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DONNINA C. HALLEY, G.R. No.

157549
Petitioner,
Present:

CARPIO MORALES, Chairperson,


BRION,
-versus- BERSAMIN,
VILLARAMA, JR., and
SERENO, JJ.

Promulgated:
PRINTWELL, INC.,
Respondent. May 30, 2011
x-----------------------------------------------------------------------------------------x

DECISION

BERSAMIN, J:

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

Weaffirm with modification the decisionpromulgated on August 14,


2002,[1]whereby the Court of Appeals(CA) upheld thedecision of the Regional Trial Court,
Branch 71, in Pasig City (RTC),[2]ordering the defendants (including the petitioner)to pay
to Printwell, Inc. (Printwell) the principal sum of P291,342.76 plus interest.

Antecedents

The petitioner wasan incorporator and original director of Business Media


Philippines, Inc. (BMPI), which, at its incorporation on November 12, 1987, [3]had an
authorized capital stock of P3,000,000.00 divided into 300,000 shares each with a par
value of P10.00,of which 75,000 were initially subscribed, to wit:

Subscriber No. of Total Amount paid


shares subscription
Donnina C. Halley 35,000 P 350,000.00 P87,500.00
Roberto V. Cabrera, 18,000 P 180,000.00 P45,000.00
Jr.
Albert T. Yu 18,000 P 180,000.00 P45,000.00
Zenaida V. Yu 2,000 P 20,000.00 P5,000.00
Rizalino C. Vineza 2,000 P 20,000.00 P5,000.00
TOTAL 75,000 P750,000.00 P187,500.00

Printwellengaged in commercial and industrial printing.BMPI commissioned


Printwell for the printing of the magazine Philippines, Inc. (together with wrappers and
subscription cards) that BMPI published and sold. For that purpose, Printwell extended
30-day credit accommodations to BMPI.

In the period from October 11, 1988 until July 12, 1989, BMPI placedwith Printwell
several orders on credit, evidenced byinvoices and delivery receipts
totalingP316,342.76.Considering that BMPI paidonlyP25,000.00,Printwell suedBMPIon
January 26, 1990 for the collection of the unpaid balance of P291,342.76 in the RTC.[4]

On February 8, 1990,Printwell amended thecomplaint in order to implead as


defendants all the original stockholders and incorporators to recover on theirunpaid
subscriptions, as follows:[5]

Name Unpaid Shares


Donnina C. Halley P 262,500.00
Roberto V. Cabrera, Jr. P135,000.00
Albert T. Yu P135,000.00
Zenaida V. Yu P15,000.00
Rizalino C. Vieza P15,000.00
TOTAL P 562,500.00

The defendants filed a consolidated answer,[6]averring that they all had paid their
subscriptions in full; that BMPI had a separate personality from those of its stockholders;
thatRizalino C. Vieza had assigned his fully-paid up sharesto a certain Gerardo R. Jacinto
in 1989; andthat the directors and stockholders of BMPI had resolved to dissolve BMPI
during the annual meetingheld on February 5, 1990.
To prove payment of their subscriptions, the defendantstockholderssubmitted in
evidenceBMPI official receipt (OR) no. 217, OR no. 218, OR no. 220,OR no. 221, OR no.
222, OR no. 223, andOR no. 227,to wit:

Receipt No. Date Name Amount


217 November 5, 1987 Albert T. Yu P 45,000.00
218 May 13, 1988 Albert T. Yu P 135,000.00
220 May 13, 1988 Roberto V. Cabrera, Jr. P 135,000.00
221 November 5, 1987 Roberto V. Cabrera, Jr. P 45,000.00
222 November 5, 1987 Zenaida V. Yu P 5,000.00
223 May 13, 1988 Zenaida V. Yu P 15,000.00
227 May 13, 1988 Donnina C. Halley P 262,500.00

In addition, the stockholderssubmitted other documentsin evidence, namely:(a) an audit


report dated March 30, 1989 prepared by Ilagan, Cepillo & Associates (submitted to the
SEC and the BIR);[7](b) BMPIbalance sheet[8] and income statement[9]as of December 31,
1988; (c) BMPI income tax return for the year 1988 (stamped received by the BIR);[10](d)
journal vouchers;[11](e) cash deposit slips;[12] and(f)Bank of the Philippine Islands (BPI)
savings account passbookin the name of BMPI.[13]

Ruling of the RTC

On November 3, 1993, the RTC rendereda decision in favor of Printwell, rejecting the
allegation of payment in full of the subscriptions in view of an irregularity in the issuance
of the ORs and observingthat the defendants had used BMPIs corporate personality to
evade payment and create injustice, viz:

The claim of individual defendants that they have fully paid their
subscriptions to defend[a]nt corporation, is not worthy of consideration,
because:

a) in the case of defendants-spouses Albert and Zenaida Yu, it will be


noted that the alleged payment made on May 13, 1988 amounting
to P135,000.00, is covered by Official Receipt No. 218 (Exh. 2),
whereas the alleged payment made earlier on November 5, 1987,
amounting to P5,000.00, is covered by Official Receipt No. 222 (Exh.
3). This is cogent proof that said receipts were belatedly issued just
to suit their theory since in the ordinary course of business, a receipt
issued earlier must have serial numbers lower than those issued on a
later date. But in the case at bar, the receipt issued on November 5,
1987 has serial numbers (222) higher than those issued on a later
date (May 13, 1988).

b) The claim that since there was no call by the Board of Directors of
defendant corporation for the payment of unpaid subscriptions will
not be a valid excuse to free individual defendants from liability.
Since the individual defendants are members of the Board of
Directors of defendantcorporation, it was within their exclusive
power to prevent the fulfillment of the condition, by simply not
making a call for the payment of the unpaid subscriptions. Their
inaction should not work to their benefit and unjust enrichment at
the expense of plaintiff.
Assuming arguendo that the individual defendants have paid their
unpaid subscriptions, still, it is very apparent that individual defendants
merely used the corporate fiction as a cloak or cover to create an injustice;
hence, the alleged separate personality of defendant corporation should be
disregarded (Tan Boon Bee & Co., Inc. vs. Judge Jarencio, G.R. No. 41337, 30
June 1988).[14]
Applying the trust fund doctrine, the RTC declared the defendant stockholders liable to
Printwell pro rata, thusly:

Defendant Business Media, Inc. is a registered corporation (Exhibits A,


A-1 to A-9), and, as appearing from the Articles of Incorporation, individual
defendants have the following unpaid subscriptions:
Names Unpaid Subscription
Donnina C. Halley P262,500.00
Roberto V. Cabrera, Jr. 135.000.00
Albert T. Yu 135,000.00
Zenaida V. Yu 15,000.00
Rizalino V. Vineza 15,000.00
--------------------
Total P562,500.00

and it is an established doctrine that subscriptions to the capital stock of a


corporation constitute a fund to which creditors have a right to look for
satisfaction of their claims (Philippine National Bank vs. Bitulok Sawmill,
Inc., 23 SCRA 1366) and, in fact, a corporation has no legal capacity to
release a subscriber to its capital stock from the obligation to pay for his
shares, and any agreement to this effect is invalid (Velasco vs. Poizat, 37
Phil. 802).
The liability of the individual stockholders in the instant case shall be
pro-rated as follows:

Names Amount
Donnina C. Halley P149,955.65
Roberto V. Cabrera, Jr. 77,144.55
Albert T. Yu 77,144.55
Zenaida V. Yu 8,579.00
Rizalino V. Vineza 8,579.00
------------------
Total P321,342.75[15]

The RTC disposed as follows:


WHEREFORE, judgment is hereby rendered in favor of plaintiff and against
defendants, ordering defendants to pay to plaintiff the amount
of P291,342.76, as principal, with interest thereon at 20% per annum, from
date of default, until fully paid, plus P30,000.00 as attorneys fees, plus costs
of suit.

Defendants counterclaims are ordered dismissed for lack of merit.

SO ORDERED.[16]

Ruling of the CA

All the defendants, except BMPI, appealed.

Spouses Donnina and Simon Halley, andRizalinoVieza defined the following errors
committed by the RTC, as follows:

I.
THE TRIAL COURT ERRED IN HOLDING APPELLANTS-
STOCKHOLDERS LIABLE FOR THE LIABILITIES OF THE DEFENDANT
CORPORATION.

II.
ASSUMING ARGUENDO THAT APPELLANTS MAY BE LIABLE TO THE
EXTENT OF THEIR UNPAID SUBSCRIPTION OF SHARES OF STOCK, IF
ANY, THE TRIAL COURT NONETHELESS ERRED IN NOT FINDING
THAT APPELLANTS-STOCKHOLDERS HAVE, AT THE TIME THE SUIT
WAS FILED, NO SUCH UNPAID SUBSCRIPTIONS.
On their part, Spouses Albert and Zenaida Yu averred:

I.
THE RTC ERRED IN REFUSING TO GIVE CREDENCE AND WEIGHT TO
DEFENDANTS-APPELLANTS SPOUSES ALBERT AND ZENAIDA YUS
EXHIBITS 2 AND 3 DESPITE THE UNREBUTTED TESTIMONY THEREON
BY APPELLANT ALBERT YU AND THE ABSENCE OF PROOF
CONTROVERTING THEM.

II.
THE RTC ERRED IN HOLDING DEFENDANTS-APPELLANTS SPOUSES
ALBERT AND ZENAIDA YU PERSONALLY LIABLE FOR THE
CONTRACTUAL OBLIGATION OF BUSINESS MEDIA PHILS., INC.
DESPITE FULL PAYMENT BY SAID DEFENDANTS-APPELLANTS OF
THEIR RESPECTIVE SUBSCRIPTIONS TO THE CAPITAL STOCK OF
BUSINESS MEDIA PHILS., INC.

Roberto V. Cabrera, Jr. argued:

I.
IT IS GRAVE ERROR ON THE PART OF THE COURT A QUO TO APPLY
THE DOCTRINE OF PIERCING THE VEIL OF CORPORATE
PERSONALITY IN ABSENCE OF ANY SHOWING OF EXTRA-ORDINARY
CIRCUMSTANCES THAT WOULD JUSTIFY RESORT THERETO.

II.
IT IS GRAVE ERROR ON THE PART OF THE COURT A QUO TO RULE
THAT INDIVIDUAL DEFENDANTS ARE LIABLE TO PAY THE PLAINTIFF-
APPELLEES CLAIM BASED ON THEIR RESPECTIVE SUBSCRIPTION.
NOTWITHSTANDING OVERWHELMING EVIDENCE SHOWING FULL
SETTLEMENT OF SUBSCRIBED CAPITAL BY THE INDIVIDUAL
DEFENDANTS.

On August 14, 2002, the CA affirmed the RTC, holding that the defendants resort to the
corporate personality would createan injustice becausePrintwell would thereby be at a
loss against whom it would assert the right to collect, viz:

Settled is the rule that when the veil of corporate fiction is used as a means
of perpetrating fraud or an illegal act or as a vehicle for the evasion of an
existing obligation, the circumvention of statutes, the achievements or
perfection of 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 (First Philippine
International Bank vs. Court of Appeals, 252 SCRA 259). Moreover, under
this doctrine, the corporate existence may be disregarded where the entity
is formed or used for non-legitimate purposes, such as to evade a just and
due obligations or to justify wrong (Claparols vs. CIR, 65 SCRA 613).

In the case at bench, it is undisputed that BMPI made several orders on


credit from appellee PRINTWELL involving the printing of business
magazines, wrappers and subscription cards, in the total amount of
P291,342.76 (Record pp. 3-5, Annex A) which facts were never denied by
appellants stockholders that they owe appellee the amount of P291,342.76.
The said goods were delivered to and received by BMPI but it failed to pay
its overdue account to appellee as well as the interest thereon, at the rate of
20% per annum until fully paid. It was also during this time that appellants
stockholders were in charge of the operation of BMPI despite the fact that
they were not able to pay their unpaid subscriptions to BMPI yet greatly
benefited from said transactions. In view of the unpaid subscriptions, BMPI
failed to pay appellee of its liability, hence appellee in order to protect its
right can collect from the appellants stockholders regarding their unpaid
subscriptions. To deny appellee from recovering from appellants would
place appellee in a limbo on where to assert their right to collect from BMPI
since the stockholders who are appellants herein are availing the defense of
corporate fiction to evade payment of its obligations.[17]

Further, the CA concurred with the RTC on theapplicability of thetrust fund doctrine,
under which corporate debtors might look to the unpaid subscriptions for the satisfaction
of unpaid corporate debts, stating thus:

It is an established doctrine that subscription to the capital stock of a


corporation constitute a fund to which creditors have a right to look up to
for satisfaction of their claims, and that the assignee in insolvency can
maintain an action upon any unpaid stock subscription in order to realize
assets for the payment of its debts (PNB vs. Bitulok Sawmill, 23 SCRA 1366).

Premised on the above-doctrine, an inference could be made that the funds,


which consists of the payment of subscriptions of the stockholders, is where
the creditors can claim monetary considerations for the satisfaction of their
claims. If these funds which ought to be fully subscribed by the
stockholders were not paid or remain an unpaid subscription of the
corporation then the creditors have no other recourse to collect from the
corporation of its liability. Such occurrence was evident in the case at bar
wherein the appellants as stockholders failed to fully pay their unpaid
subscriptions, which left the creditors helpless in collecting their claim due
to insufficiency of funds of the corporation. Likewise, the claim of
appellants that they already paid the unpaid subscriptions could not be
given weight because said payment did not reflect in the Articles of
Incorporations of BMPI that the unpaid subscriptions were fully paid by the
appellants stockholders. For it is a rule that a stockholder may be sued
directly by creditors to the extent of their unpaid subscriptions to the
corporation (Keller vs. COB Marketing, 141 SCRA 86).

Moreover, a corporation has no power to release a subscription or its capital


stock, without valuable consideration for such releases, and as against
creditors, a reduction of the capital stock can take place only in the manner
and under the conditions prescribed by the statute or the charter or the
Articles of Incorporation. (PNB vs. Bitulok Sawmill, 23 SCRA 1366).[18]

The CAdeclared thatthe inconsistency in the issuance of the ORs rendered the claim of
full payment of the subscriptions to the capital stock unworthy of consideration; andheld
that the veil of corporate fiction could be pierced when it was used as a shield to
perpetrate a fraud or to confuse legitimate issues, to wit:

Finally, appellants SPS YU, argued that the fact of full payment for the
unpaid subscriptions was incontrovertibly established by competent
testimonial and documentary evidence, namely Exhibits 1, 2, 3 & 4, which
were never disputed by appellee, clearly shows that they should not be held
liable for payment of the said unpaid subscriptions of BMPI.

The reliance is misplaced.

We are hereby reproducing the contents of the above-mentioned


exhibits, to wit:

Exh: 1 YU Official Receipt No. 217 dated November 5,


1987 amounting to P45,000.00 allegedly representing the initial
payment of subscriptions of stockholder Albert Yu.
Exh: 2 YU Official Receipt No. 218 dated May 13, 1988 amounting
to P135,000.00 allegedly representing full payment of balance of
subscriptions of stockholder Albert Yu. (Record p. 352).
Exh: 3 YU Official Receipt No. 222 dated November 5,
1987 amounting to P5,000.00 allegedly representing the initial
payment of subscriptions of stockholder Zenaida Yu.
Exh: 4 YU Official Receipt No. 223 dated May 13, 1988 amounting
to P15,000.00 allegedly representing the full payment of balance of
subscriptions of stockholder Zenaida Yu. (Record p. 353).

Based on the above exhibits, we are in accord with the lower courts
findings that the claim of the individual appellants that they fully paid their
subscription to the defendant BMPI is not worthy of consideration, because,
in the case of appellants SPS. YU, there is an inconsistency regarding the
issuance of the official receipt since the alleged payment made on May 13,
1988 amounting to P135,000.00 was covered by Official Receipt No. 218
(Record, p. 352), whereas the alleged payment made earlier on November 5,
1987 amounting to P5,000.00 is covered by Official Receipt No. 222 (Record,
p. 353). Such issuance is a clear indication that said receipts were belatedly
issued just to suit their claim that they have fully paid the unpaid
subscriptions since in the ordinary course of business, a receipt is issued
earlier must have serial numbers lower than those issued on a later date.
But in the case at bar, the receipt issued on November 5, 1987 had a serial
number (222) higher than those issued on May 13, 1988 (218). And even
assuming arguendo that the individual appellants have paid their unpaid
subscriptions, still, it is very apparent that the veil of corporate fiction may
be pierced when made as a shield to perpetuate fraud and/or confuse
legitimate issues. (Jacinto vs. Court of Appeals, 198 SCRA 211).[19]

Spouses Halley and Vieza moved for a reconsideration, but the CA denied their motion
for reconsideration.

Issues

Only Donnina Halley has come to the Court to seek a further review, positing the
following for our consideration and resolution, to wit:

I.
THE COURT OF APPEALS ERRED IN AFFIRMING IN TOTO THE
DECISION THAT DID NOTSTATE THE FACTS AND THE LAW UPON
WHICH THE JUDGMENT WAS BASED BUT MERELY COPIED THE
CONTENTS OF RESPONDENTS MEMORANDUM ADOPTING THE SAME
AS THE REASON FOR THE DECISION

II.
THE COURT OF APPEALS ERRED IN AFFIRMING THE DECISION OF
THE REGIONAL TRIAL COURT WHICH ESSENTIALLY ALLOWED THE
PIERCING OF THE VEIL OF CORPORATE FICTION

III.
THE HONORABLE COURT OF APPEALS ERRED IN APPLYING THE
TRUST FUND DOCTRINE WHEN THE GROUNDS THEREFOR HAVE
NOT BEEN SATISFIED.

On the first error, the petitioner contends that the RTC lifted verbatim from the
memorandum of Printwell; and submits that the RTCthereby violatedthe requirement
imposed in Section 14, Article VIII of the Constitution[20] as well as in Section 1,Rule 36 of
the Rules of Court,[21]to the effect that a judgment or final order of a court should state
clearly and distinctly the facts and the law on which it is based. The petitioner claims that
the RTCs violation indicated that the RTC did not analyze the case before rendering its
decision, thus denying her the opportunity to analyze the decision; andthat a suspicion of
partiality arose from the fact that the RTC decision was but a replica of Printwells
memorandum.She cites Francisco v. Permskul,[22] in which the Court has stated that the
reason underlying the constitutional requirement, that every decision should clearly and
distinctly state the facts and the law on which it is based, is to inform the reader of how
the court has reached its decision and thereby give the losing party an opportunity to
study and analyze the decision and enable such party to appropriately assign the errors
committed therein on appeal.

On the second and third errors, the petitioner maintains that the CA and the RTC
erroneously pierced the veil of corporate fiction despite the absence of cogent proof
showing that she, as stockholder of BMPI, had any hand in transacting with Printwell;
thatthe CA and the RTC failed to appreciate the evidence that she had fully paid her
subscriptions; and the CA and the RTCwrongly relied on the articles of incorporation in
determining the current list of unpaid subscriptions despite the articles of
incorporationbeing at best reflectiveonly of the pre-incorporation status of BMPI.
As her submissions indicate, the petitioner assails the decisions of the CA on: (a) the
propriety of disregarding the separate personalities of BMPI and its stockholdersby
piercing the thin veil that separated them; and (b) the application of the trust fund
doctrine.

Ruling

The petition for review fails.

I
The RTC did not violate
the Constitution and the Rules of Court

The contention of the petitioner, that the RTC merely copied the memorandum of
Printwell in writing its decision, and did not analyze the records on its own, thereby
manifesting a bias in favor of Printwell, is unfounded.

It is noted that the petition for review merely generally alleges that starting from
its page 5, the decision of the RTC copied verbatim the allegations of herein Respondents
in its Memorandum before the said court, as if the Memorandum was the draft of the
Decision of the Regional Trial Court of Pasig,[23]but fails to specify either the portions
allegedly lifted verbatim from the memorandum, or why she regards the decision as
copied. The omission renders thepetition for review insufficient to support her
contention, considering that the mere similarityin language or thought between
Printwells memorandum and the trial courts decisiondid not necessarily justify the
conclusion that the RTC simply lifted verbatim or copied from thememorandum.

It is to be observed in this connection that a trial or appellate judge may


occasionally viewa partys memorandum or brief as worthy of due consideration either
entirely or partly. When he does so, the judgemay adopt and incorporatein his
adjudicationthe memorandum or the parts of it he deems suitable,and yet not be guilty of
the accusation of lifting or copying from the memorandum.[24] This isbecause ofthe
avowed objective of the memorandum to contribute in the proper illumination and
correct determination of the controversy.Nor is there anything untoward in the
congruence of ideas and views about the legal issues between himself and the party
drafting the memorandum.The frequency of similarities in argumentation, phraseology,
expression, and citation of authorities between the decisions of the courts and the
memoranda of the parties, which may be great or small, can be fairly attributable tothe
adherence by our courts of law and the legal profession to widely knownor universally
accepted precedents set in earlier judicial actions with identical factual milieus or posing
related judicial dilemmas.

We also do not agree with the petitioner that the RTCs manner of writing the
decisiondeprivedher ofthe opportunity to analyze its decisionas to be able to assign errors
on appeal. The contrary appears, considering that she was able to impute and
assignerrors to the RTCthat she extensively discussed in her appeal in the CA, indicating
her thorough analysis ofthe decision of the RTC.

Our own readingof the trial courts decision persuasively shows that the RTC did
comply with the requirements regarding the content and the manner of writing a
decision prescribed in the Constitution and the Rules of Court. The decision of the RTC
contained clear and distinct findings of facts, and stated the applicablelaw and
jurisprudence, fully explaining why the defendants were being held liable to the
plaintiff. In short, the reader was at once informed of the factual and legal reasons for the
ultimate result.

II
Corporate personality not to be used to foster injustice

Printwell impleaded the petitioner and the other stockholders of BMPI for two
reasons, namely: (a) to reach the unpaid subscriptions because it appeared that such
subscriptions were the remaining visible assets of BMPI; and (b) to avoid multiplicity of
suits.[25]

The petitionersubmits that she had no participation in the transaction between


BMPI and Printwell;that BMPI acted on its own; and that shehad no hand in persuading
BMPI to renege on its obligation to pay. Hence, she should not be personally liable.

We rule against the petitioners submission.


Although a corporation has a personality separate and distinct from those of its
stockholders, directors, or officers,[26]such separate and distinct personality is merely a
fiction created by law for the sake of convenience and to promote the ends of
justice.[27]The corporate personality may be disregarded, and the individuals composing
the corporation will be treated as individuals, if the corporate entity is being used as a
cloak or cover for fraud or illegality;as a justification for a wrong; as an alter ego, an
adjunct, or a business conduit for the sole benefit of the stockholders.[28] As a general
rule, a corporation is looked upon as a legal entity, unless and until sufficient reason to
the contrary appears. Thus,the courts always presume good faith, andfor that reason
accord prime importance to the separate personality of the corporation, disregarding the
corporate personality only after the wrongdoing is first clearly and convincingly
established.[29]It thus behooves the courts to be careful in assessing the milieu where the
piercing of the corporate veil shall be done.[30]

Although nowhere in Printwells amended complaint or in the testimonies


Printwell offered can it be read or inferred from that the petitioner was instrumental in
persuading BMPI to renege onits obligation to pay; or that sheinduced Printwell to
extend the credit accommodation by misrepresenting the solvency of BMPI toPrintwell,
her personal liability, together with that of her co-defendants, remainedbecause the CA
found her and the other defendant stockholders to be in charge of the operations of BMPI
at the time the unpaid obligation was transacted and incurred, to wit:
In the case at bench, it is undisputed that BMPI made several orders
on credit from appellee PRINTWELL involving the printing of business
magazines, wrappers and subscription cards, in the total amount
of P291,342.76 (Record pp. 3-5, Annex A) which facts were never denied by
appellants stockholders that they owe(d) appellee the amount
of P291,342.76. The said goods were delivered to and received by BMPI but
it failed to pay its overdue account to appellee as well as the interest
thereon, at the rate of 20% per annum until fully paid. It was also during
this time that appellants stockholders were in charge of the operation of
BMPI despite the fact that they were not able to pay their unpaid
subscriptions to BMPI yet greatly benefited from said transactions. In view
of the unpaid subscriptions, BMPI failed to pay appellee of its liability,
hence appellee in order to protect its right can collect from the appellants
stockholders regarding their unpaid subscriptions. To deny appellee from
recovering from appellants would place appellee in a limbo on where to
assert their right to collect from BMPI since the stockholders who are
appellants herein are availing the defense of corporate fiction to evade
payment of its obligations.[31]

It follows, therefore, that whether or not the petitioner persuaded BMPI to renege
on its obligations to pay, and whether or not she induced Printwell to transact with BMPI
were not gooddefensesin the suit.

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

Both the RTC and the CA applied the trust fund doctrineagainst the defendant
stockholders, including the petitioner.

The petitionerargues, however,that the trust fund doctrinewas inapplicablebecause


she had already fully paid her subscriptions to the capital stock of BMPI. She thus
insiststhat both lower courts erred in disregarding the evidence on the complete payment
of the subscription, like receipts, income tax returns, and relevant financial statements.

The petitioners argumentis devoid of substance.

The trust fund doctrineenunciates a

xxx rule that the property of a corporation is a trust fund for the
payment of creditors, but such property can be called a trust fund only by
way of analogy or metaphor. As between the corporation itself and its
creditors it is a simple debtor, and as between its creditors and stockholders
its assets are in equity a fund for the payment of its debts.[32]

The trust fund doctrine, first enunciated in the American case of Wood v.
Dummer,[33]was adopted in our jurisdiction in Philippine Trust Co. v. Rivera,[34]where
thisCourt declared that:

It is established doctrine that subscriptions to the capital of a


corporation constitute a fund to which creditors have a right to look for
satisfaction of their claims and that the assignee in insolvency can maintain
an action upon any unpaid stock subscription in order to realize assets for
the payment of its debts. (Velasco vs. Poizat, 37 Phil., 802) xxx[35]

We clarify that the trust fund doctrineis not limited to reaching the stockholders
unpaid subscriptions. The scope of the doctrine when the corporation is insolvent
encompasses not only the capital stock, but also other property and assets generally
regarded in equity as a trust fund for the payment of corporate debts. [36]All assets and
property belonging to the corporation held in trust for the benefit of creditors thatwere
distributed or in the possession of the stockholders, regardless of full paymentof their
subscriptions, may be reached by the creditor in satisfaction of its claim.

Also, under the trust fund doctrine,a 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,[37] without a valuable consideration,[38] or fraudulently, to the prejudice
of creditors.[39]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.[40]To make out a prima facie case in a suit against stockholders of an insolvent
corporation to compel them to contribute to the payment of its debts by making good
unpaid balances upon their subscriptions, it is only necessary to establish that
thestockholders have not in good faith paid the par value of the stocks of the
corporation.[41]

The petitionerposits that the finding of irregularity attending the issuance of the
receipts (ORs) issued to the other stockholders/subscribers should not affect her
becauseher receipt did not suffer similar irregularity.

Notwithstanding that the RTC and the CA did not find any irregularity in the OR
issued in her favor,we still cannot sustain the petitioners defense of full payment of her
subscription.

In civil cases, theparty who pleads payment has the burden of proving it, that even
where the plaintiff must allege nonpayment, the general rule is that the burden rests on
the defendant to prove payment, rather than on the plaintiff to prove nonpayment. In
other words, the debtor bears the burden of showing with legal certainty that the
obligation has been discharged by payment.[42]
Apparently, the petitioner failed to discharge her burden.

A receipt is the written acknowledgment of the fact of payment in money or other


settlement between the seller and the buyer of goods, thedebtor or thecreditor, or
theperson rendering services, and theclient or thecustomer.[43]Althougha receipt is the
best evidence of the fact of payment, it isnot conclusive, but merely presumptive;nor is it
exclusive evidence,considering thatparole evidence may also establishthe fact of
payment.[44]

The petitioners ORNo. 227,presentedto prove the payment of the balance of her
subscription, indicated that her supposed payment had beenmade by means of a check.
Thus, to discharge theburden to prove payment of her subscription, she had to adduce
evidence satisfactorily proving that her payment by check wasregardedas payment under
the law.

Paymentis defined as the delivery of money.[45]Yet, because a check is not money


and only substitutes for money, the delivery of a check does not operate as payment and
does not discharge the obligation under a judgment.[46] The delivery of a bill of exchange
only produces the fact of payment when the bill has been encashed. [47]The following
passage fromBank of Philippine Islands v. Royeca[48]is enlightening:

Settled is the rule that payment must be made in legal tender. A check
is not legal tender and, therefore, cannot constitute a valid tender of
payment. Since a negotiable instrument is only a substitute for
money and not money, the delivery of such an instrument does not,
by itself, operate as payment. Mere delivery of checks does not
discharge the obligation under a judgment. The obligation is not
extinguished and remains suspended until the payment by
commercial document is actually realized.

To establish their defense, the respondents therefore had to


present proof, not only that they delivered the checks to the
petitioner, but also that the checks were encashed. The respondents
failed to do so. Had the checks been actually encashed, the
respondents could have easily produced the cancelled checks as
evidence to prove the same. Instead, they merely averred that they
believed in good faith that the checks were encashed because they
were not notified of the dishonor of the checks and three years had
already lapsed since they issued the checks.
Because of this failure of the respondents to present sufficient proof of
payment, it was no longer necessary for the petitioner to prove non-
payment, particularly proof that the checks were dishonored. The burden of
evidence is shifted only if the party upon whom it is lodged was able to
adduce preponderant evidence to prove its claim.

Ostensibly, therefore, the petitioners mere submission of the receipt issued in


exchange of the check did not satisfactorily establish her allegation of full payment of her
subscription. Indeed, she could not even inform the trial court about the identity of her
drawee bank,[49]and about whether the check was cleared and its amount paid to
BMPI.[50]In fact, she did not present the check itself.

Theincome tax return (ITR) and statement of assets and liabilities of BMPI, albeit
presented, had no bearing on the issue of payment of the subscription because they did
not by themselves prove payment. ITRsestablish ataxpayers liability for taxes or a
taxpayers claim for refund. In the same manner, the deposit slips and entries in the
passbook issued in the name of BMPI were hardly relevant due to their not reflecting the
alleged payments.

It is notable, too, that the petitioner and her co-stockholders did not support their
allegation of complete payment of their respective subscriptions with the stock and
transfer book of BMPI. Indeed, books and records of a corporation (including the stock
and transfer book) are admissible in evidence in favor of or against the corporation and
its members to prove the corporate acts, its financial status and other matters (like the
status of the stockholders), and are ordinarily the best evidence of corporate acts and
proceedings.[51]Specifically, a stock and transfer book is necessary as a measure of
precaution, expediency, and convenience because it provides the only certain and
accurate method of establishing the various corporate acts and transactions and of
showing the ownership of stock and like matters.[52]That she tendered no explanation
why the stock and transfer book was not presented warrants the inference that the book
did not reflect the actual payment of her subscription.

Nor did the petitioner present any certificate of stock issued by BMPI to her. Such
a certificate covering her subscription might have been a reliable evidence of full payment
of the subscriptions, considering that under Section 65 of the Corporation Code a
certificate of stock issues only to a subscriber who has fully paid his subscription. The lack
of any explanation for the absence of a stock certificate in her favor likewise warrants an
unfavorable inference on the issue of payment.

Lastly, the petitioner maintains that both lower courts erred in relying on
the articles of incorporationas proof of the liabilities of the stockholders subscribing to
BMPIs stocks, averring that the articles of incorporationdid not reflect the latest
subscription status of BMPI.

Although the articles of incorporation may possibly reflect only the pre-
incorporation status of a corporation, the lower courts reliance on that document to
determine whether the original subscribersalready fully paid their subscriptions or not
was neither unwarranted nor erroneous. As earlier explained, the burden of establishing
the fact of full payment belonged not to Printwell even if it was the plaintiff, but to the
stockholders like the petitioner who, as the defendants, averredfull payment of their
subscriptions as a defense. Their failure to substantiate their averment of full payment, as
well as their failure to counter the reliance on the recitals found in the articles of
incorporation simply meant their failure or inability to satisfactorily prove their defense of
full payment of the subscriptions.

To reiterate, the petitionerwas liablepursuant to the trust fund doctrine for the
corporate obligation of BMPI by virtue of her subscription being still unpaid. Printwell, as
BMPIs creditor,had a right to reachher unpaid subscription in satisfaction of its claim.

IV
Liability of stockholders for corporate debts isup
to the extentof their unpaid subscription

The RTC declared the stockholders pro rata liable for the debt(based on the
proportion to their shares in the capital stock of BMPI); and held the petitionerpersonally
liable onlyin the amount of P149,955.65.

We do not agree. The RTC lacked the legal and factual support for its prorating the
liability. Hence, we need to modify the extent of the petitioners personal liability to
Printwell. The prevailing rule is that a stockholder is personally liable for the financial
obligations of the corporation to the extent of his unpaid subscription.[53]In view ofthe
petitioners unpaid subscription being worth P262,500.00, shewas liable up to that
amount.

Interest is also imposable on the unpaid obligation. Absent any stipulation,


interest is fixed at 12% per annum from the date the amended complaint was filed on
February 8, 1990 until the obligation (i.e., to the extent of the petitioners personal liability
of P262,500.00) is fully paid.[54]

Lastly, we find no basis togrant attorneys fees, the award for which must be
supported by findings of fact and of law as provided under Article 2208 of the Civil
Code[55]incorporated in the body of decision of the trial court. The absence of the
requisite findings from the RTC decision warrants the deletion of the attorneys fees.

ACCORDINGLY, we deny the petition for review on certiorari;and affirm with


modification the decision promulgated on August 14, 2002by ordering the petitionerto
pay to Printwell, Inc. the sum of P262,500.00, plus interest of 12% per annum to be
computed from February 8, 1990 until full payment.

The petitioner shall paycost of suit in this appeal.

SO ORDERED.

OFFICE OF THE PRESIDENT G.R. No. 183445

and PRESIDENTIAL ANTI-GRAFT


COMMISSION,
Present:
Petitioners,

PERALTA, J., Acting Chairperson,

BERSAMIN,*

ABAD,
- versus - MENDOZA, and

SERENO,** JJ.

CALIXTO R. CATAQUIZ, Promulgated:

Respondent. September 14, 2011

x --------------------------------------------------------------------------------------- x

DECISION

MENDOZA, J.:

Before the Court is a petition for review on certiorari under Rule 45 of the Rules of
Court assailing the January 31, 2008 Decision[1] and the June 23, 2008 Resolution[2] of the
Court of Appeals (CA) in CA-G.R. SP No. 88736 entitled Calixto R. Cataquiz v. Office of the
President and Concerned Employees of the LLDA (CELLDA), which reversed and set aside
the Amended Resolution[3] dated February 10, 2005 of the Office of the President (OP).

The Facts

Respondent Calixto R. Cataquiz (Cataquiz) was appointed as General Manager of


the Laguna Lake Development Authority (LLDA) on April 16, 2001.[4]
On April 1, 2003, a majority of the members of the Management Committee and
the rank-and-file employees of the LLDA submitted to then Department of Environment
and Natural Resources (DENR) Secretary Elisea G. Gozun (Secretary Gozun) their Petition
for the Ouster of Cataquiz as LLDA General Manager[5] on the grounds of corrupt and
unprofessional behavior and management incompetence.

In response, Secretary Gozun ordered the formation of an investigating team to


conduct an inquiry into the allegations against Cataquiz. The results of the fact-finding
activity were submitted in a Report[6] dated May 21, 2003 in which it was determined that
respondent may be found guilty for acts prejudicial to the best interest of the government
and for violations of several pertinent laws and regulations. Consequently, the
investigating team recommended that the case be forwarded to the Presidential Anti-
Graft Commission (PAGC) for proper investigation.

In her Memorandum[7] for the President dated May 23, 2003, Secretary Gozun
reported that there is prima facie evidence to support some accusations against Cataquiz
which may be used to pursue an administrative or criminal case against him. It was
further noted that respondent lost his leadership credibility. In light of these, she
recommended that Cataquiz be relieved from his position and that he be investigated by
PAGC.

On June 6, 2003, in a letter[8] to then President Gloria Macapagal-Arroyo (President


Arroyo), the Concerned Employees of the Laguna Lake Development
Authority (CELLDA), a duly organized employees union of the LLDA, expressed their
support for the petition to oust Cataquiz and likewise called for his immediate
replacement.

Thereafter, CELLDA formally filed its Affidavit Complaint[9] dated September 5,


2003 before PAGC charging Cataquiz with violations of Republic Act (R.A.) No. 3019 (The
Anti-Graft and Corrupt Practices Act), Executive Order (E.O.) No. 292 (The
Administrative Code) and R.A. No. 6713 (Code of Conduct and Ethical Standards for
Public Officials and Employees), to wit:

Violation of Section 3(e) of Republic Act 3019 in relation to Section 46 b(8)


and (27), Chapter VI, Book V of EO 292.

a. That respondent directly transacted with 35 fishpen operators and


authorized [the] payment of fishpen fees based on negotiated prices
in violation of LLDA Board Resolution No. 28, Series of 1996 as
alleged.

b. That respondent allegedly approved additional fishpen areas in


the Lake without the approval of the Board and in violation of the
existing Zoning and Management Plan (ZOMAP) of the Laguna de
Bay that allows a carrying capacity of 10,000 hectares [of] fishpen
structures in the lake based on scientific and technical studies.

c. That respondent allegedly condoned or granted reductions of


fines and penalties imposed by the Public Hearing Committee, the
duly authorized adjudicatory body of the LLDA. The condonation
was allegedly without the concurrence of LLDA Board of Directors.

d. That respondent allegedly caused the dismissal of some cases


pending with the LLDA without the concurrence of the Public
Hearing Committee.

e. That on June 4, 2002, respondent allegedly appropriated and


disbursed the amount of Five Hundred Thousand Pesos
(₱500,000.00) from LLDA funds and confidential funds without any
authority from the Department of Budget and Management.

f. That respondent allegedly contracted the services of several


consultants without prior written concurrence from the Commission
on Audit.
g. That on December 19, 2001, respondent allegedly appropriated and
disbursed LLDA funds for the grant of gifts to indigent residents of
San Pedro, Laguna. Said appropriation is not within the approved
budget neither was it sanctioned by the Board of Directors, as
alleged.

h. That respondent allegedly allowed a Taiwanese company identified


as Phil-Tai Fishing and Trade Company to occupy and utilize certain
portions of LLDA facilities located at Km. 70, Barangay Bangyas,
Calauan, Laguna without any contract nor authority from the LLDA
Board.

i. That respondent allegedly authorized the direct procurement of


fish breeders from Delacon Realty and Development Corporation
without the required bidding in accordance with COA rules and
regulations.

Violation of Section 7(d) of Republic Act 6713:


a. That respondent allegedly solicited patronage from regulated
industries in behalf of RVQ Productions, Inc. for the promotion of its
film entry to the 2002 Metro Manila Film Festival entitled Home
Alone the Riber.

Violation of Section 5(a) of Republic Act 6713:

a. That respondent allegedly failed to act promptly and expeditiously


on official documents, requests, papers or letters sent by the public
or those which have been processed and completed staff work for his
appropriate action.[10]

On December 5, 2003, PAGC issued a Resolution[11] recommending to the President


that the penalty of dismissal from the service with the accessory penalties of
disqualification for re-employment in the public service and forfeiture of government
retirement benefits be imposed upon Cataquiz.
Thereafter, on December 8, 2003, Cataquiz was replaced by Fatima A.S. Valdez,
who then assumed the position of Officer-in-Charge/General Manager and Chief
Operating Officer of the LLDA by virtue of a letter of appointment dated December 3,
2003 issued by President Arroyo.[12]

In its Decision[13] dated June 29, 2004, the OP adopted by reference the findings
and recommendations of PAGC. The dispositive portion thereof reads:

WHEREFORE, as recommended by the PAGC, respondent Calixto


R. Cataquiz, is hereby DISMISSED FROM THE SERVICE, with the
accessory penalties of disqualification from re-employment to government
service and forfeiture of retirement benefits, effective immediately upon
receipt of this order.

SO ORDERED.

Aggrieved, Cataquiz filed his Motion for Reconsideration and/or for New
Trial[14]
dated August 4, 2004, arguing that: (1) prior to the issuance by the PAGC of its
Resolution and by the OP of its Decision, he was already removed from office, thereby
making the issue moot and academic; and (2) he cannot be found guilty for violating a
resolution which was foreign to the charges against him or for acts which did not
constitute sufficient cause for his removal in office, as shown by acts and documents
which subsequently became available to him, entitling him to a new trial.
On February 10, 2005, the OP issued an Amended Resolution,[15] imposing on
Cataquiz the penalties of disqualification from re-employment in the government service
and forfeiture of retirement benefits, in view of the fact that the penalty of dismissal was
no longer applicable to him because of his replacement as General Manager of the LLDA.

Cataquiz elevated his case to the CA via a petition for review[16] dated March 2,
2005, raising the same issues presented in his Motion for Reconsideration and/or New
Trial before the OP.

The CA promulgated its Decision on January 31, 2008, which reversed and set aside
the Amended Resolution of the OP. In so resolving, the CA reasoned that the accessory
penalties of disqualification from employment in the government service and forfeiture of
retirement benefits could no longer be imposed because the principal penalty of dismissal
was not enforced, following the rule that the accessory penalty follows the principal
penalty. The CA also agreed with Cataquiz that he could not be held liable for a violation
of Board Resolution No. 68 of the LLDA, which when examined, was found not to be
related to fishpen awards. If at all, the applicable rule would be Board Resolution No. 28,
as suggested by Cataquiz himself. Said resolution though would be an invalid basis
because it was not approved by the President pursuant to Section 4(k) of R.A. No. 4850
(An Act Creating the Laguna Lake Development Authority). Finally, the CA found that
the offenses charged against Cataquiz under R.A. No. 4850 constituted acts that were
within his authority as general manager of the LLDA to perform.

Not in conformity, the OP and the PAGC (petitioners) filed this petition for review.
After the submission of respondents comment[17] and the petitioners
reply,[18] Cataquiz filed an Urgent Motion for Judicial Notice[19] dated August 13,
2009 urging the Court to take judicial notice of the Resolution[20] rendered by the Office
of the Ombudsman (Ombudsman) on November 30, 2004 which recommended the
dismissal of the charges against him for violation of R.A. No. 3019.

The Issues

Petitioners cite the following errors as grounds for the allowance of the petition:

I.

The Court of Appeals gravely erred when it reversed in toto the


findings of the OP and PAGC without stating clearly and distinctly
the reasons therefor, which is contrary to the Constitution and the
Rules of Court; the findings of the Court of Appeals are conclusions
without citation of specific evidence on which they are based.

II.

The Court of Appeals erred because its judgment is based on a


misapprehension of facts;

III.

The Court of Appeals erred when it went beyond the issues of the
case;

IV.

The findings of the Court of Appeals are contrary to the findings of


the OP, PAGC and DENR Fact Finding Committee, [and]

V.

The OP and PAGC correctly found respondent to be unfit in public


service, thus it did not err in imposing the accessory penalties of
disqualification from employment in the government service and
forfeiture of retirement benefits.[21]

Cataquiz, on the other hand, submits the following arguments in his Memorandum:[22]

I.

The dismissal by the Ombudsman of the cases against the


respondent under the same set of facts further constitute the law of
the case between the parties which necessitates the dismissal of this
appeal and further supports the correctness of the decision of the
Court of Appeals.

II.

The Court of Appeals did not commit any error when it


reversed the amended resolution of the petitioner Office of the
President.[23]

The issues can be condensed into four essential questions:

(1) Whether the CA made an incorrect determination of the facts of the case
warranting review of its factual findings by the Court;

(2) Whether the dismissal by the Ombudsman of the charges against Cataquiz serves as a
bar to the decision of the OP;
(3) Whether Cataquiz can be made to suffer the accessory penalties of disqualification
from re-employment in the public service and forfeiture of government retirement
benefits, despite his dismissal from the LLDA prior to the issuance by the PAGC and the
OP of their decision and resolution, respectively; and

(4) Whether Cataquiz can be charged with a violation of Board Resolution No. 28, despite
the clerical error made by the PAGC in indicating the Board Resolution number to be No.
68.

The Courts Ruling

The Court finds merit in the petition.

