Business Organization 1

Case Analysis 1
Harvy S. Halasan

Case No. 1
NARRA NICKEL MINING AND DEVELOPMENT CORP.,
DEVELOPMENT,
INC.,
and McARTHUR
MINING,
CONCOLIDATED MINES CORP.,

TESORO MINING AND

INC.,
vs.
REDMONT

G.R. No. 195580, January 28, 2015

Facts:
Narra and its co-petitioner corporations Tesoro and MacArthur, filed a motion
before the SC to reconsider its April 21, 2014 Decision which upheld the denial of
their MPSA applications. The SC affirmed the CA ruling that there is a doubt to their
nationality, and that in applying the Grandfather Rule, the finding is that MBMI, a
100% Canadian-owned corporation, effectively owns 60% of the common stocks of
petitioners by owning equity interests of the petitioners other majority corporate
shareholders. Narra, Tesoro and MacArthur argued that the application of the
Grandfather Rule to determine their nationality is erroneous and allegedly without
basis in the Constitution, the FIA, the Philippine Mining Act, and the Rules issued by
the SEC. These laws and rules supposedly espouse the application of the Control
Test in verifying the Philippine nationality of corporate entities for purposes of
determining compliance with Sec. 2, Art. XII of the Constitution that only
corporations or associations at least 60% of whose capital is owned by such Filipino
citizens may enjoy certain rights and privileges, like the exploration and
development of natural resources.

Issue:
W/N the application by the SC of the grandfather resulted to the abandonment of
the control test
Ruling:
No. The control test can be applied jointly with the Grandfather Rule to determine
the observance of foreign ownership restriction in nationalized economic activities.
The Control Test and the Grandfather Rule are not incompatible ownershipdeterminant methods that can only be applied alternative to each other. Rather,
these methods can, if appropriate, be used cumulatively in the determination of the
ownership and control of corporations engaged in fully or partly nationalized

activities, as the mining operation involved in this case or the operation of public
utilities.

The Grandfather Rule, standing alone, should not be used to determine the Filipino
ownership and control in a corporation, as it could result in an otherwise foreign
corporation rendered qualified to perform nationalized or partly nationalized
activities. Hence, it is only when the Control Test is first complied with that the
Grandfather Rule may be applied.
Put in another manner, if the subject
corporations Filipino equity falls below the threshold 60%, the corporation is
immediately considered foreign-owned, in which case, the need to resort to the
Grandfather Rule disappears.

In this case, using the control test, Narra, Tesoro and MacArthur appear to have
satisfied the 60-40 equity requirement. But the nationality of these corporations
and the foreign-owned common investor that funds them was in doubt, hence, the
need to apply the Grandfather Rule.

Discussion Questions:
1. Explain the Grandfather Rule. When do you apply the test? Give the
rationale of the rule.
Grandfather Rule determines the actual Filipino ownership and control
in a corporation by tracing both the direct and indirect shareholdings in the
corporation. Paragraph 7 of the 1967 SEC rules which states, but If the
percentage of Filipino ownership in the corporation is less than 60%, only the
number of shares corresponding to such percentage shall be counted as of
Philippine nationality.
Under the Strict or Grandfather Rule, the combined totals in the
investing corporation and the investee corporation must be traced (i.e.,
grandfathered) to determine the total percentage of Filipino ownership.
The rationale of the rule is to strike a balance between allowing foreign
participation in economic activities and protecting the rights of Filipinos to
use our resources, provisions in the constitution and in other laws abound to
ensure that some identified areas of activities are reserved to Philippine
nationals. For juridical entities, this means that a certain percentage
ownership shall be reserved to Filipinos.
2. Explain the Control Test or the Liberal Rule.
The control test provides that shares belonging to corporations or
partnerships at least 60% of the capital of which is owned by Filipino citizens
shall be considered of Philippine nationality. This test is straightforward and
does not scrutinize further the ownership of the Filipino shareholdings.

3. Distinguish the above two tests of determining the nationality of corporation.

The control test provides that shares belonging to corporations or
partnerships at least 60% of the capital of which is owned by Filipino citizens
shall be considered of Philippine nationality while
Grandfather Rule determines the actual Filipino ownership and control in a
corporation by tracing both the direct and indirect shareholdings in the
corporation.
4. What do you mean by corporate layering?
Corporate layering means that at face value, it appears that the corporations
satisfy the Filipino equity requirement, but in truth the ultimate controlling
shareholders are foreigners.

