1. Lopez Realty, Inc. v. Sps. Reynaldo Tanjangco G.R. No.

154291, 12 November 2014

By virtue of ratification, the acts of the board of directors become the acts of the stockholders
themselves, even if those acts were, at the outset, unauthorized.

Lopez Realty, Inc. (LRI) and Asuncion Lopez-Gonzalez initiated a Complaint for annulment of
sale, cancellation of title, reconveyance and damages with prayer for the issuance of temporary
restraining order (TRO) and/or writ of preliminary injunction against the spouses Tanjangco,
Arturo and the Registrar of Deeds of Manila.

Previously, LRI and Dr. Jose Tanjangco (Jose) were the registered co-owners of three parcels of
land and the building erected thereon known as the Trade Center Building Joses one-half
share in the subject properties were later transferred and registered in the name of his son
Reynaldo Tanjangco and daughter-in-law, Maria Luisa Arguelles (spouses Tanjangco).

These were the stockholders of record of LRI at the time material to this case:

1. Asuncion Lopez-Gonzalez (Asuncion, Director & Corporate Secretary) 7,831 shares;

2. Arturo F. Lopez (Arturo) 7,830 shares;

3. Teresita Lopez-Marquez (Teresita) 7,830 shares;

4. Rosendo de Leon (Rosendo, Director) 5 shares

5. Benjamin Bernardino (Benjamin, Director) 1 share;

6. Augusto de Leon (Augusto, Director) 1 share; and

7. Leo Rivera (Leo, Director) 1 share

During a special stockholders meeting held on 27 July 1981, the sale of 1/2 share of LRI in the
Trade Center Building was taken up. While the selling price was at P4 M, the Tanjancos offered
P3.8 M. To this, Asuncion countered with P5 M which was not accepted by the Tanjancos. Thus,
the board agreed to give Asuncion the priority to equal the Tanjanco offer and the same to be
exercised within ten (10) days. Otherwise, the Tanjanco offer will be deemed accepted. Just a day
after, Teresita died (her estates executor Juanito L. Santos represented her afterwards).

As Asuncion failed to exercise her option to purchase the subject properties, and while she was
abroad, the remaining directors: Rosendo, Benjamin and Leo convened in a special meeting
passing and approving the 17 August 1981 Resolution authorizing Arturo to negotiate and carry
out the complete termination of the sale terms and conditions as embodied in the Resolution of
July 27, 1981, among others. Subsequently, the sale was perfected with payments subsequently
made.

After learning of the sale, Asuncion filed this complaint challenging the validity of the 17 August
1982 Resolution on the ground that she was not notified of the meeting.

HELD: The sale was valid. The 17 August 1981 Board Resolution did not give Arturo the
authority to act as LRIs representative in the sale as the meeting of the board of directors where
such was passed was conducted without giving any notice to Asuncion. This is in violation of
Section 53 of the Corporation Code which requires sending of notices for regular or special
meetings to every director.

As a result, a meeting of the board of directors is legally infirm if there is failure to comply with
the requirements or formalities of the law or the corporations by laws and any action taken on
such meeting may be challenged as a consequence.

Notwithstanding, the actions taken in such a meeting by the directors or trustees may be ratified
expressly or impliedly. In the case of ratification, it means that the principal voluntarily adopts,
confirms and gives sanction to some unauthorized act of its agent on its behalf.

Here, the ratification was expressed through the July 30, 1982 Board Resolution. Regarding
Asuncions claims that the 30 July 1982 Board Resolution did not ratify the 17 August 1981
Resolution due to Juanitos disqualification and Leos negative vote. Asuncion assails the
authority of Juanito to vote because he was not a director and he did not own any share of stock
which would qualify him to be one. On the contrary, Juanito defends his right to vote as the
representative of Teresitas estate. Upon examination of the July 30, 1982 minutes of the
meeting, it can be deduced that the meeting is a joint stockholders and directors meeting. The
Court takes into account that majority of the board of directors except for Asuncion, had already
approved of the sale to the spouses Tanjangco prior to this meeting. As a consequence, the power
to ratify the previous resolutions and actions of the board of directors in this case lies in the
stockholders, not in the board of directors. It would be absurd to require the board of directors to
ratify their own actsacts which the same director s already approved of beforehand. Hence,
Juanito, as the administrator of Teresitas estate even though not a director, is entitled to vote on
behalf of Teresitas estate as the administrator thereof.