Findings of fact of the appellate court

can be reviewed

As a general rule, only questions of law can be raised in a petition for review on
certiorari under Rule 45 of the Rules of Court.[24] Since this Court is not a trier of facts,
findings of fact of the appellate court are binding and conclusive upon this
Court.[25] There are, however, several recognized exceptions to this rule, namely:

(1) When the conclusion is a finding grounded entirely on speculation,


surmises and conjectures;

(2) When the inference made is manifestly mistaken, absurd or impossible;

(3) Where there is a grave abuse of discretion;


(4) When the judgment is based on a misapprehension of facts;

(5) When the findings of fact are conflicting;

(6) When the Court of Appeals, in making its findings, went beyond the
issues of the case, and the same is contrary to the admissions of both
appellant and appellee;

(7) When the findings are contrary to those of the trial court;

(8) When the findings of fact are conclusions without citation of


specific evidence on which they are based;

(9) When the facts set forth in the petition as well as in the petitioners main
and reply briefs, are not disputed by the respondents; and

(10) When the findings of fact of the Court of Appeals are premised on the
supposed absence of evidence and contradicted by the evidence on
record.[26] [Emphases supplied]

In this case, the findings of the CA are contrary to those of PAGC which
recommended Cataquiz dismissal for violating Section 3(e) of R.A. No. 3019, in relation to
Section 46(b)(27), Chapter 6, Subtitle A, Title I, Book V of E.O. 292. Likewise, the
Investigating Team of the DENR also agreed that there exists evidence that could sustain
a finding of respondents violation of several laws and regulations.

The result of PAGCs investigation, however, was simply brushed aside by the CA,
without citing any evidence on which its findings were based. In ignoring the meticulous
discussion of PAGCs conclusions and in absolving Cataquiz from any wrongdoing, the CA
cavalierly declared as follows:

The petitioner likewise presented to us in support of his petition the


argument that he had sufficient authority to do what had been complained
against him. We have examined the charges against the provisions of R.A.
No. 4850 and we found that the said acts could be sustained because they
were within his powers as general manager of the Laguna Lake
Development Authority as implied from express powers granted to him by
the law. Moreover, the records of the Authority show that transactions
resulting into contracts in the Authoritys trading activities have been done
by previous general managers of the Authority even without prior approval
by the board. Ordinary corporate practices likewise point out to the fact
that a general manager, having the general management and control of its
business and affairs, has implied and apparent authority to do acts or make
any contracts in its behalf falling within the scope of the ordinary and usual
business of the company, especially so when, relative to a contract that the
petitioner had entered into with Phil-Tai Fishing and Trade Company, the
Office of the Government Corporate Counsel had formally acceded
thereto.[27]

As plain as that, without any analysis of the evidence on record or a comprehensive


discussion on how the decision was arrived at, the CA absolved Cataquiz of the acts he
was accused of committing during his service as General Manager of the LLDA.

Section 14, Article VIII of the 1987 Constitution mandates that decisions must
clearly and distinctly state the facts and the law on which it is based. Decisions of courts
must be able to address the issues raised by the parties through the presentation of a
comprehensive analysis or account of factual and legal findings of the court.[28] It is
evident that the CA failed to comply with these requirements. PAGC, in its Resolution
dated December 5, 2003, discussing each of the twelve allegations against Cataquiz,
determined that he should be dismissed from the government service and that he could
be held liable under Section 3(e) of R.A. No. 3019, in relation to Section 46(b)(27),
Chapter 6, Subtitle A, Title I, Book V of E.O. No. 292, to wit:

R.A. No. 3019

Section 3. Corrupt practices of public officers. In addition to acts or


omissions of public officers already penalized by existing law, the following
shall constitute corrupt practices of any public officer and are hereby
declared to be unlawful:
(e) Causing any undue injury to any party, including
the Government, or giving any private party any unwarranted
benefits, advantage or preference in the discharge of his
official administrative or judicial functions through manifest
partiality, evident bad faith or gross inexcusable negligence.
This provision shall apply to officers and employees of offices
or government corporations charged with the grant of
licenses or permits or other concessions.

E.O. No. 292

Section 46. Discipline: General Provisions.

xxx

(b) The following shall be grounds for disciplinary


action:

xxx

(27) Conduct prejudicial to the best


interest of the service

The one-paragraph pronouncement of the CA that Cataquiz had authority to


perform the acts complained of is grossly insufficient to overturn the determination by
PAGC that he should be punished for acts prejudicial to the LLDA committed during his
service as General Manager of the said agency. It should be emphasized that findings of
fact of administrative agencies will not be interfered with and shall be considered binding
and conclusive upon this Court provided that there is substantial evidence to support
such findings.[29] Substantial evidence has been defined as that amount of relevant
evidence which a reasonable mind might accept as adequate to justify a conclusion[30] or
evidence commonly accepted by reasonably prudent men in the conduct of their
affairs.[31]
After a diligent review of the evidence presented and the pleadings filed, this Court
finds that there is substantial evidence to justify the conclusion of PAGC that Cataquiz
should be punished with the penalty of dismissal, along with its accessory penalties, for
committing acts prejudicial to the best interest of the government and for giving undue
advantage to a private company in the award of fishpens. Thus, the PAGC was correct
when it wrote:

I.

[I]n the first allegation, respondent Cataquiz impliedly admitted his


direct transaction with 35 fishpen operators and the payment of fishpen
fees without conducting a public bidding. In respondents defense, he raised
the invalidity of Board Resolution No. 68 [sic] which provides for guidelines
in public bidding for fishpen areas. Respondent argued that Board
Resolution No. 68 [sic] is an unreasonable exercise of the Boards legislative
power since public bidding has never been intended by RA 4850, the
enabling law of LLDA.

The Commission finds the contention of the respondent bereft of


merit. Section 25-A of RA 4850 authorizes the Board to formulate,
prescribe, amend and repeal rules and regulations to govern the conduct of
business of the Authority and it is the function of the respondent in his
capacity as General Manager to implement and administer the policies,
programs and projects approved by the Board pursuant to Section 26 (b) of
RA 4850. While it is true that a Board Resolution draws life from the
enabling statute, the Commission cannot find any inconsistency between
the former and the latter. The Board Resolution No. 68 [sic] is still within
the bounds of RA 4850 and is germane to its purpose in promoting a
balanced growth of the Laguna Lake. Thus, the validity of the questioned
Resolution stands. It becomes now the duty of the respondent to
implement the Resolution and not to question its legality nor disregard it.

In the case at hand, respondents act of not giving credence to the


Board Resolution resulted to undue prejudice to the best interest of the
public service considering that the Authority incurred Revenue loss from
the direct transaction of respondent Cataquiz amounting to Seven Hundred
Fifty Five Thousand Seven Hundred Pesos ₱755,700.00.
The presumption that the official duty has been regularly performed
was overcome by the fact that the government was deprived of much
needed revenue as a result of the act committed by respondent Cataquiz.

xxxx

III.

The Commission finds that the act of respondent Cataquiz in


condoning penalties and reducing the fines imposed by the Public Hearing
Committee (PHC) of the LLDA has no basis in law. The premise of the
respondent citing Section 26 (b) giving him the executive prerogative and
Section 4 (a) justifying the condonation and reduction is misplaced. A
careful examination of the aforementioned provisions would reveal that
Section 26 (b) does not vest the respondent the executive prerogative. Said
provision gives him the authority to execute and administer the policies,
plans, programs and projects approved by the Board. There is no showing
that the condonation of penalties and reduction of fines has been approved
by the Board. Section 26 (b) is clear in its terms that before respondent
executes any policy, program or project, the same has to be approved by the
Board. Thus, there is no executive prerogative to speak of.

The Commission agrees with the contention of the complainant that


Section 4 (d) refers to additional power and function of the Authority and
not to the respondent. Of equal importance is that Section 4 (d) does not
confer him the authority to condone penalties nor reduce fines. Said
provision is referring to Orders requiring the discontinuance of
pollution.When the law is clear it needs no further interpretation.

The contention of respondent Cataquiz that there is nothing in


Section 25-A that states that the approval of the Board is necessary has no
leg to stand on. Same provision gives the Board the implied power to do
such other acts and perform such other functions as may be necessary to
carry out the provisions of this Charter.

In relation to this is Section 31 of RA 4850 that gives the Board the


authority to create such other divisions and positions as may be deemed
necessary for the efficient, economic and effective conduct of the activity of
the Authority.
The findings of the PHC, although a recommendatory body, must be
accorded great respect. The penalties imposed by the PHC cannot be
substituted by the respondent without any basis and the latter cannot
simply claim that he has the sole authority to condone penalties and reduce
fines.

Evidently respondents act of condonation of penalties and reduction


of fines was uncalled for. Thus, his act resulted to undue prejudice to the
best interest of the service and will set a dangerous precedent to the justice
system of the government.

IV.

In the same vein, the dismissal of the pending case against Twenty
First Century Resources Inc. by the respondent has no basis in law. Section
26 of RA 4850 clearly enumerates the powers and functions of respondent,
to wit:

xxx.

a. Submit for consideration of the Board the policies and


measures which he believes to be necessary to carry out
the purposes and provisions of this Act;

b. Execute and administer the policies, plan, programs and


projects approved by the Board;

c. Direct and supervise the operation and internal


administration of the Authority. The General Manager
may delegate certain administrative responsibilities to
other officers of the Authority subject to the rules and
regulations of the Board;

d. Appoint officials and employees below the rank of


division heads to positions in the approved budget upon
written recommendation of the division head concerned
using as guide the standard set forth in the Authoritys
merit system;

e. Submit quarterly reports to the Board on personnel


selection, placement and training;

f. Submit to the NEDA an annual report and such other


reports as may be required, including the details of the
annual and supplemental budgets of the Authority;

g. Perform such other functions as may be provided by law.

From the aforementioned section, nowhere can the Commission find


any grant of power to adjudicate in favor of respondent Cataquiz and the
latter cannot hide under the cloak of managerial prerogative absent any law
that justifies his act of dismissing the case. To reiterate, the dismissal of the
case against Twenty First Century is an act clearly prejudicial to the best
interest of the service. Consequently, the Authority was deprived of a
committed service to the government and this fact cannot be overlooked
upon by the Commission.

xxxx

VI.

The contract of service for consultancy duly signed by the respondent and
the legal consultants of LLDA is not in accordance with Section 212 of the
Government Accounting and Auditing Manual (GAAM) 86 which provides
that:

Payment of public funds of retainer fees of private law


practitioners who are so hired and employed without the
prior written concurrence and acquiescence by the Solicitor
General of the Government Corporate Counsel, as the case
may be, as well as the written concurrence of the Commission
on Audit, shall be disallowed in audit and the same shall be a
personal liability of the official concerned.

The contention of the respondent that the LLDA Administrative


Section failed to advise him regarding the requisites laid down by law
cannot stand. Occupying an executive position, respondent is required to
exercise diligence in the highest degree in the performance of his
duties. Respondent cannot pass responsibility to other Division which in
the first place, he has supervision and control of, pursuant to Section 31 of
RA 4850. Supervision as defined is the overseeing or the power or authority
of an officer to see that subordinate officers perform their duties. If the
latter fail or neglect to fulfill them, the former may take such action or step
as prescribed by law to make them perform their duties. Control on the
other hand, is the power of an officer to alter or modify or nullify or set
aside what a subordinate officer has done in the performance of his duties
and to substitute the judgment of the former for that of the latter. There is
therefore a given authority to the respondent by law to regulate the acts of
the Administrative Division and respondent cannot simply evade
responsibility by invoking the shortcomings of his subordinates. In signing
the contract, without verifying compliance of existing laws, respondent falls
short of the required competence expected of him in the performance of his
official functions. Incompetence, has been defined as lack of ability, legal
qualification or fitness to discharge the required duty; want of physical or
intellectual or moral fitness.

xxxx

VIII.

The Commission finds that the transaction entered into by the


respondent and Phil-Tai Fishing and Trade Company is violative of Section
3 (e) of RA 3019. The elements of Section 3 (e) are as follows:

1. The accused is a public officer discharging official


administrative, or judicial functions or private persons in
conspiracy with them;
2. The public officer committed the prohibited act during
the performance of his official duty or in relation to his
public position;

3. The public officer acted with manifest partiality, evident


bad faith or gross inexcusable negligence; and

4. His action caused undue injury to the Government or


any private party or gave any party any unwarranted
benefit, advantage or preference.

Applying the first element, respondent Cataquiz is a public officer


within the legal term of RA 3019 which provides that Public officer includes
elective and appointive officials and employees, permanent or temporary,
whether in the classified or unclassified or exempt from service receiving
compensation, even nominal from the government xxx. Clearly, respondent
is a public officer discharging official functions in transacting with Phil-Tai
to occupy and utilize portions of LLDA facilities locate (sic) at Km. 70 Brgy.
Bangyas, Calauan, Laguna.

Relating to the second element in the instant case, respondent in the


exercise of his official duties allowed Phil-Tai to use the LLDA facility
without the concurrence of the Board of Directors of LLDA where the
corporate powers of the Authority lies as explicitly provided in Section 16 of
RA 4850.

Applying the third element, respondent Cataquiz acted with


manifest partiality when by reason of his office he allowed Phil-Tai to
occupy the LLDA facility without any contract and without the approval of
the Board of Directors. The privilege granted was by virtue of a joint
venture proposal which was never authorized by the Board as admitted by
the respondent in his position paper. In fact the proposal is still awaiting
resolution from the board. Partiality is synonymous with bias which excites
a disposition to see and report matters as they are wished for rather than as
they are.
Manifest means obvious to the understanding, evident to the mind,
not obscure or hidden and is synonymous with open, clear, visible,
unmistakable, indubitable, indisputable, evident and self-evident.

There was manifest partiality when respondent Cataquiz entered a


transaction with Phil-Tai disregarding the requirements set forth by RA
4850 which requires the approval of the Board. Worse, the joint venture
proposal by Phil-Tai which was accepted by the respondent took place
without any contract at all. The contention of the respondent that Phil-Tai
is only given the authority to conduct a preliminary study and including the
technical survey and Pilot testing at the aforesaid facility for the purpose of
determining its structural integrity and commercial viability cannot prevail
over the records available at hand.

The findings of DENR officials in their ocular inspection on May 13,


2003 would disclose that Phil-Tai is in actual possession of the LLDA facility
and personally witnessed the actual harvesting of tilapia from the fishpond
owned by LLDA. The report of DENR officials contains that the act of the
respondent is prejudicial to the interest of the government mainly because
there was no contract executed between LLDA and Phil-Tai.

Moreover, the Memorandum from the Division Chief III Jose K.


Cario III of the Community Development Division would reveal that Phil-
Tai is introducing exotic aquatic species in one of the earthen ponds at
LLDA Calauan Complex. RA 8550 otherwise known as the Philippine
Fisheries Code of 1998 provides that the introduction of foreign crustaceans
such as crayfish in Philippine waters without a sound ecological, biological
and environmental justification based on scientific studies is
prohibited. There is, therefore, an unwarranted act by Phil-Tai which is
prejudicial to the government.

Applying the fourth element in the case at bar, respondent Cataquiz


gave Phil-Tai unwarranted benefit, advantage or preference when he
entertained the joint venture proposal without any consideration. In fact, as
stated in respondents position paper, LLDA was assured by Phil-Tai that in
the event the agreement does not materialize, it will remove all its
equipment without damage to the LLDA aqua culture facilities. Be it noted
that the assurance was not made in writing.
Respondent refused to discern the adverse consequences of the joint
venture proposal considering that no available remedy was left to the
government in case of untoward incidents that may arise. The transaction
entered into is at most unenforceable because the agreements therein was
(sic) not put into writing. The transaction cannot be tolerated by the
Commission and the unwarranted benefit that Phil-Tai is enjoying deserves
much consideration because it puts the government into a very
disadvantageous situation.

xxxx

X.

The Commission finds that the promotion of the film entry of RVQ
Productions by respondent Cataquiz does not offend Section 7 (d) of RA
6713 which provides as follows:

Public officials and employees shall not solicit or


accept, directly or indirectly, any gift, gratuity, favor,
entertainment, loan or anything of monetary value from any
person in the course of their official duties, or in connection
with any operation being regulated by, or any transaction
which may be affected by the functions of their office.

There was no undue solicitation of patronage of the film considering


that the tickets sold are voluntary participation of interested employees. In
fact, no monetary consideration was received nor accepted by the
respondent.

Of important consideration, however, is the use of government


vehicles in the delivery of movie tickets and the collection of payments
thereof to different industrial establishments. Respondent Cataquiz in his
official capacity as the General Manager of LLDA, approved the use of
government vehicles and drivers for the promotion of the movie.

The impropriety of using government property in favor of a (sic)


RVQ Production, a private entity cannot be countenanced as this is
prejudicial to the best interest of the service.The very purpose of the use of
the government property has not been properly served. [32] [Underscoring
supplied]

xxxx
The dismissal of the criminal case against

Respondent does not bar the finding

of administrative liability.

Cataquiz claims that the dismissal by the Ombudsman of the case against him
constitutes the law of the case between him and the OP which necessitates the dismissal
of the petition before this Court.

At the outset, the Court would like to highlight the fact that Cataquiz never raised
this issue before the CA, despite having had ample time to do so. The records show that
the Ombudsman promulgated its resolution on November 30, 2004, more than three
months prior to the filing by the respondent of his petition before the CA on March 2,
2005.[33]Nevertheless, he only chose to mention this after the CA had rendered its decision
and after the submission of his comment on the petition at bench. This is evidently a
desperate effort on his part to strengthen his position and support the decision of the CA
exonerating him from any administrative liability. The Court has consistently ruled that
issues not previously ventilated cannot be raised for the first time on
appeal.[34] Otherwise, to consider such issues and arguments belatedly raised by a party
would be tantamount to a blatant disregard of the basic principles of fair play, justice and
due process.[35] Therefore, this issue does not merit the attention of the Court.

Even if the Court were to overlook this procedural lapse, Cataquiz argument would
still fail. The Ombudsman Resolution dated November 30, 2004 recommending the
dismissal of the charges against him pertains only to the criminal case against him and
not the administrative case, which is the subject matter of the case at bench. As can be
gleaned from the Resolution, the charges referred to by the Ombudsman were for
respondents alleged violation of Section 3(b) and (c) of R.A. No. 3019 or for malversation
of public funds and fraud against the public treasury.[36]

It is a basic rule in administrative law that public officials are under a three-fold
responsibility for a violation of their duty or for a wrongful act or omission, such that they
may be held civilly, criminally and administratively liable for the same act. [37] Obviously,
administrative liability is separate and distinct from penal and civil liability.[38] In the case
of People v. Sandiganbayan,[39]the Court elaborated on the difference between
administrative and criminal liability:

The distinct and independent nature of one proceeding from the


other can be attributed to the following: first, the difference in the quantum
of evidence required and, correlatively, the procedure observed and
sanctions imposed; and second, the principle that a single act may offend
against two or more distinct and related provisions of law, or that the same
act may give rise to criminal as well as administrative liability.[40]

Accordingly, the dismissal of the criminal case by the Ombudsman does not foreclose
administrative action against Cataquiz.[41] His absolution from criminal liability is not
conclusive upon the OP, which subsequently found him to be administratively liable. The
pronouncement made by the Ombudsman cannot serve to protect the respondent from
further administrative prosecution. A contrary ruling would be unsettling as it would
undermine the very purpose of administrative proceedings, that is, to protect the public
service and uphold the time-honored principle that a public office is a public trust.[42]

Respondent can be imposed with

the accessory penalties.


Removal or resignation from office is not a bar to a finding of administrative
liability.[43] Despite his removal from his position, Cataquiz can still be held
administratively liable for acts committed during his service as General Manager of the
LLDA and he can be made to suffer the corresponding penalties. The subsequent finding
by the OP that Cataquiz is guilty of the charges against him with the imposition of the
penalty of dismissal and its corresponding accessory penalties is valid.

It cannot be disputed that Cataquiz was a presidential appointee.[44] As such, he


was under the direct disciplining authority of the President who could legitimately have
him dismissed from service. This is pursuant to the well-established principle that the
Presidents power to remove is inherent in his power to appoint.[45] Therefore, it is well
within the authority of the President to order the respondents dismissal.

Cataquiz argues that his removal has rendered the imposition of the principal penalty of
dismissal impossible. Consequently, citing the rule that the accessory follows the
principal, he insists that the accessory penalties may no longer be imposed on him.[46]

The respondent is mistaken.

In the case of In Re: Complaint of Mrs. Corazon S. Salvador against Spouses Noel
and Amelia Serafico,[47] despite the resignation from government service by the employee
found guilty of grave misconduct, disgraceful and immoral conduct and violation of the
Code of Conduct for Court Personnel, thereby making the imposition of the penalty of
dismissal impossible, this Court nevertheless imposed the accessory penalties of forfeiture
of benefits with prejudice to re-employment in any branch or instrumentality of
government.

Similarly instructive is the case of Pagano v. Nazarro, Jr.[48] where the Court held
that:
The instant case is not moot and academic, despite the petitioners
separation from government service. Even if the most severe of
administrative sanctions that of separation from service may no longer be
imposed on the petitioner, there are other penalties which may be imposed
on her if she is later found guilty of administrative offenses charged against
her, namely, the disqualification to hold any government office and the
forfeiture of benefits.[49]

Based on the foregoing, it is clear that the accessory penalties of disqualification from re-
employment in public service and forfeiture of government retirement benefits can still
be imposed on the respondent, notwithstanding the impossibility of effecting the
principal penalty of dismissal because of his removal from office.

PAGCs typographical error

can be corrected.

One of the charges against Cataquiz is for directly transacting with 35 fishpen operators
and authorizing payment of fishpen fees based on negotiated prices, in contravention of
the directive of Board Resolution No. 28, which requires the conduct of a public
bidding. The PAGC Resolution dated December 5, 2003, recommending the dismissal of
Cataquiz erroneously indicated that he violated Board Resolution No. 68, instead of No.
28.[50] The CA then sustained his contention that he could not be found guilty for
violating Board Resolution No. 68 of the LLDA because such resolution was not related to
fishpen awards and that his right to due process was violated when the OP found him
guilty of violating the said resolution. It further added that even if the respondent was
charged with acting in contravention with Board Resolution No. 28, the said resolution
would be invalid for not having been duly approved by the President.
Petitioners, however, claim that it was merely a typographical or clerical error on the part
of PAGC which was unfortunately adopted by the OP.[51] Cataquiz apparently will not be
unduly prejudiced by the correction of the PAGC resolution. In the counter-affidavit he
filed before the PAGC, he was able to exhaustively argue against the allegation that he
had violated Board Resolution No. 28.[52] Hence, he cannot feign ignorance of the true
charges against him.

In this regard, the Court agrees with the petitioners.

It is clear from the pleadings submitted before PAGC particularly in the Affidavit
Complaint filed by CELLDA against Cataquiz and in the Counter-Affidavit submitted by
the latter that the resolution referred to as having been violated by the respondent was
Board Resolution No. 28, and not No. 68, as was erroneously indicated in the PAGC
Resolution. Thus, pursuant to the rule that the judgment should be in accordance with
the allegations and the evidence presented,[53] the typographical error contained in the
PAGC Resolution can be amended. Clerical errors or any ambiguity in a decision can be
rectified even after the judgment has become final by reference to the pleadings filed by
the parties and the findings of fact and conclusions of law by the court.[54]

A careful perusal of the PAGCs discussion on the violation of the questioned board
resolution discloses that PAGC was undoubtedly referring to Board Resolution No. 28
which approved the policy guidelines for public bidding of the remaining free fishpen
areas in Laguna de Bay, and not Resolution No. 68 which had nothing at all to do with
fishpen awards. Therefore, the reference to Board Resolution No. 68, instead of Board
Resolution No. 28, in the PAGC Resolution is unmistakably a typographical error on the
part of PAGC but, nonetheless, rectifiable.
Moreover, the respondents counter-affidavit shows that he had knowledge of the
fact that he was being charged with violation of Board Resolution No. 28. He even argued
that the said resolution was an invalid and illegal administrative rule. His position was
that the resolution issued by the Board of Directors of LLDA was an unreasonable
exercise of its legislative power because the enabling law of LLDA, R.A. No. 4850, did not
require the public bidding of free fishpen areas.[55] Then, in his motion for reconsideration
before the OP, he argued that the resolution was invalid because it was never approved by
the President, contrary to Section 4(k) of R.A. No. 4850 (as amended by Presidential
Decree No. 813) which provides:

(K) For the purpose of effectively regulating and monitoring


activities in Laguna de Bay. The Authority shall have exclusive jurisdiction
to issue new permit for the use of the lake waters for any projects or
activities in/or affecting the said lake including navigation, construction,
and operation of fishpens, fish enclosures, fish corrals and the like, and to
impose necessary safeguards for lake quality control and management and
to collect necessary fees for said activities and projects: Provided, That the
fees collected for fisheries may be shared between the Authority and other
government agencies and political subdivisions in such proportion as may
be determined by the President of the Philippines upon recommendation of
the Authoritys Board: Provided further, That the Authoritys Board may
determine new areas of fishery development or activities which it may place
under the supervision of the Bureau of Fisheries and Aquatic Resources
taking into account the overall development plans and programs for Laguna
de Bay and related bodies of water: Provided, finally, That the Authority
shall subject to the approval of the President of the Philippines
promulgate such rules and regulations which shall govern fisheries
development activities in Laguna de Bay which shall take into
consideration among others the following: socio-economic amelioration of
bona-fide resident fishermen whether individually or collectively in the
form of cooperatives, lakeshore town development, a master plan for fish
construction and operation, communal fishing ground for lakeshore town
residents, and preference to lakeshore town residents in hiring laborers for
fishery projects. [Emphasis supplied]

Regrettably, the CA sustained the respondents argument. A careful examination of


the abovementioned law shows that presidential approval is only required for rules and
regulations which shall govern fisheries development activities in Laguna de Bay. The
question then is whether Board Resolution No. 28 falls under that category of rules
subject to approval by the President. The answer is in the negative.

The Revised Laguna de Bay Zoning and Management Plan[56] allocated 10,000
hectares of the lake surface areas for fishpen operators. In the event that the area would
not be fully occupied after all qualified operators had been assigned their respective
fishpen areas, the residual free areas would be opened for bidding to other prospective
qualified applicants. Accordingly, Board Resolution No. 28 simply set forth the guidelines
for the public bidding of the remaining free fishpen areas in Laguna de Bay.[57] It did not
require presidential approval because it did not regulate any fisheries development
activities. Hence, the questioned resolution cannot be declared invalid on the basis of the
CAs ratiocination that the resolution lacked the approval of the President.

WHEREFORE, the petition is GRANTED. The Decision of the Court of Appeals


is REVERSED and SET ASIDE and another judgment entered reinstating the June 29,
2004Decision of the Office of the President, as amended by its February 10,
2005 Amended Resolution.

SO ORDERED.

PAUL LEE TAN, ANDREW G.R. No. 153468


LIUSON, ESTHER WONG,
STEPHEN CO, JAMES TAN, Present:
JUDITH TAN, ERNESTO
TANCHI JR., EDWIN NGO, PANGANIBAN, CJ.,Chairperson,
VIRGINIA KHOO, SABINO YNARES-SANTIAGO,
PADILLA JR., EDUARDO P. AUSTRIA-MARTINEZ,
LIZARES and GRACE CALLEJO, SR., and
CHRISTIAN HIGH SCHOOL, CHICO-NAZARIO, JJ.
Petitioners,
- versus -
PAUL SYCIP and MERRITTO
LIM, Promulgated:
Respondents. August 17, 2006
x -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- x

DECISION

PANGANIBAN, CJ.:

For stock corporations, the quorum referred to in Section 52 of the Corporation Code

is based on the number of outstanding voting stocks. For nonstock corporations, only those

who are actual, living members with voting rights shall be counted in determining the

existence of a quorum during members meetings. Dead members shall not be counted.

The Case

The present Petition for Review on Certiorari[1] under Rule 45 of the Rules of Court

seeks the reversal of the January 23[2] and May 7, 2002,[3] Resolutions of the Court of

Appeals (CA) in CA-GR SP No. 68202. The first assailed Resolution dismissed the appeal

filed by petitioners with the CA. Allegedly, without the proper authorization of the other

petitioners, the Verification and Certification of Non-Forum Shopping were signed by

only one of them -- Atty. Sabino Padilla Jr.The second Resolution denied reconsideration.
The Facts
Petitioner Grace Christian High School (GCHS) is a nonstock, non-profit educational

corporation with fifteen (15) regular members, who also constitute the board of

trustees.[4] During the annual members meeting held on April 6, 1998, there were only

eleven (11)[5] living member-trustees, as four (4) had already died. Out of the eleven, seven

(7)[6] attended the meeting through their respective proxies. The meeting was convened

and chaired by Atty. Sabino Padilla Jr. over the objection of Atty. Antonio C. Pacis, who

argued that there was no quorum.[7] In the meeting, Petitioners Ernesto Tanchi, Edwin

Ngo, Virginia Khoo, and Judith Tan were voted to replace the four deceased member-

trustees.

When the controversy reached the Securities and Exchange Commission (SEC),

petitioners maintained that the deceased member-trustees should not be counted in the

computation of the quorum because, upon their death, members automatically lost all

their rights (including the right to vote) and interests in the corporation.

SEC Hearing Officer Malthie G. Militar declared the April 6, 1998 meeting null and void

for lack of quorum. She held that the basis for determining the quorum in a meeting of

members should be their number as specified in the articles of incorporation, not simply

the number of living members.[8] She explained that the qualifying phrase entitled to vote

in Section 24[9] of the Corporation Code, which provided the basis for determining a

quorum for the election of directors or trustees, should be read together with Section

89.[10]

The hearing officer also opined that Article III (2)[11] of the By-Laws of GCHS,

insofar as it prescribed the mode of filling vacancies in the board of trustees, must be

interpreted in conjunction with Section 29[12] of the Corporation Code. The SEC en banc
denied the appeal of petitioners and affirmed the Decision of the hearing officer in

toto.[13] It found to be untenable their contention that the word members, as used in

Section 52[14] of the Corporation Code, referred only to the living members of a nonstock

corporation.[15]

As earlier stated, the CA dismissed the appeal of petitioners, because the

Verification and Certification of Non-Forum Shopping had been signed only by Atty.

Sabino Padilla Jr. No Special Power of Attorney had been attached to show his authority

to sign for the rest of the petitioners.

Hence, this Petition.[16]

Issues

Petitioners state the issues as follows:

Petitioners principally pray for the resolution of the legal question of


whether or not in NON-STOCK corporations, dead members should still be
counted in determination of quorum for purposed of conducting the
Annual Members Meeting.

Petitioners have maintained before the courts below that the DEAD
members should no longer be counted in computing quorum primarily on
the ground that members rights are personal and non-transferable as
provided in Sections 90 and 91 of the Corporation Code of the Philippines.

The SEC ruled against the petitioners solely on the basis of a 1989 SEC
Opinion that did not even involve a non-stock corporation as petitioner
GCHS.
The Honorable Court of Appeals on the other hand simply refused to
resolve this question and instead dismissed the petition for review on a
technicality the failure to timely submit an SPA from the petitioners
authorizing their co-petitioner Padilla, their counsel and also a
petitioner before the Court of Appeals, to sign the petition on behalf of the
rest of the petitioners.

Petitioners humbly submit that the action of both the SEC and the Court of
Appeals are not in accord with law particularly the pronouncements of this
Honorable Court in Escorpizo v. University of Baguio (306 SCRA
497), Robern Development Corporation v. Quitain (315 SCRA 150,) and MC
Engineering, Inc. v. NLRC, (360 SCRA 183). Due course should have been
given the petition below and the merits of the case decided in petitioners
favor.[17]

In sum, the issues may be stated simply in this wise: 1) whether the CA erred in denying

the Petition below, on the basis of a defective Verification and Certification; and 2)

whether dead members should still be counted in the determination of the quorum, for

purposes of conducting the annual members meeting.

The Courts Ruling

The present Petition is partly meritorious.

Procedural Issue:
Verification and Certification
of Non-Forum Shopping

The Petition before the CA was initially flawed, because the Verification and

Certification of Non-Forum Shopping were signed by only one, not by all, of the

petitioners; further, it failed to show proof that the signatory was authorized to sign on

behalf of all of them. Subsequently, however, petitioners submitted a Special Power of

Attorney, attesting that Atty. Padilla was authorized to file the action on their behalf.[18]
In the interest of substantial justice, this initial procedural lapse may be

excused. [19] There appears to be no intention to circumvent the need for proper

verification and certification, which are aimed at assuring the truthfulness and

correctness of the allegations in the Petition for Review and at discouraging forum

shopping.[20] More important, the substantial merits of petitioners case and the purely

legal question involved in the Petition should be considered special circumstances[21] or

compelling reasons that justify an exception to the strict requirements of the verification

and the certification of non-forum shopping.[22]


Main Issue:
Basis for Quorum

Generally, stockholders or members meetings are called for the purpose of electing

directors or trustees[23] and transacting some other business calling for or requiring the

action or consent of the shareholders or members,[24] such as the amendment of the

articles of incorporation and bylaws, sale or disposition of all or substantially all corporate

assets, consolidation and merger and the like, or any other business that may properly

come before the meeting.

Under the Corporation Code, stockholders or members periodically elect the board of

directors or trustees, who are charged with the management of the corporation. [25] The

board, in turn, periodically elects officers to carry out management functions on a day-to-

day basis. As owners, though, the stockholders or members have residual powers over

fundamental and major corporate changes.


While stockholders and members (in some instances) are entitled to receive profits, the

management and direction of the corporation are lodged with their representatives and

agents -- the board of directors or trustees.[26] In other words, acts of management pertain

to the board; and those of ownership, to the stockholders or members. In the latter case,

the board cannot act alone, but must seek approval of the stockholders or members.[27]

Conformably with the foregoing principles, one of the most important rights of a

qualified shareholder or member is the right

to vote -- either personally or by proxy -- for the directors or trustees who are to manage

the corporate affairs.[28] The right to choose the persons who will direct, manage and

operate the corporation is significant, because it is the main way in which a stockholder

can have a voice in the management of corporate affairs, or in which a member in a

nonstock corporation can have a say on how the purposes and goals of the corporation

may be achieved.[29] Once the directors or trustees are elected, the stockholders or

members relinquish corporate powers to the board in accordance with law.

In the absence of an express charter or statutory provision to the contrary, the general

rule is that every member of a nonstock corporation, and every legal owner of shares in a

stock corporation, has a right to be present and to vote in all corporate meetings.

Conversely, those who are not stockholders or members have no right to vote.[30] Voting

may be expressed personally, or through proxies who vote in their representative


capacities.[31] Generally, the right to be present and to vote in a meeting is determined by

the time in which the meeting is held.[32]

Section 52 of the Corporation Code states:

Section 52. Quorum in Meetings. Unless otherwise provided for in this Code
or in the by-laws, a quorum shall consist of the stockholders representing a
majority of the outstanding capital stock or a majority of the members in
the case of non-stock corporations.

In stock corporations, the presence of a quorum is ascertained and counted on the basis

of the outstanding capital stock, as defined by the Code thus:

SECTION 137. Outstanding capital stock defined. The term outstanding capital
stock as used in this Code, means the total shares of stock issued under
binding subscription agreements to subscribers or stockholders, whether or
not fully or partially paid, except treasury shares. (Underscoring supplied)

The Right to Vote in

Stock Corporations

The right to vote is inherent in and incidental to the ownership of corporate stocks. [33] It

is settled that unissued stocks may not be voted or considered in determining whether a

quorum is present in a stockholders meeting, or whether a requisite proportion of the

stock of the corporation is voted to adopt a certain measure or act. Only

stock actually issued and outstanding may be voted.[34] Under Section 6 of the
Corporation Code, each share of stock is entitled to vote, unless otherwise provided in the

articles of incorporation or declared delinquent[35] under Section 67 of the Code.

Neither the stockholders nor the corporation can vote or represent shares that have never

passed to the ownership of stockholders; or, having so passed, have again been purchased

by the corporation.[36] These shares are not to be taken into consideration in determining

majorities. When the law speaks of a

given proportion of the stock, it must be construed to mean the shares that have

passed from the corporation, and that may be voted.[37]

Section 6 of the Corporation Code, in part, provides:

Section 6. Classification of shares. The shares of stock of stock corporations may be


divided into classes or series of shares, or both, any of which classes or
series of shares may have such rights, privileges or restrictions as may be
stated in the articles of incorporation: Provided, That no share may be
deprived of voting rights except those classified and issued as preferred or
redeemable shares, unless otherwise provided in this Code: Provided,
further, that there shall always be a class or series of shares which have
complete voting rights.

xxxxxxxxx

Where the articles of incorporation provide for non-voting shares in the cases
allowed by this Code, the holders of such shares shall nevertheless be
entitled to vote on the following matters:

1. Amendment of the articles of incorporation;


2. Adoption and amendment of by-laws;
3. Sale, lease, exchange, mortgage, pledge or other disposition of
all or substantially all of the corporation property;
4. Incurring, creating or increasing bonded indebtedness;
5. Increase or decrease of capital stock;
6. Merger or consolidation of the corporation with another
corporation or other corporations;
7. Investment of corporate funds in another corporation or
business in accordance with this Code; and
8. Dissolution of the corporation.

Except as provided in the immediately preceding paragraph, the vote necessary to


approve a particular corporate act as provided in this Code shall be deemed
to refer only to stocks with voting rights.

Taken in conjunction with Section 137, the last paragraph of Section 6 shows that

the intention of the lawmakers was to base the quorum mentioned in Section 52 on the

number of outstanding voting stocks.[38]

The Right to Vote in


Nonstock Corporations

In nonstock corporations, the voting rights attach to membership.[39] Members vote as

persons, in accordance with the law and the bylaws of the corporation. Each member

shall be entitled to one vote unless so limited, broadened, or denied in the articles of

incorporation or bylaws.[40] We hold that when the principle for determining the quorum

for stock corporations is applied by analogy to nonstock corporations, only those who

are actual members with voting rights should be counted.

Under Section 52 of the Corporation Code, the majority of the members

representing the actual number of voting rights, not


the number or numerical constant that may originally be specified in the articles of

incorporation, constitutes the quorum.[41]

The March 3, 1986 SEC Opinion[42] cited by the hearing officer uses the phrase

majority vote of the members; likewise Section 48 of the Corporation Code refers to 50

percent of 94 (the number of registered members of the association mentioned therein)

plus one. The best evidence of who are the present members of the corporation is the

membership book; in the case of stock corporations, it is the stock and transfer book.[43]

Section 25 of the Code specifically provides that a majority of the directors or trustees, as

fixed in the articles of incorporation, shall constitute a quorum for the transaction of

corporate business (unless the articles of incorporation or the bylaws provide for a greater

majority). If the intention of the lawmakers was to base the quorum in the meetings of

stockholders or members on their absolute number as fixed in the articles of

incorporation, it would have expressly specified so.Otherwise, the only logical conclusion

is that the legislature did not have that intention.

Effect of the Death

of a Member or Shareholder
Having thus determined that the quorum in a members meeting is to be reckoned

as the actual number of members of the corporation, the next question to resolve is what

happens in the event of the death of one of them.

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.[44]

On the other hand, membership in and all rights arising from a nonstock corporation are

personal and non-transferable, unless the articles of incorporation or the bylaws of the

corporation provide otherwise.[45] In other words, the determination of whether or not

dead members are entitled to exercise their voting rights (through their executor or

administrator), depends on those articles of incorporation or bylaws.

Under the By-Laws of GCHS, membership in the corporation shall, among others, be

terminated by the death of the member.[46] Section 91 of the Corporation Code further

provides that termination extinguishes all the rights of a member of the corporation,

unless otherwise provided in the articles of incorporation or the bylaws.

Applying Section 91 to the present case, we hold that dead members who are dropped

from the membership roster in the manner and for the cause provided for in the By-Laws
of GCHS are not to be counted in determining the requisite vote in corporate matters or

the requisite quorum for the annual members meeting. With 11 remaining members, the

quorum in the present case should be 6. Therefore, there being a quorum, the annual

members meeting, conducted with six[47] members present, was valid.

Vacancy in the
Board of Trustees

As regards the filling of vacancies in the board of trustees, Section 29 of the Corporation

Code provides:
SECTION 29. Vacancies in the office of director or trustee. -- Any
vacancy occurring in the board of directors or trustees other than by
removal by the stockholders or members or by expiration of term, may be
filled by the vote of at least a majority of the remaining directors or
trustees, if still constituting a quorum; otherwise, said vacancies must be
filled by the stockholders in a regular or special meeting called for that
purpose. A director or trustee so elected to fill a vacancy shall be elected
only for the unexpired term of his predecessor in office.

Undoubtedly, trustees may fill vacancies in the board, provided that those

remaining still constitute a quorum. The phrase may be filled in Section 29 shows that the

filling of vacancies in the board by the remaining directors or trustees constituting a

quorum is merely permissive, not mandatory.[48] Corporations, therefore, may choose

how vacancies in their respective boards may be filled up -- either by the remaining

directors constituting a quorum, or by the stockholders or members in a regular or

special meeting called for the purpose.[49]


The By-Laws of GCHS prescribed the specific mode of filling up existing vacancies in its

board of directors; that is, by a majority vote of the remaining members of the board.[50]

While a majority of the remaining corporate members were present, however, the

election of the four trustees cannot be legally upheld for the obvious reason that it was

held in an annual meeting of the members, not of the board of trustees. We are not

unmindful of the fact that the members of GCHS themselves also constitute the trustees,

but we cannot ignore the GCHS bylaw provision, which specifically prescribes that

vacancies in the board must be filled up by the remaining trustees. In other words, these

remaining member-trustees must sit as a board in order to validly elect the new ones.

Indeed, there is a well-defined distinction between a corporate act to be done by the

board and that by the constituent members of the corporation. The board of trustees

must act, not individually or separately, but as a body in a lawful meeting. On the other

hand, in their annual meeting, the members may be represented by their respective

proxies, as in the contested annual members meeting of GCHS.

WHEREFORE, the Petition is partly GRANTED. The assailed Resolutions of the

Court of Appeals are hereby REVERSED AND SET ASIDE. The remaining members of

the board of trustees of Grace Christian High School (GCHS) may convene and fill up the

vacancies in the board, in accordance with this Decision. No pronouncement as to costs

in this instance.

SO ORDERED.
G.R. No. 84197 July 28, 1989

PIONEER INSURANCE & SURETY CORPORATION, petitioner,


vs.
THE HON. COURT OF APPEALS, BORDER MACHINERY & HEAVY EQUIPMENT,
INC., (BORMAHECO), CONSTANCIO M. MAGLANA and JACOB S. LIM, respondents.

G.R. No. 84157 July 28, 1989

JACOB S. LIM, petitioner,


vs.
COURT OF APPEALS, PIONEER INSURANCE AND SURETY CORPORATION,
BORDER MACHINERY and HEAVY EQUIPMENT CO., INC,, FRANCISCO and
MODESTO CERVANTES and CONSTANCIO MAGLANA, respondents.

Eriberto D. Ignacio for Pioneer Insurance & Surety Corporation.

Sycip, Salazar, Hernandez & Gatmaitan for Jacob S. Lim.

Renato J. Robles for BORMAHECO, Inc. and Cervanteses.

Leonardo B. Lucena for Constancio Maglana.

GUTIERREZ, JR., J.:

The subject matter of these consolidated petitions is the decision of the Court of Appeals
in CA-G.R. CV No. 66195 which modified the decision of the then Court of First Instance
of Manila in Civil Case No. 66135. The plaintiffs complaint (petitioner in G.R. No. 84197)
against all defendants (respondents in G.R. No. 84197) was dismissed but in all other
respects the trial court's decision was affirmed.

The dispositive portion of the trial court's decision reads as follows:

WHEREFORE, judgment is rendered against defendant Jacob S. Lim


requiring Lim to pay plaintiff the amount of P311,056.02, with interest at the
rate of 12% per annum compounded monthly; plus 15% of the amount
awarded to plaintiff as attorney's fees from July 2,1966, until full payment is
made; plus P70,000.00 moral and exemplary damages.

It is found in the records that the cross party plaintiffs incurred additional
miscellaneous expenses aside from Pl51,000.00,,making a total of
P184,878.74. Defendant Jacob S. Lim is further required to pay cross party
plaintiff, Bormaheco, the Cervanteses one-half and Maglana the other half,
the amount of Pl84,878.74 with interest from the filing of the cross-
complaints until the amount is fully paid; plus moral and exemplary
damages in the amount of P184,878.84 with interest from the filing of the
cross-complaints until the amount is fully paid; plus moral and exemplary
damages in the amount of P50,000.00 for each of the two Cervanteses.