5. Give a concrete example of the application of the grandfather rule as cited in

the case.
6.
In the Narra Nickel Mining case, the Supreme Court found that while
the petitioning corporations complied with the Control Test, factual
circumstances nonetheless raise doubt as to their true nationality and
therefore requires the application of the Grandfather Rule. Some of the
indicators of doubt found by the Court in the said case are the following: (1)
the three mining corporations had the same 100% Canadian owned foreign
investor, (2) the similar corporate structure and shareholder composition of
the three corporations, (3) a major Filipino shareholder within the corporate
layering did not pay any amount with respect to its subscription, and (4) the
dubious act of the foreign investor in conveying its interests in the mining
corporations to another domestic corporation, among others. These instances
demonstrate that corporate layering was utilized to allow a foreign
corporation to gain control of these mining corporations in the Philippines.
After applying the Grandfather Rule, the Supreme Court was able to trace and
conclude that the Filipino shareholders did not actually have the required
amount of control and beneficial ownership in the mining companies, and
consequently failed to comply with the nationality requirement under the
Constitution.

Case No. 2

WILSON GAMBOA V. SEC. MARGARITO TEVES

GR No. 176579, June 28, 2011

Facts:

In 1928, the Philippine Long Distance Telephone Company (PLDT) was

granted a franchise to engage in the business of telecommunications.
Telecommunications is a nationalized area of activity where a corporation engaged
therein must have 60% of its capital be owned by Filipinos as provided for by
Section 11, Article XII (National Economy and Patrimony) of the 1987 Constitution,
to wit:
Section 11. No franchise, certificate, or any other form of authorization for the
operation of a public utility shall be granted except to citizens of the Philippines or
to corporations or associations organized under the laws of the Philippines, at least
sixty per centum of whose capital is owned by such citizens; xxx
In 1999, First Pacific, a foreign corporation, acquired 37% of PLDT common shares.
Wilson Gamboa opposed said acquisition because at that time, 44.47% of PLDT
common shares already belong to various other foreign corporations. Hence, if First
Pacifics share is added, foreign shares will amount to 81.47% or more than the 40%
threshold prescribed by the Constitution.
Margarito Teves, as Secretary of Finance, and the other respondents argued that
this is okay because in totality, most of the capital stocks of PLDT is Filipino owned.
It was explained that all PLDT subscribers, pursuant to a law passed by Marcos, are
considered shareholders (they hold serial preferred shares). Broken down, preferred
shares consist of 77.85% while common shares consist of 22.15%.
Gamboa argued that the term capital should only pertain to the common shares
because that is the share which is entitled to vote and thus have effective control
over the corporation.
Issue:
What does the term capital pertain to? Does the term capital in Section 11,
Article XII of the Constitution refer to common shares or to the total outstanding
capital stock (combined total of common and non-voting preferred shares)?
Ruling:
Gamboa is correct. Capital only pertains to common shares. It will be absurd for
capital to pertain as inclusive of non-voting shares. This is because a corporation
consisting of 1,000,000 capital stocks, 100 of which are common shares which are
foreign owned and the rest (999,900 shares) are preferred shares which are nonvoting shares and are Filipino owned, would seem compliant to the constitutional
requirement here 99.999% is Filipino owned. But if scrutinized, the controlling
stock the voting stock or that miniscule .001% is foreign owned. That is absurd.
In this case, it is true that at least 77.85% of the capital is owned by Filipinos (the
PLDT subscribers). But these subscribers, who hold non-voting preferred shares,
have no control over the corporation. Hence, capital should only pertain to common
shares.
Thus, to be compliant with the constitution, 60% of the common shares of PLDT
should be Filipino owned. That is not so in this case as it appears that 81.47% of the

common shares are already foreign owned (split between First Pacific (37%) and a
Japanese corporation).

Discussion Questions:
1. How is the term Capital defined in the Constitution and interpreted by the
Court?
The term Capital in Section 11, Article XII of the constitution refers only to
shares of stock entitled to vote in the election of directors, and thus in the
present case only to common shares, and not to the total outstanding capital
stock comprising both common and non- voting preferred shares.
2. Give the rationale of the ruling
It imposed the limitations and restrictions on fully nationalized and partially
nationalized activities is for Filipino nationals to be always in control of the
corporation undertaking said activities. And to place the control of public
utilities in the hands of the Filipinos. It also renders illusory the State Policy of
an independent national economy effectively controlled by Filipinos.
3. What do you mean by controlling interest? Is it the same with effectively
controlled?
A controlling interest is an ownership interest in a corporation with enough
voting stock shares to prevail in any stockholders' motion. A majority of
voting shares (over 50%) is always a controlling interest while effectively
controlled refers to the shares with voting rights, as well as with full beneficial
ownership.
4. What is the purpose of General Information Sheet (GIS) submitted by
corporations to SEC?
The purpose of the GIS which is submitted annually to the SEC, is for the SEC
to be put on guard, for them to be able to monitor against violations of the
nationality requirement prescribed in the Constitution and existing laws.
5. Do you agree with the ruling? Why or why not?
No. The broad definition of Capital unjustifiably disregards who owns the allimportant voting stock, which necessarily equates to control of the
corporation. According to the SC, application of this definition may give rise
to a situation where a partly nationalized entity with 100 voting shares owned
by foreigners, and 1,000 non-voting shares owned by Filipinos, would be
deemed a Philippine national but is not effectively controlled by Filipinos
since all the voting shares are held by foreigners.