Citing jurisprudence, in stock corporations, shareholders may generally transfer their shares.
Thus, on the death of a shareholder, the executor or administrator duly appointed by the Court is
vested with the legal title to the stock and entitled to vote it. Until a settlement and division of the
estate is effected, the stocks of the decedent are held by the administrator or executor.

As there exists no corporate secretarys certification of the minutes of the meeting, only Juanito,
Benjamin and Roseno, whose signature appeared on the minutes, could be considered as to have
ratified the sale to the spouses Tanjangco. As Leo owns only 1 share, the results are the same
against the overwhelming shares who voted in favor of ratification.

In sum, whatever defect there was on the sale to the spouses Tanjangco pursuant to the August
17, 1981 Board Resolution, the same was cured through its ratification in the July 30, 1982
Board Resolution. It is of no moment whether Arturo was authorized to merely negotiate or to
enter into a contract of sale on behalf of LRI as all his actions in connection to the sale were
expressly ratified by the stockholders holding 67% of the outstanding capital stock.

Citing jurisprudence, the Court held that by virtue of ratification, the acts of the board of
directors become the acts of the stockholders themselves, even if those acts were, at the outset,
unauthorized.

2. Valle Verde Country Club, Inc. v. Africa, G.R. No.151969, September 4, 2009.

FACTS:

On February 27, 1996, during the Annual Stockholders Meeting of petitioner Valle Verde
Country Club, Inc. (VVCC), the VVCC Board of Directors were elected including Eduardo
Makalintal (Makalintal) among others. In the years 1997, 1998, 1999, 2000, and 2001, however,
the requisite quorum for the holding of the stockholders meeting could not be obtained.
Consequently, the directors continued to serve in the VVCC Board in a hold-over capacity. Later,
Makalintal resigned as member of the VVCC Board. He was replaced by Jose Ramirez
(Ramirez), who was elected by the remaining members of the VVCC Board on March 6, 2001.
Respondent Africa (Africa), a member of VVCC, questioned the election of Ramirez as members
of the VVCC Board with the Regional Trial Court (RTC), respectively. Africa claimed that a
year after Makalintals election as member of the VVCC Board in 1996, his [Makalintals] term
as well as those of the other members of the VVCC Board should be considered to have
already expired. Thus, according to Africa, 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 the VVCC Board, as was done in this case. The RTC sustained Africas complaint.

ISSUE:

Whether the remaining directors of the corporations Board, still constituting a quorum, can elect
another director to fill in a vacancy caused by the resignation of a hold-over director.

RULING:

NO.
When Section 23 of the Corporation Code declares that the board of directorsshall hold office
for one (1) year until their successors are elected and qualified, we construe 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 members election to the Board and until his successors election and
qualification is not part of the directors 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.

[Here], when remaining members of the VVCC Board elected Ramirez to replace Makalintal,
there was no more unexpired term to speak of, as Makalintals one-year term had already
expired. Pursuant to law, the authority to fill in the vacancy caused by Makalintals leaving lies
with the VVCCs stockholders, not the remaining members of its board of directors. To assume
as VVCC does that the vacancy is caused by Makalintals 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
Makalintals term had been created long before his resignation.