Furthermore, he is required to pay P20,000.00 to Bormaheco and the


Cervanteses, and another P20,000.00 to Constancio B. Maglana as
attorney's fees.

xxx xxx xxx

WHEREFORE, in view of all above, the complaint of plaintiff Pioneer


against defendants Bormaheco, the Cervanteses and Constancio B.
Maglana, is dismissed. Instead, plaintiff is required to indemnify the
defendants Bormaheco and the Cervanteses the amount of P20,000.00 as
attorney's fees and the amount of P4,379.21, per year from 1966 with legal
rate of interest up to the time it is paid.

Furthermore, the plaintiff is required to pay Constancio B. Maglana the


amount of P20,000.00 as attorney's fees and costs.

No moral or exemplary damages is awarded against plaintiff for this action


was filed in good faith. The fact that the properties of the Bormaheco and
the Cervanteses were attached and that they were required to file a
counterbond in order to dissolve the attachment, is not an act of bad faith.
When a man tries to protect his rights, he should not be saddled with moral
or exemplary damages. Furthermore, the rights exercised were provided for
in the Rules of Court, and it was the court that ordered it, in the exercise of
its discretion.

No damage is decided against Malayan Insurance Company, Inc., the third-


party defendant, for it only secured the attachment prayed for by the
plaintiff Pioneer. If an insurance company would be liable for damages in
performing an act which is clearly within its power and which is the reason
for its being, then nobody would engage in the insurance business. No
further claim or counter-claim for or against anybody is declared by this
Court. (Rollo - G.R. No. 24197, pp. 15-16)

In 1965, Jacob S. Lim (petitioner in G.R. No. 84157) was engaged in the airline business as
owner-operator of Southern Air Lines (SAL) a single proprietorship.
On May 17, 1965, at Tokyo, Japan, Japan Domestic Airlines (JDA) and Lim entered into
and executed a sales contract (Exhibit A) for the sale and purchase of two (2) DC-3A Type
aircrafts and one (1) set of necessary spare parts for the total agreed price of US
$109,000.00 to be paid in installments. One DC-3 Aircraft with Registry No. PIC-718,
arrived in Manila on June 7,1965 while the other aircraft, arrived in Manila on July 18,1965.

On May 22, 1965, Pioneer Insurance and Surety Corporation (Pioneer, petitioner in G.R.
No. 84197) as surety executed and issued its Surety Bond No. 6639 (Exhibit C) in favor of
JDA, in behalf of its principal, Lim, for the balance price of the aircrafts and spare parts.

It appears that Border Machinery and Heavy Equipment Company, Inc. (Bormaheco),
Francisco and Modesto Cervantes (Cervanteses) and Constancio Maglana (respondents in
both petitions) contributed some funds used in the purchase of the above aircrafts and
spare parts. The funds were supposed to be their contributions to a new corporation
proposed by Lim to expand his airline business. They executed two (2) separate
indemnity agreements (Exhibits D-1 and D-2) in favor of Pioneer, one signed by Maglana
and the other jointly signed by Lim for SAL, Bormaheco and the Cervanteses. The
indemnity agreements stipulated that the indemnitors principally agree and bind
themselves jointly and severally to indemnify and hold and save harmless Pioneer from
and against any/all damages, losses, costs, damages, taxes, penalties, charges and
expenses of whatever kind and nature which Pioneer may incur in consequence of having
become surety upon the bond/note and to pay, reimburse and make good to Pioneer, its
successors and assigns, all sums and amounts of money which it or its representatives
should or may pay or cause to be paid or become liable to pay on them of whatever kind
and nature.

On June 10, 1965, Lim doing business under the name and style of SAL executed in favor
of Pioneer as deed of chattel mortgage as security for the latter's suretyship in favor of the
former. It was stipulated therein that Lim transfer and convey to the surety the two
aircrafts. The deed (Exhibit D) was duly registered with the Office of the Register of
Deeds of the City of Manila and with the Civil Aeronautics Administration pursuant to
the Chattel Mortgage Law and the Civil Aeronautics Law (Republic Act No. 776),
respectively.

Lim defaulted on his subsequent installment payments prompting JDA to request


payments from the surety. Pioneer paid a total sum of P298,626.12.

Pioneer then filed a petition for the extrajudicial foreclosure of the said chattel mortgage
before the Sheriff of Davao City. The Cervanteses and Maglana, however, filed a third
party claim alleging that they are co-owners of the aircrafts,

On July 19, 1966, Pioneer filed an action for judicial foreclosure with an application for a
writ of preliminary attachment against Lim and respondents, the Cervanteses, Bormaheco
and Maglana.
In their Answers, Maglana, Bormaheco and the Cervanteses filed cross-claims against Lim
alleging that they were not privies to the contracts signed by Lim and, by way of
counterclaim, sought for damages for being exposed to litigation and for recovery of the
sums of money they advanced to Lim for the purchase of the aircrafts in question.

After trial on the merits, a decision was rendered holding Lim liable to pay Pioneer but
dismissed Pioneer's complaint against all other defendants.

As stated earlier, the appellate court modified the trial court's decision in that the
plaintiffs complaint against all the defendants was dismissed. In all other respects the
trial court's decision was affirmed.

We first resolve G.R. No. 84197.

Petitioner Pioneer Insurance and Surety Corporation avers that:

RESPONDENT COURT OF APPEALS GRIEVOUSLY ERRED WHEN IT


DISMISSED THE APPEAL OF PETITIONER ON THE SOLE GROUND
THAT PETITIONER HAD ALREADY COLLECTED THE PROCEEDS OF
THE REINSURANCE ON ITS BOND IN FAVOR OF THE JDA AND THAT
IT CANNOT REPRESENT A REINSURER TO RECOVER THE AMOUNT
FROM HEREIN PRIVATE RESPONDENTS AS DEFENDANTS IN THE
TRIAL COURT. (Rollo - G. R. No. 84197, p. 10)

The petitioner questions the following findings of the appellate court:

We find no merit in plaintiffs appeal. It is undisputed that plaintiff Pioneer


had reinsured its risk of liability under the surety bond in favor of JDA and
subsequently collected the proceeds of such reinsurance in the sum of
P295,000.00. Defendants' alleged obligation to Pioneer amounts to
P295,000.00, hence, plaintiffs instant action for the recovery of the amount
of P298,666.28 from defendants will no longer prosper. Plaintiff Pioneer is
not the real party in interest to institute the instant action as it does not
stand to be benefited or injured by the judgment.

Plaintiff Pioneer's contention that it is representing the reinsurer to recover


the amount from defendants, hence, it instituted the action is utterly
devoid of merit. Plaintiff did not even present any evidence that it is the
attorney-in-fact of the reinsurance company, authorized to institute an
action for and in behalf of the latter. To qualify a person to be a real party in
interest in whose name an action must be prosecuted, he must appear to be
the present real owner of the right sought to be enforced (Moran, Vol. I,
Comments on the Rules of Court, 1979 ed., p. 155). It has been held that the
real party in interest is the party who would be benefited or injured by the
judgment or the party entitled to the avails of the suit (Salonga v. Warner
Barnes & Co., Ltd., 88 Phil. 125, 131). By real party in interest is meant a
present substantial interest as distinguished from a mere expectancy or a
future, contingent, subordinate or consequential interest (Garcia v. David,
67 Phil. 27; Oglleaby v. Springfield Marine Bank, 52 N.E. 2d 1600, 385 III,
414; Flowers v. Germans, 1 NW 2d 424; Weber v. City of Cheye, 97 P. 2d 667,
669, quoting 47 C.V. 35).

Based on the foregoing premises, plaintiff Pioneer cannot be considered as


the real party in interest as it has already been paid by the reinsurer the
sum of P295,000.00 — the bulk of defendants' alleged obligation to Pioneer.

In addition to the said proceeds of the reinsurance received by plaintiff


Pioneer from its reinsurer, the former was able to foreclose extra-judicially
one of the subject airplanes and its spare engine, realizing the total amount
of P37,050.00 from the sale of the mortgaged chattels. Adding the sum of
P37,050.00, to the proceeds of the reinsurance amounting to P295,000.00, it
is patent that plaintiff has been overpaid in the amount of P33,383.72
considering that the total amount it had paid to JDA totals to only
P298,666.28. To allow plaintiff Pioneer to recover from defendants the
amount in excess of P298,666.28 would be tantamount to unjust
enrichment as it has already been paid by the reinsurance company of the
amount plaintiff has paid to JDA as surety of defendant Lim vis-a-vis
defendant Lim's liability to JDA. Well settled is the rule that no person
should unjustly enrich himself at the expense of another (Article 22, New
Civil Code). (Rollo-84197, pp. 24-25).

The petitioner contends that-(1) it is at a loss where respondent court based its finding
that petitioner was paid by its reinsurer in the aforesaid amount, as this matter has never
been raised by any of the parties herein both in their answers in the court below and in
their respective briefs with respondent court; (Rollo, p. 11) (2) even assuming
hypothetically that it was paid by its reinsurer, still none of the respondents had any
interest in the matter since the reinsurance is strictly between the petitioner and the re-
insurer pursuant to section 91 of the Insurance Code; (3) pursuant to the indemnity
agreements, the petitioner is entitled to recover from respondents Bormaheco and
Maglana; and (4) the principle of unjust enrichment is not applicable considering that
whatever amount he would recover from the co-indemnitor will be paid to the reinsurer.

The records belie the petitioner's contention that the issue on the reinsurance money was
never raised by the parties.

A cursory reading of the trial court's lengthy decision shows that two of the issues
threshed out were:
xxx xxx xxx

1. Has Pioneer a cause of action against defendants with respect to so much


of its obligations to JDA as has been paid with reinsurance money?

2. If the answer to the preceding question is in the negative, has Pioneer


still any claim against defendants, considering the amount it has realized
from the sale of the mortgaged properties? (Record on Appeal, p. 359,
Annex B of G.R. No. 84157).

In resolving these issues, the trial court made the following findings:

It appearing that Pioneer reinsured its risk of liability under the surety bond
it had executed in favor of JDA, collected the proceeds of such reinsurance
in the sum of P295,000, and paid with the said amount the bulk of its
alleged liability to JDA under the said surety bond, it is plain that on this
score it no longer has any right to collect to the extent of the said amount.

On the question of why it is Pioneer, instead of the reinsurance (sic), that is


suing defendants for the amount paid to it by the reinsurers,
notwithstanding that the cause of action pertains to the latter, Pioneer says:
The reinsurers opted instead that the Pioneer Insurance & Surety
Corporation shall pursue alone the case.. . . . Pioneer Insurance & Surety
Corporation is representing the reinsurers to recover the amount.' In other
words, insofar as the amount paid to it by the reinsurers Pioneer is suing
defendants as their attorney-in-fact.

But in the first place, there is not the slightest indication in the complaint
that Pioneer is suing as attorney-in- fact of the reinsurers for any amount.
Lastly, and most important of all, Pioneer has no right to institute and
maintain in its own name an action for the benefit of the reinsurers. It is
well-settled that an action brought by an attorney-in-fact in his own name
instead of that of the principal will not prosper, and this is so even where
the name of the principal is disclosed in the complaint.

Section 2 of Rule 3 of the Old Rules of Court provides that


'Every action must be prosecuted in the name of the real party
in interest.' This provision is mandatory. The real party in
interest is the party who would be benefitted or injured by the
judgment or is the party entitled to the avails of the suit.

This Court has held in various cases that an attorney-in-fact is


not a real party in interest, that there is no law permitting an
action to be brought by an attorney-in-fact. Arroyo v. Granada
and Gentero, 18 Phil. Rep. 484; Luchauco v. Limjuco and
Gonzalo, 19 Phil. Rep. 12; Filipinos Industrial Corporation v.
San Diego G.R. No. L- 22347,1968, 23 SCRA 706, 710-714.

The total amount paid by Pioneer to JDA is P299,666.29. Since Pioneer has
collected P295,000.00 from the reinsurers, the uninsured portion of what it
paid to JDA is the difference between the two amounts, or P3,666.28. This is
the amount for which Pioneer may sue defendants, assuming that the
indemnity agreement is still valid and effective. But since the amount
realized from the sale of the mortgaged chattels are P35,000.00 for one of
the airplanes and P2,050.00 for a spare engine, or a total of P37,050.00,
Pioneer is still overpaid by P33,383.72. Therefore, Pioneer has no more claim
against defendants. (Record on Appeal, pp. 360-363).

The payment to the petitioner made by the reinsurers was not disputed in the appellate
court. Considering this admitted payment, the only issue that cropped up was the effect
of payment made by the reinsurers to the petitioner. Therefore, the petitioner's argument
that the respondents had no interest in the reinsurance contract as this is strictly between
the petitioner as insured and the reinsuring company pursuant to Section 91 (should be
Section 98) of the Insurance Code has no basis.

In general a reinsurer, on payment of a loss acquires the same rights by


subrogation as are acquired in similar cases where the original insurer pays
a loss (Universal Ins. Co. v. Old Time Molasses Co. C.C.A. La., 46 F 2nd
925).

The rules of practice in actions on original insurance policies are in general


applicable to actions or contracts of reinsurance. (Delaware, Ins. Co. v.
Pennsylvania Fire Ins. Co., 55 S.E. 330,126 GA. 380, 7 Ann. Con. 1134).

Hence the applicable law is Article 2207 of the new Civil Code, to wit:

Art. 2207. If the plaintiffs property has been insured, and he has received
indemnity from the insurance company for the injury or loss arising out of
the wrong or breach of contract complained of, the insurance company
shall be subrogated to the rights of the insured against the wrongdoer or
the person who has violated the contract. If the amount paid by the
insurance company does not fully cover the injury or loss, the aggrieved
party shall be entitled to recover the deficiency from the person causing the
loss or injury.

Interpreting the aforesaid provision, we ruled in the case of Phil. Air Lines, Inc. v. Heald
Lumber Co. (101 Phil. 1031 [1957]) which we subsequently applied in Manila Mahogany
Manufacturing Corporation v. Court of Appeals (154 SCRA 650 [1987]):
Note that if a property is insured and the owner receives the indemnity
from the insurer, it is provided in said article that the insurer is deemed
subrogated to the rights of the insured against the wrongdoer and if the
amount paid by the insurer does not fully cover the loss, then the aggrieved
party is the one entitled to recover the deficiency. Evidently, under this legal
provision, the real party in interest with regard to the portion of the
indemnity paid is the insurer and not the insured. (Emphasis supplied).

It is clear from the records that Pioneer sued in its own name and not as an attorney-in-
fact of the reinsurer.

Accordingly, the appellate court did not commit a reversible error in dismissing the
petitioner's complaint as against the respondents for the reason that the petitioner was
not the real party in interest in the complaint and, therefore, has no cause of action
against the respondents.

Nevertheless, the petitioner argues that the appeal as regards the counter indemnitors
should not have been dismissed on the premise that the evidence on record shows that it
is entitled to recover from the counter indemnitors. It does not, however, cite any
grounds except its allegation that respondent "Maglanas defense and evidence are
certainly incredible" (p. 12, Rollo) to back up its contention.

On the other hand, we find the trial court's findings on the matter replete with evidence
to substantiate its finding that the counter-indemnitors are not liable to the petitioner.
The trial court stated:

Apart from the foregoing proposition, the indemnity agreement ceased to


be valid and effective after the execution of the chattel mortgage.

Testimonies of defendants Francisco Cervantes and Modesto Cervantes.

Pioneer Insurance, knowing the value of the aircrafts and the spare parts
involved, agreed to issue the bond provided that the same would be
mortgaged to it, but this was not possible because the planes were still in
Japan and could not be mortgaged here in the Philippines. As soon as the
aircrafts were brought to the Philippines, they would be mortgaged to
Pioneer Insurance to cover the bond, and this indemnity agreement would
be cancelled.

The following is averred under oath by Pioneer in the original complaint:

The various conflicting claims over the mortgaged properties


have impaired and rendered insufficient the security under
the chattel mortgage and there is thus no other sufficient
security for the claim sought to be enforced by this action.

This is judicial admission and aside from the chattel mortgage there is no
other security for the claim sought to be enforced by this action, which
necessarily means that the indemnity agreement had ceased to have any
force and effect at the time this action was instituted. Sec 2, Rule 129,
Revised Rules of Court.

Prescinding from the foregoing, Pioneer, having foreclosed the chattel


mortgage on the planes and spare parts, no longer has any further action
against the defendants as indemnitors to recover any unpaid balance of the
price. The indemnity agreement was ipso jure extinguished upon the
foreclosure of the chattel mortgage. These defendants, as indemnitors,
would be entitled to be subrogated to the right of Pioneer should they make
payments to the latter. Articles 2067 and 2080 of the New Civil Code of the
Philippines.

Independently of the preceding proposition Pioneer's election of the


remedy of foreclosure precludes any further action to recover any unpaid
balance of the price.

SAL or Lim, having failed to pay the second to the eight and last
installments to JDA and Pioneer as surety having made of the payments to
JDA, the alternative remedies open to Pioneer were as provided in Article
1484 of the New Civil Code, known as the Recto Law.

Pioneer exercised the remedy of foreclosure of the chattel mortgage both by


extrajudicial foreclosure and the instant suit. Such being the case, as
provided by the aforementioned provisions, Pioneer shall have no further
action against the purchaser to recover any unpaid balance and any
agreement to the contrary is void.' Cruz, et al. v. Filipinas Investment &
Finance Corp. No. L- 24772, May 27,1968, 23 SCRA 791, 795-6.

The operation of the foregoing provision cannot be escaped from through


the contention that Pioneer is not the vendor but JDA. The reason is that
Pioneer is actually exercising the rights of JDA as vendor, having subrogated
it in such rights. Nor may the application of the provision be validly
opposed on the ground that these defendants and defendant Maglana are
not the vendee but indemnitors. Pascual, et al. v. Universal Motors
Corporation, G.R. No. L- 27862, Nov. 20,1974, 61 SCRA 124.

The restructuring of the obligations of SAL or Lim, thru the change of their
maturity dates discharged these defendants from any liability as alleged
indemnitors. The change of the maturity dates of the obligations of Lim, or
SAL extinguish the original obligations thru novations thus discharging the
indemnitors.

The principal hereof shall be paid in eight equal successive


three months interval installments, the first of which shall be
due and payable 25 August 1965, the remainder of which ...
shall be due and payable on the 26th day x x x of each
succeeding three months and the last of which shall be due
and payable 26th May 1967.

However, at the trial of this case, Pioneer produced a memorandum


executed by SAL or Lim and JDA, modifying the maturity dates of the
obligations, as follows:

The principal hereof shall be paid in eight equal successive


three month interval installments the first of which shall be
due and payable 4 September 1965, the remainder of which ...
shall be due and payable on the 4th day ... of each succeeding
months and the last of which shall be due and payable 4th
June 1967.

Not only that, Pioneer also produced eight purported promissory notes
bearing maturity dates different from that fixed in the aforesaid
memorandum; the due date of the first installment appears as October 15,
1965, and those of the rest of the installments, the 15th of each succeeding
three months, that of the last installment being July 15, 1967.

These restructuring of the obligations with regard to their maturity dates,


effected twice, were done without the knowledge, much less, would have it
believed that these defendants Maglana (sic). Pioneer's official Numeriano
Carbonel would have it believed that these defendants and defendant
Maglana knew of and consented to the modification of the obligations. But
if that were so, there would have been the corresponding documents in the
form of a written notice to as well as written conformity of these
defendants, and there are no such document. The consequence of this was
the extinguishment of the obligations and of the surety bond secured by the
indemnity agreement which was thereby also extinguished. Applicable by
analogy are the rulings of the Supreme Court in the case of Kabankalan
Sugar Co. v. Pacheco, 55 Phil. 553, 563, and the case of Asiatic Petroleum Co.
v. Hizon David, 45 Phil. 532, 538.

Art. 2079. An extension granted to the debtor by the creditor


without the consent of the guarantor extinguishes the
guaranty The mere failure on the part of the creditor to
demand payment after the debt has become due does not of
itself constitute any extension time referred to herein, (New
Civil Code).'

Manresa, 4th ed., Vol. 12, pp. 316-317, Vol. VI, pp. 562-563, M.F. Stevenson &
Co., Ltd., v. Climacom et al. (C.A.) 36 O.G. 1571.

Pioneer's liability as surety to JDA had already prescribed when Pioneer


paid the same. Consequently, Pioneer has no more cause of action to
recover from these defendants, as supposed indemnitors, what it has paid
to JDA. By virtue of an express stipulation in the surety bond, the failure of
JDA to present its claim to Pioneer within ten days from default of Lim or
SAL on every installment, released Pioneer from liability from the claim.

Therefore, Pioneer is not entitled to exact reimbursement from these


defendants thru the indemnity.

Art. 1318. Payment by a solidary debtor shall not entitle him to


reimbursement from his co-debtors if such payment is made
after the obligation has prescribed or became illegal.

These defendants are entitled to recover damages and attorney's fees from
Pioneer and its surety by reason of the filing of the instant case against
them and the attachment and garnishment of their properties. The instant
action is clearly unfounded insofar as plaintiff drags these defendants and
defendant Maglana.' (Record on Appeal, pp. 363-369, Rollo of G.R. No.
84157).

We find no cogent reason to reverse or modify these findings.

Hence, it is our conclusion that the petition in G.R. No. 84197 is not meritorious.

We now discuss the merits of G.R. No. 84157.

Petitioner Jacob S. Lim poses the following issues:

l. What legal rules govern the relationship among co-investors whose


agreement was to do business through the corporate vehicle but who failed
to incorporate the entity in which they had chosen to invest? How are the
losses to be treated in situations where their contributions to the intended
'corporation' were invested not through the corporate form? This Petition
presents these fundamental questions which we believe were resolved
erroneously by the Court of Appeals ('CA'). (Rollo, p. 6).
These questions are premised on the petitioner's theory that as a result of the failure of
respondents Bormaheco, Spouses Cervantes, Constancio Maglana and petitioner Lim to
incorporate, a de facto partnership among them was created, and that as a consequence of
such relationship all must share in the losses and/or gains of the venture in proportion to
their contribution. The petitioner, therefore, questions the appellate court's findings
ordering him to reimburse certain amounts given by the respondents to the petitioner as
their contributions to the intended corporation, to wit:

However, defendant Lim should be held liable to pay his co-defendants'


cross-claims in the total amount of P184,878.74 as correctly found by the
trial court, with interest from the filing of the cross-complaints until the
amount is fully paid. Defendant Lim should pay one-half of the said amount
to Bormaheco and the Cervanteses and the other one-half to defendant
Maglana. It is established in the records that defendant Lim had duly
received the amount of Pl51,000.00 from defendants Bormaheco and
Maglana representing the latter's participation in the ownership of the
subject airplanes and spare parts (Exhibit 58). In addition, the cross-party
plaintiffs incurred additional expenses, hence, the total sum of P 184,878.74.

We first state the principles.

While it has been held that as between themselves the rights of the
stockholders in a defectively incorporated association should be governed
by the supposed charter and the laws of the state relating thereto and not
by the rules governing partners (Cannon v. Brush Electric Co., 54 A. 121, 96
Md. 446, 94 Am. S.R. 584), it is ordinarily held that persons who attempt,
but fail, to form a corporation and who carry on business under the
corporate name occupy the position of partners inter se (Lynch v.
Perryman, 119 P. 229, 29 Okl. 615, Ann. Cas. 1913A 1065). Thus, where
persons associate themselves together under articles to purchase property
to carry on a business, and their organization is so defective as to come
short of creating a corporation within the statute, they become in legal
effect partners inter se, and their rights as members of the company to the
property acquired by the company will be recognized (Smith v. Schoodoc
Pond Packing Co., 84 A. 268,109 Me. 555; Whipple v. Parker, 29 Mich. 369).
So, where certain persons associated themselves as a corporation for the
development of land for irrigation purposes, and each conveyed land to the
corporation, and two of them contracted to pay a third the difference in the
proportionate value of the land conveyed by him, and no stock was ever
issued in the corporation, it was treated as a trustee for the associates in an
action between them for an accounting, and its capital stock was treated as
partnership assets, sold, and the proceeds distributed among them in
proportion to the value of the property contributed by each (Shorb v.
Beaudry, 56 Cal. 446). However, such a relation does not necessarily exist, for
ordinarily persons cannot be made to assume the relation of partners, as
between themselves, when their purpose is that no partnership shall
exist (London Assur. Corp. v. Drennen, Minn., 6 S.Ct. 442, 116 U.S. 461, 472,
29 L.Ed. 688), and it should be implied only when necessary to do justice
between the parties; thus, one who takes no part except to subscribe for stock
in a proposed corporation which is never legally formed does not become a
partner with other subscribers who engage in business under the name of the
pretended corporation, so as to be liable as such in an action for settlement of
the alleged partnership and contribution (Ward v. Brigham, 127 Mass. 24). A
partnership relation between certain stockholders and other stockholders,
who were also directors, will not be implied in the absence of an agreement,
so as to make the former liable to contribute for payment of debts illegally
contracted by the latter (Heald v. Owen, 44 N.W. 210, 79 Iowa 23). (Corpus
Juris Secundum, Vol. 68, p. 464). (Italics supplied).

In the instant case, it is to be noted that the petitioner was declared non-suited for his
failure to appear during the pretrial despite notification. In his answer, the petitioner
denied having received any amount from respondents Bormaheco, the Cervanteses and
Maglana. The trial court and the appellate court, however, found through Exhibit 58, that
the petitioner received the amount of P151,000.00 representing the participation of
Bormaheco and Atty. Constancio B. Maglana in the ownership of the subject airplanes
and spare parts. The record shows that defendant Maglana gave P75,000.00 to petitioner
Jacob Lim thru the Cervanteses.

It is therefore clear that the petitioner never had the intention to form a corporation with
the respondents despite his representations to them. This gives credence to the cross-
claims of the respondents to the effect that they were induced and lured by the petitioner
to make contributions to a proposed corporation which was never formed because the
petitioner reneged on their agreement. Maglana alleged in his cross-claim:

... that sometime in early 1965, Jacob Lim proposed to Francisco Cervantes
and Maglana to expand his airline business. Lim was to procure two DC-3's
from Japan and secure the necessary certificates of public convenience and
necessity as well as the required permits for the operation thereof. Maglana
sometime in May 1965, gave Cervantes his share of P75,000.00 for delivery
to Lim which Cervantes did and Lim acknowledged receipt thereof.
Cervantes, likewise, delivered his share of the undertaking. Lim in an
undertaking sometime on or about August 9,1965, promised to incorporate
his airline in accordance with their agreement and proceeded to acquire the
planes on his own account. Since then up to the filing of this answer, Lim
has refused, failed and still refuses to set up the corporation or return the
money of Maglana. (Record on Appeal, pp. 337-338).
while respondents Bormaheco and the Cervanteses alleged in their answer, counterclaim,
cross-claim and third party complaint:

Sometime in April 1965, defendant Lim lured and induced the answering
defendants to purchase two airplanes and spare parts from Japan which the
latter considered as their lawful contribution and participation in the
proposed corporation to be known as SAL. Arrangements and negotiations
were undertaken by defendant Lim. Down payments were advanced by
defendants Bormaheco and the Cervanteses and Constancio Maglana (Exh.
E- 1). Contrary to the agreement among the defendants, defendant Lim in
connivance with the plaintiff, signed and executed the alleged chattel
mortgage and surety bond agreement in his personal capacity as the alleged
proprietor of the SAL. The answering defendants learned for the first time
of this trickery and misrepresentation of the other, Jacob Lim, when the
herein plaintiff chattel mortgage (sic) allegedly executed by defendant Lim,
thereby forcing them to file an adverse claim in the form of third party
claim. Notwithstanding repeated oral demands made by defendants
Bormaheco and Cervanteses, to defendant Lim, to surrender the possession
of the two planes and their accessories and or return the amount advanced
by the former amounting to an aggregate sum of P 178,997.14 as evidenced
by a statement of accounts, the latter ignored, omitted and refused to
comply with them. (Record on Appeal, pp. 341-342).

Applying therefore the principles of law earlier cited to the facts of the case, necessarily,
no de facto partnership was created among the parties which would entitle the petitioner
to a reimbursement of the supposed losses of the proposed corporation. The record shows
that the petitioner was acting on his own and not in behalf of his other would-be
incorporators in transacting the sale of the airplanes and spare parts.

WHEREFORE, the instant petitions are DISMISSED. The questioned decision of the
Court of Appeals is AFFIRMED.

SO ORDERED.

[G.R. No. 124535. September 28, 2001]

THE RURAL BANK OF LIPA CITY, INC., THE OFFICERS AND DIRECTORS,
BERNARDO BAUTISTA, JAIME CUSTODIO, OCTAVIO KATIGBAK,
FRANCISCO CUSTODIO, and JUANITA BAUTISTA OF THE RURAL BANK OF
LIPA CITY, INC., petitioners, vs. HONORABLE COURT OF APPEALS,
HONORABLE COMMISSION EN BANC, SECURITIES AND EXCHANGE
COMMISSION, HONORABLE ENRIQUE L. FLORES, JR., in his capacity as
Hearing Officer, REYNALDO VILLANUEVA, SR., AVELINA M. VILLANUEVA,
CATALINO VILLANUEVA, ANDRES GONZALES, AURORA LACERNA, CELSO
LAYGO, EDGARDO REYES, ALEJANDRA TONOGAN and ELENA
USI, respondents.

DECISION
YNARES-SANTIAGO, J.:

Before us is a petition for review on certiorari assailing the Decision of the Court of
Appeals dated February 27, 1996, as well as the Resolution dated March 29, 1996, in CA-
G.R. SP No. 38861.
The instant controversy arose from a dispute between the Rural Bank of Lipa City,
Incorporated (hereinafter referred to as the Bank), represented by its officers and
members of its Board of Directors, and certain stockholders of the said bank. The records
reveal the following antecedent facts:
Private respondent Reynaldo Villanueva, Sr., a stockholder of the Rural Bank of Lipa
City, executed a Deed of Assignment,[1] wherein he assigned his shares, as well as those of
eight (8) other shareholders under his control with a total of 10,467 shares, in favor of the
stockholders of the Bank represented by its directors Bernardo Bautista, Jaime Custodio
and Octavio Katigbak. Sometime thereafter, Reynaldo Villanueva, Sr. and his wife,
Avelina, executed an Agreement[2] wherein they acknowledged their indebtedness to the
Bank in the amount of Four Million Pesos (P4,000,000.00), and stipulated that said debt
will be paid out of the proceeds of the sale of their real property described in the
Agreement.
At a meeting of the Board of Directors of the Bank on November 15, 1993, the
Villanueva spouses assured the Board that their debt would be paid on or before
December 31 of that same year; otherwise, the Bank would be entitled to liquidate their
shareholdings, including those under their control. In such an event, should the proceeds
of the sale of said shares fail to satisfy in full the obligation, the unpaid balance shall be
secured by other collateral sufficient therefor.
When the Villanueva spouses failed to settle their obligation to the Bank on the due
date, the Board sent them a letter[3] demanding: (1) the surrender of all the stock
certificates issued to them; and (2) the delivery of sufficient collateral to secure the
balance of their debt amounting to P3,346,898.54. The Villanuevas ignored the banks
demands, whereupon their shares of stock were converted into Treasury Stocks. Later,
the Villanuevas, through their counsel, questioned the legality of the conversion of their
shares.[4]
On January 15, 1994, the stockholders of the Bank met to elect the new directors and
set of officers for the year 1994. The Villanuevas were not notified of said meeting. In a
letter dated January 19, 1994, Atty. Amado Ignacio, counsel for the Villanueva spouses,
questioned the legality of the said stockholders meeting and the validity of all the
proceedings therein. In reply, the new set of officers of the Bank informed Atty. Ignacio
that the Villanuevas were no longer entitled to notice of the said meeting since they had
relinquished their rights as stockholders in favor of the Bank.
Consequently, the Villanueva spouses filed with the Securities and Exchange
Commission (SEC), a petition for annulment of the stockholders meeting and election of
directors and officers on January 15, 1994, with damages and prayer for preliminary
injunction[5], docketed as SEC Case No. 02-94-4683. Joining them as co-petitioners were
Catalino Villanueva, Andres Gonzales, Aurora Lacerna, Celso Laygo, Edgardo Reyes,
Alejandro Tonogan, and Elena Usi. Named respondents were the newly-elected officers
and directors of the Rural Bank, namely: Bernardo Bautista, Jaime Custodio, Octavio
Katigbak, Francisco Custodio and Juanita Bautista.
The Villanuevas main contention was that the stockholders meeting and election of
officers and directors held on January 15, 1994 were invalid because: (1) they were
conducted in violation of the by-laws of the Rural Bank; (2) they were not given due
notice of said meeting and election notwithstanding the fact that they had not waived
their right to notice; (3) they were deprived of their right to vote despite their being
holders of common stock with corresponding voting rights; (4) their names were
irregularly excluded from the list of stockholders; and (5) the candidacy of petitioner
Avelina Villanueva for directorship was arbitrarily disregarded by respondent Bernardo
Bautista and company during the said meeting.
On February 16, 1994, the SEC issued a temporary restraining order enjoining the
respondents, petitioners herein, from acting as directors and officers of the Bank, and
from performing their duties and functions as such.[6]
In their joint Answer,[7] the respondents therein raised the following defenses:
1) The petitioners have no legal capacity to sue;
2) The petition states no cause of action;
3) The complaint is insufficient;
4) The petitioners claims had already been paid, waived, abandoned, or otherwise
extinguished;
5) The petitioners are estopped from challenging the conversion of their shares.
Petitioners, respondents therein, thus moved for the lifting of the temporary
restraining order and the dismissal of the petition for lack of merit, and for the upholding
of the validity of the stockholders meeting and election of directors and officers held on
January 15, 1994. By way of counterclaim, petitioners prayed for actual, moral and
exemplary damages.
On April 6, 1994, the Villanuevas application for the issuance of a writ of preliminary
injunction was denied by the SEC Hearing Officer on the ground of lack of sufficient basis
for the issuance thereof. However, a motion for reconsideration[8] was granted on
December 16, 1994, upon finding that since the Villanuevas have not disposed of their
shares, whether voluntarily or involuntarily, they were still stockholders entitled to notice
of the annual stockholders meeting was sustained by the SEC. Accordingly, a writ of
preliminary injunction was issued enjoining the petitioners from acting as directors and
officers of the bank.[9]
Thereafter, petitioners filed an urgent motion to quash the writ of preliminary
injunction,[10] challenging the propriety of the said writ considering that they had not yet
received a copy of the order granting the application for the writ of preliminary
injunction.
With the impending 1995 annual stockholders meeting only nine (9) days away, the
Villanuevas filed an Omnibus Motion[11] praying that the said meeting and election of
officers scheduled on January 14, 1995 be suspended or held in abeyance, and that the 1993
Board of Directors be allowed, in the meantime, to act as such. One (1) day before the
scheduled stockholders meeting, the SEC Hearing Officer granted the Omnibus Motion
by issuing a temporary restraining order preventing petitioners from holding the
stockholders meeting and electing the board of directors and officers of the Bank.[12]
A petition for Certiorari and Annulment with Damages was filed by the Rural Bank,
its directors and officers before the SEC en banc,[13] naming as respondents therein SEC
Hearing Officer Enrique L. Flores, Jr., and the Villanuevas, erstwhile petitioners in SEC
Case No. 02-94-4683. The said petition alleged that the orders dated December 16, 1994
and January 13, 1995, which allowed the issuance of the writ of preliminary injunction and
prevented the bank from holding its 1995 annual stockholders meeting, respectively, were
issued by the SEC Hearing Officer with grave abuse of discretion amounting to lack or
excess of jurisdiction.Corollarily, the Bank, its directors and its officers questioned the
SEC Hearing Officers right to restrain the stockholders meeting and election of officers
and directors considering that the Villanueva spouses and the other petitioners in SEC
Case No. 02-94-4683 were no longer stockholders with voting rights, having already
assigned all their shares to the Bank.
In their Comment/Opposition, the Villanuevas and other private respondents argued
that the filing of the petition for certiorari was premature and there was no grave abuse of
discretion on the part of the SEC Hearing Officer, nor did he act without or in excess of
his jurisdiction.
On June 7, 1995, the SEC en banc denied the petition for certiorari in an
Order,[14] which stated:

In the case now before us, petitioners could not show any proof of despotic or arbitrary
exercise of discretion committed by the hearing officer in issuing the assailed orders save
and except the allegation that the private respondents have already transferred their
stockholdings in favor of the stockholders of the Bank. This, however, is the very issue of
the controversy in the case a quo and which, to our mind, should rightfully be litigated
and proven before the hearing officer. This is so because of the undisputed fact the (sic)
private respondents are still in possession of the stock certificates evidencing their
stockholdings and as held by the Supreme Court in Embassy Farms, Inc. v. Court of
Appeals, et al., 188 SCRA 492, citing Nava v. Peers Marketing Corp., the non-delivery of the
stock certificate does not make the transfer of the shares of stock effective. For an
effective transfer of stock, the mode of transfer as prescribed by law must be followed.

We likewise find that the provision of the Corporation Code cited by the herein
petitioner, particularly Section 83 thereof, to support the claim that the private
respondents are no longer stockholders of the Bank is misplaced. The said law applies to
acquisition of shares of stock by the corporation in the exercise of a stockholders right of
appraisal or when the said stockholder opts to dissent on a specific corporate act in those
instances provided by law and demands the payment of the fair value of his shares. It
does not contemplate a transfer whereby the stockholder, in the exercise of his right to
dispose of his shares (jus disponendi) sells or assigns his stockholdings in favor of another
person where the provisions of Section 63 of the same Code should be complied with.

The hearing officer, therefore, had a basis in issuing the questioned orders since the
private respondents rights as stockholders may be prejudiced should the writ of
injunction not be issued. The private respondents are presumably stockholders of the
Bank in view of the fact that they have in their possession the stock certificates
evidencing their stockholdings. Until proven otherwise, they remain to be such and the
hearing officer, being the one directly confronted with the facts and pieces of evidence in
the case, may issue such orders and resolutions which may be necessary or reasonable
relative thereto to protect their rights and interest in the meantime that the said case is
still pending trial on the merits.

A subsequent motion for reconsideration[15] was likewise denied by the SEC en


banc in a Resolution[16] dated September 29, 1995.
A petition for review was thus filed before the Court of Appeals, which was docketed
as CA-G.R. SP No. 38861, assailing the Order dated June 7, 1995 and the Resolution dated
September 29, 1995 of the SEC en banc in SEC EB No. 440. The ultimate issue raised
before the Court of Appeals was whether or not the SEC en banc erred in finding:

1. That the Hon. Hearing Officer in SEC Case No. 02-94-4683 did not commit any grave
abuse of discretion that would warrant the filing of a petition for certiorari;

2. That the private respondents are still stockholders of the subject bank and further
stated that it does not contemplate a transfer whereby the stockholders, in the exercise of
his right to dispose of his shares (Jus Disponendi) sells or assigns his stockholdings in
favor of another person where the provisions of Sec. 63 of the same Code should be
complied with; and

3. That the private respondents are presumably stockholders of the bank in view of the
fact that they have in their possession the stock certificates evidencing their
stockholdings.

On February 27, 1996, the Court of Appeals rendered the assailed


Decision[17] dismissing the petition for review for lack of merit. The appellate court found
that:

The public respondent is correct in holding that the Hearing Officer did not commit
grave abuse of discretion. The officer, in exercising his judicial functions, did not exercise
his judgment in a capricious, whimsical, arbitrary or despotic manner. The questioned
Orders issued by the Hearing Officer were based on pertinent law and the facts of the
case.

Section 63 of the Corporation Code states: x x x Shares of stock so issued are personal
property and may be transferred by delivery of the certificate or certificates indorsed by
the owner x x x. No transfer, however, shall be valid, except as between the parties, until
the transfer is recorded in 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.

In the case at bench, when private respondents executed a deed of assignment of their
shares of stocks in favor of the Stockholders of the Rural Bank of Lipa City, represented by
Bernardo Bautista, Jaime Custodio and Octavio Katigbak, title to such shares will not be
effective unless the duly indorsed certificate of stock is delivered to them. For an effective
transfer of shares of stock, the mode and manner of transfer as prescribed by law should
be followed. Private respondents are still presumed to be the owners of the shares and to
be stockholders of the Rural Bank.

We find no reversible error in the questioned orders.

Petitioners motion for reconsideration was likewise denied by the Court of Appeals in
an Order[18] dated March 29, 1996.
Hence, the instant petition for review seeking to annul the Court of Appeals decision
dated February 27, 1996 and the resolution dated March 29, 1996. In particular, the
decision is challenged for its ruling that notwithstanding the execution of the deed of
assignment in favor of the petitioners, transfer of title to such shares is ineffective until
and unless the duly indorsed certificate of stock is delivered to them. Moreover,
petitioners faulted the Court of Appeals for not taking into consideration the acts of
disloyalty committed by the Villanueva spouses against the Bank.
We find no merit in the instant petition.
The Court of Appeals did not err or abuse its discretion in affirming the order of the
SEC en banc, which in turn upheld the order of the SEC Hearing Officer, for the said
rulings were in accordance with law and jurisprudence.
The Corporation Code specifically provides:

SECTION 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 stocks 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 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.

No shares of stock against which the corporation holds any unpaid claim shall be
transferable in the books of the corporation. (Underscoring ours)

Petitioners argue that by virtue of the Deed of Assignment,[19] private respondents


had relinquished to them any and all rights they may have had as stockholders of the
Bank. While it may be true that there was an assignment of private respondents shares to
the petitioners, said assignment was not sufficient to effect the transfer of shares since
there was no endorsement of the certificates of stock by the owners, their attorneys-in-
fact or any other person legally authorized to make the transfer. Moreover, petitioners
admit that the assignment of shares was not coupled with delivery, the absence of which
is a fatal defect. The rule is that the delivery of the stock certificate duly endorsed by the
owner is the operative act of transfer of shares from the lawful owner to the
transferee.[20] Thus, title may be vested in the transferee only by delivery of the duly
indorsed certificate of stock.[21]
We have uniformly held that for a valid transfer of stocks, there must be strict
compliance with the mode of transfer prescribed by law.[22] The requirements are:
(a) There must be delivery of the stock certificate; (b) The certificate must be endorsed by
the owner or his attorney-in-fact or other persons legally authorized to make the
transfer; and (c) To be valid against third parties, the transfer must be recorded in the
books of the corporation. As it is, compliance with any of these requisites has not been
clearly and sufficiently shown.
It may be argued that despite non-compliance with the requisite endorsement and
delivery, the assignment was valid between the parties, meaning the private respondents
as assignors and the petitioners as assignees.While the assignment may be valid and
binding on the petitioners and private respondents, it does not necessarily make the
transfer effective. Consequently, the petitioners, as mere assignees, cannot enjoy the
status of a stockholder, cannot vote nor be voted for, and will not be entitled to
dividends, insofar as the assigned shares are concerned. Parenthetically, the private
respondents cannot, as yet, be deprived of their rights as stockholders, until and unless
the issue of ownership and transfer of the shares in question is resolved with finality.
There being no showing that any of the requisites mandated by law[23] was complied
with, the SEC Hearing Officer did not abuse his discretion in granting the issuance of the
preliminary injunction prayed for by petitioners in SEC Case No. 02-94-4683 (herein
private respondents). Accordingly, the order of the SEC en banc affirming the ruling of
the SEC Hearing Officer, and the Court of Appeals decision upholding the SEC en
banc order, are valid and in accordance with law and jurisprudence, thus warranting the
denial of the instant petition for review.
To enable the shareholders of the Rural Bank of Lipa City, Inc. to meet and elect their
directors, the temporary restraining order issued by the SEC Hearing Officer on January
13, 1995 must be lifted. However, private respondents shall be notified of the meeting and
be allowed to exercise their rights as stockholders thereat.
While this case was pending, Republic Act No. 8799[24] was enacted, transferring to
the courts of general jurisdiction or the appropriate Regional Trial Court the SECs
jurisdiction over all cases enumerated under Section 5 of Presidential Decree No. 902-
A.[25] One of those cases enumerated is any controversy arising out of intra-corporate or
partnership relations, between and among stockholders, members, or associates, between
any and/or all of them and the corporation, partnership or association of which they are
stockholders, members or associates, respectively; and between such corporation,
partnership or association and the state insofar as it concerns their individual franchise or
right to exist as such entity. The instant controversy clearly falls under this category of
cases which are now cognizable by the Regional Trial Court.
Pursuant to Section 5.2 of R.A. No. 8799, this Court designated specific branches of
the Regional Trial Courts to try and decide cases formerly cognizable by the SEC. For the
Fourth Judicial Region, specifically in the Province of Batangas, the RTC of Batangas City,
Branch 32 is the designated court.[26]
WHEREFORE, in view of all the foregoing, the instant petition for review on
certiorari is DENIED. The Decision and Resolution of the Court of Appeals in CA-G.R. SP
No. 38861 are hereby AFFIRMED. The case is ordered REMANDED to the Regional Trial
Court of Batangas City, Branch 32, for proper disposition. The temporary restraining
order issued by the SEC Hearing Officer dated January 13, 1995 is ordered LIFTED.
SO ORDERED.