Case No. 3

ALHAMBRA CIGAR & CIGARETTE MANUFACTURING COMPANY, INC. V. SEC

GR No. L-23606, July 29, 1968

Facts:
On January 15, 1912, Alhambra Cigar & Cigarette Manufacturing Company, Inc. was
incorporated. Its lifespan was for 50 years so on January 15, 1962, it expired.
Thereafter, its Board authorized its liquidation. Under the prevailing law, Alhambra
has 3 years to liquidate.
In 1963, while Alhambra was liquidating, Republic Act 3531 was enacted. It
amended Section 18 of the Corporation Law; it empowered domestic private
corporations to extend their corporate life beyond the period fixed by the articles of
incorporation for a term not to exceed fifty years in any one instance. Previous to
Republic Act 3531, the maximum non-extendible term of such corporations was fifty
years.
Alhambra now amended its articles of incorporation to extend its lifespan for
another 50 years. The Securities and Exchange Commission (SEC) denied the
amended articles of incorporation.

Issue:
Whether or not a corporation under liquidation may still amend its articles of
incorporation to extend its lifespan.

Ruling:
No. Alhambra cannot avail of the new law because it has already expired at the
time of its passage. When a corporation is liquidating pursuant to the statutory
period of three years to liquidate, it is only allowed to continue for the purpose of
final closure of its business and no other purposes. In fact, within that period, the
corporation is enjoined from continuing the business for which it was established.
Hence, Alhambras board cannot validly amend its articles of incorporation to
extend its lifespan.

Discussion Questions:
1. May a corporation extend its life by amendment of its articles of incorporation
effected during the three-year statutory period for liquidation? Explain the
reason for the ruling.

No. a corporation cannot extend its life by amending its articles of

incorporation during the three-year statutory period for liquidation. When a
corporation is liquidating pursuant to the statutory period of three years to
liquidate, it is only allowed to continue for the purpose of final closure of its
business and no other purposes. In fact, within that period, the corporation is
enjoined from continuing the business for which it was established.
2. When can a corporation extend its corporate existence? Cite the legal basis.
Sec. 11 of the Corporation Code provides that a corporation shall exist for a
period not exceeding fifty (50) years from the date of incorporation unless
sooner dissolved or unless said period is extended. The corporate term as
originally stated in the articles of incorporation may be extended for periods
not exceeding fifty (50) years in any single instance by an amendment of the
articles of incorporation, in accordance with this Code; Provided, That no
extension can be made earlier than five (5) years prior to the original or
subsequent expiry date(s) unless there are justifiable reasons for an earlier
extension as may be determined by the Securities and Exchange
Commission.
3. What do you mean by liquidation? What is its purpose?
Liquidation is the collection of all corporation assets, and the payments of all
its debts and settlement of its obligations and the ultimate distribution of the
corporates assets, if any of it remains, to all stockholders in accordance with
their proportionate stockholdings in the corporation. The purpose of such is to
finally settle or close the corporate affairs, for those pecuniary interest in the
corporate assets, including not only the stockholders but likewise the
creditors, acting for and its behalf, may make proper representations with the
SEC for working out a final settlement of the corporate concern.
4. Distinguish liquidation from dissolution.
Liquidation is the collection of all corporation assets, and the payments of all
its debts and settlement of its obligations and the ultimate distribution of the
corporates assets, if any of it remains, to all stockholders in accordance with
their proportionate stockholdings in the corporation while on the other hand
dissolution is the extinguishment of the corporate franchise and the
termination of corporate existence.