4. COLLECTOR OF INTERNAL REVENUE vs

. CLUB FILIPINO, INC. DE CEBUG.R. No. L-12719 May 31, 1962

FACTS:

Club Filipino, Inc. de Cebu is a civic corporation with an original authorized capital stock
ofP22,000.00, which was subsequently increased to P200,000.00, among others, to it provide
,operate, and maintain x x x all sorts of games not prohibited under general laws and general
ordinances; and develop and cultivate sports of every kind and any denomination for recreation
and healthy training of its members and shareholders. The Club owns and operates a club house,
a bowling alley, a golf course, and a bar-restaurant for its members and their guests, which was a
necessary incident to the operation of the club. The club is operated mainly with funds derived
from membership fees and dues. As a result of a capital surplus, arising from the increased value
due to the revaluation of its real properties, the Club declared stock dividends; but no actual cash
dividends were distributed to the stockholders. A BIR agent discovered that the Club has never
paid percentage tax on the gross receipts of its bar and restaurant. The Collector of Internal
Revenue assessed against and demanded from the Club the unpaid percentage tax on the gross
receipts plus surcharges. The Club requested for the cancellation of the assessment. The request
having been denied, the Club led the instant petition for review.

ISSUE:

Whether or not Club Filipino is a stock corporation.

HELD:

NO. It is a non-stock corporation

5. Donnina Halley vs. Printwell, Inc.

Facts:

BMPI (Business Media Philippines Inc.) is a corporation under the control of itsstockholders,
including Donnina Halley. In the course of its business, BMPI commissioned PRINTWELL to
print Philippines, Inc. (a magazine published and distributed by BMPI) PRINTWELL extended
30-day credit accommodation in favor of BMPI and in aperiod of 9 mos. BMPI placed several
orders amounting to 316,000. However, only 25,000 was paid hence a balance of 291,000
PRINTWELL sued BMPI for collection of the unpaid balance and later on impleaded BMPIs
original stockholders and incorporators to recover on theirunpaid subscriptions. It appears that
BMPI has an authorized capital stock of 3M divided into 300,000shares with P10 par value Only
75,000 shares worth P750,000 were originally subscribed of whichP187,500 were paid up
capital. Halley subscribed to 35,000 shares worth P350,000 but only paid P87,500.

Halley contends that:

1. They all had already paid their subscriptions in full

2. BMPI had a separate and distinct personality

3. BOD and SH had resolved to dissolve BMPIRTC and CA

Defendant merely used the corporate fiction as a cloak/cover to create an injustice (against
PRINTWELL) Rejected allegations of full payment in view of irregularity in the issuance of
ORs (Payment made on a later date was covered by an OR with a lower serial number than
payment made on an earlier date.

Issue: WON a stockholder who was in active management of the business of the corporation and
still has unpaid subscriptions should be made liable for the debts of the corporation by piercing
the veil of corporate fiction

Held: YES! Such stockholder should be made liable up to the extent of her unpaid subscription
Ratio: It was found that at the time the obligation was incurred, BMPI was under the control of
its stockholders who know fully well that the corporation was not in a position to pay its account
(thinly capitalized).

And, that the stockholders personally benefited from the operations of thecorporation even
though they never paid their subscriptions in full. The stockholders cannot now claim the
doctrine of corporate fiction otherwise (to deny creditors to collect from SH) it would create an
injustice because creditors would be at a loss (limbo) against whom it would assert the right to
collect.

On piercing the veil:

Although the corporation has a personality separate and distinct from its SH, such personality is
merely a legal fiction (for the convenience and to promote the ends of justice) which may be
disregarded by the courts if it is used as a cloak or cover for fraud, justification of a wrong, or an
alter ego for the sole benefit of the SH.

As to the Trust Fund Doctrine:

The RTC and CA correctly applied the Trust Fund Doctrine

Under which corporate debtors might look to the unpaid subscriptions for the satisfaction of
unpaid corporate debts. Subscriptions to the capital of a corporation constitutes a trust fund for
the payment of the creditors (by mere analogy) In reality, corporation is a simple debtor.