[G.R. No. 141994. January 17, 2005]


FILIPINAS BROADCASTING NETWORK, INC., petitioner, vs. AGO MEDICAL AND
EDUCATIONAL CENTER-BICOL CHRISTIAN COLLEGE OF MEDICINE,
(AMEC-BCCM) and ANGELITA F. AGO, respondents.

DECISION
CARPIO, J.:

The Case

This petition for review[1] assails the 4 January 1999 Decision[2] and 26 January 2000
Resolution of the Court of Appeals in CA-G.R. CV No. 40151. The Court of Appeals
affirmed with modification the 14 December 1992 Decision[3] of the Regional Trial Court
of Legazpi City, Branch 10, in Civil Case No. 8236. The Court of Appeals held Filipinas
Broadcasting Network, Inc. and its broadcasters Hermogenes Alegre and Carmelo Rima
liable for libel and ordered them to solidarily pay Ago Medical and Educational Center-
Bicol Christian College of Medicine moral damages, attorneys fees and costs of suit.

The Antecedents

Expos is a radio documentary[4] program hosted by Carmelo Mel Rima (Rima) and
Hermogenes Jun Alegre (Alegre).[5] Expos is aired every morning over DZRC-AM which is
owned by Filipinas Broadcasting Network, Inc. (FBNI). Expos is heard over Legazpi City,
the Albay municipalities and other Bicol areas.[6]
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 AMECs
College of Medicine, filed a complaint for damages[7] against FBNI, Rima and Alegre on 27
February 1990. Quoted are portions of the allegedly libelous broadcasts:

JUN ALEGRE:

Let us begin with the less burdensome: if you have children taking medical course at
AMEC-BCCM, advise them to pass all subjects because if they fail in any subject
they will repeat their year level, taking up all subjects including those they have
passed already. Several students had approached me stating that they had consulted
with the DECS which told them that there is no such regulation. If [there] is no such
regulation why is AMEC doing the same?

xxx
Second: Earlier AMEC students in Physical Therapy had complained that the
course is not recognized by DECS. xxx

Third: Students are required to take and pay for the subject even if the subject
does not have an instructor - such greed for money on the part of AMECs
administration. Take the subject Anatomy: students would pay for the subject upon
enrolment because it is offered by the school. However there would be no instructor for
such subject. Students would be informed that course would be moved to a later date
because the school is still searching for the appropriate instructor.

xxx

It is a public knowledge that the Ago Medical and Educational Center has survived and
has been surviving for the past few years since its inception because of funds support
from foreign foundations. If you will take a look at the AMEC premises youll find out that
the names of the buildings there are foreign soundings. There is a McDonald Hall. Why
not Jose Rizal or Bonifacio Hall? That is a very concrete and undeniable evidence that the
support of foreign foundations for AMEC is substantial, isnt it? With the report which is
the basis of the expose in DZRC today, it would be very easy for detractors and enemies of
the Ago family to stop the flow of support of foreign foundations who assist the medical
school on the basis of the latters purpose. But if the purpose of the institution (AMEC) is
to deceive students at cross purpose with its reason for being it is possible for these
foreign foundations to lift or suspend their donations temporarily.[8]

xxx

On the other hand, the administrators of AMEC-BCCM, AMEC Science High School
and the AMEC-Institute of Mass Communication in their effort to minimize
expenses in terms of salary are absorbing or continues to accept rejects. For
example how many teachers in AMEC are former teachers of Aquinas University but were
removed because of immorality? Does it mean that the present administration of AMEC
have the total definite moral foundation from catholic administrator of Aquinas
University. I will prove to you my friends, that AMEC is a dumping ground, garbage,
not merely of moral and physical misfits. Probably they only qualify in terms of
intellect. The Dean of Student Affairs of AMEC is Justita Lola, as the family name implies.
She is too old to work, being an old woman. Is the AMEC administration exploiting the
very [e]nterprising or compromising and undemanding Lola? Could it be that AMEC is
just patiently making use of Dean Justita Lola were if she is very old. As in atmospheric
situation zero visibility the plane cannot land, meaning she is very old, low pay follows.
By the way, Dean Justita Lola is also the chairman of the committee on scholarship in
AMEC. She had retired from Bicol University a long time ago but AMEC has patiently
made use of her.

xxx
MEL RIMA:

xxx My friends based on the expose, AMEC is a dumping ground for moral and physically
misfit people. What does this mean? Immoral and physically misfits as teachers.

May I say Im sorry to Dean Justita Lola. But this is the truth. The truth is this, that your
are no longer fit to teach. You are too old. As an aviation, your case is zero visibility. Dont
insist.

xxx Why did AMEC still absorb her as a teacher, a dean, and chairman of the scholarship
committee at that. The reason is practical cost saving in salaries, because an old person is
not fastidious, so long as she has money to buy the ingredient of beetle juice. The elderly
can get by thats why she (Lola) was taken in as Dean.

xxx

xxx On our end our task is to attend to the interests of students. It is likely that the
students would be influenced by evil. When they become members of society outside
of campus will be liabilities rather than assets. What do you expect from a doctor
who while studying at AMEC is so much burdened with unreasonable imposition? What
do you expect from a student who aside from peculiar problems because not all students
are rich in their struggle to improve their social status are even more burdened with false
regulations. xxx[9] (Emphasis supplied)

The complaint further alleged that AMEC is a reputable learning institution. With the
supposed exposs, 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[10] 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[11] on FBNIs 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 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[12] 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 Rimas only participation
was when he agreed with Alegres expos. The trial court found Rimas statement within the
bounds of freedom of speech, expression, and of the press. The dispositive portion of the
decision reads:

WHEREFORE, premises considered, this court finds for the plaintiff. Considering the
degree of damages caused by the controversial utterances, which are not found by
this court to be really very serious and damaging, and there being no showing that
indeed the enrollment of plaintiff school dropped, defendants Hermogenes Jun
Alegre, Jr. and Filipinas Broadcasting Network (owner of the radio station DZRC), are
hereby jointly and severally ordered to pay plaintiff Ago Medical and Educational Center-
Bicol Christian College of Medicine (AMEC-BCCM) the amount of P300,000.00 moral
damages, plus P30,000.00 reimbursement of attorneys fees, and to pay the costs of suit.

SO ORDERED. [13] (Emphasis supplied)

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 courts judgment with modification. The appellate court made Rima solidarily
liable with FBNI and Alegre. The appellate court denied Agos claim for damages and
attorneys fees because the broadcasts were directed against AMEC, and not against her.
The dispositive portion of the Court of Appeals decision reads:

WHEREFORE, the decision appealed from is hereby AFFIRMED, subject to the


modification that broadcaster Mel Rima is SOLIDARILY ADJUDGED liable with FBN[I]
and Hermo[g]enes Alegre.

SO ORDERED.[14]

FBNI, Rima and Alegre filed a motion for reconsideration which the Court of Appeals
denied in its 26 January 2000 Resolution.
Hence, FBNI filed this petition.[15]
The Ruling of the Court of Appeals

The Court of Appeals upheld the trial courts ruling that the questioned broadcasts
are libelous per se and that FBNI, Rima and Alegre failed to overcome the legal
presumption of malice. The Court of Appeals found Rima and Alegres claim that they
were actuated by their moral and social duty to inform the public of the students gripes
as insufficient to justify the utterance of the defamatory remarks.
Finding no factual basis for the imputations against AMECs administrators, the Court
of Appeals ruled that the broadcasts were made with reckless disregard as to whether
they were true or false. The appellate court pointed out that FBNI, Rima and Alegre failed
to present in court any of the students who allegedly complained against AMEC. Rima
and Alegre merely gave a single name when asked to identify the students. According to
the Court of Appeals, these circumstances cast doubt on the veracity of the broadcasters
claim that they were impelled by their moral and social duty to inform the public about
the students gripes.
The Court of Appeals found Rima also liable for libel since he remarked that (1)
AMEC-BCCM is a dumping ground for morally and physically misfit teachers; (2) AMEC
obtained the services of Dean Justita Lola to minimize expenses on its employees salaries;
and (3) AMEC burdened the students with unreasonable imposition and false
regulations.[16]
The Court of Appeals held that FBNI failed to exercise due diligence in the selection
and supervision of its employees for allowing Rima and Alegre to make the radio
broadcasts without the proper KBP accreditation. The Court of Appeals denied Agos
claim for damages and attorneys fees because the libelous remarks were directed against
AMEC, and not against her. The Court of Appeals adjudged FBNI, Rima and Alegre
solidarily liable to pay AMEC moral damages, attorneys fees and costs of suit.

Issues

FBNI raises the following issues for resolution:

I. WHETHER THE BROADCASTS ARE LIBELOUS;

II. WHETHER AMEC IS ENTITLED TO MORAL DAMAGES;

III. WHETHER THE AWARD OF ATTORNEYS FEES IS PROPER; and

IV. WHETHER FBNI IS SOLIDARILY LIABLE WITH RIMA AND ALEGRE FOR
PAYMENT OF MORAL DAMAGES, ATTORNEYS FEES AND COSTS OF SUIT.

The Courts Ruling


We deny the petition.
This is a civil action for damages as a result of the allegedly defamatory remarks of
Rima and Alegre against AMEC.[17] While AMEC did not point out clearly the legal basis
for its complaint, a reading of the complaint reveals that AMECs cause of action is based
on Articles 30 and 33 of the Civil Code. Article 30[18] authorizes a separate civil action to
recover civil liability arising from a criminal offense. On the other hand, Article
33[19] particularly provides that the injured party may bring a separate civil action for
damages in cases of defamation, fraud, and physical injuries. AMEC also invokes Article
19[20] of the Civil Code to justify its claim for damages. AMEC cites Articles 2176 [21] and
2180[22] of the Civil Code to hold FBNI solidarily liable with Rima and Alegre.

I.
Whether the broadcasts are libelous

A libel[23] is a public and malicious imputation of a crime, or of a vice or defect, real or


imaginary, or any act or omission, condition, status, or circumstance tending to cause the
dishonor, discredit, or contempt of a natural or juridical person, or to blacken the
memory of one who is dead.[24]
There is no question that the broadcasts were made public and imputed to AMEC
defects or circumstances tending to cause it dishonor, discredit and contempt. Rima and
Alegres remarks such as greed for money on the part of AMECs administrators; AMEC is a
dumping ground, garbage of xxx moral and physical misfits; and AMEC students who
graduate will be liabilities rather than assets of the society are libelous per se. Taken as a
whole, the broadcasts suggest that AMEC is a money-making institution where physically
and morally unfit teachers abound.
However, FBNI contends that the broadcasts are not malicious. FBNI claims that
Rima and Alegre were plainly impelled by their civic duty to air the students gripes. FBNI
alleges that there is no evidence that ill will or spite motivated Rima and Alegre in
making the broadcasts. FBNI further points out that Rima and Alegre exerted efforts to
obtain AMECs side and gave Ago the opportunity to defend AMEC and its administrators.
FBNI concludes that since there is no malice, there is no libel.
FBNIs contentions are untenable.
Every defamatory imputation is presumed malicious.[25] Rima and Alegre failed to
show adequately their good intention and justifiable motive in airing the supposed gripes
of the students. As hosts of a documentary or public affairs program, Rima and Alegre
should have presented the public issues free from inaccurate and misleading
information.[26] Hearing the students alleged complaints a month before the
expos,[27] they had sufficient time to verify their sources and information. However, Rima
and Alegre hardly made a thorough investigation of the students alleged gripes. Neither
did they inquire about nor confirm the purported irregularities in AMEC from the
Department of Education, Culture and Sports. Alegre testified that he merely went to
AMEC to verify his report from an alleged AMEC official who refused to disclose any
information. Alegre simply relied on the words of the students because they were many
and not because there is proof that what they are saying is true.[28] This plainly shows
Rima and Alegres reckless disregard of whether their report was true or not.
Contrary to FBNIs claim, the broadcasts were not the result of straight reporting.
Significantly, some courts in the United States apply the privilege of neutral reportage in
libel cases involving matters of public interest or public figures. Under this privilege, a
republisher who accurately and disinterestedly reports certain defamatory statements
made against public figures is shielded from liability, regardless of the republishers
subjective awareness of the truth or falsity of the accusation.[29] Rima and Alegre cannot
invoke the privilege of neutral reportage because unfounded comments abound in the
broadcasts. Moreover, there is no existing controversy involving AMEC when the
broadcasts were made. The privilege of neutral reportage applies where the defamed
person is a public figure who is involved in an existing controversy, and a party to that
controversy makes the defamatory statement.[30]
However, FBNI argues vigorously that malice in law does not apply to this case.
Citing Borjal v. Court of Appeals,[31] FBNI contends that the broadcasts fall within the
coverage of qualifiedly privileged communications for being commentaries on matters of
public interest. Such being the case, AMEC should prove malice in fact or actual malice.
Since AMEC allegedly failed to prove actual malice, there is no libel.
FBNIs reliance on Borjal is misplaced. In Borjal, the Court elucidated on the
doctrine of fair comment, thus:

[F]air commentaries on matters of public interest are privileged and constitute a valid
defense in an action for libel or slander. The doctrine of fair comment means that while in
general every discreditable imputation publicly made is deemed false, because every man
is presumed innocent until his guilt is judicially proved, and every false imputation is
deemed malicious, nevertheless, when the discreditable imputation is directed against a
public person in his public capacity, it is not necessarily actionable. In order that such
discreditable imputation to a public official may be actionable, it must either be a
false allegation of fact or a comment based on a false supposition. If the comment
is an expression of opinion, based on established facts, then it is immaterial that the
opinion happens to be mistaken, as long as it might reasonably be inferred from the
facts.[32] (Emphasis supplied)

True, AMEC is a private learning institution whose business of educating students is


genuinely imbued with public interest. The welfare of the youth in general and AMECs
students in particular is a matter which the public has the right to know. Thus, similar to
the newspaper articles in Borjal, the subject broadcasts dealt with matters of public
interest. However, unlike in Borjal, the questioned broadcasts are not based
on established facts. The record supports the following findings of the trial court:
xxx Although defendants claim that they were motivated by consistent reports of
students and parents against plaintiff, yet, defendants have not presented in court, nor
even gave name of a single student who made the complaint to them, much less present
written complaint or petition to that effect. To accept this defense of defendants is too
dangerous because it could easily give license to the media to malign people and
establishments based on flimsy excuses that there were reports to them although they
could not satisfactorily establish it. Such laxity would encourage careless and
irresponsible broadcasting which is inimical to public interests.

Secondly, there is reason to believe that defendant radio broadcasters, contrary to the
mandates of their duties, did not verify and analyze the truth of the reports before they
aired it, in order to prove that they are in good faith.

Alegre contended that plaintiff school had no permit and is not accredited to offer
Physical Therapy courses. Yet, plaintiff produced a certificate coming from DECS that as
of Sept. 22, 1987 or more than 2 years before the controversial broadcast, accreditation to
offer Physical Therapy course had already been given the plaintiff, which certificate is
signed by no less than the Secretary of Education and Culture herself, Lourdes R.
Quisumbing (Exh. C-rebuttal). Defendants could have easily known this were they careful
enough to verify. And yet, defendants were very categorical and sounded too positive
when they made the erroneous report that plaintiff had no permit to offer Physical
Therapy courses which they were offering.

The allegation that plaintiff was getting tremendous aids from foreign foundations like
Mcdonald Foundation prove not to be true also. The truth is there is no Mcdonald
Foundation existing. Although a big building of plaintiff school was given the name
Mcdonald building, that was only in order to honor the first missionary in Bicol of
plaintiffs religion, as explained by Dr. Lita Ago. Contrary to the claim of defendants over
the air, not a single centavo appears to be received by plaintiff school from the
aforementioned McDonald Foundation which does not exist.

Defendants did not even also bother to prove their claim, though denied by Dra. Ago,
that when medical students fail in one subject, they are made to repeat all the other
subject[s], even those they have already passed, nor their claim that the school charges
laboratory fees even if there are no laboratories in the school. No evidence was presented
to prove the bases for these claims, at least in order to give semblance of good faith.

As for the allegation that plaintiff is the dumping ground for misfits, and immoral
teachers, defendant[s] singled out Dean Justita Lola who is said to be so old, with zero
visibility already. Dean Lola testified in court last Jan. 21, 1991, and was found to be 75
years old. xxx Even older people prove to be effective teachers like Supreme Court Justices
who are still very much in demand as law professors in their late years. Counsel for
defendants is past 75 but is found by this court to be still very sharp and effective. So is
plaintiffs counsel.
Dr. Lola was observed by this court not to be physically decrepit yet, nor mentally
infirmed, but is still alert and docile.

The contention that plaintiffs graduates become liabilities rather than assets of our
society is a mere conclusion. Being from the place himself, this court is aware that
majority of the medical graduates of plaintiffs pass the board examination easily and
become prosperous and responsible professionals.[33]

Had the comments been an expression of opinion based on established facts, it is


immaterial that the opinion happens to be mistaken, as long as it might reasonably be
inferred from the facts.[34] However, the comments of Rima and Alegre were not backed
up by facts. Therefore, the broadcasts are not privileged and remain libelous per se.
The broadcasts also violate the Radio Code[35] of the Kapisanan ng mga Brodkaster sa
Pilipinas, Ink. (Radio Code). Item I(B) of the Radio Code provides:

B. PUBLIC AFFAIRS, PUBLIC ISSUES AND COMMENTARIES

1. x x x

4. Public affairs program shall present public issues free from personal bias,
prejudice and inaccurate and misleading information. x x x Furthermore,
the station shall strive to present balanced discussion of issues. x x x.

xxx

7. The station shall be responsible at all times in the supervision of public affairs,
public issues and commentary programs so that they conform to the
provisions and standards of this code.

8. It shall be the responsibility of the newscaster, commentator, host and


announcer to protect public interest, general welfare and good order in the
presentation of public affairs and public issues.[36] (Emphasis supplied)

The broadcasts fail to meet the standards prescribed in the Radio Code, which lays
down the code of ethical conduct governing practitioners in the radio broadcast industry.
The Radio Code is a voluntary code of conduct imposed by the radio broadcast industry
on its own members. The Radio Code is a public warranty by the radio broadcast industry
that radio broadcast practitioners are subject to a code by which their conduct are
measured for lapses, liability and sanctions.
The public has a right to expect and demand that radio broadcast practitioners live
up to the code of conduct of their profession, just like other professionals. A professional
code of conduct provides the standards for determining whether a person has acted
justly, honestly and with good faith in the exercise of his rights and performance of his
duties as required by Article 19[37] of the Civil Code. A professional code of conduct also
provides the standards for determining whether a person who willfully causes loss or
injury to another has acted in a manner contrary to morals or good customs under Article
21[38] of the Civil Code.
II.
Whether AMEC is entitled to moral damages

FBNI contends that AMEC is not entitled to moral damages because it is a


corporation.[39]
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.[40] The Court of Appeals
cites Mambulao Lumber Co. v. PNB, et al.[41] to justify the award of moral damages.
However, the Courts 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.[42]
Nevertheless, AMECs claim for moral damages falls under item 7 of Article 2219 [43] of
the Civil Code. This provision expressly authorizes the recovery of moral damages in cases
of libel, slander or any other form of defamation. Article 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.[44]
Moreover, where the broadcast is libelous per se, the law implies damages.[45] 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.[46] 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.
However, we find the award of P300,000 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 from P300,000 to P150,000.

III.
Whether the award of attorneys fees is proper

FBNI contends that since AMEC is not entitled to moral damages, there is no basis
for the award of attorneys fees. FBNI adds that the instant case does not fall under the
enumeration in Article 2208[48] of the Civil Code.
The award of attorneys fees is not proper because AMEC failed to justify satisfactorily
its claim for attorneys fees. AMEC did not adduce evidence to warrant the award of
attorneys fees. Moreover, both the trial and appellate courts failed to explicitly state in
their respective decisions the rationale for the award of attorneys fees. [49] In Inter-Asia
Investment Industries, Inc. v. Court of Appeals,[50] we held that:

[I]t is an accepted doctrine that the award thereof as an item of damages is the exception
rather than the rule, and counsels fees are not to be awarded every time a party wins a
suit. The power of the court to award attorneys fees under Article 2208 of the Civil
Code demands factual, legal and equitable justification, without which the award
is a conclusion without a premise, its basis being improperly left to speculation
and conjecture. In all events, the court must explicitly state in the text of the decision,
and not only in the decretal portion thereof, the legal reason for the award of attorneys
fees.[51] (Emphasis supplied)

While it mentioned about the award of attorneys fees by stating that it lies within the
discretion of the court and depends upon the circumstances of each case, the Court of
Appeals failed to point out any circumstance to justify the award.
IV.
Whether FBNI is solidarily liable with Rima and Alegre
for moral damages, attorneys fees
and costs of suit

FBNI contends that it is not solidarily liable with Rima and Alegre for the payment of
damages and attorneys fees because it exercised due diligence in the selection and
supervision of its employees, particularly Rima and Alegre. FBNI maintains that its
broadcasters, including Rima and Alegre, undergo a very regimented process before they
are allowed to go on air. Those who apply for broadcaster are subjected to interviews,
examinations and an apprenticeship program.
FBNI further argues that Alegres age and lack of training are irrelevant to his
competence as a broadcaster. FBNI points out that the minor deficiencies in the KBP
accreditation of Rima and Alegre do not in any way prove that FBNI did not exercise the
diligence of a good father of a family in selecting and supervising them. Rimas
accreditation lapsed due to his non-payment of the KBP annual fees while Alegres
accreditation card was delayed allegedly for reasons attributable to the KBP Manila
Office. FBNI claims that membership in the KBP is merely voluntary and not required by
any law or government regulation.
FBNIs arguments do not persuade us.
The basis of the present action is a tort. Joint tort feasors are jointly and severally
liable for the tort which they commit.[52] Joint tort feasors are all the persons who
command, instigate, promote, encourage, advise, countenance, cooperate in, aid or abet
the commission of a tort, or who approve of it after it is done, if done for their
benefit.[53] Thus, AMEC correctly anchored its cause of action against FBNI on Articles
2176 and 2180 of the Civil Code.
As operator of DZRC-AM and employer of Rima and Alegre, FBNI is solidarily liable
to pay for damages arising from the libelous broadcasts. As stated by the Court of
Appeals, recovery for defamatory statements published by radio or television may be had
from the owner of the station, a licensee, the operator of the station, or a person who
procures, or participates in, the making of the defamatory statements. [54] An employer
and employee are solidarily liable for a defamatory statement by the employee within the
course and scope of his or her employment, at least when the employer authorizes or
ratifies the defamation.[55] In this case, Rima and Alegre were clearly performing their
official duties as hosts of FBNIs radio program Expos when they aired the broadcasts.
FBNI neither alleged nor proved that Rima and Alegre went beyond the scope of their
work at that time. There was likewise no showing that FBNI did not authorize and ratify
the defamatory broadcasts.
Moreover, there is insufficient evidence on record that FBNI exercised due diligence
in the selection and supervision of its employees, particularly Rima and Alegre. FBNI
merely showed that it exercised diligence in the selection of its broadcasters without
introducing any evidence to prove that it observed the same diligence in
the supervision of Rima and Alegre. FBNI did not show how it exercised diligence in
supervising its broadcasters. FBNIs alleged constant reminder to its broadcasters to
observe truth, fairness and objectivity and to refrain from using libelous and indecent
language is not enough to prove due diligence in the supervision of its broadcasters.
Adequate training of the broadcasters on the industrys code of conduct, sufficient
information on libel laws, and continuous evaluation of the broadcasters performance are
but a few of the many ways of showing diligence in the supervision of broadcasters.
FBNI claims that it has taken all the precaution in the selection of Rima and Alegre
as broadcasters, bearing in mind their qualifications. However, no clear and convincing
evidence shows that Rima and Alegre underwent FBNIs regimented process of
application. Furthermore, FBNI admits that Rima and Alegre had deficiencies in their
KBP accreditation,[56] which is one of FBNIs requirements before it hires a broadcaster.
Significantly, membership in the KBP, while voluntary, indicates the broadcasters strong
commitment to observe the broadcast industrys rules and regulations. Clearly, these
circumstances show FBNIs lack of diligence in selecting and supervising Rima and Alegre.
Hence, FBNI is solidarily liable to pay damages together with Rima and Alegre.
WHEREFORE, we DENY the instant petition. We AFFIRM the Decision of 4 January
1999 and Resolution of 26 January 2000 of the Court of Appeals in CA-G.R. CV No. 40151
with the MODIFICATION that the award of moral damages is reduced from P300,000
to P150,000 and the award of attorneys fees is deleted. Costs against petitioner.
SO ORDERED.
[G.R. No. 125778. June 10, 2003]

INTER-ASIA INVESTMENTS INDUSTRIES, INC., petitioner, vs. COURT OF APPEALS


and ASIA INDUSTRIES, INC., respondents.

DECISION
CARPIO-MORALES, J.:

The present petition for review on certiorari assails the Court of Appeals Decision[1] of
January 25, 1996 and Resolution[2] of July 11, 1996.
The material facts of the case are as follows:
On September 1, 1978, Inter-Asia Industries, Inc. (petitioner), by a Stock Purchase
Agreement[3] (the Agreement), sold to Asia Industries, Inc. (private respondent) for and in
consideration of the sum of P19,500,000.00 all its right, title and interest in and to all the
outstanding shares of stock of FARMACOR, INC. (FARMACOR).[4] The Agreement was
signed by Leonides P. Gonzales and Jesus J. Vergara, presidents of petitioner and private
respondent, respectively.[5]
Under paragraph 7 of the Agreement, petitioner as seller made warranties and
representations among which were (iv.) [t]he audited financial statements of FARMACOR
at and for the year ended December 31, 1977... and the audited financial statements of
FARMACOR as of September 30, 1978 being prepared by S[ycip,] G[orres,] V[elayo and
Co.]... fairly present or will present the financial position of FARMACOR and the results
of its operations as of said respective dates; said financial statements show or will show all
liabilities and commitments of FARMACOR, direct or contingent, as of said respective
dates . . .; and (v.) [t]he Minimum Guaranteed Net Worth of FARMACOR as of September
30, 1978 shall be Twelve Million Pesos (P12,000,000.00).[6]
The Agreement was later amended with respect to the Closing Date, originally set up
at 10:00 a.m. of September 30, 1978, which was moved to October 31, 1978, and to the
mode of payment of the purchase price.[7]
The Agreement, as amended, provided that pending submission by SGV of
FARMACORs audited financial statements as of October 31, 1978, private respondent may
retain the sum of P7,500,000.00 out of the stipulated purchase price of P19,500,000.00;
that from this retained amount of P7,500,000.00, private respondent may deduct any
shortfall on the Minimum Guaranteed Net Worth of P12,000,000.00;[8] and that if the
amount retained is not sufficient to make up for the deficiency in the Minimum
Guaranteed Net Worth, petitioner shall pay the difference within 5 days from date of
receipt of the audited financial statements.[9]
Respondent paid petitioner a total amount of P 12,000,000.00: P5,000,000.00 upon
the signing of the Agreement, and P7,000,000.00 on November 2, 1978.[10]
From the STATEMENT OF INCOME AND DEFICIT attached to the financial
report[11] dated November 28, 1978 submitted by SGV, it appears that FARMACOR had, for
the ten months ended October 31, 1978, a deficit of P11,244,225.00.[12] Since the
stockholders equity amounted to P10,000,000.00, FARMACOR had a net worth deficiency
of P1,244,225.00. The guaranteed net worth shortfall thus amounted to P13,244,225.00
after adding the net worth deficiency of P1,244,225.00 to the Minimum Guaranteed Net
Worth of P12,000,000.00.
The adjusted contract price, therefore, amounted to P6,225,775.00 which is the
difference between the contract price of P19,500,000.00 and the shortfall in the
guaranteed net worth of P13,224,225.00. Private respondent having already paid petitioner
P12,000,000.00, it was entitled to a refund of P5,744,225.00.
Petitioner thereafter proposed, by letter[13] of January 24, 1980, signed by its president,
that private respondents claim for refund be reduced to P4,093,993.00, it promising to
pay the cost of the Northern Cotabato Industries, Inc. (NOCOSII) superstructures in the
amount of P759,570.00. To the proposal respondent agreed. Petitioner, however, weiched
on its promise. Petitioners total liability thus stood at P4,853,503.00 (P4,093,993.00 plus
P759,570.00)[14] exclusive of interest.[15]
On April 5, 1983, private respondent filed a complaint[16] against petitioner with the
Regional Trial Court of Makati, one of two causes of action of which was for the recovery
of above-said amount of P4,853,503.00[17] plus interest.
Denying private respondents claim, petitioner countered that private respondent
failed to pay the balance of the purchase price and accordingly set up a counterclaim.
Finding for private respondent, the trial court rendered on November 27, 1991 a
Decision,[18] the dispositive portion of which reads:

WHEREFORE, judgment is rendered in favor of plaintiff and against defendant (a)


ordering the latter to pay to the former the sum of P4,853,503.00[19] plus interest thereon
at the legal rate from the filing of the complaint until fully paid, the sum of P30,000.00 as
attorneys fees and the costs of suit; and (b) dismissing the counterclaim.

SO ORDERED.

On appeal to the Court of Appeals, petitioner raised the following errors:

THE TRIAL COURT ERRED IN HOLDING THE DEFENDANT LIABLE UNDER THE
FIRST CAUSE OF ACTION PLEADED BY THE PLAINTIFF.

THE TRIAL COURT ERRED IN AWARDING ATTORNEYS FEES AND IN DISMISSING


THE COUNTERCLAIM.
THE TRIAL COURT ERRED IN RENDERING JUDGMENT IN FAVOR OF THE
PLAINTIFF, THE ALLEGED BREACH OF WARRANTIES AND REPRESENTATION NOT
HAVING BEEN SHOWN, MUCH LESS ESTABLISHED BY THE PLAINTIFF.[20]

By Decision of January 25, 1996, the Court of Appeals affirmed the trial courts
decision. Petitioners motion for reconsideration of the decision having been denied by
the Court of Appeals by Resolution of July 11, 1996, the present petition for review on
certiorari was filed, assigning the following errors:
I

THE RESPONDENT COURT ERRED IN NOT HOLDING THAT THE LETTER OF THE
PRESIDENT OF THE PETITIONER IS NOT BINDING ON THE PETITIONER
BEING ULTRA VIRES.

II

THE LETTER CAN NOT BE AN ADMISSION AND WAIVER OF THE PETITIONER AS A


CORPORATION.

III

THE RESPONDENT COURT ERRED IN NOT DECLARING THAT THERE IS NO


BREACH OF WARRANTIES AND REPRESENTATION AS ALLEGED BY THE PRIVATE
RESPONDENT.

IV

THE RESPONDENT COURT ERRED IN ORDERING THE PETITIONER TO PAY


ATTORNEYS FEES AND IN SUSTAINING THE DISMISSAL OF THE
COUNTERCLAIM.18 (Underscoring in the original)

Petitioner argues that the January 24, 1980 letter-proposal (for the reduction of
private respondents claim for refund upon petitioners promise to pay the cost of
NOCOSII superstructures in the amount of P759,570.00) which was signed by its
president has no legal force and effect against it as it was not authorized by its board of
directors, it citing the COrporation Law which provides that unless the act of the
president is authorized by the board of directors, the same is not binding on it.
This Court is not persuaded.
The January 24, 1980 letter signed by petitioners president is valid and binding. The
case of Peoples Aircargo and Warehousing Co., Inc. v. Court of Appeals19 instructs:

The general rule is that, in the absence of authority from the board of directors,
no person, not even its officers, can validly bind a corporation. A corporation is a
juridical person, separate and distinct from its stockholders and members, having x x x
powers, attributes and properties expressly authorized by law or incident to its existence.

Being a juridical entity, a corporation may act through its board of directors, which
exercises almost all corporate powers, lays down all corporate business policies and is
responsible for the efficiency of management, as provided in Section 23 of the
Corporation Code of the Philippines:

SEC. 23. The Board of Directors or Trustees. - Unless otherwise provided in this Code, the
corporate powers of all corporations formed under this Code shall be exercised, all
business conducted and all property of such corporations controlled and held by the
board of directors or trustees x x x.

Under this provision, the power and responsibility to decide whether the corporation
should enter into a contract that will bind the corporation is lodged in the board, subject
to the articles of incorporation, bylaws, or relevant provisions of law. However, just as a
natural person may authorize another to do certain acts for and on his behalf, the
board of directors may validly delegate some of its functions and powers to
officers, committees or agents. The authority of such individuals to bind the
corporation is generally derived from law, corporate bylaws or authorization from
the board, either expressly or impliedly by habit, custom or acquiescence in the
general course of business, viz:

A corporate officer or agent may represent and bind the corporation in transactions with
third persons to the extent that [the] authority to do so has been conferred upon him,
and this includes 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 person dealing with the officer or agent to believe
that it has conferred.

xxx

[A]pparent authority is derived not merely from practice. Its existence may be
ascertained through (1) the general manner in which the corporation holds out an
officer or agent as having the power to act or, in other words the apparent authority to act
in general, with which it clothes him; or (2) the acquiescence in his acts of a particular
nature, with actual or constructive knowledge thereof, within or beyond the scope
of his ordinary powers.
It requires presentation of evidence of similar act(s) executed either in its favor or
in favor of other parties. It is not the quantity of similar acts which establishes
apparent authority, but the vesting of
a corporate officer with power to bind the corporation.
x x x (Emphasis and underscoring supplied)

As correctly argued by private respondent, an officer of a corporation who is


authorized to purchase the stock of another corporation has the implied power to
perform all other obligations arising therefrom, such as payment of the shares of stock. By
allowing its president to sign the Agreement on its behalf, petitioner clothed him with
apparent capacity to perform all acts which are expressly, impliedly and inherently stated
therein.[21]
Petitioner further argues that when the Agreement was executed on September 1,
1978, its financial statements were extensively examined and accepted as correct by
private respondent, hence, it cannot later be disproved by resorting to some scheme such
as future financial auditing;[22] and that it should not be bound by the SGV Report
because it is self-serving and biased, SGV having been hired solely by private respondent,
and the alleged shortfall of FARMACOR occurred only after the execution of the
Agreement.
This Court is not persuaded either.
The pertinent provisions of the Agreement read:

7. Warranties and Representations - (a) SELLER warrants and represents as follows:

xxx

(iv) The audited financial statements of FARMACOR as at and for the year ended
December 31, 1977 and
the audited financial statements of FARMACOR as at September 30, 19
78 being prepared bySGV pursuant to paragraph 6(b) fairly present or
will present the financial position of FARMACOR and the results of
its operations as of said respective dates; said financial statements
show or will show all liabilities and commitments of FARMACOR,
direct or contingent, as of said respective dates; and the receivables set
forth in said financial statements are fully due and collectible, free and clear
of any set-offs, defenses, claims and other impediments to their
collectibility.

(v) The Minimum Guaranteed Net Worth of FARMACOR as of September


30, 1978 shall be Twelve Million Pesos (P12,000,000.00), Philippine
Currency.

x x x (Underscoring in the original; emphasis supplied)[23]

True, private respondent accepted as correct the financial statements submitted to it


when the Agreement was executed on September 1, 1978. But
petitioner expressly warranted that the SGV Reports fairly present or will present the
financial position of FARMACOR. By such warranty, petitioner is estopped from claiming
that the SGV Reports are self-serving and biased.
As to the claim that the shortfall occurred after the execution of the Agreement, the
declaration of Emmanuel de Asis, supervisor in the Accounting Division of SGV and head
of the team which conducted the auditing of FARMACOR, that the period covered by the
audit was from January to October 1978 shows that the period before the Agreement was
entered into (on September 1, 1978) was covered.[24]
As to petitioners assigned error on the award of attorneys fees which, it argues, is
bereft of factual, legal and equitable justification, this Court finds the same well-taken.

On the matter of attorneys fees, it is an accepted doctrine that the award thereof as an
item of damages is the exception rather than the rule, and counsels fees are not to be
awarded every time a party wins a suit. The power of the court to award
attorneys fees under Article 2208 of the Civil Code demands
factual, legal and equitable justification, without which the award is
a conclusion without a premise, its basis being improperly left
to speculation and conjecture. In all events, the court must explicitly state in the
text of the decision, and not only in the decretal portion thereof, the legal reason
for the award of attorneys fees.[25]

x x x (Emphasis and underscoring supplied; citations omitted)

WHEREFORE, the instant petition is PARTLY GRANTED. The assailed decision of


the Court of Appeals affirming that of the trial court is modified in that the award of
attorneys fees in favor of private respondent is deleted. The decision is affirmed in other
respects.
SO ORDERED.

[G.R. No. 137592. December 12, 2001]

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

DECISION
YNARES-SANTIAGO, J.:
This is a petition for review assailing the Decision dated October 7, 1997[1] and the
Resolution dated February 16, 1999[2] of the Court of Appeals in CA-G.R. SP No. 40933,
which affirmed the Decision of the Securities and Exchange and Commission (SEC) in
SEC-AC No. 539.[3]
Respondent Iglesia ng Dios Kay Cristo Jesus, Haligi at Suhay ng Katotohanan (Church
of God in Christ Jesus, the Pillar and Ground of Truth),[4] is a non-stock religious society
or corporation registered in 1936.Sometime in 1976, one Eliseo Soriano and several other
members of respondent corporation disassociated themselves from the latter and
succeeded in registering on March 30, 1977 a new non-stock religious society or
corporation, named Iglesia ng Dios Kay Kristo Hesus, Haligi at Saligan ng Katotohanan.
On July 16, 1979, respondent corporation filed with the SEC a petition to compel
the Iglesia ng Dios Kay Kristo Hesus, Haligi at Saligan ng Katotohanan to change its
corporate name, which petition was docketed as SEC Case No. 1774. On May 4, 1988, the
SEC rendered judgment in favor of respondent, ordering the Iglesia ng Dios Kay Kristo
Hesus, Haligi at Saligan ng Katotohanan to change its corporate name to another name
that is not similar or identical to any name already used by a corporation, partnership or
association registered with the Commission.[5] No appeal was taken from said decision.
It appears that during the pendency of SEC Case No. 1774, Soriano, et al., caused the
registration on April 25, 1980 of petitioner corporation, Ang Mga Kaanib sa Iglesia ng Dios
Kay Kristo Hesus, H.S.K., sa Bansang Pilipinas. The acronym H.S.K. stands for Haligi at
Saligan ng Katotohanan.[6]
On March 2, 1994, respondent corporation filed before the SEC a petition, docketed
as SEC Case No. 03-94-4704, praying that petitioner be compelled to change its corporate
name and be barred from using the same or similar name on the ground that the same
causes confusion among their members as well as the public.
Petitioner filed a motion to dismiss on the ground of lack of cause of action. The
motion to dismiss was denied. Thereafter, for failure to file an answer, petitioner was
declared in default and respondent was allowed to present its evidence ex parte.
On November 20, 1995, the SEC rendered a decision ordering petitioner to change its
corporate name. The dispositive portion thereof reads:

PREMISES CONSIDERED, judgment is hereby rendered in favor of the petitioner


(respondent herein).

Respondent Mga Kaanib sa Iglesia ng Dios Kay Kristo Jesus (sic), H.S.K. sa Bansang
Pilipinas (petitioner herein) is hereby MANDATED to change its corporate name to
another not deceptively similar or identical to the same already used by the
Petitioner, any corporation, association, and/or partnership presently registered with
the Commission.
Let a copy of this Decision be furnished the Records Division and the Corporate and
Legal Department [CLD] of this Commission for their records, reference and/or for
whatever requisite action, if any, to be undertaken at their end.

SO ORDERED.[7]

Petitioner appealed to the SEC En Banc, where its appeal was docketed as SEC-AC
No. 539. In a decision dated March 4, 1996, the SEC En Banc affirmed the above decision,
upon a finding that petitioner's corporate name was identical or confusingly or
deceptively similar to that of respondents corporate name.[8]
Petitioner filed a petition for review with the Court of Appeals. On October 7, 1997,
the Court of Appeals rendered the assailed decision affirming the decision of the SEC En
Banc. Petitioners motion for reconsideration was denied by the Court of Appeals on
February 16, 1992.
Hence, the instant petition for review, raising the following assignment of errors:
I

THE HONORABLE COURT OF APPEALS ERRED IN CONCLUDING THAT


PETITIONER HAS NOT BEEN DEPRIVED OF ITS RIGHT TO PROCEDURAL DUE
PROCESS, THE HONORABLE COURT OF APPEALS DISREGARDED THE
JURISPRUDENCE APPLICABLE TO THE CASE AT BAR AND INSTEAD RELIED ON
TOTALLY INAPPLICABLE JURISPRUDENCE.

II

THE HONORABLE COURT OF APPEALS ERRED IN ITS INTEPRETATION OF THE


CIVIL CODE PROVISIONS ON EXTINCTIVE PRESCRIPTION, THEREBY
RESULTING IN ITS FAILURE TO FIND THAT THE RESPONDENT'S RIGHT OF
ACTION TO INSTITUTE THE SEC CASE HAS SINCE PRESCRIBED PRIOR TO ITS
INSTITUTION.

III

THE HONORABLE COURT OF APPEALS FAILED TO CONSIDER AND PROPERLY


APPLY THE EXCEPTIONS ESTABLISHED BY JURISPRUDENCE IN THE
APPLICATION OF SECTION 18 OF THE CORPORATION CODE TO THE INSTANT
CASE.