Case No. 4
TAYAG V. BENGUET CONSOLIDATED, 26 SCRA 242 [1968]
G.R. No. L-23145, November 29, 1968

Facts:

March 27, 1960: Idonah Slade Perkins died in New York City

August 12, 1960: Prospero Sanidad instituted ancillary administration

proceedings appointing ancillary administrator Lazaro A. Marquez later on
substituted by Renato D. Tayag

On January 27, 1964: CFI ordered domiciliary administrator County Trust

Company of New York to surrender to the ancillary administrator in the
Philippines 33,002 shares of stock certificates owned by her in a Philippine
corporation, Benguet Consolidated, Inc., to satisfy the legitimate claims of
local creditors

When County Trust Company of New York refused the court ordered Benguet
Consolidated, Inc. to declare the stocks lost and required it to issue new
certificates in lieu thereof

Appeal was taken by Benguet Consolidated, Inc. alleging the failure to comply
with its by-laws setting forth the procedure to be followed in case of a lost,
stolen or destroyed so it cannot issue new stock certs.

Issue:
W/N Benguet Consolidated, Inc. can ignore a court order because of its by-laws

Ruling:
NO. CFI Affirmed
Fear of contigent liability - obedience to a lawful order = valid defense
Benguet Consolidated, Inc. is a Philippine corporation owing full allegiance
and subject to the unrestricted jurisdiction of local courts
Assuming that a contrariety exists between the above by-law and the
command of a court decree, the latter is to be followed.
Corporation is an artificial being created by operation of law...."It owes its life
to the state, its birth being purely dependent on its will. Cannot ignore the
source of its very existence

Discussion Questions:
1. Discuss the genossenchaft theory. Is the theory acceptable? Explain.

This theory treats a corporation as the reality of the group as

social and legal entity, independent of State recognition and
concession. There is thus a rejection of Gierkes genossenchaft theory,
the basic theme of which to quote from Friedmann, is the reality of
the group as a social and legal entity, independent of state recognition
and concession. A corporation as known to Philippine jurisprudence is
a creature without any existence until it has received the imprimatur of
the state according to law. It is logically inconceivable therefore that it
will have rights and privileges of a higher priority than that of its
creator. More than that, it cannot legitimately refuse to yield obedience
to acts of its state organs, certainly not excluding the judiciary,
whenever called upon to do so.
As a matter of fact, a corporation once it comes into being, following
American law still persuasive authority in our jurisdiction, comes more
often within the ken of the judiciary than the other two coordinate
branches. It institutes the appropriate court action to enforce its right.
Correlatively, it is not immune from judicial control in those instances,
where a duty under the law as ascertained in an appropriate legal
proceeding is cast upon it.
To assert that it can choose which court order to follow and which to
disregard is to confer upon it not autonomy which may be conceded
but license which cannot be tolerated. It is to argue that it may, when
so minded, overrule the state, the source of its very existence; it is to
contend that what any of its governmental organs may lawfully require
could be ignored at will. So extravagant a claim cannot possibly merit
approval.
2. Discuss the theory of concession.
It is a principle in the creation of corporations, under which a
corporation is an artificial creature without any existence until it has
received the imprimatur of the State acting according to law, through
SEC. The life of the Corporation is a concession made by the State
Section 19 of Batas Pambansa Bilang 68, otherwise known as the
Corporation Code of the Philippines provides for the commencement of
corporate existence that A private corporation formed or organized
under this Code commences to have corporate existence and juridical
personality and is deemed incorporated from the date the Securities
and Exchange Corporation issues a certificate of incorporation under
its official seal.
3. Why corporation is considered an artificial being? Explain as discussed in the
case.

As discussed in the case, a corporation is an artificial being

created by operation of law. It owes its life to the state, its birth
being purely dependent on its will. As Berle so aptly stated:
Classically, a corporation n was conceived as an artificial person,
owing its existence through creation by a sovereign power. As a
matter of fact, the statutory language employed owes much to Chief
Justice Marshall, who in the Dartmouth College decision defined a
corporation precisely as an artificial being, invisible, intangible, and
existing only in contemplation of law.
The well-known authority Fletcher could summarized the matter thus:
A corporation is not in fact and in reality a person, but the law treats it
as though it were a person by process of fiction, or by regarding it as
an artificial person distinct and separate from its individual
stockholders. It owes its existence to law. It is an artificial person
created by law for certain specific purposes, the extent of whose
existence, powers and liberties is fixed by its charter. Dean Pounds
terse summary, a juristic person, resulting from an association of
human beings granted legal personality by the state, puts the matter
neatly.