Moreover, the corporation has no legal capacity to release an original subscriber to its capital
stock from the obligation of paying for his shares, in whole or in part, without valuable
consideration, or fraudulently, to the prejudice of the creditors. The creditor is allowed to
maintain an action upon any unpaid subscriptions and thereby steps into the shoes of the
corporation for the satisfaction of its debt. The trust fund doctrine is not limited to reaching the
SHs unpaid subscriptions. The scope of the doctrine when the corporation is insolvent
encompasses not only the capital stock but also other property and assets generally regarded in
equity as a trust fund for the payment of corporate

6. Ong Yong V. Tiu G.R. No. 144476 April 8, 2003

FACTS:

1994: construction of the Masagana Citimall in Pasay City was threatened with stoppage, when
its owner, the First Landlink Asia Development Corporation (FLADC), owned by the Tius,
became heavily indebted to the Philippine National Bank (PNB) for P190M
To save the 2 lots where the mall was being built from foreclosure, the Tius invited Ong Yong,
Juanita Tan Ong, Wilson T. Ong, Anna L. Ong, William T. Ong and Julia Ong Alonzo (the Ongs),
to invest in FLADC.

Pre-Subscription Agreement: Ongs and the Tius agreed to maintain equal shareholdings in
FLADC

Ongs: subscribe to 1,000,000 shares

Tius: subscribe to an additional 549,800 shares in addition to their already existing subscription
of 450,200 shares

Tius: nominate the Vice-President and the Treasurer plus 5 directors

Ongs nominate the President, the Secretary and 6 directors (including the chairman) to the board
of directors of FLADC and right to manage and operate the mall.

Tius: contribute to FLADC a 4-storey building P20M (for 200K shares)and 2 parcels of land
P30M (for 300K shares) and P49.8M (for 49,800 shares)

Ongs: paid P190M to settle the mortgage indebtedness of FLADC to PNB (P100M in cash for
their subscription to 1M shares)

February 23, 1996: Tius rescinded the Pre-Subscription Agreement

February 27, 1996: Tius filed at the Securities and Exchange Commission (SEC) seeking
confirmation of their rescission of the Pre-Subscription Agreement

SEC: confirmed recission of Tius

Ongs filed reconsideration that their P70M was not a premium on capital stock but an advance
loan

SEC en banc: affirmed it was a premium on capital stock

CA: Ongs and the Tius were in pari delicto (which would not have legally entitled them to
rescission) but, "for practical considerations," that is, their inability to work together, it was best
to separate the two groups by rescinding the Pre-Subscription Agreement, returning the original
investment of the Ongs and awarding practically everything else to the Tius.
ISSUE: W/N Specific performance and NOT recission is the remedy

HELD: YES. Ongs granted.

did not justify the rescission of the contract providing appropriate offices for David S. Tiu and
Cely Y. Tiu as Vice-President and Treasurer, respectively, had no bearing on their obligations
under the Pre-Subscription Agreement since the obligation pertained to FLADC itself failure of
the Ongs to credit shares of stock in favor of the Tius for their property contributions also
pertained to the corporation and not to the Ongs the principal objective of both parties in entering
into the Pre-Subscription Agreement in 1994 was to raise the P190 million law requires that the
breach of contract should be so "substantial or fundamental" as to defeat the primary objective of
the parties in making the agreement since the cash and other contributions now sought to be
returned already belong to FLADC, an innocent third party, said remedy may no longer be
availed of under the law.

Any contract for the acquisition of unissued stock in an existing corporation or a corporation still
to be formed shall be deemed a subscription within the meaning of this Title, notwithstanding the
fact that the parties refer to it as a purchase or some other contract

allows the distribution of corporate capital only in three instances: (1) amendment of the Articles
of Incorporation to reduce the authorized capital stock,24 (2) purchase of redeemable shares by
the corporation, regardless of the existence of unrestricted retained earnings,25 and (3)
dissolution and eventual liquidation of the corporation.