IV

THE HONORABLE COURT OF APPEALS FAILED TO PROPERLY APPRECIATE THE


SCOPE OF THE CONSTITUTIONAL GUARANTEE ON RELIGIOUS FREEDOM,
THEREBY FAILING TO APPLY THE SAME TO PROTECT PETITIONERS RIGHTS.[9]
Invoking the case of Legarda v. Court of Appeals,[10] petitioner insists that the decision
of the Court of Appeals and the SEC should be set aside because the negligence of its
former counsel of record, Atty. Joaquin Garaygay, in failing to file an answer after its
motion to dismiss was denied by the SEC, deprived them of their day in court.
The contention is without merit. As a general rule, the negligence of counsel binds
the client. This is based on the rule that any act performed by a lawyer within the scope of
his general or implied authority is regarded as an act of his client.[11] An exception to the
foregoing is where the reckless or gross negligence of the counsel deprives the client of
due process of law.[12] Said exception, however, does not obtain in the present case.
In Legarda v. Court of Appeals, the effort of the counsel in defending his clients cause
consisted in filing a motion for extension of time to file answer before the trial
court. When his client was declared in default, the counsel did nothing and allowed the
judgment by default to become final and executory. Upon the insistence of his client, the
counsel filed a petition to annul the judgment with the Court of Appeals, which denied
the petition, and again the counsel allowed the denial to become final and executory. This
Court found the counsel grossly negligent and consequently declared as null and void the
decision adverse to his client.
The factual antecedents of the case at bar are different. Atty. Garaygay filed before
the SEC a motion to dismiss on the ground of lack of cause of action. When his client was
declared in default for failure to file an answer, Atty. Garaygay moved for reconsideration
and lifting of the order of default.[13] After judgment by default was rendered against
petitioner corporation, Atty. Garaygay filed a motion for extension of time to
appeal/motion for reconsideration, and thereafter a motion to set aside the decision.[14]
Evidently, Atty. Garaygay was only guilty of simple negligence. Although he failed to
file an answer that led to the rendition of a judgment by default against petitioner, his
efforts were palpably real, albeit bereft of zeal.[15]
Likewise, the issue of prescription, which petitioner raised for the first time on appeal
to the Court of Appeals, is untenable. Its failure to raise prescription before the SEC can
only be construed as a waiver of that defense.[16] At any rate, the SEC has the authority to
de-register at all times and under all circumstances corporate names which in its
estimation are likely to spawn confusion. It is the duty of the SEC to prevent confusion in
the use of corporate names not only for the protection of the corporations involved but
more so for the protection of the public.[17]
Section 18 of the Corporation Code provides:

Corporate Name. --- No corporate name may be allowed by the Securities and 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 is 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.
Corollary thereto, the pertinent portion of the SEC Guidelines on Corporate Names
states:

(d) If the proposed name contains a word similar to a word already used as part of the
firm name or style of a registered company, the proposed name must contain two other
words different from the name of the company already registered;

Parties organizing a corporation must choose a name at their peril; and the use of a
name similar to one adopted by another corporation, whether a business or a nonprofit
organization, if misleading or likely to injure in the exercise of its corporate functions,
regardless of intent, may be prevented by the corporation having a prior right, by a suit
for injunction against the new corporation to prevent the use of the name.[18]
Petitioner claims that it complied with the aforecited SEC guideline by adding not
only two but eight words to their registered name, to wit: Ang Mga Kaanib" and "Sa
Bansang Pilipinas, Inc., which, petitioner argues, effectively distinguished it from
respondent corporation.
The additional words Ang Mga Kaanib and Sa Bansang Pilipinas, Inc. in petitioners
name are, as correctly observed by the SEC, merely descriptive of and also referring to the
members, or kaanib, of respondent who are likewise residing in the Philippines. These
words can hardly serve as an effective differentiating medium necessary to avoid
confusion or difficulty in distinguishing petitioner from respondent. This is especially so,
since both petitioner and respondent corporations are using the same acronym ---
H.S.K.;[19] not to mention the fact that both are espousing religious beliefs and operating
in the same place. Parenthetically, it is well to mention that the acronym H.S.K. used by
petitioner stands for Haligi at Saligan ng Katotohanan.[20]
Then, too, the records reveal that in holding out their corporate name to the public,
petitioner highlights the dominant words IGLESIA NG DIOS KAY KRISTO HESUS,
HALIGI AT SALIGAN NG KATOTOHANAN,which is strikingly similar to respondent's
corporate name, thus making it even more evident that the additional words Ang Mga
Kaanib and Sa Bansang Pilipinas, Inc., are merely descriptive of and pertaining to the
members of respondent corporation.[21]
Significantly, the only difference between the corporate names of petitioner and
respondent are the words SALIGAN and SUHAY. These words are synonymous --- both
mean ground, foundation or support. Hence, this case is on all fours with Universal Mills
Corporation v. Universal Textile Mills, Inc.,[22] where the Court ruled that the corporate
names Universal Mills Corporation and Universal Textile Mills, Inc., are undisputably so
similar that even under the test of reasonable care and observation confusion may arise.
Furthermore, the wholesale appropriation by petitioner of respondent's corporate
name cannot find justification under the generic word rule. We agree with the Court of
Appeals conclusion that a contrary ruling would encourage other corporations to adopt
verbatim and register an existing and protected corporate name, to the detriment of the
public.
The fact that there are other non-stock religious societies or corporations using the
names Church of the Living God, Inc., Church of God Jesus Christ the Son of God the
Head, Church of God in Christ & By the Holy Spirit, and other similar names, is of no
consequence. It does not authorize the use by petitioner of the essential and
distinguishing feature of respondent's registered and protected corporate name.[23]
We need not belabor the fourth issue raised by petitioner. Certainly, ordering
petitioner to change its corporate name is not a violation of its constitutionally
guaranteed right to religious freedom. In so doing, the SEC merely compelled petitioner
to abide by one of the SEC guidelines in the approval of partnership and corporate names,
namely its undertaking to manifest its willingness to change its corporate name in the
event another person, firm, or entity has acquired a prior right to the use of the said firm
name or one deceptively or confusingly similar to it.
WHEREFORE, in view of all the foregoing, the instant petition for review is
DENIED. The appealed decision of the Court of Appeals is AFFIRMED in toto.
SO ORDERED.

[G. R. No. 107789. April 30, 2003]

REPUBLIC OF THE PHILIPPINES (PRESIDENTIAL COMMISSION ON GOOD


GOVERNMENT), petitioner, vs. THE HONORABLE SANDIGANBAYAN
(THIRD DIVISION) and VICTOR AFRICA, respondents.
EROCOM INVESTORS AND MANAGERS, INC., BENITO NIETO, CARLOS NIETO,
MANUEL NIETO III, RAMON NIETO, ROSARIO ARELLANO, VICTORIA
LEGARDA, ANGELA LOBREGAT, MA. RITA DE LOS REYES, CARMEN
TUAZON and RAFAEL VALDEZ, intervenors.

[G. R. No. 147214. April 30, 2003]

VICTOR AFRICA, petitioner, vs. THE HONORABLE SANDIGANBAYAN and THE


PRESIDENTIAL COMMISSION ON GOOD GOVERNMENT, respondents.

RESOLUTION
CARPIO-MORALES, J.:

These consolidated cases, the first for Certiorari, Mandamus and Prohibition, and the
second for Review on Certiorari although it is actually one for Certiorari, stem from a
Resolution of November 13, 1992 issued by the Sandiganbayan in Civil Case No. 0130, [1] on
motion of Victor Africa (Africa) who prayed that said court order the calling and holding
of the Eastern Telecommunications, Philippines, Inc. (ETPI) annual stockholders meeting
for 1992 under the [c]ourts control and supervision and prescribed guidelines.
It is gathered that on August 7, 1991, the Presidential Commission on Good
Government (PCGG) conducted an ETPI stockholders meeting during which a PCGG
controlled board of directors was elected. A special stockholders meeting was later
convened by the registered ETPI stockholders wherein another set of board of directors
was elected, as a result of which two sets of such board and officers were elected.
Africa, a stockholder of ETPI, alleging that the PCGG had since January 29, 1988 been
illegally exercising the rights of stockholders of ETPI,[2] especially in the election of the
members of the board of directors, filed the above-said motion before the Sandiganbayan.
The PCGG did not object to Africas motion provided that:

1. An Order be issued upholding the right of PCGG to vote all the Class A shares
of ETPI.

2. In the alternative, in the remote event that PCGGs right to vote the
sequestered shares be not upheld, an Order be issued:

a. Disregarding the Stock and Transfer Book and Booklet of Stock Certificates
of ETPI in determining who can vote the shares in an Annual
Stockholders Meeting of ETPI,

b. Allowing PCGG to vote twenty-three and 90/100 percent (23.9%) of the


total subscription in ETPI, and

c. Directing the amendment of the Articles of Incorporation and By-laws of


ETPI providing for the minimum safeguards for the conservation of
assets x x x prior to the calling of a stockholders meeting.[3]

By the assailed Resolution of November 13, 1992,[4] the Sandiganbayan resolved


Africas motion, the dispositive portion of which reads:

WHEREFORE, it is ordered that an annual stockholders meeting of the Eastern


Telecommunications, Philippines, Inc. (ETPI), for 1992 be held on Friday, November 27,
1992, at 2:00 oclock in the afternoon, at the ETPI Board Room, Telecoms Plaza, 7th Floor,
316 Gil J. Puyat Avenue, Makati, Metro Manila. The Executive Clerk of Court of this
Division shall issue the call and notice of annual stockholders meeting of ETPI addressed
to all the duly registered/recorded stockholders of ETPI. The stockholders meeting shall
be conducted under the supervision and control of this Court, through Mr. Justice Sabino
R. de Leon, Jr. In accordance with the Supreme Court ruling in Cojuangco et al vs.
Azcuna, et al., supra, only the registered owners, their duly authorized representatives or
their proxies may vote their corresponding shares.

The following minimum safeguards must be set in place and carefully maintained until
final judicial resolution of the question of whether or not the sequestered shares of stock
(or in a proper case the underlying assets of the corporation concerned) constitute ill-
gotten wealth:

a. An independent comptroller must be appointed by the Board of Directors


upon nomination of the PCGG as conservator. The comptroller shall not be
removable (nor shall his position be abolished or his compensation
changed) without the consent of the conservator. The comptroller shall, in
addition to his other functions as such, have charge of internal audit.

b. The corporate secretary must be acceptable to the conservator. If the corporate


secretary ceases to be acceptable to the conservator, a new one must be
appointed by the Board of Directors upon nomination of the conservator.

c. The external auditors of the corporation must be independent and must be


acceptable to the conservator. The independent external auditors shall not
be changed without the consent of the conservator.

d. The conservator must be represented in the Board of Directors and in the


Executive (or equivalent) and Audit Committees of the corporation
involved and of its majority-owned subsidiaries or affiliates. The
representative of the conservator must be a full director (not merely an
honorary or ex-officio director) with the right to vote and all other rights
and duties of a member of the Board of Directors under the Corporation
Code. The conservators representative shall not be removed from the Board
of Directors (or the mentioned Committees) without the consent of the
conservator. The conservator shall, however, have the right to remove and
change its representative at any time, and the new representative shall be
promptly elected to the Board and its mentioned Committees.

e. All transactions involving the disbursement of corporate funds in excess of P5


million must have the prior approval of the director representing the
conservator, in order to be valid and effective.

f. The incurring of debt by the corporation, whether in the form of bonds,


debentures, commercial paper or any other form, in excess of P5 million,
must have the prior approval of the director representing the conservator,
in order to be valid and effective.

g. The disposition of a substantial part of assets of the corporation (substantial


meaning in excess of P5 million) shall require the prior approval of the
director representing the conservator, in order to be valid and effective.

h. The above safeguards must be written into the articles of incorporation and
by-laws of the company involved. In other words, the articles of
incorporation and by-laws of the company must be amended so as to
incorporate the above safeguards.

i. Any amendment of the articles of incorporation or by-laws of the company that


will modify in any way any of the above safeguards, shall need the prior
approval of the director representing the conservator.

SO ORDERED.[5] (Underscoring supplied)

Assailing the foregoing resolution, the PCGG filed before this Court the herein first
petition, docketed as G. R. No. 107789, anchored upon the following grounds:
I

RESPONDENT SANDIGANBAYAN ACTED WITH GRAVE ABUSE OF DISCRETION IN


RULING THAT THE REGISTERED STOCKHOLDERS OF ETPI HAD THE RIGHT TO
VOTE IN SPITE OF (A) THE RULING OF THIS HONORABLE COURT IN PCGG V. SEC
AND AFRICA (G. R. NO. 82188) AND (B) A CLEAR SHOWING THAT ETPIS STOCK AND
TRANSFER BOOK WAS ALTERED AND CANNOT BE USED AS THE BASIS TO
DETERMINE WHO CAN VOTE IN A STOCKHOLDERS MEETING.

II

RESPONDENT SANDIGANBAYAN GRAVELY ABUSED ITS DISCRETION AND


EXCEEDED ITS JURISDICTION WHEN IT HELD THAT PCGG CANNOT VOTE AT
LEAST 23.9% OF THE OUTSTANDING CAPITAL STOCK OF ETPI.

III

WITHOUT DUE CARE AND IN RECKLESS DISREGARD OF THE INTERESTS OF THE


REPUBLIC, RESPONDENT SANDIGANBAYAN GRAVELY ABUSED ITS DISCRETION IN
ORDERING THE HOLDING OF A STOCKHOLDERS MEETING IN ETPI WITHOUT
FIRST SETTING IN PLACE BY AMENDING THE ARTICLES AND BY-LAWS OF ETPI TO
INCORPORATE THE SAFEGUARDS PRESCRIBED BY THIS HONORABLE COURT IN
COJUANGCO V. ROXAS.
IV

THE SANDIGANBAYAN ACTED IN EXCESS OF ITS AUTHORITY AND/OR WITH


GRAVE ABUSE OF DISCRETION IN APPOINTING (A) ITS OWN DIVISION CLERK OF
COURT TO PERFORM THE DUTIES OF A CORPORATE SECRETARY, AND (B) ITS
OWN JUSTICE SABINO DE LEON, JR. TO CONTROL AND SUPERVISE THE
STOCKHOLDERS MEETING.[6] (Underscoring in the original)

By Resolution of November 26, 1992, this Court enjoined the Sandiganbayan from (a)
implementing its Resolution of November 13, 1992, and (b) holding the stockholders
meeting of ETPI scheduled on November 27, 1992, at 2:00 p.m.
On December 7, 1992, Aerocom Investors and Managers, Inc. (AEROCOM), Benito
Nieto, Carlos Nieto, Manuel Nieto III, Ramon Nieto, Rosario Arellano, Victoria Legarda,
Angela Lobregat, Ma. Rita de los Reyes, Carmen Tuazon and Rafael Valdez, all
stockholders of record of ETPI, filed a motion to intervene in G. R. No. 107789. Their
motion was granted by this Court by Resolution of January 14, 1993.
After the parties submitted their respective memoranda, the PCGG, in early 1995,
filed a VERY URGENT PETITION FOR AUTHORITY TO HOLD SPECIAL
STOCKHOLDERS MEETING FOR [THE] SOLE PURPOSE OF INCREASING [ETPIs]
AUTHORIZED CAPITAL STOCK, it claiming that the increase in authorized capital stock
was necessary in light of the requirements laid down by Executive Order No. 109[7] and
Republic Act No. 7975.[8]
By Resolution of May 7, 1996,[9] this Court resolved to refer the PCGGs very urgent
petition to hold the special stockholders meeting to the Sandiganbayan for reception of
evidence and resolution.
In compliance therewith, the Sandiganbayan issued a Resolution of December 13,
1996,[10] which is being assailed in the herein second petition, granting the PCGG
authority to cause the holding of a special stockholders meeting of ETPI for the sole
purpose of increasing ETPIs authorized capital stock and to vote therein the sequestered
Class A shares of stock. . . . In said Resolution, the Sandiganbayan held that there was an
urgent necessity to increase ETPIs authorized capital stock; there existed a prima
facie factual foundation for the issuance of the writ of sequestration covering the Class A
shares of stock; and the PCGG was entitled to vote the sequestered shares of stock.
The PCGG-controlled ETPI board of directors thus authorized the ETPI Chair and
Corporate Secretary to call the special stockholders meeting. Notices were sent to those
entitled to vote for a meeting on March 17, 1997. The meeting was held as scheduled and
the increase in ETPIs authorized capital stock from P250 Million to P2.6 Billion was
unanimously approved.[11]
On April 1, 1997, Africa filed before this Court a motion to cite the PCGG and its
accomplices in contempt and to nullify the stockholders meeting called/conducted by
PCGG and its accomplices, he contending that only this Court, and not the
Sandiganbayan, has the power to authorize the PCGG to call a stockholders meeting and
vote the sequestered shares. Africa went on to contend that, assuming that the
Sandiganbayan had such power, its Resolution of December 13, 1996 authorizing the
PCGG to hold the stockholders meeting had not yet become final because the motions for
reconsideration of said resolution were still pending. Further, Africa alleged that he was
not given notice of the meeting, and the PCGG had no right to vote the sequestered Class
A shares.
A motion for leave to intervene relative to Africas Motion to Cite the PCGG and its
Accomplices in Contempt was filed by ETPI. This Court granted the motion for leave but
ETPI never filed any pleading relative to Africas motion to cite the PCGG in contempt.
By Resolution of February 16, 2001, the Sandiganbayan finally resolved to deny the
motions for reconsideration of its Resolution of December 13, 1996, prompting Africa to
file on April 6, 2001 before this Court the herein second petition,[12] docketed as G. R. No.
147214, challenging the Sandiganbayan Resolutions of December 13, 1996 (authorizing the
holding of a stockholders meeting to increase ETPIs authorized capital stock and to vote
therein the sequestered Class A shares of stock) and February 16, 2001 (denying
reconsideration of the December 13, 1996 Resolution).
In his petition in G. R. No. 147214, Africa alleged that the Sandiganbayan committed
grave abuse of discretion when, by the assailed Resolutions,

a. IT DID NOT ACKNOWLEDGE THE NON-SEQUESTERED STATUS OF THE


SHARES [OF SMALL STOCHHOLDERS OF WHICH HE IS ONE AND
AEROCOM AND POLYGON] AND/OR OWNERS THEREOF[;] [AND]

b. IT DID NOT ACCORD TO THE NON-SEQUESTERED SHARES/OWNERS


THE RIGHTS APPURTENANT TO A STOCKHOLDER[.]

He thus prayed that this Court set aside the questioned Resolutions permitting the PCGG
to vote the non-sequestered ETPI Class A shares and nullify the votes the PCGG had cast
in the stockholders meeting held on March 17, 1997.
By Resolution of February 24, 2003,[13] this Court ordered the consolidation of G. R.
No. 147214 with G. R. No. 107789, now the subject of the present Resolution.
I
The first issue to be resolved is whether the PCGG can vote the sequestered ETPI
Class A shares in the stockholders meeting for the election of the board of directors. The
leading case on the matter is Bataan Shipyard & Engineering Co., Inc. v. Presidential
Commission on Good Government[14] where this Court defined the powers of the PCGG as
follows:

a. PCGG May Not Exercise Acts of Ownership


One thing is certain, and should be stated at the outset: the PCGG cannot exercise acts of
dominion over property sequestered, frozen or provisionally taken over. As already earlier
stressed with no little insistence, the act of sequestration[,] freezing or provisional
takeover of property does not import or bring about a divestment of title over said
property; [it] does not make the PCGG the owner thereof. In relation to the property
sequestered, frozen or provisionally taken over, the PCGG is a conservator, not an
owner. Therefore, it can not perform acts of strict ownership; and this is specially true in
the situations contemplated by the sequestration rules where, unlike cases of
receivership, for example, no court exercises effective supervision or can upon due
application and hearing, grant authority for the performance of acts of dominion.

Equally evident is that resort to the provisional remedies in question should entail the
least possible interference with business operations or activities so that, in the event that
the accusation of the business enterprise being ill-gotten be not proven, it may be
returned to its rightful owner as far as possible in the same condition as it was at the time
of sequestration.

b. PCGG Has Only Powers of Administration

The PCGG may thus exercise only powers of administration over the property or business
sequestered or provisionally taken over, much like a court-appointed receiver, such as to
bring and defend actions in its own name; receive rents; collect debts due; pay
outstanding debts due; and generally do such other acts and things as may be necessary
to fulfill its mission as conservator and administrator. In this context, it may in addition
enjoin or restrain any actual or threatened commission of acts by any person or entity
that may render moot and academic, or frustrate or otherwise make ineffectual its efforts
to carry out its task; punish for direct or indirect contempt in accordance with the Rules
of Court; and seek and secure the assistance of any office, agency or instrumentality of the
government. In the case of sequestered businesses generally (i.e., going concerns,
businesses in current operation), as in the case of sequestered objects, its essential role, as
already discussed, is that of conservator, caretaker, watchdog or overseer. It is not that of
manager, or innovator, much less an owner.

c. Powers over Business Enterprises Taken Over by Marcos or Entities or Persons Close to
him; Limitations Thereon

Now, in the special instance of a business enterprise shown by evidence to have been
taken over by the government of the Marcos Administration or by entities or persons
close to former President Marcos, the PCGG is given power and authority, as already
adverted to, to provisionally take (it) over in the public interest or to prevent * * (its)
disposal or dissipation; and since the term is obviously employed in reference to going
concerns, or business enterprises in operation, something more than mere physical
custody is connoted; the PCGG may in this case exercise some measure of control in the
operation, running, or management of the business itself. But even in this special
situation, the intrusion into management should be restricted to the minimum degree
necessary to accomplish the legislative will, which is to prevent the disposal or dissipation
of the business enterprise. There should be no hasty, indiscriminate, unreasoned
replacement or substitution of management officials or change of policies, particularly in
respect of viable establishments. In fact, such a replacement or substitution should be
avoided if at all possible, and undertaken only when justified by demonstrably tenable
grounds and in line with the stated objectives of the PCGG. And it goes without saying
that where replacement of management officers may be called for, the greatest prudence,
circumspection, care and attention should accompany that undertaking to the end that
truly competent, experienced and honest managers may be recruited. There should be no
role to be played in this area by rank amateurs, no matter how well meaning. The road to
hell, it has been said, is paved with good intentions. The business is not to be
experimented or played around with, not run into the ground, not driven to bankruptcy,
not fleeced, not ruined. Sight should never be lost x x x of the ultimate objective of the
whole exercise, which is to turn over the business to the Republic, once judicially
established to be ill-gotten. Reason dictates that it is only under these conditions and
circumstances that the supervision, administration and control of business enterprises
provisionally taken over may legitimately be exercised.

d. Voting of Sequestered Stock; Conditions Therefor

So, too, it is within the parameters of these conditions and circumstances that the PCGG
may properly exercise the prerogative to vote sequestered stock of corporations, granted
to it by the President of the Philippines through a Memorandum dated June 26,
1986. That Memorandum authorizes the PCGG, pending the outcome of proceedings to
determine the ownership of * * (sequestered) shares of stock, to vote such shares of stock
as it may have sequestered in corporations at all stockholders meetings called for the
election of directors, declaration of dividends, amendment of the Articles of
Incorporation, etc. The Memorandum should be construed in such a manner as to be
consistent with, and not contradictory to the Executive Orders earlier promulgated on
the same matter. There should be no exercise of the right to vote simply because the right
exists, or because the stocks sequestered constitute the controlling or a substantial part of
the corporate voting power. The stock is not to be voted to replace directors, or revise the
articles or by-laws, or otherwise bring about substantial changes in policy, program or
practice of the corporation except for demonstrably weighty and defensible grounds, and
always in the context of the stated purposes of sequestration or provisional takeover, i.e.,
to prevent the dispersion or undue disposal of the corporate assets. Directors are not to
be voted out simply because the power to do so exists. Substitution of directors is not to
be done without reason or rhyme, should indeed be shunned if at all possible, and
undertaken only when essential to prevent disappearance or wastage of corporate
property, and always under such circumstances as to assure that replacements are truly
possessed of competence, experience and probity.
In the case at bar, there was adequate justification to vote the incumbent directors out of
office and elect others in their stead because the evidence showed prima facie that the
former were just tools of President Marcos and were no longer owners of any stock in the
firm, if they ever were at all. This is why, in its Resolution of October 28, 1986[,] this
Court declared that

Petitioner has failed to make out a case of grave abuse or excess of jurisdiction in
respondents calling and holding of a stockholders meeting for the election of directors as
authorized by the Memorandum of the President * * (to the PCGG) dated June 26, 1986,
particularly, where as in this case, the government can, through its designated directors,
properly exercise control and management over what appear to be properties and assets
owned and belonging to the government itself and over which the persons who appear in
this case on behalf of BASECO have failed to show any right or even any shareholding in
said corporation.

It must however be emphasized that the conduct of the PCGG nominees in the BASECO
Board in the management of the companys affairs should henceforth be guided and
governed by the norms herein laid down.They should never for a moment allow
themselves to forget they are conservators, not owners of the business; they are
fiduciaries, trustees, of whom the highest degree of diligence and rectitude is, in the
premises, required. (Italics in the original)

The PCGG cannot thus vote sequestered shares, except when there are demonstrably
weighty and defensible grounds or when essential to prevent disappearance or wastage of
corporate property.[15]
The principle laid down in Baseco was further enhanced in the subsequent cases
of Cojuungco v. Calpo[16] and Presidential Commission on Good Government v. Cojuangco,
Jr.,[17] where this Court developed a two-tiered test in determining whether the PCGG may
vote sequestered shares:

The issue of whether PCGG may vote the sequestered shares in SMC necessitates a
determination of at least two factual matters:

1. whether there is prima facie evidence showing that the said shares are ill-gotten and
thus belong to the state; and

2. whether there is an immediate danger of dissipation thus necessitating their continued


sequestration and voting by the PCGG while the main issue pends with the
Sandiganbayan.[18]

The two-tiered test, however, does not apply in cases involving funds of public
character. In such cases, the government is granted the authority to vote said shares,
namely:
(1) Where government shares are taken over by private persons or entities who/which
registered them in their own names, and

(2) Where the capitalization or shares that were acquired with public funds somehow
landed in private hands.[19]

This Court, in Republic v. Cocofed,[20] explained:

The [public character] exceptions are based on the common-sense principle that legal
fiction must yield to truth; that public property registered in the names of non-owners is
affected with trust relations; and that the prima facie beneficial owner should be given the
privilege of enjoying the rights flowing from the prima facie fact of ownership.

In Baseco, a private corporation known as the Bataan Shipyard and Engineering Co. was
placed under sequestration by the PCGG. Explained the Court:

The facts show that the corporation known as BASECO was owned and controlled by
President Marcos during his administration, through nominees, by taking undue
advantage of his public office and/or using his powers, authority, or influence, and that it
was by and through the same means, that BASECO had taken over the business and/or
assets of the National Shipyard and Engineering Co., Inc., and other government-owned
or controlled entities.

Given this factual background, the Court discussed PCGGs right over BASECO in the
following manner:

Now, in the special instance of a business enterprise shown by evidence to have been
taken over by the government of the Marcos Administration or by entities or persons
close to former President Marcos, the PCGG is given power and authority, as already
adverted to, to provisionally take (it) over in the public interest or to prevent * * (its)
disposal or dissipation; and since the term is obviously employed in reference to going
concerns, or business enterprises in operation, something more than mere physical
custody is connoted; the PCGG may in this case exercise some measure of control in the
operation, running, or management of the business itself.

Citing an earlier Resolution, it ruled further:

Petitioner has failed to make out a case of grave abuse of excess of jurisdiction in
respondents calling and holding of a stockholders meeting for the election of directors as
authorized by the Memorandum of the President * * (to the PCGG) dated June 26, 1986,
particularly, where as in this case, the government can, through its designated directors,
properly exercise control and management over what appear to be properties and assets
owned and belonging to the government itself and over which the persons who appear in
this case on behalf of BASECO have failed to show any right or even any shareholding in
said corporation. (Italics supplied)

The Court granted PCGG the right to vote the sequestered shares because they appeared
to be assets belonging to the government itself. The Concurring Opinion of Justice
Ameurfina A. Melencio-Herrera, in which she was joined by Justice Florentino P.
Feliciano, explained this principle as follows:

I have no objection to according the right to vote sequestered stock in case of a take-over
of business actually belonging to the government or whose capitalization comes from
public funds but which, somehow, landed in the hands of private persons, as in the case
of BASECO. To my mind, however, caution and prudence should be exercised in the case
of sequestered shares of an on-going private business enterprise, specially the sensitive
ones, since the true and real ownership of said shares is yet to be determined and proven
more conclusively by the Courts. (Italics supplied)

The exception was cited again by the Court in Cojuanco-Roxas in this wise:

The rule in this jurisdiction is, therefore, clear. The PCGG cannot perform acts of strict
ownership of sequestered property. It is a mere conservator. It may not vote the shares in
a corporation and elect the members of the board of directors. The only conceivable
exception is in a case of a takeover of a business belonging to the government or whose
capitalization comes from public funds, but which landed in private hands as in
BASECO.(Italics supplied)

The public character test was reiterated in many subsequent cases; most recently,
in Antiporda v. Sandiganbayan. Expressly citing Cojuanco-Roxas, this Court said that in
determining the issue of whether the PCGG should be allowed to vote sequestered shares,
it was crucial to find out first whether this were purchased with public funds, as follows:

It is thus important to determine first if the sequestered corporate shares came from
public funds that landed in private hands.

This Court summed up the rule in the determination of whether the PCGG has the
right to vote sequestered shares as follows:

In short, when sequestered shares registered in the names of private individuals or


entities are alleged to have been acquired with ill-gotten wealth, then the two-tiered test
is applied. However, when the sequestered shares in the name of private individuals or
entities are shown, prima facie, to have been (1) originally government shares, or (2)
purchased with public funds or those affected with public interest, then the two-tiered
test does not apply. Rather, the public character exception in Baseco v.
PCGG and Conjuanco Jr. v. Roxas prevail; that is, the government shall vote the shares.
The PCGG contends, however, that it is entitled to vote the sequestered shares in the
election of the board of directors, it invoking this Courts alleged finding in PCGG et al. v.
Securities and Exchange Commission, et al.[21] that Africa had dissipated ETPIs assets, thus:

Under a consultancy contract, Polygon Investors and Managers, Inc. with Jose L. Africa as
Chairman and Victor Africa as President, earned from ETPI as of 1987, more than P57
million. Likewise in 1987, ETPI paid to Jose L. Africa P1,200,000.00 as professional fees
and Manuel Nieto, Jr. another P1,200,000.00 as allowances.[22]

The PCGGs contention is misleading, This Court made no finding in PCGG v. SEC et
al. that Africa dissipated ETPIs assets. Precisely this Court issued a Resolution of July 28,
1988 in the same case to clarify, upon motion of Africa, that the narration of facts found
in the decision therein did not constitute a finding of facts:

The categorical statement in the decision of June 30, 1988 that the relevant background
facts of the case culled from Petitioners Urgent Consolidated Petition was not without a
reason or purpose. Precisely this statement was made to impress upon the parties
that the narration of facts is just that a narration, without necessarily judging its
truth or veracity. Being based on mere allegations, properly controverted, it is not
a finding of facts, but more of a presentation of the complete picture of events
which led to the sequestration of Eastern Telecommunications, Philippines, Inc.
as well as to the instant petition. This Court, it must be remembered, is not a trier of
facts, and particularly so in this case where the facts narrated are precisely the facts in
litigation before the Sandiganbayan. (Emphasis supplied.)

Unfortunately, the Sandiganbayan, in its impugned Resolution of November 13, 1992,


skirted the question of whether there is evidence of dissipation of ETPI assets, holding
instead that:

The issue as to whether the B[enedicto]A[frica]N[ieto] group had dissipated funds of ETPI
during its administration of ETPI is a matter which is not in issue herein. Dissipation by
the PCGG Board of Directors is also charged by the BAN group. An investigation of the
anomalies charged by one against the other may be taken up in another case.[23]

And it further held that the PCGG could not vote the sequestered shares as only the
owners of the shares of stock of subject corporation, their duly authorized representatives
or their proxies, may vote the said shares,[24] relying on this Courts ruling in Cojuangco, Jr.
v. Roxas[25] that:

The rule in this jurisdiction is, therefore, clear. The PCGG cannot perform acts of strict
ownership of sequestered property. It is a mere conservator. It may not vote the shares in
a corporation and elect members of the board of directors. The only conceivable
exception is in a case of a takeover of a business belonging to the government or whose
capitalization comes from public funds, but which landed in private hands as in BASECO.
In short, the Sandiganbayan held that the public character exception does not apply,
in which case it should have proceeded to apply the two-tiered test. This it failed to do.
The questions thus remain if there is prima facie evidence showing that the subject
shares are ill-gotten and if there is imminent danger of dissipation. This Court is not,
however, a trier of facts, hence, it is not in a position to rule on the correctness of the
PCGGs contention. Consequently, this issue must be remanded to the Sandiganbayan for
resolution.
II
On the PCGGs submission that the Stock and Transfer Book should not be used as
the basis for determining the voting rights of the shareholders because some entries
therein were altered by substitution: This Court sees no grave abuse of discretion on the
part of the Sandiganbayan in ruling that:

The charge that there were alterations by substitution in the Stock and Transfer Book is
not a matter which should preclude the Stock and Transfer Book from being the basis or
guide to determine who the true owners of the shares of stock in ETPI are. If there be any
substitution or alterations, the anomaly, if at all, may be explained by the corporate
secretary who made the entries therein. At any rate, the accuracy of the Stock and
Transfer Book may be checked by comparing the entries therein with the issued stock
certificates. The fact is that any transfer of stock or issuance thereof would necessitate an
alteration of the record by substitution. Any anomaly in any entry which may deprive a
person or entity of its right to vote may generate a controversy personal to the
corporation and the stockholder and should not affect the issue as to whether it is the
PCGG or the shareholder who has the right to vote. In other words, should there be a
stockholder who feels aggrieved by any alteration by substitution in the Stock and
Transfer Book, said stockholder may object thereto at the proper time and before the
stockholders meeting.[26]

Whether the ETPI Stock and Transfer Book was falsified and whether such
falsification deprives the true owners of the shares of their right to vote are thus issues
best settled in a different proceeding instituted by the real parties-in-interest.
III
On the PCGGs submission that the Sandiganbayan gravely abused its discretion when
it held that it cannot vote at least 23.9% of the outstanding capital stock of ETPI, which
percentage is broken down as follows:

Shares ceded to the government by virtue


of the Benedicto compromise - 12.8%

Shares represented by some stock


certificates found in Malacanang (at least) - 3.1%
Shares held and admitted by Manuel Nieto
to belong to then President Marcos - 8.0%

The PCGG alleges that the 12.8% indicated above represents 51% of the combined
shareholdings of Roberto S. Benedicto and his controlled corporations amounting to
12.8% of the total equity of ETPI which was ceded to the Republic; the 3.1% represents the
shares covered by the ETPI stock certificates endorsed in blank found in Malacaang, now
in its (PCGGs) possession, which it submits it may, under Section 34 of the Negotiable
Instruments Law,[27] take title thereto and vote the same in the stockholders meeting; and
the 8% represents the shares of Manuel H. Nieto, Jr. which, so it avers, he, in an Affidavit
of May 28, 1986, admitted actually belong to former President Marcos:

5. That in relation to and simultaneously with the board meeting of PHILCOMSAT, on


March 21, 1986, I declared my concurrence in the disclosures made on the participation of
Mr. Ferdinand E. Marcos and associates in the companies covered by the sequestration
order dated March 14, 1986 i.e., 39,926.2% (sic) of the total subscribed capital stock of
Philippine Overseas Telecommunications Corporation and 40% of the individual
shareholdings of Jose L. Africa, Manuel H. Nieto, Jr., & Roberto S. Benedicto in Eastern
Telecommunications Philippines, Inc.[28]

On the question of whether the PCGG can vote all the above shares, the
Sandiganbayan, finding in the affirmative, held in its Resolution of November 13, 1992:

Considering the Compromise Agreement entered into by the PCGG and Roberto S.
Benedicto in Civil Case No. 009 wherein Roberto S. Benedicto assigned and transferred to
the Government 12.8% of the shares of stock of ETPI, which Compromise Agreement was
made the basis of a judgment of this Court, it is only proper that the PCGG may vote
these shares in the stockholders meeting after said judgment shall have become final and
executory. Besides, before the PCGG can vote these shares, the transfer to the State of the
shares of stock must be entered in the Stock and Transfer Book, the entries therein being
the only basis for which the stockholder may vote the said shares.

The same ruling is made in respect to the shares of stock represented by stock certificates
found in Malacaang (3.1%) and the shares of stock allegedly admitted by Manuel H. Nieto
to belong to former President Ferdinand E. Marcos (8.0%).[29] (Underscoring supplied)

The Sandiganbayan clearly made no ruling proscribing the PCGG from voting the
shares representing 12.8% of ETPIs outstanding capital stock, the only requirement it
imposed being that the transfer of the shares be registered in the Stock and Transfer Book
and that, in the case of the Benedicto shares, the Compromise Agreement be final and
executory.
In requiring that the transfer of the Benedicto shares be first recorded in ETPIs Stock
and Transfer Book before the PCGG may vote them, the Sandiganbayan committed no
grave abuse of discretion. For Section 63 of the Corporation Code provides:
Sec. 63. Certificate of stock and transfer of shares. The capital stock of stock corporations
shall be divided into shares for which the 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 the delivery of the certificate or
certificates endorsed 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 to the transaction, the date of the transfer, the number of the certificate or
certificates and the number of shares transferred.

x x x.

Explaining why registration is a prerequisite for the voting of shares, this Court,
in Batangas Laguna Tayabas Bus Company, Inc., v. Bitanga,[30] discoursed:

Indeed, until registration is accomplished, the transfer, though valid between the parties,
cannot be effective as against the corporation. Thus, the unrecorded transferee x x x
cannot vote nor be voted for. The purpose of registration, therefore, is two-fold: to enable
the transferee to exercise all the rights of a stockholder, including the right to vote and to
be voted for, and to inform the corporation of any change in share ownership so that it
can ascertain the persons entitled to the rights and subject to the liabilities of a
stockholder. Until challenged in a proper proceeding, a stockholder of record has a right
to participate in any meeting; his vote can be properly counted to determine whether a
stockholders resolution was approved, despite the claim of the alleged transferee. On the
other hand, a person who has purchased stock, and who desires to be recognized as a
stockholder for the purpose of voting, must secure such a standing by having the transfer
recorded on the corporate books. Until the transfer is registered, the transferee is not a
stockholder but an outsider.

Whether the PCGG needs to await the finality of the judgment[31] based on the
Republic-Benedicto compromise agreement is now moot since it is not disputed that it
had long become final and executory. Accordingly, the PCGG may vote in its name the
shares ceded to the Republic by Benedicto pursuant to the said agreement once they are
registered in its name.
With respect to the PCGGs submission that under Section 34 of the Negotiable
Instruments Law, it may take title to the shares represented by the blank stock
certificates found in Malacanang and vote the same, the same is untenable. The PCGG
assumes that stock certificates are negotiable. They are not.

x x x [A]lthough a stock certificate is sometimes regarded as quasi-negotiable, in the


sense that it may be transferred by delivery, it is well settled that the instrument is non-
negotiable, because the holder thereof takes it without prejudice to such rights or
defenses as the registered owner or creditor may have under the law, except insofar as
such rights or defenses are subject to the limitations imposed by the principles governing
estoppel.[32]

That the PCGG found the stock certificates endorsed in blank does not necessarily
make it the owner of the shares represented therein. Their true ownership has to be
ascertained in a proper proceeding. Similarly, the ownership of the Nieto shares has yet to
be adjudicated. That they allegedly belong to former President Marcos does not make the
PCGG its owner. The PCGG must, in an appropriate proceeding, first establish that they
truly belong to the former President and that they were ill- gotten. Pending final
judgment over the ownership of these shares, the PCGG may not register and vote the
Nieto and the Malacaang shares in its name. If the Sandiganbayan finds, however, that
there is evidence of dissipation of these shares, the PCGG may vote the same as
conservator thereof.
IV
On the PCGGs imputation of grave abuse of discretion upon the Sandiganbayan for
ordering the holding of a stockholders meeting to elect the ETPI board of directors
without first setting in place, through the amendment of the articles of incorporation and
the by-laws of ETPI, the safeguards prescribed in Cojuangco, Jr. v. Roxas:[33] This Court
laid down those safeguards because of the obvious need to reconcile the rights of the
stockholder whose shares have been sequestered and the duty of the conservator to
preserve what could be ill-gotten wealth.

It is through the right to vote that the stockholder participates in the management of the
corporation. The right to vote, unlike the rights to receive dividends and liquidating
distributions, is not a passive thing because management or administration is, under the
Corporation Code, vested in the board of directors, with certain reserved powers residing
in the stockholders directly. The board of directors and executive committee (or
management committee) and the corporate officers selected by the board may make it
very difficult if not impossible for the PCGG to carry out its duties as conservator if the
Board or officers do not cooperate, are hostile or antagonistic to the conservators
objectives.

Thus, it is necessary to achieve a balancing of or a reconciliation between the


stockholders right to vote and the conservators statutory duty to recover and in the
process thereof, to conserve assets, thought to be ill-gotten wealth, until final judicial
determination of the character of such assets or until a final compromise agreement
between the parties is reached.

There are, in the main, two (2) types of situations that need to be addressed. The first
situation arises where the sequestered shares of stock constitute a distinct minority of the
voting shares of the corporation involved, such that the registered owners of such
sequestered shares would in any case be able to vote in only a minority of the Board of
Directors of the corporation. The second situation arises where the sequestered shares of
stock constitute a majority of the voting shares of the corporation concerned, such that
the registered owners of such shares of stock would in any case be entitled to elect
a majority of the Board of Directors of the corporation involved.

Turning to the first situation, the Court considers and so holds that in order to enable the
PCGG to perform its functions as conservator of the sequestered shares of stock pending
final determination by the courts as to whether or not the same constitute ill-gotten
wealth or a final compromise agreement between the parties, the PCGG must be
represented in the Board of Directors of the corporation and to its majority-owned
subsidiaries or affiliates and in the Executive Committee (or its equivalent) and the Audit
Committee thereof, in at least an ex officio (i.e., non-voting) capacity. The PCGG
representative must have a right of full access to and inspection of (including the right to
obtain copies of) the books, records and all other papers of the corporation relating to its
business, as well as a right to receive copies of reports to the Board of Directors, its
Executive (or equivalent) and Audit Committees. By such representation and rights of full
access, the PCGG must be able so to observe and monitor the carrying out of the business
of the corporation as to discover in a timely manner any move or effort on the part of the
registered owners of the sequestered stock alone or in concert with other shareholders, to
conceal, waste and dissipate the assets of the corporation, or the sequestered shares
themselves, and seasonably to bring such move or effort to the attention of the
Sandiganbayan for appropriate action.

In the second situation above referred to, the Court considers and so holds that the
following minimum safeguards must be set in place and carefully maintained until final
judicial resolution of the question of whether or not the sequestered shares of stock (or,
in a proper case, the underlying assets of the corporation concerned) constitute ill-gotten
wealth or until a final compromise agreement between the parties is reached:

a. An independent comptroller must be appointed by the Board of Directors upon


nomination of the PCGG as conservator. The comptroller shall not be removable (nor
shall his position be abolished or his compensation changed) without the consent of the
conservator. The comptroller shall, in addition to his other functions as such, have charge
of internal audit.

b. The corporate secretary must be acceptable to the conservator. If the corporate


secretary ceases to be acceptable to the conservator, a new one must be appointed by the
Board of Directors upon nomination of the conservator.

c. The external auditors of the corporation must be independent and must be acceptable
to the conservator. The independent external auditors shall not be changed without the
consent of the conservator.

d. The conservator must be represented in the Board of Directors and in the Executive (or
equivalent) and Audit Committees of the corporation involved and of its majority-owned
subsidiaries or affiliates. The representative of the conservator must be a full director (not
merely an honorary or ex officio director) with the right to vote and all other rights and
duties of a member of the Board of Directors under the Corporation Code. The
conservators representative shall not be removed from the Board of Directors (or the
mentioned Committees) without the consent of the conservator. The conservator shall,
however, have the right to remove and change its representative at any time, and the new
representative shall be promptly elected to the Board and its mentioned Committees.

e. All transactions involving the disbursement of corporate funds in excess of P5 million


must have the prior approval of the director representing the conservator, in order to be
valid and effective.

f. The incurring of debt by the corporation, whether in the form of bonds, debentures,
commercial paper or any other form, in excess of P5 million, must have the prior approval
of the director representing the conservator, in order to be valid and effective.

g. The disposition of a substantial part of assets of the corporation (substantial meaning


in excess of P5 million) shall require the prior approval of the director representing the
conservator, in order to be valid and effective.

h. The above safeguards must be written into the articles of incorporation and by-laws of
the company involved. In other words, the articles of incorporation and by-laws of the
company must be amended so as to incorporate the above safeguards.

i. Any amendment of the articles of incorporation or by-laws of the company that will
modify in any way any of the above safeguards, shall need the prior approval of the
director representing the conservator.

The amount of P5,000,000.00 referred to in paragraphs (e), (f) and (g) above is intended
merely to be indicative. The precise amount may differ depending upon the size of the
corporation involved and the reasonable operating requirements of its business.

