene Liddell
has the money to start Liddell Motors, her income from the United States not enough to
cover even the payment for its subscription. There was also the fact that her supposed
income from Liddell Motors found its way to her husband’s account.
 82

In other words, while the mere fact that Liddell & Co. and Liddell Motors, Inc. are
corporations owned and controlled by Frank Liddell directly or indirectly is not by itself
sufficient to justify the disregard of the separate corporate identity of one from the other,
there are other circumstances which would warrant the opposite. In the present case,
Liddel Motors was the medium created by Liddel & Co to reduce its tax liability.
Under the law in force at the time of its incorporation the sales tax on original
sales of cars (sections 184, 185 and 186 of the National Internal Revenue Code), was
progressive, i.e. 10% of the selling price of the car if it did not exceed P5000, and 15%
of the price if more than P5000 but not more than P7000, etc. This progressive rate of
the sales tax naturally would tempt the taxpayer to employ a way of reducing the price
of the first sale. And Liddell Motors, Inc. was the medium created by Liddell & Co. to
reduce the price and the tax liability.
Let us illustrate: a car with engine motor No. 212381 was sold by Liddell & Co.
Inc. to Liddell Motors, Inc. on January 17, 1948 for P4,546,000.00 including tax; the
price of the car was P4,133,000.23, the tax paid being P413.22, at 10%. And when this
car was later sold (on the same day) by Liddell Motors, Inc. to P.V. Luistro for P5500, no
more sales tax was paid.11 In this price of P5500 was included the P413.32 representing
taxes paid by Liddell & Co. Inc. in the sale to Liddell Motors, Inc. Deducting P413.32
representing taxes paid by Liddell & Co., Inc. the price of P5500, the balance of
P5,087.68 would have been the net selling price of Liddell & Co., Inc. to the general
public (had Liddell Motors, Inc. not participated and intervened in the sale), and 15%
sales tax would have been due. In this transaction, P349.68 in the form of taxes was
evaded. All the other transactions (numerous) examined in this light will inevitably reveal
that the Government coffers had been deprived of a sizeable amount of taxes.
A taxpayer has the legal right to decrease, by means which the law permits, the
amount of what otherwise would be his taxes or altogether avoid them; but a dummy
corporation serving no business purposes other than as a blind, will be disregarded. A
taxpayer may gain advantage of doing business thru a corporation if he pleases, but the
revenue officers in the proper cases may disregard the separate corporate entity where
it serves but as a shield for tax evasion and treat the person who actually may take the
benefits of the transaction as the person accordingly taxable. Mere ownership by a
single stockholder or by another corporation of all or nearly all capital stocks of the
corporation is not by itself a sufficient ground for disregarding the separate corporate
personality. Substantial ownership in the capital stock of a corporation entitling the
shareholder a significant vote in the corporate affairs allows them no standing or claims
pertaining to corporate affairs. Where a corporation is a dummy and serves no business
purpose and is intended only as a blind, the corporate fiction may be ignored.
Substantial ownership in the capital stock of a corporation entitling the SH to a
significant vote in corporate affairs allows then no standing or claims pertaining to
corporate affairs. Mere ownership by a single SH or by another corporation of all or
nearly all capital stock of a corporation is not of itself sufficient ground for disregarding
the separate corporate personality.
 83

7. YOUNG AUTO SUPPLY CO. AND NEMESIO GARCIA, petitioners, vs. THE
HONORABLE COURT OF APPEALS (THIRTEENTH DIVISION) AND
GEORGE CHIONG ROXAS, respondents.

FACTS
Young Auto Supply Co. Inc. (YASCO) represented by Nemesio Garcia, its president,
Nelson Garcia and Vicente Sy, sold all of their shares of stock in Consolidated
Marketing & Development Corporation (CMDC) to Roxas. The purchase price was
P8,000,000.00 payable as follows: a down payment of P4,000,000.00 and the balance
of P4,000,000.00 in four postdated checks of P1,000,000.00 each. Immediately after the
execution of the agreement, Roxas took full control of the four markets of CMDC.
However, the vendors held on to the stock certificates of CMDC as security pending full
payment of the balance of the purchase price. The first check of P4,000,000.00,
representing the down payment, was honored by the drawee bank but the four other
checks representing the balance of P4,000,000.00 were dishonored. In the meantime,
Roxas sold one of the markets to a third party. Out of the proceeds of the sale, YASCO
received P600,000.00, leaving a balance of P3,400,000.00. Subsequently, Nelson
Garcia and Vicente Sy assigned all their rights and title to the proceeds of the sale of
the CMDC shares to Nemesio Garcia. Petitioners filed a complaint against Roxas in the
Regional Trial Court, Branch 11, Cebu City, praying that Roxas be ordered to pay
petitioners the sum of P3,400,000.00 or that full control of the three markets be turned
over to YASCO and Garcia. The complaint also prayed for the forfeiture of the partial
payment of P4,600,000.00 and the payment of attorney's fees and costs. Roxas filed a
Motion for the dismissal of the case for Improper Venue

ISSUE:
Whether or not the case was filed in the wrong Venue

HELD:
NO, The Corporation Code precisely requires each corporation to specify in its articles
of incorporation the "place where the principal office of the corporation is to be located
which must be within the Philippines”. The purpose of this requirement is to fix the
residence of a corporation in a definite place, instead of allowing it to be ambulatory. In
the case at bar Plaintiff Young Auto Supply Co., Inc. ("YASCO") is a domestic
corporation duly organized and existing under Philippine laws with principal place of
business at M.J. Cuenco Avenue, Cebu City the residence of YASCO for purposes of
venue is in Cebu City, where its principal place of business is located
 84

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

CHIANG KAI SHEK SCHOOL, petitioner,

vs.
COURT OF APPEALS and FAUSTINA FRANCO OH, respondents

Facts:
An unpleasant surprise awaited Fausta F. Oh when she reported for work at the Chiang
Kai Shek School in Sorsogon on the first week of July, 1968. She was told she had no
assignment for the next semester. Oh was shocked. She had been teaching in the
school since 1932 for a continuous period of almost 33 years. And now, out of the blue,
and for no apparent or given reason, this abrupt dismissal.
Oh sued. She demanded separation pay, social security benefits, salary differentials,
maternity benefits and moral and exemplary damages. The original defendant was the
Chiang Kai Shek School but when it filed a motion to dismiss on the ground that it could
not be sued, the complaint was amended. Certain officials of the school were also
impleaded to make them solidarily liable with the school.
The Court of First Instance of Sorsogon dismissed the complaint. On appeal, its
decision was set aside by the respondent court, which held the school suable and liable
while absolving the other defendants. The motion for reconsideration having been
denied, the school then came to this Court in this petition for review on certiorari.

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

Held:
We hold against the petitioner on the first question. It is true that Rule 3, Section 1, of
the Rules of Court clearly provides that "only natural or juridical persons may be parties
in a civil action." It is also not denied that the school has not been incorporated.
However, this omission should not prejudice the private respondent in the assertion of
her claims against the school.
As a school, the petitioner was governed by Act No. 2706 as amended by C.A. No. 180,
which provided as follows:
 85

Unless exempted for special reasons by the Secretary of Public Instruction, any private
school or college recognized by the government shall be incorporated under the
provisions of Act No. 1459 known as the Corporation Law, within 90 days after the date
of recognition, and shall file with the Secretary of Public Instruction a copy of its
incorporation papers and by-laws.
Having been recognized by the government, it was under obligation to incorporate
under the Corporation Law within 90 days from such recognition. It appears that it had
not done so at the time the complaint was filed notwithstanding that it had been in
existence even earlier than 1932. The petitioner cannot now invoke its own non-
compliance with the law to immunize it from the private respondent's complaint.
There should also be no question that having contracted with the private respondent
every year for thirty two years and thus represented itself as possessed of juridical
personality to do so, the petitioner is now estopped from denying such personality to
defeat her claim against it. According to Article 1431 of the Civil Code, "through
estoppel an admission or representation is rendered conclusive upon the person
making it and cannot be denied or disproved as against the person relying on it."
As the school itself may be sued in its own name, there is no need to apply Rule 3,
Section 15, under which the persons joined in an association without any juridical
personality may be sued with such association.

9. LYCEUM VS. CA

LYCEUM OF THE PHILIPPINES, INC. VS. CA

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

FELICIANO, J p:

FACTS:
Petitioner is an educational institution duly registered with the Securities and Exchange
Commission ("SEC"). When it first registered with the SEC, it used the corporate name
Lyceum of the Philippines, Inc. and has used that name ever since. Petitioner instituted
proceedings before the SEC to compel the private respondents, which are also
educational institutions, to delete the word "Lyceum" from their corporate names and
permanently to enjoin them from using "Lyceum" as part of their respective names.

The background of the case at bar needs some recounting. Petitioner had sometime
before commenced in the SEC a proceeding (SEC-Case No. 1241) against the Lyceum
of Baguio, Inc. to require it to change its corporate name and to adopt another name not
"similar [to] or identical" with that of petitioner. In an Order, Associate Commissioner
Julio Sulit held that the corporate name of petitioner and that of the Lyceum of Baguio,
Inc. were substantially identical because of the presence of a "dominant" word, i.e.,
"Lyceum," the name of the geographical location of the campus being the only word
which distinguished one from the other corporate name. The SEC also noted that
petitioner had registered as a corporation ahead of the Lyceum of Baguio, Inc. in point
of time, and ordered the latter to change its name to another name "not similar or
 86

identical [with]" the names of previously registered entities.

Armed with the Resolution of this Court, petitioner then wrote all the educational
institutions it could find using the word "Lyceum" as part of their corporate name, and
advised them to discontinue such use of "Lyceum." When, with the passage of time, it
became clear that this recourse had failed, petitioner instituted before the SEC to
enforce what petitioner claims as its proprietary right to the word "Lyceum." The SEC
hearing officer rendered a decision sustaining petitioner's claim to an exclusive right to
use the word "Lyceum." The hearing officer relied upon the SEC ruling in the Lyceum of
Baguio, Inc. case and held that the word "Lyceum" was capable of appropriation and
that petitioner had acquired an enforceable exclusive right to the use of that word.

On appeal, however, by private respondents to the SEC En Banc, the decision of the
hearing officer was reversed and set aside. The SEC En Banc did not consider the word
"Lyceum" to have become so identified with petitioner as to render use thereof by other
institutions as productive of confusion about the identity of the schools concerned in the
mind of the general public.

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

RULING:
NO. The Articles of Incorporation of a corporation must, among other things, set out the
name of the corporation. 6 Section 18 of the Corporation Code establishes a restrictive
rule insofar as corporate names are concerned:

"SECTION 18. Corporate name. — No corporate name may be allowed by the

Securities an Exchange Commission if the proposed name is identical or deceptively or
confusingly similar to that of any existing corporation or to any other name already
protected by law or is patently deceptive, confusing or contrary to existing laws. When a
change in the corporate name is approved, the Commission shall issue an amended
certificate of incorporation under the amended name." (Emphasis supplied)

The policy underlying the prohibition in Section 18 against the registration of a corporate
name which is "identical or deceptively or confusingly similar" to that of any existing
corporation or which is "patently deceptive" or "patently confusing" or "contrary to
existing laws," is the avoidance of fraud upon the public which would have occasion to
deal with the entity concerned, the evasion of legal obligations and duties, and the
reduction of difficulties of administration and supervision over corporations.

We do not consider that the corporate names of private respondent institutions are
"identical with, or deceptively or confusingly similar" to that of the petitioner institution.
True enough, the corporate names of private respondent entities all carry the word
 87

"Lyceum" but confusion and deception are effectively precluded by the appending of
geographic names to the word "Lyceum."

Etymologically, the word "Lyceum" is the Latin word for the Greek lykeion which in turn
referred to a locality on the river Ilissius in ancient Athens "comprising an enclosure
dedicated to Apollo and adorned with fountains and buildings erected by Pisistratus,
Pericles and Lycurgus frequented by the youth for exercise and by the philosopher
Aristotle and his followers for teaching." In time, the word "Lyceum" became associated
with schools and other institutions providing public lectures and concerts and public
discussions. Thus today, the word "Lyceum" generally refers to a school or an institution
of learning. While the Latin word "lyceum" has been incorporated into the English
language, the word is also found in Spanish (liceo) and in French (lycee).

While the appellant may have proved that it had been using the word 'Lyceum' for a
long period of time, this fact alone did not amount to mean that the said word had
acquired secondary meaning in its favor because the appellant failed to prove that it had
been using the same word all by itself to the exclusion of others. More so, there was no
evidence presented to prove that confusion will surely arise if the same word were to be
used by other educational institutions. Consequently, the allegations of the appellant in
its first two assigned errors must necessarily fail."

We conclude and so hold that petitioner institution is not entitled to a legally enforceable
exclusive right to use the word "Lyceum" in its corporate name and that other
institutions may use "Lyceum" as part of their corporate names. To determine whether a
given corporate name is "identical" or "confusingly or deceptively similar" with another
entity's corporate name, it is not enough to ascertain the presence of "Lyceum" or
"Liceo" in both names. One must evaluate corporate names in their entirety and when
the name of petitioner is juxtaposed with the names of private respondents, they are not
reasonably regarded as "identical" or "confusingly or deceptively similar" with each
other.

10. PHILIPS EXPORT VS. COURT OF APPEALS- Corporate Trade Name

A corporation’s right to use its corporate and trade name is a property right, a right in
rem, which it may assert and protect against the whole world.

FACTS:
Philips Export B.V. (PEBV) filed with the SEC for the cancellation of the word “Philips”
the corporate name of Standard Philips Corporation in view of its prior registration with
the Bureau of Patents and the SEC. However, Standard Philips refused to amend its
Articles of Incorporation so PEBV filed with the SEC a petition for the issuance of a Writ
of Preliminary Injunction, however this was denied ruling that it can only be done when
the corporate names are identical and they have at least 2 words different. This was
affirmed by the SEC en banc and the Court of Appeals thus the case at bar.

ISSUE:
 88

Whether or not Standard Philips can be enjoined from using Philips in its corporate
name

RULING: YES
A corporation’s right to use its corporate and trade name is a property right, a right in
rem, which it may assert and protect against the whole world. According to Sec. 18 of
the Corporation Code, no corporate name may be allowed if the proposed name is
identical or deceptively confusingly similar to that of any existing corporation or to any
other name already protected by law or is patently deceptive, confusing or contrary to
existing law.

For the prohibition to apply, 2 requisites must be present:

(1) the complainant corporation must have acquired a prior right over the use of such
corporate name and
(2) the proposed name is either identical or deceptively or confusingly similar to that of
any existing corporation or to any other name already protected by law or patently
deceptive, confusing or contrary to existing law.

With regard to the 1st requisite, PEBV adopted the name “Philips” part of its name 26
years before Standard Philips. As regards the 2nd, the test for the existence of
confusing similarity is whether the similarity is such as to mislead a person using
ordinary care and discrimination. Standard Philips only contains one word, “Standard”,
different from that of PEBV. The 2 companies’ products are also the same, or cover the
same line of products. Although PEBV primarily deals with electrical products, it has
also shipped to its subsidiaries machines and parts which fall under the classification of
“chains, rollers, belts, bearings and cutting saw”, the goods which Standard Philips also
produce. Also, among Standard Philips’ primary purposes are to buy, sell trade x x x
electrical wiring devices, electrical component, electrical supplies. Given these, there is
nothing to prevent Standard Philips from dealing in the same line of business of
electrical devices. The use of “Philips” by Standard Philips tends to show its intention to
ride on the popularity and established goodwill of PEBV.

12. ENRIQUE SALAFRANCA vs. PHILAMLIFE VILLAGE, HOMEOWNERS

ASSOCIATION
G.R. No. 121791. December 23, 1998
ROMERO, J.

FACTS:

Petitioner Enrique Salafranca worked as hired as an administrative officer by

respondent Philamlife Village first for six months, then later, extended for successive
appointments. .

In 1987, private respondent decided to amend its by-laws. It was provided in the
amended by-laws that the administrative officer shall see at the pleasure of the Board of
Directors. In view of this development, petitioner was told that his term of office shall
 89

be coterminus with the Board of Directors which appointed him to his position.
Nevertheless, petitioner continued to work until his services was terminated in
December 1992. He filed a complaint for illegal dismissal, claiming that he had been
unlawfully dismissed from service.

The Labor Arbiter decided in favor of petitioner, holding that the amendment would not
be applicable to the case of the complainant who became a regular employee long
before the amendment took place, and that "the Amendment should be applied
prospectively and not retroactively.”

On appeal by the private respondent, the NLRC reversed the decision of the Labor
Arbiter, viewing the dismissal of the petitioner as a valid act by the private respondent.

ISSUE:
Whether the amendment in the by-laws will make the dismissal of the petitioner valid?

HELD:
"Admittedly, the right to amend the by-laws lies solely in the discretion of the employer,
this being in the exercise of management prerogative or business judgment. However
this right, extensive as it may be, cannot impair the obligation of existing contracts or
rights.

Prescinding from these premises, private respondent’s insistence that it can legally
dismiss petitioner on the ground that his tenure has expired is untenable. To reiterate,
petitioner, being a regular employee, is entitled to security of tenure; hence, his services
may only be terminated for causes provided by law. A contrary interpretation would not
find justification in the laws or the Constitution. If we were to rule otherwise, it would
enable an employer to remove any employee from his employment by the simple
expediency of amending its by-laws and providing that his/her position shall cease to
exist upon the occurrence of a specified event.

If private respondent wanted to make the petitioner’s position co-terminus with that of
the Board of Directors, then the amendment must be effective after petitioner’s stay with
the private respondent, not during his term.

Obviously, the measure taken by the private respondent in amending its by-laws is
nothing but a devious, but crude, attempt to circumvent petitioner’s right to security of
tenure as a regular employee guaranteed under the Labor Code."

13 LOYOLA GRAND VILLAS HOMEOWNERS (SOUTH) ASSOCIATION,

INC., petitioner, vs. HON. COURT OF APPEALS, HOME INSURANCE AND
GUARANTY CORPORATION, EMDEN ENCARNACION and HORATIO
AYCARDO, respondents.
G.R. No. 117188. August 7, 1997
 90

FACTS:
Loyola Grand Villas Homeowners Association (LGVHAI) was organized on February 8,
1983 as the association of homeowners and residents of the Loyola Grand Villas owned
and developed by Solid Homes, Inc. It was registered with the Home Financing
Corporation, the predecessor of herein respondent Home Insurance and Guaranty
Corporation (HIGC), as the sole homeowners’ organization in the said subdivision under
Certificate of Registration No. 04-197. It was organized by the developer of the
subdivision and its first president was Victorio V. Soliven, himself the owner of the
developer. For unknown reasons, however, LGVHAI did not file its corporate by-laws.
Sometime in 1988, the officers of the LGVHAI tried to register its by-laws. They failed to
do so. They discovered that there were two other organizations within the subdivision –
Loyola Grand Villas Homeowners (North) Association Incorporated (the North
Association for brevity) and Loyola Grand Villas Homeowners (South) Association
Incorporated (the South Association).
In July, 1989, when Soliven inquired about the status of LGVHAI, Atty. Joaquin A.
Bautista, the head of the legal department of the HIGC, informed him that LGVHAI had
been automatically dissolved for two reasons. First, it did not submit its by-laws within
the period required by the Corporation Code and, second, there was non-user of
corporate charter because HIGC had not received any report on the association’s
activities. Apparently, this information resulted in the registration of the South
Association with the HIGC.
The officers of the LGVHAI lodged a complaint with the HIGC questioning the
revocation of LGVHAI’s certificate of registration without due notice and hearing and
concomitantly prayed for the cancellation of the certificates of registration of the North
and South Associations by reason of the earlier issuance of a certificate of registration
in favor of LGVHAI.
On 1993, after due notice and hearing, private respondents obtained a favorable ruling
from HIGC recognizing the Loyola Grand Villas Homeowners Association, Inc., as the
duly registered and existing homeowners association for Loyola Grand Villas
homeowners, and declaring the Certificates of Registration of North Association, Inc.
and South Association, Inc. as hereby revoked or cancelled.
The South Association appealed to the Appeals Board of the HIGC, which was
dismissed for lack of merit. Petitioner appealed to the CA, who affirmed the Resolution
of the HIGC Appeals Board.
ISSUE:
WON the failure of a corporation to file its by-laws within one month from the date of its
incorporation, as mandated by Section 46 of the Corporation Code, result in its
automatic dissolution
HELD:
Failure of a corporation to file its by-laws within one month does not automatically result
in its dissolution.
Although the Corporation Code requires the filing of by-laws, it does not expressly
provide for the consequences of the non-filing of the same within the period provided for
in Section 46. However, such omission has been rectified by Presidential Decree No.
902-A, the pertinent provisions on the jurisdiction of the SEC of which state:
 91

“SEC. 6. In order to effectively exercise such jurisdiction, the Commission shall

possess the following powers:
xxx xxx xxx xxx
(l) To suspend, or revoke, after proper notice and hearing, the franchise or
certificate of registration of corporations, partnerships or associations, upon
any of the grounds provided by law, including the following:
xxx xxx xxx xxx
5. Failure to file by-laws within the required period;
xxx xxx xxx xxx
Even under the foregoing express grant of power and authority, there can be
no automatic corporate dissolution simply because the incorporators failed to abide by
the required filing of by-laws embodied in Section 46 of the Corporation Code. There is
no outright “demise” of corporate existence. Proper notice and hearing are cardinal
components of due process in any democratic institution, agency or society. In other
words, the incorporators must be given the chance to explain their neglect or omission
and remedy the same.
The Court cited the case of Chung Ka Bio v. Intermediate Appellate Court: “ Under
Section 6(I) of PD 902-A, the SEC is empowered to ‘suspend or revoke, after proper
notice and hearing, the franchise or certificate of registration of a corporation’ on the
ground inter alia of ‘failure to file by-laws within the required period.’ It is clear from this
provision that there must first of all be a hearing to determine the existence of the
ground, and secondly, assuming such finding, the penalty is not necessarily revocation
but may be only suspension of the charter. In fact, under the rules and regulations of
the SEC, failure to file the by-laws on time may be penalized merely with the imposition
of an administrative fine without affecting the corporate existence of the erring firm.
It should be stressed in this connection that substantial compliance with conditions
subsequent will suffice to perfect corporate personality. Organization and
commencement of transaction of corporate business are but conditions subsequent and
not prerequisites for acquisition of corporate personality. The adoption and filing of by-
laws is also a condition subsequent. Under Section 19 of the Corporation Code, a
corporation commences its corporate existence and juridical personality and is deemed
incorporated from the date the Securities and Exchange Commission issues certificate
of incorporation under its official seal. This may be done even before the filing of the
by-laws, which under Section 46 of the Corporation Code, must be adopted ‘within one
month after receipt of official notice of the issuance of its certificate of incorporation.’

ADDITION:
Petitioner relies heavily on the wordings of Sec 46, since Section 46 uses the word
“must” with respect to the filing of by-laws, noncompliance therewith would result in
“self-extinction” either due to non-occurrence of a suspensive condition or the
occurrence of a resolutory condition “under the hypothesis that (by) the issuance of the
certificate of registration alone the corporate personality is deemed already formed.”
Interpretation of this provision of law begins with the determination of the meaning and
import of the word “must” in this section. Ordinarily, the word “must” connotes an
imperative act or operates to impose a duty which may be enforced. It is synonymous
with “ought” which connotes compulsion or mandatoriness. However, the word “must” in
 92

a statute, like “shall,” is not always imperative. It may be consistent with an exercise of
discretion. In this jurisdiction, the tendency has been to interpret “shall” as the context
or a reasonable construction of the statute in which it is used demands or requires. This
is equally true as regards the word “must.” Thus, if the language of a statute considered
as a whole and with due regard to its nature and object reveals that the legislature
intended to use the words “shall” and “must” to be directory, they should be given that
meaning.
14. GR. 54580 ARMCO STEEL CORPORATION (Phil) vs SEC, ARMCO STEEL
CORP. (OHIO, USA) and ARMCO MARSTEEL ALLOY CORP.

FACTS: On 7/1/65, ARMCO Steel Corporation, a corporation organized in Ohio

(ARMCO-OHIO) obtained from Phil. Patent Office, Cert. of Registration for its trademark
consisting of the word “ARMCO” and a triangular device for “ferrous metals and ferrous
metal castings and forgings.” Later, respondent ARMCO-OHIO filed an “Affidavit of Use”
for said trademark and the same was issued in favor of it.
ARMCO Marsteel-Alloy Corp. was incorporated on 7/11/72 under its name
Marsteel Alloy Company, Inc. However, its name was changed to ARMCO-Marsteel
Alloy Corp (hereinafter called ARMCO-Marsteel), by amendment of its Articles of
Incorporation upon purchase of 40% of its capital stock. Both corporations are engaged
in the manufacture of steel products.
On the other hand, ARMCO Steel Corp. was incorporated in the Philippines
called ARMCO-Phil on 4/25/73.
ARMCO-OHIO and ARMCO- Marsteel then filed a petition in the SEC to compel
ARMCO-Philippines to change its corporate name on the ground that it is very similar, if
not exactly the same as the name of one of the respondents in this case. On 2/14/75,
SEC issued an order granting the petition ordering ARMCO Steel Corporation (Phil) to
take out the name “ARMCO” by amending its Articles of Incorporation.
A series of MRs were filed and appeals made regarding the order but still, the
latter remained final and unheeded.
Later, petitioner ARMCO-Philippines amended its Articles of Incorporation by
changing its name to ARMCO Structures, Inc.” filed with and approved by the SEC.
Nevertheless, SEC ordered petitioner ARMCO-Phil (now ARMCO Structures), its
directors and officers to comply with the 2/14 SEC order within 10days from notice
thereof.
A manifestation and motion was filed by petitioner ARMCO Structures informing
SEC that it had already changed its corporate name with the approval of SEC to
ARMCO Structures, Inc. in substantial compliance w/ the SEC order or as an
alternative, praying to determine the confusing similarity between the names of
petitioner and that of respondents.
Respondents ARMCO-OHIO and ARMCO-Marsteel alleged that the change of
corporate name was not done in good faith and not in accordance with the order.
Subsequently, the respondents filed a motion to cite petitioner ARMCO Structures for
contempt in disobeying the order.
SEC found that ARMCO Structures did not make the proper disclosure of the
circumstances when it amended its Articles of Incorporation and ordered ARMCO
 93

Structures to comply with the SEC Order. SEC En Banc dismissed the appeal by
ARMCO Structures.
ISSUE: W/N there was substantial compliance of the SEC Order and that the latter is
functus officio.
HELD: No. The SEC Order was clear that the word “ARMCO” must be taken out must
be substituted for another word for it. According to SEC, the amendment of the
incorporation was made without the proper authorities of the SEC.
The Court found that the said amendment in the corporate name of petitioner
was not in substantial compliance with the SEC Order. The SEC could not legalize nor
change what is clearly unauthorized, if not contemptuous. Had the petitioner revealed
the SEC Order, the registration of the amended corporate name could not have been
accepted. Certainly, the said Order of 2/14/75 is not rendered functus oficio. The
actuations in this respect of petitioner are far from regular much less in good faith.
The names of both parties are not only similar but identical. Having a certificate
of registration of the trademark in its favor, respondent ARMCO-OHIO is entitled to
protection in the use thereof in the Philippines. The respondents have the right to the
exclusive use and enjoyment of said term.
Petition DISMISSED.

15. THE GOVERNMENT OF THE PHILIPPINE ISLANDS vs. Martin AVILA, ET AL.
G.R. No. L-11955; July 29, 1918
en banc

Facts: On October 6, 1913 a cadastral proceeding was instituted by the Director of

Lands, praying for a judicial declaration of the ownership of 655 lots of land situated in
the municipality of Cavite, Province of Cavite, in accordance with the provisions of the
Cadastral Act, No. 2259, and the amendments thereof.

The lots in question were claimed by is claimed by the Archicofradia del Santisimo y
Animas del Purgatorio, and also by the Roman Catholic Archbishop of Manila and by
Cofradia de Jesus Nazareno .

It appears to have been agreed upon by the parties that the Cofradia de Jesus
Nazareno has been in possession of lot No. 751-A for more than a hundred years since
it was donated to the Cofradia by Mario Gonzalez, according to a document executed in
1762.

It has also been agreed upon by the attorneys for both parties that lots Nos. 584, 637,
and 762 were donated to the said Cofradia, according to the evidence presented to
substantiate this fact (p. 19), and that lot No. 389 has been in the possession of the
Archicofradia del Santisimo y Animas del Purgatorio for more than 50 years from the
time that such lot had been acquired by donation from one of its members.

It is therefore undisputed that the said Cofradia and Archicofradia are in possession as
owners of the said lots of land, thus limiting the question for the decision of this Court as
 94

to whether the inscription of the said lots in the registry of property should be made in
the name of the said Cofradias or in that of Roman Catholic Archbishop of Manila.

Neither of two associations named above is incorporated in accordance with the

provisions of the law in force regarding corporations, although it appears proved in the
records that the Cofradia de Jesus Nazareno is composed of members belonging to the
Catholic religion and that the actual rector of the said Cofradia is the Catholic parish
priest of the town of San Roque, Cavite. It is a fact agreed upon by the parties that the
Archicofradia del Santisimo y Animas del Purgatorio is also a Catholic priest, and whose
funds as well as the products of its property are destined to cover the expenses incurred
in the celebration of the Holy Week and to preserve the building of the Roman Catholic
Church.

Issue: Whether the Confradia had the right to have its name inscribed in the titles of the
said lots as one with a juridical personality.

Held: Yes. It is true that the Cofradia organized under the old laws of the former regime
is not incorporated in accordance with Act No. 1459, known as the Corporation Law,
enacted subsequently to the said Land Registration Act No. 496, has not declared that
the corporations and associations created and established in accordance with the olds
laws of the former regime, to which class of corporations the said Cofradia belongs, can
not be recognized nor can exist.

This Cofradia was organized under the provisions of Law 25, Title IV, of the compilation
of the laws of the Indies and of the Real Cedula of October 15, 1805. Its by-laws were
approved by the Royal Order of February 25, 1895, upon a previous information by the
Council of the Indies. From that time the said Cofradia has had a legal existence and
has been performing its functions as a Catholic association duly organized with a right
to possess and administer property, applying the products of its property to the
purposes provided for in its by-laws, and, in enjoying the attributes and privileges
corresponding to an entity created by law, it is undisputed that, as owner of the said five
lots of land, it has a right to inscribe in its name, as a juridical entity, the titles to the said
property which it possesses. Without the reasons above stated the present Corporation
Law could have retroactive effect, for, while the said law recognizes the associations
constituted under the prior legislation, it has not declared in any of its provisions that the
said Cofradia became non-existent since said Corporation Law became operative.

Aside from this, it is undisputed that the Catholic Archbishop of Manila, as head and
representative of the Catholic Church, has and enjoys the right of intervention and
supervision over the existence and modus operandi of such Catholic associations and
Cofradias as that of Jesus Nazareno, the actual rector of which is the parish priest of
the town which is the legal residence of the Cofradia, but said supervision or
intervention does not imply concentration or assumption of the right to ownership which
the Cofradia de Jesus Nazareno enjoys over the real property which it possesses, nor
can such intervention deprive the members of the Archicofradia del Santisimo y Animas
del Purgatorio of the ownership of the five lots which they possess in common and
 95

under the title of an association, although such association is neither legally constituted
nor incorporated in accordance with the law in force regarding corporations.
16. Vda. de Salvatierra vs. Hon. Garlitos

G.R. No. L-11442 May 23, 1958

FELIX, J.:

FACTS: Alanuela T. Vda, de Salvatierra filed with the Court of First Instance of Leyte a
complaint against the Philippine Fibers Producers Co., Inc., and Segundino Q.
Refuerzo, for accounting, rescission and damages averring that 1. defendants planted
kenaf on 3 hectares of the leased property which crop was, at the time of the
commencement of the action, already harvested, processed and sold by defendants; 2.
that notwithstanding that fact, defendants refused to render an accounting of the income
derived therefrom and to deliver the lessor's share; 3. that the estimated gross income
was P4,500, and the deductible expenses amounted to P1,000; 4. that as defendants'
refusal to undertake such task was in violation of the terms of the covenant entered into
between the plaintiff and defendant corporation, a rescission was but proper.

As defendants apparently failed to file their answer to the complaint, of which they were
allegedly notified, the Court declared them in default and proceeded to receive plaintiff's
evidence. The lower court rendered a decision on favor of the plaintiff. No appeal
therefrom having been perfected within the reglementary period, the Court, upon motion
of plaintiff, issued a writ of execution, in virtue of which the Provincial Sheriff of Leyte
caused the attachment of 3 parcels of land registered in the name of Segundino
Refuerzo. No property of the Philippine Fibers Producers Co., Inc., was found available
for attachment. On January 31, 1956, defendant Segundino Refuerzo filed a motion
claiming that the decision rendered was null and void with respect to him, there being
no allegation in the complaint pointing to his personal liability and thus prayed that an
order be issued limiting such liability to defendant corporation.

Plaintiff contended that that her failure to specify defendant's personal liability was due
to the fact that all the time she was under the impression that the Philippine Fibers
Producers Co., Inc., represented by Refuerzo was a duly registered corporation as
appearing in the contract, but a subsequent inquiry from the Securities and Exchange
Commission yielded otherwise. While as a general rule a person who has contracted or
dealt with an association in such a way as to recognize its existence as a corporate
body is estopped from denying the same in an action arising out of such transaction or
dealing, yet this doctrine may not be held to be applicable where fraud takes a part in
the said transaction. In the instant case, on plaintiff's charge that she was unaware of
the fact that the Philippine Fibers Producers Co., Inc., had no juridical personality,
defendant Refuerzo gave no confirmation or denial and the circumstances surrounding
the execution of the contract lead to the inescapable conclusion that plaintiff Manuela T.
Vda. de Salvatierra was really made to believe that such corporation was duly
organized in accordance with law.
 96

ISSUE: Whether or not Refuerzo may be held personally liable for the liabilities of the
unregistered corporation for which Refuerzo was the President.

RULING: There can be no question that a corporation with registered has a juridical
personality separate and distinct from its component members or stockholders and
officers such that a corporation cannot be held liable for the personal indebtedness of a
stockholder even if he should be its president and conversely, a stockholder or member
cannot be held personally liable for any financial obligation be, the corporation in excess
of his unpaid subscription.

But this rule is understood to refer merely to registered corporations and cannot be
made applicable to the liability of members of an unincorporated association. The
reason behind this doctrine is obvious-since an organization which before the law is
non-existent has no personality and would be incompetent to act and appropriate for
itself the powers and attribute of a corporation as provided by law; it cannot create
agents or confer authority on another to act in its behalf; thus, those who act or purport
to act as its representatives or agents do so without authority and at their own risk. And
as it is an elementary principle of law that a person who acts as an agent without
authority or without a principal is himself regarded as the principal, possessed of all the
rights and subject to all the liabilities of a principal, a person acting or purporting to act
on behalf of a corporation which has no valid existence assumes such privileges and
obligations and comes personally liable for contracts entered into or for other acts
performed as such agent.

Considering that defendant Refuerzo, as president of the unregistered corporation

Philippine Fibers Producers Co., Inc., was the moving spirit behind the consummation of
the lease agreement by acting as its representative, his liability cannot be limited or
restricted that imposed upon corporate shareholders. In acting on behalf of a
corporation, which he knew to be unregistered, he assumed the risk of reaping the
consequential damages or resultant rights, if any, arising out of such transaction.

18.) [G.R. No. 19026. April 3, 1923.]

PHILIPPINE NATIONAL BANK, plaintiff-appellee, vs. UMBERTO DE POLI and WISE &
CO., defendants-appellants.

AVANCEÑA, J p:

Facts: In a document dated October 22, 1920, Umberto de Poli mortgaged the
properties therein described to the Philippine National Bank as security for a loan, credit
or overdraft not exceeding P650,000. Later, in another document dated November 15,
1920, Umberto de Poli and the Philippine National Bank agreed to release some of the
 97

properties from the mortgage and replace them with other properties which were
described in the latter document.
Umberto de Poli having violated the conditions of the mortgage, Philippine National
Bank, filed a complaint against Umberto de Poli, Henry Hunter Bayne and J. G.
Lawrence, the latter two being the persons who were holding the goods and the keys of
the warehouses where they were kept, and who refused to deliver them. On the next
day, December 8, 1920, Umberto de Poli was adjudged insolvent. Later the Chartered
Bank of India & Australia, the American Foreign Banking Corporation and Wise & Co.
intervened in the case, claiming to be creditors of the insolvent.
After the commencement of this action and the adjudication of insolvency of the
defendant Umberto de Poli, certiorari proceedings were instituted in this court against
the Honorable Judge of CFI of Manila. They alleged that the trial court lost its
jurisdiction over the case, the same having been absorbed by the insolvency
proceeding. This court, in a decision published March 15, 1921, denied the application
for a writ of certiorari, declaring that the Court of First Instance continued to have
jurisdiction over the case notwithstanding the insolvency proceeding. In the course of
the proceedings in this case, the plaintiff Bank, making use of the right granted it by rule
33 of Act No. 2938 and the contract of October 22, 1920, sold some of the mortgaged
property. After trial, the court below rendered judgment declaring the plaintiff to be
entitled to recover the mortgaged goods and holding the sale made by the plaintiff of
some of the goods valid.

Isssue: Whether or not the sale made by PNB of the mortgaged goods valid

Held: As has been stated above, the appellee sold to third persons, without the
intervention of the assignee in insolvency, some of the mortgaged goods, and
appellants contend that this sale was illegal and void. In the document of mortgage the
creditor was expressly authorized, in case of a violation of any of the conditions of the
contract, to sell the mortgaged goods or part thereof at private sale without previous
notice or advertisement of any kind, for the purpose of applying the proceeds of the sale
on the payment of the debt. This stipulation is perfectly valid. Article 1255 of the Civil
Code authorizes the contracting parties to make the stipulations, clauses and conditions
they may deem fit, provided the same are not contrary to law, morals or public order.
Moreover, Act No. 2938, creating the appellee Bank, in its section 33, grants the latter
express authority to sell the mortgaged goods under those conditions. The
constitutionality of this Act is challenged in so far as it is grants this power to the
appellee, but the fact that the parties themselves may stipulate to this effect is in itself
alone a sufficient refutation of the argument advanced against its constitutionality.
Therefore the sale made by the appellee of some of the goods mortgaged is perfectly
valid, not only because the same is authorized by the parties, but also because it is in
accordance with law.
Appellants also claim that the mortgage on the properties described in the document of
November 15, 1920, constitutes an unlawful preference. The mortgage evidenced by
the second document was but a partial substitute of the mortgage contained in the first.
It was stipulated in the second document that some of the properties covered by the first
document should be released in order that they might be used by Umberto de Poli in his
 98

business, and in lieu thereof other properties should be mortgaged, which were
described in the second document. It clearly appears that the second mortgage was
merely a partial substitution for the first. For this reason, although this second mortgage
was made on November 15, 1920, that is, within thirty days prior to the adjudication of
the insolvency of Umberto de Poli, which took place on December 8th of that same
year, it does not constitute an unlawful preference. A mere exchange of securities of
equal value may be made at any time without the same being held to constitute an
unlawful preference.
A fair exchange of values may be made at any time, even if one of the parties to the
transaction be insolvent. There in nothing in the Bankrupt Act, either in its language or
subject, which prevents an insolvent from dealing with his property, selling it or
exchanging it for other property, at any time before proceedings in bankruptcy are taken
by or against him, provided such dealing be conducted without any purpose to defraud
or delay his creditors or give preference to anyone, and does not impair the value of his
estate. An insolvent is not bound in the misfortune of his insolvency to abandon all
dealing with his property; his creditors can only complain if he waste his estate or give
preference in its disposition to one over another.
Equal value means substantially, not mathematically, equal. If what makes a
substitution fraudulent is the intention to defraud the creditors or to give preference to
some of them to the prejudice of the others, it cannot be supposed, in reason, that in the
case the substitution was made with such an intention simply on account of this small
differences, which, on the other hand, is ordinarily the case with goods previously
deposited in large lots.

19. PHILIPPINE TRUST COMPANY, as assignee in insolvency of "La Cooperativa

Naval Filipina," plaintiff-appellee,
vs.
MARCIANO RIVERA, defendant-appellant.

Araneta and Zaragoza for appellant.

Ross and Lawrence for appellee.

STREET, J.:

This action was instituted on November 21, 1921, in the Court of First Instance of
Manila, by the Philippine Trust Company, as assignee in insolvency of La Cooperativa
Naval Filipina, against Marciano Rivera, for the purpose of recovering a balance of
P22,500, alleged to be due upon defendant's subscription to the capital stock of said
insolvent corporation. The trial judge having given judgment in favor of the plaintiff for
the amount sued for, the defendant appealed.

It appears in evidence that in 1918 the Cooperativa Naval Filipina was duly incorporated
under the laws of the Philippine Islands, with a capital of P100,000, divided into one
thousand shares of a par value of P100 each. Among the incorporators of this company
was numbered the defendant Mariano Rivera, who subscribed for 450 shares
 99

representing a value of P45,000, the remainder of the stock being taken by other
persons. The articles of incorporation were duly registered in the Bureau of Commerce
and Industry on October 30 of the same year.

In the course of time the company became insolvent and went into the hands of the
Philippine Trust Company, as assignee in bankruptcy; and by it this action was
instituted to recover one-half of the stock subscription of the defendant, which
admittedly has never been paid.

The reason given for the failure of the defendant to pay the entire subscription is, that
not long after the Cooperativa Naval Filipina had been incorporated, a meeting of its
stockholders occurred, at which a resolution was adopted to the effect that the capital
should be reduced by 50 per centum and the subscribers released from the obligation to
pay any unpaid balance of their subscription in excess of 50 per centum of the same. As
a result of this resolution it seems to have been supposed that the subscription of the
various shareholders had been cancelled to the extent stated; and fully paid certificate
were issued to each shareholders for one-half of his subscription. It does not appear
that the formalities prescribed in section 17 of the Corporation Law (Act No. 1459), as
amended, relative to the reduction of capital stock in corporations were observed, and in
particular it does not appear that any certificate was at any time filed in the Bureau of
Commerce and Industry, showing such reduction.

His Honor, the trial judge, therefore held that the resolution relied upon the defendant
was without effect and that the defendant was still liable for the unpaid balance of his
subscription. In this we think his Honor was clearly right.

It is established doctrine that subscription to the capital of a corporation constitute a find

to which creditors have a right to look for satisfaction of their claims and that the
assignee in insolvency can maintain an action upon any unpaid stock subscription in
order to realize assets for the payment of its debts. (Velasco vs. Poizat, 37 Phil., 802.) A
corporation has no power to release an original subscriber to its capital stock from the
obligation of paying for his shares, without a valuable consideration for such release;
and as against creditors a reduction of the capital stock can take place only in the
manner an under the conditions prescribed by the statute or the charter or the articles of
incorporation. Moreover, strict compliance with the statutory regulations is necessary
(14 C. J., 498, 620).

In the case before us the resolution releasing the shareholders from their obligation to
pay 50 per centum of their respective subscriptions was an attempted withdrawal of so
much capital from the fund upon which the company's creditors were entitled ultimately
to rely and, having been effected without compliance with the statutory requirements,
was wholly ineffectual.

The judgment will be affirmed with cost, and it is so ordered.

 100

20. HENRY FLEISCHER, plaintiff-appellee,

vs.
BOTICA NOLASCO CO., INC., defendant-appellant.
G.R. No. L-23241 March 14, 1925
FACTS: Manuel Gonzalez was the original owner of the five shares of stock in question,
Nos. 16, 17, 18, 19 and 20 of the Botica Nolasco, Inc. On March 11, 1923, he assigned
and delivered said five shares to the plaintiff, Henry Fleischer, by accomplishing the
form of endorsement provided on the back thereof, together with other credits, in
consideration of a large sum of money owed by Gonzalez to Fleischer. Dr. Eduardo
Miciano, who was the secretary-treasurer of said corporation, offered to buy from Henry
Fleischer, on behalf of the corporation, said shares of stock, at their par value of P100 a
share, for P500. Under article 12 of the by-laws of Botica Nolasco, Inc., said corporation
had the preferential right to buy from Gonzalez said shares but plaintiff refused to sell
them to the defendant. Fleischer requested Dr. Miciano to register said shares in his
name but the latter refused to do so, saying that it would be in contravention of the by-
laws of the corporation. Article 12 of the said by-laws create in favor of Botica Nolasco,
Inc. a preferential right to buy, under the same conditions, the share or shares of stock
of a retiring shareholder.
Fleischer filed an action in the Court of First Instance of the Province of Oriental Negros
against the board of directors of the Botica Nolasco, Inc. praying that said board of
directors be ordered to register in the books of the corporation five shares of its stock in
his name and to pay P500 for damages.
ISSUE: Whether or not article 12 of the by-laws of Botica Nolasco, Inc., is in conflict
with the provisions of the Corporation Law (Act No. 1459) and may not be adopted by
the corporation.
HELD: Yes. The by-law in question was adopted under the power conferred upon the
corporation by section 13, paragraph 7but in adopting said by-law the corporation has
transcended the limits fixed by section 35 of Act No. 1459.
Section 13, paragraph 7 of the Corporation Code empowers a corporation to make by-
laws, not inconsistent with any existing law, for the transferring of its stock. It follows
from said provision, that a by-law adopted by a corporation relating to transfer of stock
should be in harmony with the law on the subject of transfer of stock. Section 35 of Act
No. 1459 specifically provides that the shares of stock "are personal property and may
be transferred by delivery of the certificate indorsed by the owner, etc." Said section
contemplates no restriction as to whom they may be transferred or sold. It does not
suggest that any discrimination may be created by the corporation in favor or against a
certain purchaser. The holder of shares, as owner of personal property, is at liberty to
dispose of them in favor of whomsoever he pleases, without any other limitation in this
respect, than the general provisions of law. Therefore, a stock corporation in adopting a
by-law governing transfer of shares of stock should take into consideration the specific
provisions of section 35 of Act No. 1459, and said by-law should be made to harmonize
with said provisions. It should not be inconsistent therewith.
As a general rule, the by-laws of a corporation are valid if they are reasonable and
calculated to carry into effect the objects of the corporation, and are not contradictory to
the general policy of the laws of the land. It is equally well settled that by-laws of a
corporation must be reasonable and for a corporate purpose, and always within the
 101

charter limits. They must always be strictly subordinate to the constitution and the
general laws of the land. They must not infringe the policy of the state, nor be hostile to
public welfare.

The only restraint imposed by the Corporation Law upon transfer of shares is found in
section 35 of Act No. 1459, quoted above, as follows: "No transfer, however, shall be
valid, except as between the parties, until the transfer is entered and noted upon the
books of the corporation so as to show the names of the parties to the transaction, the
date of the transfer, the number of the certificate, and the number of shares
transferred." This restriction is necessary in order that the officers of the corporation
may know who are the stockholders, which is essential in conducting elections of
officers, in calling meeting of stockholders, and for other purposes. But any restriction of
the nature of that imposed in the by-law now in question, is ultra vires, violative of the
property rights of shareholders, and in restraint of trade.

And moreover, the by-laws now in question cannot have any effect on the appellee. He
had no knowledge of such by-law when the shares were assigned to him. He obtained
them in good faith and for a valuable consideration. He was not a privy to the contract
created by said by-law between the shareholder Manuel Gonzalez and the Botica
Nolasco, Inc. Said by-law cannot operate to defeat his rights as a purchaser.

Whenever a corporation refuses to transfer and register stock in cases like the present,
mandamus will lie to compel the officers of the corporation to transfer said stock upon
the books of the corporation.
23. THE GOVERNMENT OF THE PHILIPPINE ISLANDS (on relation of the
Attorney-General), plaintiff,
vs.
EL HOGAR FILIPINO, defendant.
G.R. No. L-26649 July 13, 1927
STREET, J.:

FACTS: The Philippine Government instituted a quo warranto proceeding for the
purpose of depriving El Hogar Filipino, a building and loan association, of its corporate
franchise, excluding it from all corporate rights and privileges, and effecting a final
dissolution of said corporation. The complaint alleged that the defendant was organized
in the year 1911 as a building and loan association under the laws of the Philippine
Islands, and that, since its organization, the corporation has been doing business in the
Philippine Islands, with its principal office in the City of Manila.
On March 1, 1906, the Philippine Commission enacted what is known as the
Corporation Law (Act No. 1459) effective upon April 1 of the same year. Section 171 to
190, inclusive, of this Act are devoted to the subject of building and loan associations.
The respondent, El Hogar Filipino, was apparently the first corporation organized in the
Philippine Islands under the said law. Under the law as it then stood, the capital of the
Association was not permitted to exceed P3,000,000 which was later increased to ten
million. Soon thereafter the association took advantage of this enactment by amending
 102

its articles so as to provide that the capital should be in an amount not exceeding the
then lawful limit.