They want this Court to make a corporate decision for FLADC.

The Ongs' shortcomings were far from serious and certainly less than substantial; they were in
fact remediable and correctable under the law. It would be totally against all rules of justice,
fairness and equity to deprive the Ongs of their interests on petty and tenuous grounds.

7. CASTILLO vs. BALINGHASAY G.R. No. 150976 October 18, 2004

FACTS:

Petitioners and the respondents are stockholders of MCPI, with the former holding Class "B"
shares and the latter owning Class "A" shares. MCPI is a domestic corporation. It was organized
sometime in September 1977. At the time of its incorporation, Act no. 1459, the old Corporation
Law was still in force and effect. On September 9, 1992 Article VII was again amended. It states
that concept when otherwise provided by law, only holders of Class "A" shares have the right to
vote and the right to be elected as directors or as corporate officers. The SEC approved the
foregoing amendment on September 22, 1992. On February 9, 2009 the shareholders of MCPI
held their annual stockholders meeting and election for directors. During the course of the
proceedings, respondent Rustico Jimenez, citing Article VII, as amended, and notwithstanding
MCPI5s history, declared over the objections of herein petitioners, that no Class "B" shareholder
was qualified to run or be voted upon as a director. In the past, MCPI had seen holders of Class
"B" shares voted for and serve as members of the corporate board and some Class "B" share
owners were in fact nominated for election as board members. Nonetheless, Jimenez went on to
announce that the candidates holding Class "A" shares were the winners of all seats in the
corporate board. The petitioners protested, claiming that Article VII was null and void for
depriving them, as Class "B" shareholders, of their right to vote and to be voted upon, in
violation of the Corporation Code Batas Pambansa Blg. 68, as amended. on March 22, 2001,
after their protest was given short shrift, herein petitioners filed a Complaint for Injunction,
Accounting and damages before the RTC of Paranaque City, Branch 258. In finding for the
respondents, the trial court ruled that corporations had the power to classify their shares of
stocks, such as voting and non-voting" shares, conformably with Section 6 of the Corporation
Code of the Philippines. It pointed out that Article VII of both the original and amended Articles
of Incorporation clearly provided that only Class "A" shareholders could vote and be voted for to
the exclusion of Class "B" shareholders, the exception being in instances provided by law, such
as those enumerated in Section 6, paragraph 6 of the Corporation Code. The RC found merit in
the respondents theory that the Articles of Incorporation, which defines the rights and limitations
of all its shareholders, is a contract between MCPI and its shareholders. It is thus the law
between the parties and should be strictly enforced as to them. Hence this petition.

ISSUE:

Whether or not holders of Class "B" shares of the MCPI may be deprived of the right to vote and
be voted for as directors in MCPI.

RULING:

The law referred to in the amendment to Article VII refers to the Corporation Code and no other
law. At the time of the incorporation of MCPI in 1977, the right of a corporation to classify its
shares of stock was sanctioned by Section 5 of Act no. 1459. The law repealing Act no. 1459 B.P.
Blg. 68, retained the same grant of right of classification of stock shares to corporations, but with
a significant change. Under Section 6 of B.P. Blg. 68, the requirements and restrictions on voting
rights were explicitly provided for, such that "no share mav be deprived of voting rights except
those classified and issued as "preferred" or "redeemable" shares, unless otherwise provided in
this Code and that there shall always be a class or series of shares which have complete voting
rights." Section 6 of the Corporation Code being deemed written into Article VII of the Articles
of Incorporation of MCPI, it necessarily follows that unless Class "B" shares of MCPI stocks are
clearly categorized to be "preferred" or "redeemable" shares, the holders of said Class "B" shares
may not be deprived of their voting rights. Note that there is nothing in the Articles of
Incorporation nor an iota of evidence on record to show that Class "B" shares were categorized
as either "preferred" or "redeemable" shares. The only possible conclusion is that Class "B"
shares fall under neither category and thus, under the law, are allowed to exercise voting rights.
There is no merit in respondents position that Section 6 of the Corporation Code cannot apply to
MCPI without running afoul of the non-impairment clause of the Bill of Rights. Section 148 of
the Corporation Code expressly provides that it shall apply to corporations in existence at the
time of the effectivity of the Code.