4. If there is conflict between the corporations by-laws and a judicial order,

which should prevail? Explain.
In cases of conflict between the corporations by-laws and a judicial order, as
stated in this case, court order is to be followed. As provided in the case,
appellant Benguet Consolidated, Inc. would seek to bolster the above
contention by its invoking one of the provisions of its by-laws which would set
the forth the procedure to be followed in case of a lost, stolen or destroyed
stock certificate; it would stress that in the event of a contest or the
pendency of an action regarding ownership of such certificate or certificates
of stock allegedly lost, stolen or destroyed, the issuance of a new certificate
or certificates would await the final decision by a court regarding the
ownership thereof.
Such reliance is misplaced. In the first place, there is no such occasion to
apply such by-law. It is admitted that the foreign domiciliary administrator did
not appeal from the order now in question. Moreover, there is likewise the
express admission of appellant that as far as it is concerned, it is
immaterial who is entitled to the possession of the stock certificates
Even if such were not the case, it would be a legal absurdity, to impart to
such a provision conclusiveness and finality. Assuming that a contrariety
exists between the above by-law and the command of a court decree, the
latter is to be followed.
It is understandable, as Cardazo pointed out, that the Constitution overrides a
statute, to which, however, the judiciary must yield deference, when

appropriately invoked and deemed applicable. It would be most highly

unorthodox, however, if a corporate by-law would be accorded such a high
estate in the jural order that a court must not only take note of it but yield to
its alleged controlling force.
The fear of appellant of a contingent liability with which it could be saddled
unless the appealed order be set aside for its inconsistency with one of its bylaws does not impress us. Its obedience to a lawful court order certainly
constitutes a valid defense, assuming that such apprehension of a possible
court action against it could possibly materialize. Thus far, nothing in the
circumstances as they have developed gives substances to such a fear.
Gossamer possibilities of a future prejudice to appellant do not suffice to
nullify the lawful exercise of judicial authority.

Case No. 5
CHING V. SECRETARY OF JUSTICE, 481 SCRA 602 (2006)
GR No. 164317, February 6, 2006

Facts:
Ching 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. 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 banks property. When the trust receipts matured, petitioner failed to
return the goods to respondent bank, or to return their value amounting
to P6,940,280.66 despite demands. Thus, the bank filed a criminal complaint for
estafa6 against petitioner in the Office of the City Prosecutor of Manila.

Issue:
Whether or not Ching is liable for Estafa

Ruling:

In the case at bar, the transaction between petitioner and respondent bank
falls under the trust receipt transactions envisaged in P.D. No. 115. Respondent
bank imported the goods and entrusted the same to PBMI under the trust receipts
signed by petitioner, as entrustee, with the bank as entruster. The failure of person
to turn over the proceeds of the sale of the goods covered by the trust receipt to the
entruster or to return said goods, if not sold, is a public nuisance to be abated by
the imposition of penal sanctions.It must be stressed that P.D. No. 115 is a
declaration by legislative authority that, as a matter of public policy, the failure of
person to turn over the proceeds of the sale of the goods covered by a trust receipt
or to return said goods, if not sold, is a public nuisance to be abated by the
imposition of penal sanctions.
Failure of the entrustee to turn over the proceeds of the sale of the goods
covered by the trust receipts to the entruster or to return said goods if they were
not disposed of in accordance with the terms of the trust receipt is a crime under
P.D. No. 115, without need of proving intent to defraud.In Colinares v. Court of
Appeals, the Court declared that there are two possible situations in a trust receipt
transaction. The first is covered by the provision which refers to money received
under the obligation involving the duty to deliver it (entregarla) to the owner of the
merchandise sold. The second is covered by the provision which refers to
merchandise received under the obligation to return it (devolvera) to the owner.
Thus, failure of the entrustee to turn over the proceeds of the sale of the goods covered by the trust receipts to the entruster or to return said goods if they were not
disposed of in accordance with the terms of the trust receipt is a crime under P.D.
No. 115, without need of proving intent to defraud. The law punishes dishonesty
and abuse of confidence in the handling of money or goods to the prejudice of the
entruster, regardless of whether the latter is the owner or not. A mere failure to
deliver the proceeds of the sale of the goods, if not sold, constitutes a criminal
offense that causes prejudice, not only to another, but more to the public interest.
P.D. No. 115 is malum prohibitum but is classified as estafa under paragraph
1(b), Article 315 of the Revised Penal Code, or estafa with abuse of confidence.
The crime defined in P.D. No. 115 is malum prohibitum but is classified as estafa
under paragraph 1(b), Article 315 of the Revised Penal Code, or estafa with abuse of
confidence. It may be committed by a corporation or other juridical entity or by
natural persons. However, the penalty for the crime is imprisonment for the periods
provided in said Article 315.