ISSUE/s:
1) WON a provision in the by-laws allowing the BOD, by vote of absolute majority, to
cancel shares is valid
2) WON a provision in the by-laws fixing the salary of directors is valid
3) WON a provision requiring persons elected to the Board of Directors to own at least
P 5,000 shares is valid

HELD:
1) No. It appears that among the bylaws of the association there is an article (No. 10)
which reads as follows: The board of directors of the association, by the vote of an
absolute majority of its members, is empowered to cancel shares and to return to the
owner thereof the balance resulting from the liquidation thereof whenever, by reason of
their conduct, or for any other motive, the continuation as members of the owners of
such shares is not desirable.This by-law is of course a patent nullity, since it is in direct
conflict with the latter part of section 187 of the Corporation Law, which expressly
declares that the board of directors shall not have the power to force the surrender and
withdrawal of unmatured stock except in case of liquidation of the corporation or of
forfeiture of the stock for delinquency. It is agreed that this provision of the by-laws has
never been enforced, and in fact no attempt has ever been made by the board of
directors to make use of the power therein conferred. In November, 1923, the Acting
Insular Treasurer addressed a letter to El Hogar Filipino, calling attention to article 10 of
its by-laws and expressing the view that said article was invalid. It was therefore
suggested that the article in question should be eliminated from the by-laws. At the next
meeting of the board of directors the matter was called to their attention and it was
resolved to recommend to the shareholders that in their next annual meeting the article
in question be abrogated. It appears, however, that no annual meeting of the
shareholders called since that date has been attended by a sufficient number of
shareholders to constitute a quorum, with the result that the provision referred to has
not been eliminated from the by-laws, and it still stands among the by-laws of the
association, notwithstanding its patent conflict with the law.
It is supposed that the existence of this article among the by-laws of the
association is a misdemeanor on the part of the respondent which justifies its
dissolution. In this view we are unable to concur. The obnoxious by-law, as it stands, is
a mere nullity, and could not be enforced even if the directors were to attempt to do so.
There is no provision of law making it a misdemeanor to incorporate an invalid provision
in the by-laws of a corporation; and if there were such, the hazards incident to corporate
effort would certainly be largely increased.

2) Yes. It is alleged that the directors of El Hogar Filipino, instead of serving without pay,
or receiving nominal pay or a fixed salary, — as the complaint supposes would be
proper, — have been receiving large compensation, varying in amount from time to
time, out of the profits of the respondent. In so far as this court is concerned the
question here before us is not one concerning the propriety and wisdom of the measure
 103

of compensation adopted by the respondent but rather the question of the validity of the
measure. Upon this point there can, it seems to us, be no difference of intelligent
opinion. The Corporation Law does not undertake to prescribe the rate of compensation
for the directors of corporations. The power to fixed the compensation they shall
receive, if any, is left to the corporation, to be determined in its by-laws (Act No. 1459,
sec. 21). Pursuant to this authority the compensation for the directors of El Hogar
Filipino has been fixed in section 92 of its by-laws, as already stated. The justice and
property of this provision was a proper matter for the shareholders when the by-laws
were framed; and the circumstance that, with the growth of the corporation, the amount
paid as compensation to the directors has increased beyond what would probably be
necessary to secure adequate service from them is matter that cannot be corrected in
this action; nor can it properly be made a basis for depriving the respondent of its
franchise, or even for enjoining it from compliance with the provisions of its own by-
laws. If a mistake has been made, or the rule adopted in the by-laws meeting to change
the rule. The remedy, if any, seems to lie rather in publicity and competition, rather than
in a court proceeding.

3) Yes. Article 70 of the by-laws requires that persons elected to the board of directors
must be holders of shares of the paid up value of P5,000 which shall be held as security
may be put up in the behalf of any director by some other holder of shares in the
amount stated. Article 76 of the by-laws declares that the directors waive their right as
shareholders to receive loans from the association.
It is asserted that article 70 is objectionable in that, under the requirement for security, a
poor member, or wage-earner, cannot serve as director, irrespective of other
qualifications and that as a matter of fact only men of means actually sit on the board.
Article 76 is criticized on the ground that the provision requiring directors to renounce
their right to loans unreasonably limits their rights and privileges as members. There is
nothing of value in either of these suggestions. Section 21 of the Corporation Law
expressly gives the power to the corporation to provide in its by-laws for the
qualifications of directors; and the requirement of security from them for the proper
discharge of the duties of their office, in the manner prescribed in article 70, is highly
prudent and in conformity with good practice. Article 76, prohibiting directors from
making loans to themselves, is of course designed to prevent the possibility of the
looting of the corporation by unscrupulous directors. A more discreet provision to insert
in the by-laws of a building and loan association would be hard to imagine. Clearly, the
eighth cause of action cannot be sustained.

24. National Exchange v Dexter

Facts: Respondent subscribed to the corporate stock of CS Salmon & Co. amounting to
P30,000, which was to be paid from the first dividends to be declared on the shares of
the said company. The payments will be taken from the dividends Dexter will be
receiving on his shares, until the full price or value of such shares have been fully paid.
An initial amount of P15,000 was paid from the dividends of Dexter’s shares as declared
by the company. However, no other dividend was thereafter declared by the company,
and thus, no other payment was made for the subscription. The National Exchange
became the assignee of CS Salmon, who instituted an action in the CFI to recover the
 104

remaining amount from Dexter. The CFI ruled in favor of National Exchange, thus,
Dexter appealed to the SC.
Issue: Whether the stipulation contained in the subscription to the effect that the
subscription is payable from the first dividends declared on the shares has the effect of
relieving the subscriber from personal liability in an action to recover the value of the
shares, and if such stipulation is valid.
Held: The said stipulation is unlawful. It obligates the subscriber to pay nothing for the
shares except dividends as may accrue upon the stock. In the contingency that the
dividends are not paid, there is no liability at all, and as such creates a discrimination in
favor of a particular subscriber. Dexter must pay for the amount claimed with interest.
The law prohibits the issuance of shares by corporations except for actual cash to the
par value of the stock or its full equivalent in property actually received by it at a fair
valuation equal to the par value of the stock or bonds so issued.
25. G.R. No. L-4824 June 30, 1953
LINGAYEN GULF ELECTRIC POWER COMPANY, INC., plaintiff-appellant, 
vs.

IRINEO BALTAZAR, defendant-appellee.
x---------------------------------------------------------x
G.R. No. L-6244 June 30, 1953
LINGAYEN GULF ELECTRIC POWER COMPANY, INC., plaintiff-appellee, 
vs.

IRINEO BALTAZAR, defendant and appellant.

MONTEMAYOR, J.:

FACTS:

The plaintiff, Lingayen Gulf Electric Power Company is a domestic corporation with an
authorized capital stock of P300,000 divided into 3,000 shares with a par value of P100
per share. The defendant, Irineo Baltazar appears to have subscribed for 600 shares on
account of which he had paid upon the organization of the corporation the sum of
P15,000. After incorporation, the defendant made further payments on account of his
subscription, leaving a balance of P18,500 unpaid for, which amount, the plaintiff now
claims in this action.

On July 23, 1946, a majority of the stockholders of the corporation, among them the
herein defendant, held a meeting and adopted stockholders' resolution No. 17. By said
resolution, it was agreed upon by the stockholders present to call the balance of all
unpaid subscribed capital stock as of July 23, 1946, the first 50 per cent payable within
60 days beginning August 1, 1946, and the remaining 50 per cent payable within 60
days beginning October 1, 1946. The resolution also provided, that all unpaid
subscription after the due dates of both calls would be subject to 12 per cent interest per
annum. Lastly, the resolution provided, that after the expiration of 60 days' grace which
would be on December 1, 1946, for the first call, and on February 1, 1947, for the
second call, all subscribed stocks remaining unpaid would revert to the corporation.

On September 22, 1946, the plaintiff corporation wrote a letter to the defendant
reminding him that the first 50 per cent of his unpaid subscription would be due on
 105

October 1, 1946. The plaintiff requested the defendant to "kindly advise the company
thru the undersigned your decision regarding this matter." The defendant answered on
September 25, 1946, asking the corporation that he be allowed to pay his unpaid
subscription by February 1, 1947. In his answer, the defendant also agreed that if he
could not pay the balance of his subscription by February 1, 1947, his unpaid
subscription would be reverted to the corporation.

On December 19, 1947, the defendant wrote another letter to the members of the Board
of Directors of the plaintiff corporation, offering to withdraw completely from the
corporation by selling out to the corporation all his shares of stock in the total amount of
P23,000. Apparently this offer of the defendant was left unacted upon by the plaintiff.

On April 17, 1948, the Board of Directors of the plaintiff corporation held a meeting, and
in the course of the said meeting they adopted Resolution No. 17. This resolution in
effect set aside the stockholders resolution approved on June 23, 1946, on the ground
that said stockholders' resolution was null and void, and because the plaintiff
corporation was not in a financial position to absorb the unpaid balance of the
subscribed capital stock. At the said meeting the directors also decided to call 50 per
cent of the unpaid subscription within 30 days from April 17, 1948, the call payable
within 60 days from receipt of notice from the Secretary-Treasurer. This resolution also
authorized legal counsel of the company to take all the necessary legal steps for the
collection of the payment of the call.

On June 10, 1949, the stockholders of the corporation held another meeting in which
the stockholders were all present, either in person or by proxy. At such meeting, the
stockholders adopted resolution No. 4, whereby it was agreed to revalue the stocks
and assets of the company so as to attract outside investors to put in money for the
rehabilitation of the company. The president was authorized to make all arrangement for
such appraisal and the Secretary to call a meeting upon completion of the
reassessment.

It was admitted by the defendant that he received notice from the Secretary-Treasurer
of the company, demanding payment of the unpaid balance of his subscription. It was
agreed by the parties that the call of the Board of Directors was not published in a
newspaper of general circulation as required by section 40 of the Corporation Law.

On September 28, 1949, the legal counsel of the plaintiff corporation wrote a letter to
the defendant, demanding the payment of the unpaid balance of his subscription
amounting to P18,500. Copy of this letter was sent by registered mail to the defendant
on September 29,1949. The defendant ignored the said demand. Hence this action.

In an exhaustive and well prepared decision, Judge M. Mejia of the lower court found
that the call for payment embodied in resolution No. 17 of July 23, 1946 was null and
void for lack of publication; consequently, he dismissed the complaint as premature. He
further held said resolution null and void in so far as it tried to relieve the defendant from
liability on his unpaid subscription, on the ground that the resolution was not approved
 106

by all the stockholders of the corporation. He also dismissed the defendant's

counterclaim for compensation as president of the corporation.

ISSUES:

1. Was the call valid?

2. Was the defendant released from the obligation of the unpaid balance of his
subscription by virtue of stockholders' resolution Nos. 17 and 4?

3. Is the defendant entitled to compensation as president of the plaintiff corporation?

HELD:

1. We agree with the lower court that the law requires that notice of any call for the
payment of unpaid subscription should be made not only personally but also by
publication. This is clear from the provisions of section 40 of the Corporation Law, Act
No. 1459, as amended, which reads as follows:

SEC. 40. Notice of call for unpaid subscriptions must be either personally served upon
each stockholder or deposited in the post office, postage prepaid, addressed to him at
his place of residence, if known, and if not known, addressed to the place where the
principal office of the corporation is situated. The notice must also be published once a
week for four successive weeks in some newspaper of general circulation devoted to
the publication of general news published at the place where the principal office of the
corporation is established or located, and posted in some prominent place at the works
of the corporation if any such there be. If there be no newspaper published at the place
where the principal office of the corporation is established or located, then such notice
may be published in any newspaper of general news in the Philippines.

It will be noted that section 40 is mandatory as regards publication, using the word
"must". As correctly stated by the trial court, the reason for the mandatory provision is
not only to assure notice to all subscribers, but also to assure equality and uniformity in
the assessment on stockholders.

2. Going to the claim of defendant and appellant that Resolution No. 17 of 1946
released him from the obligation to pay for his unpaid subscription, the authorities are
generally agreed that in order to effect the release, there must be unanimous consent of
the stockholders of the corporation. We quote some authorities:

Subject to certain exceptions, considered in subdivision (3) of this section, the general
rule is that a valid and binding subscription for stock of a corporation cannot be
cancelled so as to release the subscriber from liability thereon without the consent of all
the stockholders or subscribers. Furthermore, a subscription cannot be cancelled by the
company, even under a secret or collateral agreement for cancellation made with the
subscriber at the time of the subscription, as against persons who subsequently
 107

subscribed or purchased without notice of such agreement.

(3) Exceptions.

In particular circumstances, as where it is given pursuant to a bona fide

compromise, or to set off a debt due from the corporation, a release, supported
by consideration, will be effectual as against dissenting stockholders and
subsequent and existing creditors. A release which might originally have been
held invalid may be sustained after a considerable lapse of time.

In the present case, the release claimed by defendant and appellant does not fall under
the exception above referred to, because it was not given pursuant to a bona fide
compromise, or to set off a debt due from the corporation, and there was no
consideration for it.

3. As regards the compensation of President claimed by defendant and appellant, it is

clear that he is not entitled to the same. The by-laws of the company are silent as to the
salary of the President. And, while resolutions of the incorporators and stockholders
provide salaries for the general manager, secretary-treasurer and other employees,
there was no provision for the salary of the President. On the other hand, other
resolutions provide for per diems to be paid to the President and the directors of each
meeting attended, P10 for the President and P8 for each director, which were later
increased to P25 and P15, respectively. This leads to the conclusions that the President
and the board of directors were expected to serve without salary, and that the per diems
paid to them were sufficient compensation for their services. Furthermore, for
defendant's several years of service as President and up to the filing of the action
against him, he never filed a claim for salary. He thought of claiming it only when this
suit was brought against him.

In conclusion we hold that under the Corporation Law, notice of call for payment for
unpaid subscribed stock must be published, except when the corporation is insolvent, in
which case, payment is immediately demandable. We also rule that release from such
payment must be made by all the stockholders.

In view of the foregoing and finding no reversible error in the decision appealed, the
same is hereby affirmed.

No pronouncement as to costs.

26. LUMANLAN VS. CURA

G.R. No. L-39861 March 21, 1934

GODDARD, J.:.

FACTS:
Dizon & Co., Inc., is a corporation duly organized under the laws of the Philippine
 108

Islands with its central office in the City of Manila. The plaintiff-appellee Bonifacio
Lumanlan, subscribed for 300 shares of stock of said corporation at a par value of P50
or a total of P15,000. Julio Valenzuela, Pedro Santos and Francisco Escoto, creditors of
this corporation, filed suit against it in the Court of First Instance of Manila, praying that
a receiver be appointed, as it appeared that the corporation at that time had no assets
except credits against those who had subscribed for shares of stock. The court named
Tayag as receiver for the purpose of collecting, said subscriptions. As Bonifacio
Lumanlan failed to pay the full amount of stock, the receiver, filed a suit against him in
the Court of First Instance of Manila for collection. In that case Lumanlan was
sentenced to pay the corporation the above-mentioned sum of P15,109 with legal
interest thereon. Lumanlan appealed from this decision. The creditors, some of the
directors and the majority of the stockholders held several meetings in which it was
agreed in substance that subscribers for the capital stock who were in default should
pay the creditors; Lumanlan was designated to pay the debt of the corporation to Julio
Valenzuela, one of the petitioners as payment for the loan received from the
corporation. Notwithstanding the payment made by Lumanlan to Valenzuela, the
corporation, asked for the execution of the sentence and by virtue of an order of
execution the provincial sheriff levied upon two parcels of land belonging to Lumanlan.
Lumanlan brought this case to collect from Dizon & Co., Inc., and to prevent the sheriff
from selling the two parcels of land.

ISSUE:
Whether or not the corporation has a right to collect all unpaid stock subscriptions and
any other amounts which may be due it.

RULING: YES. It is established doctrine that subscriptions to the capital of a corporation

constitute a fund to which the creditors have a right to look for satisfaction of their claims
and that the assignee in insolvency can maintain an action upon any unpaid stock
subscription in order to realize assets for the payment of its debts. The Corporation Law
clearly recognizes that a stock subscription is a subsisting liability from the time the
subscription is made, since it requires the subscriber to pay interest quarterly from that
date unless he is relieved from such liability by the by-laws of the corporation. The
subscriber is as much bound to pay the amount of the share subscribed by him as he
would be to pay any other debt, and the right of the company to demand payment is no
less incontestable.

The judgment of the trial court is modified in accordance with the above and Dizon &
Co., Inc., is ordered to credit Bonifacio Lumanlan with the sum of P13,840 against the
judgment for P15,109,; to issue to Bonifacio Lumanlan 300 shares of its capital stock
upon payment by him of the sum of P1,269 with interest thereon at 6 per cent per
annum. The preliminary injunction issued in this case is hereby dissolved for the
purpose of enabling Dizon & Co., Inc., to ask for a new order of execution in case No.
37492, Court of First Instance of Manila, for the sum of P1,269 with interest thereon as
stated above.

27. De Silva v. ABOITIZ & COMPANY (1923)

 109

1) De Silva subscribed for 650 shares of stock (P500/share) of ABOITIZ.

2) He paid only for 200 shares, so that 450 remained unpaid for which he was
indebted to the sum of P225,000 .

3) April 1922- he was notified of the call for payment for unpaid subscribed
stocks and that it will be declared delinquent and sold if not paid.

4) The call was also published.

5) De Silva filed a complaint arguing that the C exceeded its executive authority
and asked for an injunction based on the ground:

The B-Ls provide that “Provided however, That from this 70% of the profit
obtained the BOD may deduct such amount as it may deem fit for the
payment of the unpaid subscriptions to the capitals stock and not pay any
dividend to the holders until said shares were paid in full.”
Thus, when C made a call and declared the unpaid subscribed stocks of
complainant to be delinquent, C violated the right of the SH as stated in the B-
Ls.
HELD: The said provision may be resorted to in the discretion of the BOD.
Said B-L provision does not give the shareholder the right
If the BOD does not wish to make, or does not make, use of said authority, it has
2 other remedies for accomplishing the same purpose. As stated in Velasco v. Poizat:
sale of delinquent shares or court action.
BOD elected to avail of the remedy of sale of the delinquent shares.
 110

Pamatian 1. Gokongwei Jr. v. SEC, et. al. – 89 SCRA 336

Aldeosa 2. Grace Christian High School v. CA – GR No. 108905; Oct. 23, 1997
Comia 3. Thomson v. CA – 298 SCRA 280
Caisido 4. Salafranca v. Philamlife (Pamplona) Homeowners Asso. – 300 SCRA
469
Villasin5. China Banking Corp. v. CA – 270 SCRA 503
Fangayen 6. Republic Planters Bank v. Agana – GR 51765; March 3, 1997
Alvarez 7. COCOFED v. RP – GR Nos. 177857-58; 178193; 180705
Cero 8. Garcia v. Lim Chu Sing – 59 Phil 562
Tria 9. Apodaca v. NLRC – 172 SCRA 442
Ballesta 10. National Exchange v. Dexter – 51 Phil 601
Zapata 11. Velasco v. Poizat – 37 Phil 802
Cervantes 12. Lingayen Gulf Electric v. Baltazar – 93 Phil 404
Gaite 13. Da Silva v. Aboitiz – 44 Phil 755
Garcia 14. Lumanlan v. Cura – 59 Phil 746
Concordia 15. China Banking Corp. v. CA – GR 117604; March 26, 1997
Arpafo 16. Fua Chin v. Summers, et. al. – 44 Phil 704
Chua 17. Baltazar v. Lingayen Gulf – 14 SCRA 522
Rojas 18. Nava v. Peers Mktg. Corp. – 76 SCRA 65
Diaz 19. Tan v. SEC – 206 SCRA 740
Briones 20. Nautica Canning Corp. Yumul – GR 164588; Oct. 19, 2005
Gutierrez 21. Lao v. Lao – GR 170585; Oct. 6, 2008

1. G.R. No. L-45911 April 11, 1979

JOHN GOKONGWEI, JR., petitioner,
vs.
SECURITIES AND EXCHANGE COMMISSION, ANDRES M. SORIANO, JOSE M.
SORIANO, ENRIQUE ZOBEL, ANTONIO ROXAS, EMETERIO BUNAO,
WALTHRODE B. CONDE, MIGUEL ORTIGAS, ANTONIO PRIETO, SAN MIGUEL
CORPORATION, EMIGDIO TANJUATCO, SR., and EDUARDO R. VISAYA,
respondents.

DOCTRINE: The doctrine of "corporate opportunity" 29 is precisely a recognition by the

courts that the fiduciary standards could not be upheld where the fiduciary was acting
for two entities with competing interests. This doctrine rests fundamentally on the
unfairness, in particular circumstances, of an officer or director taking advantage of an
opportunity for his own personal profit when the interest of the corporation justly calls for
protection. 30
It is not denied that a member of the Board of Directors of the San Miguel Corporation
has access to sensitive and highly confidential information, such as: (a) marketing
strategies and pricing structure; (b) budget for expansion and diversification; (c)
research and development; and (d) sources of funding, availability of personnel,
proposals of mergers or tie-ups with other firms.
It is obviously to prevent the creation of an opportunity for an officer or director of San
Miguel Corporation, who is also the officer or owner of a competing corporation, from
 111

taking advantage of the information which he acquires as director to promote his

individual or corporate interests to the prejudice of San Miguel Corporation and its
stockholders, that the questioned amendment of the by-laws was made. Certainly,
where two corporations are competitive in a substantial sense, it would seem
improbable, if not impossible, for the director, if he were to discharge effectively his
duty, to satisfy his loyalty to both corporations and place the performance of his
corporation duties above his personal concerns.
FACTS:
Petitioner, as stockholder of respondent San Miguel Corporation, filed with the
Securities and Exchange Commission (SEC) a petition for "declaration of nullity of
amended by-laws, cancellation of certificate of filing of amended by- laws, injunction
and damages with prayer for a preliminary injunction" against the majority of the
members of the Board of Directors and San Miguel Corporation as an unwilling
petitioner.
SEC case 1375
As a first cause of action-----(1976) individual respondents amended by bylaws of the
corporation, basing their authority to do so on a resolution of the stockholders adopted
on March 13, 1961, when the outstanding capital stock of respondent corporation was
only P70,139.740.00, divided into 5,513,974 common shares at P10.00 per share and
150,000 preferred shares at P100.00 per share. At the time of the amendment, the
outstanding and paid up shares totalled 30,127,047 with a total par value of
P301,270,430.00. It was contended that according to section 22 of the Corporation Law
and Article VIII of the by-laws of the corporation, the power to amend, modify, repeal or
adopt new by-laws may be delegated to the Board of Directors only by the affirmative
vote of stockholders representing not less than 2/3 of the subscribed and paid up capital
stock of the corporation, which 2/3 should have been computed on the basis of the
capitalization at the time of the amendment. Since the amendment was based on the
1961 authorization, petitioner contended that the Board acted without authority and in
usurpation of the power of the stockholders.
As a second cause of action, it was alleged that the authority granted in 1961 had
already been exercised in 1962 and 1963, after which the authority of the Board ceased
to exist.
As a third cause of action, petitioner averred that the membership of the Board of
Directors had changed since the authority was given in 1961, there being six (6) new
directors.
As a fourth cause of action, it was claimed that prior to the questioned amendment,
petitioner had all the qualifications to be a director of respondent corporation, being a
Substantial stockholder thereof; that as a stockholder, petitioner had acquired rights
inherent in stock ownership, such as the rights to vote and to be voted upon in the
election of directors; and that in amending the by-laws, respondents purposely provided
for petitioner's disqualification and deprived him of his vested right as afore-mentioned
hence the amended by-laws are null and void.
As additional causes of action, it was alleged that:
1. corporations have no inherent power to disqualify a stockholder from being elected
as a director and, therefore, the questioned act is ultra vires and void;
 112

2. that Andres M. Soriano, Jr. and/or Jose M. Soriano, while representing other
corporations, entered into contracts (specifically a management contract) with
respondent corporation, which was allowed because the questioned amendment gave
the Board itself the prerogative of determining whether they or other persons are
engaged in competitive or antagonistic business;
3. that the portion of the amended bylaws which states that in determining whether or
not a person is engaged in competitive business, the Board may consider such factors
as business and family relationship, is unreasonable and oppressive and, therefore,
void; and
4. that the portion of the amended by-laws which requires that "all nominations for
election of directors ... shall be submitted in writing to the Board of Directors at least five
(5) working days before the date of the Annual Meeting" is likewise unreasonable and
oppressive.
In view of the fact that the annual stockholders' meeting of respondent corporation had
been scheduled for May 10, 1977, petitioner filed with respondent Commission a
Manifestation stating that he intended to run for the position of director of respondent
corporation. Thereafter, respondents filed a Manifestation with respondent Commission,
submitting a Resolution of the Board of Directors of Respondent Corporation
disqualifying and precluding petitioner from being a candidate for director unless he
could submit evidence on May 3, 1977 that he does not come within the
disqualifications specified in the amendment to the by-laws, subject matter of SEC Case
No. 1375. By reason thereof, petitioner filed a manifestation and motion to resolve
pending incidents in the case and to issue a writ of injunction, alleging that private
respondents were seeking to nullify and render ineffectual the exercise of jurisdiction by
the respondent Commission, to petitioner's irreparable damage and prejudice, Allegedly
despite a subsequent Manifestation to prod respondent Commission to act, petitioner
was not heard prior to the date of the stockholders' meeting.
Petitioner alleges that there appears a deliberate and concerted inability on the part of
the SEC to act hence petitioner came to this Court.
SEC. CASE NO. 1423
Petitioner likewise alleges that, having discovered that respondent corporation has been
investing corporate funds in other corporations and businesses outside of the primary
purpose clause of the corporation, in violation of section 17 1/2 of the Corporation Law.
----------
With respect to the afore-mentioned SEC cases, it is petitioner's contention before this
Court that respondent Commission gravely abused its discretion when it failed to act
with deliberate dispatch on the motions of petitioner seeking to prevent illegal and/or
arbitrary impositions or limitations upon his rights as stockholder of respondent
corporation, and that respondent are acting oppressively against petitioner, in gross
derogation of petitioner's rights to property and due process. He prayed that this Court
direct respondent SEC to act on collateral incidents pending before it.
Issues:
1. Whether or not amended by-laws are valid is purely a legal question which public
interest requires to be resolved
2. Whether or not the amended by-laws of SMC of disqualifying a competitor from
nomination or election to the Board of Directors of SMC are valid and reasonable
 113

3. Whether or not respondent SEC gravely abused its discretion in denying petitioner's
request for an examination of the records of San Miguel International Inc., a fully owned
subsidiary of San Miguel Corporation
HELD:
1. Yes. It is settled that the doctrine of primary jurisdiction has no application where
only a question of law is involved. 8a Because uniformity may be secured through
review by a single Supreme Court, questions of law may appropriately be determined in
the first instance by courts. 8b In the case at bar, there are facts which cannot be
denied, viz.: that the amended by-laws were adopted by the Board of Directors of the
San Miguel Corporation in the exercise of the power delegated by the stockholders
ostensibly pursuant to section 22 of the Corporation Law; that in a special meeting on
February 10, 1977 held specially for that purpose, the amended by-laws were ratified by
more than 80% of the stockholders of record; that the foreign investment in the
Hongkong Brewery and Distellery, a beer manufacturing company in Hongkong, was
made by the San Miguel Corporation in 1948; and that in the stockholders' annual
meeting held in 1972 and 1977, all foreign investments and operations of San Miguel
Corporation were ratified by the stockholders.
2. Yes. Petitioner claims that the amended by-laws are invalid and unreasonable
because they were tailored to suppress the minority and prevent them from having
representation in the Board", at the same time depriving petitioner of his "vested right"
to be voted for and to vote for a person of his choice as director.
Upon the other hand, respondents Andres M. Soriano, Jr., Jose M. Soriano and San
Miguel Corporation content that ex. conclusion of a competitor from the Board is
legitimate corporate purpose, considering that being a competitor, petitioner cannot
devote an unselfish and undivided Loyalty to the corporation; that it is essentially a
preventive measure to assure stockholders of San Miguel Corporation of reasonable
protective from the unrestrained self-interest of those charged with the promotion of the
corporate enterprise; that access to confidential information by a competitor may result
either in the promotion of the interest of the competitor at the expense of the San Miguel
Corporation, or the promotion of both the interests of petitioner and respondent San
Miguel Corporation, which may, therefore, result in a combination or agreement in
violation of Article 186 of the Revised Penal Code by destroying free competition to the
detriment of the consuming public.
A. AUTHORITY OF CORPORATION TO PRESCRIBE QUALIFICATIONS OF
DIRECTORS EXPRESSLY CONFERRED BY LAW -- In this jurisdiction, under section
21 of the Corporation Law, a corporation may prescribe in its by-laws "the qualifications,
duties and compensation of directors, officers and employees ... " This must necessarily
refer to a qualification in addition to that specified by section 30 of the Corporation Law,
which provides that "every director must own in his right at least one share of the capital
stock of the stock corporation of which he is a director ... " In Government v. El Hogar,
the Court sustained the validity of a provision in the corporate by-law requiring that
persons elected to the Board of Directors must be holders of shares of the paid up value
of P5,000.00, which shall be held as security for their action, on the ground that section
21 of the Corporation Law expressly gives the power to the corporation to provide in its
by-laws for the qualifications of directors and is "highly prudent and in conformity with
good practice. "
 114

B. NO VESTED RIGHT OF STOCKHOLDER TO BE ELECTED DIRECTOR --

Pursuant to section 18 of the Corporation Law, any corporation may amend its articles
of incorporation by a vote or written assent of the stockholders representing at least
two-thirds of the subscribed capital stock of the corporation If the amendment changes,
diminishes or restricts the rights of the existing shareholders then the disenting minority
has only one right, viz.: "to object thereto in writing and demand payment for his share."
Under section 22 of the same law, the owners of the majority of the subscribed capital
stock may amend or repeal any by-law or adopt new by-laws. It cannot be said,
therefore, that petitioner has a vested right to be elected director, in the face of the fact
that the law at the time such right as stockholder was acquired contained the
prescription that the corporate charter and the by-law shall be subject to amendment,
alteration and modification.
C. AN AMENDMENT TO THE CORPORATION BY-LAW WHICH RENDERS A
STOCKHOLDER INELIGIBLE TO BE DIRECTOR, IF HE BE ALSO DIRECTOR IN A
CORPORATION WHOSE BUSINESS IS IN COMPETITION WITH THAT OF THE
OTHER CORPORATION, HAS BEEN SUSTAINED AS VALID -- section 21 of the
Corporation Law expressly provides that a corporation may make by-laws for the
qualifications of directors. Thus, it has been held that an officer of a corporation cannot
engage in a business in direct competition with that of the corporation where he is a
director by utilizing information he has received as such officer, under "the established
law that a director or officer of a corporation may not enter into a competing enterprise
which cripples or injures the business of the corporation of which he is an officer or
director.
It is also well established that corporate officers "are not permitted to use their position
of trust and confidence to further their private interests." In a case where directors of a
corporation cancelled a contract of the corporation for exclusive sale of a foreign firm's
products, and after establishing a rival business, the directors entered into a new
contract themselves with the foreign firm for exclusive sale of its products, the court held
that equity would regard the new contract as an offshoot of the old contract and,
therefore, for the benefit of the corporation, as a "faultless fiduciary may not reap the
fruits of his misconduct to the exclusion of his principal.
3. YES. Pursuant to the second paragraph of section 51 of the Corporation Law, "(t)he
record of all business transactions of the corporation and minutes of any meeting shall
be open to the inspection of any director, member or stockholder of the corporation at
reasonable hours."
The stockholder's right of inspection of the corporation's books and records is based
upon their ownership of the assets and property of the corporation. It is, therefore, an
incident of ownership of the corporate property, whether this ownership or interest be
termed an equitable ownership, a beneficial ownership, or a ownership. This right is
predicated upon the necessity of self-protection. It is generally held by majority of the
courts that where the right is granted by statute to the stockholder, it is given to him as
such and must be exercised by him with respect to his interest as a stockholder and for
some purpose germane thereto or in the interest of the corporation. In other words, the
inspection has to be germane to the petitioner's interest as a stockholder, and has to be
proper and lawful in character and not inimical to the interest of the corporation. In the
case at bar, considering that the foreign subsidiary is wholly owned by respondent San
 115

Miguel Corporation and, therefore, under its control, it would be more in accord with
equity, good faith and fair dealing to construe the statutory right of petitioner as
stockholder to inspect the books and records of the corporation as extending to books
and records of such wholly subsidiary which are in respondent corporation's possession
and control.
WHEREFORE, judgment is hereby rendere GRANTING the petition by allowing
petitioner to examine the books and records of San Miguel International, Inc. as
specified in the petition. The petition, insofar as it assails the validity of the amended by-
laws and the ratification of the foreign investment of respondent corporation, for lack of
necessary votes, is hereby DISMISSED. No costs.

02. G.R. No. 108905 October 23, 1997

Grace Christian High School vs Court of Appeals
MENDOZA, J.:

FACTS: Grace Christian High School (GCHS) is an educational institution in Grace

Village (QC). Grace Village Association, Inc. (GVAI) is the homeowners association in
Grace Village. GVAI has an existing by-laws which was already in effect since 1968. But
in 1975, the board of directors made a draft amending the by-laws whereby the
representative of GCHS shall have a permanent seat in the 15-seat board. The draft
however was never presented to the general membership for approval. But
nevertheless, the representative of GCHS held a seat in the board for 15 years until in
1990 when a proposal was made to the board to reconsider the practice of allowing the
GCHS representative in taking a permanent seat. Thereafter, an election was
scheduled for the 15 seat in the board. GCHS opposed the election as it insists that the
election should only be for 14 directors because it has a permanent seat. GVAI argued
that GCHS claim has no basis because the 1975 proposed amendment was never
ratified. GCHS averred that it was ratified when it was allowed to take the seat for 15
years and as such its right has already vested.

ISSUE: WON the representative from Grace Christian High School should be allowed to
have a permanent seat in the board of directors.

HELD: No. The Corporation Code is clear when it provides that members of the board
of a corporation must be elected by the stockholders (stock corporation) or the
members (non-stock corporation). Admittedly, there are corporations who allow some of
their directors to sit in the board without being elected – but such practice cannot prevail
over provisions of law. Practice, no matter how long continued, cannot give rise to any
vested right if it is contrary to law. Further, there is no reason as to why a representative
from GCHS should be given an automatic seat. It should therefore go through the
process of election. It cannot also be argued that the draft of the by-laws in 1975 was
ratified when GCHS was allowed to take its seat for 15 years without an election. In the
first place, the proposal was merely a draft and even if passed and approved by the
general membership, it cannot be given effect because it is void and contrary to the law.
GCHS’ seat in the corporate board is at best merely tolerated by GVAI.
 116

3. G.R. No. 116631 October 28, 1998

MARSH THOMSON, petitioner,
vs.
COURT OF APPEALS and THE AMERICAN CHAMPER OF COMMERCE OF THE
PHILIPPINES, INC,respondents.

FACTS: Petitioner Marsh Thomson (Thomson) was the Executive Vice-President and,
later on, the Management Consultant of private respondent, the American Chamber of
Commerce of the Philippines, Inc. (AmCham) for over ten years. While petitioner was
still working with private respondent, his superior, A. Lewis Burridge, retired as
AmCham's President. Before Burridge decided to return to his home country, he wanted
to transfer his proprietary share in the Manila Polo Club (MPC) to petitioner. However,
through the intercession of Burridge, private respondent paid for the share but had it
listed in petitioner's name. This was made clear in an employment advice dated January
13, 1986, wherein petitioner was informed by private respondent.
Burridge transferred said proprietary share to petitioner, as confirmed in a
letter of notification to the Manila Polo Club. Upon his admission as a new member of
the MPC, petitioner paid the transfer fee of P40,000.00 from his own funds; but private
respondent subsequently reimbursed this amount. MPC issued Proprietary Membership
Certificate Number 3398 in favor of petitioner. But petitioner, however, failed to execute
a document recognizing private respondent's beneficial ownership over said share.
Following AmCham's policy and practice, there was a yearly renewal of
employment contract between the petitioner and private respondent. Separate letters of
employment advice dated October 1, 1986 , as well March 4, 1988 and January 7,
1989 , mentioned the MPC share. But petitioner never acknowledged that private
respondent is the beneficial owner of the share as requested in follow-up requests.
When petitioner's contract of employment was up for renewal in 1989, he notified
private respondent that he would no longer be available as Executive Vice President
after September 30, 1989. Still, the private respondent asked the petitioner to stay on
for another six (6) months. Petitioner indicated his acceptance of the consultancy
arrangement with a counter-proposal.
Pending the negotiation for the consultancy arrangement, private respondent
executed on September 29, 1989 a Release and Quitclaim, stating that "AMCHAM, its
directors, officers and assigns, employees and/or representatives do hereby release,
waive, abandon and discharge J. MARSH THOMSON from any and all existing claims
that the AMCHAM, its directors, officers and assigns, employees and/or representatives
may have against J. MARSH THOMSON." The quitclaim, expressed in general terms,
did not mention specifically the MPC share.
On April 5, 1990, private respondent, through counsel sent a letter to the
petitioner demanding the return and delivery of the MPC share which "it (AmCham)
owns and placed in your (Thomson's) name."
Failing to get a favorable response, private respondent filed on May 15, 1990, a
complaint against petitioner praying, inter alia, that the Makati Regional Trial Court
render judgment ordering Thomson "to return the Manila Polo Club share to the plaintiff
and transfer said share to the nominee of plaintiff.
 117

The trial court awarded the MPC share to defendant (petitioner now) on the
ground that the Articles of Incorporation and By-laws of Manila Polo Club prohibit
artificial persons, such as corporations, to be club members.
The Court of Appeals (Former Special Sixth Division) promulgated its decision ,
reversing the, trial court's judgment and ordered herein petitioner to transfer the MPC
share to the nominee of private respondent.

ISSUE: Whether or not private respondent is a beneficial owner of the disputed share.

HELD: Yes. The beneficiary of a trust has beneficial interest in the trust property, while
a creditor has merely a personal claim against the debtor. In trust, there is a fiduciary
relation between a trustee and a beneficiary, but there is no such relation between a
debtor and creditor. While a debt implies merely an obligation to pay a certain sum of
money, a trust refers to a duty to deal with a specific property for the benefit of another.
If a creditor-debtor relationship exists, but not a fiduciary relationship between the
parties, there is no express trust. However, it is understood that when the purported
trustee of funds is entitled to use them as his or her own (and commingle them with his
or her own money), a debtor-creditor relationship exists, not a trust.
In the present case, as the Executive Vice-President of AmCham, petitioner
occupied a fiduciary position in the business of AmCham. AmCham released the funds
to acquire a share in the Club for the use of petitioner but obliged him to "execute such
document as necessary to acknowledge beneficial ownership thereof by the
Chamber". 22 A trust relationship is, therefore, manifestly indicated.
Moreover, petitioner failed to present evidence to support his allegation of being merely
a debtor when the private respondent paid the purchase price of the MPC share.
Applicable here is the rule that a trust arises in favor of one who pays the purchase
money of property in the name of another, because of the presumption that he who
pays for a thing intends a beneficial interest therein for himself.
 118

4. G.R. No. 121791 December 23, 1998

Salafranca v. Philamlife (Pamplona) Homeowners Asso. – 300 SCRA 469

FACTS: Enrique Salafranca started working with the private respondent

Philamlife Village Homeowners Association on May 1, 1981 as administrative
officer for a period of six months. From this date until December 31, 1983,
petitioner was reappointed to his position three more times. As administrative
officer, petitioner was generally responsible for the management of the village's
day to day activities. After petitioner's term of employment expired on December
31, 1983, he still continued to work in the same capacity, albeit, without the
benefit of a renewed contract.
Sometime in 1987, private respondent decided to amend its by-laws.
Included therein was a provision regarding officers, specifically, the position of
administrative officer under which said officer shall hold office at the pleasure of
the Board of Directors.Private respondent informed the petitioner that his term of
office shall be coterminus with the Board of Directors which appointed him to his
position. Furthermore, until he submits a medical certificate showing his state of
health, his employment shall be on a month-to-month basis. Oddly,
notwithstanding the failure of herein petitioner to submit his medical certificate,
he continued working until his termination in December 1992. Claiming that his
services had been unlawfully and unceremoniously dispensed with, petitioner
filed a complaint for illegal dismissal with money claims and for damages.

ISSUE: 1.Whether or not the employment of the Petitioner is not purely based on
considerations of Employer-Employee relationship.
 119

2.Whether or not Petitioner was illegally dismissed by private respondents.

HELD: 1. YES, The first element is present in this case. Petitioner was hired as
Administrative Officer by respondents. In fact, he was extended successive
appointments by respondents.The second element is also present since it is not
denied that respondent PVHA paid petitioner a fixed salary for his services. As to
the third element, it can be seen from the Records that respondents had the
power of dismissal over petitioner.With respect to the fourth and most important
element, respondents controlled the work of petitioner not only with respect to
the ends to be achieved but also the means used in reaching such ends.

2.YES, there is no dispute that petitioner had already attained the status of a
regular employee, as evidenced by his eleven years of service with the private
respondent. While private respondent has the right to terminate the services of
petitioner, this is subject to both substantive and procedural grounds.private
respondent utterly failed to substantiate petitioner's dismissal, rendering the
latter's termination illegal. At the risk of being redundant, it must be stressed that
these requirements are mandatory and non-compliance therewith renders any
judgment reached by the management void and inexistent.private respondent
imputes "gross negligence," and "serious misconduct" as the causes of
petitioner's dismissal, 18 not a shred of evidence was offered in support thereof,
other than bare and uncorroborated allegations.

5. China Banking Corporation vs. Court of Appeals

G.R. No. 117604, 26 March 1997

FACTS: Galicano Calapatia, Jr., a stockholder of Valley Golf & Country Club, Inc.
(VGCCI), pledged his Stock Certificate No. 1219 to China Banking Corporation (CBC).
CBC wrote VGCCI requesting that the pledge agreement be recorded in its books. In a
letter, VGCCI replied that the deed of pledge executed by Calapatia in CBC's favor was
duly noted in its corporate books. Calapatia obtained a loan of P20,000.00 from CBC,
payment of which was secured by the pledge agreement still existing between Calapatia
and CBC. Due to Calapatia's failure to pay his obligation, CBC filed a petition for
extrajudicial foreclosure, requesting for a public auction sale of the pledged stock. CBC
informed VGCCI of the foreclosure proceedings and requested that the pledged stock
be transferred to its name and the same be recorded in the corporate books. However,
VGCCI wrote CBC expressing its inability to accede to CBC's request in view of
Calapatia's unsettled accounts with the club. Despite the foregoing, a public auction was
held on 17 September 1985 and CBC emerged as the highest bidder at P20,000.00 for
the pledged stock. Consequently, CBC was issued the corresponding certificate of
sale.
VGCCI sent Calapatia a notice demanding full payment of his overdue account in
the amount of P18,783.24. Said notice was followed by a demand letter for the same
 120

amount and another notice for P23,483.24. VGCCI caused to be published in the
newspaper Daily Express a notice of auction sale of a number of its stock certificates, to
be held on 10 December 1986 at 10:00 a.m. Included therein was Calapatia's own
share of stock (Stock Certificate No. 1219). Through a letter, VGCCI informed Calapatia
of the termination of his membership due to the sale of his share of stock in the 10
December 1986 auction.
CBC advised VGCCI that it is the new owner of Calapatia's Stock Certificate No.
1219 by virtue of being the highest bidder in the 17 September 1985 auction and
requested that a new certificate of stock be issued in its name. VGCCI replied that "for
reason of delinquency" Calapatia's stock was sold at the public auction held on 10
December 1986 for P25,000.00. CBC protested the sale by VGCCI of the subject share
of stock and thereafter filed a case with the Makati RTC for the nullification of the 10
December 1986 auction and for the issuance of a new stock certificate in its name. The
Makati RTC dismissed the complaint for lack of jurisdiction over the subject matter on
the theory that it involves an intra-corporate dispute and it denied CBC's motion for
reconsideration. CBC filed a complaint with the SEC for the nullification of the sale of
Calapatia's stock by VGCCI; the cancellation of any new stock certificate issued
pursuant thereto; for the issuance of a new certificate in petitioner's name; and for
damages, attorney's fees and costs of litigation.
The SEC Hearing Officer ruled in favor of VGCCI, stating that considering that
the said share is delinquent, VGCCI had valid reason not to transfer the share in the
name of CBC in the books of VGCCI until liquidation of delinquency. Consequently, the
case was dismissed. The Hearing Officer denied CBC's motion for reconsideration.
CBC appealed to the SEC en banc which issued an order reversing the decision of its
hearing officer; holding that CBC has a prior right over the pledged share and because
of pledgor's failure to pay the principal debt upon maturity, CBC can proceed with the
foreclosure of the pledged share; declaring that the auction sale conducted by VGCCI
on 10 December 1986 is declared NULL and VOID; and ordering VGCCI to issue
another membership certificate in the name of CBC. VGCCI sought reconsideration of
the order. However, the SEC denied the same. The sudden turn of events sent VGCCI
to seek redress from the Court of Appeals. The Court of Appeals rendered its decision
nullifying and setting aside the orders of the SEC and its hearing officer on ground of
lack of jurisdiction over the subject matter and, consequently, dismissed CBC's original
complaint. The Court of Appeals declared that the controversy between CBC and
VGCCI is not intra-corporate; nullifying the SEC orders and dismissing CBC’s
complaint. CBC moved for reconsideration but the same was denied by the Court of
Appeals. CBC filed the petition for review on certiorari.

ISSUE: Whether CBC is bound by VGCCI's by-laws.

HELD: In order to be bound, the third party must have acquired knowledge of the
pertinent by-laws at the time the transaction or agreement between said third party and
the shareholder was entered into. At the time the pledge agreement was executed
VGCCI could have easily informed CBC of its by-laws when it sent notice formally
recognizing CBC as pledgee of one of its shares registered in Calapatia's name. CBC's
belated notice of said by-laws at the time of foreclosure will not suffice. By-laws signifies
 121

the rules and regulations or private laws enacted by the corporation to regulate, govern
and control its own actions, affairs and concerns and its stockholders or members and
directors and officers with relation thereto and among themselves in their relation to it.
The purpose of a by-law is to regulate the conduct and define the duties of the members
towards the corporation and among themselves. They are self-imposed and, although
adopted pursuant to statutory authority, have no status as public law. Therefore, third
persons are not bound by by-laws, except when they have knowledge of the provisions
either actually or constructively. For the exception to the general accepted rule that third
persons are not bound by by-laws to be applicable and binding upon the pledgee,
knowledge of the provisions of the VGCCI By-laws must be acquired at the time the
pledge agreement was contracted. Knowledge of said provisions, either actual or
constructive, at the time of foreclosure will not affect pledgee's right over the pledged
share. Article 2087 of the Civil Code provides that it is also of the essence of these
contracts that when the principal obligation becomes due, the things in which the pledge
or mortgage consists maybe alienated for the payment to the creditor. Further, VGCCI's
contention that CBC is duty-bound to know its by-laws because of Article 2099 of the
Civil Code which stipulates that the creditor must take care of the thing pledged with the
diligence of a good father of a family, fails to convince. CBC was never informed of
Calapatia's unpaid accounts and the restrictive provisions in VGCCI's by-laws.
Furthermore, Section 63 of the Corporation Code which provides that “no share
of stock against which the corporation holds any unpaid claim shall be transferable in
the books of the corporation” cannot be utilized by the corporation to refuse to recognize
ownership over pledged shares purchased at public auction. The term “unpaid claims”
refers to “any unpaid claims arising from unpaid subscription, and not to any
indebtedness which a subscriber or stockholder may owe the corporation arising from
any other transactions. Obligations arising from unpaid monthly dues do not fall within
the coverage of Section 63. Herein, the subscription for the share in question has been
fully paid as evidenced by the issuance of Membership Certificate No. 1219. What
Calapatia owed the corporation were merely the monthly dues. Hence, Section 63 does
not apply.

6. Republic Planters Bank v. Agana – GR 51765; March 3, 1997

7. COCOFED v. RP – GR Nos. 177857-58; 178193; 180705

8. GARCIA (representative of Mercantile Bank) VS. LIM CHU SING

GR. No. L-39427 February 24, 1934
Villareal, J.

FACTS: On June 20, 1930, Lim Chu Sing executed and delivered to the Mercantile
Bank of China promissory note for the sum of P19,605.17 with interest thereon at 6 per
cent per annum, payable monthly. The debt which is the subject matter of the complaint
was not really an indebtedness of Lim Chu Sing but of Lim Cuan Sy, who had an
account with the Mercantile Bank in the form of "trust receipts" guaranteed by the
defendant as surety and with chattel mortgage securities. Inasmuch as Lim Cuan Sy
failed to comply with his obligations, the Bank required Lim Chu Sing, as surety, to sign
a promissory note for the sum of P19,105.17. The defendant had been paying the
 122

corresponding installments until the debt was reduced to the sum of P9,105.17 claimed
in the complaint. The defendant is the owner of shares of stock of the plaintiff Mercantile
Bank of China amounting to P10,000. The plaintiff bank is now under liquidation.