Whether a particular case falls within the first or the second type of situation described
above, the following safeguards are indispensably necessary:

1. The sequestered shares and any stock dividends pertaining to such shares, may not be
sold, transferred, alienated, mortgaged, or otherwise disposed of and no such sale,
transfer or other disposition shall be registered in the books of the corporation, pending
final judicial resolution of the question of ill-gotten wealth or a final compromise
agreement between the parties; and

2. Dividend and liquidating distributions shall not be delivered to the registered


stockholders of the sequestered shares, including stock dividends pertaining to such
shares, but shall instead be deposited in an escrow, interest-bearing, account in a first
class bank or banks, acceptable to the Sandiganbayan, to be held by such banks for the
benefit of whoever is held by final judicial decision or final compromise agreement, to be
entitled to the shares involved. (Italics in the original)

There is nothing in the Cojuangco case that would suggest that the above measures
should be incorporated in the articles and by-laws before a stockholders meeting for the
election of the board of directors is held. The PCGG nonetheless insists that those
measures should be written in the articles and by-laws before such meeting, otherwise,
the [Marcos] cronies will elect themselves or their representatives, control the
corporation, and for an appreciable period of time, have every opportunity to disburse
funds, destroy or alter corporate records, and dissipate assets. That could be a possibility,
but the peculiar circumstances of this case require that the election of the board of
directors first be held before the articles of incorporation are amended. Section 16 of the
Corporation Code requires the majority vote of the board of directors to amend the
articles of incorporation:

Sec. 16. Amendment of Articles of Incorporation. Unless otherwise prescribed by this Code
or by special law, and for legitimate purposes, any provision or matter stated in the
articles of incorporation may be amended by a majority vote of the board of
directors or trustees and the vote or written assent of the stockholders representing at
least two-thirds (2/3) of the outstanding capital stock, without prejudice to the appraisal
right of dissenting stockholders in accordance with the provisions of this Code, or the
vote or written assent of at least two thirds (2/3) of the members if it be a non-stock
corporation.

x x x. (Emphasis supplied)

At the time Africa filed his motion for the holding of the annual stockholders
meeting, there were two sets of ETPI directors, one controlled by the PCGG and the other
by the registered stockholders. Which of them is the legitimate board of directors? Which
of them may rightfully vote to amend the articles of incorporation and integrate the
safeguards laid down in Cojuangco? It is essential, therefore, to cure this aberration of
two boards of directors sitting in a single corporation before the articles of incorporation
are amended to set in place the Cojuangco safeguards.
The danger of the so-called Marcos cronies taking control of the corporation and
dissipating its assets is, of course, a legitimate concern of the PCGG, charged as it is with
the duties of a conservator. Nevertheless, such danger may be averted by the substantially
contemporaneous amendment of the articles after the election of the board. This Court
said as much in Cojuangco:

The Court is aware that the implementation of some of the above safeguards may require
agreement between the registered stockholders and the PCGG as well as action on the
part of the Securities and Exchange Commission. The Court, therefore, directs petitioners
and the PCGG to effect the implementation of this decision under the supervision and
control of the Sandiganbayan so that the right to vote the sequestered shares and the
installation and operation of the safeguards above-specified may be exercised and
effected in a substantially contemporaneous manner and with all deliberate dispatch.

V
As for the PCGGs contention that the Sandiganbayan gravely abused its discretion in
ordering the Division Clerk of Court to call the stockholders meeting and in appointing
then Sandiganbayan Associate Justice Sabino de Leon, Jr. to control and supervise the
same, it is impressed with merit.
The Clerk of Court, who is already saddled with judicial responsibilities, need not be
burdened with the additional duties of a corporate secretary. Moreover, the Clerk of
Court may not have the requisite knowledge and expertise to discharge the functions of a
corporate secretary. It is not thus surprising to find the PCGG complaining that:

x x x ETPIs By-laws provide:

Sec. 4. Notice of Meeting. Except as otherwise provided by law, written or printed notice
of all annual and special meetings of stockholders, stating the place and time of the
meeting and the general nature of the business to be considered, shall be transmitted by
personal delivery, registered air-mail, telegraph, or cable to each stockholder of record
entitled to vote thereat at his address last known to the Secretary of the Company, at least
ten (10) days before the date of the meeting, if an annual meeting, or at least five (5) days
before the date of the meeting, if a special meeting.

Here, respondent Victor Africa filed a Motion dated March 30, 1992 asking the
Sandiganbayan to issue the call and Notice of Annual Stockholders Meeting in ETPI
because under ETPIs By-laws such meeting should be held in the month of May. x x x. In
the Resolution dated November 13, 1992, the Sandiganbayan granted the Motion and
authorized its Division Clerk of Court to issue such Notice of Annual Stockholders
Meeting.However, for inexplicable reasons, the Division Clerk of Court issued a Notice
of Special Stockholders Meeting x x x which requires only a prior 5-day notice, instead of
a notice of (Delayed) Annual Stockholders Meeting which requires a prior 10-day notice.

Instead of sending the Notices to each stockholder at his recorded address, the Division
Clerk of Court whimsically sent all the Notices meant for the Class B stockholders to Atty.
Eduardo de los Angeles (who returned the Notices because he was not authorized to
receive such Notices). According to him x x x, he does not know some of the Class B
stockholders for whom notices were sent to him. As a result, at this late stage, no proper
notice has been sent to Class B stockholders. Yet, the Sandiganbayan has scheduled and is
dead set to supervise a stockholders meeting on November 27, 1992. This clearly violates
the substantial rights of the Class B stockholders who own 40% of ETPI. Under the
Articles of Incorporation x x x and By-laws x x x of ETPI, Class B stockholders are entitled
to vote two members of the Board of Directors. Unless properly notified, most of the
Class B stockholders who reside in the United Kingdom (and whose shares are not
sequestered) will not be able to exercise their right to vote.[34] (Underscoring in the
original)

The appointment of a sitting member of the Sandiganbayan is particularly unsound


for, as the PCGG points out:

x x x. What then is the reason for him to attend and supervise the meeting? To observe so
that he can later testify in the court where he himself sits in the court which will
eventually decide any controversy which may arise from the meeting?[35]

Obviously, under such situation, the justice so appointed would be compelled to


inhibit himself from any judicial controversy arising from the stockholders
meeting.[36] Worse, if he were to preside at the meeting and rule upon the objections that
may be raised by some stockholders, the Sandiganbayan would be faced with the
anomaly[37] of eventually reviewing the decisions rendered by a member of its court
during the stockholders meeting.
This Court appreciates the quandary that the Sandiganbayan faced when it ordered
its Division Clerk of Court to call the meeting: ETPI has two sets of officers and,
presumably, two corporate secretaries. And given the stakes involved, the stockholders
meeting would be contentious, to say the least, hence, the need for an impartial referee to
supervise and control the meeting.
Happily, the case of Board of Directors and Election Committee of SMB Workers
Savings and Loan Asso., Inc. v. Tan, etc., et al.[38] provides a solution to the
Sandiganbayans dilemma. There, this Court upheld the creation of a committee
empowered to call, conduct and supervise the election of the board of directors:

As regards the creation of a committee of three vested with the authority to call, conduct
and supervise the election, and the appointment thereto of Cndido C. Viernes as
chairman and representative of the court and one representative each from the parties,
the Court in the exercise of its equity jurisdiction may appoint such committee, it having
been shown that the Election Committee that conducted the election annulled by the
respondent court if allowed to act as such may jeopardize the rights of the respondents.

In a proper proceeding a court of equity may direct the holding of a stockholders meeting
under the control of a special master, and the action taken at such a meeting will not be
set aside because of a wrongful use of the courts interlocutory decree, where not brought
to the attention of the court prior to the meeting. (18 C.J.S. 1270.)

A court of equity may, on showing of good reason, appoint a master to conduct and
supervise an election of directors when it appears that a fair election cannot otherwise be
had. Such a court cannot make directions contrary to statute and public policy with
respect to the conduct of such election. (19 C.J.S. 41)

This Court also approved a similar action by the Securities and Exchange Commission
in Sales v. Securities and Exchange Commission.[39]
Such a committee composed of impartial persons knowledgeable in corporate
proceedings would provide the needed expertise and objectivity in the calling and the
holding of the meeting without compromising the Sandiganbayan or its officers. The
appointment of the committee members and the delineation of the scope of the duties of
the committee may be made pursuant to an agreement by the parties or in accordance
with the provisions of Rule 9 (Management Committee) of the Interim Rules of Procedure
for Intra-Corporate Controversies insofar as they are applicable.
VI
And now, Africas motion to cite the PCGG and its accomplices in contempt for
calling and holding a stockholders meeting to increase ETPIs authorized capital stock
without this Courts authority and despite the pendency of motions for reconsideration of
the Sandiganbayan Resolution of December 13, 1996 granting the PCGG authority to cause
the holding of such meeting. In the same motion, Africa asks this Court to nullify the
March 17, 1997 stockholders meeting which increased ETPIs authorized capital stock on
the grounds that he, an ETPI stockholder, was not notified of the meeting, and the PCGG
voted the sequestered ETPI shares despite the absence of evidence of dissipation of
assets. Intervenor AEROCOM has shared Africas assertions.
As earlier stated, this Court, by Resolution of May 7, 1996, referred the PCGGs VERY
URGENT MOTION FOR RECONSIDERATION TO HOLD SPECIAL STOCKHOLDERS
MEETING . . . to the Sandiganbayan for reception of evidence and resolution. The
dispositive portion of said Resolution reads:

Taking account of all the foregoing, the Court Resolved to REFER the VERY URGENT
PETITION FOR AUTHORITY TO HOLD SPECIAL STOCKHOLDERS MEETING FOR
SOLE PURPOSE OF INCREASING EASTERNS AUTHORIZED CAPITAL STOCK to the
Sandiganbayan for reception of evidence and resolution WITH ALL DELIBERATE
DISPATCH but no longer than sixty (60) days from notice hereof of the factual issues
raised by the parties as herein set out, and such others, factual or otherwise as are
relevant, in order to decide the basic question in this proceeding of the necessity and
propriety of the holding of the special stockholders meeting of EASTERN for the sole
purpose of increasing ** (its) authorized capital stock and the exercise by the PCGG of the
right to vote at said meeting.[40] (Emphasis supplied)

Clearly, when the PCGGs VERY URGENT PETITION TO HOLD SPECIAL


STOCKHOLDERS MEETING . . . was referred to the Sandiganbayan, this Court gave the
latter full authority to decide the issue of whether a stockholders meeting should be
held. Implicit in this authority was the power to grant (or deny) the petition. There is
thus no need for the parties to seek this Courts imprimatur to hold the same.
Africas motion must thus be denied.
Even assuming arguendo that the holding of the meeting was contemptuous because
the December 13, 1996 Sandiganbayan Resolution had not yet attained finality, it was the
Sandiganbayan, and not this Court, which was contemned. Consequently, it is the
Sandiganbayan, and not this Court, which has jurisdiction over the motion to declare the
PCGG and its accomplices in contempt.

In whatever context it may arise, contempt of court involves the doing of an act, or the
failure to do an act, in such a manner as to create an affront to the court and the
sovereign dignity with which it is clothed. As a matter of practical judicial administration,
jurisdiction has been felt properly to rest in only one tribunal at a time with respect to a
given controversy. Partly because of administrative considerations, and partly to visit the
full personal effect of the punishment on a contemnor, the rule has been that no other
court than the one contemned will punish a given contempt.

The rationale that is usually advanced for the general rule that the power to punish for
contempt rests with the court contemned is that contempt proceedings are sui
generic and are triable only by the court against whose authority the contempts are
charged; the power to punish for contempt exists for the purpose of enabling a court to
compel due decorum and respect in its presence and due obedience to its judgments,
orders and processes; and in order that a court may compel obedience to its orders, it
must have the right to inquire whether there has been any disobedience thereof, for to
submit the question of disobedience to another tribunal would operate to deprive the
proceeding of half its efficiency.[41]

The above rule is not of course absolute as it admits exception when the entire case
has already been appealed [in which case] jurisdiction to punish for contempt rests with
the appellate court where the appeal completely transfers to proceedings thereto or
where there is a tendency to affect the status quo or otherwise interfere with the
jurisdiction of the appellate court.[42] This exception does not, however, apply to Africas
motion since at the time he filed it on April 1, 1997 before this Court, his petition in G. R.
No. L-147214 assailing the December 17, 1996 Resolution of the Sandiganbayan had not yet
been filed.
The motion to nullify the March 17, 1997 stockholders meeting must likewise be
denied for lack of jurisdiction. Such motion is but an incident to Sandiganbayan Civil
Case No. 0130.[43] As such, jurisdiction over it pertains exclusively and originally to the
Sandiganbayan.

Under Section 2 of the Presidents Executive Order No. 14 issued on May 7, 1986, all 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 Sandiganbayans
exclusive and original jurisdiction, subject to review on certiorari exclusively by the
Supreme Court.[44]

This is another reason for the denial of the motion to cite the PCGG and its
accomplices in contempt.
VII
FINALLY, the question on the validity of the PCCGs voting the Class A shares to
increase the authorized capital stock of ETPI.
In his petition in G. R. No. 147214, Africa faults the Sandiganbayan for failing to
acknowledge, in its Resolution of February 16, 2001, the Decisions of this Court declaring
that his shares in ETPI[45] and those of AEROCOM[46] and POLYGON (Polygon Investors
& Managers, Inc.)[47] were not sequestered. Hence, so he contends, they, and not the
PCGG, should have been allowed to vote their respective shares during the meeting.
Two matters require clarification at this point. First, that this Court rendered
decisions holding that the shares of Africa, AEROCOM and POLYGON are not or are no
longer sequestered is of little consequence since the decisions were
promulgated after the Sandiganbayan issued its resolution granting the PCGG authority
to call and hold the stockholders meeting to increase the authorized capital stock. At that
time, the shares were presumed to have been regularly sequestered. The more
fundamental question that confronts this Court is: Was the PCGG entitled to vote the
sequestered shares in the stockholders meeting of March 17, 1997?
Second, the PCGG correctly argues that Africa has no cause of action to claim on
behalf of AEROCOM and POLYGON that these two companies are entitled to vote their
respective shares in the stockholders meeting to increase ETPIs authorized capital
stock. The claim is personal to AEROCOM and POLYGON. Nevertheless, this does not
preclude Africa from invoking his own right as a small stockholder of ETPI to vote in the
stockholders meeting for the purpose of increasing ETPIs authorized capital stock. The
PCGG maintains, however, that it is entitled to vote said shares because this Court, by its
claim, recognized in PCGG v. SEC, supra, that ETPIs assets were being dissipated by the
BAN (Benedicto, Africa, Nieto) Group, thus:

Under the Management of Cable and Wireless ETPI grew and prospered. But when its
dividends, which were paid in dollars to the BAN Group, began to run into millions, said
group also started to intervene in the corporations operations and management. Requests
for employment of family relatives and high salaries for them were made. The BAN Group
likewise placed the majority of their individual stockholdings in three separate
companies, namely: Aerocom Investors, Universal Molasses, and Polygon, so that in 1986,
the ownership of the Class A stocks of the corporation was as follows:

Roberto S. Benedicto - 3.3 percent


Universal Molasses Corp. - 16.6 percent
Manuel Nieto, Jr. - 2.2 percent
Nieto's relatives - 3.3 percent
Aerocom Investors and
Managers Inc. - 17.5 percent
Jose Africa - 2.2 percent
Africa's relatives - .3 percent
Polygon Investors and
Managers Inc. - 17.5 percent

By the end of 1987, the initial capital of P1M of the BAN Group, its corporations and
relatives had grown to the astronomical sum of P784,185,198.00. Cash dividends paid to
them as of 1986 had amounted to P225,845,000.00 even as another P180,000,000.00 is due
them for 1987, for a grand total of P405,845,000.00. In 1984, cash dividends to
the BAN Group, et al. in the amount of $1M were remitted to the United States.

Under a consultancy contract, Polygon Investors and Managers with Jose L. Africa as
Chairman and his son, Victor Africa as President, earned from ETPI as of 1987 more
than P57M. Likewise in 1987, ETPI paid to Jose L. Africa P1,200,000.00 as professional fees
and Manuel H. Nieto, Jr., another P1,200,000.00 as allowances.[48]

As stated early on, however, the foregoing narration does not constitute a finding of fact.
The PCGG further submits that the Sandiganbayan found prima facie evidence for the
issuance of the writ of sequestration covering the Class A shares of ETPI. Such reliance on
the Sandiganbayans ruling is misplaced because the issue is not whether there is prima
facie evidence to warrant sequestration of the shares, but whether there is prima
facie evidence showing that the shares are ill-gotten and whether there is evidence of
dissipation of assets to warrant the voting by the PCGG of sequestered shares. As to the
latter issue, the Sandiganbayan held in the affirmative in this wise:

x x x [T]he propriety and legality of allowing the PCGG to cause the holding of a
stockholders meeting of the ETPI for the purpose of electing a new Board of Directors or
effecting changes in the policy, program and practices of said corporation (except for the
specified purpose of amending the right of first refusal clause in ETPIs Articles of
Incorporation and By Laws) and impliedly to vote the sequestered shares of stocks has
been upheld by the Supreme Court in the case of PCGG vs. SEC, PCGG vs.
Sandiganbayan, et al., G.R. No. 82188, promulgated June 30, 1988 x x x.[49] (Underscoring
supplied)
The Sandiganbayan proceeded to quote the following pronouncement of this Court
in PCGG v. SEC:

But while We find the Sandiganbayan to have acted properly in enjoining the PCGG from
holding the stockholders meeting for the specified purpose of amending the right of first
refusal clause in ETPI's Articles of Incorporation and By-Laws, We find the general
injunction imposed by it on the PCGG to desist and refrain from calling a stockholders
meeting for the purpose of electing a new Board of Directors of effectingsubstantial
changes in the policy, program or practice of the corporation to be too broad as to taint
said order with grave abuse of discretion. Said order completely ties the hands of
the PCGG, rendering it virtually helpless in the exercise of its power of conserving and
preserving the assets of the corporation. Indeed, of what use is the PCGG if it cannot even
do this? x x x.[50] (Underscoring and italics supplied)

The Sandiganbayan, however, misread this Courts ruling in the said SEC case. One of
the issues raised therein was whether the Sandiganbayan committed grave abuse of
discretion in enjoining the PCGG from calling and holding stockholders meetings and
voting the sequestered ETPI shares for the purpose of deleting the right of first
refusal clause in ETPIs articles of incorporation.In its therein assailed Order, the
Sandiganbayan temporarily restrained the PCGG from calling and/or holding
stockholders meetings and voting the sequestered shares thereat for the purpose
of amending the articles or by-laws of ETPI, or otherwise effecting substantial
changes in policy, programs or practices of said corporation.
Clearly, the temporary restraining order was too broad. The Sandiganbayan should
have limited itself to restraining the calling and holding of the stockholders meeting and
voting the shares for the sole purpose of amending the right of first refusal clause. It was
thus necessary for this Court to make the underscored ruling above. No declaration
therein was made that in all instances the PCGG may vote the sequestered shares to effect
substantial changes in ETPI policy, programs or practices. In lifting the injunction on that
aspect, this Court merely recognized that situations may arise wherein only through an
act of strict ownership can the PCGG be able to prevent the dissipation of the assets of
the sequestered corporation or business.[51]
Moreover, if, as the Sandiganbayan assumed, this Court had come to a conclusion in
the SEC case that the BAN Group was guilty of dissipation and that, consequently, the
PCGG was entitled to vote the sequestered shares, this Court would not have bothered, in
its Resolution of May 7, 1996, to direct said court to decide whether the PCGG has the
right to vote in the stockholders meeting for the purpose of increasing ETPIs authorized
capital stock.[52]
This Court notes that, like in Africas motion to hold a stockholders meeting (to elect
a board of directors), the Sandiganbayan, in the PCGGs petition to hold a stockholders
meeting (to amend the articles of incorporation to increase the authorized capital stock),
again failed to apply the two-tiered test. On such determination hinges the validity of the
votes cast by the PCGG in the stockholders meeting of March 17, 1997. This lapse by the
Sandiganbayan leaves this Court with no other choice but to remand these questions to it
for proper determination.
IN SUM, this Court rules that:
(1) The PCGG cannot vote sequestered shares to elect the ETPI Board of Directors or
to amend the Articles of Incorporation for the purpose of increasing the authorized
capital stock unless there is a prima facie evidence showing that said shares are ill-gotten
and there is an imminent danger of dissipation.
(2) The ETPI Stock and Transfer Book should be the basis for determining which
persons have the right to vote in the stockholders meeting for the election of the ETPI
Board of Directors.
(3) The PCGG is entitled to vote the shares ceded to it by Roberto S. Benedicto and
his controlled corporations under the Compromise Agreement, provided that the shares
are first registered in the name of the PCGG. The PCGG may not register the transfer of
the Malacaang and the Nieto shares in the ETPI Stock and Transfer Book; however, it may
vote the same as conservator provided that the PCGG satisfies the two-tiered test devised
by the Court in Cojuangco v. Calpo, supra.
(4) The safeguards laid down in the case of Cojuangco v. Roxas shall be incorporated
in the ETPI Articles of Incorporation substantially contemporaneous to, but not before,
the election of the ETPI Board of Directors.
(5) Members of the Sandiganbayan shall not participate in the stockholders meeting
for the election of the ETPI Board of Directors. Neither shall a Clerk of Court be
appointed to call such meeting and issue notices thereof. The Sandiganbayan shall
appoint, or the parties may agree to constitute, a committee of competent and impartial
persons to call, send notices and preside at the meeting for the election of the ETPI Board
of Directors; and
(6) This Court has no jurisdiction over the motion to cite the PCGG and its
accomplices in contempt and to nullify the stockholders meeting of March 17, 1997.
WHEREFORE, this Court Resolved to REFER the petitions at bar to the
Sandiganbayan for reception of evidence to determine whether there is a prima
facie evidence showing that the sequestered shares in question are ill-gotten and there is
an imminent danger of dissipation to entitle the PCGG to vote them in a stockholders
meeting to elect the ETPI Board of Directors and to amend the ETPI Articles of
Incorporation for the sole purpose of increasing the authorized capital stock of ETPI.
The Sandiganbayan shall render a decision thereon within sixty (60) days from
receipt of this Resolution and in conformity herewith.
The motion to cite the PCGG and its accomplices and to nullify the ETPI
Stockholders Meeting of March 17, 1997 filed by Victor Africa is DENIED for lack of
jurisdiction.
SO ORDERED.
Davide, Jr., C.J., Bellosillo, Puno, Ynares-Santiago, Sandoval-Gutierrez, Carpio, Austria-
Martinez, Corona, and Callejo, Sr., JJ., concur.
Vitug, J., in the result.
Panganiban, J., No part, former counsel of a party.
Quisumbing, J., abroad on official business.
Azcuna, J., No part.

[1] Entitled Victor Africa v. Presidential Commission on Good Government, involving a


petition for certiorari, with prayer for a temporary restraining order/preliminary
injunction, filed by Victor Africa. The petition seeks to nullify the Orders of the
PCGG dated August 5, 1991 and August 9, 1991, directing Africa to account for his
sequestered shares in ETPI and to cease and desist from exercising voting rights on
the sequestered shares in the special stockholders meeting to be held on August 12,
1991, from representing himself as a director, officer, employee or agent of ETPI,
and from participating, directly or indirectly in the management of ETPI. (Rollo, G.
R. No. 107789, p. 453).
[2] Id. at 83.
[3] Id. at 104-105.
[4] Id. at 39-47.
[5] Id. at 45-47.
[6] Id. at 11-12.
[7] POLICY TO IMPROVE THE PROVISION OF LOCAL EXCHANGE CARRIER SERVICE.
[8] AN ACT TO PROMOTE AND GOVERN THE DEVELOPMENT OF PHILIPPINE
TELECOMMUNICATIONS AND THE DELIVERY OF PUBLIC
TELECOMMUNICATIONS SERVICES.
[9] Rollo, G. R. No. 107780, pp. 958-963.
[10] Rollo, G. R. No. 107789, pp. 962-963.
[11] Id. at 1124-1125.
[12] Rollo, G.R. No. 147214, pp. 17-32.
[13] Rollo, G. R. No. 147214, p. 319.
[14] 150 SCRA 181 (1987).
[15] Vide San Miguel Corporation v. Kahn, 176 SCRA 447, 464 (1989); Republic v.
Sandiganbayan, 200 SCRA 530 (1991), holding that the PCGGs authority to vote
sequestered shares must be conceded only where there is evident necessity for
such voting in order to prevent the disposal and dissipation of the sequestered
assets.
[16] G. R. No. 115352, June 10, 1993.
[17] 302 SCRA 217 (1999).
[18] Ibid.
[19] Republic v. Cocofed, G. R. Nos. 147062-64, December 14, 2001.
[20] Ibid.
[21] G. R. No. 82188, June 30, 1988. The decision, penned by then Associate Justice Marcelo
Fernan, was concurred in by thirteen justices (Yap, C .J., Narvasa, Melencio-
Herrera, Cruz, Paras, Feliciano, Gancayco, Padilla, Bidin, Sarmiento, Cortes, Grio-
Aquino and Medialdea, JJ.); one justice (Gutierrez, Jr., J.) was on leave. For easy
reference, the decision, which is not found in either the Philippine Reports
or in the Supreme Court Reports Annotated, is reproduced in full below:
Assailed in this consolidated petition for certiorari, mandamus and prohibition with
prayer for preliminary injunction and/or temporary restraining order as having
been issued with grave abuse of discretion and in excess of jurisdiction are two
restraining orders issued by [1] the Securities and Exchange Commission Hearing
Panel on March 3, 1988 in SEC Case No. 3297 entitled Victor Africa and Rafael C.
Valdez, Complainants, versus Eduardo M. Villanueva, et al., Respondents
enjoining the respondents therein as members of the Board of Directors of Eastern
Telecommunications Philippines, Inc. [ETPI] from holding the stockholders
meeting scheduled on March 4, 1988; and [2] the Sandiganbayan on March 4, 1988
in SB Civil Case No. 0009 entitled Republic of the Philippines, Plaintiff, versus Jose
L. Africa, et al., Defendants, enjoining the PCGG, its Commissioners, nominated
Directors and/or Corporate Officers, employees, nominees, agents and/or
representatives x x x from calling and/or holding stockholders meetings and voting
(the) sequestered shares thereat for the purpose of amending the Articles or By-
laws of ETPI, or otherwise effecting substantial changes in policy, programs or
practices of said corporation. (Annex U, Petition, p. 192, Rollo) The temporary
restraining order dated March 4, 1988 was subsequently replaced by a writ of
preliminary injunction on March 25, 1988. (Annex B, Petitioners Urgent
Manifestation and Motion dated March 29, 1988)
The relevant background facts of the case culled from Petitioners URGENT
CONSOLIDATED PETITION are as follows: Until 1974, Eastern
Telecommunications of the Philippines [ETPI] was a wholly-owned subsidiary of
Cable and Wireless, Ltd., operating under the name Eastern Extension Australasia
and China Telegraph Company Ltd. [EEATC] by virtue of a royal decree from
Spain, renewed in 1952 by the Philippine Government. In the late 1966, EEATC
attempted to win a contract for the establishment of a satellite earth station but
the contract was awarded by then President Ferdinand E. Marcos to a previously
unknown corporation, the Philippine Overseas Telecoms Corporation [POTC],
controlled by Messrs. Ilusorio, Poblador, Nieto, Benedicto and Reyes. Thereafter,
desiring to obtain the franchise for the establishment of a tropospheric scatter
system communications with Taiwan, but aware that it could not possibly do so
without a strong Filipino partner, EEATC entered into a business alliance
with POTC enabling them to obtain a franchise and the needed government
approvals.
Despite this alliance, Cable & Wireless was uneasy about its tenure in the Philippines, in
view of the then forthcoming expiration of the Laurel-Langley Act, which
expiration would require American corporations to reorganize themselves into
60/40 corporations with majority Filipino ownership.
In March 1974, EEATC Philippine representative M.C. Bane was called to a conference at
Camp Crame with the then Secretary of National Defense. Present at the meeting
were representatives of RCA and Globe Mackay, who together with M.C. Bane,
were told that they had until July of 1974 within which to reorganize their
respective corporations into a 60/40 corporation in favor of Filipino ownership and
that failing to do so, the Philippine Government would take the necessary action.
With the deadline fast approaching, EEATC re-opened negotiations with POTC, which at
that time had undergone rapid changes resulting in Nieto, Jr. becoming its
controlling figure and Atty. Jose L. Africa as its negotiating representative. During
the negotiations, Atty. Africa was quick to point out that EEATC was to deal only
with the BAN Group [Benedicto, Africa and Nieto] allegedly at the express wish of
then President Marcos.
The figure eventually arrived at for EEATC's assets was P10M of which P6M was to be the
input of the BAN Group. However, upon Atty. Africa's information that
the BAN Group could put up only P1M a compromise was suggested for the new
corporation to raise a bank loan from which Cable and Wireless could be paid for
the assets to be acquired. After a series of negotiations, it was agreed that a loan
of P7M was to be arranged and BAN would contribute P3M while Cable and
Wireless would contribute P2M, thus establishing a 60/40 relationship in a new
corporation. Despite this agreement, Africa again informed Cable and Wireless
that the BAN Group could raise only P1M and asked whether it would be possible
for Cable and Wireless to lend the group P2M repayable over a period of three [3]
years. Seeing no other alternative, Cable and Wireless agreed to this arrangement.
The loan document was drawn up while Nieto, Jr. secured the signature of then
President Marcos on Presidential Decree No. 489 transferring the franchise
of EEATC to the new corporation, Eastern Telecommunications of the Philippines,
Inc. [ETPI].
Under the Management of Cable and Wireless ETPI grew and prospered. But when its
dividends, which were paid in dollars to the BAN Group, began to run into
millions, said group also started to intervene in the corporations operations and
management. Requests for employment of family relatives and high salaries for
them were made. The BAN Group likewise placed the majority of their individual
stockholdings in three separate companies, namely: Aerocom Investors, Universal
Molasses, and Polygon, so that in 1986, the ownership of the Class A stocks of the
corporation was as follows:
Roberto S. Benedicto - 3.3 percent
Universal Molasses Corp. - 16.6 percent
Manuel Nieto, Jr. - 2.2 percent
Nieto's relatives - 3.3 percent
Aerocom Investors and Managers Inc. - 17.5 percent
Jose Africa - 2.2 percent
Africas relatives - .3 percent
Polygon Investors and Managers Inc. - 17.5 percent
By the end of 1987, the initial capital of P1M of the BAN Group, its corporations and
relatives had grown to the astronomical sum of P784,185,198.00. Cash dividends
paid to them as of 1986 had amounted to P225,845,000.00 even as
another P180,000,000.00 is due them for 1987, for a grand total of P405,845,000.00.
In 1984, cash dividends to the BAN Group, et al. in the amount of $1M were
remitted to the United States.
Under a consultancy contract, Polygon Investors and Managers with Jose L. Africa as
Chairman and his son, Victor Africa as President, earned from ETPI as of 1987
more than P57M. Likewise in 1987, ETPI paid to Jose L. Africa P1,200,000.00 as
professional fees and Manuel H. Nieto, Jr., another P1,200,000.00 as allowances.
On a prima facie finding that the three owned corporations, Aerocom, Universal and
Polygon are Marcos-owned firms, the PCGG, on March 14, 1986 sequestered the
company ETPI and on July 22, 1987 PCGG filed with the Sandiganbayan Civil Case
No. 0009 for Reconveyance, Reversion, Accounting, Restitution of the ill-
gotten ETPI shares and damages in connection therewith. The sequestration order
was partially lifted with respect to the Class B shares which belonged to Cable and
Wireless.
The root cause of the present controversy is the PCGG Resolution dated January 28, 1988
which ordered the reconvening and resumption of the annual stockholders
meeting of the Eastern Telecommunications Philippines, Inc. on 29 January 1988 at
2:00 P.M. at the principal office of the corporation. The meeting was originally
scheduled for 4 January 1988, but had to be and was duly adjourned the same day.
A copy of this resolution, contained in a letter addressed to the Chairman and Corporate
Secretary of ETPI was received by respondent Victor Africa as Corporation
Secretary of ETPI at 11:11 A.M. of January 29, 1988. At 2:00 P.M. of the same day, the
reconvened stockholders meeting was held over the objection interposed by said
respondent Victor Africa as corporate secretary and stockholder of ETPI, on the
manner the meeting was called. In said stockholders meeting petitioners Eduardo
M. Villanueva, as PCGG nominee, and Roman Mabanta and Eduardo de los
Angeles as nominees of the foreign investors, Cable and Wireless Ltd. and Jose L.
Africa [who was absent] were elected members of the Board of Directors.
Immediately thereafter, the elected directors present held an organizational
meeting, in turn, electing Eduardo Villanueva as President and General Manager,
petitioners Ramon Desuasido, Almario Velasco and Ranulfo Payos as Acting
Corporate Secretary, Acting Treasurer and Acting Assistant Corporate Secretary,
respectively. The Board of Directors further resolved to hold a Board meeting on
February 8, 1988.
At the February 8, 1988 meeting, the Board of Directors resolved, among others, to
propose amendments to ETPIs Articles of Incorporation to abrogate the right of
first refusal clause embodied in Article 10 thereof and to call for a special
stockholders meeting in February 29, 1988 for the purpose of ratifying the
proposed amendment.
On February 15, 1988, respondents Victor Africa and Rafael C. Valdez, as alleged erstwhile
Corporate Secretary and Director, respectively, of ETPI, filed before the Securities
and Exchange Commission [SEC] a verified complaint with prayer for preliminary
injunction, docketed therein as SEC Case No. 3297, assailing the legality of the
Board of Directors' and Corporate Officers elections at the reconvened
stockholders meeting on January 29, 1988, the Board meetings of January 29 and
February 8, 1988 as well as all the acts done by the Board during said meetings.
During the pendency of the application for preliminary injunction, respondents Victor
Africa and Rafael Valdez filed an urgent motion for a temporary restraining order
to enjoin the Board of Directors from proceeding with the special stockholders
meeting on February 29, 1988. This motion was opposed by therein respondents
Mabanta and delos Angeles.
On February 26, 1988, by way of special appearance, the office of the Solicitor General
filed an omnibus motion for the PCGG to intervene and for the dismissal of the
case in so far as Villanueva, Velasco, Payos and Desuasido were concerned,
claiming that they were PCGG nominees/designees, and therefore beyond the
jurisdiction of the SEC.
At the hearing on February 29, 1988, therein respondent de los Angeles agreed to defer
the February 29 meeting but at the resumption of the hearing on March 1, 1988,
therein petitioners reiterated their urgent motion for a temporary restraining
order, manifesting that the meeting of February 29, 1988 was merely adjourned to
March 4, 1988.
On March 3, 1988, after marathon hearings on the application for a temporary restraining
order, the hearing panel of the SEC issued the assailed order, effective for twenty
(20) days, on the grounds that the said stockholders meeting on March 4, 1988 x x
x is not really that urgent and to afford the Panel sufficient time to deliberate on
the matter without rendering the act sought to be enjoined academic. (p. 190,
Rollo)
Also on March 3, 1988, respondents Jose Africa and Manuel H. Nieto, Jr. as stockholders
of ETPI filed in Civil Case No. 0009 of the Sandiganbayan a motion for injunction
with prayer for a temporary restraining order to enjoin the PCGG, its
Commissioners, nominated Directors and/or Corporate Officers, employees,
nominees, agents and/or representatives from calling or holding meetings of the
stockholders and the Board of Directors, managing the corporation, controlling its
policies, running its day-to-day business, etc. The following day, March 4, 1988, the
Sandiganbayan issued the second assailed temporary restraining order. Hence, this
petition, PCGG maintaining that both the SECand Sandiganbayan acted with
grave abuse of discretion and in excess of jurisdiction in issuing said temporary
restraining orders, the SEC for having done so without first resolving its motion for
intervention and for dismissal of the case; and the Sandiganbayan for taking
cognizance of the motion, thereby intervening with the PCGG's executive and
administrative jurisdiction.
Without giving due course to the petition, the Court set the case for hearing on March 17,
1988. At said hearing, We required the parties to file their memoranda on the
applicability of the case of Bataan Shipyard & Engineering, Co., Inc. vs. Presidential
Commission on Good Government [150 SCRA 181] to the petition at bar. All parties
complied with this order.
We shall deal first with the SEC case. By its own terms, the temporary restraining order
issued in SEC Case No. 3297 was effective only for twenty (20) days. The same has
therefore already expired, rendering the challenge against it moot and academic.
This, notwithstanding, the Court has decided to delve deeper into the SEC case to
correct a blatant jurisdictional defect and thus save the parties unnecessary waste
of time and effort as well as to avoid multiplicity of suits and promote the orderly
administration of justice.
On the basis of the allegations in the complaint filed by respondent Victor Africa and
Rafael Valdez in SEC Case No. 3297, it would appear that the complaint being
lodged before the SEC pertained primarily to an intra-corporate controversy. The
respondents named therein are the individual members of the Board of Directors
and the Corporate Officers of ETPI and the acts sought to be nullified or enjoined
were the supposedly illegal corporate acts of these individuals. Conveniently
omitted are the information that certain stocks of the corporation are under
sequestration by the PCGG and that some individually named respondents
are PCGG nominees or designees. The lone reference to PCGG is found in
paragraph 5 of the complaint alleging the receipt by Victor Africa of a letter
from PCGG Chairman Ramon A. Diaz ordering a stockholders meeting on the 29th
of January, 1988 at 2:00 P.M. at the principal office of the Corporation and the
allegation that this notice was in violation of the provision in the corporations By-
laws regarding notice of meetings. By this clever presentation of the antecedent
facts, the SEC was misled into taking cognizance of the complaint, and in view of
the forthcoming special stockholders meeting being sought to be enjoined, the
Hearing Panel was constrained to issue the assailed temporary restraining order if
only to maintain the status quo and thus prevent the case from becoming moot
and academic.
Under these circumstances, the issuance of the temporary restraining order would have
been legal and proper. What, to our mind, taints the same with grave abuse of
discretion was the fact that at the time of the issuance of the assailed temporary
restraining order, there were certain information already within the knowledge of
the Hearing Panel. For it must be remembered that as early as February 26, 1988,
the Office of the Solicitor General had filed a motion for intervention and for
dismissal of the case for lack of jurisdiction. If on the basis of the complaint filed
by respondents Victor Africa and Rafael Valdez, it was not readily discernible that
it was the legality of the PCGGs resolution of January 29, 1988 that has to be
determined as the order which gave rise to the chain of events sought to be
nullified or enjoined, the disclosure in the motion to intervene that some of the
individual respondents in SEC Case No. 3297 are PCGG nominees or designees
should have made it clear to the Hearing Panel that the PCGG was the real party
in interest. The Hearing Panel should have then realized that there exists an
element in the case which effectively removes it from the jurisdiction of the
Commission, i.e., the presence of the PCGG, which as another quasi-judicial body
is a co-equal entity over which actions the SEC has no power of control.
In one of the valedictory decisions of Mr. Chief Justice Claudio Teehankee, this Court
finally laid to rest the question of the proper forum before which actions to
challenge the PCGG's acts or orders in sequestration cases may be instituted.
Thus:
x x x Executive Order No. 14 xxx specifically provides in Section 2 that The Presidential
Commission on Good Government shall file such cases whether civil or criminal,
with the Sandiganbayan which shall have exclusive and original jurisdiction
thereof. Necessarily, those who wish to question or challenge the Commission's
acts or orders in such case must seek recourse in the same court, the
Sandiganbayan, which is vested exclusive and original jurisdiction. The
Sandiganbayans decisions and final orders are in turn subject to review on
certiorari exclusively by this Court. (Presidential Commission on Good
Government v. Hon. Emmanuel Pea, etc., et al., G.R. No. 77663, April 12, 1988)
The root cause of the SEC controversy being undeniably the PCGG's resolution calling for
a stockholders meeting of the partially sequestered ETPI, the challenge thereto is
properly cognizable by the Sandiganbayan. The other respondents in this petition,
Messrs. Jose Africa and Manuel H. Nieto, Jr., were in a sense more perceptive in
filing a motion for injunction in Civil Case No. 0009 pending before the
Sandiganbayan.
In the face of this glaring lack of jurisdiction, it follows that had the temporary restraining
order issued in SEC Case No. 3297 not lost its effectivity functus officio, the same
would have been set aside. But, as earlier intimated, the case does not end
here. SEC Case No. 3297 should further be ordered dismissed for lack of
jurisdiction.
We come now to the second assailed temporary restraining order dated March 4, 1988
issued by the Sandiganbayan in Civil Case No. 0009, which was replaced on March
29, 1988 with a writ of preliminary injunction, and which injunction was reiterated
on May 2, 1988. (Annex A, Third Urgent Motion to Resolve Urgent Consolidated
Petition) The main objection interposed by the PCGG to the issuance of these
orders is that they were in effect an intervention by the Sandiganbayan with
the PCGG's discretionary executive and administrative jurisdiction.
Verily, the PCGG is vested with executive and administrative jurisdiction over
sequestered corporations, business enterprises and properties. The powers granted
to the PCGG, no matter how broad they appear, however, must be exercised
pursuant to its pronounced objective of provisionally taking over in the public
interest or to prevent its disposal or dissipation business enterprises and properties
taken over by the government of the Marcos administration or entities or persons
close to the former President Marcos x x x. (Sec. 3[b], Executive Order No. 1) It is
with this objective in mind that in the leading case of BASECO vs.
PCGG, supra this Court laid down certain guidelines on what acts may or may not
be done by the PCGG with regard to said sequestered properties or businesses. We
tried to cover as wide a range of activities in said case as possible but We realize
that We cannot even attempt to encompass allsituations. Each case must be
decided on the basis of its factual antecedents and merits, but always with
reference to the objectives for which the PCGG was created. In like manner should
the PCGG's acts and orders be measured. Acts or orders transgressing this
parameter are certainly tainted with abuse of discretion which the Sandiganbayan,
the court vested with exclusive and original jurisdiction over case involving
the PCGG, may correct. Otherwise, PCGG would be above the law.
In the case at bar, the stockholders meeting enjoined by the SEC and the Sandiganbayan
was called specifically for the purpose of ratifying the proposed amendment to
delete from ETPIs Articles of Incorporation and By-Laws the right of first refusal
clause. The question that must now be resolved is whether the PCGG may be
permitted to vote the sequestered shares to effect this change.
The right of first refusal is primarily an attribute of ownership. Conversely, a waiver
thereof is an act of ownership. To allow the PCGG to vote the sequestered shares
for this purpose would be sanctioning its exercise of an act of strict ownership. To
our mind, though, it is not so much the nature of the act proposed to be done by
the PCGG that is essential, but rather, the purpose for doing so. The prime
consideration should be: is the act proposed to be done by the PCGG merely an
act of administration or an act of strict ownership essential to the pursuit of its
objectives? For it cannot be totally discounted that situations may arise wherein
only through an act of strict ownership can the PCGG be able to prevent the
dissipation of the assets of the sequestered corporation or business. Fortunately,
this is not one of them. For while We commend the purported objective of
the PCGG for trying to amend the right of first refusal clause to enable it to sell the
sequestered shares to the public, We cannot see our way clear as to how this move
could help prevent the dissipation of the corporations assets, particularly when it
has its own representatives in the Board of Directors, who can effectively provide
such measures and safeguards to prevent such dissipation. Moreover, to sell the
sequestered shares at this time when the issue of ownership is still pending before
the Sandiganbayan and the exact equity proportion thereof is still uncertain,
would not only be premature, but would also expose the would-be buyers to great
risks.
But while We find the Sandiganbayan to have acted properly in enjoining the PCGG from
holding the stockholders meeting for the specified purpose of amending the right
of first refusal clause in ETPI's Articles of Incorporation and By-Laws, We find the
general injunction imposed by it on the PCGG to desist and refrain from calling a
stockholders meeting for the purpose of electing a new Board of Directors of
effecting substantial changes in the policy, program or practice of the corporation
to be too broad as to taint said order with grave abuse of discretion. Said order
completely ties the hands of the PCGG, rendering it virtually helpless in the
exercise of its power of conserving and preserving the assets of the
corporation. Indeed, of what use is the PCGG if it cannot even do this? The
injunction issued by the Sandiganbayan must be lifted with qualifications as it was
lifted in our resolution dated May 24, 1988.
As to the charge of forum-shopping imputed to private respondents, We give the latter
the benefit of the doubt considering that there are two separate sets of petitioners
in the SEC and Sandiganbayan cases and the lack of a definite ruling, at the time of
the filing of the petitions in SEC and Sandiganbayan, as to which is the proper
forum in cases of this nature.
WHEREFORE. the temporary restraining order issued in SEC Case No. 3297 is hereby
declared a nullity and SEC Case No. 3297 is ordered dismissed for lack of
jurisdiction. The writs of preliminary injunction dated March 25 and May 2, 1988
issued by the Sandiganbayan in Civil Case No. 0009 are lifted except in so far as
they enjoin petitioners from holding a stockholders meeting for the purpose of
deleting from ETPI's Articles of Incorporation and By-Laws the right of first refusal
clause. No pronouncement as to costs.
SO ORDERED.

[G.R. No. 144476. April 8, 2003]

ONG YONG, JUANITA TAN ONG, WILSON T. ONG, ANNA L. ONG, WILLIAM T.
ONG, WILLIE T. ONG, and JULIE ONG ALONZO, petitioners, vs. DAVID S.
TIU, CELY Y. TIU, MOLY YU GAW, BELEN SEE YU, D. TERENCE Y. TIU, JOHN
YU, LOURDES C. TIU, INTRALAND RESOURCES DEVELOPMENT CORP.,
MASAGANA TELAMART, INC., REGISTER OF DEEDS OF PASAY CITY, and
the SECURITIES AND EXCHANGE COMMISSION, respondents.