Discussion Questions:

1. Can a corporation commit a crime? Distinguish the liability of the

corporation from the liability of its BOD or corporate officers. Cite legal
basis. Explain.

The general rule is that unless the law specifically provides, a corporate
officers or agent that is not civilly or criminally liable for acts done by his
as much officer or agent. Personal liability of a corporate director, trustee
or officer along with the corporation may validly attach, only when:
(1) He assents (a) to a patently unlawful act of the corporation, or (b) for
bad faith, gross negligence in directing its affairs, or (c) for conflict of
interest, resulting in damages to the corporation, its stockholders or
other person;
(2) He consents to the issuance of watered stocks or who, having
knowledge thereof, does not forthwith file 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 specific provision of law, to personally answer for his
corporate action.
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.
2. May a corporation be held liable for a crime? Explain
A corporation may be charged and prosecuted for a crime if the
imposable penalty is fine, however, a corporation cannot be arrested
and imprisoned; hence, cannot be penalized for a crime punishable by
imprisonment. Even if the statute prescribes both fine and
imprisonment as penalty, a corporation may be prosecuted and, if
found guilty, may be fined.
3. Cite examples of a crime where a corporation may be held liable.
Where a check is drawn by a corporation, company or entity, the
person or persons who actually signed the check in behalf of such
drawer shall be liable under this act. (Section 1, BP 22)
In labour cases, corporate directors and officers are solidarily liable
with the corporation for the termination of employment of corporate
employees done with malice or in bad faith. (Ulchico vs. NLRC)

4. Who is liable for crimes committed by corporation? Explain

A corporation has a separate legal personality and, as such, it is
entitled to rights, and subject to obligations, very much like a natural
person. Considering that a corporation has a legal personality distinct
and separate from its incorporators or members, any liability of the
corporation is limited to its properties and does not spill over to its
incorporators, directors, stockholders, officers or members. Also, it may
happen that the incorporator already sold all his/her stocks to another
person. While he would still remain on official record as an

incorporator, he will no longer be liable for subsequent acts of the

corporation (if piercing the corporate veil is proper).
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.

Case No. 6
FILIPINAS BROADCASTING NETWORK V. AGO MEDICAL AND EDUCATIONAL CENTER,
448 SCRA 413 (2005)
GR No. 141994, January 17, 2005

Facts:
Rima & Alegre were host of FBNI radio program Expose. Respondent Ago
was the owner of the Medical & Educational center, subject of the radio program
Expose. AMEC claimed that the broadcasts were defamatory and owner Ago and
school AMEC claimed for damages. The complaint further alleged that AMEC is a
reputable learning institution. With the supposed expose, FBNI, Rima and Alegre
transmitted malicious imputations and as such, destroyed plaintiffs reputation.
FBNI was included as defendant for allegedly failing to exercise due diligence in the
selection and supervision of its employees. The trial court found Rimas statements
to be within the bounds of freedom of speech and ruled that the broadcast was
libelous. It ordered the defendants Alegre and FBNI to pay AMEC 300k for moral
damages.

Issue:
Whether or not AMEC is entitled to moral damages
Ruling:
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. Nevertheless,
AMECs claim, or moral damages fall under item 7 of Art 2219 of the NCC.
This provision expressly authorizes the recovery of moral damages in cases of
libel, slander or any other form of defamation. Art 2219 (7) does not qualify whether
the plaintiff is a natural or juridical 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

implied 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. In
this case, the broadcasts are libelous per se. thus, AMEC is entitled to moral
damages. However, we find the award P500,000 moral damages unreasonable. The
record shows that even though the broadcasts were libelous, per se, AMEC has not
suffered any substantial or material damage to its reputation. Therefore, we reduce
the award of moral damages to P150k.
JOIN TORT FEASORS are all the persons who command, instigate, promote,
encourage, advice countenance, cooperate in, aid or abet the commission of a tort,
as who approve of it after it is done, for its benefit.

Discussion Questions:

1. Is a corporation entitled to moral damages? Give the rationale of the rule.

As a rule corporation as 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.
2. Is there exception to the above rule? Discuss and cite legal bases.
Under the law on Torts and Damages, the only exception to the above rule is
where the corporation has a good reputation that is debased, resulting in its
social humiliation.

Case No. 7
DANTE V. LIBAN ET. AL. VS. RICHARD J. GORDON
GR No. 175352 dated January 18, 2011

Facts:
Petitioners Liban, et al., who were officers of the Board of Directors of the Quezon
City Red Cross Chapter, filed with the Supreme Court what they styled as Petition
to Declare Richard J. Gordon as Having Forfeited His Seat in the Senate against
respondent Gordon, who was elected Chairman of the Philippine National Red Cross
(PNRC) Board of Governors during his incumbency as Senator.