ISSUE: Whether or not it is proper to compensate Lim Chu Sing’s indebtedness of

P9,105.17 with the sum of P10,000 representing the value of his shares of stock with
the Mercantile Bank of China.

HELD: No. According to the weight of authority, a share of stock or the certificate
thereof is not an indebtedness to the owner nor evidence of indebtedness and,
therefore, it is not a credit. Stockholders, as such, are not creditors of the corporation. It
is the prevailing doctrine of the American courts, repeatedly asserted in the broadest
terms, that the capital stock of a corporation is a trust fund to be used more particularly
for the security of creditors of the corporation, who presumably deal with it on the credit
of its capital stock. Therefore, the defendant-appellant Lim Chu Sing not being a creditor
of the Mercantile Bank of China, although the latter is a creditor of the former, there is
no sufficient ground to justify a compensation.

9. G.R. No. 80039 April 18, 1989

ERNESTO M. APODACA, petitioner,
v.
NATIONAL LABOR RELATIONS COMMISSION, JOSE M. MIRASOL and INTRANS
PHILS., INC., respondents.
GANCAYCO, J.:
FACTS: Petitioner was employed in respondent corporation. On August 28, 1985,
respondent Jose M. Mirasol persuaded petitioner to subscribe to 1,500 shares of
respondent corporation at P100.00 per share or a total of P150,000.00. He made an
initial payment of P37,500.00. On September 1, 1975, petitioner was appointed
President and General Manager of the respondent corporation. However, on January 2,
1986, he resigned.
On December 19, 1986, petitioner instituted with the NLRC a complaint against
private respondents for the payment of his unpaid wages, his cost of living allowance,
the balance of his gasoline and representation expenses and his bonus compensation
for 1986. Petitioner and private respondents submitted their position papers to the labor
arbiter. Private respondents admitted that there is due to petitioner the amount of
P17,060.07 but this was applied to the unpaid balance of his subscription in the amount
of P95,439.93. Petitioner questioned the set-off alleging that there was no call or notice
for the payment of the unpaid subscription and that, accordingly, the alleged obligation
is not enforceable.
LABOR ARBITER: sustained the claim of petitioner for P17,060.07 on the ground that
the employer has no right to withhold payment of wages already earned under Article
103 of the Labor Code.
NLRC: the decision of the labor arbiter was reversed in a decision. The NLRC held that
a stockholder who fails to pay his unpaid subscription on call becomes a debtor of the
corporation and that the set-off of said obligation against the wages and others due to
petitioner is not contrary to law, morals and public policy.
 123

ISSUES:
1. Does the National Labor Relations Commission (NLRC) have jurisdiction to
resolve a claim for non-payment of stock subscriptions to a corporation?
2. Assuming that it has, can an obligation arising therefrom be offset against a
money claim of an employee against the employer?

RULING: Firstly, the NLRC has no jurisdiction to determine such intra-corporate dispute
between the stockholder and the corporation as in the matter of unpaid subscriptions.
This controversy is within the exclusive jurisdiction of the Securities and Exchange
Commission.
Secondly, assuming arguendo that the NLRC may exercise jurisdiction over the
said subject matter under the circumstances of this case, the unpaid subscriptions are
not due and payable until a call is made by the corporation for payment. 2 Private
respondents have not presented a resolution of the board of directors of respondent
corporation calling for the payment of the unpaid subscriptions. It does not even appear
that a notice of such call has been sent to petitioner by the respondent corporation.
What the records show is that the respondent corporation deducted the amount due to
petitioner from the amount receivable from him for the unpaid subscriptions. 3 No doubt
such set-off was without lawful basis, if not premature. As there was no notice or call for
the payment of unpaid subscriptions, the same is not yet due and payable.
Lastly, assuming further that there was a call for payment of the unpaid
subscription, the NLRC cannot validly set it off against the wages and other benefits due
petitioner. Article 113 of the Labor Code allows such a deduction from the wages of the
employees by the employer, only in three instances, to wit:
ART. 113. Wage Deduction. — No employer, in his own behalf or in behalf of any
person, shall make any deduction from the wages of his employees, except:
(a) In cases where the worker is insured with his consent by the employer, and
the deduction is to recompense the employer for the amount paid by him as
premium on the insurance;
(b) For union dues, in cases where the right of the worker or his union to checkoff
has been recognized by the employer or authorized in writing by the individual
worker concerned; and
(c) In cases where the employer is authorized by law or regulations issued by the
Secretary of Labor.

10. G.R. No. L-27872 February 25, 1928

THE NATIONAL EXCHANGE CO., INC., plaintiff-appellee,

vs.
I. B. DEXTER, defendant-appellant.

FACTS: It appears that on August 10, 1919, defendant, I. B. Dexter, SUBSCRIBED 300
shares of stock of C.S Salmom and Company payable from the first dividends declared
on any and all shares of said company owned by Dexter at the time dividends are
declared, until the full amount of this subscription has been paid.
 124

Upon this subscription the sum of P15,000 was paid in January, 1920, from a
dividend declared at about that time by the company. No further dividend was declared.
The balance of 15000 remained unpaid.
The National Exchange became the assignee of CS Salmon, who instituted an
action in the CFI to recover the remaining amount from Dexter. The CFI ruled in favor of
National Exchange, thus, Dexter appealed to the SC.

ISSUE: Whether the stipulation contained in the subscription to the effect that the
subscription is payable from the first dividends declared on the shares has the effect of
relieving the subscriber from personal liability in an action to recover the value of the
shares.

HELD: NO. the Philippine Commission inserted in the Corporation Law, enacted March
1, 1906, the following provision: ". . . no corporation shall issue stock or bonds
except in exchange for actual cash paid to the corporation or for property actually
received by it at a fair valuation equal to the par value of the stock or bonds so
issued." (Act No. 1459, sec. 16 as amended by Act No. 2792, sec. 2.)
RATIONALE OF THR prohibition against the issuance of shares by
corporations except for actual cash: to secure absolute equality stockholders
with respect to their liability upon stock subscriptions. In the contingency that
dividends are not paid, there is no liability at all. This is a discrimination in favor
of the particular subcriber, and hence the stipulation is unlawful.
We may add that the law in force in this jurisdiction makes no distinction, in
respect to the liability of the subcriber, between shares subscribed before incorporation
is effected and shares subscribed thereafter. All like are bound to pay full value in
cash or its equivalent, and any attempt to discriminate in favor of one subscriber
by relieving him of this liability wholly or in part is forbidden. In what is here said
we have reference of course primarily to subcriptions to shares that have not
been previously issued. It is conceivable that the power of the corporation to make
terms with the purchaser would be greater where the shares which are the subject of
the transaction have been acquired by the corporation in course of commerce, after
they have already been once issued. But the shares with which are here concerned are
not of this sort.
The judgment appealed from must be affirmed, and it is so ordered, with costs
against the appellant.

11. MIGUEL VELASCO vs. JEAN M. POIZAT

G.R. No. L-11528 March 15, 1918
STREET, J.:

FACTS: The Philippine Chemical Product Co. submitted a resolution in a board

meeting, in which they released Infante, a stockholder, from his obligation of paying his
unpaid subscription in the amount of P1,500 and it is conditioned upon his surrendering
his certificates of shares of stock. In the same resolution, Poizat was obligated to shell
out the amount of his subscription valued at P1,500, and if he should refuse to make
 125

payment, judicial proceedings against him may be undertaken by the corporation

through its management.
Thereafter, the company underwent voluntary insolvency proceedings. The
assignee of the company, Velasco, sought to recover the amount owed by Poizat.
Nevertheless, the latter denied any accountability to pay the amount. Poizat asserted
the invalidity of making the call, and he asserted that he was given the same rights as
that given to Infante. The CFI dismissed the complaint filed by Velasco against Poizat.
Thus, Velasco appealed to the SC.

ISSUE: Whether or not Poizat is liable upon his subscription

.
HELD: The court ruled in the affirmative. A stock subscription is a contract between the
corporation and the subscriber, and the courts will enforce it either for or against the
other. The law recognizes that a stock subscription is a subsisting liability from the time
the subscription is made, since it requires the subscriber to pay interest quarterly from
the date of the subscription, unless he is relieved from such liability in the By-laws of the
corporation. The subscriber is as much bound to pay for his subscription as he would
any other debt. The law also provides 2 remedies to enforce stock subscriptions. The
first consists in permitting the corporation to put up the unpaid stock for sale and
dispose of it for the account of the delinquent subscriber. The other remedy is for the
directors to file an action in court. An assignee of an insolvent corporation, by stepping
into the shoes of the same, succeeds to all the corporate rights of action vested in the
corporation prior to its insolvency, and the assignee therefore has the same freedom
with respect to suing upon a stock subscription as the directors themselves would have.
Also, when insolvency supervenes upon a corporation and the court assumes
jurisdiction to wind it up, all unpaid stock subscriptions become payable on demand and
are at once recoverable in an action instituted by the assignee or receiver appointed by
the court. A subscriber cannot be permitted to escape his lawful obligation by reason of
the failure of the officers of the corporation to perform their duty in making a call; and
when the original mode of making the call becomes impracticable, the obligation must
be deemed as being due upon demand.
The judgment of the lower court is therefore reversed, and judgment will be
rendered in favor of the plaintiff and against the defendant for the sum of one thousand
five hundred pesos (P1,500), with interest from July 13, 1014, and costs of both
instances. So ordered.

12. G.R. No. L-4824 June 30, 1953

LINGAYEN GULF ELECTRIC POWER COMPANY, INC vs. IRINEO BALTAZAR
MONTEMAYOR, J.:

FACTS: When Lingayen Gulf Corporation (plaintiff) was organized, Irineo Baltazar
(defendant) subscribed for 600 shares and paid an initial sum of P15,000. After
incorporation, defendant made further payments for his subscription but left an unpaid
balance of P18,500. Plaintiff filed an action to collect said balance.
Defendant maintains that plaintiff can no longer claim anything from him
because: (1) he wrote a letter to the corporation expressly stating that his unpaid
 126

subscription would revert back to the corporation should he fail to pay his remaining
balance on 1 February 1947; (2) his December 1947 letter offering to withdraw
completely from the corporation by selling out to the corporation all his shares of stock
in the total amount of P23,000.
Defendant relied on Resolution No. 17 adopted in 1946 by majority stockholders
which provided that all subscribed stocks remaining unpaid after the expiration of 60
days of the first and second call would revert to the corporation.
But the Board of Directors of plaintiff corporation, in another resolution declared
null and void said stockholders resolution, saying that the plaintiff was not in a financial
position to absorb the unpaid balance of the subscribed capital stock.
In 1949, stockholders of the corporation held another meeting in which the
stockholders were all present, either in person or by proxy. At such meeting, the
stockholders adopted resolution No. 4, whereby it was agreed to revalue the stocks and
assets of the company so as to attract outside investors to put in money for the
rehabilitation of the company. It was admitted by the defendant that he received notice
from the Secretary-Treasurer of the company, demanding payment of the unpaid
balance of his subscription.
It was agreed by the parties that the call of the Board of Directors was not
published in a newspaper of general circulation as required by section 40 of the
Corporation Law. On September 28, 1949, the legal counsel of the plaintiff corporation
wrote a letter to the defendant, demanding the payment of the unpaid balance of his
subscription amounting to P18,500. The defendant ignored the said demand.
Since defendant ignored the call, plaintiff sued him for the balance.
Judge M. Mejia of the lower court found that the call for payment embodied in
resolution No. 17 of July 23, 1946 was null and void for lack of publication;
consequently, he dismissed the complaint as premature. He further held said resolution
null and void in so far as it tried to relieve the defend- ant from liability on his unpaid
subscription, on the ground that the resolution was not approved by all the stockholders
of the corporation.

ISSUES/HELD:
1. Whether the call was valid
NO. the law requires that notice of any call for the payment of unpaid subscription
should be made not only personally but also by publication. This is clear from the
provisions of section 40 of the Corporation Law, Act No. 1459, as amended, which
reads as follows:
SEC. 40. Notice of call for unpaid subscriptions must be either personally served
upon each stockholder or deposited in the post office, postage prepaid, addressed to
him at his place of residence, if known, and if not known, addressed to the place where
the principal office of the corporation is situated. The notice must also be published
once a week for four successive weeks in some newspaper of general circulation
devoted to the publication of general news published at the place where the principal
office of the corporation is established or located, and posted in some prominent place
at the works of the corporation if any such there be. If there be no newspaper published
at the place where the principal office of the corporation is established or located, then
such notice may be published in any newspaper of general news in the Philippines.
 127

It will be noted that section 40 is mandatory as regards publication, using the

word "must". As correctly stated by the trial court, the reason for the mandatory
provision is not only to assure notice to all subscribers, but also to assure equality and
uniformity in the assessment on stockholders.

2. Whether the defendant is relieved from his obligation by virtue of Resolution

No. 17.
NO. the authorities are generally agreed that in order to effect the release, there must
be unanimous consent of the stockholders of the corporation. We quote some
authorities:
Subject to certain exceptions, considered in subdivision (3) of this section, the
general rule is that a valid and binding subscription for stock of a corporation cannot be
cancelled so as to release the subscriber from liability thereon without the consent of all
the stockholders or subscribers. Furthermore, a subscription cannot be cancelled by the
company, even under a secret or collateral agreement for cancellation made with the
subscriber at the time of the subscription, as against persons who subsequently
subscribed or purchased without notice of such agreement. (18 C.J.S. 874).
(3) Exceptions.
In particular circumstances, as where it is given pursuant to a bona fide
compromise, or to set off a debt due from the corporation, a release, supported by
consideration, will be effectual as against dissenting stockholders and subsequent and
existing creditors. A release which might originally have been held invalid may be
sustained after a considerable lapse of time. (18 C.J.S. 874).
In the present case, the release claimed by defendant and appellant does not fall under
the exception above referred to, because it was not given pursuant to a bona
fide compromise, or to set off a debt due from the corporation, and there was no
consideration for it.
Another authority:
SEC. 850. Unanimous consent of stockholders necessary to release subscriber.
— It may be asserted as the first rule under this proposition that, after a valid
subscription to the capital stock of a corporation has been made and accepted, there
can be no cancellation or release from the obligation without the consent of the
corporation and all the stockholders; . . . . (2 Thompson on Corporation, p. 186).
He states the reason for the rule as follows:
SEC. 855. Right to withdraw as against subscribers. — A contract of subscription
is, at least in the sense which creates as estoppel, a contract among the several
subscribers. For this reason no one of the subscribers can withdraw from the contract
without the consent of all the others, and thereby diminish, without the universal
consent, the common fund in which all have acquired an interest. . . . (2 Thompson on
Corporations, p. 194.).
As already found by the trial court, the release attempted in Resolution No. 17 of
1946 was not valid for lack of a unanimous vote. If found that at least seven
stockholders were absent from the meeting when said resolution was approved.
 128

13. ARNALDO F. DE SILVA, plaintiff-appellant,

vs.
ABOITIZ & COMPANY, INC., defendant-appellee.

G.R. No. L-19893 March 31, 1923

FACTS: The plaintiff subscribed for 650 shares of stock of the defendant corporation of
the value of P500 each, of which he has paid only the total value of 200 shares, there
remaining 450 shares unpaid.

Subsequently, the Board of said corporation declared, by resolution, the unpaid

subscription to be due and demandable, and non-payment of which on the date fixed
would amount to a sale of said shares. De Silva questioned said authority of the Board,
as the corporation’s by-laws provided that the Board may deduct an amount from the
net profit to be applied to unpaid subscriptions. He contended that the Board cannot
prescribe another manner of collecting unpaid subscriptions when one has already been
provided in the by-laws.

HELD: The Court ruled that the Board of Directors has absolute discretion to choose
which remedy it deems proper in order to collect on the unpaid subscriptions. If it does
not wish to make use of the authority given to it in the by-law, it still has two other
remedies. It may put up the unpaid stock for sale as provided in the Corporation Code
or may collect by action in a court of proper jurisdiction the amount due on any unpaid
subscription, with accrued interests, costs, and expenses.

14. Lumanlan vs. Cura

G.R. No. L-39861 March 21, 1934

FACTS: The plaintiff-appellee Bonifacio Lumanlan, subscribed for 300 shares of stock
of said corporation at a par value of P50 or a total of P15,000. Julio Valenzuela, Pedro
Santos and Francisco Escoto, creditors of this corporation, filed suit against it in the
Court of First Instance of Manila, praying that a receiver be appointed, as it appeared
that the corporation at that time had no assets except credits against those who had
subscribed for shares of stock. The court named Tayag as receiver for the purpose of
collecting, said subscriptions. As Bonifacio Lumanlan had only paid P1,500 of the
P15,000, par value of the stock for which he subscribed, the receiver, filed a suit against
him in the Court of First Instance of Manila, for the collection of the amount he owed for
unpaid stock and for loans and advances by the corporation to Lumanlan. In that case
Lumanlan was sentenced to pay the corporation the above-mentioned sum of P15,109
with legal interest thereon. Lumanlan appealed from the said decision. With the
permission of the court, the creditors, some of the directors and the majority of the
stockholders held several meetings in which it was agreed in substance that subscribers
for the capital stock who were in default should pay the creditors; Lumanlan was
designated to pay the debt of the corporation of to Julio Valenzuela. In view of an
agreement between Lumanlan and Respondents, Lumanlan withdrew his appeal and
paid Valenzuela the sum of P11,840 including interest and thereby was subrogated in
 129

place of Valenzuela. The petitioning creditors having been paid the amounts owed to
them by the corporation asked that the receiver be dismissed and the court granted this.
Disregarding this agreement and notwithstanding the payment made by Lumanlan to
Valenzuela, the corporation still claimed from Lumanlan the amount of the
subscriptions. The provincial sheriff levied upon two parcels of land belonging to
Lumanlan.

ISSUE: Whether or not the corporation has a right to collect all unpaid stock
subscriptions and any other amounts which may be due it.

RULING: Yes. It is established doctrine that subscriptions to the capital of a corporation

constitute a fund to which the creditors have a right to look for satisfaction of their claims
and that the assignee in insolvency can maintain an action upon any unpaid stock
subscription in order to realize assets for the payment of its debts. The Corporation Law
clearly recognizes that a stock subscription is a subsisting liability from the time the
subscription is made, since it requires the subscriber to pay interest quarterly from that
date unless he is relieved from such liability by the by-laws of the corporation. The
subscriber is as much bound to pay the amount of the share subscribed by him as he
would be to pay any other debt, and the right of the company to demand payment is no
less incontestable.
 130

15. [G.R. No. 117604. March 26, 1997]

CHINA BANKING CORPORATION, petitioner, vs. COURT OF APPEALS, and VALLEY
GOLF and COUNTRY CLUB, INC., respondents.
DECISION
KAPUNAN, J.:

The case unfolds thus: On 21 August 1974, Galicano Calapatia, Jr. (Calapatia, for
brevity) a stockholder of private respondent Valley Golf & Country Club, Inc.
(VGCCI, for brevity), pledged his Stock Certificate No. 1219 to petitioner China
Banking Corporation (CBC, for brevity).
On 16 September 1974, petitioner wrote VGCCI requesting that the
aforementioned pledge agreement be recorded in its books.
In a letter dated 27 September 1974, VGCCI replied that the deed of pledge
executed by Calapatia in petitioner's favor was duly noted in its corporate books.
On 3 August 1983, Calapatia obtained a loan of P20,000.00 from petitioner,
payment of which was secured by the aforestated pledge agreement still existing
between Calapatia and petitioner.
Due to Calapatia's failure to pay his obligation, petitioner, on 12 April 1985,
filed a petition for extrajudicial foreclosure before Notary Public Antonio T. de
Vera of Manila, requesting the latter to conduct a public auction sale of the
pledged stock.
On 14 May 1985, petitioner informed VGCCI of the above-mentioned
foreclosure proceedings and requested that the pledged stock be transferred to
its (petitioner's) name and the same be recorded in the corporate books.
However, on 15 July 1985, VGCCI wrote petitioner expressing its inability to
accede to petitioner's request in view of Calapatia's unsettled accounts with the
club.
Despite the foregoing, Notary Public de Vera held a public auction on 17
September 1985 and petitioner emerged as the highest bidder at P20,000.00 for
the pledged stock. Consequently, petitioner was issued the corresponding
certificate of sale.

ISSUE: Whether or not it is an intracorporate controversy.

And by laws?

HELD: The basic issue we must first hurdle is which body has jurisdiction over
the controversy, the regular courts or the SEC.
 131

Applying the foregoing principles in the case at bar, to ascertain which

tribunal has jurisdiction we have to determine therefore whether or not petitioner
is a stockholder of VGCCI and whether or not the nature of the controversy
between petitioner and private respondent corporation is intra-corporate.
As to the first query, there is no question that the purchase of the subject
share or membership certificate at public auction by petitioner (and the issuance
to it of the corresponding Certificate of Sale) transferred ownership of the same
to the latter and thus entitled petitioner to have the said share registered in its
name as a member of VGCCI. It is readily observed that VGCCI did not assail the
transfer directly and has in fact, in its letter of 27 September 1974, expressly
recognized the pledge agreement executed by the original owner, Calapatia, in
favor of petitioner and has even noted said agreement in its corporate books. In
addition, Calapatia, the original owner of the subject share, has not contested the
said transfer.
By virtue of the afore-mentioned sale, petitioner became a bona fide
stockholder of VGCCI and, therefore, the conflict that arose between petitioner
and VGCCI aptly exemplies an intra-corporate controversy between a corporation
and its stockholder under Sec. 5(b) of P.D. 902-A.
An important consideration, moreover, is the nature of the controversy
between petitioner and private respondent corporation. VGCCI claims a prior
right over the subject share anchored mainly on Sec. 3, Art VIII of its by-laws
which provides that "after a member shall have been posted as delinquent, the
Board may order his/her/its share sold to satisfy the claims of the Club . . ." It is
pursuant to this provision that VGCCI also sold the subject share at public
auction, of which it was the highest bidder. VGCCI caps its argument by asserting
that its corporate by-laws should prevail. The bone of contention, thus, is the
proper interpretation and application of VGCCI's aforequoted by-laws, a subject
which irrefutably calls for the special competence of the SEC.
The procedural niceties settled, we proceed to the merits.
VGCCI likewise insists that due to Calapatia's failure to settle his
delinquent accounts, it had the right to sell the share in question in accordance
with the express provision found in its by-laws.
 132

Private respondent's insistence comes to naught. It is significant to note

that VGCCI began sending notices of delinquency to Calapatia after it was
informed by petitioner (through its letter dated 14 May 1985) of the foreclosure
proceedings initiated against Calapatia's pledged share, although Calapatia has
been delinquent in paying his monthly dues to the club since 1975. Stranger still,
petitioner, whom VGCCI had officially recognized as the pledgee of Calapatia's
share, was neither informed nor furnished copies of these letters of overdue
accounts until VGCCI itself sold the pledged share at another public auction. By
doing so, VGCCI completely disregarded petitioner's rights as pledgee. It even
failed to give petitioner notice of said auction sale. Such actuations of VGCCI
thus belie its claim of good faith.
In defending its actions, VGCCI likewise maintains that petitioner is bound
by its by-laws.
In order to be bound, the third party must have acquired knowledge of the
pertinent by-laws at the time the transaction or agreement between said third
party and the shareholder was entered into, in this case, at the time the pledge
agreement was executed. VGCCI could have easily informed petitioner of its by-
laws when it sent notice formally recognizing petitioner as pledgee of one of its
shares registered in Calapatia's name. Petitioner's belated notice of said by-laws
at the time of foreclosure will not suffice.
Therefore, it is the generally accepted rule that third persons are not bound
by by-laws, except when they have knowledge of the provisions either actually or
constructively. In the case of Fleisher v. Botica Nolasco, 47 Phil. 584, the
Supreme Court held that the by-law restricting the transfer of shares cannot have
any effect on the the transferee of the shares in question as he "had no
knowledge of such by-law when the shares were assigned to him. He obtained
them in good faith and for a valuable consideration. He was not a privy to the
contract created by the by-law between the shareholder x x x and the Botica
Nolasco, Inc. Said by-law cannot operate to defeat his right as a purchaser."
(Underscoring supplied.)
By analogy of the above-cited case, the Commission en banc is of the
opinion that said case is applicable to the present controversy. Appellant-
petitioner bank as a third party can not be bound by appellee-respondent's by-
laws. It must be recalled that when appellee-respondent communicated to
appellant-petitioner bank that the pledge agreement was duly noted in the club's
books there was no mention of the shareholder-pledgor's unpaid accounts. The
transcript of stenographic notes of the June 25, 1991 Hearing reveals that the
pledgor became delinquent only in 1975. Thus, appellant-petitioner was in good
faith when the pledge agreement was contracted.
 133

The Commission en banc also believes that for the exception to the general
accepted rule that third persons are not bound by by-laws to be applicable and
binding upon the pledgee, knowledge of the provisions of the VGCCI By-laws
must be acquired at the time the pledge agreement was contracted. Knowledge of
said provisions, either actual or constructive, at the time of foreclosure will not
affect pledgee's right over the pledged share. Art. 2087 of the Civil Code provides
that it is also of the essence of these contracts that when the principal obligation
becomes due, the things in which the pledge or mortgage consists maybe
alienated for the payment to the creditor.

16. G.R. No. L-19441 March 27, 1923

FUA CUN (alias Tua Cun), plaintiff-appellee,
vs.
RICARDO SUMMERS, in his capacity as Sheriff ex-oficio of the City of Manila, and
the CHINA BANKING CORPORATION, defendants-appellants.
OSTRAND, J.:

FACTS: On August 26, 1920, one Chua Soco subscribed for five hundred shares of
stock of the defendant Banking Corporation paying the sum of P25,000, one-half of the
subscription price, in cash, for which a receipt was issued.
On May 18, 1921, Chua Soco executed a promissory note in favor of the plaintiff
Fua Cun for the sum of P25,000, securing the note with a chattel mortgage on the
shares of stock subscribed for by Chua Soco. The plaintiff thereupon took the receipt to
the manager of the defendant Bank and informed him of the transaction with Chua
Soco, but was told to await action upon the matter by the Board of Directors.
In the meantime Chua Soco appears to have become indebted to defendant in the sum
of P37,731.68 for dishonored acceptances of commercial paper and in an action
brought against him to recover this amount, Chua Soco's interest in the five hundred
shares subscribed for was attached and the receipt seized by the sheriff. The
attachment was levied after the defendant bank had received notice of the facts that the
receipt had been endorsed over to the plaintiff.
Fua Cun thereupon brought the present action maintaining that by virtue of the
payment of the one-half of the subscription price of five hundred shares Chua Soco in
effect became the owner of two hundred and fifty shares and praying that his, the
plaintiff's, lien on said shares, by virtue of the chattel mortgage, be declared to hold
priority over the claim of the defendant Banking Corporation.
The trial court rendered judgment in favor of the plaintiff declaring that Chua
Soco, through the payment of the P25,000, acquired the right to two hundred and fifty
shares fully paid up, upon which shares the plaintiff holds a lien superior to that of the
defendant Banking Corporation and ordering that the receipt be returned to said plaintiff.

ISSUE: Whether or not Fua Cun hold a lien superior to that of defendant.

HELD: Yes. The claim of the defendant Banking Corporation upon which it brought the
action in which the writ of attachment was issued, was for the non-payment of drafts
 134

accepted by Chua Soco and had no direct connection with the shares of stock in
question. At common law a corporation has no lien upon the shares of stockholders for
any indebtedness to the corporation and our attention has not been called to any statute
creating such lien here. On the contrary, section 120 of the Corporation Act provides
that "no bank organized under this Act shall make any loan or discount on the security
of the shares of its own capital stock, nor be the purchaser or holder of any such
shares, unless such security or purchase shall be necessary to prevent loss upon a
debt previously contracted in good faith, and stock so purchased or acquired shall,
within six months from the time of its purchase, be sold or disposed of at public or
private sale, or, in default thereof, a receiver may be appointed to close up the business
of the bank in accordance with law."
Turning now to the rights of the plaintiff in the stock in question, it is argued that
the interest held by Chua Soco was merely an equity which could not be made the
subject of a chattel mortgage. Though the courts have uniformly held that chattel
mortgages on shares of stock and other choses in action are valid as between the
parties, there is still much to be said in favor of the defendants' contention that the
chattel mortgage here in question would not prevail over liens of third parties without
notice; an equity in shares of stock is of such an intangible character that it is somewhat
difficult to see how it can be treated as a chattel and mortgaged in such a manner that
the recording of the mortgage will furnish constructive notice to third parties.
But a determination of this question is not essential in the present case. There
can be no doubt that an equity in shares of stock may be assigned and that the
assignment is valid as between the parties and as to persons to whom notice is brought
home. Such an assignment exists here, though it was made for the purpose of securing
a debt.
This endorsement was accompanied by the delivery of the receipt to the plaintiff
and further strengthened by the execution of the chattel mortgage, which mortgage, at
least, operated as a conditional equitable assignment.

17. G.R. No. L-16236 June 30, 1965

IRINEO S. BALTAZAR, plaintiff-appellee, 
vs.
LINGAYEN GULF ELECTRIC POWER,
CO., INC., DOMINADOR C. UNGSON, BRIGIDO G. ESTRADA, MANUEL L.
FERNANDEZ, BENEDICTO C. YUSON and BERNARDO ACENA, defendants-
appellants.
-----------------------------
G.R. No. L-16237 June 30, 1965
MARVIN O. ROSE, plaintiff-appellee, 
vs.
LINGAYEN GULF ELECTRIC CO., INC.,
DOMINADOR, C. UNGSON, BRIGIDO G. ESTRADA, MANTEL L. FERNANDEZ,
BENEDICTO C. YUSON and BERNARDO C. ACENA, defendants-appellants.
-----------------------------
G.R. No. L-16238 June 30, 1965.
IRINEO S. BALTAZAR and MARVIN O. ROSE, plaintiffs-appellees, 
vs.
BERNARDO
ACENA, defendant-appellant.
PAREDES, J.:

FACTS: The Lingayen Gulf Electric Power Co., Inc., hereinafter referred to as
 135

Corporation, has an authorized capital stock of P300.000.00 divided into 3,000 shares
of voting stock at P100.00 par value, per share.
Plaintiffs Baltazar and Rose were among the incorporators, having subscribed to
600 and 400 shares of the capital stock, or a total par value of P60,000.00 and
P40.000.00, respectively.
It is alleged that it has always been the practice and procedure of the Corporation to
issue certificates of stock to its individual subscribers for unpaid shares of stock.
Of the 600 shares of capital stock subscribed by Baltazar, he had fully paid 535 shares
of stock. He had also 65 shares with par value of P6,500.00, for which no certificate was
issued to him.
Of the 400 shares of stock subscribed by Rose, he had 375 shares of fully paid stock,
duly covered by certificates of stock issued to him.
The respondents Ungson, Estrada, Fernandez and Yuson were small
stockholders of the Corporation, all holding a total number of fully paid-up shares of
stock, of not more than 100 shares, with a par value of P10,000.00 and the defendant
Acena, was likewise an incorporator and stockholder, holding 600 shares of stock, for
which certificate of stock were issued to him and as such, was the largest individual
stockholder thereof. Defendants Ungson, Estrada, Fernandez and Yuzon constituted
the majority of the holdover seven-member Board of Directors of the Corporation in
1955.
The date of the annual stockholders' meeting of the Corporation had been fixed, under
its by-laws, on the first Tuesday of February of every year, but for one reason or
another, the meeting was to be held on May 1, 1955, principally for the purpose of
electing new officers and Board of Directors for the calendar year 1955.
A realignment was effected and the total number of fully paid-up shares held by
stockholders of Ungson group, was almost equal the number of fully paid-up shares
held by the Baltazar group.
The Ungson group (specially defendant Acena), which had been in complete control of
the management and property of the Corporation since January 1, 1955 in the regular
meeting of the Board of Directors, held on January 30, 1955, passed three (3)
resolutions.
Resolution No. 2 (Exh. A), declared all watered stocks issued to Acena, Baltazar,
Rose and Jubenville, "of no value and consequently cancelled from the books of the
Corporation.
Resolution No. 3 (Exh. B) resolved that "... all unpaid subscriptions should bear
interest annually from the year of subscription on the basis of quarterly payment, and
any or all payments already made on said unpaid subscriptions should be credited to
pay interest first, then the capital debt after all interest is fully paid.
All shares of stock issued to and in favor of any stockholder or stockholders of
the Lingayen Gulf Electric Power Co., Inc., on account of payments on unpaid
subscriptions without the interest thereon — accrued and collectible having been fully
paid from the date of subscription as required by the Corporation Law, shall be declared
of no value and cancelled from its books, and if the payments already made exceeded
the interest accrued and collectible by virtue of the provision of law and the previous
resolution of its board of directors, the excess should be applied to the payment of the
unpaid subscription. For this purpose, the accountant of the corporation is directed to
 136

make and report the proper computation of the interest.

Resolution No. 4 (Exh. C) resolved that "any and all shares of stock of the
Lingayen Gulf Electric Power Co., Inc., issued as fully paid-up to stockholders whose
subscription to a number of shares have been declared delinquent with the accrued
interest on the unpaid thereof per Resolution No. 42, S. 1954, of the Board of Directors
which has been duly published in the "Manila Chronicle," are hereby incapacitated to
utilize or avail of the voting power until such delinquency with the accrued interest is
fully paid up as indicated in Resolution No. 3, S. 1955.
On the authority of these resolutions, the Ungson group was threatening and
procuring to expel and oust the plaintiffs and their companion stockholders, for the
ultimate purpose of depriving them of their right to vote in the said annual stockholders'
meeting scheduled for May 1, 1955.
In their complaint, Baltazar and Rose prayed that a writ of preliminary injunction
be issued against the defendants, enjoining them to desist and refrain from carrying out
the objects and purposes of the three resolutions aforestated, and commanding them to
allow plaintiffs and companions to vote in the stockholders' meeting, on May 1, 1955,
their fully paid up shares of stocks, as evidenced by stock certificates issued to them
and outstanding on the stock book of the defendant Corporation, on or before January
30, 1955, to declare said three resolutions illegal and invalid, and to pay plaintiffs the
sum of P10,000.00 each, as damages.

ISSUES:
1. If a stockholder, in a stock corporation, subscribes to a certain number of shares of
stock, and he pays only partially, for which he is issued certificates of stock, is he
entitled to vote the latter, notwithstanding the fact that he has not paid the balance of his
subscription, which has been called for payment or declared delinquent?
2. If the entire subscribed shares of stock are not paid, will the paid shares of stock be
deprived of the right to vote, until the entire subscribed shares of stock are fully paid,
including interest?

HELD:
1. Yes. Section 37 of the Corporation Law, as amended by Act No. 3518, approved on
March 1, 1929, six (6) years after the promulgation of the Fua-Summers case (decided
in 1923), provides:
SEC. 37. ... . No certificate of stock shall be issued to a subscriber as fully paid
up until the full par value thereof, or the full subscription in the case of no par stock, has
been paid by him to the corporation. Subscribed shares not fully paid up may be voted
provided no subscription is unpaid and delinquent.
The law just quoted was originally section 36 of the Corporation Law of 1906,
which reads as follows:
SEC. 36. ... . No certificate of stock shall be issued to a subscriber as fully paid up until
the full par value thereof has been paid by him to the corporation. Subscribed shares
not fully paid up may be voted provided no subscription is unpaid and delinquent.
As may readily be seen, said Section 37 makes payment of the "par value" as
prerequisite for the issuance of certificates of par value stocks, and makes payment of
the "full subscription" as prerequisite for the issuance of certificates of no par value
 137

stocks. No such distinction was contained in section 36 of our Corporation Law of 1906,
corresponding to section 37 now. The present law could have simply provided that no
certificate of par value and no par value stock shall be issued to a subscriber, as fully
paid up, until the full subscription has been paid by him to the corporation, if full
payment of subscription were intended is the criterion in the issuance of certificates, for
both the par value and no par value stocks. Stated in another way, the present law
requires as a condition before a share holder can vote his shares, that his full
subscription be paid in the case of no par value stock; and in case of stock corporation
with par value, the stockholder can vote the shares fully paid by him only, irrespective of
the unpaid delinquent shares.
As well-observed by the trial court, a corporation may now, in the absence of
provisions in their by-laws to the contrary, apply payment made by, subscribers-
stockholders, either as: "(a) full payment for the corresponding number of shares of
stock, the par value of each of which is covered by such payment; or (b) as payment
pro-rata to each and all the entire number of shares subscribed for" (amended
decision).
In the cases at bar, the defendant-corporation had chosen to apply payments by
its stockholders to definite shares of the capital stock of the corporation and had fully
paid capital stock shares certificates for said payments; its call for payment of unpaid
subscription and its declaration of delinquency for non-payment of said call affecting
only the remaining number of shares of its capital stock for which no fully paid capital
stock shares certificates have been issued, "and only these have been legally shorn of
their voting rights by said declaration of delinquency" (amended decision).

2. No. The second paragraph of resolution No. 3 (Exh. C-1), unilaterally declared as of
no value and cancelled all capital stock shares certificates issued as fully paid up, upon
payments made by stockholders, when interests on unpaid subscription from date of
subscription were not previously and/or then and there paid. Defendants-appellants,
invoking Art. 1253 NCC (Art. 1173 of the Old Civil Code) which provides that "if the debt
produces interest, payment of the principal shall not be deemed to have been made
until the interests have been covered," and relying on an opinion of the Securities and
Exchange Commission, claim that said unilateral nullification and/or cancellation of
previously issued capital stock shares certificates was valid. This provision of law only
applies in the absence of verbal or written agreement, to the contrary (8 Manresa, p.
317); it is likewise merely directory, and not mandatory. (Art. 1252 NCC). In the present
case, the defendant-corporation had applied the payments made by the stockholders to
the full par value of the shares of stock subscribed by them, instead of the accepted
interest, as shown by the capital stock shares certificate issued for the payments made,
and the stockholders had accepted such certificates issued for such payments. This
being the case, the said application of payments must be deemed to have been agreed
upon by the Corporation and the stockholders, and the same cannot now be changed
without the consent of the stockholders concerned. The Corporation Law and the by-
laws of the defendant Corporation do not contain any provision, prohibiting the
application of stockholders' payments to the full par value of a corporation's capital
stock, ahead of the payment of accrued interest for unpaid subscriptions. It would,
therefore, result that a corporation may, upon request of an interested stockholder, as
 138

his option, apply payment by them to the full par value of shares of capital leaving its
collection later of the accrued interest on unpaid subscriptions, and that once such
option has been exercised and the corresponding stock certificates have been issued,
the corporation cannot, by a unilateral act, legally nullify and cancel the capital stock
certificates so issued.

18. Nava v. Peers Mktg. Corp. – 76 SCRA 65

19. Tan v. SEC – 206 SCRA 740

20. Nautica Canning Corp, First Dominion Prime Holdings, Inc. & Fernando
Arguelles VS. Roberto Yumul
G.R. No. 164588, October 19, 2005

FACTS: On December 19, 1994, respondent Roberto C. Yumul was appointed Chief
Operating Officer/General Manager of Nautica with a monthly compensation of P85,000
and an additional compensation equal to 5% of the company’s operating profit for the
calendar year. On the same date, First Dominion Prime Holdings, Inc., Nautica’s parent
company, through its Chairman Alvin Y. Dee, granted Yumul an Option to Purchase up
to 15% of the total stocks it subscribed from Nautica.
On June 22, 1995, a Deed of Trust and Assignment was executed between First
Dominion Prime Holdings, Inc. and Yumul whereby the former assigned 14,999 of its
subscribed shares in Nautica to the latter. The deed stated that the 14,999 “shares
were acquired and paid for in the name of the ASSIGNOR only for convenience, but
actually executed in behalf of and in trust for the ASSIGNEE.” In March 1996, Nautica
declared a P35,000,000 cash dividend, P8,250,000 of which was paid to Yumul
representing his 15% share.
After Yumul’s resignation from Nautica on August 5, 1996, he wrote a letter to
Dee requesting the latter to formalize his offer to buy Yumul’s 15% share in Nautica on
or before August 20, 1996; and demanding the issuance of the corresponding certificate
of shares in his name should Dee refuse to buy the same. Dee, denied the request
claiming that Yumul was not a stockholder of Nautica.
Yumul requested that the Deed of Trust and Assignment be recorded in the Stock and
Transfer Book of Nautica, and that he, as a stockholder, be allowed to inspect its books
and records. Yumul’s requests were denied allegedly because he neither exercised the
option to purchase the shares nor paid for the acquisition price of the 14,999
shares. Atty. Arguelles maintained that the cash dividend received by Yumul is held by
him only in trust for First Dominion Prime Holdings, Inc.
Thus, Yumul filed on October 3, 1996, before the SEC a petition for mandamus
with damages, with prayer that the Deed of Trust and Assignment be recorded in the
Stock and Transfer Book of Nautica and that the certificate of stocks corresponding
thereto be issued in his name. The SEC en banc rendered a decision in favor of Yumul.
Hence the instant petition.

ISSUE: Whether or not Yumul is a stockholder.

 139

RULING: Petitioners contend that Yumul was not a stockholder of Nautica; that he was
just a nominal owner of one share as the beneficial ownership belonged to Dee who
paid for said share when Nautica was incorporated. They presented China Banking
Corporation Check No. A2620636 and Citibank Check No. B82642 as proof of payment
by Dee; a letter by Dee dated July 15, 1994 requesting the corporate secretary of
Nautica to issue a certificate of stock in Yumul’s name but in trust for Dee; and Stock
Certificate No. 6 with annotation “ITF Alvin Y. Dee” which means that respondent held
said stock “In Trust For Alvin Y. Dee”.
We are not persuaded.
Indeed, it is possible for a business to be wholly owned by one individual. The
validity of its incorporation is not affected when such individual gives nominal ownership
of only one share of stock to each of the other four incorporators. This is not
necessarily illegal. But, this is valid only between or among the incorporators privy to the
agreement. It does bind the corporation which, at the time the agreement is made, was
non-existent. Thus, incorporators continue to be stockholders of a corporation unless,
subsequent to the incorporation, they have validly transferred their subscriptions to the
real parties in interest. As between the corporation on the one hand, and its
shareholders and third persons on the other, the corporation looks only to its books for
the purpose of determining who its shareholders are.
In the case at bar, the SEC and the Court of Appeals correctly found Yumul to be
a stockholder of Nautica, of one share of stock recorded in Yumul’s name, although
allegedly held in trust for Dee. Nautica’s Articles of Incorporation and By-laws, as well
as the General Information Sheet filed with the SEC indicated that Yumul was an
incorporator and subscriber of one share. Even granting that there was an agreement
between Yumul and Dee whereby the former is holding the share in trust for Dee, the
same is binding only as between them. From the corporation’s vantage point, Yumul is
its stockholder with one share, considering that there is no showing that Yumul
transferred his subscription to Dee. Moreover, the contents of the articles of
incorporation bind the corporation and its stockholders. Its contents cannot be
disregarded considering that it was the basic document which legally triggered the
creation of the corporation.
Thus, from the point of view of the corporation, Yumul was the owner of one
share of stock. As such, the SEC correctly ruled that he has the right to inspect the
books and records of Nautica, pursuant to Section 74 of BP Blg. 68 which states that
the records of all business transactions of the corporation and the minutes of any
meetings shall be open to inspection by any director, trustee, stockholder or member of
the corporation at reasonable hours on business days and he may demand, in writing,
for a copy of excerpts from said records or minutes, at his expense.
As to whether or not Yumul is the beneficial owner of the 14,999 shares of stocks
of Nautica, petitioners allege that Yumul was given the option to purchase shares of
stocks in Nautica under the Option to Purchase dated December 19, 1994. However,
he failed to exercise the option, thus there was no cause or consideration for the Deed
of Trust and Assignment, which makes it void for being simulated or fictitious. Anent this
issue, the SEC did not make a categorical finding on whether Yumul exercised his
option and also on the validity of the Deed of Trust and Assignment.
 140

Considering that the issue of the validity of the Deed of Trust and Assignment is
civil in nature, thus, under the competence of the regular courts, and the failure of the
SEC and the Court of Appeals to make a determinative finding as to its validity, we are
constrained to refrain from ruling on whether or not Yumul can compel the corporate
secretary to register said deed. It is only after an appropriate case is filed and decision
rendered thereon by the proper forum can the issue be resolved.
WHEREFORE, the petition is PARTIALLY GRANTED.

21. DAVID C. LAO and JOSE C. LAO, petitioners, vs. DIONISIO C. LAO, respondents
G.R. No. 170585 October 6, 2008

FACTS: Petitioners David and Jose Lao filed a petition with the Securities and
Exchange Commission (SEC) against respondent Dionisio Lao, president of Pacific
Foundry Shop Corporation (PFSC). Petitioners prayed for a declaration as stockholders
and directors of PFSC, issuance of certificates of shares in their name and to be
allowed to examine the corporate books of PFSC.
Petitioners claimed that they are stockholders of PFSC based on the General
Information Sheet filed with the SEC, in which they are named as stockholders
and directors of the corporation. Petitioner David Lao alleged that he acquired 446
shares in PFSC from his father, Lao Pong Bao, which shares were previously
purchased from a certain Hipolito Lao. Petitioner Jose Lao, on the other hand, alleged
that he acquired 333 shares from respondent Dionisio Lao himself.
Respondent denied petitioners' claim. He alleged that the inclusion of their
names in the corporation's General Information Sheet was inadvertently made. He also
claimed that petitioners did not acquire any shares in PFSC by any of the modes
recognized by law, namely subscription, purchase, or transfer. Since they were neither
stockholders nor directors of PFSC, petitioners had no right to be issued certificates or
stocks or to inspect its corporate books. Pursuant to the law, (RA8799) the petition with
the SEC was transferred to the RTC in Cebu City .
RTC denied the petition as they (petitioners) do not appear to have acquired
shares of stock of the corporation either as subscribers or by purchase from a holder of
outstanding shares or by purchase from the corporation of additionally issued shares.
Secondly, the claim or contention of the petitioners David C. Lao and Jose C. Lao is
wanting in merit because they have no stock certificates in their names. A stock
certificate, as we very well know, is the evidence of ownership of corporate stock. If ever
the said petitioners acquired shares of stock of the corporation, there is a need for their
acquisition of said shares to be registered in the Stock and Transfer Book of the
corporation. Registration is necessary to entitle a person to exercise the rights of a
stockholder and to hold office as director or other offices.
CA modified decision of RTC declaring petitioners as the owners of the stocks nd
ordering respondent to issue the corresponding certificates of stocks. However, the CA
later on amended its decision (since the ponente voluntarily inhibited himself) affirming
the decision of the RTC.

ISSUE: WON the mere inclusion as shareholder in the General Information Sheet of a
corporation sufficient proof that one is a shareholder in such corporation
 141

HELD:
No. Petitioners failed to prove that they are shareholders of PSFC. Records
disclose that petitioners have no certificates of shares in their name. A certificate of
stock is the evidence of a holder's interest and status in a corporation. It is a written
instrument signed by the proper officer of a corporation stating or acknowledging that
the person named in the document is the owner of a designated number of shares of its
stock. It is prima facie evidence that the holder is a shareholder of a corporation.
Nor is there any written document that there was a sale of shares, as claimed by
petitioners. Petitioners did not present any deed of assignment, or any similar
instrument, between Lao Pong Bao and Hipolito Lao; or between Lao Pong Bao and
petitioner David Lao. There is likewise no deed of assignment between petitioner Jose
Lao and private respondent Dionisio Lao.
Absent a written document, petitioners must prove, at the very least, possession
of the certificates of shares in the name of the alleged seller. Again, they failed to prove
possession. They failed to prove the due delivery of the certificates of shares of the
sellers to them. See Section 63 of Corpo Code.
In contrast, respondent was able to prove that he is the owner of the disputed
shares. He had in his possession the certificates of stocks of Hipolito Lao. The
certificates of stocks were also properly endorsed to him. More importantly, the transfer
was duly registered in the stock and transfer book of the corporation. Thus, as between
the parties, respondent has proven his right over the disputed shares.
The mere inclusion as shareholder of petitioners in the General Information
Sheet of PFSC is insufficient proof that they are shareholders of the company. While it
may be true that petitioners were named as shareholders in the General Information
Sheet submitted to the SEC, that document alone does not conclusively prove that they
are shareholders of PFSC. The information in the document will still have to be
correlated with the corporate books of PFSC. As between the General Information
Sheet and the corporate books, it is the latter that is controlling. As correctly ruled by the
CA: “We agree with the trial court that mere inclusion in the General Information Sheets
as stockholders and officers does not make one a stockholder of a corporation, for this
may have come to pass by mistake, expediency or negligence. As professed by
respondent-appellee, this was done merely to comply with the reportorial requirements
with the SEC. This maybe against the law but "practice, no matter how long continued,
cannot give rise to any vested right."
If a transferee of shares of stock who failed to register such transfer in the Stock
and Transfer Book of the Corporation could not exercise the rights granted unto him by
law as stockholder, with more reason that such rights be denied to a person who is not
a stockholder of a corporation. Petitioners-appellants never secured such a standing as
stockholders of PFSC and consequently, their petition should be denied.
It should be stressed that the burden of proof is on petitioners to show that they
are shareholders of PFSC. This is so because they do not have any certificates of
shares in their name. Moreover, they do not appear in the corporate books as registered
shareholders. If they had certificates of shares, the burden would have been with PFSC
to prove that they are not shareholders of the corporation. We note that petitioners
agreed to submit their case for decision based merely on the documents on record.
 142

Petition is DENIED.