[G.R. No. 144629. April 8, 2003]

DAVID S. TIU, CELY Y. TIU, MOLY YU GAW, BELEN SEE YU, D. TERENCE Y. TIU,
JOHN YU, LOURDES C. TIU, and INTRALAND RESOURCES DEVELOPMENT
CORP., petitioners, vs. ONG YONG, JUANITA TAN ONG, WILSON T. ONG,
ANNA L. ONG, WILLIAM T. ONG, WILLIE T. ONG, and JULIA ONG
ALONZO, respondents.

RESOLUTION
CORONA, J.:

Before us are the (1) motion for reconsideration, dated March 15, 2002, of petitioner
movants Ong Yong, Juanita Tan Ong, Wilson Ong, Anna Ong, William Ong, Willie Ong
and Julia Ong Alonzo (the Ongs); (2) motion for partial reconsideration, dated March 15,
2002, of petitioner movant Willie Ong seeking a reversal of this Courts Decision,[1] dated
February 1, 2002, in G.R. Nos. 144476 and 144629 affirming with modification the
decision[2] of the Court of Appeals, dated October 5, 1999, which in turn upheld, likewise
with modification, the decision of the SEC en banc, dated September 11, 1998; and (3)
motion for issuance of writ of execution of petitioners David S. Tiu, Cely Y. Tiu, Moly Yu
Gow, Belen See Yu, D. Terence Y. Tiu, John Yu and Lourdes C. Tiu (the Tius) of our
February 1, 2002 Decision.
A brief recapitulation of the facts shows that:
In 1994, the construction of the Masagana Citimall in Pasay City was threatened with
stoppage and incompletion when its owner, the First Landlink Asia Development
Corporation (FLADC), which was owned by the Tius, encountered dire financial
difficulties. It was heavily indebted to the Philippine National Bank (PNB) for P190
million. To stave off foreclosure of the mortgage on the two lots where the mall was being
built, 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. Under the Pre-Subscription
Agreement they entered into, the Ongs and the Tius agreed to maintain equal
shareholdings in FLADC: the Ongs were to subscribe to 1,000,000 shares at a par value
of P100.00 each while the Tius were to subscribe to an additional 549,800 shares
at P100.00 each in addition to their already existing subscription of 450,200
shares. Furthermore, they agreed that the Tius were entitled to nominate the Vice-
President and the Treasurer plus five directors while the Ongs were entitled to nominate
the President, the Secretary and six directors (including the chairman) to the board of
directors of FLADC. Moreover, the Ongs were given the right to manage and operate the
mall.
Accordingly, the Ongs paid P100 million in cash for their subscription to 1,000,000
shares of stock while the Tius committed to contribute to FLADC a four-storey building
and two parcels of land respectively valued at P20 million (for 200,000 shares), P30
million (for 300,000 shares) and P49.8 million (for 49,800 shares) to cover their
additional 549,800 stock subscription therein. The Ongs paid in another P70 million[3] to
FLADC and P20 million to the Tius over and above their P100 million investment, the
total sum of which (P190 million) was used to settle the P190 million mortgage
indebtedness of FLADC to PNB.
The business harmony between the Ongs and the Tius in FLADC, however, was
shortlived because the Tius, on February 23, 1996, rescinded the Pre-Subscription
Agreement. The Tius accused the Ongs of (1) refusing to credit to them the FLADC shares
covering their real property contributions; (2) preventing David S. Tiu and Cely Y. Tiu
from assuming the positions of and performing their duties as Vice-President and
Treasurer, respectively, and (3) refusing to give them the office spaces agreed upon.
According to the Tius, the agreement was for David S. Tiu and Cely S. Tiu to assume
the positions and perform the duties of Vice-President and Treasurer, respectively, but
the Ongs prevented them from doing so. Furthermore, the Ongs refused to provide them
the space for their executive offices as Vice-President and Treasurer. Finally, and most
serious of all, the Ongs refused to give them the shares corresponding to their property
contributions of a four-story building, a 1,902.30 square-meter lot and a 151 square-meter
lot. Hence, they felt they were justified in setting aside their Pre-Subscription Agreement
with the Ongs who allegedly refused to comply with their undertakings.
In their defense, the Ongs said that David S. Tiu and Cely Y. Tiu had in fact assumed
the positions of Vice-President and Treasurer of FLADC but that it was they who refused
to comply with the corporate duties assigned to them. It was the contention of the Ongs
that they wanted the Tius to sign the checks of the corporation and undertake their
management duties but that the Tius shied away from helping them manage the
corporation. On the issue of office space, the Ongs pointed out that the Tius did in fact
already have existing executive offices in the mall since they owned it 100% before the
Ongs came in. What the Tius really wanted were new offices which were anyway
subsequently provided to them. On the most important issue of their alleged failure to
credit the Tius with the FLADC shares commensurate to the Tius property contributions,
the Ongs asserted that, although the Tius executed a deed of assignment for the 1,902.30
square-meter lot in favor of FLADC, they (the Tius) refused to pay P 570,690 for capital
gains tax and documentary stamp tax. Without the payment thereof, the SEC would not
approve the valuation of the Tius property contribution (as opposed to cash
contribution). This, in turn, would make it impossible to secure a new Transfer Certificate
of Title (TCT) over the property in FLADCs name. In any event, it was easy for the Tius to
simply pay the said transfer taxes and, after the new TCT was issued in FLADCs name,
they could then be given the corresponding shares of stocks. On the 151 square-meter
property, the Tius never executed a deed of assignment in favor of FLADC. The Tius
initially claimed that they could not as yet surrender the TCT because it was still being
reconstituted by the Lichaucos from whom the Tius bought it. The Ongs later on
discovered that FLADC had in reality owned the property all along, even before their Pre-
Subscription Agreement was executed in 1994. This meant that the 151 square-meter
property was at that time already the corporate property of FLADC for which the Tius
were not entitled to the issuance of new shares of stock.
The controversy finally came to a head when this case was commenced[4] by the Tius
on February 27, 1996 at the Securities and Exchange Commission (SEC), seeking
confirmation of their rescission of the Pre-Subscription Agreement. After hearing, the
SEC, through then Hearing Officer Rolando G. Andaya, Jr., issued a decision on May 19,
1997 confirming the rescission sought by the Tius, as follows:

WHEREFORE, judgment is hereby rendered confirming the rescission of the Pre-


Subscription Agreement, and consequently ordering:

(a) The cancellation of the 1,000,000 shares subscription of the individual


defendants in FLADC;
(b) FLADC to pay the amount of P170,000,000.00 to the individual defendants
representing the return of their contribution for 1,000,000 shares of FLADC;
( c) The plaintiffs to submit with (sic) the Securities and Exchange Commission
amended articles of incorporation of FLADC to conform with this decision;
(d) The defendants to surrender to the plaintiffs TCT Nos. 132493, 132494, 134066
(formerly 15587), 135325 and 134204 and any other title or deed in the name of
FLADC, failing in which said titles are declared void;
(e) The Register of Deeds to issue new certificates of titles in favor of the
plaintiffs and to cancel the annotation of the Pre-Subscription Agreement
dated 15 August 1994 on TCT No. 134066 (formerly 15587);
(f) The individual defendants, individually and collectively, their agents and
representatives, to desist from exercising or performing any and all acts
pertaining to stockholder, director or officer of FLADC or in any manner
intervene in the management and affairs of FLADC;
(g) The individual defendants, jointly and severally, to return to FLADC interest
payment in the amount of P8,866,669.00 and all interest payments as well as
any payments on principal received from the P70,000,000.00 inexistent loan,
plus the legal rate of interest thereon from the date of their receipt of such
payment until fully paid;
(h) The plaintiff David Tiu to pay individual defendants the sum of
P20,000,000.00 representing his loan from said defendants plus legal interest
from the date of receipt of such amount.

SO ORDERED.[5]

On motion of both parties, the above decision was partially reconsidered but only
insofar as the Ongs P70 million was declared not as a premium on capital stock but an
advance (loan) by the Ongs to FLADC and that the imposition of interest on it was
correct.[6]
Both parties appealed[7] to the SEC en banc which rendered a decision on September
11, 1998, affirming the May 19, 1997 decision of the Hearing Officer. The SEC en
banc confirmed the rescission of the Pre-Subscription Agreement but reverted to
classifying the P70 million paid by the Ongs as premium on capital and not as a loan or
advance to FLADC, hence, not entitled to earn interest.[8]
On appeal, the Court of Appeals (CA) rendered a decision on October 5, 1999, thus:

WHEREFORE, the Order dated September 11, 1998 issued by the Securities and Exchange
Commission En Banc in SEC AC CASE NOS. 598 and 601 confirming the rescission of the
Pre-Subscription Agreement dated August 15, 1994 is hereby AFFIRMED, subject to the
following MODIFICATIONS:

1. The Ong and Tiu Groups are ordered to liquidate First Landlink Asia
Development Corporation in accordance with the following cash and
property contributions of the parties therein.

(a) Ong Group P100,000,000.00 cash contribution for one (1) million shares
in First Landlink Asia Development Corporation at a par value of
P100.00 per share;
(b) Tiu Group:

1) P45,020,000.00 original cash contribution for 450,200 shares in First


Landlink Asia Development Corporation at a par value of P100.00
per share;

2) A four-storey building described in Transfer Certificate of Title No.


15587 in the name of Intraland Resources and Development
Corporation valued at P20,000,000.00 for 200,000 shares in First
Landlink Asia Development Corporation at a par value of P100.00
per share;

3) A 1,902.30 square-meter parcel of land covered by Transfer


Certificate of Title No. 15587 in the name of Masagana Telamart, Inc.
valued at P30,000,000.00 for 300,000 shares in First Landlink Asia
Development Corporation at a par value of P100.00 per share.

2) Whatever remains of the assets of the First Landlink Asia Development


Corporation and the management thereof is (sic) hereby ordered
transferred to the Tiu Group.

3) First Landlink Asia Development Corporation is hereby ordered to pay the


amount of P70,000,000.00 that was advanced to it by the Ong Group upon
the finality of this decision. Should the former incur in delay in the
payment thereof, it shall pay the legal interest thereon pursuant to Article
2209 of the New Civil Code.

4) The Tius are hereby ordered to pay the amount of P20,000,000.00 loaned
them by the Ongs upon the finality of this decision. Should the former
incur in delay in the payment thereof, it shall pay the legal interest thereon
pursuant to Article 2209 of the New Civil Code.

SO ORDERED.[9]

An interesting sidelight of the CA decision was its description of the rescission made
by the Tius as the height of ingratitude and as pulling a fast one on the Ongs. The CA
moreover found the Tius guilty of withholding FLADC funds from the Ongs and diverting
corporate income to their own MATTERCO account.[10] These were findings later on
affirmed in our own February 1, 2002 Decision which is the subject of the instant motion
for reconsideration.[11]
But there was also a strange aspect of the CA decision. The CA concluded that both
the 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.
Their motions for reconsideration having been denied, both parties filed separate
petitions for review before this Court.
In their petition docketed as G.R. No. 144476, Ong et al. vs. Tiu et al., the Ongs argued
that the Tius may not properly avail of rescission under Article 1191 of the Civil Code
considering that the Pre-Subscription Agreement did not provide for reciprocity of
obligations; that the rights over the subject matter of the rescission (capital assets and
properties) had been acquired by a third party (FLADC); that they did not commit a
substantial and fundamental breach of their agreement since they did not prevent the
Tius from assuming the positions of Vice-President and Treasurer of FLADC, and that the
failure to credit the 300,000 shares corresponding to the 1,902.30 square-meter property
covered by TCT No. 134066 (formerly 15587) was due to the refusal of the Tius to pay the
required transfer taxes to secure the approval of the SEC for the property contribution
and, thereafter, the issuance of title in FLADCs name. They also argued that the
liquidation of FLADC may not legally be ordered by the appellate court even for so called
practical considerations or even to prevent further squabbles and numerous litigations,
since the same are not valid grounds under the Corporation Code. Moreover, the Ongs
bewailed the failure of the CA to grant interest on their P70 million and P20 million
advances to FLADC and David S. Tiu, respectively, and to award costs and damages.
In their petition docketed as G.R. No. 144629, Tiu et al. vs. Ong et al., the Tius, on the
other hand, contended that the rescission should have been limited to the restitution of
the parties respective investments and not the liquidation of FLADC based on the
erroneous perception by the court that: the Masagana Citimall was threatened with
incompletion since FLADC was in financial distress; that the Tius invited the Ongs to
invest in FLADC to settle its P190 million loan from PNB; that they violated the Pre-
Subscription Agreement when it was the Lichaucos and not the Tius who executed the
deed of assignment over the 151 square-meter property commensurate to 49,800 shares in
FLADC thereby failing to pay the price for the said shares; that they did not turn over to
the Ongs the entire amount of FLADC funds; that they were diverting rentals from lease
contracts due to FLADC to their own MATTERCO account; that the P70 million paid by
the Ongs was an advance and not a premium on capital; and that, by rescinding the Pre-
Subscription Agreement, they wanted to wrestle away the management of the mall and
prevent the Ongs from enjoying the profits of their P190 million investment in FLADC.
On February 1, 2002, this Court promulgated its Decision (the subject of the instant
motions), affirming the assailed decision of the Court of Appeals but with the following
modifications:
1. the P20 million loan extended by the Ongs to the Tius shall earn interest at
twelve percent (12%) per annum to be computed from the time of judicial
demand which is from April 23, 1996;
2. the P70 million advanced by the Ongs to the FLADC shall earn interest at ten
percent (10%) per annum to be computed from the date of the FLADC Board
Resolution which is June 19, 1996; and
3. the Tius shall be credited with 49,800 shares in FLADC for their property
contribution, specifically, the 151 sq. m. parcel of land.
This Court affirmed the fact that both the Ongs and the Tius violated their respective
obligations under the Pre-Subscription Agreement. The Ongs prevented the Tius from
assuming the positions of Vice-President and Treasurer of the corporation. On the other
hand, the Decision established that the Tius failed to turn over FLADC funds to the Ongs
and that the Tius diverted rentals due to FLADC to their MATTERCO
account. Consequently, it held that rescission was not possible since both parties were
in pari delicto. However, this Court agreed with the Court of Appeals that the remedy of
specific performance, as espoused by the Ongs, was not practical and sound either and
would only lead to further squabbles and numerous litigations between the parties.
On March 15, 2002, the Tius filed before this Court a Motion for Issuance of a Writ of
Execution on the grounds that: (a) the SEC order had become executory as early as
September 11, 1998 pursuant to Sections 1 and 12, Rule 43 of the Rules of Court; (b) any
further delay would be injurious to the rights of the Tius since the case had been pending
for more than six years; and (c) the SEC no longer had quasi-judicial jurisdiction under
RA 8799 (Securities Regulation Code). The Ongs filed their opposition, contending that
the Decision dated February 1, 2002 was not yet final and executory; that no good reason
existed to issue a warrant of execution; and that, pursuant to Section 5.2 of RA 8799, the
SEC retained jurisdiction over pending cases involving intra-corporate disputes already
submitted for final resolution upon the effectivity of the said law.
Aside from their opposition to the Tius Motion for Issuance of Writ of Execution, the
Ongs filed their own Motion for Reconsideration; Alternatively, Motion for Modification
(of the February 1, 2002 Decision) on March 15, 2002, raising two main points: (a) that
specific performance and not rescission was the proper remedy under the premises; and
(b) that, assuming rescission to be proper, the subject decision of this Court should be
modified to entitle movants to their proportionate share in the mall.
On their first point (specific performance and not rescission was the proper remedy),
movants Ong argue that their alleged breach of the Pre-Subscription Agreement was, at
most, casual which did not justify the rescission of the contract. They stress that
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 said obligation (to provide executive offices) pertained to FLADC
itself. Such obligation arose from the relations between the said officers and the
corporation and not any of the individual parties such as the Ongs. Likewise, the alleged
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. Just the same, it
could not be done in view of the Tius refusal to pay the necessary transfer taxes which in
turn resulted in the inability to secure SEC approval for the property contributions and
the issuance of a new TCT in the name of FLADC.
Besides, according to the Ongs, the principal objective of both parties in entering into
the Pre-Subscription Agreement in 1994 was to raise the P190 million desperately needed for
the payment of FLADCs loan to PNB. Hence, in this light, the alleged failure to provide
office space for the two corporate officers was no more than an inconsequential
infringement. For rescission to be justified, the 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. At any rate, the Ongs claim that it was the Tius who were guilty
of fundamental violations in failing to remit funds due to FLADC and diverting the same
to their MATTERCO account.
The Ongs also allege that, in view of the findings of the Court that both parties were
guilty of violating the Pre-Subscription Agreement, neither of them could resort to
rescission under the principle of pari delicto. In addition, 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.
On their second point (assuming rescission to be proper, the Ongs should be given
their proportionate share of the mall), movants Ong vehemently take exception to the
second item in the dispositive portion of the questioned Decision insofar as it decreed
that whatever remains of the assets of FLADC and the management thereof (after
liquidation) shall be transferred to the Tius. They point out that the mall itself, which
would have been foreclosed by PNB if not for their timely investment of P190 million in
1994 and which is now worth about P1 billion mainly because of their efforts, should be
included in any partition and distribution. They (the Ongs) should not merely be given
interest on their capital investments. The said portion of our Decision, according to them,
amounted to the unjust enrichment of the Tius and ran contrary to our own
pronouncement that the act of the Tius in unilaterally rescinding the agreement was the
height of ingratitude and an attempt to pull a fast one as it would prevent the Ongs from
enjoying the fruits of their P190 million investment in FLADC. It also contravenes this
Courts assurance in the questioned Decision that the Ongs and Tius will have a bountiful
return of their respective investments derived from the profits of the corporation.
Willie Ong filed a separate Motion for Partial Reconsideration dated March 8, 2002,
pointing out that there was no violation of the Pre-Subscription Agreement on the part of
the Ongs; that, after more than seven years since the mall began its operations, rescission
had become not only impractical but would also adversely affect the rights of innocent
parties; and that it would be highly inequitable and unfair to simply return the P100 million
investment of the Ongs and give the remaining assets now amounting to about P1 billion to
the Tius.
The Tius, in their opposition to the Ongs motion for reconsideration, counter that
the arguments therein are a mere re-hash of the contentions in the Ongs petition for
review and previous motion for reconsideration of the Court of Appeals decision. The
Tius compare the arguments in said pleadings to prove that the Ongs do not raise new
issues, and, based on well-settled jurisprudence,[12]the Ongs present motion is
therefore pro-forma and did not prevent the Decision of this Court from attaining finality.
On January 29, 2003, the Special Second Division of this Court held oral arguments
on the respective positions of the parties. On February 27, 2003, Dr. Willie Ong and the
rest of the movants Ong filed their respective memoranda. On February 28, 2003, the Tius
submitted their memorandum.
We grant the Ongs motions for reconsideration.
This is not the first time that this Court has reversed itself on a motion for
reconsideration. In Philippine Consumers Foundation, Inc. vs. National
Telecommunications Commission,[13] this Court, through then Chief Justice Felix V.
Makasiar, said that its members may and do change their minds, after a re-study of the
facts and the law, illuminated by a mutual exchange of views.[14] After a thorough re-
examination of the case, we find that our Decision of February 1, 2002 overlooked certain
aspects which, if not corrected, will cause extreme and irreparable damage and prejudice
to the Ongs, FLADC and its creditors.
The procedural rule on pro-forma motions pointed out by the Tius should not be
blindly applied to meritorious motions for reconsideration. As long as the same
adequately raises a valid ground[15](i.e., the decision or final order is contrary to law), this
Court has to evaluate the merits of the arguments to prevent an unjust decision from
attaining finality. In Security Bank and Trust Company vs. Cuenca,[16] we ruled that a
motion for reconsideration is not pro-forma for the reason alone that it reiterates the
arguments earlier passed upon and rejected by the appellate court. We explained there
that a movant may raise the same arguments, if only to convince this Court that its ruling
was erroneous. Moreover, the rule (that a motion is pro-forma if it only repeats the
arguments in the previous pleadings) will not apply if said arguments were not squarely
passed upon and answered in the decision sought to be reconsidered. In the case at bar,
no ruling was made on some of the petitioner Ongs arguments. For instance, no clear
ruling was made on why an order distributing corporate assets and property to the
stockholders would not violate the statutory preconditions for corporate dissolution or
decrease of authorized capital stock. Thus, it would serve the ends of justice to entertain
the subject motion for reconsideration since some important issues therein, although
mere repetitions, were not considered or clearly resolved by this Court.
Going now to the merits, we resolve whether the Tius could legally rescind the Pre-
Subscription Agreement. We rule that they could not.
FLADC was originally incorporated with an authorized capital stock of 500,000 shares
with the Tius owning 450,200 shares representing the paid-up capital. When the Tius
invited the Ongs to invest in FLADC as stockholders, an increase of the authorized capital
stock became necessary to give each group equal (50-50) shareholdings as agreed upon in
the Pre-Subscription Agreement.The authorized capital stock was thus increased from
500,000 shares to 2,000,000 shares with a par value of P100 each, with the Ongs
subscribing to 1,000,000 shares and the Tius to 549,800 more shares in addition to their
450,200 shares to complete 1,000,000 shares. Thus, the subject matter of the contract was
the 1,000,000 unissued shares of FLADC stock allocated to the Ongs. Since these were
unissued shares, the parties Pre-Subscription Agreement was in fact a subscription
contract as defined under Section 60, Title VII of the Corporation Code:

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 (Italics supplied).

A subscription contract necessarily involves the corporation as one of the contracting


parties since the subject matter of the transaction is property owned by the corporation
its shares of stock. Thus, the subscription contract (denominated by the parties as a Pre-
Subscription Agreement) whereby the Ongs invested P100 million for 1,000,000 shares of
stock was, from the viewpoint of the law, one between the Ongs and FLADC, not between
the Ongs and the Tius. Otherwise stated, the Tius did not contract in their personal
capacities with the Ongs since they were not selling any of their own shares to them. It
was FLADC that did.
Considering therefore that the real contracting parties to the subscription agreement
were FLADC and the Ongs alone, a civil case for rescission on the ground of breach of
contract filed by the Tius in their personal capacities will not prosper. Assuming it had
valid reasons to do so, only FLADC (and certainly not the Tius) had the legal personality
to file suit rescinding the subscription agreement with the Ongs inasmuch as it was the
real party in interest therein. Article 1311 of the Civil Code provides that contracts take
effect only between the parties, their assigns and heirs Therefore, a party who has not
taken part in the transaction cannot sue or be sued for performance or for cancellation
thereof, unless he shows that he has a real interest affected thereby. [17]
In their February 28, 2003 Memorandum, the Tius claim that there are two contracts
embodied in the Pre-Subscription Agreement: a shareholders agreement between the
Tius and the Ongs defining and governing their relationship and a subscription contract
between the Tius, the Ongs and FLADC regarding the subscription of the parties to the
corporation. They point out that these two component parts form one whole agreement
and that their terms and conditions are intrinsically related and dependent on each other.
Thus, the breach of the shareholders agreement, which was allegedly the consideration
for the subscription contract, was also a breach of the latter.
Aside from the fact that this is an entirely new angle never raised in any of their
previous pleadings until after the oral arguments on January 29, 2003, we find this
argument too strained for comfort. It is obviously intended to remedy and cover up the
Tius lack of legal personality to rescind an agreement in which they were personally not
parties-in-interest. Assuming arguendo that there were two sub-agreements embodied in
the Pre-Subscription Agreement, this Court fails to see how the shareholders agreement
between the Ongs and Tius can, within the bounds of reason, be interpreted as the
consideration of the subscription contract between FLADC and the Ongs. There was
nothing in the Pre-Subscription Agreement even remotely suggesting such alleged
interdependence. Be that as it may, however, the Tius are nevertheless not the proper
parties to raise this point because they were not parties to the subscription contract
between FLADC and the Ongs. Thus, they are not in a position to claim that the
shareholders agreement between them and the Ongs was what induced FLADC and the
Ongs to enter into the subscription contract. It is the Ongs alone who can say
that. Though FLADC was represented by the Tius in the subscription contract, FLADC
had a separate juridical personality from the Tius. The case before us does not warrant
piercing the veil of corporate fiction since there is no proof that the corporation is being
used as a cloak or cover for fraud or illegality, or to work injustice.[18]
The Tius also argue that, since the Ongs represent FLADC as its management, breach
by the Ongs is breach by FLADC. This must also fail because such an argument disregards
the separate juridical personality of FLADC.
The Tius allege that they were prevented from participating in the management of
the corporation. There is evidence that the Ongs did prevent the rightfully elected
Treasurer, Cely Tiu, from exercising her function as such. The records show that the
President, Wilson Ong, supervised the collection and receipt of rentals in the Masagana
Citimall;[19] that he ordered the same to be deposited in the bank;[20] and that he held on
to the cash and properties of the corporation.[21] Section 25 of the Corporation Code
prohibits the President from acting concurrently as Treasurer of the corporation. The
rationale behind the provision is to ensure the effective monitoring of each officers
separate functions.
However, although the Tius were adversely affected by the Ongs unwillingness to let
them assume their positions, rescission due to breach of contract is definitely the wrong
remedy for their personal grievances. The Corporation Code, SEC rules and even the
Rules of Court provide for appropriate and adequate intra-corporate remedies,
other than rescission, in situations like this. Rescission is certainly not one of them,
specially if the party asking for it has no legal personality to do so and the requirements of
the law therefor have not been met. A contrary doctrine will tread on extremely
dangerous ground because it will allow just any stockholder, for just about any real or
imagined offense, to demand rescission of his subscription and call for the distribution of
some part of the corporate assets to him without complying with the requirements of the
Corporation Code.
Hence, the Tius, in their personal capacities, cannot seek the ultimate and
extraordinary remedy of rescission of the subject agreement based on a less than
substantial breach of subscription contract. Not only are they not parties to the
subscription contract between the Ongs and FLADC; they also have other available and
effective remedies under the law.
All this notwithstanding, granting but not conceding that the Tius possess the legal
standing to sue for rescission based on breach of contract, said action will nevertheless
still not prosper since rescission will violate the Trust Fund Doctrine and the procedures
for the valid distribution of assets and property under the Corporation Code.
The Trust Fund Doctrine, first enunciated by this Court in the 1923 case of Philippine
Trust Co. vs. Rivera,[22] provides that subscriptions to the capital stock of a corporation
constitute a fund to which the creditors have a right to look for the satisfaction of their
claims.[23] This doctrine is the underlying principle in the procedure for the distribution of
capital assets, embodied in the Corporation Code, which 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. Furthermore, the doctrine is
articulated in Section 41 on the power of a corporation to acquire its own shares[26] and in
Section 122 on the prohibition against the distribution of corporate assets and property
unless the stringent requirements therefor are complied with.[27]
The distribution of corporate assets and property cannot be made to depend on the
whims and caprices of the stockholders, officers or directors of the corporation, or even,
for that matter, on the earnest desire of the court a quo to prevent further squabbles and
future litigations unless the indispensable conditions and procedures for the protection of
corporate creditors are followed. Otherwise, the corporate peace laudably hoped for by
the court will remain nothing but a dream because this time, it will be the creditors turn
to engage in squabbles and litigations should the court order an unlawful distribution in
blatant disregard of the Trust Fund Doctrine.
In the instant case, the rescission of the Pre-Subscription Agreement will effectively
result in the unauthorized distribution of the capital assets and property of the
corporation, thereby violating the Trust Fund Doctrine and the Corporation Code, since
rescission of a subscription agreement is not one of the instances when distribution of
capital assets and property of the corporation is allowed.
Contrary to the Tius allegation, rescission will, in the final analysis, result in the
premature liquidation of the corporation without the benefit of prior dissolution in
accordance with Sections 117, 118, 119 and 120 of the Corporation Code. [28] The Tius
maintain that rescinding the subscription contract is not synonymous to corporate
liquidation because all rescission will entail would be the simple restoration of the status
quo ante and a return to the two groups of their cash and property contributions. We
wish it were that simple. Very noticeable is the fact that the Tius do not explain why
rescission in the instant case will not effectively result in liquidation. The Tius merely
refer in cavalier fashion to the end-result of rescission (which incidentally is 100%
favorable to them) but turn a blind eye to its unfair, inequitable and disastrous effect on
the corporation, its creditors and the Ongs.
In their Memorandum dated February 28, 2003, the Tius claim that rescission of the
agreement will not result in an unauthorized liquidation of the corporation because their
case is actually a petition to decrease capital stock pursuant to Section 38 of the
Corporation Code. Section 122 of the law provides that (e)xcept by decrease of capital
stock, no corporation shall distribute any of its assets or property except upon lawful
dissolution and after payment of all its debts and liabilities. The Tius claim that their case
for rescission, being a petition to decrease capital stock, does not violate the liquidation
procedures under our laws. All that needs to be done, according to them, is for this Court
to order (1) FLADC to file with the SEC a petition to issue a certificate of decrease of
capital stock and (2) the SEC to approve said decrease. This new argument has no merit.
The Tius case for rescission cannot validly be deemed a petition to decrease capital
stock because such action never complied with the formal requirements for decrease of
capital stock under Section 33 of the Corporation Code. No majority vote of the board of
directors was ever taken. Neither was there any stockholders meeting at which the
approval of stockholders owning at least two-thirds of the outstanding capital stock was
secured. There was no revised treasurers affidavit and no proof that said decrease will not
prejudice the creditors rights. On the contrary, all their pleadings contained were alleged
acts of violations by the Ongs to justify an order of rescission.
Furthermore, it is an improper judicial intrusion into the internal affairs of the
corporation to compel FLADC to file at the SEC a petition for the issuance of a certificate
of decrease of stock. Decreasing a corporations authorized capital stock is an amendment
of the Articles of Incorporation. It is a decision that only the stockholders and the
directors can make, considering that they are the contracting parties thereto. In this case,
the Tius are actually not just asking for a review of the legality and fairness of a corporate
decision. They want this Court to make a corporate decision for FLADC. We decline to
intervene and order corporate structural changes not voluntarily agreed upon by its
stockholders and directors.
Truth to tell, a judicial order to decrease capital stock without the assent of FLADCs
directors and stockholders is a violation of the business judgment rule which states that:

xxx xxx xxx (C)ontracts intra vires entered into by the board of directors are binding upon
the corporation and courts will not interfere unless such contracts are so unconscionable
and oppressive as to amount to wanton destruction to the rights of the minority, as when
plaintiffs aver that the defendants (members of the board), have concluded a transaction
among themselves as will result in serious injury to the plaintiffs stockholders.[29]

The reason behind the rule is aptly explained by Dean Cesar L. Villanueva, an
esteemed author in corporate law, thus:

Courts and other tribunals are wont to override the business judgment of the board
mainly because, courts are not in the business of business, and the laissez faire rule or the
free enterprise system prevailing in our social and economic set-up dictates that it is
better for the State and its organs to leave business to the businessmen; especially so,
when courts are ill-equipped to make business decisions. More importantly, the social
contract in the corporate family to decide the course of the corporate business has been
vested in the board and not with courts.[30]

Apparently, the Tius do not realize the illegal consequences of seeking rescission and
control of the corporation to the exclusion of the Ongs. Such an act infringes on the law
on reduction of capital stock. Ordering the return and distribution of the Ongs capital
contribution without dissolving the corporation or decreasing its authorized capital stock
is not only against the law but is also prejudicial to corporate creditors who enjoy
absolute priority of payment over and above any individual stockholder thereof.
Stripped to its barest essentials, the issue of rescission in this case is not difficult to
understand. If rescission is denied, will injustice be inflicted on any of the parties? The
answer is no because the financial interests of both the Tius and the Ongs will remain
intact and safe within FLADC. On the other hand, if rescission is granted, will any of the
parties suffer an injustice? Definitely yes because the Ongs will find themselves out in the
streets with nothing but the money they had in 1994 while the Tius will not only enjoy a
windfall estimated to be anywhere from P450 million to P900 million[31] but will also take
over an extremely profitable business without much effort at all.
Another very important point follows. The Court of Appeals and, later on, our
Decision dated February 1, 2002, stated that both groups were in pari delicto, meaning,
that both the Tius and the Ongs committed breaches of the Pre-Subscription
Agreement. This may be true to a certain extent but, judging from the comparative
gravity of the acts separately committed by each group, we find that the Ongs acts were
relatively tame vis--vis those committed by the Tius in not surrendering FLADC funds to
the corporation and diverting corporate income to their own MATTERCO account. The
Ongs were right in not issuing to the Tius the shares corresponding to the four-story
building and the 1,902.30 square-meter lot because no title for it could be issued in
FLADCs name, owing to the Tius refusal to pay the transfer taxes. And as far as the 151
square-meter lot was concerned, why should FLADC issue additional shares to the Tius
for property already owned by the corporation and which, in the final analysis, was
already factored into the shareholdings of the Tius before the Ongs came in?
We are appalled by the attempt by the Tius, in the words of the Court of Appeals, to
pull a fast one on the Ongs because that was where the problem precisely started. It is
clear that, when the finances of FLADC improved considerably after the equity infusion of
the Ongs, the Tius started planning to take over the corporation again and exclude the
Ongs from it. It appears that the Tius refusal to pay transfer taxes might not have really
been at all unintentional because, by failing to pay that relatively small amount which
they could easily afford, the Tius should have expected that they were not going to be
given the corresponding shares. It was, from every angle, the perfect excuse for
blackballing the Ongs. In other words, the Tius created a problem then used that same
problem as their pretext for showing their partners the door. In the process, they stood to
be rewarded with a bonanza of anywhere between P450 million to P900 million in assets
(from an investment of only P45 million which was nearly foreclosed by PNB), to the
extreme and irreparable damage of the Ongs, FLADC and its creditors.
After all is said and done, no one can close his eyes to the fact that the Masagana
Citimall would not be what it has become today were it not for the timely infusion of P190
million by the Ongs in 1994. There are no ifs or buts about it.
Without the Ongs, the Tius would have lost everything they originally invested in
said mall. If only for this and the fact that this Resolution can truly pave the way for both
groups to enjoy the fruits of their investments assuming good faith and honest intentions
we cannot allow the rescission of the subject subscription agreement. 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.
WHEREFORE, the motion for reconsideration, dated March 15, 2002, of petitioners
Ong Yong, Juanita Tan Ong, Wilson Ong, Anna Ong, William Ong, Willie Ong and Julie
Ong Alonzo and the motion for partial reconsideration, dated March 15, 2002, of
petitioner Willie Ong are hereby GRANTED. The Petition for Confirmation of the
Rescission of the Pre-Subscription Agreement docketed as SEC Case No. 02-96-5269 is
hereby DISMISSED for lack of merit. The unilateral rescission by the Tius of the subject
Pre-Subscription Agreement, dated August 15, 1994, is hereby declared as null and void.
The motion for the issuance of a writ of execution, dated March 15, 2002, of
petitioners David S. Tiu, Cely Y. Tiu, Moly Yu Gow, Belen See Yu, D. Terence Y. Tiu, John
Yu and Lourdes C. Tiu is hereby DENIED for being moot.
Accordingly, the Decision of this Court, dated February 1, 2002, affirming with
modification the decision of the Court of Appeals, dated October 5, 1999, and the SEC en
banc, dated September 11, 1998, is hereby REVERSED.
Costs against the petitioner Tius.
SO ORDERED.

VALLEY GOLF & COUNTRY G.R. No. 158805

CLUB, INC.,

Petitioner, Present:

QUISUMBING, J.,

Chairperson,
CARPIO MORALES,

- versus - TINGA,

VELASCO, JR., and

BRION, JJ.

ROSA O. VDA. DE CARAM,

Respondent. Promulgated:

April 16, 2009

x----------------------------------------------------------------------------x

DECISION

TINGA, J.:

May a non-stock corporation seize and dispose of the membership share of a fully-paid
member on account of its unpaid debts to the corporation when it is authorized to do so
under the corporate by-laws but not by the Articles of Incorporation? Such is the central
issue raised in this petition, which arose after petitioner Valley Golf & Country Club
(Valley Golf) sold the membership share of a member who had been delinquent in the
payment of his monthly dues.

I.
The facts that preceded this petition are simple. Valley Golf & Country Club (Valley Golf)
is a duly constituted non-stock, non-profit corporation which operates a golf course. The
members and their guests are entitled to play golf on the said course and otherwise avail
of the facilities and privileges provided by Valley Golf.[1] The shareholders are likewise
assessed monthly membership dues.

In 1961, the late Congressman Fermin Z. Caram, Jr. (Caram),[2] the husband of the present
respondent, subscribed to purchased and paid for in full one share (Golf Share) in the
capital stock of Valley Golf. He was issued Stock Certificate No. 389 dated 26 January
1961 for the Golf Share.[3] The Stock Certificate likewise indicates a par value of P9,000.00.

Valley Golf would subsequently allege that beginning 25 January 1980, Caram stopped
paying his monthly dues, which were continually assessed until 31 June 1987. Valley Golf
claims to have sent five (5) letters to Caram concerning his delinquent account within
the period from 27 January 1986 until 3 May 1987, all forwarded to

P.O. Box No. 1566, Makati Commercial Center Post Office, the mailing address which
Caram allegedly furnished Valley Golf.[4] The first letter informed Caram that his account
as of 31 December 1985 was delinquent and that his club privileges were suspended
pursuant to Section 3, Article VII of the by-laws of Valley Golf.[5] Despite such notice of
delinquency, the second letter, dated 26 August 1986, stated that should Carams account
remain unpaid for 45 days, his name would be included in the delinquent list to be posted
on the clubs bulletin board.[6] The third letter, dated 25 January 1987, again informed
Caram of his delinquent account and the suspension of his club privileges.[7] The fourth
letter, dated 7 March 1987, informed Caram that should he fail to settle his delinquencies,
then totaling P7,525.45, within ten (10) days from receipt thereof Valley Golf would
exercise its right to sell the Golf Share to satisfy the outstanding amount, again pursuant
to the provisions of the by-laws.[8] The final letter, dated 3 May 1987, issued a final
deadline until 31 May 1987 for Caram to settle his account, or otherwise face the sale of
the Golf Share to satisfy the claims of Valley Golf.[9]

The Golf Share was sold at public auction on 11 June 1987 for P25,000.00 after the
Board of Directors had authorized the sale in a meeting on 11 April 1987, and the Notice of
Auction Sale was published in the 6 June 1987 edition of the Philippine Daily Inquirer.[10]

As it turned out, Caram had died on 6 October 1986. Respondent initiated intestate
proceedings before the Regional Trial Court (RTC) of Iloilo City, Branch 35, to settle her
husbands estate.[11] Unaware of the pending controversy over the Golf Share, the Caram
family and the RTC included the same as part of Carams estate. The RTC approved a
project of partition of Carams estate on 29 August 1989. The Golf Share was adjudicated
to respondent, who paid the corresponding estate tax due, including that on the Golf
Share.

It was only through a letter dated 15 May 1990 that the heirs of Caram learned of the sale
of the Golf Share following their inquiry with Valley Golf about the share. After a series of
correspondence, the Caram heirs were subsequently informed, in a letter dated 15
October 1990, that they were entitled to the refund of P11,066.52 out of the proceeds of
the sale of the Golf Share, which amount had been in the custody of Valley Golf since 11
June 1987.[12]

Respondent filed an action for reconveyance of the share with damages before the
Securities and Exchange Commission (SEC) against Valley Golf.[13] On 15 November 1996,
SEC Hearing Officer Elpidio S. Salgado rendered a decision in favor of respondent,
ordering Valley Golf to convey ownership of the Golf Share or in the alternative to issue
one fully paid share of stock of Valley Golf the same class as the Golf Share to respondent.
Damages totaling P90,000.00 were also awarded to respondent.[14]

The SEC hearing officer noted that under Section 67, paragraph 2 of the Corporation
Code, a share stock could only be deemed delinquent and sold in an extrajudicial sale at
public auction only upon the failure of the stockholder to pay the unpaid subscription or
balance for the share. The section could not have applied in Carams case since he had
fully paid for the Golf Share and he had been assessed not for the share itself but for his
delinquent club dues. Proceeding from the foregoing premises, the SEC hearing officer
concluded that the auction sale had no basis in law and was thus a nullity.

The SEC hearing officer did entertain Valley Golfs argument that the sale of the Golf
Share was authorized under the by-laws. However, it was ruled that pursuant to Section 6
of the Corporation Code, a provision creating a lien upon shares of stock for unpaid
debts, liabilities, or assessments of stockholders to the corporation, should be embodied
in the Articles of Incorporation, and not merely in the by-laws, because Section 6 (par.1)
prescribes that the shares of stock of a corporation may have such rights, privileges and
restrictions as may be stated in the articles of incorporation.[15] It was observed that the
Articles of Incorporation of Valley Golf did not impose any lien, liability or restriction on
the Golf Share or, for that matter, even any conditionality that the Golf Share would be
subject to assessment of monthly dues or a lien on the share for non-payment of such
dues.[16] In the same vein, it was opined that since Section 98 of the Corporation Code
provides that restrictions on transfer of shares should appear in the articles of
incorporation, by-laws and the certificate of stock to be valid and binding on any
purchaser in good faith, there was more reason to apply the said rule to club
delinquencies to constitute a lien on golf shares.[17]

The SEC hearing officer further held that the delinquency in monthly club dues was
merely an ordinary debt enforceable by judicial action in a civil case. The decision
generally affirmed respondents assertion that Caram was not properly notified of the
delinquencies, citing Carams letter dated 7 July 1978 to Valley Golf about the change in
his mailing address. He also noted that Valley Golf had sent most of the letters after
Carams death. In all, the decision concluded that the sale of the Golf Share was effectively
a deprivation of property without due process of law.

On appeal to the SEC en banc,[18] said body promulgated a decision[19] on 9 May 2000,
affirming the hearing officers decision in toto. Again, the SEC found that Section 67 of the
Corporation Code could not justify the sale of the Golf Share since it applies only to
unpaid subscriptions and not to delinquent membership dues. The SEC also cited a
general rule, formulated in American jurisprudence, that a corporation has no right to
dispose of shares of stock for delinquent assessments, dues, service fees and other
unliquidated charges unless there is an express grant to do so, either by the statute itself
or by the charter of a corporation.[20] Said rule, taken in conjunction with Section 6 of the
Corporation Code, militated against the validity of the sale of the Golf Share, the SEC
stressed. In view of these premises, which according to the SEC entailed the nullity of the
sale, the body found it unnecessary to rule on whether there was valid notice of the sale at
public auction.

Valley Golf elevated the SECs decision to the Court of Appeals by way of a petition for
review.[21] On 4 April 2003, the appellate court rendered a decision[22] affirming the
decisions of the SEC and the hearing officer, with modification consisting of the deletion
of the award of attorneys fees. This time, Valley Golfs central argument was that its by-
laws, rather than Section 67 of the Corporation Code, authorized the auction sale of the
Golf Share. Nonetheless, the Court of Appeals found that the by-law provisions cited by
Valley Golf are of doubtful validity, as they purportedly conflict with Section 6 of the
Code, which mandates that rights privileges or restrictions attached to a share of stock
should be stated in the articles of incorporation.[23] It noted that what or who had become
delinquent was was Mr. Caram himself and not his golf share, and such being the case,
the unpaid account should have been filed as a money claim in the proceedings for the
settlement of his estate, instead of the petitioner selling his golf share to satisfy the
account.[24]

The Court of Appeals also adopted the findings of the hearing officer that the notices had
not been properly served on Caram or his heirs, thus effectively depriving respondent of
property without due process of law. While it upheld the award of damages, the appellate
court struck down the award of attorneys fees since there was no discussion on the basis
of such award in the body of the decisions of both the hearing officer and the SEC.[25]
There is one other fact of note, mentioned in passing by the SEC hearing officer[26] but
ignored by the SEC en banc and the Court of Appeals. Valley Golfs third and fourth
demand letters dated 25 January 1987 and 7 March 1987, respectively, were both addressed
to Est. of Fermin Z. Caram, Jr. The abbreviation Est. can only be taken to refer to
Estate. Unlike the first two demand letters, the third and fourth letters were sent after
Caram had died on 6 October 1986. However, the fifth and final demand letter, dated 3
May 1987 or twenty-eight (28) days before the sale, was again addressed to Fermin Caram
himself and not to his estate, as if he were still alive. The foregoing particular facts are
especially significant to our disposition of this case.