Petitioners alleged that by accepting the chairmanship of the PNRC Board of

Governors, respondent Gordon ceased to be a member of the Senate pursuant to
Sec. 13, Article VI of the Constitution, which provides that [n]o Senator . . . may
hold any other office or employment in the Government, or any subdivision, agency,
or instrumentality thereof, including government-owned or controlled corporations
or their subsidiaries, during his term without forfeiting his seat. Petitioners cited
the case of Camporedondo vs. NLRC, G.R. No. 129049, decided August 6,
1999, which held that the PNRC is a GOCC, in supporting their argument that
respondent Gordon automatically forfeited his seat in the Senate when he accepted
and held the position of Chairman of the PNRC Board of Governors.
Formerly, in its Decision dated July 15, 2009, the Court, voting 7-5,[1] held
thatthe office of the PNRC Chairman is NOT a government office or an office in a
GOCC for purposes of the prohibition in Sec. 13, Article VI of the 1987 Constitution.
The PNRC Chairman is elected by the PNRC Board of Governors; he is not appointed
by the President or by any subordinate government official. Moreover, the PNRC is
NOT a GOCC because it is a privately-owned, privately-funded, and privately-run
charitable organization and because it is controlled by a Board of Governors fourfifths of which are private sector individuals. Therefore, respondent Gordon did not
forfeit his legislative seat when he was elected as PNRC Chairman during his
incumbency as Senator.

The Court however held further that the PNRC Charter, R.A. 95, as amended
by PD 1264 and 1643, is void insofar as it creates the PNRC as a private corporation
since Section 7, Article XIV of the 1935 Constitution states that [t]he Congress
shall not, except by general law, provide for the formation, organization, or
regulation of private corporations, unless such corporations are owned or controlled
by the Government or any subdivision or instrumentality thereof. The Court thus
directed the PNRC to incorporate under the Corporation Code and register with the
Securities and Exchange Commission if it wants to be a private
corporation. The fallo of the Decision read:

WHEREFORE, we declare that the office of the Chairman of the Philippine National
Red Cross is not a government office or an office in a government-owned or
controlled corporation for purposes of the prohibition in Section 13, Article VI of the
1987 Constitution. We also declare that Sections 1, 2, 3, 4(a), 5, 6, 7, 8, 9, 10, 11,
12, and 13 of the Charter of the Philippine National Red Cross, or Republic Act No.
95, as amended by Presidential Decree Nos. 1264 and 1643, are VOID because they
create the PNRC as a private corporation or grant it corporate powers.
Respondent
Gordon
filed
a Motion
for
Clarification
and/or
for
Reconsideration of the Decision. The PNRC likewise moved to intervene and filed its
own Motion for Partial Reconsideration. They basically questioned the second part of
the Decision with regard to the pronouncement on the nature of the PNRC and
the constitutionality of some provisions of the PNRC Charter.

Issue:
Was it correct for the Court to have passed upon and decided on the issue of the
constitutionality of the PNRC charter? Corollarily: What is the nature of the PNRC?

Ruling:
NO, it was not correct for the Court to have decided on the constitutional
issue because it was not the very lis mota of the case. The PNRC is sui generis in
nature; it is neither strictly a GOCC nor a private corporation.

The issue of constitutionality of R.A. No. 95 was not raised by the parties, and
was not among the issues defined in the body of the Decision; thus, it was not the
very lis mota of the case. We have reiterated the rule as to when the Court will
consider the issue of constitutionality in Alvarez v. PICOP Resources, Inc., thus:

This Court will not touch the issue of unconstitutionality unless it is the
very lis mota. It is a well-established rule that a court should not pass upon a
constitutional question and decide a law to be unconstitutional or invalid, unless
such question is raised by the parties and that when it is raised, if the record also
presents some other ground upon which the court may [rest] its judgment, that
course will be adopted and the constitutional question will be left for consideration
until such question will be unavoidable.

This Court should not have declared void certain sections of . . . the PNRC
Charter. Instead, the Court should have exercised judicial restraint on this matter,
especially since there was some other ground upon which the Court could have
based its judgment. Furthermore, the PNRC, the entity most adversely affected by
this declaration of unconstitutionality, which was not even originally a party to this
case, was being compelled, as a consequence of the Decision, to suddenly
reorganize and incorporate under the Corporation Code, after more than sixty (60)
years of existence in this country.