6.REPUBLIC PLANTERS BANK, petitioner, vs. HON. ENRIQUE A. AGANA, SR., as

Presiding Judge, Court of First Instance of Rizal, Branch XXVIII, Pasay City,
ROBES-FRANCISCO REALTY & DEVELOPMENT CORPORATION and ADALIA F.
ROBES, respondents.
[G.R. No. 51765. March 3, 1997]

FACTS:

Private respondent Corporation secured a loan from petitioner. As part of the

proceeds of the loan, preferred shares of stocks were issued to private respondent
Corporation, through its officers then, private respondent Adalia F. Robes and one
Carlos F. Robes. In other words, instead of giving the legal tender totaling to the full
amount of the loan,petitioner lent such amount partially in the form of money and
partially in the form of stock certificates numbered. Said stock certificates were in the
name of private respondent Adalia F. Robes and Carlos F. Robes, who subsequently,
however, endorsed his shares in favor of Adalia F. Robes.

Said certificates of stock bear the following terms and conditions:

"The Preferred Stock shall have the following rights, preferences, qualifications and
limitations, to wit:

1. Of the right to receive a quarterly dividend of One Per

Centum (1%), cumulative and participating.
xxx
2. That such preferred shares may be redeemed, by the
system of drawing lots, at any time after two (2) years from
the date of issue at the option of the Corporation. x x x."

Private respondents proceeded against petitioner and filed a Complaint anchored on

private respondents' alleged rights to collect dividends under the preferred shares in
question and to have petitioner redeem the same under the terms and conditions of the
stock certificates. Private respondents attached to their complaint, a letter-demand
dated January 5, 1979 which, significantly, was not formally offered in evidence. The
trial court rendered decision ordering petitioner to pay private respondents the face
value of the stock certificates as redemption price, plus 1% quarterly interest thereon
until full payment. The case was elevated to SC on pure questions of law.

ISSUE:
 143

Whether or not the corporation may be compelled to pay the dividends and redeem the
stocks?

HELD:

No. What respondent Judge failed to recognize was that while the stock
certificate does allow redemption, the option to do so was clearly vested in the petitioner
bank. The redemption therefore is clearly the type known as "optional". Thus, except as
otherwise provided in the stock certificate, the redemption rests entirely with the
corporation and the stockholder is without right to either compel or refuse the
redemption of its stock. Furthermore, the terms and conditions set forth therein use the
word "may". It is a settled doctrine in statutory construction that the word "may" denotes
discretion, and cannot be construed as having a mandatory effect. We fail to see how
respondent judge can ignore what, in his words, are the "very wordings of the terms and
conditions in said stock certificates" and construe what is clearly a mere option to be his
legal basis for compelling the petitioner to redeem the shares in question.

The redemption of said shares cannot be allowed. As pointed out by the

petitioner, the Central Bank made a finding that said petitioner has been suffering from
chronic reserve deficiency, and that such finding resulted in a directive by then Gov. G.
S. Licaros of the Central Bank, to the President and Acting Chairman of the Board of the
petitioner bank prohibiting the latter from redeeming any preferred share, on the ground
that said redemption would reduce the assets of the Bank to the prejudice of its
depositors and creditors. Redemption of preferred shares was prohibited for a just and
valid reason. The directive issued by the Central Bank Governor was obviously meant
to preserve the status quo, and to prevent the financial ruin of a banking institution that
would have resulted in adverse repercussions, not only to its depositors and creditors,
but also to the banking industry as a whole. The directive, in limiting the exercise of a
right granted by law to a corporate entity, may thus be considered as an exercise of
police power. The respondent judge insists that the directive constitutes an impairment
of the obligation of contracts. It has, however, been settled that the Constitutional
guaranty of non-impairment of obligations of contract is limited by the exercise of the
police power of the state, the reason being that public welfare is superior to private
rights.

The respondent judge also stated that since the stock certificate granted the
private respondents the right to receive a quarterly dividend of one Per Centum (1%),
cumulative and participating, it "clearly and unequivocably indicates that the same are
'interest bearing stocks' or stocks issued by a corporation under an agreement to pay a
certain rate of interest thereon. As such, plaintiffs (private respondents herein) become
entitled to the payment thereof as a matter of right without necessity of a prior
declaration of dividend." There is no legal basis for this observation. Both Sec. 16 of the
Corporation Law and Sec. 43 of the present Corporation Code prohibit the issuance of
any stock dividend without the approval of stockholders, representing not less than two-
thirds (2/3) of the outstanding capital stock at a regular or special meeting duly called for
the purpose. These provisions underscore the fact that payment of dividends to a
 144

stockholder is not a matter of right but a matter of consensus. Furthermore, "interest

bearing stocks", on which the corporation agrees absolutely to pay interest before
dividends are paid to common stockholders, is legal only when construed as requiring
payment of interest as dividends from net earnings or surplus only. Clearly, the
respondent judge, in compelling the petitioner to redeem the shares in question and to
pay the corresponding dividends, committed grave abuse of discretion amounting to
lack or excess of jurisdiction in ignoring both the terms and conditions specified in the
stock certificate, as well as the clear mandate of the law.

18. Nava v. Peers Mktg. Corp. – 76 SCRA 65

FACTS: This is a mandamus case, Teofilo Po as an incorporator subscribed to eighty

shares of Peers Marketing Corporation at one hundred pesos a share or a total par
value of eight thousand pesos. Po paid two thousand pesos or twenty-five percent of
the amount of his subscription. No certificate of stock was issued to him or, for that
matter, to any incorporator, subscriber or stockholder.
Po sold to Ricardo A. Nava for two thousand pesos twenty of his eighty shares.
In the deed of sale Po represented that he was "the absolute and registered owner of
twenty shares" of Peers Marketing Corporation.
Nava requested the officers of the corporation to register the sale in the books of
the corporation. The request was denied because Po has not paid fully the amount of
his subscription. Nava was informed that Po was delinquent in the payment of the
balance due on his subscription and that the corporation had a claim on his entire
subscription of eighty shares which included the twenty shares that had been sold to
Nava.
Nava filed this mandamus action to compel the corporation to register the said
twenty shares in Nava's name in the corporation's transfer book.
The respondents in their answer pleaded the defense that no shares of stock
against which the corporation holds an unpaid claim are transferable in the books of the
corporation.

ISSUE: The issue is whether the officers of Peers Marketing Corporation can be
compelled by mandamus to enter in its stock and transfer book the sale made by Po to
Nava of the twenty shares forming part of Po's subscription of eighty shares, with a total
par value of P8,000 and for which Po had paid only P2,000, it being admitted that the
corporation has an unpaid claim of P6,000 as the balance due on Po's subscription and
that the twenty shares are not covered by any stock certificate.

HELD: Apparently, no provision of the by-laws of the corporation covers that situation.
The parties did not bother to submit in evidence the by-laws nor invoke any of its
provisions. The corporation can include in its by-laws rules, not inconsistent with law,
governing the transfer of its shares of stock.
 145

We hold that the transfer made by Po to Nava is not the "alienation, sale, or
transfer of stock" that is supposed to be recorded in the stock and transfer book, as
contemplated in section 52 of the Corporation Law.
As a rule, the shares which may be alienated are those which are covered by
certificates of stock, as shown in the following provisions of the Corporation Law:
"SEC. 35. The capital stock of stock corporations shall be divided into
shares for which certificates signed by the president or the vice-president,
countersigned by the secretary or clerk and sealed with the seal of the
corporation, shall be issued in accordance with the by-laws. Shares of stock so
issued are personal property and may be transferred by delivery of the certificate
indorsed by the owner or his attorney in fact or other person legally authorized to
make the transfer. No transfer, however, shall be valid, except as between the,
parties, until the transfer is entered and noted upon the books of the corporation
so as to show the names of the parties to the transaction, the date of the transfer,
the number of the certificate, and the number of shares transferred.
No share of stock against which the corporation holds any unpaid claim
shall be transferable on the books of the corporation."
The certificates of stock so transferred shall be surrendered and cancelled, and
new certificates therefor issued to such person or persons, or corporation, as such
trustee or trustees, in which new certificates it shall appear that they are issued
pursuant to said agreement.
As prescribed in section 35, shares of stock may be transferred by delivery to the
transferee of the certificate properly indorsed. Title may be vested in the transferee by
delivery of the certificate with a written assignment or indorsement thereof. There
should be compliance with the mode of transfer prescribed by law.
The usual practice is for the stockholder to sign the form on the back of the stock
certificate. The certificate may thereafter be transferred from one person to another. If
the holder of the certificate desires to assume the legal rights of a shareholder to enable
him to vote at corporate elections and to receive dividends, he fills up the blanks in the
form by inserting his own name as transferee. Then he delivers the certificate to the
secretary of the corporation so that the transfer may be entered in the corporation's
books. The certificate is then surrendered and a new one issued to the transferee.
That procedure cannot be followed in the instant case because, as already
noted, the twenty shares in question are not covered by any certificate of stock in Po's
name. Moreover, the corporation has a claim on the said shares for the unpaid balance
of Po's subscription. A stock subscription is a subsisting liability from the time the
subscription is made. The subscriber is as much bound to pay his subscription as he
would be to pay any other debt. The right of the corporation to demand payment is no
less incontestable.
A corporation cannot release an original subscriber from paying for his shares
without a valuable consideration.
Under the facts of this case, there is no clear legal duty on the part of the officers
of the corporation to register the twenty shares in Nava's name, Hence, there is no
cause of action for mandamus.
 146

In this case no stock certificate was issued to Po. Without stock certificate, which
is the evidence of ownership of corporate stock, the assignment of corporate shares is
effective only between the parties to the transaction.
The delivery of the stock certificate, which represents the shares to be alienated ,
is essential for the protection of both the corporation and its stockholders.

19. ALFONSO TAN vs. SECURITIES and EXCHANGE COMISSION, Visayan

Educational Supply, Corp, et al.
G.R. # 95696, March 3, 1992

FACTS: Private respondent Visayan Educational Supply Corp. was incorporated in

1979. As incorporator, petitioner Alfonso Tan had 400 shares of the capital stock in his
name (par value of Php100 per share) evidenced by Cert. # 2. He was the president
until 1982 and a director until 1983.
While still the president, 2 incorporators assigned their shares (Cert. 4 and 5) in
favor of the corporation, after which they were paid the 40% corporate stock-in-trade. As
a result, and in order to complete the membership of 5 directors of the board, petitioner
Alfonso Tan sold 50 shares out of his 400 shares to his brother Angel Tan. Another
incorporator, Alfredo Uy, also sold 50 shares out of his 400 shares to Teodora Tan. On
March 27, 1981, Angel Tan was elected director.
Certificate of Stock #2 was cancelled and Cert. of Stock # 6 in the name of Angel
Tan and and Cert. of Stock # 8 in the name of Alfonso Tan were issued and delivered.
Petitioner was given back Cert. of Stock # 2 for him to endorse but he deliberately
withheld it for reason of his own.
Certificate of Stock # 8 was delivered to Tan Su Ching who was elected
president of the corporation in 1983 and petitioner Tan as VP. After being dislodged as
the president, petitioner Tan withdrew from the corporation his stock-in-trade
corresponding to 33.3% par value amounting to P35,000 in lieu of the stock value of his
shares. Thus, in a Board meeting, Certificates of Stock # 2 and 8 were cancelled.
Petitioner Tan, for the first time, questioned the cancellation of his shares
alleging that the deprivation of his shares despite non-endorsement or surrender of his
Certs. of Stock 2 and 8 was without process and contrary to Sec. 63 of the Corporation
code which provides that:
“...No transfer, however, shall be valid, except as between the parties, until the
transfer is recorded to the books of the corporation so as to show the names of
the parties to the transaction, the date of the transfer, the number of the
certificate or certificates and the number of shares transferred.”
SEC Extension Office Hearing Officer Chan ruled in favor of petitioner Tan,
declaring the cancellation of Certificate of Stock nos 2 and 8 as null and void and
ordered the necessary correction in the corporate book to reinstate the 400 shares of
petitioner.
Respondent corporation appealed before the Securities and Exchange
Commission which reversed the decision of the hearing officer.

ISSUE: W/N the cancellation of the Certs. Of Stock resulting to its transfer is valid
without delivery.
 147

HELD: Yes. There was already delivery of the unendorsed Cert. of Stock # 2, which
was essential to the issuance of Certificates of Stock # 6 and 8 to Angel Tan and
petitioner Alfonso Tan respectively. Moreover, since Cert. of stock # 2 was already
cancelled, which cancellation was also reported to the respondent Commission, there
was no necessity for the same certificate to be endorsed by the petitioner. All the acts
required for the transferee to exercise its rights over the acquired stocks were attendant
and even the corporation was protected from other parties, considering that said
transfer was earlier recorded or registered in the corporate stock and transfer book.
Petitioner should be held guilty of manipulating the provision of Section 63 of the
Corporation Law for contumaciously withholding the endorsement of Stock Certificate
No. 2 which was returned to him.
Considering the circumstances of the case, it appearing that petitioner is guilty of
manipulation, and high-handedness, circumventing the clear provisions of law in
shielding himself from his wrongdoing contrary to the protective mantle that the law
intended for innocent parties, the Court finds the excuses of the petitioner as unworthy
of belief.
Wherefore, decision of SEC affirmed. Transfer is valid.
 148

1. Thomson v. CA (298 SCRA 280) Lamigo

2. Rural Bank of Salinas, Inc. v. CA (210 SCRA 510) geronilla
3. Razon v. IAC GR 74306 (March 16, 1992) kalaw
4. Torres v. CA (278 SCRA 793) lukban
5. Rivera v. Florendo (144 SCRA 647; 1986) tria
6. Lim Tay v. CA GR 126891 (Aug. 5, 1998) Jordan
7. Ponce v. Alsons Cement GR 139802 ( Dec. 10, 2002) rojas
8. Bitong v. CA 292 SCRA 503 villasin
9. Abejo v. De la Cruz 149 SCRA 654 (1987) layno
10. Santamaria vs. Hongkong 89 Phil. 780 (1951) pamatian
11. De los Santos vs. McGrath 96 Phil. 577(1955) Castillo
12. Uson v. Diosomito (61 Phil. 535; 1935) gutierez
13. Chua Guan vs. Samahang Magsasaka 62 Phil. 473 (1935) mariano
14. Chemphil Export & Import v. CA (Dec. 12, 1995) lalas

1.
MARSH THOMSON, petitioner, vs. COURT OF APPEALS and THE AMERICAN
CHAMPER OF COMMERCE OF THE PHILIPPINES, INC, respondents.
G.R. No. 116631 October 28, 1998

FACTS: Petitioner Marsh Thomson (Thomson) was the Executive Vice-President and,
later on, the Management Consultant of private respondent, the American Chamber of
Commerce of the Philippines, Inc. (AmCham) for over ten years. While petitioner was
still working with private respondent, his superior, A. Lewis Burridge, retired as
AmCham's President. Before Burridge decided to return to his home country, he wanted
to transfer his proprietary share in the Manila Polo Club (MPC) to petitioner. However,
through the intercession of Burridge, private respondent paid for the share but had it
listed in petitioner's name. This was made clear in an employment advice dated January
13, 1986, wherein petitioner was informed by private respondent.

Burridge transferred said proprietary share to petitioner, as confirmed in a

letter of notification to the Manila Polo Club. Upon his admission as a new member of
the MPC, petitioner paid the transfer fee of P40,000.00 from his own funds; but private
respondent subsequently reimbursed this amount. MPC issued Proprietary Membership
Certificate Number 3398 in favor of petitioner. But petitioner, however, failed to execute
a document recognizing private respondent's beneficial ownership over said share.

Following AmCham's policy and practice, there was a yearly renewal of

employment contract between the petitioner and private respondent. Separate letters of
employment advice dated October 1, 1986 , as well March 4, 1988 and January 7,
1989 , mentioned the MPC share. But petitioner never acknowledged that private
respondent is the beneficial owner of the share as requested in follow-up requests.

When petitioner's contract of employment was up for renewal in 1989, he notified

private respondent that he would no longer be available as Executive Vice President
 149

after September 30, 1989. Still, the private respondent asked the petitioner to stay on
for another six (6) months. Petitioner indicated his acceptance of the consultancy
arrangement with a counter-proposal.

Pending the negotiation for the consultancy arrangement, private respondent

executed on September 29, 1989 a Release and Quitclaim, stating that "AMCHAM, its
directors, officers and assigns, employees and/or representatives do hereby release,
waive, abandon and discharge J. MARSH THOMSON from any and all existing claims
that the AMCHAM, its directors, officers and assigns, employees and/or representatives
may have against J. MARSH THOMSON." The quitclaim, expressed in general terms,
did not mention specifically the MPC share.

On April 5, 1990, private respondent, through counsel sent a letter to the

petitioner demanding the return and delivery of the MPC share which "it (AmCham)
owns and placed in your (Thomson's) name."

Failing to get a favorable response, private respondent filed on May 15, 1990, a
complaint against petitioner praying, inter alia, that the Makati Regional Trial Court
render judgment ordering Thomson "to return the Manila Polo Club share to the plaintiff
and transfer said share to the nominee of plaintiff.

The trial court awarded the MPC share to defendant (petitioner now) on the
ground that the Articles of Incorporation and By-laws of Manila Polo Club prohibit
artificial persons, such as corporations, to be club members.

The Court of Appeals (Former Special Sixth Division) promulgated its decision ,
reversing the, trial court's judgment and ordered herein petitioner to transfer the MPC
share to the nominee of private respondent.

ISSUE: Whether or not private respondent is a beneficial owner of the disputed share.

HELD: Yes. The beneficiary of a trust has beneficial interest in the trust property, while
a creditor has merely a personal claim against the debtor. In trust, there is a fiduciary
relation between a trustee and a beneficiary, but there is no such relation between a
debtor and creditor. While a debt implies merely an obligation to pay a certain sum of
money, a trust refers to a duty to deal with a specific property for the benefit of another.
If a creditor-debtor relationship exists, but not a fiduciary relationship between the
parties, there is no express trust. However, it is understood that when the purported
trustee of funds is entitled to use them as his or her own (and commingle them with his
or her own money), a debtor-creditor relationship exists, not a trust.

In the present case, as the Executive Vice-President of AmCham, petitioner

occupied a fiduciary position in the business of AmCham. AmCham released the funds
to acquire a share in the Club for the use of petitioner but obliged him to "execute such
document as necessary to acknowledge beneficial ownership thereof by the
Chamber". 22 A trust relationship is, therefore, manifestly indicated.
 150

Moreover, petitioner failed to present evidence to support his allegation of being

merely a debtor when the private respondent paid the purchase price of the MPC share.
Applicable here is the rule that a trust arises in favor of one who pays the purchase
money of property in the name of another, because of the presumption that he who
pays for a thing intends a beneficial interest therein for himself.

2.
RURAL BANK OF SALINAS, INC., MANUEL SALUD, LUZVIMINDA TRIAS and
FRANCISCO TRIAS, petitioners, vs. COURT OF APPEALS*, SECURITIES AND
EXCHANGE COMMISSION, MELANIA A. GUERRERO, LUZ ANDICO, WILHEMINA
G. ROSALES, FRANCISCO M. GUERRERO, JR., and FRANCISCO GUERRERO ,
SR., respondents.
G.R. No. 96674 June 26, 1992
PARAS, J.:

FACTS: Clemente G. Guerrero, President of the Rural Bank of Salinas, Inc., executed
a Special Power of Attorney in favor of his wife, private respondent Melania Guerrero,
giving her full power and authority to sell or otherwise dispose of and/or mortgage 473
shares of stock of the Bank registered in his name to execute the proper documents
therefor, and to receive and sign receipts for the dispositions. Pursuant to said Special
Power of Attorney, private respondent Melania Guerrero, as Attorney-in-Fact, executed
a Deed of Assignment for 472 shares out of the 473 shares, in favor of private
respondents Luz Andico (457 shares), Wilhelmina Rosales (10 shares) and Francisco
Guerrero, Jr. (5 shares). Almost four months later, or two (2) days before the death of
Clemente Guerrero on June 24, 1980, private respondent Melania Guerrero, pursuant
to the same Special Power of Attorney, executed a Deed of Assignment for the
remaining one (1) share of stock in favor of private respondent Francisco Guerrero, Sr.
Private respondent Melania Guerrero presented to petitioner Rural Bank of Salinas the
two (2) Deeds of Assignment for registration with a request for the transfer in the Bank's
stock and transfer book of the 473 shares of stock so assigned, the cancellation of stock
certificates in the name of Clemente G. Guerrero, and the issuance of new stock
certificates covering the transferred shares of stocks in the name of the new owners
thereof. However, petitioner Bank denied the request of respondent Melania Guerrero.

Private respondent Melania Guerrero filed with the Securities and Exchange
Commission" (SEC) an action for mandamus against petitioners Rural Bank of Salinas,
its President and Corporate Secretary. Petitioner alleged that upon the death of
Clemente G. Guerrero, his 473 shares of stock became the property of his estate, and
his property and that of his widow should first be settled and liquidated in accordance
with law before any distribution can be effected so that petitioners may not be a party to
any scheme to evade payment of estate or inheritance tax and in order to avoid liability
to any third persons or creditors of the late Clemente G. Guerrero.

The SEC Hearing Officer rendered a Decision granting the writ

of Mandamus prayed for by the private respondents and directing petitioners to cancel
 151

stock certificates nos. 26, 49 and 65 of the Bank, all in the name of Clemente G.
Guerrero, and to issue new certificates in the names of private respondents, except
Melania Guerrero. On appeal, the SEC En Banc affirmed the decision of the Hearing
Officer. Petitioner filed a petition for review with the Court of Appeals but said Court
likewise affirmed the decision of the SEC.

ISSUE: WON the respondent court erred in sustaining the Securities and Exchange
Commission when it compelled by Mandamus the Rural Bank of Salinas to register in its
stock and transfer book the transfer of 473 shares of stock to private respondents

HELD: No. Respondent SEC correctly ruled in favor of the registering of the shares of
stock in question in private respondent's names. Such ruling finds support under
Section 63 of the Corporation Code, to wit: Sec. 63. . . . Shares of stock so issued are
personal property and may be transferred by delivery of the certificate or certificates
indorsed by the owner or his attorney-in-fact or other person legally authorized to make
the transfer. No transfer, however, shall be valid, except as between the parties, until
the transfer is recorded in the books of the corporation. The only limitation imposed by
Section 63 of the Corporation Code is when the corporation holds any unpaid claim
against the shares intended to be transferred, which is absent here.

A corporation, either by its board, its by-laws, or the act of its officers, cannot
create restrictions in stock transfers, because restrictions in the traffic of stock must
have their source in legislative enactment, as the corporation itself cannot create such
impediment. By-laws are intended merely for the protection of the corporation, and
prescribe regulation, not restriction; they are always subject to the charter of the
corporation. The right of a transferee/assignee to have stocks transferred to his name is
an inherent right flowing from his ownership of the stocks. Whenever a corporation
refuses to transfer and register stock in cases like the present, mandamus will lie to
compel the officers of the corporation to transfer said stock in the books of the
corporation" The corporation's obligation to register is ministerial.

3.
ENRIQUE RAZON, petitioner, vs. INTERMEDIATE APPELLATE COURT and
VICENTE B. CHUIDIAN, in his capacity as Administrator of the Estate of the
Deceased JUAN T. CHUIDIAN, respondents.
G.R. No. 74306 March 16, 1992
GUTIERREZ, JR., J.:

FACTS: E. Razon, Inc. was organized in 1962 by petitioner Enrique Razon for the
purpose of participating in the bidding for the arrastre services in South Harbor, Manila.
The incorporators were Enrique Razon, Enrique Valles, Luisa M. de Razon, Jose
Tuazon, Jr., Victor L. Lim, Jose F. Castro and Salvador Perez de Tagle. The business,
however, did not start operations until 1966. According to the petitioner, some of the
incorporators withdrew from the said corporation. The petitioner then distributed the
stocks previously placed in the names of the withdrawing nominal incorporators to some
friends, among them the late Juan T. Chuidian to whom he gave 1,500 shares of stock.
 152

The shares of stock were registered in the name of Chuidian only as nominal
stockholder and with the agreement that the said shares of stock were owned and held
by the petitioner but Chuidian was given the option to buy the same. In view of this
arrangement, The petitioner maintains that his aforesaid oral testimony as regards the
true nature of his agreement with the late Juan Chuidian on the 1,500 shares of stock of
E. Razon, Inc. is sufficient to prove his ownership over the said 1,500 shares of stock.

ISSUES:
1. Whether or notpetitionersoral testimony as regards the true nature of his
agreement with the late Juan Chuidian on the 1,500 shares of stock of E. Razon,
Inc. is sufficient to prove his ownership
2. Whether or not in declaring the deceased father Juan T. Chuidian as owner of
the 1,500 shares of stock of E. Razon, Inc. should have included all cash and
stock dividends and all the pre-emptive rights accruing to the said 1,500 shares
of stock.

HELD: No.The petitioner's contention is not correct.

In the case of Embassy Farms, Inc. v. Court of Appeals (188 SCRA 492 [1990])
we ruled:
. . . For an effective, transfer of shares of stock the mode and manner of
transfer as prescribed by law must be followed (Navea v. Peers Marketing
Corp., 74 SCRA 65). As provided under Section 3 of Batas
PambansaBilang, 68 otherwise known as the Corporation Code of the
Philippines, shares of stock may be transferred by delivery to the
transferee of the certificate properly indorsed. Title may be vested in the
transferee by the delivery of the duly indorsed certificate of stock (18
C.J.S. 928, cited in Rivera v. Florendo, 144 SCRA 643). However, no
transfer shall be valid, except as between the parties until the transfer is
properly recorded in the books of the corporation (Sec. 63, Corporation
Code of the Philippines; Section 35 of the Corporation Law)

In the instant case, there is no dispute that the questioned 1,500 shares of stock
of E. Razon, Inc. are in the name of the late Juan Chuidian in the books of the
corporation. Moreover, the records show that during his lifetime Chuidian was ellected
member of the Board of Directors of the corporation which clearly shows that he was a
stockholder of the corporation. (See Section 30, Corporation Code) From the point of
view of the corporation, therefore, Chuidian was the owner of the 1,500 shares of stock.
In such a case, the petitioner who claims ownership over the questioned shares of stock
must show that the same were transferred to him by proving that all the requirements
for the effective transfer of shares of stock in accordance with the corporation's by laws,
if any, were followed (See Nava v. Peers Marketing Corporation, 74 SCRA 65 [1976]) or
in accordance with the provisions of law.

The petitioner failed in both instances. The petitioner did not present any by-laws
which could show that the 1,500 shares of stock were effectively transferred to him. In
 153

the absence of the corporation's by-laws or rules governing effective transfer of shares
of stock, the provisions of the Corporation Law are made applicable to the instant case.

The law is clear that in order for a transfer of stock certificate to be effective, the
certificate must be properly indorsed and that title to such certificate of stock is vested in
the transferee by the delivery of the duly indorsed certificate of stock. (Section 35,
Corporation Code) Since the certificate of stock covering the questioned 1,500 shares
of stock registered in the name of the late Juan Chuidian was never indorsed to the
petitioner, the inevitable conclusion is that the questioned shares of stock belong to
Chuidian. The petitioner's asseveration that he did not require an indorsement of the
certificate of stock in view of his intimate friendship with the late Juan Chuidiancan not
overcome the failure to follow the procedure required by law or the proper conduct of
business even among friends. To reiterate, indorsement of the certificate of stock is a
mandatory requirement of law for an effective transfer of a certificate of stock.

Moreover, the preponderance of evidence supports the appellate court's factual

findings that the shares of stock were given to Juan T. Chuidian for value. Juan T.
Chuidian was the legal counsel who handled the legal affairs of the corporation. We
give credence to the testimony of the private respondent that the shares of stock were
given to Juan T. Chuidian in payment of his legal services to the corporation. Petitioner
Razon failed to overcome this testimony.

Yes. The petition is impressed with merit.

The cash and stock dividends and all the pre-emptive rights are all incidents of
stock ownership.

The rights of stockholders are generally enumerated as follows:

xxxxxxxxx
. . . [F]irst, to have a certificate or other evidence of his status as
stockholder issued to him; second, to vote at meetings of the corporation;
third, to receive his proportionate share of the profits of the corporation;
and lastly, to participate proportionately in the distribution of the corporate
assets upon the dissolution or winding up. (Purdy's Beach on Private
Corporations, sec. 554) (Pascual v. Del Saz Orozco, 19 Phil. 82, 87)

4.
JUDGE MANUEL TORRES, JR. v. CA
GR No. 120139. Sept. 5, 1997
Kapunan, J.:

FACTS: The present case involves two separate but interrelated conflicts. The facts
leading to the first controversy are as follows:

The late Manuel A. Torres, Jr. (Judge Torres for brevity) was the majority stockholder of
Tormil Realty & Development Corporation while private respondents who are the
 154

children of Judge Torres' deceased brother Antonio A. Torres, constituted the minority
stockholders. Namely:
Manuel A. Torres, Jr. -------------- Dir./Pres./Chair
Milagros P. Torres --------------------Dir./Treasurer
Josefina P. Torres --------------------Dir./Ass. Cor-Sec.
Ma. Cristina T. Carlos -----------------Dir./Cor-Sec.
Antonio P. Torres, Jr. ----------------- Director
Ma. Jacinta P. Torres ---------------- Director
Ma. Luisa T. Morales ------------------Director
Dante D. Morales ----------------------Director

In 1984, Judge Torres, in order to make substantial savings in taxes, adopted an estate
planning scheme under which he assigned to Tormil Realty & Development Corporation
(Tormil for brevity) various real properties he owned and his shares of stock in other
corporations in exchange for 225,972 Tormil Realty shares. Hence, on various dates in
July and August of 1984, ten (10) deeds of assignment were executed by the late Judge
Torres:

Consequently, the aforelisted properties were duly recorded in the inventory of assets of
Tormil Realty and the revenues generated by the said properties were correspondingly
entered in the corporations books of account and financial records.

Likewise, all the assigned parcels of land were duly registered with the respective
Register of Deeds in the name of Tormil Realty, except for the ones located in Makati
and Pasay City.

At the time of the assignments and exchange, however, only 225,000 Tormil Realty
shares remained unsubscribed, all of which were duly issued to and received by Judge
Torres (as evidenced by stock certificates Nos. 17, 18, 19, 20, 21, 22, 23, 24 & 25).

Due to the insufficient number of shares of stock issued to Judge Torres and the alleged
refusal of private respondents to approve the needed increase in the corporations
authorized capital stock (to cover the shortage of 972 shares due to Judge Torres under
the estate planning scheme), on 11 September 1986, Judge Torres revoked the two (2)
deeds of assignment covering the properties in Makati and Pasay City.

Noting the disappearance of the Makati and Pasay City properties from the corporations
inventory of assets and financial records private respondents, on 31 March 1987, were
constrained to file a complaint with the Securities and Exchange Commission (SEC)
docketed as SEC Case No. 3153 to compel Judge Torres to deliver to Tormil
Corporation the two (2) deeds of assignment covering the aforementioned Makati and
Pasay City properties which he had unilaterally revoked and to cause the registration of
the corresponding titles in the name of Tormil. Private respondents alleged that
following the disappearance of the properties from the corporations inventory of assets,
they found that on October 24, 1986, Judge Torres, together with Edgardo Pabalan and
Graciano Tobias, then General Manager and legal counsel, respectively, of Tormil,
 155

formed and organized a corporation named Torres-Pabalan Realty and Development

Corporation and that as part of Judge Torres contribution to the new corporation, he
executed in its favor a Deed of Assignment conveying the same Makati and Pasay City
properties he had earlier transferred to Tormil.

The second controversy--involving the same parties--concerned the election of the 1987
corporate board of directors.

The 1987 annual stockholders meeting and election of directors of Tormil corporation
was scheduled on 25 March 1987 in compliance with the provisions of its by-laws.

Pursuant thereto, Judge Torres assigned from his own shares, one (1) share each to
petitioners Tobias, Jocson, Jurisprudencia, Azura and Pabalan. These assigned shares
were in the nature of qualifying shares, for the sole purpose of meeting the legal
requirement to be able to elect them (Tobias and company) to the Board of Directors as
Torres nominees.

On 25 March 1987, the annual stockholders meeting was held as scheduled. What
transpired therein was ably narrated by Attys. Benito Cataran and Bayani De los Reyes,
the official representatives dispatched by the SEC to observe the proceedings (upon
request of the late Judge Torres) in their report dated 27 March 1987. It says that, the
parties met at Urdaneta Village in Makati. However, due to an apparent family fewd the
meeting a.k.a the election was not finished when the corporate secretary refused to
write down the nominees. Antonio Torres, Jr. nominated the present members of the
Board. At this juncture, Milagros Torres cried out and told the group of Manuel Torres,
Jr. to leave the house. Manuel Torres, Jr., together with his lawyers-stockholders went
to the residence of Ma. Jacinta Torres in San Miguel Village, Makati, Metro Manila. The
undersigned joined them since the group with Manuel Torres, Jr. the one who requested
for S.E.C. observers, represented the majority of the outstanding capital stock and still
constituted a quorum. After the election, it was resolved that after the meeting, the new
board of directors shall convene for the election of officers.

Upon complaint filed by herein respondents praying for the annulment of the election,
the SEC held in favor of herein respondents and ordered petitioners to return the deeds
of assignments of the Makati and Pasay properties. Consequently, all motions were
dismissed by the SEC. CA affirmed the SEC decision.

ISSUE: Whether the election of the officers held is null & void.

HELD: Yes.

The Court agrees with the contention of the Solicitor General that the shortage of
shares should not have affected the assignment of the Makati and Pasay City properties
which were executed in 13 and 24 July 1984 and the consideration for which have been
duly paid or fulfilled but should have been applied logically to the last assignment of
property -- Judge Torres Ayala Fund shares--which was executed on 29 August 1984.
 156

It is precisely the brewing family discord between Judge Torres and private
respondents--his nephew and nieces that should have placed Judge Torres on his
guard. He should have been more careful in ensuring that his actions (particularly the
assignment of qualifying shares to his nominees) comply with the requirements of the
law. Petitioners cannot use the flimsy excuse that it would have been a vain attempt to
force the incumbent corporate secretary to register the aforestated assignments in the
stock and transfer book because the latter belonged to the opposite faction. It is the
corporate secretary's duty and obligation to register valid transfers of stocks and if said
corporate officer refuses to comply, the transferor-stockholder may rightfully bring suit to
compel performance. In other words, there are remedies within the law that petitioners
could have availed of, instead of taking the law in their own hands, as the cliche goes.

We likewise sustain respondent SEC when it ruled, interpreting Section 74 of the

Corporation Code, as follows (Rollo, p. 45):

In the absence of (any) provision to the contrary, the corporate secretary is the
custodian of corporate records. Corollarily, he keeps the stock and transfer book and
makes proper and necessary entries therein.

Contrary to the generally accepted corporate practice, the stock and transfer book of
TORMIL was not kept by Ms. Maria Cristina T. Carlos, the corporate secretary but by
respondent Torres, the President and Chairman of the Board of Directors of TORMIL. In
contravention to the above cited provision, the stock and transfer book was not kept at
the principal office of the corporation either but at the place of respondent Torres.

These being the obtaining circumstances, any entries made in the stock and transfer
book on March 8, 1987 by respondent Torres of an alleged transfer of nominal shares to
Pabalan and Co. cannot therefore be given any valid effect. Where the entries made are
not valid, Pabalan and Co. cannot therefore be considered stockholders of record of
TORMIL. Because they are not stockholders, they cannot therefore be elected as
directors of TORMIL.

To rule otherwise would not only encourage violation of clear mandate of Sec. 74 of the
Corporation Code that stock and transfer book shall be kept in the principal office of the
corporation but would likewise open the flood gates of confusion in the corporation as to
who has the proper custody of the stock and transfer book and who are the real
stockholders of records of a certain corporation as any holder of the stock and transfer
book, though not the corporate secretary, at pleasure would make entries therein.

The fact that respondent Torres holds 81.28% of the outstanding capital stock of
TORMIL is of no moment and is not a license for him to arrogate unto himself a duty
lodged to the corporate secretary.
 157

All corporations, big or small, must abide by the provisions of the Corporation Code.
Being a simple family corporation is not an exemption. Such corporations cannot have
rules and practices other than those established by law.

5.
AQUILINO RIVERA, ISAMU AKASAKO and FUJIYAMA HOTEL & RESTAURANT,
INC., petitioners,
vs. THE HON. ALFREDO C. FLORENDO, as Judge of the Court of First Instance of
Manila (Branch XXXVI), LOURDES JUREIDINI and MILAGROS
TSUCHIYA, respondents.
G.R. No. L-57586 October 8, 1986
PARAS, J.:

FACTS: Petitioner corporation was organized and registered under Philippine laws with
a capital stock of P1,000,000.00 divided into 10,000 shares of P100.00 par value each
by the herein petitioner Rivera and four (4) other incorporators. Sometime thereafter
petitioner Rivera increased his subscription from the original 1,250 to a total of 4899
shares.

Subsequently, Isamu Akasako, a Japanese national and co-petitioner who is

allegedly the real owner of the shares of stock in the name of petitioner Aquilino Rivera,
sold 2550 shares of the same to private respondent Milagros Tsuchiya for a
consideration of P440,000.00 with the assurance that Milagros Tsuchiya will be made
the President and Lourdes Jureidini a director after the purchase. Aquilino Rivera who
was in Japan also assured private respondents by overseas call that he will sign the
stock certificates because Isamu Akasako is the real owner. However, after the sale
was consummated and the consideration was paid with a receipt of payment therefor
shown, Aquilino Rivera refused to make the indorsement unless he is also paid.

It also appears that the other incorporators sold their shares to both respondent
Jureidini and Tsuchiya such that both respondents became the owners of a total of
3300 shares or the majority out of 5,649 outstanding subscribed shares of the
corporation, and that there was no dispute as to the legality of the transfer of the stock
certificate Exhibits "B-1" to "B-4" to Jureidini, all of which bear the signatures of the
president and the secretary as required by the Corporation Law with the proper
indorsements of the respective owners appearing thereon. Exhibits "B-1" to "B-4" are
specifically indorsed to her while Exhibits "B-2" and "B-3" are indorsed in blank. Aquilino
Rivera admitted the genuineness of the signatures of the officers of the corporation and
of an the indorsee therein.

Nonetheless, private respondents attempted several times to register their stock

certificates with the corporation but the latter refused to register the same. Thus, private
respondents filed a special civil action for mandamus and damages with preliminary
mandatory injunction and/or receivership naming herein petitioners as respondents
presided by respondent Judge. Petitioners' counsel Atty. Marcelino A. Bueno, upon
receipt of the summons and a copy of the aforesaid petition, filed an answer thereto with
 158

denials, special and affirmative defenses and counterclaim. Thereafter, a hearing was
held on the application for preliminary mandatory injunction and/or receivership, after
which respondent Judge issued an order for a writ of preliminary mandatory injunction
authorizing respondent Jureidini and Tsuchiya to manage the corporation's hotel and
restaurant, upon the filing of a bond in the amount of P30,000.00.

ISSUES:
I. Whether it is the regular court or the Securities and Exchange Commission
that has jurisdiction over the present controversy.
II. Whether respondents’ principal action of mandamus is an improper course of
action
III. Whether the respondent Judge in the issuance of a Writ of Preliminary
Mandatory Injunction committed acts of grave abuse of discretion

RULING:
I
Presidential Decree No. 902-A provides:
Sec. 5. In addition to the regulatory and adjudicative functions of the Securities
and Exchange Commission over corporations, partnerships and other forms of
associations registered with it as expressly granted under existing laws and
decrees, it shall have original and exclusive jurisdiction to hear and decide cases
involving
(a) ...
(b) Controversies arising out of intra-corporate or partnership relations and
among stockholders, members, or associates; between any or all of them and
the corporation, partnership or association of which they are stockholders,
members, or associates, respectively and between such corporations,
partnership or association and the State insofar as it concerns their individual
franchise or right to exist as such entity.

It has already been settled that an intracorporate controversy would call for the
jurisdiction of the Securities and Exchange Commission. (Philippine School of Business
Administration v. Lanao, 127 SCRA 781, February 24, 1984). On the other hand, an
intra-corporate controversy has been defined as "one which arises between a
stockholder and the corporate. There is no distinction, qualification, nor any exemption
whatsoever." (Philex Mining Corporation v. Reyes, 118 SCRA 605, November 19,
1982). This Court has also ruled that cases of private respondents who are not
shareholders of the corporation, cannot be a "controversy arising out of intracorporate
or partnership relations between and among stockholders, members or associates;
between any or all of them and the corporation, partnership or association, of which
they are stockholders, members or associates, respectively." (Sunset View
Condominium Corporation v. Campos, Jr., 104 SCRA 303, April 27, 1981).

Under Batas Pambansa Blg. 68 otherwise known as "The Corporation Code of

the Philippines," shares of stock are transferred as follows:
 159

SEC. 63. Certificate of stock and transfer of shares. — The capital stock of stock
corporations shall be divided into shares for which certificates signed by the
president or vice-president, countersigned by the secretary or assistant
secretary, and sealed with the seal of the corporation shall be issued in
accordance with the by-laws. Shares of stock so issued are personal property
and may be transferred by delivery of the certificate or certificates indorsed by
the owner or his attorney-in- fact or other person legally authorized to make the
transfer. No transfer, however, shall be valid, except as between the parties, until
the transfer is recorded in the book of the corporation showing the names of the
parties to the transaction, the date of the transfer, the number of the certificate or
certificates and the number of shares transferred.

xxx xxx xxx

As confirmed by this Court, "shares of stock may be transferred by delivery to the

transferee of the certificate properly indorsed. 'Title may be vested in the transferee by
delivery of the certificate with a written assignment or indorsement thereof ' (18 C.J. S.
928). There should be compliance with the mode of transfer prescribed by law (18
C.J.S. 930)' " (Nava v. Peers Marketing Corp. 74 SCRA 65, 69, Nov. 25, 1976)

As the bone of contention in this case, is the refusal of petitioner Rivera to

indorse the shares of stock in question and the refusal of the Corporation to register
private respondents' shares in its books, there is merit in the findings of the lower court
that the present controversy is not an intracorporate controversy; private respondents
are not yet stockholders; they are only seeking to be registered as stockholders
because of an alleged sale of shares of stock to them. Therefore, as the petition is filed
by outsiders not yet members of the corporation, jurisdiction properly belongs to the
regular courts.

II
On the other hand, there is merit in petitioners' contention that private
respondents' principal action of mandamus is an improper course of action.

It is evident that mandamus will not lie in the instant case where the shares of
stock in question are not even indorsed by the registered owner Rivera who is
specifically resisting the registration thereof in the books of the corporation. Under the
above ruling, even the shares of stock which were purchased by private respondents
from the other incorporators cannot also be the subject of mandamus on the strength of
mere indorsement of the supposed owners of said shares in the absence of express
instructions from them. The rights of the parties will have to be threshed out in an
ordinary action.

III-V
Petitioners insist that what was issued was a provisional receivership, while
private respondents maintain that the trial court issued a Writ of Preliminary Mandatory
Injunction. Be that as it may, it appears obvious that from the abovementioned rulings of
 160

this Court, petitioners' contention that respondent Judge in the issuance thereof
committed acts of grave abuse of discretion, is well taken.

A mandatory injunction is granted only on a showing (a) that the invasion of the
right is material and substantial; (b) the right of complainant is clear and unmistakable;
and (c) there is an urgent and permanent necessity for the writ to prevent serious
damage. (Pelejo v. Court of Appeals, 117 SCRA 668, Oct. 18, 1982).

Respondent court in the instant case violated the fundamental rule of injunctions
that a mandatory injunction will not issue in favor of a party whose rights are not clear
and free of doubt or as yet undetermined. (Namarco v. Cloribel, 22 SCRA 1038-1039,
March 13, 1968). It will be recalled that the disputed shares of stock were purchased not
from the registered owner but from a Japanese national who allegedly was the real
owner thereof. It was also alleged that the registered owner was only a dummy of
Akasako. it is also true that the trial court has already made findings to that effect at the
hearing for the issuance of the Order of June 5, 1981. Nonetheless, these are
contentious issues that should properly be ventilated at the trial on the merits. As
correctly stated in petitioners' motion for reconsideration, the Order of the trial court is in
effect a judgment on the merits, declaring expressly or impliedly that petitioners are
stockholders of the Corporation at the hearing of only the incident for the issuance of a
Writ of Preliminary Injunction. On the other hand if the Order amounts to a judgment on
the merits, the lower court should first rule on what private respondents seek, the
registration of their shareholdings in the books of the corporation and the issuance of
new stock certificates. It is only thereafter that the subsequent act of management may
be ordered and the period of finality of such a judgment should be in accordance with
the Rules of Court, giving the respondents the right to an appeal or review and not be
immediately executory as the Writ of Preliminary Mandatory Injunction would infer.
(Rollo, p. 65).

Another fundamental rule which appears to have been violated in the case at bar
is that no advantage may be given to one to the prejudice of the other, a court should
not by means of a preliminary injunction transfer the property in litigation from the
possession of one party to another where the legal title is in dispute and the party
having possession asserts ownership thereto. (Rodulfo v. Alonso, 76 Phil. 225),
February 28, 1946). Similarly, the primary purpose of an injunction is to preserve
the status quo, that is the last actual peaceable uncontested status which preceded the
controversy. In the instant case, petitioner Rivera is the registered majority and
controlling stockholder of the corporation before the ensuing events transpired. By the
issuance of the Writ in question he appears to have been deprived of his rights as
stockholder thereof apart from his status as Chairman of the Board and President of the
corporation, with Akasako as the Manager of the two restaurants in this case; the same
being the last uncontested status which preceded the controversy.

6.
 161

LIM TAY, petitioner vs., COURT OF APPEALS, GO FAY AND CO. INC., SY GUIOK,
and THE ESTATE OF ALFONSO LIM, respondents.
G.R. No. 126891. August 5, 1998
PANGANIBAN, J.:

FACTS: Sy Guiok and Alfonso Sy Lim both secured a loan from Lim Tay in the
amount of P40,000 each payable within 6 months, where, as security, they each
executed separate Contracts of Pledge in favor of Lim Tay whereby they both pledged
their respective 300 shares of stock in the Go Fay & Company Inc. and obliged
themselves to pay interest on said loan at the rate of 10% per annum from the date of
said contract of pledge. Guiok and Sy Lim endorsed and delivered to Lim Tay in blank
their respective shares of stock, which Lim Tay is authorized and empowered to sell in a
public or private sale with or without notice and, at his option, to transfer to his own
name on the books of the corporation and to hold the certificate issued, in case of
failure to pay, pursuant the contracts of pledge.

When Guiok and Sy Lim both failed to pay their respective loans and the accrued
interests, Lim Tay filed a ‘Petition for Mandamus’ against Go Fay & Co. with the SEC
praying that the corporate secretary of Go Fay & Co., who refused to do so, be ordered
to register the stock transfers and issue a new certificates in his favor, and that Go Fay
& Co. be ordered to pay all dividends due and unclaimed on the said certificates to him.
Lim Tay alleged that the controversy between him as stockholder and Go Fay & Co.
was intra-corporate. In addition, Lim Tay contends that he has acquired ownership of
the shares “through extraordinary prescription,” and through Guiok and Sy Lim’s
subsequent acts, which amounted to a novation of the contracts of pledge. He also
claims that there was dacion en pago, in which the shares of stock were deemed sold to
him, the consideration for which was the extinguishment of the loans and the interests
thereon; and likewise claims that laches bars recovery of the shares.

ISSUES:
(1) Does SEC have jurisdiction?
(2) Is Lim Tay entitled to relief of mandamus as against Go Fay & Co., Inc.?