8. WILSON P. GAMBOA vs. FINANCE SECRETARY TEVES G.R. No. 176579,

June 28, 2011

FACTS:

This is a petition to nullify the sale of shares of stock of Philippine Telecommunications

Investment Corporation (PTIC) by the government of the Republic of the Philippines, acting
through the Inter-Agency Privatization Council (IPC), to Metro Pacific Assets Holdings, Inc.
(MPAH), an affiliate of First Pacific Company Limited (First Pacific), a Hong Kong-based
investment management and holding company and a shareholder of the Philippine Long Distance
Telephone Company (PLDT).

The petitioner questioned the sale on the ground that it also involved an indirect sale of 12
million shares (or about 6.3 percent of the outstanding common shares) of PLDT owned by PTIC
to First Pacific. With the this sale, First Pacifics common shareholdings in PLDT increased from
30.7 percent to 37 percent, thereby increasing the total common shareholdings of foreigners in
PLDT to about 81.47%. This, according to the petitioner, violates Section 11, Article XII of the
1987 Philippine Constitution which limits foreign ownership of the capital of a public utility to
not more than 40%.

ISSUE:

Does the term capital in Section 11, Article XII of the Constitution refer to the total common
shares only, or to the total outstanding capital stock (combined total of common and non-voting
preferred shares) of PLDT, a public utility?

RULING:

[The Court partly granted the petition and held that 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 of a
public utility, or in the instant case, to the total common shares of PLDT.]

Section 11, Article XII (National Economy and Patrimony) of the 1987 Constitution mandates
the Filipinization of public utilities, to wit:
Section 11. No franchise, certificate, or any other form of authorization for the operation of a
public utility shall be granted except to citizens of the Philippines or to corporations or
associations organized under the laws of the Philippines, at least sixty per centum of whose
capital is owned by such citizens; nor shall such franchise, certificate, or authorization be
exclusive in character or for a longer period than fifty years. Neither shall any such franchise or
right be granted except under the condition that it shall be subject to amendment, alteration, or
repeal by the Congress when the common good so requires. The State shall encourage equity
participation in public utilities by the general public. The participation of foreign investors in the
governing body of any public utility enterprise shall be limited to their proportionate share in its
capital, and all the executive and managing officers of such corporation or association must be
citizens of the Philippines. (Emphasis supplied)

The 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 [of PLDT].

Indisputably, one of the rights of a stockholder is the right to participate in the control or
management of the corporation. This is exercised through his vote in the election of directors
because it is the board of directors that controls or manages the corporation. In the absence of
provisions in the articles of incorporation denying voting rights to preferred shares, preferred
shares have the same voting rights as common shares. However, preferred shareholders are often
excluded from any control, that is, deprived of the right to vote in the election of directors and on
other matters, on the theory that the preferred shareholders are merely investors in the
corporation for income in the same manner as bondholders.

Considering that common shares have voting rights which translate to control, as opposed to
preferred shares which usually have no voting rights, the term capital in Section 11, Article XII
of the Constitution refers only to common shares. However, if the preferred shares also have the
right to vote in the election of directors, then the term capital shall include such preferred
shares because the right to participate in the control or management of the corporation is
exercised through the right to vote in the election of directors. In short, the term capital in
Section 11, Article XII of the Constitution refers only to shares of stock that can vote in the
election of directors.