Since its enactment, the PNRC Charter was amended several times,
particularly on June 11, 1953, August 16, 1971, December 15, 1977, and October 1,
1979, by virtue of R.A. No. 855, R.A. No. 6373, P.D. No. 1264, and P.D. No. 1643,
respectively. The passage of several laws relating to the PNRCs corporate
existence notwithstanding the effectivity of the constitutional proscription on the
creation of private corporations by law is a recognition that the PNRC is not strictly

in the nature of a private corporation contemplated by the aforesaid constitutional

ban.

A closer look at the nature of the PNRC would show that there is none like it,
not just in terms of structure, but also in terms of history, public service and official
status accorded to it by the State and the international community. There is merit
in PNRCs contention that its structure is sui generis. It is in recognition of this sui
generis character of the PNRC that R.A. No. 95 has remained valid and effective
from the time of its enactment in March 22, 1947 under the 1935 Constitution and
during the effectivity of the 1973 Constitution and the 1987 Constitution. The PNRC
Charter and its amendatory laws have not been questioned or challenged on
constitutional grounds, not even in this case before the Court now.

This Court must recognize the countrys adherence to the Geneva Convention
and respect the unique status of the PNRC in consonance with its treaty
obligations. The Geneva Convention has the force and effect of law. Under the
Constitution, the Philippines adopts the generally accepted principles of
international law as part of the law of the land. This constitutional provision must be
reconciled and harmonized with Article XII, Section 16 of the Constitution, instead of
using the latter to negate the former. By requiring the PNRC to organize under the
Corporation Code just like any other private corporation, the Decision of July 15,
2009 lost sight of the PNRCs special status under international humanitarian law
and as an auxiliary of the State, designated to assist it in discharging its obligations
under the Geneva Conventions.

Although the PNRC is neither a subdivision, agency, or instrumentality of the

government, nor a GOCC or a subsidiary thereof . . . so much so that respondent,
under the Decision, was correctly allowed to hold his position as Chairman thereof
concurrently while he served as a Senator, such a conclusion does not ipso
facto imply that the PNRC is a private corporation within the contemplation of the
provision of the Constitution, that must be organized under the Corporation
Code. [T]he sui generis character of PNRC requires us to approach controversies
involving the PNRC on a case-to-case basis.

Discussion Questions:

1. Is Philippine National Red Cross (PNRC) a private corporation? Discuss and

cite legal basis. (Please see also GR No. 175352 dated July 15, 2009)
The PNRC is sui generis in nature; it is neither strictly a GOCC nor a private
corporation. The PNRC, as a National Society of the International Red Cross

and Red Crescent Movement, can neither be classified as an instrumentality

of the State, so as not to lose its character of neutrality as well as its
independence, nor strictly as a private corporation since it is regulated by
international humanitarian law and is treated as an auxiliary of the State.

2. Can Congress create private corporations? Explain. Cite legal bases and
rationale of the rule.
In section 7, Article XIV of the 1935 Constitution states that the Congress
shall not, except by general law, provide for the formation, organization, or
regulation of private corporations, unless such corporations are owned or
controlled by the Government or any subdivision or instrumentality thereof.
However, Section 16, Article XII of the constitution mandates that Congress
shall not, except by general law, provide for the creation of private
corporations. Thus, the constitution prohibits one special law to create one
private corporation, requiring instead a general law to create private
corporations.
The rationale behind the prohibition is that Congress primary functions is to
enact law, and one of the special law that enacted by the Congress is the
formation of the Securities and Exchange Commission (SEC). The Congress
gave the power to SEC to create private corporations by approving its
application. Hence, it is not the jurisdiction of the Congress to create Private
Corporation but I is with SEC, creation is void.
3. Discuss the corporate status of PNRC?
PNRC is sui generis. It is unlike the private corporations that the Constitution
wants to prevent Congress from creating. First, the PNRC is not organized for
profit. It is an organization dedicated to assist victims of war and administer
relief to those who have been devastated by calamities, among others. It is
entirely devoted to public service. It is not covered by the prohibition since
the Constitution aims to eliminate abuse by the Congress, which tend to favor
personal gain. Secondly, the PNRC was created in order to participate in the
mitigation of the effects or of war, as embodied in the Geneva Convention.
The creation of the PNRC is compliance with international treaty obligations.
Lastly, the PNRC is a National Society, an auxiliary of the government. It is
not like government instrumentalities and GOCC. The PNRC is regulated
directly by international humanitarian law, as opposed to local law regulating
the other mentioned entities.

END