HELD: The duty of a corporate secretary to record transfers of stocks is ministerial.

However, he cannot be compelled to do so when the transferee’s title to said shares has
no prima facie validity or is uncertain. More specifically, a pledgee, prior to foreclosure
and sale, does not acquire ownership rights over the pledged shares and thus cannot
compel the corporate secretary to record his alleged ownership of such shares on the
basis merely of the contract of pledge.

Similarly, the SEC does not acquire jurisdiction over a dispute when a party’s
claim to being a shareholder is, on the face of the complaint, invalid or inadequate or is
otherwise negated by the very allegations of such complaint. Mandamus will not issue
to establish a right, but only to enforce one that is already established.
 162

(1) No. The determination of whether a shareholder is entitled to registration of

shares in a his name, the issuance of stock certificates, and the right to receive
dividends which pertain to the said shares, which are all rights that flow from ownership,
falls within the jurisdiction of the SEC. However, if ownership of the shares is not clearly
established and is still unresolved at the time the action for mandamus is filed, then
jurisdiction lies with the regular courts.

In the present case, Lim Tay’s claim that he was the owner of the shares of stock
in question has no prima facie basis. The contracts of pledge cannot be basis of his
ownership for it merely authorizes him to foreclose, which is not automatic, and there is
no mention that he in fact foreclosed the pledge and purchased the shares after such
foreclosure. His status as a mere pledgee does not, under civil law, entitle him to
ownership of the shares. There is no showing Lim Tay made any attempt to foreclose or
sell the shares, therefore, ownership of the shares could not have passed to him. The
pledgor remains the owner during the pendency of the pledge and prior to foreclosure
and sale, as provided by Article 2103, CC.

Further, whether prescription effectively transferred ownership of the shares,

whether there was a novation of the contracts of pledge, and whether laches had set in
were difficult legal issues, which, unpleaded and unresolved, actually negates SEC's
jurisdiction.

(2) No. Since Lim Tay failed to establish a clear legal right, Mandamus will not
issue. It is essential that the person petitioning for Mandamus has a clear legal right to
the thing demanded and that it is the imperative duty of the respondent to perform the
act required. Mandamus will not issue to establish a legal right, but only to enforce one
that is already clearly established.

7.
PONCE vs. ALSONS CEMENT CORPORATION
G. R. No. 139802, 10 December 2002

FACTS: On 25 January 1996, Vicente C. Ponce, filed a complaint with the SEC for
mandamus and damages against Alsons Cement Corporation and its corporate
secretary Francisco M. Giron, Jr. In his complaint, Ponce alleged, among others, that
"the late Fausto G. Gaid was an incorporator of Victory Cement Corporation (VCC),
having subscribed to and fully paid 239,500 shares of said corporation; that on 8
February 1968, Ponce and Fausto Gaid executed a "Deed of Undertaking" and
"Indorsement" whereby the latter acknowledges that the former is the owner of said
shares and he was therefore assigning/endorsing the same to Ponce; that on 10 April
1968, VCC was renamed Floro Cement Corporation (FCC); that on 22 October 1990,
FCC was renamed Alsons Cement Corporation (ACC); that from the time of
incorporation of VCC up to the present, no certificates of stock corresponding to the
239,500 subscribed and fully paid shares of Gaid were issued in the name of Fausto G.
Gaid and/or Ponce; and that despite repeated demands, ACC and Giron refused and
continue to refuse without any justifiable reason to issue to Ponce the certificates of
 163

stocks corresponding to the 239,500 shares of Gaid, in violation of Ponce's right to

secure the corresponding certificate of stock in his name. ACC and Giron moved to
dismiss. SEC Hearing Officer Enrique L. Flores, Jr. granted the motion to dismiss in an
Order dated 29 February 1996. Ponce appealed the Order of dismissal.

On 6 January 1997, the Commission En Banc reversed the appealed Order and
directed the Hearing Officer to proceed with the case. In ruling that a transfer or
assignment of stocks need not be registered first before it can take cognizance of the
case to enforce Ponce's rights as a stockholder, the Commission En Banc cited the
Supreme Court's ruling in Abejo vs. De la Cruz, 149 SCRA 654 (1987). Their motion for
reconsideration having been denied, ACC and Giron appealed the decision of the SEC
En Banc and the resolution denying their motion for reconsideration to the Court of
Appeals. In its decision, the Court of Appeals held that in the absence of any allegation
that the transfer of the shares between Gaid and Ponce was registered in the stock and
transfer book of ACC, Ponce failed to state a cause of action. Thus, said the appellate
court, "the complaint for mandamus should be dismissed for failure to state a cause of
action." Ponce's motion for reconsideration was denied in a resolution dated 10 August
1999. Ponce filed the petition for review on certiorari.

ISSUE: Whether Ponce can require the corporate secretary, Giron, to register Gaid's
shares in his name.

HELD: No. Fausto Gaid was an original subscriber of ACC's 239,500 shares. From the
Amended Articles of Incorporation approved on 9 April 1995, each share had a par
value of P1.00 per share. Ponce had not made a previous request upon the corporate
secretary of ACC, Francisco M. Giron Jr., to record the alleged transfer of stocks.
Pursuant to Section 63 of the Corporation Code, a transfer of shares of stock not
recorded in the stock and transfer book of the corporation is non-existent as far as the
corporation is concerned. As between the corporation on the one hand, and its
shareholders and third persons on the other, the corporation looks only to its books for
the purpose of determining who its shareholders are. It is only when the transfer has
been recorded in the stock and transfer book that a corporation may rightfully regard the
transferee as one of its stockholders. From this time, the consequent obligation on the
part of the corporation to recognize such rights as it is mandated by law to recognize
arises. Hence, without such recording, the transferee may not be regarded by the
corporation as one among its stockholders and the corporation may legally refuse the
issuance of stock certificates in the name of the transferee even when there has been
compliance with the requirements of Section 64 of the Corporation Code. The stock and
transfer book is the basis for ascertaining the persons entitled to the rights and subject
to the liabilities of a stockholder. Where a transferee is not yet recognized as a
stockholder, the corporation is under no specific legal duty to issue stock certificates in
the transferee's name. A petition for mandamus fails to state a cause of action where it
appears that the petitioner is not the registered stockholder and there is no allegation
that he holds any power of attorney from the registered stockholder, from whom he
obtained the stocks, to make the transfer. The deed of undertaking with indorsement
presented by Ponce does not establish, on its face, his right to demand for the
 164

registration of the transfer and the issuance of certificates of stocks. Under the
provisions of our statute touching the transfer of stock, the mere indorsement of stock
certificates does not in itself give to the indorsee such a right to have a transfer of the
shares of stock on the books of the company as will entitle him to the writ of mandamus
to compel the company and its officers to make such transfer at his demand, because,
under such circumstances the duty, the legal obligation, is not so clear and indisputable
as to justify the issuance of the writ. As a general rule, as between the corporation on
the one hand, and its shareholders and third persons on the other, the corporation looks
only to its books for the purpose of determining who its shareholders are, so that a mere
indorsee of a stock certificate, claiming to be the owner, will not necessarily be
recognized as such by the corporation and its officers, in the absence of express
instructions of the registered owner to make such transfer to the indorsee, or a power of
attorney authorizing such transfer. Thus, absent an allegation that the transfer of shares
is recorded in the stock and transfer book of ACC, there appears no basis for a clear
and indisputable duty or clear legal obligation that can be imposed upon the corporate
secretary, so as to justify the issuance of the writ of mandamus to compel him to
perform the transfer of the shares to Ponce.

8.
NORA A. BITONG vs. COURT OF APPEALS
G.R. No. 123553. July 13, 1998

FACTS: Bitong alleged that she was the treasurer and member of the Board of
Directors of Mr. & Mrs. Corporation. She filed a derivative suit with the SEC to hold
respondent spouses Apostol liable for fraud, misrepresentation, disloyalty, evident bad
faith, conflict of interest and mismanagement in directing the affairs of the corporation to
the prejudice of the stockholders. She alleges that certain transactions entered into by
the corporation were not supported by any stockholder’s resolution. The complaint
sought to enjoin respondent, Apostol from further acting as president-director of the
corporation and from disbursing any money or funds. Apostol contends that Bitong was
merely a holder-in-trust of the JAKA shares of the corporation, hence, not entitled to the
relief she prays for. SEC Hearing Panel issued a writ enjoining Apostol. The SEC
Hearing Panel dissolved the writ and dismissed the complaint filed by Bitong. Bitong
appealed to the SEC en banc. The latter reversed the SEC Hearing Panel decision.
Apostol filed petition for review with the CA. The CA reversed SEC en banc ruling
holding that Bitong was not the owner of any share of stock in the corporation and
therefore, not a real party in interest to prosecute the complaint.

ISSUE: Whether or not petitioner is the true party-in-interest allowing her to initiate and
prosecute a derivative suit against respondents.

HELD: No. As found by the Hearing Panel and the CA, there is overwhelming evidence
that despite what appears on the certificate of stock and the stock and transfer book,
 165

petitioner was not a bona fide stockholder of the Company at the time the acts
complained of were carried out. The true party in interest was actually JAKA, from
whom petitioner acquired her shares of stock. A certificate of stock can only be issued
after compliance with the following requisite: 1) the certificates must be signed by the
president or VP, countersigned by the corporate secretary or assistant secretary; 2)
delivery of the certificate, essential to its issuance; 3) the par value or the full
subscription must be fully paid; and 4) the original certificate must be surrendered
where the person requesting the issuance of a certificate is a transferee from a
stockholder. Once so issued, the certificate becomes a continuing affirmation or
representation of that the stock described therein is valid and genuine and is at least
prima facie evidence that it was legally issued in the absence of evidence to the
contrary. However, this presumption may be rebutted by entries in the books and
records of the corporation, as well as parole evidence may be admitted to supply
omissions to the books and records. In this case, the certificate of stock of petitioner,
when it was issued to her, was not yet signed by the president of the company. The
same was fraudulently antedated by petitioner who had possession of the Certificate
Book and the Stock and Transfer Book. Petitioner admitted this when she stated in her
reply that the certificate was issued to her by the corporate secretary years before it was
signed by the President, and other certificates were not yet signed by the same at the
time of the filing of the complaint with the SEC. Thus, the certificate could not be
considered issued in contemplation of law unless signed by the president or VP and
countersigned by the secretary or assistant secretary.

9.
ABEJO v. DE LA CRUZ
149 SCRA 654

10.
SANTAMARIA vs. HONGKONG AND SHANGHAI BANK
G.R. No. L-2808; August 31, 1951

FACTS: Sometime in February, 1937, Mrs. Josefa T. Santamaria bought 10,000 shares
of the Batangas Minerals, Inc., through the offices of Woo, Uy-Tioco & Naftaly, a stock
brokerage firm and pay therefore the sum of P8,041.20 as shown by receipt Exh. B. The
buyer received Stock Certificate No. 517, Exh. “F”, issued in the name of Woo, Uy-Tioco
& Naftaly and indorsed in bank by this firm.

On March 9, 1937, Mrs. Santamaria placed an order for the purchase of 10,000
shares of the Crown Mines, Inc. with R.J. Campos & Co., a brokerage firm, and
delivered Certificate No. 517 to the latter as security therefor with the understanding that
said certificate would be returned to her upon payment of the 10,000 Crown Mines, Inc.
shares. Exh. D. is the receipt of the certificate in question signed by one Mr.
Cosculluela, Manager of the R.J. Campos & Co., Inc. According to certificate Exh. E, R.
 166

J. Campos & Co., Inc. bought for Mrs. Josefa Santamaria 10,000 shares of the Crown
Mines, Inc. at .225 a share, or the total amount of P2,250.

At the time of the delivery of a stock Certificate No. 517 to R.J. Campos & Co.,
Inc. this certificate was in the same condition as that when Mrs. Santamaria received
from Woo, Uy-Tioco & Naftaly, with the sole difference that her name was later written
in lead pencil on the upper right hand corner thereof.

Two days later, on March 11, Mrs. Santamaria went to R.J. Campos & Co., Inc.
to pay for her order of 10,000 Crown Mines shares and to get back Certificate No. 517.
Cosculluela then informed her that R.J. Campos & Co., Inc. was no longer allowed to
transact business due to a prohibition order from Securities and Exchange Commission.
She was also inform that her Stock certificate was in the possession of the Hongkong
and Shanghai Banking Corporation.

Thereafter, she instituted an action against Hongkong Bank for the recovery of
the certificate. Trial court decided in her favor. The bank appealed.

ISSUES:
(1) WON Santamaria was chargeable with negligence which gave rise to the
case.
(2) WON the Bank was obligated to inquire into the ownership of the certificate.

HELD:
(1) The facts of the case justify the conclusion that she was negligent. She
delivered the certificate, which was endorsed in blank, to Campos without having taken
any precaution. She did not ask the Batangas Minerals to cancel it and instead, issue
another in her name. In failing to do so, she clothed Campos with apparent title to the
shares represented by the certificate. By her misplaced confidence in Campos, she
made possible the wrong done. She was therefore estopped from asserting title thereto
for it is well-settled that “where one of the innocent parties must suffer by reason of a
wrongful or unauthorized act, the loss must fall on the one who first trusted the
wrongdoer.”

(2) t should be noted that the certificate of stock in question was issued in the
name of the brokerage firm-Woo, Uy-Tioco & Naftaly and that it was duly indorsed in
blank by said firm, and that said indorsement was guaranteed by R.J. Campos & Co.,
Inc., which in turn indorsed it in blank. This certificate is what it is known as street
certificate. Upon its face, the holder was entitled to demand its transfer into his name
from the issuing corporation. The Bank was not obligated to look beyond the certificate
to ascertain the ownership of the stock at the time it received the same from R.J.
Campos & Co., Inc., for it was given to the Bank pursuant to their letter of
hypothecation. Even if said certificate had been in the name of the plaintiff but indorsed
in blank, the Bank would still have been justified in believing that R.J. Campos & Co.,
Inc. had title thereto for the reason that it is a well-known practice that a certificate of
 167

stock, indorsed in blank, is deemed quasi negotiable, and as such the transferee thereof
is justified in believing that it belongs to the holder and transferor.

The only evidence in the record to show that the certificate of stock in question
may not have belonged to R.J. Campos & Co., Inc. is the testimony of the plaintiff to the
effect that she had approached Robert W. Taplin on March 13, 1937, and informed him
that she was the true owner of said certificate and demanded the return thereof, or its
value, but even assuming for the sake of argument that what plaintiff has stated is true,
such an incident would merely show that plaintiff has an adverse claim to the ownership
of said certificate of stock, but that would not necessarily place the Bank in the position
to inquire as to the real basis of her claim, nor would it place the Bank in the obligation
to recognize her claim and return to her the certificate outright. A mere claim and of
ownership does not establish the fact of ownership. The right of the plaintiff in such a
case would be against the transferor. In fact, this is the attitude plaintiff has adopted
when she filed a charge for estafa against Rafael J. Campos, which culminated in his
prosecution and conviction, and it is only when she found him to be insolvent that she
decided to go against the Bank. The fact that on the right margin of the said certificate
the name of the plaintiff appeared written, granting it to be true, can not be considered
sufficient reason to indicate that its owner was the plaintiff considering that said
certificate was indorsed in blank by her brokers Woo, Uy-Tioco & Naftaly, was
guaranteed by indorsement in blank by R.J. Campos & Co., Inc., and was transferred in
due course by the latter to the Bank under their letter of hypothecation. Said indicium
could at best give the impression that the plaintiff was the original holder of the
certificate.

11.
DELOS SANTOS VS MCGRATH

FACTS: Briefly stated, plaintiffs contend that De los Santos bought 55,000 shares from
Juan Campos, in Manila, early in December, 1942; that he bought 300,000 shares from
Carl Hess, in the same city, several days later; and that, before Christmas of 1942, be
bought 800,000 shares from Carl Hess, this time for the account and benefit of
Astraquillo. By virtue of vesting P-12, dated February 18, 1945, title to the 1,600,000
shares of stock in dispute was, however, vested in the Alien Property Custodian of the
U. S. (hereinafter referred to as the Property Custodian) as Japanese property. Hence,
plaintiffs filed their respective claims with the Property Custodian. In due course, the
Vested Property Claims Committee of the Philippine Alien Property Administration made
a "determination," dated March 9, 1948, allowing said claims, which were considered
and heard jointly as Claim No. 535, but, upon personal review, the Philippine Alien
Property Administration made by said Committee and decreed that "title to the shares in
question shall remain in the name of the Philippine Alien Property Administrator."
Consequently, plaintiffs instituted the present action to establish title to the
aforementioned shares of stock. In their complaint, they pray that judgment be rendered
declaring them lawful owners of said shares of stock, with such dividends, profits and
rights as may have accrued thereto; requiring the defendant to render accounts and to
transfer said shares of stock to plaintiffs' names; and sentencing the former to pay the
 168

costs. After due hearing, the Court of First Instance rendered a decision in favor of the
plaintiffs and against the defendant, declaring the former the absolute owners of the
shares of stock of the Lepanto consolidated Mining Company, covered by the
certificates of stock, respectively, in their (plaintiffs') possession. The transfer of said
shares of stock in favor of the Alien Property Custodian of the U. S. of America, now
Philippine Alien Property Administration, is hereby declared null and void and of no
effect. Consequently, the Lepanto consolidated mining Company is ordered to cancel
the certificates of stock issued in the name of the Philippine Alien Property Custodian or
Philippine Alien Property Administrator, as the case may be. Defendant shall pay the
cost of the proceeding. (p. 67, R.A.) The defendant and the intervenor have appealed
from this decision.

ISSUE: Whether or not plaintiffs had purchased the shares of stock in question.

HELD: In the case at bar, neither madrigal nor the Mitsuis had alienated shares of stock
in question. It is not even claimed that either had, through negligence, given — occasion
for an improper or irregular disposition of the corresponding stock certificates. Plaintiffs
merely argue without any evidence whatsoever thereon — that Kitajima might have, or
must have, assigned the certificates on or before December 1942, although, as above
stated, this is, not only, improbable, under the conditions, then obtaining, but, also.,
impossible, considering that, in April 1943, Kitajima delivered the instruments to Miwa,
who kept them in its possession until 1945. At any rate, such assignment by Miwa —
granting for the sake of argument the accuracy of the surmise of plaintiffs herein — was
unauthorized by the mitsuis, who, in the light of the precedents cited above, are not
chargeable with negligence. In other words, assuming that Kitajima had been guilty of
embezzlement, by negotiating the stock certificates in question for his personal benefit,
as claimed by the plaintiffs, the title of his assignees and successors in interest would
still be subject to the rights of the registered owner, namely, Madrigal, and
consequently, of the party for whose benefit and account the latter held the
corresponding shares of stock, that is to say, the Mitsuis. At any rate, at the time of the
alleged sales in their favor, plaintiffs were aware of sufficient facts to put them on notice
of the need of inquiring into the regularity of the transactions and the title of the
supposed vendors. Indeed, the certificates of stock in question were in the name of
madrigal. Obviously, therefore, the alleged sellers (Campos and Hess) were not
registered owners of the corresponding shares of stock. Being presumed to know the
law — particularly the provisions of section 35 of Act No. 1459 — and, as experienced
traders in shares of stock, plaintiffs must have, accordingly, been conscious of the
consequent infirmities in the title of the supposed vendors, or of the handicaps thereof.
Moreover, the aforementioned sales were admittedly hostile to the Japanese, who had
prohibited it and plaintiffs had actual knowledge of these facts and of the risks attendant
to the alleged transaction. In other words, plaintiffs advisedly assumed those risks and,
hence, they can not validly claim, against the registered stockholder, the status of
purchasers in good faith. The lower court held, and plaintiffs maintain that, not being
the registered owners of the shares of stock in question, the Mitsuis can not assert a
better right than said plaintiffs. This pretense is untenable. Inasmuch as Madrigal, the
registered owner of said shares of stock, has always acknowledged that he held the
 169

same merely as an agent of, or trustee for, the mitsuis — and this is not denied — it
follows that the latter are entitled to invoke such rights as Madrigal had as registered
stockholder. Upon the other hand, even the alleged sale by Juan Campos and Carl
Hess to plaintiffs herein is contested by the defense and, to our mind, has not been
established by a preponderance of the evidence. Hence, as the undisputed principal or
beneficiary of the registered owner (Madrigal), the Mitsuis may claim his rights, which
cannot be exercised by the plaintiffs, not only because their alleged title is not derived
either from madrigal or from the Mitsuis, but, also, because it is in derogation, of said
rights. madrigal and the Mitsuis are not privies to the alleged sales by Campos and
Hess to the plaintiffs, contrary to the latter's pretense. In conclusion, when the Property
Custodian issued the Vesting Order complained of, the shares of stock in question
belonged to the Mitsuis, admittedly an enemy corporation, so that Vesting Order is in
conformity with law and should be upheld. Wherefore, the decision appealed from is
hereby reversed, and the complaint, accordingly, dismissed, with costs against the
plaintiffs-appellees. It is so ordered.

12.
USON vs. DIOSOMITO
61 PHIL 535 (1935)

FACTS: Uson filed a civil action for debt against Diosomito upon institution of which an
attachment was duly issued and levied upon the property of the latter on January 18,
1932, including seventy-five shares of the North Electric Co. Inc. A judgment was
rendered infavor of Uson on June 23, 1932. As a consequence of it , the sheriff sold the
said shares at a public auction on March 20, 1933 wherein the highest bidder was
Uson.

In the present action, H.P.L. Jollye claims to be the owner of the said shares and
it presents a certificate of stock issued to him by the company on February 13, 1933 as
evidence of his ownership.

Upon evaluation of the facts by the lower court, the following were established:
(1) that Diosomito was the original owner of the questioned shares; (2) that on
February 3,1931, he sold the same shares to a certain Barcelon and delivered to the
latter the corresponding certificates; (3) that Barcelon presented these certificates to the
company for registration only on September 16, 1932; and (4), that Barcelon sold the
same to H.P.L.Jollye to whom a new certificate was issued on February 13, 1933.

In short, the transfer of the said shares from Diosomito to Barcelon was
registered and noted on the books of the corporation nine months after the attachment
had been levied on the same shares. The lower court ruled for Uson.

ISSUE: Whether or not a bona fide transfer of the shares of a corporation, not
registered or noted on the books of the corporation, is valid as against a subsequent
lawful attachment of said shares, regardless of whether the attaching creditor had actual
notice of said transfer or not.
 170

HELD: The Supreme Court affirmed the lower court decision. It argued that the
language of the legislature is plain to the effect that the right of the owner of the shares
of stock of a Philippine corporation to transfer the same by delivery of the certificate,
whether it be regarded as a statutory or common law right, is limited and restricted by
the express provision that “no transfer, however, shall be valid except as between the
parties, until the transfer is entered and noted upon the books of the
corporation.” Therefore, the transfer from Diosomito to Barcelon was not valid as to
Uson since at the time it was attached, the shares still stood in the name of Diosomito
on the books of the corporation.

13.
GONZALO CHUA GUAN, plaintiff-appellant, vs. SAMAHANG MAGSASAKA, INC.,
and SIMPLICIO OCAMPO, ADRIANO G. SOTTO, and EMILIO VERGARA, as
president, secretary and treasurer respectively of the same, defendants-appellees.
G.R. No. L-42091 November 2, 1935
BUTTE, J.:

FACTS: Samahang Magsasaka, Inc., is a corporation duly organized under the laws of
the Philippine Islands with principal office in Cabanatuan, Nueva Ecija, and that the
individual defendants are the president, secretary and treasurer of the same. Gonzalo
H. Co Toco was the owner of 5,894 shares of the capital stock of the said corporation
represented by nine certificates having a par value of P5 per share; Co Toco, a resident
of Manila, mortgaged said 5,894 shares to Chua Chiu to guarantee the payment of a
debt of P20,000 due on or before June 19, 1932. The said certificates of stock were
delivered with the mortgage to the mortgagee, Chua Chiu. The said mortgage was duly
registered in the office of the register of deeds of Manila and in the office of the said
corporation.

Chua Chiu assigned all his right and interest in the said mortgage to the plaintiff
and the assignment was registered in the office of the register of deeds in the City of
Manila and in the office of the said corporation. Co Toco, having defaulted in the
payment of said debt at maturity, the plaintiff foreclosed said mortgage and delivered
the certificates of stock and copies of the mortgage and assignment to the sheriff of the
City of Manila in order to sell the said shares at public auction. The sheriff auctioned
said 5,894 shares of stock and the plaintiff having been the highest bidder for the sum
of P14,390, the sheriff executed in his favor a certificate of sale of said shares. The
plaintiff tendered the certificates of stock standing in the name of Gonzalo H. Co Toco to
the proper officers of the corporation for cancellation and demanded that they issue new
certificates in the name of the plaintiff. The said officers (the individual defendants)
refused to issue said new shares in the name of the plaintiff.

ISSUE: whether the said mortgage of shares of stock assigned to Chua Guan takes
priority over the writs of attachment noted on the books of the corporation
 171

HELD: The defendants refuse to cancel the said certificates standing in the name of
Gonzalo H. Co Toco on the books of the corporation and to issue new ones in the name
of the plaintiff because prior to the date when the plaintiff made his demand, to wit,
February 4, 1933, nine attachments had been issued and served and noted on the
books of the corporation against the shares of Gonzalo H. Co Toco and the plaintiff
objected to having these attachments noted on the new certificates which he
demanded. The first eight of the said writs of attachment were served on the corporation
and noted on its records before the corporation received notice from the mortgagee
Chua Chiu of the mortgage of said shares.

Section 4 of Act No. 1508 provides two ways for executing a valid chattel
mortgage which shall be effective against third persons. First, the possession of the
property mortgage must be delivered to and retained by the mortgagee; and, second,
without such delivery the mortgage must be recorded in the proper office or offices of
the register or registers of deeds. If a chattel mortgage of shares of stock of a
corporation may validly be made without the delivery of possession of the property to
the mortgagee and the mere registration of the mortgage is sufficient to constructive
notice to third parties, we are confronted with the question as to the proper place of
registration of such a mortgage. Section 4 provides that in such a case the mortgage
resides at the time of making the same or, if he is a non-resident, in the province in
which the property is situated; and it also provides that if the property is situated in a
different province from that in which the mortgagor resides the mortgage shall be
recorded both in the province of the mortgagor's residence and in the province where
the property is situated.

If with respect to a chattel mortgage of shares of stock of a corporation,

registration in the province of the owner's domicile should be sufficient, those who lend
on such security would be confronted with the practical difficulty of being compelled not
only to search the records of every province in which the mortgagor might have been
domiciled but also every province in which a chattel mortgage by any former owner of
such shares might be registered.

A reasonable construction of section 4 of Act No. 1508 to hold that the property
in the shares may be deemed to be situated in the province in which the corporation has
its principal office or place of business. If this province is also the province of the
owner's domicile, a single registration sufficient. If not, the chattel mortgage should be
registered both at the owner's domicile and in the province where the corporation has its
principal office or place of business. In this sense the property mortgaged is not the
certificate but the participation and share of the owner in the assets of the corporation.
he situs of shares of stock for some purposes may be at the domicile of the owner and
for others at the domicile of the corporation; and even elsewhere. It is a general rule that
for purposes of execution, attachment and garnishment, it is not the domicile of the
owner of a certificate but the domicile of the corporation which is decisive.

Apart from the cumbersome and unusual method of hypothecating shares of

stock by chattel mortgage, it appears that in the present state of our law, the only safe
 172

way to accomplish the hypothecation of share of stock of a Philippine corporation is for

the creditor to insist on the assignment and delivery of the certificate and to obtain the
transfer of the legal title to him on the books of the corporation by the cancellation of the
certificate and the issuance of a new one to him. From the standpoint of the debtor this
may be unsatisfactory because it leaves the creditor as the ostensible owner of the
shares and the debtor is forced to rely upon the honesty and solvency of the creditor. Of
course, the mere possession and retention of the debtor's certificate by the creditor
gives some security to the creditor against an attempted voluntary transfer by the
debtor, provided the by-laws of the corporation expressly enact that transfers may be
made only upon the surrender of the certificate. It is to be noted, however, that section
35 of the Corporation Law (Act No. 1459) enacts that shares of stock "may be
transferred by delivery of the certificate endorsed by the owner or his attorney in fact or
other person legally authorized to make the transfer." The use of the verb "may" does
not exclude the possibility that a transfer may be made in a different manner, thus
leaving the creditor in an insecure position even though he has the certificate in his
possession. Moreover, the shares still standing in the name of the debtor on the books
of the corporation will be liable to seizure by attachment or levy on execution at the
instance of other creditors. In view of the premises, the attaching creditors are entitled
to priority over the defectively registered mortgage of the appellant.

14.
CHEMPHIL EXPORT & IMPORT vs. CA
 173

XI. CORPORATE POWERS

1 National Power Corp. v. Vera (1989) 170 SCRA 721 caisido
2 Pirovano, et al v. De la Rama (1954) 96 Phil. 335 zapata
3 Bissel v. Michigan Southern 22 NY 258; 1860 diaz

XII. CONTROL & MANAGEMENT

4 Expert Travel & Tours, Inc v. CA 459 SCRA 147 alvarez
5 Citibank NA v. Chua 220 SCRA 75 cero
6 Boyer-Roxas v. CA 211 SCRA 470 ballesta
7 Valle Verde CC v. Africa GR 151969 (Sept. 4, 2009) aldeosa
8 Yu Chuck v. Kong Li Po 46 Phil 608 briones
9 Woodchild Holdings v. Roxas Electric 436 SCRA 235 gaite
10 Bd. Of Liquidators v. Heirs of Kalaw 20 SCRA 987 comia
11 Hayes v. Canada Atlantic & Plant S.S. Co., Ltd. (1910) castillo
12 US Circuit CA, First Circuit 181 F. 289 fangayen

XIII. DUTIES OF DIRECTORS & CONTROLLINGSTOCKHOLDERS

13 Benguet Electric Coop. v. NLRC 209 SCRA 55 arpafo
3) Self-dealing directors- Sec. 32
14 Prime White Cement v. IAC 220 SCRA 103 chua
4) Interlocking directors – Sec. 33
15 Gokongwei v. SEC et al. 89 SCRA 336 garcia
5)Doctrine of Corporate Opportunity – Sec. 34
6) Duty to stockholders - Special Facts Doctrine
16 Strong v. Repide 41 Phil. 947 concordia
7) Duty to creditors – 17 Steinberg v. Velasco 52 Phil. 953 geronilla
8) Watered Stocks - Sec. 65

G.R. No. 83558 February 27, 1989

NATIONAL POWER CORPORATION, petitioner,
vs.
HONORABLE ABRAHAM P. VERA, Presiding Judge, Regional Trial Court,
National Capital Judicial Region, Branch 90, Quezon City and SEA LION
INTERNATIONAL PORT TERMINAL SERVICES, INC., respondents.

FACTS: National Power Corporation (NPC), seeks to annul the order of respondent
judge dated June 8, 1988 issuing a writ of preliminary injunction which enjoined NPC
from further undertaking stevedoring and arrastre services in its pier located at the
Batangas Coal-Fired Thermal Power Plant at Calaca, Batangas and directing it either to
enter into a contract for stevedoring and arrastre services or to conduct a public bidding
therefor.
A complaint for prohibition and mandamus with damages filed by private
respondent against NPC (National Power Corporation) and Philippine Ports Authority
(PPA), wherein private respondent alleged that NPC had acted in bad faith and with
 174

grave abuse of discretion in not renewing its Contract for Stevedoring Services for Coal-
Handling Operations at NPC's plant, and in taking over its stevedoring services.
Respondent judge issued a restraining order against NPC enjoining the latter
from undertaking stevedoring services at its pier. Consequently, NPC filed an "Urgent
Motion" to dissolve the restraining order, asserting, inter alia: (1) that by virtue of
Presidential Decree No. 1818, respondent judge had no jurisdiction to issue the order;
and (2) that private respondent, whose contract with NPC had expired prior to the
commencement of the suit, failed to establish a cause of action for a writ of preliminary
injunction.
Court issued a temporary restraining order. After private respondent filed its
comment to the petition, and petitioner filed its reply, the Court considered the issues
joined and the case submitted for decision.

ISSUE:
1.)Whether or not respondent judge acted without jurisdiction when he issued the writ of
preliminary injunction against NPC.
2.)Whether or not NPC is not empowered by its Charter to undertake stevedoring
services in its pier

HELD: Yes, Presidential Decree No. 1818 explicitly provides.

SECTION 1. No court in the Philippines shall have jurisdiction to issue any
restraining order, preliminary injunction, or preliminary mandatory injunction in
any case, dispute, or controversy involving an infrastructure project, or a mining,
fishery, forest or other natural resource development project of the government,
or any public utility operated by the government, including among others public
utilities for the transport of the goods or commodities, stevedoring and arrastre
contracts, to prohibit any person or persons, entity or government official from
proceeding with, or continuing the execution or implementation of any such
project, or the operation of such public utility, or pursuing any lawful activity
necessary for such execution, implementation or operation.
Undeniably, NPC is a public utility, created under special legislation engaged in
the generation and distribution of electric power and energy. It, therefore, enjoys the
protective mantle of the above decree.
No, it is an undisputed fact that the pier located at Calaca, Batangas, which is
owned by NPC, receives the various shipments of coal which is used exclusively to fuel
the Batangas Coal-Fired Thermal Power Plant of the NPC for the generation of electric
power. The stevedoring services which involve the unloading of the coal shipments into
the NPC pier for its eventual conveyance to the power plant are incidental and
indispensable to the operation of the plant. The Court holds that NPC is empowered
under its Charter to undertake such services, it being reasonably necessary to the
operation and maintenance of the power plant.

Pirovano vs. The De La Rama Steamship Co.

[G.R. No. L-5377, December 29, 1954]
 175

Facts: In De la Rama Steamship Company, Enrico Pirovano was the President and
General Manager . On the year 1941, the company insured the life of said Enrico
Pirovano in various Philippine and American Life Insurance companies. Enrico Pirovano
was largely responsible for the rapid and very successful development of the activities
of the company. Nevertheless, he was killed by the Japanese in Manila leaving as his
only heirs four minor children. The President proposed that out of the proceeds of the
insurance policies the sum of P400,000 be set aside for Pirovano's minor children
forvthe reason that Pirovano left practically nothing to his heir. The said sum of money
to be convertible into 4,000 shares of the stock of the Company, at par, or 1,000 shares
for each child. In such light, a resolution was adopted to carry out the proposal and
submitted to the stockholders of the De la Rama company at a meeting properly
convened, and on that same date the same was duly approved.
Thereafter, the President of the corporation, Sergio Osmeña, Jr., inquired to the
Securities and Exchange Commission asking for opinion regarding the validity of the
donation of the proceeds of the insurance policies to the Pirovano children. SEC
rendered its opinion that the donation was void because the corporation could not
dispose of its assets by gift and therefore the corporation acted beyond the scope of its
corporate powers. In view of the failure of compliance with the conditions to which the
above donation was made subject, and in view of the opinion of the SEC
Commissioner, the majority of the stockholders' voted to revoke the resolution
approving the donation to the Pirovano children.
As represented by the mother and guardian of the minor children of the late
Pirovano, Estefania demanded the payment of the credit due them, amounting to
P564,980.89, but the company refused to pay and such triggered the institution of
an action in the Court of First Instance of Rizal.

Issue: Whether or not the defendant corporation can give by way of donation the
proceeds of said insurance policies to the minor children of the late Pirovano.

Held: As reflected in the provisions of the articles of incorporation of the De la Rama

company, the Court found that the corporation was given broad and almost unlimited
powers to carry out the purposes for which it was organized and among them:
(1) "To invest and deal with the moneys of the company not immediately
required, in such manner as from time to time may be determined" and,
(2) "to aid in any other manner any person, association, or corporation of
which any obligation or in which any interest is held by this corporation or in the
affairs or prosperity of which this corporation has a lawful interest."
The world deal is broad enough to include any manner of disposition, and refers
to moneys not immediately required by the corporation, and such disposition may be
made in such manner as from time to time may be determined by the corporations. The
donation in question undoubtedly comes within the scope of this broad power for it is a
fact appearing in the evidence that the insurance proceeds were not immediately
required when they were given away. Granting arguendo that the donation given by
Pirovano children is outside the scope of the powers of the defendant corporation, or
the scope of the powers that it may exercise under the law, or it is an ultra vires act, still
it may said that the same can not be invalidated, or declared legally ineffective for the
 176

reason alone, it appearing that the donation represents not only the act of the Board of
Directors but of the stockholders themselves as shown by the fact that the same has
been expressly ratified in a resolution duly approved by the latter. By this ratification, the
infirmity of the corporate act, it may has been obliterated thereby making the act
perfectly valid and enforceable. This is specially so if the donation is not merely
executory but executed and consummated and no creditors are prejudice, or if there are
creditors affected, the latter has expressly given their confirmity.
A distinction should be made between corporate acts or contracts which
are illegal and those which are merely ultra vires. The former contemplates the
doing of an act which is contrary to law, morals, or public policy or public duty, and are,
like similar transactions between the individuals void. They cannot serve as basis of a
court action, nor require validity. Ultra vires acts on the other hand, or those which are
not illegal and void ab initio, are not merely within the scope of the articles of
incorporation and are merely voidable and may become binding and enforceable when
ratified by the stockholders. Said donation, even if ultra vires in the supposition we
have adverted to, is not void, and if voidable its infirmity has been cured by
ratification and subsequent acts of the defendant corporation. The defendant
corporation, therefore, is now prevented or estopped from contesting the validity of the
donation.

BISSEL vs MICHIGAN SOUTHERN

22 NY 258, 1860

FACTS: Michigan Southern Railroad Company was chartered by the State of Michigan
to build and operate and railroad through the southern part of Michigan. On the other
hand, Northern Indiana Railroad Company was chartered by the State of Indiana to
build and operate a railroad through the northern part of the State of Indiana. In
conjunction with another railroad company they built a railroad from the Northern part of
the State of Indiana through a part of the State of Illinois, city of Chicago. Michigan
Southern Railroad Company and Northern Indiana Railroad Company formed a
business connection and established the Michigan Southern and Northern Indiana
Railroad Companies (Company). The company then offered their services in the
transport of passengers and freight from Lake Erie to Chicago, and the immediate
places, through the States of Ohio, Michigan, Indiana and Chicago.
Plaintiff, as passenger of the Company, availed of the latter’s service of
transportation. While plaintiff Bissel was inside one of the cars of the Company, the cars
were driven carelessly at the hazardous speed at the crossing of the Illinois Central
Railroad. As a result, the train of the Company collided with another train resulting to the
plaintiff sustaining injury, a broken leg.
Private respondent denied liability. They insisted that their business was not
legally consolidated; that they did not use and operate a road in Illinois; that they did
not, by their negligence, case the injury of the plaintiff.
The “referees” ruled in favor of plaintiff.

ISSUE: W/N the contract made between Michigan Southern and Northern Indiana was
valid and can be used to evade the liability against plaintiff.
 177

HELD: No. The contract is not valid as it considered an ultra vires act of the
corporations. The two companies could not merge into one consolidated company as
such act was beyond the powers granted to them by their charters. Therefore, the
contract between Michigan Southern and Northern Indiana was null and void. However,
the private respondents could not make use of the fact that they transcended their
powers and violated their organic laws to exculpate themselves from liability to the injury
caused to the plaintiff. The corporation would be estopped from setting up that its
contract was ultra vires to deny liability.

G.R. No. 152392 May 26, 2005

EXPERTRAVEL & TOURS, INC., petitioner,
vs.
COURT OF APPEALS and KOREAN AIRLINES, respondent.

FACTS: Korean Airlines (KAL) is a corporation established and registered in the

Republic of South Korea and licensed to do business in the Philippines. Its general
manager in the Philippines is Suk Kyoo Kim, while its appointed counsel was Atty. Mario
Aguinaldo and his law firm.
On September 6, 1999, KAL, through Atty. Aguinaldo, filed a Complaint 2 against
ETI with the Regional Trial Court (RTC) of Manila, for the collection of the principal
amount of P260,150.00, plus attorney’s fees and exemplary damages. The verification
and certification against forum shopping was signed by Atty. Aguinaldo, who indicated
therein that he was the resident agent and legal counsel of KAL and had caused the
preparation of the complaint.
ETI filed a motion to dismiss the complaint on the ground that Atty. Aguinaldo
was not authorized to execute the verification and certificate of non-forum shopping as
required by Section 5, Rule 7 of the Rules of Court. KAL opposed the motion,
contending that Atty. Aguinaldo was its resident agent and was registered as such with
the Securities and Exchange Commission (SEC) as required by the Corporation Code
of the Philippines. It was further alleged that Atty. Aguinaldo was also the corporate
secretary of KAL. Appended to the said opposition was the identification card of Atty.
Aguinaldo, showing that he was the lawyer of KAL.
During the hearing of January 28, 2000, Atty. Aguinaldo claimed that he had
been authorized to file the complaint through a resolution of the KAL Board of Directors
approved during a special meeting held on June 25, 1999. Upon his motion, KAL was
given a period of 10 days within which to submit a copy of the said resolution. The trial
court granted the motion. Atty. Aguinaldo subsequently filed other similar motions,
which the trial court granted.
Finally, KAL submitted on March 6, 2000 an Affidavit3 of even date, executed by
its general manager Suk Kyoo Kim, alleging that the board of directors conducted a
special teleconference on June 25, 1999, which he and Atty. Aguinaldo attended. It was
also averred that in that same teleconference, the board of directors approved a
resolution authorizing Atty. Aguinaldo to execute the certificate of non-forum shopping
and to file the complaint. Suk Kyoo Kim also alleged, however, that the corporation had
no written copy of the aforesaid resolution.
 178

ISSUE:
1. Whether or not a board resolution can be passed through teleconferencing.
2. Whether or not Atty. Aguinaldo was authorized to execute the above-mentioned
verification and certificate of non-forum shopping.

HELD: 1. AFFIRMATIVE. In this age of modern technology, the courts may take judicial
notice that business transactions may be made by individuals through teleconferencing.
Teleconferencing is interactive group communication (three or more people in two or
more locations) through an electronic medium. In general terms, teleconferencing can
bring people together under one roof even though they are separated by hundreds of
miles.18 This type of group communication may be used in a number of ways, and have
three basic types: (1) video conferencing - television-like communication augmented
with sound; (2) computer conferencing - printed communication through keyboard
terminals, and (3) audio-conferencing-verbal communication via the telephone with
optional capacity for telewriting or telecopying.
A teleconference represents a unique alternative to face-to-face (FTF) meetings.
It was first introduced in the 1960’s with American Telephone and Telegraph’s
Picturephone. At that time, however, no demand existed for the new technology. Travel
costs were reasonable and consumers were unwilling to pay the monthly service charge
for using the picturephone, which was regarded as more of a novelty than as an actual
means for everyday communication.20 In time, people found it advantageous to hold
teleconferencing in the course of business and corporate governance, because of the
money saved, among other advantages include:
1. People (including outside guest speakers) who wouldn’t normally attend a
distant FTF meeting can participate.
2. Follow-up to earlier meetings can be done with relative ease and little
expense.
3. Socializing is minimal compared to an FTF meeting; therefore, meetings are
shorter and more oriented to the primary purpose of the meeting.
4. Some routine meetings are more effective since one can audio-conference
from any location equipped with a telephone.
5. Communication between the home office and field staffs is maximized.
6. Severe climate and/or unreliable transportation may necessitate
teleconferencing.
7. Participants are generally better prepared than for FTF meetings.
8. It is particularly satisfactory for simple problem-solving, information exchange,
and procedural tasks.
9. Group members participate more equally in well-moderated teleconferences
than an FTF meeting.21
On the other hand, other private corporations opt not to hold teleconferences
because of the following disadvantages:
1. Technical failures with equipment, including connections that aren’t made.
2. Unsatisfactory for complex interpersonal communication, such as negotiation
or bargaining.
3. Impersonal, less easy to create an atmosphere of group rapport.
 179

4. Lack of participant familiarity with the equipment, the medium itself, and
meeting skills.
5. Acoustical problems within the teleconferencing rooms.
6. Difficulty in determining participant speaking order; frequently one person
monopolizes the meeting.
7. Greater participant preparation time needed.
8. Informal, one-to-one, social interaction not possible.22
2. NEGATIVE. While Atty. Aguinaldo is the resident agent of the respondent in
the Philippines, this does not mean that he is authorized to execute the requisite
certification against forum shopping. Under Section 127, in relation to Section 128 of the
Corporation Code, the authority of the resident agent of a foreign corporation with
license to do business in the Philippines is to receive, for and in behalf of the foreign
corporation, services and other legal processes in all actions and other legal
proceedings against such corporation, thus:
SEC. 127. Who may be a resident agent. – A resident agent may either be an
individual residing in the Philippines or a domestic corporation lawfully
transacting business in the Philippines: Provided, That in the case of an
individual, he must be of good moral character and of sound financial standing.
SEC. 128. Resident agent; service of process. – The Securities and Exchange
Commission shall require as a condition precedent to the issuance of the license
to transact business in the Philippines by any foreign corporation that such
corporation file with the Securities and Exchange Commission a written power of
attorney designating some persons who must be a resident of the Philippines, on
whom any summons and other legal processes may be served in all actions or
other legal proceedings against such corporation, and consenting that service
upon such resident agent shall be admitted and held as valid as if served upon
the duly-authorized officers of the foreign corporation as its home office.14
Under the law, Atty. Aguinaldo was not specifically authorized to execute a
certificate of non-forum shopping as required by Section 5, Rule 7 of the Rules of Court.
This is because while a resident agent may be aware of actions filed against his
principal (a foreign corporation doing business in the Philippines), such resident may not
be aware of actions initiated by its principal, whether in the Philippines against a
domestic corporation or private individual, or in the country where such corporation was
organized and registered, against a Philippine registered corporation or a Filipino
citizen.
The respondent knew that its counsel, Atty. Aguinaldo, as its resident agent, was
not specifically authorized to execute the said certification. It attempted to show its
compliance with the rule subsequent to the filing of its complaint by submitting, on
March 6, 2000, a resolution purporting to have been approved by its Board of Directors
during a teleconference held on June 25, 1999, allegedly with Atty. Aguinaldo and Suk
Kyoo Kim in attendance. However, such attempt of the respondent casts veritable doubt
not only on its claim that such a teleconference was held, but also on the approval by
the Board of Directors of the resolution authorizing Atty. Aguinaldo to execute the
certificate of non-forum shopping..
The respondent’s allegation that its board of directors conducted a
teleconference on June 25, 1999 and approved the said resolution (with Atty. Aguinaldo
 180

in attendance) is incredible, given the additional fact that no such allegation was made
in the complaint. If the resolution had indeed been approved on June 25, 1999, long
before the complaint was filed, the respondent should have incorporated it in its
complaint, or at least appended a copy thereof. The respondent failed to do so. It was
only on January 28, 2000 that the respondent claimed, for the first time, that there was
such a meeting of the Board of Directors held on June 25, 1999; it even represented to
the Court that a copy of its resolution was with its main office in Korea, only to allege
later that no written copy existed. It was only on March 6, 2000 that the respondent
alleged, for the first time, that the meeting of the Board of Directors where the resolution
was approved was held via teleconference.
The Court is, thus, more inclined to believe that the alleged teleconference on
June 25, 1999 never took place, and that the resolution allegedly approved by the
respondent’s Board of Directors during the said teleconference was a mere concoction
purposefully foisted on the RTC, the CA and this Court, to avert the dismissal of its
complaint against the petitioner.
IN LIGHT OF ALL THE FOREGOING, the petition is GRANTED. The Decision of
the Court of Appeals in CA-G.R. SP No. 61000 is REVERSED and SET ASIDE. The
Regional Trial Court of Manila is hereby ORDERED to dismiss, without prejudice, the
complaint of the respondent.

CITIBANK NA vs. CHUA

G.R. No. 102300 March 17, 1993
Campos, J.;

FACTS: Spouses Velez filed a complaint for specific performance and damages against
Citibank. On the date of the pre-trial conference, counsel for Citibank appeared,
presenting an SPA executed by Citibank officer Florencia Tarriela in favor of Citbank's
counsel, the J.P. Garcia & Associates, to represent and bind petitioner bank at the pre-
trial conference of the case at bar. Inspite of this SPA, counsel for private respondents
orally moved to declare petitioner bank as in default on the ground that the SPA was not
executed by the Board of Directors of Citibank. Petitioner bank was then required to file
a written opposition. In said opposition Citibank attached another SPA made by William
W. Ferguson, VP and highest ranking officer of Citibank, Philippines, constituting and
appointing the J.P. Garcia & Associates to represent and bind the bank at the pre-trial
conference and/or trial. On the scheduled pre-trial conference, private respondents
reiterated their oral motion to declare Citibank in default for failure to appear through an
authorized agent. Citibank filed a manifestation attaching therewith an SPA executed by
William W. Ferguson in favor of Citibank employees to represent and bind Citibank on
the pre-trial conference of the case at bar. Respondent judge issued an order declaring
Citibank in default.