9. Gamboa v. Teves etal., GR No. 176579, October 9, 2012

Facts:

The issue started when petitioner Gamboa questioned the indirect sale of shares involving almost
12 million shares of the Philippine Long Distance Telephone Company (PLDT) owned by PTIC
to First Pacific. Thus, First Pacifics common shareholdings in PLDT increased from 30.7
percent to 37 percent, thereby increasing the total common shareholdings of foreigners in PLDT
to about 81.47%. The petitioner contends that it violates the Constitutional provision on
filipinazation of public utility, stated in Section 11, Article XII of the 1987 Philippine
Constitution, which limits foreign ownership of the capital of a public utility to not more than
40%. Then, in 2011, the court ruled the case in favor of the petitioner, hence this new case,
resolving the motion for reconsideration for the 2011 decision filed by the respondents.

Issue:

Whether or not the Court made an erroneous interpretation of the term capital in its 2011
decision?

Held/Reason:

The Court said that the Constitution is clear in expressing its State policy of developing an
economy effectively controlled by Filipinos. Asserting the ideals that our Constitutions
Preamble want to achieve, that is to conserve and develop our patrimony , hence, the State
should fortify a Filipino-controlled economy. In the 2011 decision, the Court finds no wrong in
the construction of the term capital which refers to the shares with voting rights, as well as
with full beneficial ownership (Art. 12, sec. 10) which implies that the right to vote in the
election of directors, coupled with benefits, is tantamount to an effective control. Therefore, the
Courts interpretation of the term capital was not erroneous. Thus, the motion for
reconsideration is denied.

10. Narra Nickel Mining vs Redmont GR 185590, Apr 21 2014

Facts:

Redmont is a domestic corporation interested in the mining and exploration of some areas in
Palawan. Upon learning that those areas were covered by MPSA applications of other three
(allegedly Filipino) corporations Narra, Tesoro, and MacArthur, it filed a petition before the
Panel of Arbitrators of DENR seeking to deny their permits on the ground that these corporations
are in reality foreign-owned. MBMI, a 100% Canadian corporation, owns 40% of the shares of
PLMC (which owns 5,997 shares of Narra), 40% of the shares of MMC (which owns 5,997
shares of McArthur) and 40% of the shares of SLMC (which, in turn, owns 5,997 shares of
Tesoro).

Aside from the MPSA, the three corporations also applied for FTAA with the Office of the
President. In their answer, they countered that (1) the liberal Control Test must be used in
determining the nationality of a corporation as based on Sec 3 of the Foreign Investment Act
which as they claimed admits of corporate layering schemes, and that (2) the nationality question
is no longer material because of their subsequent application for FTAA.

Issue: W/N the Grandfather Rule must be applied in this case

Yes. It is the intention of the framers of the Constitution to apply the Grandfather Rule in cases
where corporate layering is present.

First, as a rule in statutory construction, when there is conflict between the Constitution and a
statute, the Constitution will prevail. In this instance, specifically pertaining to the provisions
under Art. XII of the Constitution on National Economy and Patrimony, Sec. 3 of the FIA will
have no place of application. Corporate layering is admittedly allowed by the FIA, but if it is
used to circumvent the Constitution and other pertinent laws, then it becomes illegal.

Second, under the SEC Rule1 and DOJ Opinion2 , the Grandfather Rule must be applied when
the 60-40 Filipino-foreign equity ownership is in doubt. Doubt is present in the Filipino equity
ownership of Narra, Tesoro, and MacArthur since their common investor, the 100% Canadian-
owned corporation MBMI, funded them.

Under the Grandfather Rule, it is not enough that the corporation does have the required 60%
Filipino stockholdings at face value. To determine the percentage of the ultimate Filipino
ownership, it must first be traced to the level of the investing corporation and added to the shares
directly owned in the investee corporation. Applying this rule, it turns out that the Canadian
corporation owns more than 60% of the equity interests of Narra, Tesoro and MacArthur. Hence,
the latter are disqualified to participate in the exploration, development and utilization of the
Philippines natural resources.