ISSUES:
1. Whether a resolution of the board of directors of a corporation is always necessary
for granting authority to an agent to represent the corporation in court cases.
2. Whether the by-laws of the petitioner foreign corporation which has previously been
granted a license to do business in the Philippines, are effective in this jurisdiction.
 181

HELD: READ SECTIONS 23, 25, 46, 47 and 125

1. In the corporate hierarchy, there are three levels of control: (1) the board of
directors, which is responsible for corporate policies and the general management of
the business affairs of the corporation; (2) the officers, who in theory execute the
policies laid down by the board, but in practice often have wide latitude in determining
the course of business operations; and (3) the stockholders who have the residual
power over fundamental corporate changes, like amendments of the articles of
incorporation. However, just as a natural person may authorize another to do certain
acts in his behalf, so may the board of directors of a corporation validly delegate some
of its functions to individual officers or agents appointed by it.
Taking all the above provisions of law together, it is clear that corporate powers
may be directly conferred upon corporate officers or agents by statute, the articles of
incorporation, the by-laws or by resolution or other act of the board of directors. In
addition, an officer who is not a director may also appoint other agents when so
authorized by the by-laws or by the board of directors. Such are referred to as express
powers. There are also powers incidental to express powers conferred
Since the by-laws are a source of authority for corporate officers and agents of
the corporation, a resolution of the Board of Directors of Citibank appointing an attorney
in fact to represent and bind it during the pre-trial conference of the case at bar is not
necessary because its by-laws allow its officers, the Executing Officer and the Secretary
Pro-Tem, ** to execute a power of attorney to a designated bank officer, William W.
Ferguson in this case, clothing him with authority to direct and manage corporate
affairs.
Since the by-laws specifically allows Ferguson to delegate his powers in whole or
in part, there can be no doubt that the special power of attorney in favor, first, of J.P.
Garcia & Associates and later, of the bank's employees, constitutes a valid delegation of
Ferguson's express power to represent petitioner bank in the pre-trial conference in the
lower court.
2. A corporation can submit its by-laws, prior to incorporation, or within one
month after receipt of official notice of the issuance of its certificate of incorporation by
the SEC. When the third paragraph of Section 46 mentions "in all cases", it can only
refer to these two options. But even more important, said provision starts with the
phrase "Every corporation formed under this Code", which can only refer to corporations
incorporated in the Philippines. Hence, Section 46, in so far as it refers to the effectivity
of corporate by-laws, applies only to domestic corporations and not to foreign
corporations.
Since the SEC will grant a license only when the foreign corporation has
complied with all the requirement of law, it follows that when it decides to issue such
license, it is satisfied that the applicant's by-laws, among the other documents, meet the
legal requirements. This, in effect, is an approval of the foreign corporations by-laws. It
may not have been made in express terms, still it is clearly an approval. Therefore,
petitioner bank's by-laws, though originating from a foreign jurisdiction, are valid and
effective in the Philippines.
In pursuance of the authority granted to him by petitioner bank's by-laws, its
Executing Officer appointed William W. Ferguson, a resident of the Philippines, as its
 182

Attorney-in-Fact empowering the latter, among other things, to represent petitioner bank
in court cases. In turn, William W. Ferguson executed a power of attorney in favor of
J.P. Garcia & Associates (petitioner bank's counsel) to represent petitioner bank in the
pre-trial conference before the lower court. This act of delegation is explicity authorized.
PETITION GRANTED. CASE REMANDED TO THE COURT OF ORIGIN

G.R. No. 100866 July 14, 1992

REBECCA BOYER-ROXAS and GUILLERMO ROXAS, petitioners,
vs.
HON. COURT OF APPEALS and HEIRS OF EUGENIA V. ROXAS, INC., respondents.

FACTS: In two (2) separate complaints for recovery of possession filed with the RTC
against petitioners Rebecca Boyer-Roxas and Guillermo Roxas respectively,
respondent corporation, Heirs of Eugenia V. Roxas, Inc., prayed for the ejectment of the
petitioners from buildings inside the Hidden Valley Springs Resort Laguna allegedly
owned by the respondent corporation.
In both cases, the respondent corporation alleged that the petitioners never paid rentals
for the use of the buildings and the lots and that they ignored the demand letters for
them to vacate the buildings.
The evidence of the respondent corporation upon which the lower court based its
decision is as follows:
Heirs of Eugenia V Roxas, Incorporated, was incorporated on December 4, 1962
( primary purpose of engaging in agriculture to develop the properties inherited from
Eugenia V. Roxas; that the Articles of Incorporation of the plaintiff, in 1971, was
amended to allow it to engage in the resort business; that accordingly, the corporation
put up a resort known as Hidden Valley Springs Resort on a portion of its land located
covered by TCT No. 32639 ; that the house near the Balugbugan Pool being occupied
by Rebecca B. Roxas was originally intended as staff house but later used as the
residence of Eriberto Roxas, deceased husband of the defendant Rebecca Boyer-
Roxas and father of Guillermo Roxas; that this house presently being occupied by
Rebecca B. Roxas was built from corporate funds; that the third building (Exh. "B-3")
presently being occupied by Guillermo Roxas was originally intended as a recreation
hall but later converted as a residential house which he and his family later on used as a
residential house; that this house was built also from corporate funds;
Eufrocino V. Roxas who then controlled the management of the corporation,
being the majority stockholder, consented to the petitioners' stay within the questioned
properties. Specifically, Eufrocino Roxas gave his consent to the conversion of the
recreation hall to a residential house, now occupied by petitioner Guillermo Roxas. The
Board of Directors did not object to the actions of Eufrocino Roxas
petitioners contend tha:
1. as heirs of Eugenia v. Roxas they are co-owners of the Hidden Valley Springs
Resort and as co-owners, they have a right to stay in the premises.
2. the authority thus given by Eufrocino Roxas for the conversion of the recreation
hall into a residential house can no longer be questioned by the stockholders of
the private respondent and/or its board of directors for they impliedly but no less
explicitly delegated such authority to said Eufrocino Roxas.
 183

ISSUE: whether or not the petitioners are co-owners of respondent corp.

whether or not the board may eject the petitioners.
HELD:
1. no. The respondent is a bona fide corporation. As such, it has a juridical
personality of its own separate from the members composing it. Regarding
properties owned by a corporation, we stated in the case of Stockholders
of F. Guanzon and Sons, Inc. v. Register of Deeds of Manila, (6 SCRA 373
[1962]):
. . . Properties registered in the name of the corporation are owned by it as an
entity separate and distinct from its members. While shares of stock constitute
personal property, they do not represent property of the corporation. The
corporation has property of its own which consists chiefly of real estate. A share
of stock only typifies an aliquot part of the corporation's property, or the right to
share in its proceeds to that extent when distributed according to law and equity
but its holder is not the owner of any part of the capital of the corporation. Nor is
he entitled to the possession of any definite portion of its property or assets The
stockholder is not a co-owner or tenant in common of the corporate property
2. yes. Again, we must emphasize that the respondent corporation has a distinct
personality separate from its members. The corporation transacts its business
only through its officers or agents. Whatever authority these officers or agents
may have is derived from the board of directors or other governing body unless
conferred by the charter of the corporation. An officer's power as an agent of
the corporation must be sought from the statute, charter, the by-laws or in
a delegation of authority to such officer, from the acts of the board of
directors, formally expressed or implied from a habit or custom of doing
business.
In the present case,the petitioners were allowed to stay within the questioned properties
until August 27, 1983, when the Board of Directors approved a Resolution ejecting the
petitioners in order to give way to the Corporation's expansion and improvement
program and obviate prejudice to the operation of the Hidden Valley Springs Resort by
their continued interference.
We find nothing irregular in the adoption of the Resolution by the Board of
Directors. The petitioners' stay within the questioned properties was merely by
tolerance of the respondent corporation in deference to the wishes of Eufrocino
Roxas, who during his lifetime, controlled and managed the corporation.
Eufrocino Roxas' actions could not have bound the corporation forever. The
petitioners have not cited any provision of the corporation by-laws or any
resolution or act of the Board of Directors which authorized Eufrocino Roxas to
allow them to stay within the company premises forever. We rule that in the
absence of any existing contract between the petitioners and the respondent
corporation, the corporation may elect to eject the petitioners at any time it
wishes for the benefit and interest of the respondent corporation.

Valle Verde Country Club vs. Africa

G.R. No. 151969 September 4, 2009
 184

Brion, J.:

FACTS: Jaime C. Dinglasan (Dinglasan) and Eduardo Makalintal (Makalintal)

were among those elected as BOD during the Annual Stockholders’ Meeting of Valle
Verde Country Club, Inc. (VVCC). Requisite quorum to hold a stockholder’s meeting
could not be obtained from 1997 to 2001 so they continued to serve as BOD in a hold-
over capacity. When Dinglasan resigned from his position in September 1998, the
remaining directors (still constituting a quorum) elected Eric Roxas (Roxas). Makalintal
then followed Dinglasan’s resignation in November 1998, resulting to the election of
Jose Ramirez (Ramirez) as voted by the remaining members of the board. Victor Africa
questioned the elections of Roxas and Ramirez on the ground that the same are in
violation of Sections 23 and 29 of the Corporation Code. He claimed that a year after
Makalintal’s election as member of the petitioner’s Board in 1996, his term – as well as
those of the other members – should be considered to have already expired. Thus,
according to him, the resulting vacancy should have been filled by the stockholders in a
regular or special meeting called for that purpose, and not by the remaining members
of VVCC’s Board. The trial court ruled in favour of Africa. VVCC directly appealed the
trial court’s decision with the Supreme Court via petition for certiorari, claiming pure
question of law.

ISSUE: WON the remaining directors of the corporation’s Board, still constituting a
quorum, can elect another director to fill in a vacancy caused by the resignation of a
hold-over director.

HELD: NO, they cannot. When Section 23[9] of the Corporation Code declares that “the
board of directors…shall hold office for one (1) year until their successors are elected
and qualified,” the Court construed the provision to mean that the term of the members
of the board of directors shall be only for one year; their term expires one year after
election to the office. The holdover period – that time from the lapse of one year from a
member’s election to the Board and until his successor’s election and qualification –
is not part of the director’s original term of office, nor is it a new term; the holdover
period, however, constitutes part of his tenure. Corollary, when an incumbent member
of the board of directors continues to serve in a holdover capacity, it implies that the
office has a fixed term, which has expired, and the incumbent is holding the succeeding
term. Moreover, the underlying policy of the Corporation Code is that the business and
affairs of a corporation must be governed by a board of directors whose members have
stood for election, and who have actually been elected by the stockholders, on an
annual basis. Only in that way can the directors' continued accountability to
shareholders, and the legitimacy of their decisions that bind the corporation's
stockholders, be assured. The shareholder vote is critical to the theory that legitimizes
the exercise of power by the directors or officers over properties that they do not own.
This theory of delegated power of the board of directors similarly explains why,
under Section 29 of the Corporation Code, in cases where the vacancy in the
corporation’s board of directors is caused not by the expiration of a member’s term, the
successor “so elected to fill in a vacancy shall be elected only for the unexpired term of
the his predecessor in office.” The law has authorized the remaining members of the
 185

board to fill in a vacancy only in specified instances, so as not to retard or impair the
corporation’s operations; yet, in recognition of the stockholders’ right to elect the
members of the board, it limited the period during which the successor shall serve only
to the “unexpired term of his predecessor in office.”
In the present case, after the lapse of one year from his election as member of
the VVCC Board in 1996, Makalintal’s term of office is deemed to have already
expired. That he continued to serve in the VVCC Board in a holdover capacity cannot
be considered as extending his term. To be precise, Makalintal’s term of office began in
1996 and expired in 1997, but, by virtue of the holdover doctrine in Section 23 of the
Corporation Code, he continued to hold office until his resignation on November 10,
1998. This holdover period, however, is not to be considered as part of his term, which,
as declared, had already expired.
With the expiration of Makalintal’s term of office, a vacancy resulted which, by the
terms of Section 29 of the Corporation Code, must be filled by the stockholders of
VVCC in a regular or special meeting called for the purpose. To assume – as VVCC
does – that the vacancy is caused by Makalintal’s resignation in 1998, not by the
expiration of his term in 1997, is both illogical and unreasonable. His resignation as a
holdover director did not change the nature of the vacancy; the vacancy due to the
expiration of Makalintal’s term had been created long before his resignation.

G.R. No. L-22450 December 3, 1924

YU CHUCK, MACK YUENG, and DING MOON, plaintiffs-appellees,
vs.
"KONG LI PO," defendant-appellant.
OSTRAND, J.:

FACTS: The defendant is a domestic corporation organized in accordance with the laws
of the Philippine Islands and engaged in the publication of a Chinese newspaper
styled Kong Li Po. Its articles of incorporation and by-laws are in the usual form and
provide for a board of directors and for other officers among them a president whose
duty it is to "sign all contracts and other instruments of writing." No special provision is
made for a business or general manager.
The plaintiffs thereupon brought the present action alleging, among other things,
in the complaint that their contract of employment was for a term of three years from the
first day of January, 1920; that in the case of their discharge by the defendant without
just cause before the expiration of the term of the contract, they were to receive full pay
for the remaining portion of the term; that they had been so discharged without just
cause and therefore asked judgment for damages in the sum of P20,880.
In its amended answer the defendant denies generally and specifically the
allegations of the complaint and sets up five special defenses and counterclaims. One
of these is to the effect that C. C. Chen, the person whose name appears to have been
signed to the contract of employment was not authorized by the defendant to execute
such a contract in its behalf.
The trial court rendered judgment in favor of the plaintiffs.
 186

ISSUE: Whether or not Chen had the power to bind the corporation by a contract of the
character indicated.

RULING: It is conceded that he had no express authority to do so, but the evidence is
conclusive that he, at the time the contract was entered into, was in effect the general
business manager of the newspaper Kong Li Po and that he, as such, had charge of the
printing of the paper, and the plaintiff maintain that he, as such general business
manager, had implied authority to employ them on the terms stated and that the
defendant corporation is bound by his action. The general rule is that the power to bind
a corporation by contract lies with its board of directors or trustees, but this power may
either expressly or impliedly be delegated to other officers or agents of the corporation,
and it is well settled that except where the authority of employing servants and agent is
expressly vested in the board of directors or trustees, an officer or agent who has
general control and management of the corporation's business, or a specific part
thereof, may bind the corporation by the employment of such agent and employees as
are usual and necessary in the conduct of such business. But the contracts of
employment must be reasonable. (14a C. J., 431.)
From what has been said, there can be no doubt that Chen, as general manager
of the Kong Li Po, had implied authority to bind the defendant corporation by a
reasonable and usual contract of employment with the plaintiffs, but we do not think
that the contract here in question can be so considered. Not only is the term of
employment unusually long, but the conditions are otherwise so onerous to the
defendant that the possibility of the corporation being thrown into insolvency thereby is
expressly contemplated in the same contract. This fact in itself was, in our opinion,
sufficient to put the plaintiffs upon inquiry as to the extent of the business manager's
authority; they had not the rights to presume that he or any other single officer or
employee of the corporation had implied authority to enter into a contract of employment
which might bring about its ruin.
Neither do we think that the contention that the corporation impliedly
ratified the contract is supported by the evidence. The contention is based
principally on the fact that Te Kim Hua, the president of the corporation for the year
1920, admitted on the witness stand that he saw the plaintiffs work as printers in the
office of the newspaper. He denied, however, any knowledge of the existence of the
contract and asserted that it was never presented neither to him nor to the board of
directors.
Before a contract can be ratified knowledge of its existence must, of course, be
brought home to the parties who have authority to ratify it or circumstances must be
shown from which such knowledge may be presumed. No such knowledge or
circumstances have been shown here. That the president of the corporation saw the
plaintiffs working in its office is of little significance; there were other printers working
there at that time and as the president had nothing to do with their employment, it was
hardly to be expected that be would inquire into the terms of their contracts. Moreover, a
ratification by him would have been of no avail; in order to validate a contract, a
ratification by the board of directors was necessary. The fact that the president was
required by the by-laws to sign the documents evidencing contracts of the corporation,
does not mean that he had power to make the contracts.
 187

The defendant's counterclaims have not been sufficiently established by the

evidence.
The judgment appealed from is reversed and the defendant corporation is
absolved from the complaint.

WOODCHILD HOLDINGS, INC.,

vs.
ROXAS ELECTRIC AND CONSTRUCTION COMPANY, INC.

FACTS: The respondent Roxas Electric and Construction Company, Inc. (RECCI),
formerly the Roxas Electric and Construction Company, was the owner of two parcels of
land, identified as Lot No. 491-A-3-B-1 and Lot No. 491-A-3-B-2. A portion of Lot No.
491-A-3-B-1 which abutted Lot No. 491-A-3-B-2 was a dirt road accessing to the
Sumulong Highway, Antipolo, Rizal.
At a special meeting on May 17, 1991, the respondent's Board of Directors
approved a resolution authorizing the corporation, through its president, Roberto B.
Roxas, to sell Lot No. 491-A-3-B-2 at a price and under such terms and conditions
which he deemed most reasonable and advantageous to the corporation; and to
execute, sign and deliver the pertinent sales documents and receive the proceeds of the
sale for and on behalf of the company.
Petitioner Woodchild Holdings, Inc. (WHI) wanted to buy Lot No. 491-A-3-B-2
covered by TCT No. 78086 on which it planned to construct its warehouse building, and
a portion of the adjoining lot, Lot No. 491-A-3-B-1, so that its 45-foot container van
would be able to readily enter or leave the property.
On September 5, 1991, a Deed of Absolute Sale in favor of WHI was issued,
under which Lot No. 491-A-3-B-2 covered by TCT No. 78086 was sold for P5,000,000,
receipt of which was acknowledged by Roxas under the following terms and conditions:
The Vendor agree (sic), as it hereby agrees and binds itself to give Vendee the
beneficial use of and a right of way from Sumulong Highway to the property
herein conveyed consists of 25 square meters wide to be used as the latter's
egress from and ingress to and an additional 25 square meters in the corner of
Lot No. 491-A-3-B-1, as turning and/or maneuvering area for Vendee's vehicles.
The Vendor agrees that in the event that the right of way is insufficient for the
Vendee's use (ex entry of a 45-foot container) the Vendor agrees to sell
additional square meters from its current adjacent property to allow the Vendee
full access and full use of the property.
WHI complained to Roberto Roxas that the vehicles of RECCI were parked on a
portion of the property over which WHI had been granted a right of way. Roxas
promised to look into the matter. Dy and Roxas discussed the need of the WHI to buy a
500-square-meter portion of Lot No. 491-A-3-B-1 covered by TCT No. 78085 as
provided for in the deed of absolute sale. However, Roxas died soon thereafter. On
April 15, 1992, the WHI wrote the RECCI, reiterating its verbal requests to purchase a
portion of the said lot as provided for in the deed of absolute sale, and complained
about the latter's failure to eject the squatters within the three-month period agreed
upon in the said deed.
 188

The WHI demanded that the RECCI sell a portion of Lot No. 491-A-3-B-1
covered by TCT No. 78085 for its beneficial use within 72 hours from notice thereof,
otherwise the appropriate action would be filed against it. RECCI rejected the demand
of WHI. WHI reiterated its demand in a Letter dated May 29, 1992. There was no
response from RECCI.

Issue: Whether the respondent is bound by the provisions in the deed of absolute sale
granting to the petitioner beneficial use and a right of way over a portion of Lot No. 491-
A-3-B-1 accessing to the Sumulong Highway and granting the option to the petitioner to
buy a portion thereof, and, if so, whether such agreement is enforceable against the
respondent

Held: No. Generally, the acts of the corporate officers within the scope of their authority
are binding on the corporation. However, under Article 1910 of the New Civil Code, acts
done by such officers beyond the scope of their authority cannot bind the corporation
unless it has ratified such acts expressly or tacitly, or is estopped from denying them.
Roxas was not specifically authorized under the said May 17, 1991 resolution to
grant a right of way in favor of the petitioner on a portion of Lot No. 491-A-3-B-1 or to
agree to sell to the petitioner a portion thereof. The authority of Roxas, under the
resolution, to sell Lot No. 491-A-3-B-2 covered by TCT No. 78086 did not include the
authority to sell a portion of the adjacent lot, Lot No. 491-A-3-B-1, or to create or convey
real rights thereon. Neither may such authority be implied from the authority granted to
Roxas to sell Lot No. 491-A-3-B-2 to the petitioner "on such terms and conditions which
he deems most reasonable and advantageous." Under paragraph 12, Article 1878 of
the New Civil Code, a special power of attorney is required to convey real rights over
immovable property. Article 1358 of the New Civil Code requires that contracts which
have for their object the creation of real rights over immovable property must appear in
a public document. The petitioner cannot feign ignorance of the need for Roxas to have
been specifically authorized in writing by the Board of Directors to be able to validly
grant a right of way and agree to sell a portion of Lot No. 491-A-3-B-1. The rule is that if
the act of the agent is one which requires authority in writing, those dealing with him are
charged with notice of that fact.
The general rule is that the power of attorney must be pursued within legal
strictures, and the agent can neither go beyond it; nor beside it. The act done must be
legally identical with that authorized to be done. In sum, then, the consent of the
respondent to the assailed provisions in the deed of absolute sale was not obtained;
hence, the assailed provisions are not binding on it.
The petitioner's contention that by receiving and retaining the P5,000,000
purchase price of Lot No. 491-A-3-B-2, the respondent effectively and impliedly ratified
the grant of a right of way on the adjacent lot, Lot No. 491-A-3-B-1, and to grant to the
petitioner an option to sell a portion thereof, is barren of merit. It bears stressing that the
respondent sold Lot No. 491-A-3-B-2 to the petitioner, and the latter had taken
possession of the property. As such, the respondent had the right to retain the
P5,000,000, the purchase price of the property it had sold to the petitioner. For an act of
the principal to be considered as an implied ratification of an unauthorized act of an
agent, such act must be inconsistent with any other hypothesis than that he approved
 189

and intended to adopt what had been done in his name. Ratification is based on waiver
– the intentional relinquishment of a known right. Ratification cannot be inferred from
acts that a principal has a right to do independently of the unauthorized act of the agent.
Moreover, if a writing is required to grant an authority to do a particular act, ratification of
that act must also be in writing. Since the respondent had not ratified the unauthorized
acts of Roxas, the same are unenforceable. Hence, by the respondent's retention of the
amount, it cannot thereby be implied that it had ratified the unauthorized acts of its
agent, Roberto Roxas.

Board of Liquidators v. Heirs of Kalaw

G.R. No. L-18805 August 14, 1967

Facts: Maximo Kalaw is chairman of thr board and general manager of the National
Coconut Corporation (NACOCO), a non-profit GOCC empowered by its charter to buy
sell barter export and deal in coconut, copra, and desiccated coconut. Bocar, Garcia
and Moll were directors. It entered into contracts for the trading and delivery of copra.
Nature intervened- 4 typhoons devastated agriculture and copra production. NACOCO
was on the verge of sustaining losses and could not be able to make good on the
contracT.
The buyers threatened damage suits. All the settlements sum up to
P1,343,274.52.
NACOCO represented by the Board of liquidators, seeks to recover the above
sum of P1,343,274.52 from general manager and board chairman Maximo Kalaw, and
directors Bocar, Garcia and Moll. It charges Kalaw with negligence under Article 1902 of
the old civil code and defendant board members, including Kalaw, with bad faith and/or
breach of trust for having approved the contracts without prior approval of the Board.

Issue: Whether or not the acts of the respondent as General Manager without prior
approval of the Board are valid corporate acts.

Held: Yes. A rule that has gained acceptance through the years is that a corporate
officer "intrusted with the general management and control of its business, has implied
authority to make any contract or do any other act which is necessary or appropriate to
the conduct of the ordinary business of the corporation. As such officer, "he may,
without any special authority from the Board of Directors
perform all acts of an ordinary nature, which by usage or necessity are incident to his
office, and may bind the corporation by contracts in matters arising in the usual course
of business.
Settled jurisprudence has it that where similar acts have been approved by the
directors as a matter of general practice, custom, and policy, the general manager may
bind the company without formal authorization of the board of directors. In varying
language, existence of such authority is established, by proof of the course of business,
the usage and practices of the company and by
the knowledge which the board of directors has, or must be presumed to have, of acts
and doings of its subordinates in and about the affairs of the corporation. So also,
 190

x x x authority to act for and bind a corporation may be presumed from acts of
recognition in other instances where the power was in fact exercised.
x x x Thus, when, in the usual course of business of a corporation, an officer
has been allowed in his official capacity to manage its affairs, his authority
to represent the corporation may be implied from the manner in which he has
been
permitted by the directors to manage its business.
In the case at bar, the practice of the corporation has been to allow its general
manager to negotiate and execute contracts in its copra trading activities for and in
NACOCO's behalf without prior board approval. If the by-laws were to be literally
followed, the board should give its stamp of prior approval on all corporate contracts.
But that board itself, by its acts and through acquiescence, practically laid aside the by-
law requirement of prior approval.
Under the given circumstances, the Kalaw contracts are valid corporate acts.

Hayes vs. Canada Atlantic & Plant Steamship Co.181 F. 289; 1910

FACTS: Petitioner is one of the executive committee of respondent company. In this

case, the ExecutiveCommittee: (a) removed the Treasurer and appointed a newone; (b)
fixed the annual salary of the members of theExecutive Committee; (c) amended the by-
laws by givingthe President the sole authority to call a stockholder'smeeting and a board
of directors meeting; and (d) amendedthe composition of the Executive Committee by
limiting it to just 2 persons.

ISSUE: Were these actions valid?

HELD: No, because the Executive Committee usurped thepowers vested in the board
and the stockholders. If theiractions were valid, it would put the corporation in a
situationwherein only two men, acting in their own pecuniaryinterests, would have
absorbed the powers of the entirecorporation."Full powers" should be interpreted only in
theordinary conduct of business and not total abdication of board and stockholders'
powers to the ExecutiveCommittee."FULL POWERS" does not mean unlimited
orabsolute power.

12 US Circuit CA, First Circuit 181 F. 289 G.R. No. 89070 May 18, 1992

BENGUET ELECTRlC COOPERATIVE, INC., petitioner,

vs.
NATIONAL LABOR RELATIONS COMMISSION, PETER COSALAN and BOARD OF
DIRECTORS OF BENGUET ELECTRIC COOPERATIVE, INC., * respondents.

FACTS: Private respondent Peter Cosalan was the General Manager of Petitioner
Benguet Electric Cooperative, Inc. ("Beneco").

On 19 May 1983, petitioner Beneco received the COA Audit Report on the
financial status and operations of Beneco which noted and enumerated irregularities in
 191

the utilization of funds amounting to P37 Million released by NEA to Beneco, and
recommended that appropriate remedial action be taken.

Having been made aware of the serious financial condition of Beneco and what
appeared to be mismanagement, respondent Cosalan initiated implementation of the
remedial measures recommended by the COA. The respondent members of the Board
of Beneco reacted by adopting a series of resolutions which ultimately led to the ouster
of respondent Cosalan as General Manager of Beneco and his exclusion from
performance of his regular duties as such, as well as the withholding of his salary and
allowances.

Respondent Cosalan then filed a complaint with the NLRC against respondent
members of the Beneco Board, challenging the legality of the Board resolutions which
ordered his suspension and termination from the service and demanding payment of his
salaries and allowances. Those impleaded were petitioner Beneco and respondent
Board members, the latter in their respective dual capacities as Directors and as private
individuals.

Labor Arbiter: (a) confirmed Cosalan's reinstatement; (b) ordered payment to Cosalan of
his backwages and allowances by petitioner Beneco and respondent Board members,
jointly and severally; and (3) ordering the individual Board members to pay, jointly and
severally, to Cosalan moral damages.

Respondent Board members appealed to the NLRC.

NLRC: Modified the award rendered by the Labor Arbiter by declaring that petitioner
Beneco alone, and not respondent Board members, was liable for respondent Cosalan's
backwages and allowances, and by ruling that there was no legal basis for the award of
moral damages and attorney's fees made by the Labor Arbiter.

Beneco, through its new set of directors, moved for reconsideration of the NLRC
decision, but without success.

ISSUE: That the NLRC had acted with grave abuse of discretion amounting to lack of
jurisdiction in holding petitioner alone liable for payment of the backwages and
allowances due to Cosalan and releasing respondent Board members from liability
therefor.

HELD: Yes. The applicable general rule is clear enough. The Board members and
officers of a corporation who purport to act for and in behalf of the corporation, keep
within the lawful scope of their authority in so acting, and act in good faith, do not
become liable, whether civilly or otherwise, for the consequences of their acts, Those
acts, when they are such a nature and are done under such circumstances, are properly
attributed to the corporation alone and no personal liability is incurred by such officers
and Board members.
 192

The major difficulty with the conclusion reached by the NLRC is that the NLRC
clearly overlooked or disregarded the circumstances under which respondent Board
members had in fact acted in the instant case. The respondent Board members
obviously wanted to get rid of Cosalan and so acted, in the words of the NLRC itself,
"with indecent haste" in removing him from his position and denying him substantive
and procedural due process. Thus, the record showed strong indications that
respondent Board members had illegally suspended and dismissed Cosalan precisely
because he was trying to remedy the financial irregularities and violations of NEA
regulations which the COA had brought to the attention of Beneco.

The Solicitor General has urged that respondent Board members may be held
liable for damages under the foregoing circumstance under Section 31 of the
Corporation Code which reads as follows:

Sec. 31. Liability of directors, trustees or officers. — Directors or trustees

who willfully and knowingly vote for or assent to patently unlawful acts of
the corporation or who are guilty of gross negligence or bad faith in
directing the affairs of the corporation or acquire any personal or
pecuniary interest in conflict with their duty as such directors or trustees
shall be jointly liable and severally for all damages resulting therefrom
suffered by the corporation, its stockholders or members and other
persons . . . (Emphasis supplied)

We agree with the Solicitor General, secondly, that respondent Board members
were guilty of "gross negligence or bad faith in directing the affairs of the corporation" in
enacting the series of resolutions noted earlier indefinitely suspending and dismissing
respondent Cosalan from the position of General Manager of Beneco. Respondent
Board members, in doing so, acted belong the scope of their authority as such Board
members. The dismissal of an officer or employee in bad faith, without lawful cause and
without procedural due process, is an act that is contra legem. It cannot be supposed
that members of boards of directors derive any authority to violate the express
mandates of law or the clear legal rights of their officers and employees by simply
purporting to act for the corporation they control.

We believe and so hold, further, that not only are Beneco and respondent Board
members properly held solidarily liable for the awards made by the Labor Arbiter, but
also that petitioner Beneco which was controlled by and which could act only through
respondent Board members, has a right to be reimbursed for any amounts that Beneco
may be compelled to pay to respondent Cosalan. Such right of reimbursement is
essential if the innocent members of Beneco are not to be penalized for the acts of
respondent Board members which were both done in bad faith and ultra vires. The
liability-generating acts here are the personal and individual acts of respondent Board
members, and are not properly attributed to Beneco itself.
 193

Respondent Board members are hereby ORDERED to reimburse petitioner

Beneco any amounts that it may be compelled to pay to respondent Cosalan by virtue
of the decision of Labor Arbiter Amado T. Adquilen. No pronouncement as to costs.

G.R. No. L-68555 March 19, 1993

PRIME WHITE CEMENT CORPORATION, petitioner, 
vs.
HONORABLE
INTERMEDIATE APPELLATE COURT and ALEJANDRO TE, respondents.
CAMPOS, JR., J.:

FACTS: On or about the 16th day of July, 1969, plaintiff Alejandro Te and defendant
corporation Prime White Cement Corporation thru its President, Mr. Zosimo Falcon and
Justo C. Trazo, as Chairman of the Board, entered into a dealership agreement
whereby said plaintiff was obligated to act as the exclusive dealer and/or distributor of
the said defendant corporation of its cement products in the entire Mindanao area for a
term of five (5) years and providing among others that:
a. The corporation shall, commencing September, 1970, sell to and supply the plaintiff,
as dealer with 20,000 bags (94 lbs/bag) of white cement per month;
b. The plaintiff shall pay the defendant corporation P9.70, Philippine Currency, per bag
of white cement, FOB Davao and Cagayan de Oro ports;
c. The plaintiff shall, every time the defendant corporation is ready to deliver the good,
open with any bank or banking institution a confirmed, unconditional, and irrevocable
letter of credit in favor of the corporation and that upon certification by the boat captain
on the bill of lading that the goods have been loaded on board the vessel bound for
Davao the said bank or banking institution shall release the corresponding amount as
payment of the goods so shipped.
Plaintiff placed an advertisement in a national, circulating newspaper the fact of
his being the exclusive dealer of the defendant corporation's white cement products in
Mindanao area, more particularly, in the Manila Chronicle.
Plaintiff entered into a written agreement with several hardware stores dealing in
buying and selling white cement in the Cities of Davao and Cagayan de Oro which
would thus enable him to sell his allocation of 20,000 bags regular supply of the said
commodity, by September, 1970. After the plaintiff was assured by his supposed buyer
that his allocation of 20,000 bags of white cement can be disposed of, he informed the
defendant corporation in his letter dated August 18, 1970 that he is making the
necessary preparation for the opening of the requisite letter of credit to cover the price
of the due initial delivery for the month of September, 1970 (Exhibit B), looking forward
to the defendant corporation's duty to comply with the dealership agreement. In reply to
the aforesaid letter of the plaintiff, the defendant corporation thru its corporate secretary,
replied that the board of directors of the said defendant decided to impose the following
conditions:
a. Delivery of white cement shall commence at the end of November, 1970;
b. Only 8,000 bags of white cement per month for only a period of three (3)
months will be delivered;
c. The price of white cement was priced at P13.30 per bag;
d. The price of white cement is subject to readjustment unilaterally on the part of
the defendant;
 194

e. The place of delivery of white cement shall be Austurias (sic);

f. The letter of credit may be opened only with the Prudential Bank, Makati
Branch;
g. Payment of white cement shall be made in advance and which payment shall
be used by the defendant as guaranty in the opening of a foreign letter of credit
to cover costs and expenses in the procurement of materials in the manufacture
of white cement. (Exhibit C).

Several demands to comply with the dealership agreement were made by the
plaintiff to the defendant, however, defendant refused to comply with the same, and
plaintiff by force of circumstances was constrained to cancel his agreement for the
supply of white cement with third parties, which were concluded in anticipation of, and
pursuant to the said dealership agreement.
Notwithstanding that the dealership agreement between the plaintiff and
defendant was in force and subsisting, the defendant corporation, in violation of, and
with evident intention not to be bound by the terms and conditions thereof, entered into
an exclusive dealership agreement with a certain Napoleon Co for the marketing of
white cement in Mindanao hence, this suit.
After trial, the trial court adjudged the corporation liable to Alejandro Te in the
amount of P3,302,400.00 as actual damages, P100,000.00 as moral damages, and
P10,000.00 as and for attorney's fees and costs. The appellate court affirmed the said
decision.

ISSUE: Whether or not the "dealership agreement" referred by the President and
Chairman of the Board of petitioner corporation is a valid and enforceable contract.

HELD: NO. Under the Corporation Law, which was then in force at the time this case
arose, 5 as well as under the present Corporation Code, all corporate powers shall be
exercised by the Board of Directors, except as otherwise provided by law. 6 Although it
cannot completely abdicate its power and responsibility to act for the juridical entity, the
Board may expressly delegate specific powers to its President or any of its officers. In
the absence of such express delegation, a contract entered into by its President, on
behalf of the corporation, may still bind the corporation if the board should ratify the
same expressly or impliedly. Implied ratification may take various forms — like silence
or acquiescence; by acts showing approval or adoption of the contract; or by
acceptance and retention of benefits flowing therefrom. 7 Furthermore, even in the
absence of express or implied authority by ratification, the President as such may, as a
general rule, bind the corporation by a contract in the ordinary course of business,
provided the same is reasonable under the circumstances. 8 These rules are basic, but
are all general and thus quite flexible. They apply where the President or other officer,
purportedly acting for the corporation, is dealing with a third person, i. e., a person
outside the corporation.
The situation is quite different where a director or officer is dealing with his own
corporation. In the instant case respondent Te was not an ordinary stockholder; he was
a member of the Board of Directors and Auditor of the corporation as well. He was what
is often referred to as a "self-dealing" director.
 195

A director of a corporation holds a position of trust and as such, he owes a duty

of loyalty to his corporation. 9 In case his interests conflict with those of the corporation,
he cannot sacrifice the latter to his own advantage and benefit. As corporate managers,
directors are committed to seek the maximum amount of profits for the corporation. This
trust relationship "is not a matter of statutory or technical law. It springs from the fact
that directors have the control and guidance of corporate affairs and property and hence
of the property interests of the stockholders." 10
On the other hand, a director's contract with his corporation is not in all instances
void or voidable. If the contract is fair and reasonable under the circumstances, it may
be ratified by the stockholders provided a full disclosure of his adverse interest is made.
Section 32 of the Corporation Code provides, thus:
Sec. 32. Dealings of directors, trustees or officers with the corporation. —
A contract of the corporation with one or more of its directors or trustees or
officers is voidable, at the option of such corporation, unless all the following
conditions are present:
1. That the presence of such director or trustee in the board meeting in
which the contract was approved was not necessary to constitute a
quorum for such meeting;
2. That the vote of such director or trustee was not necessary for the
approval of the contract;
3. That the contract is fair and reasonable under the circumstances; and
4. That in the case of an officer, the contract with the officer has been
previously authorized by the Board of Directors.

Where any of the first two conditions set forth in the preceding paragraph is
absent, in the case of a contract with a director or trustee, such contract may be ratified
by the vote of the stockholders representing at least two-thirds (2/3) of the outstanding
capital stock or of two-thirds (2/3) of the members in a meeting called for the purpose:
Provided, That full disclosure of the adverse interest of the directors or trustees involved
is made at such meeting: Provided, however, That the contract is fair and reasonable
under the circumstances.
Although the old Corporation Law which governs the instant case did not contain
a similar provision, yet the cited provision substantially incorporates well-settled
principles in corporate law.
Granting arguendo that the "dealership agreement" involved here would be valid
and enforceable if entered into with a person other than a director or officer of the
corporation, the fact that the other party to the contract was a Director and Auditor of the
petitioner corporation changes the whole situation. First of all, We believe that the
contract was neither fair nor reasonable. The "dealership agreement" entered into in
July, 1969, was to sell and supply to respondent Te 20,000 bags of white cement per
month, for five years starting September, 1970, at the fixed price of P9.70 per bag.
Respondent Te is a businessman himself and must have known, or at least must be
presumed to know, that at that time, prices of commodities in general, and white cement
in particular, were not stable and were expected to rise. At the time of the contract,
petitioner corporation had not even commenced the manufacture of white cement, the
reason why delivery was not to begin until 14 months later. He must have known that
 196

within that period of six years, there would be a considerable rise in the price of white
cement. In fact, respondent Te's own Memorandum shows that in September, 1970, the
price per bag was P14.50, and by the middle of 1975, it was already P37.50 per bag.
Despite this, no provision was made in the "dealership agreement" to allow for an
increase in price mutually acceptable to the parties. Instead, the price was pegged at
P9.70 per bag for the whole five years of the contract. Fairness on his part as a director
of the corporation from whom he was to buy the cement, would require such a
provision. In fact, this unfairness in the contract is also a basis which renders a contract
entered into by the President, without authority from the Board of Directors, void or
voidable, although it may have been in the ordinary course of business. We believe that
the fixed price of P9.70 per bag for a period of five years was not fair and reasonable.
Respondent Te, himself, when he subsequently entered into contracts to resell
the cement to his "new dealers" Henry Wee 13 and Gaudencio Galang 14 stipulated as
follows:
The price of white cement shall be mutually determined by us but in no case shall
the same be less than P14.00 per bag (94 lbs).
The contract with Henry Wee was on September 15, 1969, and that with
Gaudencio Galang, on October 13, 1967. A similar contract with Prudencio Lim was
made on December 29, 1969. 15 All of these contracts were entered into soon after his
"dealership agreement" with petitioner corporation, and in each one of them he
protected himself from any increase in the market price of white cement. Yet, except for
the contract with Henry Wee, the contracts were for only two years from October, 1970.
Why did he not protect the corporation in the same manner when he entered into the
"dealership agreement"? For that matter, why did the President and the Chairman of the
Board not do so either? As director, specially since he was the other party in interest,
respondent Te's bounden duty was to act in such manner as not to unduly prejudice the
corporation. In the light of the circumstances of this case, it is to Us quite clear that he
was guilty of disloyalty to the corporation; he was attempting in effect, to enrich himself
at the expense of the corporation. There is no showing that the stockholders ratified the
"dealership agreement" or that they were fully aware of its provisions. The contract was
therefore not valid and this Court cannot allow him to reap the fruits of his disloyalty.

GOKONGWEI VS. SEC

G.R. NO. L-45911, APRIL 11, 1979

FACTS: Petitioner, as stockholder of respondent San Miguel Corporation, filed with the
Securities and Exchange Commission (SEC) a petition for "declaration of nullity of
amended by-laws, cancellation of certificate of filing of amended by- laws, injunction
and damages with prayer for a preliminary injunction" against the majority of the
members of the Board of Directors and San Miguel Corporation as an unwilling
petitioner. Individual respondents amended by bylaws of the corporation, basing their
authority to do so on a resolution of the stockholders adopted on March 13, 1961, when
the outstanding capital stock of respondent corporation was only P70,139.740.00,
divided into 5,513,974 common shares at P10.00 per share and 150,000 preferred
shares at P100.00 per share. At the time of the amendment, the outstanding and paid
up shares totalled 30,127,047 with a total par value of P301,270,430.00. It was
 197

contended that according to section 22 of the Corporation Law and Article VIII of the
bylaws of the corporation, the power to amend, modify, repeal or adopt new by-laws
may be delegated to the Board of Directors only by the affirmative vote of stockholders
representing not less than 2/3 of the subscribed and paid up capital stock of the
corporation, which 2/3 should have been computed on the basis of the capitalization at
the time of the amendment. Since the amendment was based on the 1961
authorization, petitioner contended that the Board acted without authority and in
usurpation of the power of the stockholders. It was claimed by petitioner that prior to the
questioned amendment, petitioner had all the qualifications to be a director of
respondent corporation, being a Substantial stockholder thereof; that as a stockholder,
petitioner had acquired rights inherent in stock ownership, such as the rights to vote and
to be voted upon in the election of directors; and that in amending the by-laws,
respondents purposely provided for petitioner's disqualification and deprived him of his
vested right as afore-mentioned hence the amended by-laws are null and void. As
additional causes of action, it was alleged that: 1. corporations have no inherent power
to disqualify a stockholder from being elected as a director and, therefore, the
questioned act is ultra vires and void; 2. that Andres M. Soriano, Jr. and/or Jose M.
Soriano, while representing other corporations, entered into contracts (specifically a
management contract) with respondent corporation, which was allowed because the
questioned amendment gave the Board itself the prerogative of determining whether
they or other persons are engaged in competitive or antagonistic business; 3. that the
portion of the amended bylaws which states that in determining whether or not a person
is engaged in competitive business, the Board may consider such factors as business
and family relationship, is unreasonable and oppressive and, therefore, void; and 4. that
the portion of the amended by-laws which requires that "all nominations for election of
directors ... shall be submitted in writing to the Board of Directors at least five (5)
working days before the date of the Annual Meeting" is likewise unreasonable and
oppressive.

ISSUE: Whether or not the amendment if the by-laws resulting to the disqualification of
the petitioner to be Director is null and void.

RULING: NO.
Re: Interlocking of Directors
AN AMENDMENT TO THE CORPORATION BY-LAW WHICH RENDERS A
STOCKHOLDER INELIGIBLE TO BE DIRECTOR, IF HE BE ALSO DIRECTOR IN A
CORPORATION WHOSE BUSINESS IS IN COMPETITION WITH THAT OF THE
OTHER CORPORATION, HAS BEEN SUSTAINED AS VALID

- corporations have the power to make by-laws declaring a person employed in the
service of a rival company to be ineligible for the corporation's Board of Directors. ...
(A)n amendment which renders ineligible, or if elected, subjects to removal, a director if
he be also a director in a corporation whose business is in competition with or is
antagonistic to the other corporation is valid. This is based upon the principle that where
the director is so employed in the service of a rival company, he cannot serve both, but
 198

must betray one or the other. Such an amendment "advances the benefit of the
corporation and is good."
- it has been held that an officer of a corporation cannot engage in a business in direct
competition with that of the corporation where he is a director by utilizing information he
has received as such officer, under "the established law that a director or officer of a
corporation may not enter into a competing enterprise which cripples or injures the
business of the corporation of which he is an officer or director.
- It is also well established that corporate officers "are not permitted to use their position
of trust and confidence to further their private interests." The doctrine of "corporate
opportunity" is precisely a recognition by the courts that the fiduciary standards could
not be upheld where the fiduciary was acting for two entities with competing interests.
This doctrine rests fundamentally on the unfairness, in particular circumstances, of an
officer or director taking advantage of an opportunity for his own personal profit when
the interest of the corporation justly calls for protection. Certainly, where two
corporations are competitive in a substantial sense, it would seem improbable, if not
impossible, for the director, if he were to discharge effectively his duty, to satisfy his
loyalty to both corporations and place the performance of his corporation duties above
his personal concerns.
- Sound principles of corporate management counsel against sharing sensitive
information with a director whose fiduciary duty of loyalty may well require that he
disclose this information to a competitive arrival. These dangers are enhanced
considerably where the common director such as the petitioner is a controlling
stockholder of two of the competing corporations. It would seem manifest that in such
situations, the director has an economic incentive to appropriate for the benefit of his
own corporation the corporate plans and policies of the corporation where he sits as
director.
- "Competition" implies a struggle for advantage between two or more forces, each
possessing, in substantially similar if not Identical degree, certain characteristics
essential to the business sought. The test must be whether the business does in fact
compete, not whether it is capable of an indirect and highly unsubstantial duplication of
an isolated or non-characteristics activity. It is, therefore, obvious that not every person
or entity engaged in business of the same kind is a competitor. Such factors as quantum
and place of business, Identity of products and area of competition should be taken into
consideration. It is, therefore, necessary to show that petitioner's business covers a
substantial portion of the same markets for similar products to the extent of not less
than 10% of respondent corporation's market for competing products. While We here
sustain the validity of the amended by-laws, it does not follow as a necessary
consequence that petitioner is ipso facto disqualified. Consonant with the requirement of
due process, there must be due hearing at which the petitioner must be given the fullest
opportunity to show that he is not covered by the disqualification. Pursuant to this
obligation and to remove any suspicion that this power may be utilized by the incumbent
members of the Board to perpetuate themselves in power, any decision of the Board to
disqualify a candidate for the Board of Directors should be reviewed by the Securities
behind Exchange Commission en banc and its decision shall be final unless reversed
by this Court on certiorari.
 199

Strong and Strong vs. Repide

41 Phil. 947 3 May 1909
PONENTE: Justice Peckham

FACTS: Among the lands comprising the friar lands are the Dominican lands, the only
valuable asset owned by the corporation Philippine Sugar Estates Development
Company Limited (Philippine Sugar Estates). Francisco Gutierrez Repide (Repide),
defendant, was the majority stockholder and one of the five directors of Philippine Sugar
Estates. He was likewise elected by the board as the agent and administrator general of
such company.
The factual backdrop being during US occupation, the US Government wanted to
secure title over the friar lands. To accomplish this objective, Governor for the
Philippines entered into negotiations for the purchase of the Dominican lands, during
which Repide represented Philippine Sugar Estates. The first offer of the Governor was
to purchase the subject lands in the amount of $6,043,219.47. As the majority
stockholder of Philippine Sugar Estates and without prior consultation with the other
stockholders, Repide rejected the offer. For the second offer, the purchase price was
increased to $7,535,000.
While negotiations for the second offer were ongoing and while still holding out
for a higher price of the Dominican lands, Repide took steps to purchase the 800 shares
of stock of Philippine Sugar Estates. These shares were owned by Mrs. Eleanor Strong
(Strong) which were then in the possession of her agent, F. Stuart Jones (Jones).
Repide, instead of seeing Jones, employed Kauffman who later on employed Sloan, a
broker, to purchase the shares of Strong. Jones sold the 800 shares of Strong for
16,000 Mexican currency. For this sale transaction a check of one Rueda Ramos was
issued.
Later on, the negotiations for the purchase of the Dominican lands were
concluded and a contract of sale was subsequently executed. This sale transaction
increased the value of the shares of stocks originally owned by Strong from 16,000
Mexican currency to 76,256 US currency. During the negotiations regarding the
purchase of the shares of stock of Strong, not one word of the facts affecting the value
of this stock was made known to her nor her agent, Jones. After the sale of Dominican
lands and after the purchase of the 800 shares of Strong, Repide became the owner of
30,400 out of the 42,030 shares of Philippine Sugar Estates.
Strong filed a complaint for the recovery of her 800 shares. She argued that her
agent Jones had no authority to sell her shares and that Repide fraudulently concealed
the facts affecting their value.

ISSUE: Was there fraud in effecting the purchase of Strong’s shares?

RULING: Yes. With the factual circumstances of this case, it became the duty of
Repide, acting in good faith, to state the facts before making the purchase of Strong’s
shares. That Repide was one of the directors of Philippine Sugar Estates was but one of
the facts upon which liability is asserted. He was not only a director, but he owned
three-fourths of the shares of its stock, and was, at the time of the purchase of the
stock, administrator general of the company with large powers and engaged in the
 200

negotiations which finally led to the sale of the company’s lands at a price which greatly
enhanced the value of the stock. He was the negotiator for the sale of the Dominican
lands and was acting substantially as the agent of the shareholders of Philippine Sugar
Estates by reason of his ownership of the shares in the company. Because of such
ownership and agency, no one knew as well as he does about the exact condition of the
negotiations. He was the only one who knew of the probability of the sale of the
Dominican lands to the government and of the probable purchase price. Under these
circumstances, Repide employed an agent to purchase the stock of Strong, concealed
his own identity and his knowledge of the state of negotiations and their probable result.
The concealment of his identity while procuring the purchase of the stock, by his agent,
was in itself strong evidence of fraud on the part of Repide. By such means, the more
easily was he able to avoid questions relative to the negotiations for the sale of
Dominican lands and actual misrepresentations regarding that subject. He kept up the
concealment as long as he could by giving the check of a third person Rueda Ramos,
for the purchase money. This move of Repide was a studied and intentional omission to
be characterized as part of the deceitful machinations to obtain the purchase without
giving any information whatever as to the state and probable result of the negotiations
and to obtain a lower price for the shares of Strong. After the purchase of stock, he
continued negotiations for the sale of the Dominican lands as the administrator general
and eventually entered into a contract of sale. The whole transaction gives conclusive
evidence of the overwhelming influence Repide had in the negotiations and it is clear
that the final consummation was in his hands at all times.
OBITER DICTUM: The directors are declared to be mandatories of the society and that
they are prohibited from acquiring by purchase, even at public or judicial auction, the
property the administration or sale of which, may have been entrusted to them, and that
this is the extent of the prohibition.

G.R. No. L-30460 March 12, 1929

C. H. STEINBERG, as Receiver of the Sibuguey Trading Company,
Incorporated, plaintiff-appellant,
vs.
GREGORIO VELASCO, ET AL., defendants-appellees.
JOHNS, J.:

FACTS: Plaintiff is the receiver of the Sibuguey Trading Company, a domestic

corporation. The defendants are residents of the Philippine Islands. It is alleged that the
defendants, Gregorio Velasco, as president, Felix del Castillo, as vice-president, Andres
L. Navallo, as secretary-treasurer, and Rufino Manuel, as director of Trading Company,
at a meeting of the board of directors, approved and authorized various lawful
purchases already made of a large portion of the capital stock of the company from its
various stockholders, thereby diverting its funds to the injury, damage and in fraud of
the creditors of the corporation. That pursuant to such resolution, the corporation
purchased from the defendant S. R. Ganzon 100 shares of its capital stock of the par
value of P10, it purchased from the defendant Felix D. Mendaros 100 shares of the par
value of P10, and, it purchased from the defendant Felix D. Mendaros 100 shares of the
par value of P10, each, and, it purchased from the defendant Dionisio Saavedra 10
 201

shares of the same par value, and, it purchased from the defendant Valentin Matias 20
shares of like value. That the total amount of the capital stock unlawfully purchased was
P3,300. That at the time of such purchase, the corporation had accounts payable
amounting to P13,807.50, most of which were unpaid at the time petition for the
dissolution of the corporation was financial condition, in contemplation of an insolvency
and dissolution. Plaintiff also alleges that on July 24, 1922, the officers and directors of
the corporation approved a resolution for the payment of P3,000 as dividends to its
stockholders, which was wrongfully done and in bad faith, and to the injury and fraud of
its creditors. That at the time the petition for the dissolution of the corporation was
presented it had accounts payable in the sum of P9,241.19, "and practically worthless
accounts receivable."
The defendant Gregorio Velasco alleges that they were purchased by virtue of a
resolution of the board of directors of the corporation "when the business of the
company was going on very well." That the defendant is one of the principal
shareholders, and that about the same time, he purchase other shares for his own
account, because he thought they would bring profits. As to the second cause of action,
he admits that the dividends described in paragraph 4 of the complaint were distributed,
but alleges that such distribution was authorized by the board of directors, "and that the
amount represented by said dividends really constitutes a surplus profit of the
corporation," and as counterclaim, he asks for judgment against the receiver for
P12,512.47 for and on account of his negligence in failing to collect the accounts.

ISSUE/S:
1. WON Sibuguey Trading Company, Incorporated, could legally purchase its own stock
2. WON the Board of Directors of the said Corporation could legally declared a dividend
of P3,000

HELD: Creditors of a corporation have the right to assume that so long as there are
outstanding debts and liabilities, the board of directors will not use the assets of the
corporation to purchase its own stock, and that it will not declare dividends to
stockholders when the corporation is insolvent.
It is very apparent that the board of directors acted on assumption that, because
it appeared from the books of the corporation that it had accounts receivable of the face
value of P19,126.02, therefore it had a surplus over and above its debts and liabilities.
But there is no stipulation as to the actual cash value of those accounts, and it does
appear from the stipulation that P12,512.47 of those accounts had but little, if any,
value, and it must be conceded that, in the purchase of its own stock to the amount of
P3,300 and in declaring the dividends to the amount of P3,000, the real assets of the
corporation were diminished P6,300. It also appears from the stipulation that the
corporation had a "surplus profit" of P3,314.72 only. In other words, that the corporation
did not then have an actual bona fide surplus from which the dividends could be paid,
and that the payment of them in full at the time would "affect the financial condition of
the corporation."
It is, indeed, peculiar that the action of the board in purchasing the stock from the
corporation and in declaring the dividends on the stock was all done at the same
meeting of the board of directors, and it appears in those minutes that the both Ganzon
 202

and Mendaros were formerly directors and resigned before the board approved the
purchase and declared the dividends. In other words, that the directors were permitted
to resign so that they could sell their stock to the corporation. As stated, the authorized
capital stock was P20,000 divided into 2,000 shares of the par value of P10 each, which
only P10,030 was subscribed and paid. Deducting the P3,300 paid for the purchase of
the stock, there would be left P7,000 of paid up stock, from which deduct P3,000 paid in
dividends, there would be left P4,000 only. In this situation and upon this state of facts,
it is very apparent that the directors did not act in good faith or that they were grossly
ignorant of their duties.
Upon each of those points, the rule is well stated in Ruling Case Law, vol. 7, p.
473, section 454 where it is said:
General Duty to Exercise Reasonable Care. — The directors of a corporation are bound
to care for its property and manage its affairs in good faith, and for a violation of these
duties resulting in waste of its assets or injury to the property they are liable to account
the same as other trustees. Are there can be no doubt that if they do acts clearly
beyond their power, whereby loss ensues to the corporation, or dispose of its property
or pay away its money without authority, they will be required to make good the loss out
of their private estates. This is the rule where the disposition made of money or property
of the corporation is one either not within the lawful power of the corporation, or, if within
the authority of the particular officer or officers.
And section 458 which says:
Want of Knowledge, Skill, or Competency. — It has been said that directors are not
liable for losses resulting to the corporation from want of knowledge on their part; or for
mistake of judgment, provided they were honest, and provided they are fairly within the
scope of the powers and discretion confided to the managing body. But the acceptance
of the office of a director of a corporation implies a competent knowledge of the duties
assumed, and directors cannot excuse imprudence on the ground of their ignorance or
inexperience; and if they commit an error of judgment through mere recklessness or
want of ordinary prudence or skill, they may be held liable for the consequences. Like a
mandatory, to whom he has been likened, a director is bound not only to exercise
proper care and diligence, but ordinary skill and judgment. As he is bound to exercise
ordinary skill and judgment, he cannot set up that he did not possess them.
 203

XV. RIGHT OF INSPECTION ---- Secs 74 – 75

Cases:
Gonzales v. PNB 122 SCRA 490 jordan*
Veraguth v. Isabela Sugar Co. 57 Phil. 266 rojas*

XVI. DERIVATIVE SUIT

Cases:
Republic Bank v. Cuaderno 19 SCRA 671 lukban
SMC v. Khan L- 85339 (Aug. 11, 1989) tria
Yu v. Yukayguan GR 177549 (June 18, 2009) gutierez
633 scra 94 - kalaw

Dissolution
5)Cases:
National Abaca v. Pore (2 SCRA 989) lalas
Clemente v. CA (242 SCRA 717) villasin

XIX. LIQUIDATION:
576 scra 536 pnb v. Ca - lamigo
932 scra 559 pamatian
Lao v. King 500 scra 599 mariano
517 scra 1 – layno*

Republic Bank represented by Damaso Perez v. Cuaderno

Gr no. 22399. March 30, 1967
Reyes, J.B.L., J.:

FACTS: Direct appeal from an order of the Court of First Instance of Manila, in its civil
case No. 53936, dismissing the petitioner's complaint on the ground of failure to state
cause of action.

In the Court below, Damaso Perez, a stockholder of the Republic Bank, a Philippine
banking corporation domiciled in Manila, instituted a derivative suit for and in behalf of
said Bank, against Miguel Cuaderno, Bienvenido Dizon, the Board of Directors of the
Republic Bank, and the Monetary Board of the Central Bank of the Philippines.
Paragraph 6 of the Complaint expressly pleaded the following: .

6. That the relator herein filed the present derivative suit without any further demand on
the Board of Directors of the Republic Bank for the reason that such formal demand to
institute the present complaint would be a futile formality since the members of the
 204

board are personally chosen by defendant Pablo Roman himself.

For a cause of action plaintiff alleged, inter alia, that Damaso Perez had complained to
the Monetary Board of the Central Bank against certain frauds allegedly committed by
defendant Pablo Roman, in that being chairman of the Board of Directors of the
Republic Bank, and of its Executive Loan Committee, in 1957 to 1959, "in grave abuse
of his fiduciary duty and taking advantage of his said positions and in connivance with
other officials of the Republic Bank", Roman had fraudulently granted or caused to be
granted loans to fictitious and non-existing persons and to their close friends, relatives
and/or employees, who were in reality their dummies, on the basis of fictitious and
inflated appraised values of real estate properties; that said loans amounted to almost 4
million pesos; that acting upon the complaint, Miguel Cuaderno (then Governor of the
Central Bank) and the Monetary Board ordered an investigation, which was carried out
by Bank Examiners; that they and the Superintendent of Banks of the Central Bank
reported that certain mortgage loans amounting to P2,303,400.00 were granted in
violation of sections 77, 78 and 88 of the General Banking Act; that acting on said
reports, the Monetary Board, of which defendant Cuaderno was a member, ordered a
new Board of Directors of the Republic Bank to be elected, which was done, and
subsequently approved by the Monetary Board; that on January 5, 1960, the latter
accepted the offer of Pablo Roman to put up adequate security for the questioned loans
made by the Republic Bank, and such security was made a condition for the resumption
of the Bank's normal operations; that subsequently, the Central Bank through its
Governor, Miguel Cuaderno, referred to special prosecutors of the Department of
Justice on July 22, 1960, the banking frauds and violations of the Banking Act, reported
by the Superintendent of Banks, for investigation and prosecution, but no information
was filed up to the time of the retirement of Cuaderno in 1961; that other similar frauds
were subsequently discovered; that to neutralize the impending action against him,
Pablo Roman engaged Miguel Cuaderno as technical consultant at a compensation of
P12,500.00 per month, and selected Bienvenido Dizon as chairman of the Board of
Directors of the Republic Bank; that the Board of Directors composed of individuals
personally selected and chosen by Roman, connived and confederated in approving the
appointment and selection of Cuaderno and Dizon; that such action was motivated by
bad faith and without intention to protect the interest of the Republic Bank but were
prompted to protect Pablo Roman from criminal prosecution; that the appointment of
Cuaderno and his acceptance of the position of technical consultant are immoral,
anomalous and illegal, and his compensation highly unconscionable, because court
actions involving the actuations of Cuaderno as Governor and Member or Chairman of
the Monetary Board are still pending in court; that as member of the Monetary Board
from 1961 to 1962, Bienvenido Dizon exercised supervision over the Republic Bank;
that the selection of Dizon as chairman of the Board of the Republic Bank after he was
 205

forced to resign from the presidency of the Philippine National Bank and from
membership of the Monetary Board and within one year thereafter is in violation of
option 3, sub-paragraph (d) of the Anti-Graft and Corrupt Practices Act; that both
Cuaderno and Dizon were alter egos of Pablo Roman; that the Monetary Board was
about to approve the appointment of Cuaderno and Dizon and would do so unless
enjoined.

The complaint, therefore, prayed for a writ of preliminary injunction against the Monetary
Board to prevent its confirmation of the appointments of Dizon and Cuaderno; against
the Board of Directors of the Republic Bank from recognizing Cuaderno as technical
consultant and Dizon as Chairman of the Board; and against Pablo Roman from
appointing or selecting officers or directors of the Republic Bank, and against the
recognition of any such appointees until final determination of the action.

ISSUE: Whether the plaintiff-relator lacks legal capacity to sue.

HELD: NO.
They mainly controvert the right of plaintiff to question the appointment and selection of
defendants Cuaderno and Dizon, which they contend to be the result of corporate acts
with which plaintiff, as stockholder, cannot interfere. Normally, this is correct, but
Philippine jurisprudence is settled that an individual stockholder is permitted to institute
a derivative or representative suit on behalf of the corporation wherein he holds stock in
order to protect or vindicate corporate rights, whenever the officials of the corporation
refuse to sue, or are the ones to be sued or hold the control of the corporation. In such
actions, the suing stockholder is regarded as a nominal party, with the corporation as
the real party in interest. Plaintiff-appellant's action here is precisely in conformity, with
these principles. He is neither alleging nor vindicating his own individual interest or
prejudice, but the interest of the Republic Bank and the damage caused to it. The action
he has brought is a derivative one, expressly manifested to be for and in behalf of the
Republic Bank, because it was futile to demand action by the corporation, since its
Directors were nominees and creatures of defendant Pablo Roman. The frauds charged
by plaintiff are frauds against the Bank that redounded to its prejudice. Defendants urge
that the action is improper because the plaintiff was not authorized by the corporation to
bring suit in its behalf.

Any such authority could not be expected as the suit is aimed to nullify the action taken
by the manager and the board of directors of the Republic Bank; and any demand for
intra-corporate remedy would be futile, as expressly pleaded in the complaint. These
circumstances permit a stockholder to bring a derivative suit. That no other stockholder
has chosen to make common cause with plaintiff Perez is irrelevant, since the
 206

smallness of plaintiff's holdings is no ground for denying him relief. At any rate, it is yet
too early in the proceedings for the absence of other stockholders to be of any
significance, no issues having even been joined. The Court further explained that the
Corporation cannot be made party-defendant as it will put it in an awkward position of
filing a case in court against itself as both plaintiff and defendant.

G.R. No. 85339 August 11, 1989

SAN MIGUEL CORPORATION, represented by EDUARDO DE LOS

ANGELES, petitioners,
vs.
ERNEST KAHN, ANDRES SORIANO III, BENIGNO TODA, JR., ANTONIO ROXAS,
ANTONIO PRIETO, FRANCISCO EIZMENDI, JR., EDUARDO SORIANO, RALPH
KAHN and RAMON DEL ROSARIO, JR.,respondents.

NARVASA, J.:

On December 15, 1983, 33,133,266 shares of the outstanding capital stock of the San
Miguel Corporation were acquired 1 by fourteen (14) other corporations, 2 and were
placed under a Voting Trust Agreement in favor of the late Andres Soriano, Jr. When
the latter died, Eduardo M. Cojuangco, Jr. was elected Substitute Trustee on April 9,
1984 with power to delegate the trusteeship in writing to Andres Soriano III. 3 Shortly
after the Revolution of February, 1986, Cojuangco left the country amid "persistent
reports" that "huge and unusual cash disbursements from the funds of SMC" had been
irregularly made, and the resources of the firm extensively used in support of the
candidacy of Ferdinand Marcos during the snap elections in February, 1986 . 4

On March 26, 1986, an "Agreement" was executed between Andres Soriano III, as
"Buyer," and the 14 corporations, as "Sellers," for the purchase by Soriano, "for himself
and as agent of several persons," of the 33,133,266 shares of stock at the price of
P100.00 per share, or "an aggregate sum of Three Billion Three Hundred Thirteen
Million Three Hundred Twenty Six Thousand Six Hundred (P3,313,326,600.00) Pesos
payable in specified installments. 5 The Agreement revoked the voting trust above
mentioned, and expressed the desire of the 14 corporations to sell the shares of stock
"to pay certain outstanding and unpaid debts," and Soriano's own wish to purchase the
same "in order to institutionalize and stabilize the management of the COMPANY in ..
(himself) and the professional officer corps, mandated by the COMPANY's By- laws,
and to direct the COMPANY towards giving the highest priority to its principal products
and extensive support to agriculture programme of' the Government ... 6 Actually,
according to Soriano and the other private respondents, the buyer of the shares was a
foreign company, Neptunia Corporation Limited (of Hongkong, a wholly owned
subsidiary of San Miguel International which is, in turn, a wholly owned subsidiary of
San Miguel Corporation; 7 and it was Neptunia which on or about April 1, 1986 had
made the down payment of P500,000,000.00, "from the proceeds of certain loans". 8
 207

At this point the 33,133,266 SMC shares were sequestered by the Presidential
Commission on Good Government (PCGG), on the ground that the stock belonged to
Eduardo Cojuangco, Jr., allegedly a close associate and dummy of former President
Marcos, and the sale thereof was "in direct contravention of .. Executive Orders
Numbered 1 and 2 (.. dated February 28, 1986 and March 12, 1986, respectively) which
prohibit .. the transfer, conveyance, encumbrance, concealment or liquidation of assets
and properties acquired by former President Ferdinand Marcos and/or his wife, Mrs.
Imelda Romualdez Marcos, their close relatives, subordinates, business
associates. 9 The sequestration was subsequently lifted, and the sale allowed to
proceed, on representations by San Miguel Corporation x x that the shares were 'owned
by 1.3 million coconut farmers;' the seller corporations were 'fully owned' by said
farmers and Cojuangco owned only 2 shares in one of the companies, etc. However,
the sequestration was soon re-imposed by Order of the PCGG dated May 19, 1986 ..
The same order forbade the SMC corporate Secretary to register any transfer or
encumbrance of any of the stock without the PCGG's prior written authority. 10

San Miguel promptly suspended payment of the other installments of the price to the
fourteen (14) seller corporations. The latter as promptly sued for rescission and
damages. 11

On June 4,1986, the PCGG directed San Miguel Corporation"to issue qualifying shares"
in the corporation to seven (7) individuals, including Eduardo de los Angeles, "from the
sequestered shares registered as street certificates under the control of Anscor-
Hagedorn Securities, Inc.," to "be held in trust by .. (said seven [7] persons) for the
benefit of Anscor-Hagedom Securities, Inc. and/or whoever shall finally be determined
to be the owner/owners of said shares. 12

In December, 1986, the SMC Board, by Resolution No. 86-122, "decided to assume the
loans incurred by Neptunia for the down payment ((P500M)) on the 33,133,266 shares."
The Board opined that there was "nothing illegal in this assumption (of liability for the
loans)," since Neptunia was "an indirectly wholly owned subsidiary of SMC," there "was
no additional expense or exposure for the SMC Group, and there were tax and other
benefits which would redound to the SMC group of companies. 13

However, at the meeting of the SMC Board on January 30, 1987, Eduardo de los
Angeles, one of the PCGG representatives in the SMC board, impugned said
Resolution No. 86-12-2, denying that it was ever adopted, and stating that what in truth
was agreed upon at the meeting of December 4, 1986 was merely a "further study" by
Director Ramon del Rosario of a plan presented by him for the assumption of the loan.
De los Angeles also pointed out certain "deleterious effects" thereof. He was however
overruled by private respondents. 14 When his efforts to obtain relief within the
corporation and later the PCGG proved futile, he repaired to the Securities and
Exchange Commission (SEC).

He filed with the SEC in April, 1987, what he describes as a derivative suit in behalf of
San Miguel Corporation, against ten (10) of the fifteen-member Board of Directors who
 208

had "either voted to approve and/or refused to reconsider and revoke Board Resolution
No. 86-12-2." 15 His Amended Petition in the SEC recited substantially the foregoing
antecedents and the following additional facts, to wit:

a) On April 1, 1986 Soriano, Kahn and Roxas, as directors of' Neptunia

Corporation, Ltd., had met and passed a resolution authorizing the company to
borrow up to US $26,500,000.00 from the Hongkong & Shanghai Banking
Corporation, Hongkong "to enable the Soriano family to initiate steps and sign an
agreement for the purchase of some 33,133,266 shares of San ,Miguel
Corporation. 16

b) The loan of $26,500,000.00 was obtained on the same day, the corresponding
loan agreement having been signed for Neptunia by Ralph Kahn and Carl
Ottiger. At the latter's request, the proceeds of the loan were deposited in
different banks 17 for the account of "Eduardo J. Soriano".

c) Three (3) days later, on April 4, 1986, Soriano III sent identical letters to the
stockholders of San Miguel Corporation, 18 inter alia soliciting their proxies and
announcing that "the Soriano family, friends and affiliates acquired a
considerable block of San Miguel Corporation shares only a few days ago .., the
transaction .. (having been) made through the facilities of the Manila Stock
Exchange, and 33,133,266 shares .. (having thereby been) purchased for the
aggregate price of' P3,313,326,600.00." The letters also stated that the purchase
was "an exercise of the Sorianos' right to buy back the same number of shares
purchased in 1983 by the .. (14 seller corporations)."

d) In implementing the assumption of the Neptunia loan and the purchase

agreement for which said loan was obtained, which assumption constituted an
improper use of corporate funds to pay personal obligations of Andres Soriano
III, enabling him; to purchase stock of the corporation using funds of' the
corporation itself, the respondents, through various subsequent machinations
and manipulations, for interior motives and in breach of fiduciary duty, compound
the damages caused San Miguel Corporation by, among other things: (1)
agreeing to pay a higher price for the shares than was originally covenanted in
order to prevent a rescission of the purchase agreement by the sellers; (2) urging
UCPB to accept San Miguel Corporation and Neptunia as buyers of the shares,
thereby committing the former to the purchase of its own shares for at least 25%
higher than the price at which they were fairly traded in the stock exchanges, and
shifting to said corporations the personal obligations of Soriano III under the
purchase agreement; and (3) causing to be applied to the part payment of
P1,800,000.00 on said purchase, various assets and receivables of San Miguel
Corporation.

The complaint closed with a prayer for injunction against the execution or
consummation of any agreement causing San Miguel Corporation to purchase the
shares in question or entailing the use of its corporate funds or assets for said
 209

purchase, and against Andres Soriano III from further using or disposing of the funds or
assets of the corporation for his obligations; for the nullification of the SMC Board's
resolution of April 2, 1987 making San Miguel Corporation a party to the purchase
agreement; and for damages.

ISSUES: Whether the CA erred in ruling that De Los Angeles could not file a
derivative suit as stockholder and/or director of the San Miguel Corporation

Respondents’ assertions:

1) SEC has no jurisdiction over the dispute at bar which involves the ownership
of the 33,133,266 shares of SMC stock

2) de los Angeles was beholden to the controlling stockholder in the corporation

(PCGG), which had "imposed" him on the corporation; since the PCGG had a
clear conflict of interest with the minority, de los Angeles, as director of the
former, had no legal capacity to sue on behalf of the latter;

3) even assuming absence of conflict of interest, de los Angeles does not fairly
and adequately represent the interest of the minority stockholders;

RULING:

1. De los Angeles is not opposed to the asserted position of the PCGG that the
sequestered SMC shares of stock belong to Ferdinand Marcos and/or his dummies
and/or cronies. His consent to sit in the board as nominee of PCGG unquestionably
indicates his advocacy of the PCGG position. He does not here seek, and his complaint
in the SEC does not pray for, the annulment of the purchase by SMC of the stock in
question, or even the subsequent purchase of the same stock by others 26which
proposition was challenged [on the theory that the sequestered stock in fact belonged to
coconut planters and oil millers]. 27 Neither does de los Angeles impugn, obviously, the
right of the PCGG to vote the sequestered stock thru its nominee directors — as was
done by United Coconut Planters Bank and the 14 seller corporations as well as by one
Clifton Ganay, a UCPB stockholder.

The subject matter of his complaint in the SEC does not therefore fall within the ambit of
this Court's Resolution of August 10, 1988, to the effect that, citing PCGG v. Pena, et
al 29 the cases of the Commission regarding 'the funds, moneys, assets, and properties
illegally acquired or misappropriated by former President Ferdinand Marcos, Mrs.
Imelda Romualdez Marcos, their close relatives, Subordinates, Business Associates,
Dummies, Agents, or Nominees, whether civil or criminal, are lodged within the
exclusive and original jurisdiction of the Sandiganbayan,' and all incidents arising from,
incidental to, or related to, such cases necessarily fall likewise under the
Sandiganbayan's exclusive and original jurisdiction, subject to review on certiorari
exclusively by the Supreme Court." His complaint does not involve any property illegally
acquired or misappropriated by Marcos, et al., or "any incidents arising from, incidental
 210

to, or related to" any case involving such property, but assets indisputably belonging to
San Miguel Corporation which were, in his (de los Angeles') view, being illicitly
committed by a majority of its board of directors to answer for loans assumed by a sister
corporation, Neptunia Co., Ltd.

De los Angeles' complaint, in fine, is confined to the issue of the validity of the
assumption by the corporation of the indebtedness of Neptunia Co., Ltd., allegedly for
the benefit of certain of its officers and stockholders, an issue evidently distinct from,
and not even remotely requiring inquiry into the matter of whether or not the 33,133,266
SMC shares sequestered by the PCGG belong to Marcos and his cronies or dummies
(on which- issue, as already pointed out, de los Angeles, in common with the PCGG,
had in fact espoused the affirmative). De los Angeles' dispute, as stockholder and
director of SMC, with other SMC directors, an intra-corporate one, to be sure, is of no
concern to the Sandiganbayan, having no relevance whatever to the ownership- of the
sequestered stock. The contention, therefore, that in view of this Court's ruling as
regards the sequestered SMC stock above adverted to, the SEC has no jurisdiction
over the de los Angeles complaint, cannot be sustained and must be rejected. The
dispute concerns acts of the board of directors claimed to amount to fraud and
misrepresentation which may be detrimental to the interest of the stockholders, or is one
arising out of intra-corporate relations between and among stockholders, or between
any or all of them and the corporation of which they are stockholders . 30

2. The theory that de los Angeles has no personality to bring suit in behalf of the
corporation — because his stockholding is minuscule, and there is a "conflict of interest"
between him and the PCGG — cannot be sustained, either.

It is claimed that since de los Angeles 20 shares (owned by him since 1977) represent
only. 00001644% of the total number of outstanding shares (1 21,645,860), he cannot
be deemed to fairly and adequately represent the interests of the minority stockholders.
The implicit argument — that a stockholder, to be considered as qualified to bring a
derivative suit, must hold a substantial or significant block of stock — finds no support
whatever in the law. The requisites for a derivative suit 31 are as follows:

a) the party bringing suit should be a shareholder as of the time of the act or
transaction complained of, the number of his shares not being material; 32

b) he has tried to exhaust intra-corporate remedies, i.e., has made a demand on

the board of directors for the appropriate relief but the latter has failed or refused
to heed his plea; 33 and

c) the cause of action actually devolves on the corporation, the wrongdoing or

harm having been, or being caused to the corporation and not to the particular
stockholder bringing the suit. 34

The bona fide ownership by a stockholder of stock in his own right suffices to invest him
with standing to bring a derivative action for the benefit of the corporation. The number
 211

of his shares is immaterial since he is not suing in his own behalf, or for the protection
or vindication of his own particular right, or the redress of a wrong committed against
him, individually, but in behalf and for the benefit of the corporation.

3. Neither can the "conflict-of-interest" theory be upheld. From the conceded premise
that de los Angeles now sits in the SMC Board of Directors by the grace of the PCGG, it
does not follow that he is legally obliged to vote as the PCGG would have him do, that
he cannot legitimately take a position inconsistent with that of the PCGG, or that, not
having been elected by the minority stockholders, his vote would necessarily never
consider the latter's interests. The proposition is not only logically indefensible, non
sequitur, but also constitutes an erroneous conception of a director's role and function, it
being plainly a director's duty to vote according to his own independent judgment and
his own conscience as to what is in the best interests of the company. Moreover, it is
undisputed that apart from the qualifying shares given to him by the PCGG, he owns 20
shares in his own right, as regards which he cannot from any aspect be deemed to be
"beholden" to the PCGG, his ownership of these shares being precisely what he
invokes as the source of his authority to bring the derivative suit.

4. It is also theorized, on the authority of the BASECO decision, that the PCGG has no
power to vote sequestered shares of stock as an act of dominion but only in pursuance
— to its power of administration. The inference is that the PCGG's act of voting the
stock to elect de los Angeles to the SMC Board of Directors was unauthorized and void;
hence, the latter could not bring suit in the corporation's behalf. The argument is
strained and obviously of no merit. As already more than plainly indicated, it was not
necessary for de los Angeles to be a director in order to bring a derivative action; all he
had to be was a stockholder, and that he was owning in his own right 20 shares of
stock, a fact not disputed by the respondents.

Nor is there anything in the Baseco decision which can be interpreted as ruling that
sequestered stock may not under any circumstances be voted by the PCGG to elect a
director in the company in which such stock is held. On the contrary, that it held such
act permissible is evident from the context of its reference to the Presidential
Memorandum of June 26, 1986 authorizing the PCGG, "pending the outcome of
proceedings to determine the ownership of .. sequestered shares of stock,"'to vote such
shares .. at all stockholders' meetings called for the election of directors ..," the
only caveat being that the stock is not to be voted simply because the power to do so
exists, whether it be to oust and replace directors or to effect substantial changes in
corporate policy, programs or practice, but only "for demonstrably weighty and
defensible grounds" or "when essential to prevent disappearance or wastage of
corporate property."

The issues raised here do not peremptorily call for a determination of whether or not in
voting petitioner de los Angeles to the San Miguel Board, the PCGG kept within the
parameters announced in Baseco; and absent any showing to the contrary, consistently
with the presumption that official duty is regularly performed, it must be assumed to
have done so.
 212

Yu vs. Yukayguan
GR No. 177549. June 18, 2009

FACTS:
Respondents filed against petitioners a verified Complaint for Accounting, Inspection of
Corporate Books and Damages through Embezzlement and Falsification of Corporate
Records and Accounts before the RTC of Cebu. The said Complaint was filed by
respondents, in their own behalf and as a derivative suit on behalf of Winchester, Inc.
Petitioner Anthony Yu is the older half-brother of respondent Joseph Yukayguan.
Petitioners and the respondents were all stockholders of Winchester Industrial Supply,
Inc. (Winchester, Inc.), a domestic corporation engaged in the operation of a general
hardware and industrial supply and equipment business.

The case at bar was initiated before the RTC by respondents as a derivative suit, on
their own behalf and on behalf of Winchester, Inc., primarily in order to compel
petitioners to account for and reimburse to the said corporation the corporate assets
and funds which the latter allegedly misappropriated for their personal benefit. During
the pendency of the proceedings before the court a quo, the parties were able to reach
an amicable settlement wherein they agreed to divide the assets of Winchester, Inc.
among themselves. This amicable settlement was already partially implemented by the
parties, when respondents repudiated the same, for which reason the RTC proceeded
with the case on its merits. RTC promulgated its Decision dismissing respondents’
Complaint for failure to comply with essential pre-requisites of a derivative suit before
they could avail themselves of the remedies under the Interim Rules of Procedure
Governing Intra-Corporate Controversies; and for inadequate substantiation of
respondents’ allegations in said Complaint after consideration of the pleadings and
evidence on record.

On appeal, the CA affirmed, the findings of the RTC that respondents did not abide by
the requirements for a derivative suit, nor were they able to prove their case by a
preponderance of evidence. Respondents filed a Motion for Reconsideration of said
judgment of the appellate court, insisting that they were able to meet all the conditions
for filing a derivative suit. Pending resolution of respondents’ Motion for
Reconsideration, the CA urged the parties to again strive to reach an amicable
settlement of their dispute, but the parties were unable to do so. The parties were not
able to submit to the appellate court, within the given period, any amicable settlement;
and filed, instead, their Position Papers. This effectively meant that the parties opted
to submit respondents’ Motion for Reconsideration of the Decision of the Court of
Appeals, and petitioners’ opposition to the same, for resolution by the appellate court on
the merits.
 213

Then the CA remanded the case to the RTC so that all the corporate concerns between
the parties regarding Winchester, Inc. could be resolved towards final settlement. This
act by the CA converted the derivative suit between the parties into liquidation
proceedings. Petitioners contend this decision by the CA hence the present case.

ISSUE:
1. WON it was correct for the CA to remand the case to the RTC
2. WON respondents complied with the requirements for filing a derivative suit

HELD:
1. NO.
The general rule is that where a corporation is an injured party, its power to sue is
lodged with its board of directors or trustees. Nonetheless, an individual stockholder is
permitted to institute a derivative suit on behalf of the corporation wherein he holds
stocks in order to protect or vindicate corporate rights, whenever the officials of the
corporation refuse to sue, or are the ones to be sued, or hold the control of the
corporation. In such actions, the suing stockholder is regarded as a nominal party, with
the corporation as the real party in interest. A derivative action is a suit by a
shareholder to enforce a corporate cause of action. The corporation is a necessary
party to the suit. And the relief which is granted is a judgment against a third person in
favor of the corporation. Similarly, if a corporation has a defense to an action against it
and is not asserting it, a stockholder may intervene and defend on behalf of the
corporation. In contrast, liquidation is a necessary consequence of the dissolution of a
corporation; it is the process of settling the affairs of said corporation, which consists of
adjusting the debts and claims, that is, of collecting all that is due the corporation, the
settlement and adjustment of claims against it and the payment of its just debts.

Glaringly, a derivative suit is fundamentally distinct and independent from liquidation

proceedings. They are neither part of each other nor the necessary consequence of the
other. There is totally no justification for the Court of Appeals to convert what was
supposedly a derivative suit instituted by respondents, on their own behalf and on
behalf of Winchester, Inc. against petitioners, to a proceeding for the liquidation of
Winchester, Inc. There was nothing in respondents’ Complaint which sought the
dissolution and liquidation of Winchester, Inc. Hence, the supposed dissolution of
Winchester, Inc. could not have resulted in the conversion of respondents’ derivative
suit to a proceeding for the liquidation of said corporation, but only in the dismissal of
the derivative suit based on either compromise agreement or mootness of the issues.

2. NO.
 214

The Court has recognized that a stockholder’s right to institute a derivative suit is not
based on any express provision of the Corporation Code, or even the Securities
Regulation Code, but is impliedly recognized when the said laws make corporate
directors or officers liable for damages suffered by the corporation and its stockholders
for violation of their fiduciary duties. Hence, a stockholder may sue for
mismanagement, waste or dissipation of corporate assets because of a special injury to
him for which he is otherwise without redress. In effect, the suit is an action for
specific performance of an obligation owed by the corporation to the stockholders to
assist its rights of action when the corporation has been put in default by the wrongful
refusal of the directors or management to make suitable measures for its
protection. The basis of a stockholder’s suit is always one in equity. However, it cannot
prosper without first complying with the legal requisites for its institution.

Section 1, Rule 8 of the Interim Rules of Procedure Governing Intra-Corporate

Controversies lays down the following requirements which a stockholder must comply
with in filing a derivative suit:

Sec. 1. Derivative action. – A stockholder or member may bring

an action in the name of a corporation or association, as the case may be,
provided, that:

(1) He was a stockholder or member at the time the acts

or transactions subject of the action occurred and at
the time the action was filed;

(2) He exerted all reasonable efforts, and alleges the

same with particularity in the complaint, to exhaust all
remedies available under the articles of incorporation,
by-laws, laws or rules governing the corporation or
partnership to obtain the relief he desires;

(3) No appraisal rights are available for the act or acts

complained of; and

(4) The suit is not a nuisance or harassment suit.

The wordings of Section 1, Rule 8 of the Interim Rules of Procedure Governing Intra-
Corporate Controversies are simple and do not leave room for statutory
construction. The second paragraph thereof requires that the stockholder filing a
derivative suit should have exerted all reasonable efforts to exhaust all remedies
 215

available under the articles of incorporation, by-laws, laws or rules governing the
corporation or partnership to obtain the relief he desires; and to allege such fact with
particularity in the complaint. The obvious intent behind the rule is to make the
derivative suit the final recourse of the stockholder, after all other remedies to obtain the
relief sought had failed.

The allegation of respondent Joseph in his Affidavit of his repeated attempts to

talk to petitioner Anthony regarding their dispute hardly constitutes “all reasonable
efforts to exhaust all remedies available.” Respondents did not refer to or mention at all
any other remedy under the articles of incorporation or by-laws of Winchester, Inc.,
available for dispute resolution among stockholders, which respondents unsuccessfully
availed themselves of. And the Court is not prepared to conclude that the articles of
incorporation and by-laws of Winchester, Inc. absolutely failed to provide for such
remedies.

The fact that Winchester, Inc. is a family corporation should not in any way exempt
respondents from complying with the clear requirements and formalities of the rules for
filing a derivative suit. There is nothing in the pertinent laws or rules supporting the
distinction between, and the difference in the requirements for, family corporations vis-
à-vis other types of corporations, in the institution by a stockholder of a derivative suit.

The Court further notes that, with respect to the third and fourth requirements of Section
1, Rule 8 of the Interim Rules of Procedure Governing Intra-Corporate Controversies,
the respondents’ Complaint failed to allege, explicitly or otherwise, the fact that there
were no appraisal rights available for the acts of petitioners complained of, as well as a
categorical statement that the suit was not a nuisance or a harassment suit.

Global Business Holdings, Inc. (formerly Global Business Bank, Inc.) v.

Surecomp Software, B. V.
G.R. No. 173463 October 13, 2010

PONENTE: Nachura, J.

FACTS:

Respondent Surecomp Software, B.V. (Surecomp), a foreign corporation

organized and existing under the laws of the Netherlands. It entered into a software
license agreement with Asian Bank Corporation (ABC), a domestic corporation, for the
use of its IMEX Software System (System) in the bank’s computer system for a period
of twenty (20) years.
 216

ABC merged with petitioner Global Business Holdings, Inc. (Global), the
surviving corporation. Global took over the operations of ABC and found that the
System is unworkable for its operations. It informed Surecomp of its decision to
discontinue with the agreement and to stop further payments thereon. For Global’s
failure to pay its obligations under the agreement despite demands, Surecomp filed a
complaint for breach of contract with damages before the Regional Trial Court of
Makati. Global filed a motion to dismiss contending that Surecomp had no capacity to
sue because it was doing business in the Philippines without a license. RTC later on,
issued an Order where it stated that since there is a contract entered into between
Surecomp and the defendant Global, the latter as a successor in interest of the merging
corporation Asian Bank, Global is estopped from denying Surecomp’s capacity to sue.

ISSUE: May Surecomp sue Global for breach of contract?

RULING:

Yes. As a general rule, unlicensed foreign non-resident corporations doing

business in the Philippines cannot file suits in the Philippines. Section 133 of the
Corporation Code states that, “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.” A corporation has a legal status only within the state or territory
in which it was organized. For this reason, a corporation organized in another country
has no personality to file suits in the Philippines. To subject a foreign corporation doing
business in the country to the jurisdiction of our courts, it must acquire a license from
the Securities and Exchange Commission and appoint an agent for service of process.
Without such license, it cannot institute a suit in the Philippines. The exception to this
rule is the doctrine of estoppel. Global is estopped from challenging Surecomp’s
capacity to sue. A foreign corporation doing business in the Philippines without license
may sue in Philippine courts a Filipino citizen or a Philippine entity that had contracted
with and benefited from it.

Due to Global’s merger with ABC and because it is the surviving corporation, it is
as if it was the one which entered into contract with Surecomp. In the merger of two
existing corporations, one of the corporations survives and continues the business,
while the other is dissolved, and all its rights, properties, and liabilities are acquired by
the surviving corporation. In this case, Global assumed all the liabilities and obligations
of ABC as if it had incurred such liabilities or obligations itself.
 217

Ratio Decidendi:

A party is estopped from challenging the personality of a corporation after having

acknowledged the same by entering into a contract with it. The principle is 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.

G.R. No. L-16779 August 16, 1961

NATIONAL ABACA AND OTHER FIBERS CORPORATION, plaintiff-appellant,

vs.
APOLONIA PORE, defendant-appellee.

Facts:
On November 14, 1953, National Abaca filed with the Municipal Court of
Tacloban, Leyte, a complaint, against defendant Apolonia Pore, for the recovery of
P1,213.34, allegedly advanced to her for the purchase of hemp for the account of the
former and for which she had allegedly failed to account. In her answer, defendant
alleged that she had accounted for all cash advances received by her for the
aforementioned purpose from the plaintiff. In due course, said court rendering judgment
on April 11, 1956, finding that the defendant had not accounted for cash advances in
the sum of P272.49, which she was, accordingly, sentenced to pay to the plaintiff, with
legal interest from November 18, 1953, in addition to the costs.
Said court having subsequently denied a reconsideration of this decision, as well
a new trial prayed for the plaintiff, the latter appealed to the Court of First Instance of
Leyte, in which defendant moved to dismiss the complaint upon the ground that plaintiff
has no legal capacity to sue, it having abolished by Executive Order No. 372 of the
President of the Philippines, dated November 24,1950. Plaintiff objected thereto upon
the ground that pursuant to said executive order, plaintiff "shall nevertheless be
continued as a body corporate for a period of three (3) years from the effective date" of
said executive order, which was November 30, 1950, "for the purpose of prosecuting
and defending suits by or against it and of enabling the Board of Liquidators" — thereby
created — "gradually to settle and close its affairs", . . . and that this case was begun on
November 14, 1953, or before the expiration of the period aforementioned. After due
hearing, the court of first instance issued an order dated August 1, 1956, directing
plaintiff to amend the complaint, within ten (10) days from notice, by including the Board
of Liquidators as co-party plaintiff, with the admonition that otherwise the case would be
dismissed.
 218

On September 1, 1956, said court issued another order dismissing the case,
without pronouncement as to costs, it appearing that the aforementioned amended had
not been made, despite the fact that copy of said order of August 1, 1956 had been
sent, by registered mail, to plaintiff's counsel on August 6, 1956. Copy of the last order
was delivered, on September 13, 1956, to counsel for the plaintiff, which filed, on
September 21, 1956, a motion alleging that, copy of the order of August 1, 1956 was
received by the plaintiff on August 17, 1956; that thereupon said counsel prepared an
amended complaint — copy of which was annexed to the motion — as directed by the
court; that on August 24, 1956, said counsel handed two copies of said amended
complaint to Mrs. Receda Vda. de Ocampo, the employee of the aforesaid Board of
Liquidators in charge of plaintiff's incoming and outgoing correspondence, with
instructions to them mail said copies to the Court of First Instance of Leyte and to
counsel for defendant herein; that on September 13, 1956, plaintiff's counsel received
copy of the order of September 1, 1956; that thereupon he inquired from plaintiff's
mailing clerk whether or not his instructions, concerning the mailing of copies of said
amended complaint, had been complied with; that he then found out that, although said
copies of the amended complaint were entered in the record book of plaintiff's outgoing
correspondence on August 24, 1956, only the copy addressed to defendant's counsel
had actually been mailed (as evidenced by registry receipt No. 57209 dated August 25,
1956); that the original copy of the amended complaint, addressed to the clerk of court,
could not be located, despite diligent efforts made to find the same; that plaintiff's failure
to file in court the original of said amended complaint is imputable to the excusable
negligence of the aforementioned Mrs. Ocampo, whose affidavit was annexed, also, to
the motion for reconsideration; and that, plaintiff has a just and valid claim against the
defendant. Plaintiff prayed, therefore, that said order of September 1, 1956 be
reconsidered and set aside and that its aforementioned amended complaint be
admitted.
Issue:
Whether an action, commenced within three (3) years after the abolition of
plaintiff, as a corporation, may be continued by the same after the expiration of said
period
Held:
NO.
In the absence of statutory provision to the contrary, pending actions by or
against a corporation are abated upon expiration of the period allowed by law for the
liquidation of its affairs. It is generally held, that where a statute continues the existence
of a corporation for a certain period after its dissolution for the purpose of prosecuting
and defending suits, etc., the corporation becomes defunct upon the expiration of such
period, at least in the absence of a provision to the contrary, so that no action can
 219

afterwards be brought by or against it, and must be dismissed. Actions pending by or

against the corporation when the period allowed by the statute expires, ordinarily abate.
Our Corporation Law contains no provision authorizing a corporation, after three
(3) years from the expiration of its lifetime, to continue in its corporate name actions
instituted by it within said period of three (3) years. in fact, section 77 of said law
provides that the corporation shall "be continued as a body corporate for three (3) years
after the time when it would have been . . . dissolved, for the purposed of prosecuting
and defending suits by or against it . . .", so that, thereafter, it shall no longer enjoy
corporate existence for such purpose. For this reason, section 78 of the same law
authorizes the corporation, "at any time during said three years . . . to convey all of its
property to trustees for the benefit of members, stockholders, creditors and other
interested", evidently for the purpose, among others, of enabling said trustees to
prosecute and defend suits by or against the corporation begun before the expiration of
said period.

LUIS C. CLEMENTE, LEONOR CLEMENTE DE ELEPAÑO, HEIRS OF ARCADIO C.

OCHOA, represented by FE O. OCHOA-BAYBAY, CONCEPCION, MARIANO,
ARTEMIO, VICENTE, ANGELITA, ROBERTO, HERNANDO AND LOURDES, all
surnamed ELEPAÑO, petitioners, vs. THE HON. COURT OF APPEALS, ELVIRA
PANDINCO-CASTRO AND VICTOR CASTRO, respondents.
G.R. No. 82407 March 27, 1995
VITUG, J.:

FACTS: Petitioners sought to be declared the owners of a piece of land situated in

Calamba, Laguna bought by "Sociedad Popular Calambeña". The “sociedad” was
organized at the advent of the early American occupation of the Philippines. It did
business and held itself out as a corporation from 1909 up to 1932. Its principal
business was cockfighting or the operation and management of a cockpit. The
"Sociedad" acquired the subject parcel of land from the Friar Lands Estate of Calamba.
Patent was issued and the Real Property Tax Register of the Office of the Treasurer of
Calamba, Laguna showed that the lot was declared and assessed for taxation
purposes.

Plaintiffs show that Mariano Elepaño and Pablo Clemente, now both deceased, were
the original stockholders of the "sociedad." Pablo Clemente's shares of stocks were
later distributed and apportioned to his heirs. The "sociedad" then issued stock
certificates to the heirs. On the basis of their respective stocks certificates, they, along
with the heirs of Mariano Elepaño jointly claimed ownership over the subject parcel of
land, asserting that their fathers being the only known stockholders of the "sociedad"
they, to the exclusion of all others, are entitled to be declared owners of the lot. Private
respondents, in their answer; likewise claimed ownership of the property by virtue of
acquisitive prescription.
 220

The trial court dismissed the complaint on the grounds of insufficiency of evidence and
absent a corporate liquidation, it is the corporation, not the stockholders, which can
assert, if at all, any title to the corporate assets. The CA sustained the dismissal of the
complaint.

ISSUE: Whether or not petitioners can be held to have succeeded in establishing for
themselves a firm title to the property in question.

HELD: NO. Except in showing that they are the successors-in-interest of Elepaño and
Clemente, petitioners have been unable to come up with any evidence to substantiate
their claim of ownership of the corporate asset.

If, indeed, the sociedad has long become defunct, it should behoove petitioners, or
anyone else who may have any interest in the corporation, to take appropriate
measures before a proper forum for a peremptory settlement of its affairs. We might
invite attention to the various modes provided by the Corporation Code for dissolving,
liquidating or winding up, and terminating the life of the corporation.

Among the causes for such dissolution are when the corporate term has expired or
when, upon a verified complaint and after notice and hearing, the SEC orders the
dissolution of a corporation for its continuous inactivity for at least 5 years. The
corporation continues to be a body corporate for 3 years after its dissolution for
purposes of prosecuting and defending suits by and against it and for enabling it to
settle and close its affairs, culminating in the disposition and distribution of its remaining
assets. It may, during the 3-year term, appoint a trustee or a receiver who may act
beyond that period. If the 3-year extended life has expired without a trustee or receiver
having been expressly designated by the corporation, the board of directors (or
trustees) itself may be permitted to so continue as "trustees" by legal implication to
complete the corporate liquidation. Still in the absence of a board of directors or
trustees, those having any pecuniary interest in the assets, including not only the
shareholders but likewise the creditors of the corporation, acting for and in its behalf,
might make proper representations with the SEC for working out a final settlement of
the corporate concerns.

PHILIPPINE NATIONAL BANK and EQUITABLE PCI BANK vs. HONORABLE

COURT OF APPEALS, SECURITIES AND EXCHANGE COMMISSION EN BANC,
ASB HOLDINGS, INC., ASB REALTY CORPORATION, ASB DEVELOPMENT
CORPORATION (formerly TIFFANY TOWER REALTY CORPORATION), ASB LAND
INC., ASB FINANCE, INC., MAKATI HOPE CHRISTIAN SCHOOL, INC., BEL-AIR
HOLDINGS CORPORATION, WINCHESTER TRADING, INC., VYL DEVELOPMENT
CORPORATION, GERICK HOLDINGS CORPORATION, and NEIGHBORHOOD
HOLDINGS, INC.,
G.R. No. 165571 January 20, 2009
 221

Note: On April 25, 2007, PNB sold the account of ASBDC to Golden Dragon Star
Equities, Inc. and its assignee, Opal Portfolio Investments, Inc. (Opal). PNB then
requested this Court to be substituted by Opal. Meanwhile, respondents ASB Holdings,
ASB Realty Corporation, ASB Development Corporation, and ASB Land have changed
their corporate names to St. Francis Square Holdings, Inc., St. Francis Square Realty
Corporation, St. Francis Square Development Corporation, and St. Francis Square
Land, Inc., respectively.

Facts: PNB and Equitable PCI Bank are members of the consortium of creditor banks
constituted pursuant to the Mortgage Trust Indenture (MTI) by and between Rizal
Commercial Banking Corporation-Trust and Investments Division, acting as trustee for
the consortium, and ASB Development Corporation. There are other several members.
The ASB Group is owned by Luke C. Roxas.7 Under the MTI, petitioners granted a loan
of PhP 1,081,000,000 to ASBDC secured by a mortgage of five parcels of land with
improvements.

On May 2, 2000, private respondents filed with the SEC a verified petition for
rehabilitation with prayer for suspension of actions and proceedings pending
rehabilitation. They contend that they possess sufficient properties to cover their
obligations but foresee inability to pay them within a period of one year. They cited the
sudden non-renewal and/or massive withdrawal by creditors of their loans to ASB
Holdings, the glut in the real estate market, severe drop in the sale of real properties,
peso devaluation, and decreased investor confidence in the economy which resulted in
the non-completion of and failure to sell their projects and default in the servicing of their
credits as they fell due. The ASB Group had assets worth PhP 19,410,000,000 and
liabilities worth PhP 12,700,000,000. Faced with at least 712 creditors, 317
contractors/suppliers, and 492 condominium unit buyers, and the prospect of having
secured and non-secured creditors press for payments and threaten to initiate
foreclosure proceedings, the ASB Group pleaded for suspension of payments while
working for rehabilitation with the help of the SEC.

Finding the petition sufficient in form and substance, the SEC Hearing Panel11 issued
on May 4, 2000 an order suspending for 60 days all actions for claims against the ASB
Group, enjoining the latter from disposing its properties in any manner except in the
ordinary course of business and from paying outstanding liabilities. An interim receiver
was also appointed.

The consortium of creditor banks, which included petitioners, filed their

Comments/Opposition praying for the dismissal of the petition that The consortium of
creditor banks, which included petitioners, filed their Comments/Opposition praying for
 222

the dismissal of the petition, among others.

On October 10, 2000, the Hearing Panel denied the opposition of the banks and held
that the ASB Group complied with the requirements of Sec. 4-1 of the Rules of
Procedure on Corporate Recovery, which allows debtors who are technically insolvent
to file a petition for rehabilitation.

Upon motion by the ASB Group, the suspension period was extended through an order
dated October 27, 2000. The creditor banks appealed the October 10 and 27, 2000
orders by filing before the SEC en banc a Petition for Review on Certiorari with
application for a temporary restraining order.

On April 26, 2001, the Hearing Panel approved the Rehabilitation Plan based on the
following rationale and it found that the objections raised by the oppositors are
unreasonable and rules to approve the rehabilitation plan.

The CA held that the Rules of Procedure on Corporate Recovery allows financially
distressed corporations to file for either suspension of payments (Rule III, Sec. 3-1) or
rehabilitation (Rule IV, Sec. 4-1). The Rules, the CA said, does not preclude a solvent
corporation, like the ASB Group, to file a petition for rehabilitation instead of just a
petition for suspension of payments because such temporary inability to pay obligations
may extend beyond one year or the corporation may become insolvent in the interim.

The CA agreed with the Hearing Panel’s finding that the plan’s disapproval will greatly
prejudice all the other creditors who will be left unpaid. Moreover, the CA explained that
the approval of the Rehabilitation Plan does not violate the right against impairment of
contracts since the legal consequence of rehabilitation proceedings is merely a
temporary suspension of such payments of obligations falling due and not cancellation
or repudiation of those contractual obligations. Lastly, the appellate court ruled that the
SEC en banc may rely on the factual findings of the Hearing Officer; thus, it need not
make its own independent findings unless clear error has been committed.

Issue: Whether a solvent corporation can file a petition for rehabilitation.

Held: Yes. Based on the rules (RULE III, RULE IV of the Rules of Procedure on
Corporate Recovery) , we can deduce the following:

(1) A corporation which has sufficient assets to cover its liabilities but foresees its
inability to pay its obligations as they fall due may file a petition for suspension of
payments under Rule III of the Rules (Sec. 3-1);
 223

(2) If the SEC finds that the corporation’s inability to pay will last more than one year
from the filing of the petition for suspension of payments, that is, the corporation
becomes technically insolvent, the petition shall be dismissed (Sec. 3-12);

(3) If the corporation is shown or actually becomes technically insolvent anytime during
the pendency of the proceedings (supervening technical insolvency), the SEC may
either terminate the proceedings or it may, upon motion, treat the petition as one for
rehabilitation (Sec. 3-13); and

(4) If from the start, a corporation which has enough assets foresees its inability to meet
its obligations for more than one year,
i.e., existing technical insolvency, it may file a petition for rehabilitation under Rule IV,
Sec. 4-1.

A reading of Sec. 4-1 shows that there are two kinds of insolvency contemplated in it:
(1) actual insolvency, i.e., the corporation’s assets are not enough to cover its liabilities;
and (2) technical insolvency defined under Sec. 3-12, i.e., the corporation has enough
assets but it foresees its inability to pay its obligations for more than one year.

In the case at bar, the ASB Group filed with the SEC a petition for rehabilitation with
prayer for suspension of actions and proceedings pending rehabilitation. Contrary to
petitioners’ arguments, the mere fact that the ASB Group averred that it has sufficient
assets to cover its obligations does not make it "solvent" enough to prevent it from filing
a petition for rehabilitation. A corporation may have considerable assets but if it
foresees the impossibility of meeting its obligations for more than one year, it is
considered as technically insolvent. Thus, at the first instance, a corporation may file a
petition for rehabilitation—a remedy provided under Sec. 4-1.

When Sec. 4-1 mentioned technical insolvency under Sec. 3-12, it was referring to the
definition of technical insolvency in the said section; it was not requiring a previous filing
of a petition for suspension of payments which petitioners would have us believe.

Petitioners harp on the SEC’s failure to examine whether the ASB Group is technically
insolvent. They contend that the SEC should wait for a year after the filing of the petition
for suspension of payments when technical insolvency may or may not arise. This is
erroneous. The period mentioned under Sec. 3-12, "longer than one year from the filing
of the petition," does not refer to a year-long waiting period when the SEC can finally
say that the ailing corporation is technically insolvent to qualify for rehabilitation. The
period referred to the corporation’s inability to pay its obligations; when such inability
 224

extends beyond one year, the corporation is considered technically insolvent. Said
inability may be established from the start by way of a petition for rehabilitation, or it
may be proved during the proceedings for suspension of payments, if the latter was the
first remedy chosen by the ailing corporation. If the corporation opts for a direct petition
for rehabilitation on the ground of technical insolvency, it should show in its petition and
later prove during the proceedings that it will not be able to meet its obligations for
longer than one year from the filing of the petition.

As regards the status of the Repayment Schedule required to be attached to the petition
for rehabilitation (Sec. 4-2[g]), this requirement is conditioned on whether one was
approved by the SEC in the first place. If there is none, as in the case of a petition for
rehabilitation due to technical insolvency directly filed under Rule IV, Sec. 4-1, then
there is no status report to submit with the petition. LAMIGO

MWSS vs. HON. REYNALDO B. DAWAY

[G.R. No. 160732. June 21, 2004]

AZCUNA, J.

Facts:

On February 21, 1997, MWSS granted Maynilad under a Concession Agreement

a twenty-year period to manage, operate, repair, decommission and refurbish the
existing MWSS water delivery and sewerage services. Maynilad undertook to pay
consession fees, consisting mostly of paying loans of petitioner.

In compliance with this requirement, Maynilad arranged on July 14, 2000 for a three-
year facility with a number of foreign banks, led by Citicorp International Limited, for the
issuance of an Irrevocable Standby Letter of Credit in the amount of US$120,000,000.

In 2000, Maynilad wanted to recover its foreign currency losses due to the depreciation
of the Philippine Peso. It was unheeded by MWSS, thus, Maynilad issued a Force
Majeure Notice in 2001, which effectively stopped the concession payments.

This led to arbitration between MWSS and Maynilad. They agreed to new terms.
However, in 2002, Maynilad served a notice of Event of Termination, citing failure of
MWSS to comply with the agreed arbitration terms. MWSS contested such Notice of
Termination and was awarded by the Appeals panel. Thus, MWSS sent a written notice
that it was it was drawing on the Irrevocable Standby Letter of Credit (IRLC) and
thereby demanded payment in the amount of US$98,923,640.15.

Prior to this, however, Maynilad had filed on November 13, 2003, a petition for
rehabilitation. The rehabilitation court (Respondent RTC) ten issued an order staying
 225

the enforcement of claims (including the IRLC) and stopping payment of liabilities, kasi
nga under rehabilitation. It effectively stopped the commencing process of payment by
the bank to MWSS. Thus the petition.

Issue:

WON Daway’s order is GADALEJ in issuing the stop order and considering the IRLC as
part or property of the estate of Maynilad subject to rehabilitation.

Arguments of Parties:

MWSS argues that IRLC is an asset of the bank and not of Maynilad’s, thus should not
be under corporate rehabilitation. It cannot be considered a “claim” under the purview of
the stop order by the RTC. Maynilad on the other hand argues that the order of the RTC
is correct; that it never claimed that the IRLC is part of its property; the more important
issue is not whether the IRLC is part of it assets, but whether MWSS violated stop
order; that the publication of the order covers not only the assets of MWSS but also “all
affected by the proceedings”, such order being an in rem proceeding.

Held:

Respondent Maynilad’s Financial Statement as of December 31, 2001 and 2002 do not
show the Irrevocable Standby Letter of Credit as part of its assets or liabilities, and by
respondent Maynilad’s own admission it is not.

Further, the claim is not one against the debtor but against an entity that respondent
Maynilad has procured to answer for its non-performance of certain terms and
conditions of the Concession Agreement, particularly the payment of concession fees.

Secondly, Sec. 6 (b) of Rule 4 of the Interim Rules does not enjoin the enforcement of
all claims against guarantors and sureties, but only those claims against guarantors
and sureties who are not solidarily liable with the debtor. Respondent Maynilad’s
claim that the banks are not solidarily liable with the debtor does not find support in
jurisprudence.

The participating banks’ obligation are solidary with respondent Maynilad in that it is a
primary, direct, definite and an absolute undertaking to pay and is not conditioned on
the prior exhaustion of the debtor’s assets. These are the same characteristics of a
surety or solidary obligor. Being solidary, the claims against them can be pursued
separately from and independently of the rehabilitation case.

As held in Feati Bank & Trust Company v. Court of Appeals, the concept of guarantee
vis-à-vis the concept of an irrevocable letter of credit are inconsistent with each other.
The guarantee theory destroys the independence of the bank’s responsibility from the
 226

contract upon which it was opened and the nature of both contracts is mutually in
conflict with each other. In contracts of guarantee, the guarantor’s obligation is merely
collateral and it arises only upon the default of the person primarily liable. On the other
hand, in an irrevocable letter of credit, the bank undertakes a primary obligation.

A letter of credit as an engagement by a bank or other person made at the request of a

customer that the issuer shall honor drafts or other demands of payment upon
compliance with the conditions specified in the credit.

Letters of credit were developed for the purpose of insuring to a seller payment of a
definite amount upon the presentation of documents and is thus a commitment by the
issuer that the party in whose favor it is issued and who can collect upon it will have his
credit against the applicant of the letter, duly paid in the amount specified in the letter. 19
They are in effect absolute undertakings to pay the money advanced or the amount for
which credit is given on the faith of the instrument. They are primary obligations and not
accessory contracts and while they are security arrangements, they are not converted
thereby into contracts of guaranty. What distinguishes letters of credit from other
accessory contracts, is the engagement of the issuing bank to pay the seller once the
draft and other required shipping documents are presented to it. They are definite
undertakings to pay at sight once the documents stipulated therein are presented.

Lao vs King
Facts:
Petitioner et.al. and respondent are stockholders of the Philadelphia School, Inc.
Respondent’s father held the most number of subscribed shares totaling 1200. Later,
said stocks were transferred to his son, herein respondent and the latter was
consistently elected as member of the Board since 1994.
On May 23, 1998, a special meeting was held resulting to an election of a new set of
directors and officers. Petitioner Lao was elected as vice-president. Following the
election, respondent King was designated as one of the signatories for the corporation.
Four months after, Lao wrote to the President questioning the validity of the meeting
and the resulting election on the ground that King was allowed to vote 1200 of his
shares despite the fact that 700 remained unpaid. Also, Lao wanted the old set of
Directors to govern the corporation of which she was the president.
On August 15, 1998, Lao issued a Secretary’s Certificate to the effect that the board
held a meeting and on the same day passed a resolution declaring void the transfer of
shares by the respondent’s father to King. Lao continued to represent herself as the
President of the corporation.
Lao submitted with the SEC a general information sheet containing the new set of
directors and officers and the diminished shares of King totaling 500. King filed with the
SEC a petition against Lao et.al., seeking to enjoin the latter from further representing
themselves as the corporation’s Board.
 227

The RTC(formerly under SEC jurisdiction) found in favor of the respondent and after
such time, respondent moved for the execution of the judgment invoking Section 4, Rule
39 of the Rules of Court. The RTC issued an order granting the motion for execution.
Petitioner went on certiorari with the CA imputing grave abuse of discretion in as much
as the Order issued by the judge allegedly varied the terms of the judgment granting
reliefs not prayed for.
Issue:
Whether or not there is a variance between the judgment and the respondent’s
motion for execution.

Held:

No. For sure, the reliefs prayed for by the respondent in his motion are intertwined with
the disposition of issues in the trial court’s decision of September 25, 2002, as
contained in its dispositive portion.

First, the respondent's prayer to enjoin the herein petitioners from continuing to
act as officers and members of the board of directors is obviously consistent with the
first item in the decretal portion of the decision which states that all acts performed by
the herein petitioners as the alleged officers and members of the board are null and
void. Inasmuch as the trial court declared all acts done by the petitioners as null and
void, it is only appropriate for the respondent to ask that the petitioners be prohibited
from continuing to act as officers and members of the board.

Second, the respondent's prayer to hold a new election of officers to allow him to
vote his 1,200 shares and to prevent Sy Tian Tin and Dy Siok Bee from voting more
than 300 and 50 shares, respectively, is indubitably in consonance with the following
pronouncements in the dispositive portion of the trial court’s decision: (1) the election of
the petitioners as officers and members of the board is null and void, (2) the
shareholdings of the respondent should be restored to 1,200 which number he is
entitled to vote, (3) the increase in the number of shares of Sy Tian Tin (from 300 to 400
shares) and that of Dy Siok Bee (from 50 to 100 shares) is null and void, and (4) the
new elections of the corporate directors and officers should be based on the
shareholdings of the stockholders.

Third, the respondent’s prayer that the petitioners should immediately render an
accounting of the finances of the corporation clearly conforms with the judgment
ordering the petitioners to account for the funds which they disbursed during the time
they took control of the corporation.
 228

Thus, the alleged variance between the trial court’s decision of September 25,
2002 and the respondent’s Motion for Execution is mere figment of the petitioners'
imagination. As we see it, the reliefs sought by the respondent in his said motion are
merely the logical and necessary consequences of the judgment rendered by Judge
Bruselas, Jr. in his decision in Civil Case No. Q-01-42972.

Besides, and as correctly pointed out by the CA, the respondent's

motion prayed for the issuance of an order of execution so as “to
give immediate effect to the judgment dated 25 September 2002.” This only
shows that the respondent merely intended to enforce the necessary implications of
what was adjudged by the trial court in its decision.
 229

Merrill lynch v. Ca 211 scra 824 ballesta

Marubeni v. Tensuan diaz
Le chemise v. Fernandez comia
Mavest v. Sampaguita aldeosa
Agilent v. Integrated silicom technology phil geronilla
Home insurance co. V. Eastern shipping zapata

Cemco v. National life insurance garcia

Phil. Veterans bank v. Callangan cero

G. No. 97816 July 24, 1992

MERRILL LYNCH FUTURES, INC., petitioner,

vs.
HON. COURT OF APPEALS, and the SPOUSES PEDRO M. LARA and ELISA G.
LARA, respondents.

On November 23, 1987, Merrill Lynch Futures, Inc. (hereafter, simply ML FUTURES)
filed a complaint wagainst the Spouses Pedro M. Lara and Elisa G. Lara for the
recovery of a debt

In its complaint ML FUTURES described itself as —

a) a non-resident foreign corporation, not doing business in the Philippines, duly
organized and existing under Of the laws of the state of Delaware, U.S.A.;" as well
as
b) a "futures commission merchant" duly licensed to act as such in the futures markets
and exchanges in the United States, . . essentially functioning as a broker . . (executing)
orders to buy and sell futures contracts received from its customers on U.S. futures
exchanges.

In its complaint ML FUTURES alleged the following:

1) that on September 28, 1983 it entered into a Futures Customer Agreement with the
defendant spouses (Account No. 138-12161), in virtue of which it agreed to act as the
latter's broker for the purchase and sale of futures contracts in the U.S.;
2) that pursuant to the contract, orders to buy and sell futures contracts were
transmitted to ML FUTURES by the Lara Spouses "through the facilities of Merrill
Lynch Philippines, Inc., a Philippine corporation and a company servicing
plaintiffs customers; 2
3) that from the outset, the Lara Spouses "knew and were duly advised that Merrill
Lynch Philippines, Inc. was not a broker in futures contracts," and that it "did not have a
license from the Securities and Exchange Commission to operate as a commodity
trading advisor (i.e., 'an entity which, not being a broker, furnishes advice on commodity
futures to persons who trade in futures contracts');
4) that in line with the above mentioned agreement and through said Merrill Lynch
Philippines, Inc., the Lara Spouses actively traded in futures contracts,
 230

5) spouses became indebted to ML FUTURES for the ensuing balance of

US$84,836.27, which the latter asked them to pay;
6) that the Lara Spouses however refused to pay this balance, "alleging that the
transactions were null and void because Merrill Lynch Philippines, Inc., the
Philippine company servicing accounts of plaintiff, . . had no license to operate
as a 'commodity and/or financial futures broker.'"
the Lara Spouses contend that ML Futures has no capacity to sue them because the
transactions subject of the complaint were had by them, not with the plaintiff ML
FUTURES, but with Merrill Lynch Pierce Fenner & Smith, Inc.

Issue:

the crucial question is whether or not ML FUTURES may sue in Philippine Courts
to establish and enforce its rights against said spouses, in light of the undeniable
fact that it had transacted business in this country without being licensed to do
so.

The Court is satisfied that the facts on record adequately establish that ML
FUTURES, operating in the United States, had indeed done business with the
Lara Spouses in the Philippines over several years, had done so at all times
through Merrill Lynch Philippines, Inc. (MLPI), a corporation organized in this
country,

The Court is satisfied, too, that the Laras did transact business with ML FUTURES
through its agent corporation organized in the Philippines, it being unnecessary
to determine whether this domestic firm was MLPI (Merrill Lynch Philippines, Inc.)
or Merrill Lynch Pierce Fenner & Smith (MLPI's alleged predecessor).

The fact is that ML FUTURES did deal with futures contracts in exchanges in the United
States in behalf and for the account of the Lara Spouses, and that on several occasions
the latter received account documents and money in connection with those
transactions.

Given these facts, if indeed the last transaction executed by ML FUTURES in the
Laras's behalf had resulted in a loss amounting to US $160,749.69; that in relation to
this loss, ML FUTURES had credited the Laras with the amount of US$75,913.42 —
which it (ML FUTURES) then admittedly owed the spouses — and thereafter sought to
collect the balance, US$84,836.27, but the Laras had refused to pay (for the reasons
already above stated),

if it be true that during all the time that they were transacting with ML FUTURES, the
Laras were fully aware of its lack of license to do business in the Philippines, and in
relation to those transactions had made payments to, and received money from it for
several years, the question is whether or not the Lara Spouses are now estopped to
impugn ML FUTURES' capacity to sue them in the courts of the forum.
 231

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 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

There would seem to be no question that the Laras received benefits generated by their
business relations with ML FUTURES. Those business relations, according to the Laras
themselves, spanned a period of seven (7) years; In fact, even as regards their last
transaction, in which the Laras allegedly suffered a loss in the sum of US$160,749.69,
the Laras nonetheless still received some monetary advantage, for ML FUTURES
credited them with the amount of US$75,913.42 then due to them, thus reducing their
debt to US$84,836.27.

Given these facts, and assuming that the Lara Spouses were aware from the
outset that ML FUTURES had no license to do business in this country and MLPI,
no authority to act as broker for it, it would appear quite inequitable for the Laras
to evade payment of an otherwise legitimate indebtedness due and owing to ML
FUTURES upon the plea that it should not have done business in this country in
the first place, or that its agent in this country, MLPI, had no license either to
operate as a "commodity and/or financial futures broker."

ESTOPPEL APPLIED. LARA SPOUSES LIABLE

MARUBENI NEDERLAND B.V. vs HON. JUDGE TENSUAN, and ARTEMIO

GATCHALIAN
G.R. # 61950, 9/28/90

FACTS: Petitioner Marubeni Nederland B.V. (Marubeni) and D.B. Teodoro

Development Corporation (DBT) entered into a contract whereby the petitioner agreed
to supply all the necessary equipment, machinery, materials, technical know-how and
the general design of the construction of DBT’s lime plant at the Guimaras Island in
Iloilo on a deferred-payment basis. In addition, two financing contracts, construction
loan and cash loan agreements, were entered by the parties. The payment of such loan
amortizations by DBT were guaranteed by National Investment and Development
Corporation (NIDC).
The loan amortizations of DBT became due. Before the first installment became
due, DBT interposed from NIDC certain claims and revision of the payment schedule
and amounts by reason of petitioner Marubeni’s delay in the performance of its
contractual commitments. A Settlement Agreement was made between them.
Because the lime plant was not constructed in accordance with the agreement,
DBT rejected the lime plant and demanded indemnification from Marubeni. The latter
 232

refused DBT’s unilateral rejection of the plant, alleging that there was no fault on the
part of Marubeni.
Before the first installment under the Settlement Agreement became due,
Artemio Gatchalian, a stockholder of DBT, sued Marubeni for contractual breach in CFI-
Rizal and impleaded DBT as unwilling plaintiff and NIDC, which has controlling interest
in DBT as pledgee of its voting shares.
In its defense, petitioner Marubeni sought the dismissal of the case alleging that
the court has no jurisdiction over the person of the petitioner since it is a foreign
corporation.
ISSUE: W/N Marubeni is a foreign corporation.
HELD: No. Marubeni claimed that it was a foreign corporation not doing business in the
Philippines and as an entity with its own capitalization, it is separate and distinct from
Marubeni Corporation, Japan (parent company). The three contracts were entered in
Tokyo, Japan and the sale and purchase of equipment and machineries for the lime
plant were isolated transactions. On the other hand, respondent Gatchalian contended
that Marubeni could be sued in Philippine courts on liabilities arising even from a single
transaction because in reality, it was already engaging in business in the country
through Marubeni Corporation, Japan, and together with Nihon Cement Co., Ltd of
Japan, were “alter egos, mere adjuncts of Marubeni Corporation, Japan” as the parent
company.
Petitioner Marubeni can be sued in the Philippines because according to
Republic Act 5455, “doing business,” includes: “soliciting orders, purchases (sales) or
service contracts. Concrete and specific solicitations by a foreign firm amounting to
negotiation or fixing of the terms and conditions of sales and service contracts,
regardless of whether the contracts are actually reduced to writing, shall constitute
doing business, even if enterprise has no office or fixed place of business in the
Philippines.
In the case at bar, it could not be denied that petitioner Marubeni had solicited
the lime plant business from DBT through Marubeni Manila branch. Even assuming, for
the sake of argument, that Marubeni Nederland B.V. is a different and separate
business entity from Marubeni Japan and its Manila branch, in this particular transaction
at least, Marubeni Nederland B.V., had effectively solicited “orders, purchases (sales) or
service contracts” as well as constituted Marubeni Corporation, Tokyo, Japan and its
Manila Branch as its representative in the Philippines to transact business for its
account as principal. These circumstances, taken singly or in combination, constitute
“doing business in the Philippines” within the contemplation of law.
It must be emphasized that a foreign corporation, doing business in the
Philippines with or without license is subject to process and jurisdiction of the local
courts. It shall not be allowed, under any circumstance, to invoke its lack of license to
impugn the jurisdiction of the court.

LE CHEMISE LACOSTE v. FERNANDEZ (1984)

Facts:
The petitioner is a foreign corporation, organized and existing under the law of
France and not doing business in the Philippines. It is the actual owner of the
trademarks “LACOSTE”, “CHEMISE LACOSTE”, “CROCODILE DEVICE” and a
 233

composite mark consisting of the word “LACOSTE” and a representation of a crocodile/

alligator used on clothing and other goods specifically sporting apparels sold in many
parts of the world and which have been marketed in the Philippines since 1964.
Hemandas and Co., a duly licensed domestic firm applied for and was issued
Reg. No. SR-2225 for the trademark “CHEMISE LACOST AND CROCODILE DEVICE”
by the Philippine Patent Office for use on T-shirts, sportswear and other garment
products of the company. The main basis of the private respondent’s case is its claim of
alleged prior registration.
Petitioner filed with the NBI a letter-complaint alleging therein the acts of unfair
competition being committed by Hermandas and requesting their assistance in his
apprehension and prosecution.
NBI conducted an investigation and subsequently filed with the respondent court
two applications for the issuance of search warrants which were granted.
Hermadas filed a motion to quash for the search warrants and such motion was
granted by the lower court.
Hence, the petition.

ISSUE:
Whether or not petitioner being a foreign corporation has the capacity to sue
before the Philippine courts.

HELD:
Yes. LE CHEMISE LACOSTE is a foreign corporation not doing business in the
Philippines. The marketing of its products in the Philippines is done through an
exclusive distributor, Rustan Commercial Corporation. The latter is an independent
entity which buys and then markets not only products of the petitioner but also many
other products bearing equally well-known and established trademarks and
tradenames. In other words, Rustan is not a mere agent or conduit of the petitioner.
But even assuming the truth of the PR’s allegation that LE CHEMISE LACOSTE
failed to allege material facts in its petition relative to capacity to sue, LE CHEMISE
LACOSTE may still maintain the present suit against respondent Hemadas. As early as
1927, this court was, and it still is, of the view that a foreign corporation not doing
business in the Philippines needs no license to sue before Philippine courts for
infringement of trademark and unfair competition.

MAVEST (U.S.A.) INC., and MAVEST Manila Liaison Office v.

SAMPAGUITA GARMENT CORPORATION
G.R. No. 127454 September 21, 2005
GARCIA, J.:
 234

FACTS: Sometime in July and August 1989, Mavest U.S.A. (foreign corporation) and
Mavest Manila Liaison Office (MAVEST U.S.A.’s representative in the Philippines)
entered into a series of transactions with Sampaguita Garment Corporation (domestic
corporation), whereby the former would furnish from abroad raw materials to be
manufactured by the latter into finished products, for shipment to foreign buyers, Sears
Roebuck and JC Penney. Despite shipment and receipt by JC Penney of said orders,
no payment was made, thus prompting Sampaguita to send demand letters which
remained unheeded. On April 27, 1990, Sampaguita filed a complaint for collection of a
sum of money with damages before the Makati RTC against Mavest USA, Mavest
Manila, and two (2) others, namely, MAVEST International Co., LTD (MICL, corporation
organized under the laws of Taiwan) and Patrick Wang, former General Manager of
Mavest Manila. In their Answer with Counterclaim, Mavest USA, et. al., countered that
Sampaguita has already been paid by virtue of legal compensation, and that it is the
one that owes it due to the damages and losses it (sic) incurred as a result of the
breaches committed in the previous shipments to Sears Roebuck. After a protracted
trial that lasted for four (4) years, the trial court rendered judgment in favor of
Sampaguita and against Mavest USA, et. al. on appeal, the Court of Appeals affirmed
the ruling o the trial court. In the present petition, Mavest Manila submits that being
merely an agent of Mavest U.S.A, it should not be held solidarily liable with the
principal.
ISSUE: WON Mavest Manila is solidarily liable with Mavest USA.
HELD: YES, it is. Mavest USA and Mavest Manila were two (2) of the original four (4)
defendants impleaded in the basic complaint. Both MICL and Mr. Wang, while adjudged
liable in solidum with Mavest USA and Mavest Manila by the trial court, were eventually
absolved from any liability by the Court of Appeals. In holding Mavest Manila solidarily
liable with Mavest U.S.A., the appellate court proceeded on the postulate that Mavest
Manila is the liaison office of Mavest U.S.A and the extension office of both Mavest
U.S.A. and MICL.

The Court of Appeals’ holding commends itself for concurrence.

As it were, Mavest U.S.A. appears to have constituted Mavest Manila as its

representative and its fully subsidized extension office in the Philippines. As such,
Mavest Manila can be charged for the liabilities incurred by Mavest U.S.A. in the
country. And if Mavest Manila can be so charged, there is no rhyme nor reason why it
cannot be adjudged, as did the appellate court, as solidarily liable with head office,
Mavest U.S.A.

G.R. No. 154618 April 14, 2004

 235

AGILENT TECHNOLOGIES SINGAPORE (PTE) LTD., petitioner,

vs.
INTEGRATED SILICON TECHNOLOGY PHILIPPINES CORPORATION, TEOH
KIANG HONG, TEOH KIANG SENG, ANTHONY CHOO, JOANNE KATE M. DELA
CRUZ, JEAN KAY M. DELA CRUZ and ROLANDO T. NACILLA, respondents.
YNARES-SANTIAGO, J.:

FACTS: Petitioner Agilent Technologies Singapore (Pte.), Ltd. ("Agilent") is a foreign

corporation, which, by its own admission, is not licensed to do business in the
Philippines. Respondent Integrated Silicon Technology Philippines Corporation
("Integrated Silicon") is a private domestic corporation, 100% foreign owned, which is
engaged in the business of manufacturing and assembling electronics components.
Respondents Teoh Kiang Hong, Teoh Kiang Seng and Anthony Choo, Malaysian
nationals, are current members of Integrated Silicon’s board of directors, while Joanne
Kate M. dela Cruz, Jean Kay M. dela Cruz, and Rolando T. Nacilla are its former
members.

The juridical relation among the various parties in this case can be traced to a 5-
year Value Added Assembly Services Agreement ("VAASA"), entered into on April 2,
1996 between Integrated Silicon and the Hewlett-Packard Singapore (Pte.) Ltd.,
Singapore Components Operation ("HP-Singapore"). Under the terms of the VAASA,
Integrated Silicon was to locally manufacture and assemble fiber optics for export to
HP-Singapore. HP-Singapore, for its part, was to consign raw materials to Integrated
Silicon; transport machinery to the plant of Integrated Silicon; and pay Integrated Silicon
the purchase price of the finished products. The VAASA had a five-year term, beginning
on April 2, 1996, with a provision for annual renewal by mutual written consent. On
September 19, 1999, with the consent of Integrated Silicon, HP-Singapore assigned all
its rights and obligations in the VAASA to Agilent.

On May 25, 2001, Integrated Silicon filed a complaint for "Specific Performance
and Damages" against Agilent and its officers Tan Bian Ee, Lim Chin Hong, Tey Boon
Teck and Francis Khor, alleging that Agilent breached the parties’ oral agreement to
extend the VAASA. Integrated Silicon thus prayed that defendant be ordered to execute
a written extension of the VAASA for a period of five years as earlier assured and
promised; and to comply with the extended VAASA.

Summons and a copy of the complaint were served on Atty. Ramon Quisumbing,
who returned these processes on the claim that he was not the registered agent of
Agilent. Later, he entered a special appearance to assail the court’s jurisdiction over the
person of Agilent.
On July 2, 2001, Agilent filed a separate complaint against Integrated Silicon, Teoh
Kang Seng, Teoh Kiang Gong, Anthony Choo, Joanne Kate M. dela Cruz, Jean Kay M.
dela Cruz and Rolando T. Nacilla, for "Specific Performance, Recovery of Possession,
and Sum of Money with Replevin, Preliminary Mandatory Injunction, and Damages",
before the Regional Trial Court, Calamba, Laguna, Branch 92, praying that a writ of
replevin or, in the alternative, a writ of preliminary mandatory injunction, be issued
 236

ordering defendants to immediately return and deliver to plaintiff its equipment,

machineries and the materials to be used for fiber-optic components which were left in
the plant of Integrated Silicon. It further prayed that defendants be ordered to pay actual
and exemplary damages and attorney’s fees.

Respondents filed a Motion to Dismiss in Civil Case No. 3123-2001-C, on the ground,
among others, of lack of Agilent’s legal capacity to sue.

The assailed acts of petitioner Agilent, purportedly in the nature of "doing business" in
the Philippines, are the following: (1) mere entering into the VAASA, which is a "service
contract"; (2) appointment of a full-time representative in Integrated Silicon, to "oversee
and supervise the production" of Agilent’s products; (3) the appointment by Agilent of six
full-time staff members, who were permanently stationed at Integrated Silicon’s facilities
in order to inspect the finished goods for Agilent; and (4) Agilent’s participation in the
management, supervision and control of Integrated Silicon, including instructing
Integrated Silicon to hire more employees to meet Agilent’s increasing production
needs, regularly performing quality audit, evaluation and supervision of Integrated
Silicon’s employees, regularly performing inventory audit of raw materials to be used by
Integrated Silicon, which was also required to provide weekly inventory updates to
Agilent, and providing and dictating Integrated Silicon on the daily production schedule,
volume and models of the products to manufacture and ship for Agilent.

ISSUE:
1) Whether a foreign corporation without a license is incapacitated from bringing an
action in Philippine courts
2) Whether Agilent was doing business in the Philippines

HELD:
1) A foreign corporation without a license is not ipso facto incapacitated from bringing
an action in Philippine courts. A license is necessary only if a foreign corporation is
"transacting" or "doing business" in the country. The Corporation Code provides: 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 aforementioned provision prevents an unlicensed
foreign corporation "doing business" in the Philippines from accessing our courts.

In a number of cases, however, we have held that an unlicensed foreign

corporation doing business in the Philippines may bring suit in Philippine courts against
a Philippine citizen or entity who had contracted with and benefited from said
corporation. Such a suit is premised on the doctrine of estoppel. A party is estopped
from challenging the personality of a corporation after having acknowledged the same
by entering into a contract with it. This doctrine of estoppel to deny corporate existence
and capacity applies to foreign as well as domestic corporations. The application of this
 237

principle prevents 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 principles regarding the right of a foreign corporation to bring suit in

Philippine courts may thus be condensed in four statements: (1) if a foreign corporation
does business in the Philippines without a license, it cannot sue before the Philippine
courts; (2) if a foreign corporation is not doing business in the Philippines, it needs no
license to sue before Philippine courts on an isolated transaction or on a cause of action
entirely independent of any business transaction; (3) if a foreign corporation does
business in the Philippines without a license, a Philippine citizen or entity which has
contracted with said corporation may be estopped from challenging the foreign
corporation’s corporate personality in a suit brought before Philippine courts; and (4) if a
foreign corporation does business in the Philippines with the required license, it can sue
before Philippine courts on any transaction.

2) The challenge to Agilent’s legal capacity to file suit hinges on whether or not it is
doing business in the Philippines. However, there is no definitive rule on what
constitutes "doing", "engaging in", or "transacting" business in the Philippines. The
Corporation Code itself is silent as to what acts constitute doing or transacting business
in the Philippines. Jurisprudence has it, however, that the term "implies a continuity of
commercial dealings and arrangements, and contemplates, to that extent, the
performance of acts or works or the exercise of some of the functions normally incident
to or in progressive prosecution of the purpose and subject of its organization."

In Mentholatum,52 this Court discoursed on the two general tests to determine

whether or not a foreign corporation can be considered as "doing business" in the
Philippines. The first of these is the substance test, thus: whether the foreign
corporation is continuing the body of the business or enterprise for which it was
organized or whether it has substantially retired from it and turned it over to another.
The second test is the continuity test, expressed thus: The term [doing business] implies
a continuity of commercial dealings and arrangements, and contemplates, to that
extent, the performance of acts or works or the exercise of some of the functions
normally incident to, and in the progressive prosecution of, the purpose and object of its
organization.

The Foreign Investments Act of 1991 (the "FIA"; Republic Act No. 7042, as
amended), defines "doing business" as follows: Sec. 3, par. (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
totaling 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 the progressive
 238

prosecution of, commercial gain or of the purpose and object of the business
organization. An analysis of the relevant case law, in conjunction with Section 1 of the
Implementing Rules and Regulations of the FIA (as amended by Republic Act No.
8179), would demonstrate that the acts enumerated in the VAASA do not constitute
"doing business" in the Philippines. Section 1 of the Implementing Rules and
Regulations of the FIA (as amended by Republic Act No. 8179) provides that the
following shall not be deemed "doing business": (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.

By the clear terms of the VAASA, Agilent’s activities in the Philippines were
confined to (1) maintaining a stock of goods in the Philippines solely for the purpose of
having the same processed by Integrated Silicon; and (2) consignment of equipment
with Integrated Silicon to be used in the processing of products for export. As such, we
hold that, based on the evidence presented thus far, Agilent cannot be deemed to be
"doing business" in the Philippines. Respondents’ contention that Agilent lacks the legal
capacity to file suit is therefore devoid of merit. As a foreign corporation not doing
business in the Philippines, it needed no license before it can sue before our courts.

G.R. No. L-34382 July 20, 1983

THE HOME INSURANCE COMPANY vs. EASTERN SHIPPING LINES and/or ANGEL
JOSE TRANSPORTATION, INC. and HON. A. MELENCIO-HERRERA, Presiding
Judge of the Manila Court of First Instance, Branch XVII

GUTIERREZ, JR., J.:

FACTS: S. Kajita & Co., on behalf of Atlas Consolidated Mining & Development
Corporation, shipped on board the SS Eastern Jupiter from Osaka, Japan, 2,361 coils of
Black Hot Rolled Copper Wire Rods. The said VESSEL is owned and operated by
Eastern Shipping Lines. The shipment was covered by Bill of Lading O-MA-9, with
arrival notice to Phelps Dodge Copper Products Corporation of the Philippines at
Manila. The shipment was insured with the Home Insurance Company against all risks
 239

in the amount of P1,580,105.06 under its Insurance Policy AS-73633. The coils
discharged from the VESSEL numbered 2,361, of which 53 were in bad order. What the
Phelps Dodge ultimately received at its warehouse was the same number of 2,361 coils,
with 73 coils loose and partly cut and 28 coils entangled, partly cut, and which had to be
considered as scrap. Upon weighing at Phelps Dodge's warehouse, the 2,361 coils
were found to weight 263,940.85 kilos as against its invoiced weight of 264,534.00 kilos
or a net loss/shortage of 593.15 kilos, or 1,209,56 lbs., according to the claims
presented by the Phelps Dodge against Home Insurance, the Eastern Shipping, and
Angel Jose Transportation Inc.
Insurance paid the Phelps Dodge under its insurance policy for the loss or damage
undergone by the cargo, Home, by virtue of which Home Insurance became subrogated
to the rights and actions of the Phelps Dodge. Home Insurance made demands for
payment against the Eastern Shipping and the Angel Jose Transportation for
reimbursement. However, each of them declined to pay the same.

When the insurance contracts which formed the basis of these cases were executed,
Home Insurance had not yet secured the necessary licenses and authority; but when
the complaints in these two cases were filed, Home Insurance had already secured the
necessary license to conduct its insurance business in the Philippines. In both cases,
Home Insurance made the averment regarding its capacity to sue, as that it "is a foreign
insurance company duly authorized to do business in the Philippines through its agent,
Mr. Victor H. Bello, of legal age and with office address at Oledan Building, Ayala
Avenue, Makati, Rizal."

Nevertheless, the Court of First Instance of Manila dismissed the complaints in both
cases because Home Insurance had failed to prove its capacity to sue. Home Insurance
filed the petitions for review on certiorari.

Issue: Whether Home Insurance, a foreign corporation licensed to do business at the

time of the filing of the case, has the capacity to sue for claims on contracts made when
it has no license yet to do business in the Philippines.

Ruling: Home Insurance averred in its complaints that it is a foreign insurance

company, that it is authorized to do business in the Philippines, that its agent is Mr.
Victor H. Bello, as well as its office address. These are all the averments required by
Section 4, Rule 8 of the Rules of Court. Home Insurance sufficiently alleged its capacity
to sue.
Corporation Law must be given a reasonable, not an unduly harsh, interpretation which
does not hamper the development of trade relations and which fosters friendly
commercial intercourse among countries. The court distinguished between the denial of
 240

a right to take remedial action and the penal sanction for non-registration. Insofar as
transacting business without a license is concerned, Section 69 of the Corporation Law
imposed a penal sanction — imprisonment for not less than 6 months nor more than 2
years or payment of a fine not less than P200.00 nor more than P1,000.00 or both in the
discretion of the court. There is a penalty for transacting business without registration.
And insofar as litigation is concerned, the foreign corporation or its assignee may not
maintain any suit for the recovery of any debt, claim, or demand whatever. The
Corporation Law is silent on whether or not the contract executed by a foreign
corporation with no capacity to sue is null and void ab initio. Still, there is no question
that the contracts are enforceable. The requirement of registration affects only the
remedy. Significantly, Batas Pambansa 68, the Corporation Code of the Philippines has
corrected the ambiguity caused by the wording of Section 69 of the old Corporation
Law. Section 133 of the present Corporation Code provides that "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 in 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 old Section 69 has been
reworded in terms of non-access to courts and administrative agencies in order to
maintain or intervene in any action or proceeding. The prohibition against doing
business without first securing a license is now given penal sanction which is also
applicable to other violations of the Corporation Code under the general provisions of
Section 144 of the Code. It is, therefore, not necessary to declare the contract null and
void even as against the erring foreign corporation. The penal sanction for the violation
and the denial of access to Philippine courts and administrative bodies are sufficient
from the viewpoint of legislative policy. Herein, the lack of capacity at the time of the
execution of the contracts was cured by the subsequent registration.
CEMCO HOLDINGS, INC. vs. NATIONAL LIFE INSURANCE COMPANY OF THE
PHILIPPINES, INC.
G.R. NO. 171815, AUGUST 7, 2007
CHICO-NAZARIO, J.

FACTS:
Union Cement Corporation (UCC), a publicly-listed company, has two principal
stockholders – UCHC, a non-listed company, and petitioner Cemco. Majority of UCHC’s
stocks were owned by BCI and ACC . Cemco, on the other hand, owned 9% of UCHC
stocks. In a disclosure letter, BCI informed the Philippine Stock Exchange (PSE) that it
and its subsidiary ACC had passed resolutions to sell to Cemco BCI’s stocks in UCHC
and ACC’s stocks.
 241

As a consequence of this disclosure, the PSE inquired as to whether the Tender

Offer Rule under Rule 19 of the Implementing Rules of the Securities Regulation Code
is not applicable to the purchase by petitioner of the majority of shares of UCC. The
SEC en banc had resolved that the Cemco transaction was not covered by the tender
offer rule. Feeling aggrieved by the transaction, respondent National Life Insurance
Company of the Philippines, Inc., a minority stockholder of UCC, sent a letter to Cemco
demanding the latter to comply with the rule on mandatory tender offer. Cemco,
however, refused. SEC directed petitioner Cemco to make a tender offer for UCC
shares to respondent and other holders of UCC shares similar to the class held by
UCHC in accordance with Section 9(E), Rule 19 of the Securities Regulation Code.
The CA rendered a decision affirming the ruling of the SEC. it ruled that the SEC
has jurisdiction to render the questioned decision and, in any event, Cemco was barred
by estoppel from questioning the SEC’s jurisdiction. It, likewise, held that the tender
offer requirement under the SRC and its Implemanting Rules applies to Cemco’s
purchase of UCHC stocks.

ISSUE:
Whether or not the SEC has jurisdiction over respondent’s complaint and to
require Cemco to make a tender offer for respondent’s UCC shares.

RULING:
Yes. The SEC was acting pursuant to Rule 19(13) of the Amended Implementing
Rules and Regulations of the SRC to wit: “If there shall be violation of this Rule by
pursuing a purchase of equity shares of a public company at threshold amounts without
the required tender offer, the Commission, upon complaint, may nullify the said
purchase and direct the holding of a tender offer. This shall be without prejudice to the
imposition of other sanctions under the Code.”
Moreover, petitioner is barred from questioning the jurisdiction of the SEC. it
must be pointed out that petitioner had participated in all the proceedings before the
SEC and had prayed for affirmative relief. A Tender Offer is an offer by the acquiring
person to stockholders of a public company for them to tender their shares therein on
the terms specified in the offer. Tender offer is in place to protect minority shareholders
against any scheme that dilutes the share value of their investments. It gives the
minority shareholders the chance to exit the company under reasonable terms, giving
them the opportunity to sell their shares at the same price as those of the majority
shareholders.

PHILIPPINE VETERANS BANK vs. CALLANGAN

GR. No. 191995 August 3, 2011
BRION, J.:
 242

FACTS:
 Callangan is the Director of the Corporate Finance Department of SEC.
 She sent a letter to the bank informing it that it qualifies as a “public company”
under the SRC. Therefore, the bank is required to comply with the reportorial
requirements.
 Bank responded that it is a private company because its shares are available
only to a limited class and not to the general public.
 Callangan rejected the Bank’s explanation and assessed a penalty of 1,
937,262.80 for failing to comply with the reportorial requirements from 2001 to
203
 Callangan denied the MR.
 SEC En Banc dismissed the Bank’s appeal.
 CA dismissed the petition for review and affirmed the ruling. CA denied MR.
 SC denied the Bank’s petition for certiorari.
 Bank filed an MR. Contentions:
 Its shares can be owned only by a specific group of people: The World
War II veterans, their widows, orphans and compulsory heirs. It is not
open to general public.
 If it would be considered as public company subject to the reportorial
requirement, the Bank would be compelled to spend 40 million for the
Information Statement.

ISSUE: WON Philippine Veterans Bank is a public company

HELD:
 YES.
 MR denied.
 Read SRC Subsections 17.1 and 17.2 and Rule 31 of the IRR of the SRC
 17.1 provides for the reportorial requirements
 17.2 provides that 17.1 shall apply to an issuer:
 With assets of at least 50 million or such other amount as SEC shall
prescribe; and
 Having 200 or more holders each holding at least 100 shares of a class of
its equity securities.
 Rule 31 of IRR of the SRC: Public Company – any corporation with a class of
equity securities listed on an exchange OR with assets in excess of 50 million
and having 200 or more holders, at least 200 of which are holding 100 shares of
a class of its equity securities.
 A public company is not limited to a company whose shares of stock are publicly
listed. Even banks are considered as public company provided they mee the
requirement enumerated above.
 243

 The Bank has assets exceeding 50 million and has 395,998 shareholders.
Therefore, it is considered as a public company that must comply with the
reportorial requirements.
 The bank’s obligation to provide copies of its annual report is actually for the
benefit of the veteran-shareholders. It provides them information and
transparency. While compliance will be costly, the benefit clearly outweighs the
expenses.