II.

In its petition before this Court, Valley Golf concedes that Section 67 of the
Corporation Code, which authorizes the auction sale of shares with delinquent
subscriptions, is not applicable in this case. Nonetheless, it argues that the by-laws of
Valley Golf authorizes the sale of delinquent shares and that the by-laws constitute a valid
law or contractual agreement between the corporation and its stockholders or their
respective successors. Caram, by becoming a member of Valley Golf, bound himself to
observe its by-laws which constitutes 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.[27] It also points out that the by-laws itself had duly
passed the SECs scrutiny and approval.

Valley Golf further argues that it was error on the part of the Court of Appeals to rely, as it
did, upon Section 6 of the Corporation Code to nullify the subject provisions of the By-
Laws.[28] Section 6 referrs to restrictions on the shares of stock which should be stated in
the articles of incorporation, as differentiated from liens which under the by-laws would
serve as basis for the auction sale of the share. Since Section 6 refers to restrictions and
not to liens, Valley Golf submits that liens are excluded from the ambit of the provision. It
further proffers that assuming that liens and restrictions are synonymous, Section 6 itself
utilizes the permissive word may, thus evincing the non-mandatory character of the
requirement that restrictions or liens be stated in the articles of incorporation.

Valley Golf also argues that the Court of Appeals erred in relying on the factual findings
of the hearing officer, which are allegedly replete with errors and contradictions. Finally,
it assails the award of moral and exemplary damages.

III.

As found by the SEC and the Court of Appeals, the Articles of Incorporation of Valley Golf
does not contain any provision authorizing the corporation to create any lien on a
members Golf Share as a consequence of the members unpaid assessments or dues to
Valley Golf. Before this Court, Valley Golf asserts that such a provision is contained in its
by-laws. We required the parties to submit a certified copy of the by-laws of Valley Golf in
effect as of 11 June 1987.[29] In compliance, Valley Golf submitted a copy of its by-laws,
originally adopted on 6 June 1958[30] and amended on 26 November 1986.[31] The
amendments bear no relevance to the issue of delinquent membership dues. The relevant
provisions, found in Article VIII entitled Club Accounts, are reproduced below:

Section 1. Lien.The Club has the first lien on the share of the stockholder
who has, in his/her/its name, or in the name of an assignee, outstanding
accounts and liabilities in favor of the Club to secure the payment thereof.
xxx

Section 3. The account of any member shall be presented to such member


every month. If any statement of accounts remains unpaid for a period
forty-five (45) days after cut-off date, said member maybe (sic) posted as
deliqnuent (sic). No delinquent member shall be entitled to enjoy the
privileges of such membership for the duration of the deliquency (sic). After
the member shall have been posted as delinquent, the Board may order
his/her/its share sold to satisfy the claims of the club; after which the
member loses his/her/its rights and privileges permanently. No member
can be indebted to the Club at any time any amount in excess of the credit
limit set by the Board of Directors from time to time. The unpaid account
referred to here includes non-payment of dues, charges and other
assessments and non-payment for subscriptions.[32]

To bolster its cause, Valley Golf proffers the proposition that by virtue of the by-law
provisions a lien is created on the shares of its members to ensure payment of dues,
charges and other assessments on the members. Both the SEC and the Court of Appeals
debunked the tenability or applicability of the proposition through two common thrusts.

Firstly, they correctly noted that the procedure under Section 67 of the Corporation Code
for the stock corporations recourse on unpaid subscriptions is inapt to a non-stock
corporation vis--vis a members outstanding dues. The basic factual backdrops in the two
situations are disperate. In the latter, the member has fully paid for his membership
share, while in the former, the stockholder has not yet fully paid for the share or shares of
stock he subscribed to, thereby authorizing the stock corporation to call on the unpaid
subscription, declare the shares delinquent and subject the delinquent shares to a sale at
public auction.[33]
Secondly, the two bodies below concluded that following Section 6 of the Corporation
Code, which provides:

The shares of stock of stock corporation may be divided into classes or series of
shares, or both, any of which classes or series of shares may have such
rights, privileges or restrictions as may be stated in the articles of
incorporation x x x [34]

the lien on the Golf Share in favor of Valley Golf is not valid, as the power to constitute
such a lien should be provided in the articles of incorporation, and not merely in the by-
laws.

However, there is a specific provision under the Title XI, on Non-Stock Corporations of
the Corporation Code dealing with termination of membership. Section 91 of the
Corporation Code provides:

SEC. 91. Termination of membership.Membership shall be terminated in the


manner and for the causes provided in the articles of
incorporation or the by-laws. Termination of membership shall have the
effect of extinguishing all rights of a member in the corporation or in its
property, unless otherwise provided in the articles of incorporation or the
by-laws. (Emphasis supplied)

Clearly, the right of a non-stock corporation such as Valley Golf to expel a member
through the forfeiture of the Golf Share may be established in the by-laws alone, as is the
situation in this case. Thus, both the SEC and the appellate court are wrong in holding
that the establishment of a lien and the loss of the Golf Share consequent to the
enforcement of the lien should have been provided for in the articles of incorporation.

IV.

Given that the cause for termination of membership in a non-stock corporation may be
established through the by-laws alone and need not be set forth in the articles of
incorporation, is there any cause to invalidate the lien and the subsequent sale of the Golf
Share by Valley Golf?

Former SEC Chairperson, Rosario Lopez, in her commentaries on the Corporation


Code, explains the import of Section 91 in a manner relevant to this case:

The prevailing rule is that the provisions of the articles of incorporation or


by-laws of termination of membership must be strictly complied with and
applied to the letter. Thus, an association whose member fails to pay his
membership due and annual due as required in the by-laws, and which
provides for the termination or suspension of erring members as well as
prohibits the latter from intervening in any manner in the operational
activities of the association, must be observed because by-laws are self-
imposed private laws binding on all members, directors and officers of the
corporation.[35]
Examining closely the relevant by-law provisions of Valley Golf,[36] it appears that
termination of membership may occur when the following successive conditions are
met: (1) presentation of the account of the member; (2) failure of the member to settle the
account within forty-five days after the cut-off date; (3) posting of the member as
delinquent; and (4) issuance of an order by the board of directors that the share of the
delinquent member be sold to satisfy the claims of Valley Golf. These conditions found in
by-laws duly approved by the SEC warrant due respect and we are disinclined to rule
against the validity of the by-law provisions.

At the same time, two points warrant special attention.

A.

Valley Golf has sought to accomplish the termination of Carams membership through the
sale of the Golf Share, justifying the sale through the constitution of a lien on the Golf
Share under Section 1, Article VIII of its by-laws. Generally in theory, a non-stock
corporation has the power to effect the termination of a member without having to
constitute a lien on the membership share or to undertake the elaborate process of selling
the same at public auction. The articles of incorporation or the by-laws can very well
simply provide that the failure of a member to pay the dues on time is cause for the board
of directors to terminate membership. Yet Valley Golf was organized in such a way that
membership is adjunct to ownership of a share in the club; hence the necessity to dispose
of the share to terminate membership.

Share ownership introduces another dimension to the casethe reality that termination of
membership may also lead to the infringement of property rights. Even though Valley
Golf is a non-stock corporation, as evinced by the fact that it is not authorized to
distribute to the holder of its shares dividends or allotments of the surplus profits on the
basis of shares held,[37] the Golf Share has an assigned value reflected on the certificate of
membership itself.[38] Termination of membership in Valley Golf does not merely lead to
the withdrawal of the rights and privileges of the member to club properties and facilities
but also to the loss of the Golf Share itself for which the member had fully paid.

The claim of Valley Golf is limited to the amount of unpaid dues plus incremental
costs. On the other hand, Carams loss may encompass not only the amount he had paid
for the share but also the price it would have fetched in the market at the time his
membership was terminated.

There is an easy way to remedy what is obviously an unfair situation. Taking the same
example, Valley Golf seizes the share, sells it to itself or a third person for P100.000.00,
then refunds P99,000.00 back to the delinquent member. On its face, such a mechanism
obviates the inequity of the first example, and assures that the loss sustained by the
delinquent member is commensurate to the actual debt owed to Valley Golf. After all,
applying civil law concepts, the pecuniary injury sustained by Valley Golf attributable to
the delinquent member is only to the extent of the unpaid debt, and it would be difficult
to foresee what right under law Valley Golf would have to the remainder of the sales
proceeds.

A refund mechanism may disquiet concerns of undue loss of property rights


corresponding to termination of membership. Yet noticeably, the by-laws of Valley Golf
does not require the Club to refund to the discharged member the remainder of the
proceeds of the sale after the outstanding obligation is extinguished. After petitioner had
filed her complaint though, Valley Golf did inform her that the heirs of Caram are entitled
to such refund.
B.

Let us now turn to the other significant concern.

The by-laws does not provide for a mode of notice to the member before the board of
directors puts up the Golf Share for sale, yet the sale marks the termination of
membership. Whatever semblance of a notice that is afforded is bare at best, ambiguous
at most. The member is entitled to receive a statement of account every month; however,
the mode by which the member is to receive such notice is not elaborated upon. If the
member fails to pay within 45 days from the due date, Valley Golf is immediately entitled
to have the member posted as delinquent.While the assignation of delinquent status is
evident enough, it is not as clear what the word posted entails. Connotatively, the word
could imply the physical posting of the notice of delinquency within the club premises,
such as a bulletin board, which we recognize is often the case. Still, the actual posting
modality is uncertain from the language of the by-laws.

The moment the member is posted as delinquent, Valley Golf is immediately enabled to
seize the share and sell the same, thereby terminating membership in the club. The by-
laws does not require any notice to the member from the time delinquency is posted to
the day the sale of the share is actually held. The setup is to the extreme detriment to the
member, who upon being notified that the lien on his share is due for execution would be
duly motivated to settle his accounts to foreclose such possibility.

Does the Corporation Code permit the termination of membership without due notice to
the member? The Code itself is silent on that matter, and the argument can be made that
if no notice is provided for in the articles of incorporation or in the by-laws, then
termination may be effected without any notice at all. Support for such an argument can
be drawn from our ruling in Long v. Basa,[39] which pertains to a religious corporation that
is also a non-stock corporation.[40] Therein, the Court upheld the expulsion of church
members despite the absence of any provision on prior notice in the by-laws, stating that
the members had waived such notice by adhering to those by-laws[,] became members of
the church voluntarily[,] entered into its covenant and subscribed to its rules [and by]
doing so, they are bound by their consent.[41]

However, a distinction should be made between membership in a religious corporation,


which ordinarily does not involve the purchase of ownership shares, and membership in a
non-stock corporation such as Valley Golf, where the purchase of an ownership share is a
condition sine qua non. Membership in Valley Golf entails the acquisition of a property
right. In turn, the loss of such property right could also involve the application of aspects
of civil law, in addition to the provisions of the Corporation Code. To put it simply, when
the loss of membership in a non-stock corporation also entails the loss of property rights,
the manner of deprivation of such property right should also be in accordance with the
provisions of the Civil Code.

It has been held that a by-law providing that if a member fails to pay dues for a year, he
shall be deemed to have relinquished his membership and may be excluded from the
rooms of the association and his certificate of membership shall be sold at auction, and
any surplus of the proceeds be paid over him, does not ipso facto terminate the
membership of one whose dues are a year in arrears; the remedy given for non-payment
of dues is not exclusive because the corporation, so long as he remains a member, may
sue on his agreement and collect them.[42]

V.

With these foregoing concerns in mind, were the actions of Valley Golf concerning the
Golf Share and membership of Caram warranted? We believe not.

It may be conceded that the actions of Valley Golf were, technically speaking, in accord
with the provisions of its by-laws on termination of membership, vaguely defined as these
are. Yet especially since the termination of membership in Valley Golf is inextricably
linked to the deprivation of property rights over the Golf Share, the emergence of such
adverse consequences make legal and equitable standards come to fore.

The commentaries of Lopez advert to an SEC Opinion dated 29 September 1987 which we
can cite with approval. Lopez cites:

[I]n order that the action of a corporation in expelling a member for cause
may be valid, it is essential, in the absence of a waiver, that there shall be a
hearing or trial of the charge against him, with reasonable notice to him
and a fair opportunity to be heard in his defense. (Fletcher Cyc. Corp.,
supra) If the method of trial is not regulated by the by-laws of the
association, it should at least permit substantial justice. The hearing
must be conducted fairly and openly and the body of persons before whom
it is heard or who are to decide the case must be unprejudiced. (SEC
opinion dated September 29, 1987, Bacalaran-Sucat Drivers Association)

It is unmistakably wise public policy to require that the termination of membership in a


non-stock corporation be done in accordance with substantial justice. No matter how one
may precisely define such term, it is evident in this case that the termination of Carams
membership betrayed the dictates of substantial justice.

Valley Golf alleges in its present petition that it was notified of the death of Caram
only in March of 1990,[43] a claim which is reiterated in its Reply to respondents
Comment.[44]Yet this claim is belied by the very demand letters sent by Valley Golf to
Carams mailing address. The letters dated 25 January 1987 and 7 March 1987, both of
which were sent within a few months after Carams death are both addressed to Est. of
Fermin Z. Caram, Jr.; and the abbreviation [e]st. can only be taken to refer to estate. This
is to be distinguished from the two earlier letters, both sent prior to Carams death on 6
October 1986, which were addressed to Caram himself. Inexplicably, the final letter dated
3 May 1987 was again addressed to Caram himself, although the fact that the two previous
letters were directed at the estate of Caram stands as incontrovertible proof that Valley
Golf had known of Carams death even prior to the auction sale.
Interestingly, Valley Golf did not claim before the Court of Appeals that they had learned
of Carams death only after the auction sale. It also appears that Valley Golf had conceded
before the SEC that some of the notices it had sent were addressed to the estate of Caram,
and not the decedent himself.[45]

What do these facts reveal? Valley Golf acted in clear bad faith when it sent the final
notice to Caram under the pretense they believed him to be still alive, when in fact they
had very well known that he had already died. That it was in the final notice that Valley
Golf had perpetrated the duplicity is especially blameworthy, since it was that notice that
carried the final threat that his Golf Share would be sold at public auction should he fail
to settle his account on or before 31 May 1987.

Valley Golf could have very well addressed that notice to the estate of Caram, as it
had done with the third and fourth notices. That it did not do so signifies that Valley Golf
was bent on selling the Golf Share, impervious to potential complications that would
impede its intentions, such as the need to pursue the claim before the estate proceedings
of Caram. By pretending to assume that Caram was then still alive, Valley Golf would
have been able to capitalize on his previous unresponsiveness to their notices and
proceed in feigned good faith with the sale. Whatever the reason Caram was unable to
respond to the earlier notices, the fact remains that at the time of the final
notice, Valley Golf knew that Caram, having died and gone, would not be able to
settle the obligation himself, yet they persisted in sending him notice to provide a
color of regularity to the resulting sale.

That reason alone, evocative as it is of the absence of substantial justice in the sale of the
Golf Share, is sufficient to nullify the sale and sustain the rulings of the SEC and the Court
of Appeals.
Moreover, the utter and appalling bad faith exhibited by Valley Golf in sending out the
final notice to Caram on the deliberate pretense that he was still alive could bring into
operation Articles Articles 19, 20 and 21 under the Chapter on Human Relations of the
Civil Code.[46] These provisions enunciate a general obligation under law for every person
to act fairly and in good faith towards one another. Non-stock corporations and its
officers are not exempt from that obligation.

VI.

Another point. The by-laws of Valley Golf is discomfiting enough in that it fails to provide
any formal notice and hearing procedure before a members share may be seized and sold.
The Court would have been satisfied had the by-laws or the articles of incorporation
established a procedure which assures that the member would in reality be actually
notified of the pending accounts and provide the opportunity for such member to settle
such accounts before the membership share could be seized then sold to answer for the
debt. As we have emphasized, membership in Valley Golf and many other like-situated
non-stock corporations actually involves the purchase of a membership share, which is a
substantially expensive property. As a result, termination of membership does not only
lead to loss of bragging rights, but the actual deprivation of property.

The Court has no intention to interfere with how non-stock corporations should run their
daily affairs. The Court also respects the fact that membership is non-stock corporations
is a voluntary arrangement, and that the member who signs up is bound to adhere to
what the articles of incorporation or the by-laws provide, even if provisions are
detrimental to the interest of the member. At the same time, in the absence of a
satisfactory procedure under the articles of incorporation or the by-laws that affords a
member the opportunity to defend against the deprivation of significant property rights
in accordance with substantial justice, the terms of the by-laws or articles of
incorporation will not suffice. There will be need in such case to refer to substantive law.
Such a flaw attends the articles of incorporation and by-laws of Valley Golf. The Court
deems it judicious to refer to the protections afforded by the Civil Code, with respect to
the preservation, maintenance, and defense from loss of property rights.

The arrangement provided for in the afore-quoted by-laws of Valley Golf whereby a lien is
constituted on the membership share to answer for subsequent obligations to the
corporation finds applicable parallels under the Civil Code. Membership shares are
considered as movable or personal property,[47] and they can be constituted as security to
secure a principal obligation, such as the dues and fees. There are at least two contractual
modes under the Civil Code by which personal property can be used to secure a principal
obligation. The first is through a contract of pledge,[48] while the second is through a
chattel mortgage.[49] A pledge would require the pledgor to surrender possession of the
thing pledged, i.e., the membership share, to the pledge in order that the contract of
pledge may be constituted.[50]

Is delivery of the share cannot be effected, the suitable security transaction is the chattel
mortgage. Under Article 2124 of the Civil Code, movables may be the object of a chattel
mortgage. The Chattel mortgage is governed by Act No. 1508, otherwise known The
Chattel Mortgage Law,[51] and the Civil Code.
In this case, Caram had not signed any document that manifests his agreement to
constitute his Golf Share as security in favor of Valley Golf to answer for his obligations to
the club. There is no document we can assess that it is substantially compliant with the
form of chattel mortgages under Section 5 of Act No. 1508. The by-laws could not suffice
for that purpose since it is not designed as a bilateral contract between Caram and Valley
Golf, or a vehicle by which Caram expressed his consent to constitute his Golf Share as
security for his account with Valley Golf.

VII.

We finally turn to the matter of damages. The award of damages sustained by the Court
of Appeals was for moral damages in the sum of P50,000.00 and exemplary damages in
the sum of P10,000.00. Both awards should be sustained. In pretending to give actual
notice to Caram despite full knowledge that he was in fact dead, Valley Golf exhibited
utter bad faith.

The award of moral damages was based on a finding by the hearing officer that
Valley Golf had considerably besmirched the reputation and good credit standing of the
plaintiff and her family, such justification having foundation under Article 2217 of the
Civil Code. No cause has been submitted to detract from such award. In addition,
exemplary damages were awarded to [Valley Golf] defendant from repeating similar acts
in the future and to protect the interest of its stockholders and by way of example or
correction for the public good. Such conclusion is in accordance with Article 2229 of the
Civil Code, which establishes liability for exemplary damages.

WHEREFORE, the petition is DENIED. Costs against petitioners.

SO ORDERED.

[Read it!]

G.R. No. 176579 October 9, 2012

HEIRS OF WILSON P. GAMBOA,* Petitioners,


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

PABLITO V. SANIDAD and ARNO V. SANIDAD, Petitioner-in-Intervention.

RESOLUTION

CARPIO, J.:

This resolves the motions for reconsideration of the 28 June 2011 Decision filed by (1) the
Philippine Stock Exchange's (PSE) President, 1 (2) Manuel V. Pangilinan (Pangilinan),2 (3)
Napoleon L. Nazareno (Nazareno ),3 and ( 4) the Securities and Exchange Commission
(SEC)4 (collectively, movants ).
The Office of the Solicitor General (OSG) initially filed a motion for reconsideration on
behalfofthe SEC,5 assailing the 28 June 2011 Decision. However, it subsequently filed a
Consolidated Comment on behalf of the State,6declaring expressly that it agrees with the
Court's definition of the term "capital" in Section 11, Article XII of the Constitution.
During the Oral Arguments on 26 June 2012, the OSG reiterated its position consistent
with the Court's 28 June 2011 Decision.

We deny the motions for reconsideration.

I.
Far-reaching implications of the legal issue justify
treatment of petition for declaratory relief as one for mandamus.

As we emphatically stated in the 28 June 2011 Decision, the interpretation of the term
"capital" in Section 11, Article XII of the Constitution has far-reaching implications to the
national economy. In fact, a resolution of this issue will determine whether Filipinos are
masters, or second-class citizens, in their own country. What is at stake here is whether
Filipinos or foreigners will have effective control of the Philippine national economy.
Indeed, if ever there is a legal issue that has far-reaching implications to the entire nation,
and to future generations of Filipinos, it is the threshold legal issue presented in this case.

Contrary to Pangilinan’s narrow view, the serious economic consequences resulting in the
interpretation of the term "capital" in Section 11, Article XII of the Constitution
undoubtedly demand an immediate adjudication of this issue. Simply put, the far-
reaching implications of this issue justify the treatment of the petition as one for
mandamus.7

In Luzon Stevedoring Corp. v. Anti-Dummy Board,8 the Court deemed it wise and
expedient to resolve the case although the petition for declaratory relief could be
outrightly dismissed for being procedurally defective. There, appellant admittedly had
already committed a breach of the Public Service Act in relation to the Anti-Dummy Law
since it had been employing non- American aliens long before the decision in a prior
similar case. However, the main issue in Luzon Stevedoring was of transcendental
importance, involving the exercise or enjoyment of rights, franchises, privileges,
properties and businesses which only Filipinos and qualified corporations could exercise
or enjoy under the Constitution and the statutes. Moreover, the same issue could be
raised by appellant in an appropriate action. Thus, in Luzon Stevedoring the Court
deemed it necessary to finally dispose of the case for the guidance of all concerned,
despite the apparent procedural flaw in the petition.

The circumstances surrounding the present case, such as the supposed procedural defect
of the petition and the pivotal legal issue involved, resemble those in Luzon
Stevedoring. Consequently, in the interest of substantial justice and faithful adherence to
the Constitution, we opted to resolve this case for the guidance of the public and all
concerned parties.

II.
No change of any long-standing rule;
thus, no redefinition of the term "capital."

Movants contend that the term "capital" in Section 11, Article XII of the Constitution has
long been settled and defined to refer to the total outstanding shares of stock, whether
voting or non-voting. In fact, movants claim that the SEC, which is the administrative
agency tasked to enforce the 60-40 ownership requirement in favor of Filipino citizens in
the Constitution and various statutes, has consistently adopted this particular definition
in its numerous opinions. Movants point out that with the 28 June 2011 Decision, the
Court in effect introduced a "new" definition or "midstream redefinition"9 of the term
"capital" in Section 11, Article XII of the Constitution.

This is egregious error.

For more than 75 years since the 1935 Constitution, the Court has not interpreted or
defined the term "capital" found in various economic provisions of the 1935, 1973 and 1987
Constitutions. There has never been a judicial precedent interpreting the term "capital" in
the 1935, 1973 and 1987 Constitutions, until now. Hence, it is patently wrong and utterly
baseless to claim that the Court in defining the term "capital" in its 28 June 2011 Decision
modified, reversed, or set aside the purported long-standing definition of the term
"capital," which supposedly refers to the total outstanding shares of stock, whether voting
or non-voting. To repeat, until the present case there has never been a Court ruling
categorically defining the term "capital" found in the various economic provisions of the
1935, 1973 and 1987 Philippine Constitutions.

The opinions of the SEC, as well as of the Department of Justice (DOJ), on the definition
of the term "capital" as referring to both voting and non-voting shares (combined total of
common and preferred shares) are, in the first place, conflicting and inconsistent. There
is no basis whatsoever to the claim that the SEC and the DOJ have consistently and
uniformly adopted a definition of the term "capital" contrary to the definition that this
Court adopted in its 28 June 2011 Decision.

In DOJ Opinion No. 130, s. 1985,10 dated 7 October 1985, the scope of the term "capital" in
Section 9, Article XIV of the 1973 Constitution was raised, that is, whether the term
"capital" includes "both preferred and common stocks." The issue was raised in relation to
a stock-swap transaction between a Filipino and a Japanese corporation, both
stockholders of a domestic corporation that owned lands in the Philippines. Then
Minister of Justice Estelito P. Mendoza ruled that the resulting ownership structure of the
corporation would be unconstitutional because 60% of the voting stock would be
owned by Japanese while Filipinos would own only 40% of the voting stock, although
when the non-voting stock is added, Filipinos would own 60% of the combined voting
and non-voting stock. This ownership structure is remarkably similar to the current
ownership structure of PLDT. Minister Mendoza ruled:

xxxx

Thus, the Filipino group still owns sixty (60%) of the entire subscribed capital stock
(common and preferred) while the Japanese investors control sixty percent (60%) of the
common (voting) shares.

It is your position that x x x since Section 9, Article XIV of the Constitution uses
the word "capital," which is construed "to include both preferred and common
shares" and "that where the law does not distinguish, the courts shall not
distinguish."

xxxx

In light of the foregoing jurisprudence, it is my opinion that the stock-swap


transaction in question may not be constitutionally upheld. While it may be
ordinary corporate practice to classify corporate shares into common voting shares and
preferred non-voting shares, any arrangement which attempts to defeat the constitutional
purpose should be eschewed. Thus, the resultant equity arrangement which would
place ownership of 60%11 of the common (voting) shares in the Japanese group,
while retaining 60% of the total percentage of common and preferred shares in
Filipino hands would amount to circumvention of the principle of control by
Philippine stockholders that is implicit in the 60% Philippine nationality
requirement in the Constitution. (Emphasis supplied)

In short, Minister Mendoza categorically rejected the theory that the term "capital" in
Section 9, Article XIV of the 1973 Constitution includes "both preferred and common
stocks" treated as the same class of shares regardless of differences in voting rights and
privileges. Minister Mendoza stressed that the 60-40 ownership requirement in favor of
Filipino citizens in the Constitution is not complied with unless the corporation
"satisfies the criterion of beneficial ownership" and that in applying the same "the
primordial consideration is situs of control."

On the other hand, in Opinion No. 23-10 dated 18 August 2010, addressed to Castillo
Laman Tan Pantaleon & San Jose, then SEC General Counsel Vernette G. Umali-Paco
applied the Voting Control Test, that is, using only the voting stock to determine
whether a corporation is a Philippine national. The Opinion states:

Applying the foregoing, particularly the Control Test, MLRC is deemed as a Philippine
national because: (1) sixty percent (60%) of its outstanding capital stock entitled to
vote is owned by a Philippine national, the Trustee; and (2) at least sixty percent (60%) of
the ERF will accrue to the benefit of Philippine nationals. Still pursuant to the Control
Test, MLRC’s investment in 60% of BFDC’s outstanding capital stock entitled to
vote shall be deemed as of Philippine nationality, thereby qualifying BFDC to own
private land.

Further, under, and for purposes of, the FIA, MLRC and BFDC are both Philippine
nationals, considering that: (1) sixty percent (60%) of their respective outstanding
capital stock entitled to vote is owned by a Philippine national (i.e., by the Trustee, in
the case of MLRC; and by MLRC, in the case of BFDC); and (2) at least 60% of their
respective board of directors are Filipino citizens. (Boldfacing and italicization supplied)

Clearly, these DOJ and SEC opinions are compatible with the Court’s interpretation of the
60-40 ownership requirement in favor of Filipino citizens mandated by the Constitution
for certain economic activities. At the same time, these opinions highlight the conflicting,
contradictory, and inconsistent positions taken by the DOJ and the SEC on the definition
of the term "capital" found in the economic provisions of the Constitution.

The opinions issued by SEC legal officers do not have the force and effect of SEC rules and
regulations because only the SEC en banc can adopt rules and regulations. As expressly
provided in Section 4.6 of the Securities Regulation Code,12 the SEC cannot delegate to
any of its individual Commissioner or staff the power to adopt any rule or regulation.
Further, under Section 5.1 of the same Code, it is the SEC as a collegial body, and
not any of its legal officers, that is empowered to issue opinions and approve rules
and regulations. Thus:

4.6. The Commission may, for purposes of efficiency, delegate any of its functions to any
department or office of the Commission, an individual Commissioner or staff member of
the Commission except its review or appellate authority and its power to adopt, alter
and supplement any rule or regulation.

The Commission may review upon its own initiative or upon the petition of any
interested party any action of any department or office, individual Commissioner, or staff
member of the Commission.

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

xxxx
(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;

x x x x (Emphasis supplied)

Thus, the act of the individual Commissioners or legal officers of the SEC in issuing
opinions that have the effect of SEC rules or regulations is ultra vires. Under Sections 4.6
and 5.1(g) of the Code, only the SEC en banc can "issue opinions" that have the force and
effect of rules or regulations. Section 4.6 of the Code bars the SEC en banc from
delegating to any individual Commissioner or staff the power to adopt rules or
regulations. In short, any opinion of individual Commissioners or SEC legal officers
does not constitute a rule or regulation of the SEC.

The SEC admits during the Oral Arguments that only the SEC en banc, and not any of its
individual commissioners or legal staff, is empowered to issue opinions which have the
same binding effect as SEC rules and regulations, thus:

JUSTICE CARPIO:

So, under the law, it is the Commission En Banc that can issue an

SEC Opinion, correct?

COMMISSIONER GAITE:13

That’s correct, Your Honor.

JUSTICE CARPIO:

Can the Commission En Banc delegate this function to an SEC officer?

COMMISSIONER GAITE:

Yes, Your Honor, we have delegated it to the General Counsel.

JUSTICE CARPIO:

It can be delegated. What cannot be delegated by the Commission En Banc


to a commissioner or an individual employee of the Commission?

COMMISSIONER GAITE:

Novel opinions that [have] to be decided by the En Banc...


JUSTICE CARPIO:

What cannot be delegated, among others, is the power to adopt or amend


rules and regulations, correct?

COMMISSIONER GAITE:

That’s correct, Your Honor.

JUSTICE CARPIO:

So, you combine the two (2), the SEC officer, if delegated that power,
can issue an opinion but that opinion does not constitute a rule or
regulation, correct?

COMMISSIONER GAITE:

Correct, Your Honor.

JUSTICE CARPIO:

So, all of these opinions that you mentioned they are not rules and
regulations, correct?

COMMISSIONER GAITE:

They are not rules and regulations.

JUSTICE CARPIO:

If they are not rules and regulations, they apply only to that particular
situation and will not constitute a precedent, correct?

COMMISSIONER GAITE:

Yes, Your Honor.14 (Emphasis supplied)

Significantly, the SEC en banc, which is the collegial body statutorily empowered to issue
rules and opinions on behalf of the SEC, has adopted even the Grandfather Rule in
determining compliance with the 60-40 ownership requirement in favor of Filipino
citizens mandated by the Constitution for certain economic activities. This prevailing SEC
ruling, which the SEC correctly adopted to thwart any circumvention of the required
Filipino "ownership and control," is laid down in the 25 March 2010 SEC en banc ruling
in Redmont Consolidated Mines, Corp. v. McArthur Mining, Inc., et al.,15 to wit:
The avowed purpose of the Constitution is to place in the hands of Filipinos the
exploitation of our natural resources. Necessarily, therefore, the Rule interpreting
the constitutional provision should not diminish that right through the legal
fiction of corporate ownership and control. But the constitutional provision, as
interpreted and practiced via the 1967 SEC Rules, has favored foreigners contrary to the
command of the Constitution. Hence, the Grandfather Rule must be applied to
accurately determine the actual participation, both direct and indirect, of
foreigners in a corporation engaged in a nationalized activity or business.

Compliance with the constitutional limitation(s) on engaging in nationalized activities


must be determined by ascertaining if 60% of the investing corporation’s outstanding
capital stock is owned by "Filipino citizens", or as interpreted, by natural or individual
Filipino citizens. If such investing corporation is in turn owned to some extent by another
investing corporation, the same process must be observed. One must not stop until the
citizenships of the individual or natural stockholders of layer after layer of investing
corporations have been established, the very essence of the Grandfather Rule.

Lastly, it was the intent of the framers of the 1987 Constitution to adopt the
Grandfather Rule. In one of the discussions on what is now Article XII of the present
Constitution, the framers made the following exchange:

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

MR. VILLEGAS. That is right.

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

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

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

MR. VILLEGAS. That is right.

MR. NOLLEDO. Thank you. With respect to an investment by one corporation in another
corporation, say, a corporation with 60-40 percent equity invests in another corporation
which is permitted by the Corporation Code, does the Committee adopt the grandfather
rule?
MR. VILLEGAS. Yes, that is the understanding of the Committee.

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

MR. VILLEGAS. Yes. (Boldfacing and underscoring supplied; italicization in the original)

This SEC en banc ruling conforms to our 28 June 2011 Decision that the 60-40 ownership
requirement in favor of Filipino citizens in the Constitution to engage in certain
economic activities applies not only to voting control of the corporation, but also to the
beneficial ownership of the corporation. Thus, in our 28 June 2011 Decision we stated:

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

Both the Voting Control Test and the Beneficial Ownership Test must be applied to
determine whether a corporation is a "Philippine national."

The interpretation by legal officers of the SEC of the term "capital," embodied in various
opinions which respondents relied upon, is merely preliminary and an opinion only of
such officers. To repeat, any such opinion does not constitute an SEC rule or regulation.
In fact, many of these opinions contain a disclaimer which expressly states: "x x x the
foregoing opinion is based solely on facts disclosed in your query and relevant only to
the particular issue raised therein and shall not be used in the nature of a standing
rule binding upon the Commission in other cases whether of similar or dissimilar
circumstances."16 Thus, the opinions clearly make a caveat that they do not constitute
binding precedents on any one, not even on the SEC itself.

Likewise, the opinions of the SEC en banc, as well as of the DOJ, interpreting the law are
neither conclusive nor controlling and thus, do not bind the Court. It is hornbook
doctrine that any interpretation of the law that administrative or quasi-judicial agencies
make is only preliminary, never conclusive on the Court. The power to make a final
interpretation of the law, in this case the term "capital" in Section 11, Article XII of the
1987 Constitution, lies with this Court, not with any other government entity.

In his motion for reconsideration, the PSE President cites the cases of National
Telecommunications Commission v. Court of Appeals17 and Philippine Long Distance
Telephone Company v. National Telecommunications Commission18 in arguing that the
Court has already defined the term "capital" in Section 11, Article XII of the 1987
Constitution.19
The PSE President is grossly mistaken. In both cases of National Telecommunications v.
Court of Appeals20 and Philippine Long Distance Telephone Company v. National
Telecommunications Commission,21 the Court did not define the term "capital" as found in
Section 11, Article XII of the 1987 Constitution. In fact, these two cases never
mentioned, discussed or cited Section 11, Article XII of the Constitution or any of
its economic provisions, and thus cannot serve as precedent in the interpretation
of Section 11, Article XII of the Constitution. These two cases dealt solely with the
determination of the correct regulatory fees under Section 40(e) and (f) of the Public
Service Act, to wit:

(e) For annual reimbursement of the expenses incurred by the Commission in the
supervision of other public services and/or in the regulation or fixing of their rates,
twenty centavos for each one hundred pesos or fraction thereof, of the capital stock
subscribed or paid, or if no shares have been issued, of the capital invested, or of the
property and equipment whichever is higher.

(f) For the issue or increase of capital stock, twenty centavos for each one hundred pesos
or fraction thereof, of the increased capital. (Emphasis supplied)

The Court’s interpretation in these two cases of the terms "capital stock subscribed or
paid," "capital stock" and "capital" does not pertain to, and cannot control, the definition
of the term "capital" as used in Section 11, Article XII of the Constitution, or any of the
economic provisions of the Constitution where the term "capital" is found. The definition
of the term "capital" found in the Constitution must not be taken out of context. A careful
reading of these two cases reveals that the terms "capital stock subscribed or paid,"
"capital stock" and "capital" were defined solely to determine the basis for computing the
supervision and regulation fees under Section 40(e) and (f) of the Public Service Act.

III.
Filipinization of Public Utilities

The Preamble of the 1987 Constitution, as the prologue of the supreme law of the land,
embodies the ideals that the Constitution intends to achieve.22 The Preamble reads:

We, the sovereign Filipino people, imploring the aid of Almighty God, in order to build a
just and humane society, and establish a Government that shall embody our ideals and
aspirations, promote the common good, conserve and develop our patrimony, and
secure to ourselves and our posterity, the blessings of independence and democracy
under the rule of law and a regime of truth, justice, freedom, love, equality, and peace, do
ordain and promulgate this Constitution. (Emphasis supplied)

Consistent with these ideals, Section 19, Article II of the 1987 Constitution declares as
State policy the development of a national economy "effectively controlled" by Filipinos:
Section 19. The State shall develop a self-reliant and independent national
economy effectively controlled by Filipinos.

Fortifying the State policy of a Filipino-controlled economy, the Constitution decrees:

Section 10. The Congress shall, upon recommendation of the economic and planning
agency, when the national interest dictates, reserve to citizens of the Philippines or to
corporations or associations at least sixty per centum of whose capital is owned by such
citizens, or such higher percentage as Congress may prescribe, certain areas of
investments. The Congress shall enact measures that will encourage the formation and
operation of enterprises whose capital is wholly owned by Filipinos.

In the grant of rights, privileges, and concessions covering the national economy and
patrimony, the State shall give preference to qualified Filipinos.

The State shall regulate and exercise authority over foreign investments within its
national jurisdiction and in accordance with its national goals and priorities.23

Under Section 10, Article XII of the 1987 Constitution, Congress may "reserve to citizens
of the Philippines or to corporations or associations at least sixty per centum of whose
capital is owned by such citizens, or such higher percentage as Congress may prescribe,
certain areas of investments." Thus, in numerous laws Congress has reserved certain areas
of investments to Filipino citizens or to corporations at least sixty percent of the "capital"
of which is owned by Filipino citizens. Some of these laws are: (1) Regulation of Award of
Government Contracts or R.A. No. 5183; (2) Philippine Inventors Incentives Act or R.A.
No. 3850; (3) Magna Carta for Micro, Small and Medium Enterprises or R.A. No. 6977; (4)
Philippine Overseas Shipping Development Act or R.A. No. 7471; (5) Domestic Shipping
Development Act of 2004 or R.A. No. 9295; (6) Philippine Technology Transfer Act of
2009 or R.A. No. 10055; and (7) Ship Mortgage Decree or P.D. No. 1521.

With respect to public utilities, the 1987 Constitution specifically ordains:

Section 11. No franchise, certificate, or any other form of authorization for the
operation of a public utility shall be granted except to citizens of the Philippines
or to corporations or associations organized under the laws of the Philippines, at
least sixty per centum of whose capital is owned by such citizens; 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)
This provision, which mandates the Filipinization of public utilities, requires that any
form of authorization for the operation of public utilities shall be granted only to "citizens
of the Philippines or to corporations or associations organized under the laws of the
Philippines at least sixty per centum of whose capital is owned by such citizens." "The
provision is [an express] recognition of the sensitive and vital position of public
utilities both in the national economy and for national security."24

The 1987 Constitution reserves the ownership and operation of public utilities exclusively
to (1) Filipino citizens, or (2) corporations or associations at least 60 percent of whose
"capital" is owned by Filipino citizens. Hence, in the case of individuals, only Filipino
citizens can validly own and operate a public utility. In the case of corporations or
associations, at least 60 percent of their "capital" must be owned by Filipino citizens. In
other words, under Section 11, Article XII of the 1987 Constitution, to own and
operate a public utility a corporation’s capital must at least be 60 percent owned
by Philippine nationals.

IV.
Definition of "Philippine National"

Pursuant to the express mandate of Section 11, Article XII of the 1987 Constitution,
Congress enacted Republic Act No. 7042 or the Foreign Investments Act of 1991 (FIA), as
amended, which defined a "Philippine national" as follows:

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

a. The term "Philippine national" shall mean a citizen of the Philippines; or a domestic
partnership or association wholly owned by citizens of the Philippines; or a corporation
organized under the laws of the Philippines of which at least sixty percent (60%)
of the capital stock outstanding and entitled to vote is owned and held by citizens
of the Philippines; or a corporation organized abroad and registered as doing business
in the Philippines under the Corporation Code of which one hundred percent (100%) of
the capital stock outstanding and entitled to vote is wholly owned by Filipinos or a
trustee of funds for pension or other employee retirement or separation benefits, where
the trustee is a Philippine national and at least sixty percent (60%) of the fund will accrue
to the benefit of Philippine nationals: Provided, That where a corporation and its non-
Filipino stockholders own stocks in a Securities and Exchange Commission (SEC)
registered enterprise, at least sixty percent (60%) of the capital stock outstanding and
entitled to vote of each of both corporations must be owned and held by citizens of the
Philippines and at least sixty percent (60%) of the members of the Board of Directors of
each of both corporations must be citizens of the Philippines, in order that the
corporation, shall be considered a "Philippine national." (Boldfacing, italicization and
underscoring supplied)
Thus, the FIA clearly and unequivocally defines a "Philippine national" as a Philippine
citizen, or a domestic corporation at least "60% of the capital stock outstanding
and entitled to vote" is owned by Philippine citizens.

The definition of a "Philippine national" in the FIA reiterated the meaning of such term as
provided in its predecessor statute, Executive Order No. 226 or the Omnibus Investments
Code of 1987,25 which was issued by then President Corazon C. Aquino. Article 15 of this
Code states:

Article 15. "Philippine national" shall mean a citizen of the Philippines or a diplomatic
partnership or association wholly-owned by citizens of the Philippines; or a corporation
organized under the laws of the Philippines of which at least sixty per cent (60%)
of the capital stock outstanding and entitled to vote is owned and held by citizens
of the Philippines; or a trustee of funds for pension or other employee retirement or
separation benefits, where the trustee is a Philippine national and at least sixty per cent
(60%) of the fund will accrue to the benefit of Philippine nationals: Provided, That where
a corporation and its non-Filipino stockholders own stock in a registered enterprise, at
least sixty per cent (60%) of the capital stock outstanding and entitled to vote of both
corporations must be owned and held by the citizens of the Philippines and at least sixty
per cent (60%) of the members of the Board of Directors of both corporations must be
citizens of the Philippines in order that the corporation shall be considered a Philippine
national. (Boldfacing, italicization and underscoring supplied)

Under Article 48(3)26 of the Omnibus Investments Code of 1987, "no corporation x x x
which is not a ‘Philippine national’ x x x shall do business

x x x in the Philippines x x x without first securing from the Board of Investments a


written certificate to the effect that such business or economic activity x x x
would not conflict with the Constitution or laws of the Philippines."27 Thus, a "non-
Philippine national" cannot own and operate a reserved economic activity like a public
utility. This means, of course, that only a "Philippine national" can own and operate a
public utility.

In turn, the definition of a "Philippine national" under Article 15 of the Omnibus


Investments Code of 1987 was a reiteration of the meaning of such term as provided in
Article 14 of the Omnibus Investments Code of 1981,28 to wit:

Article 14. "Philippine national" shall mean a citizen of the Philippines; or a domestic
partnership or association wholly owned by citizens of the Philippines; or a corporation
organized under the laws of the Philippines of which at least sixty per cent (60%)
of the capital stock outstanding and entitled to vote is owned and held by citizens
of the Philippines; or a trustee of funds for pension or other employee retirement or
separation benefits, where the trustee is a Philippine national and at least sixty per cent
(60%) of the fund will accrue to the benefit of Philippine nationals: Provided, That where
a corporation and its non-Filipino stockholders own stock in a registered enterprise, at
least sixty per cent (60%) of the capital stock outstanding and entitled to vote of both
corporations must be owned and held by the citizens of the Philippines and at least sixty
per cent (60%) of the members of the Board of Directors of both corporations must be
citizens of the Philippines in order that the corporation shall be considered a Philippine
national. (Boldfacing, italicization and underscoring supplied)

Under Article 69(3) of the Omnibus Investments Code of 1981, "no corporation x x x
which is not a ‘Philippine national’ x x x shall do business x x x in the Philippines x x x
without first securing a written certificate from the Board of Investments to the effect
that such business or economic activity x x x would not conflict with the Constitution or
laws of the Philippines."29 Thus, a "non-Philippine national" cannot own and operate a
reserved economic activity like a public utility. Again, this means that only a "Philippine
national" can own and operate a public utility.

Prior to the Omnibus Investments Code of 1981, Republic Act No. 518630 or the Investment
Incentives Act, which took effect on 16 September 1967, contained a similar definition of a
"Philippine national," to wit:

(f) "Philippine National" shall mean a citizen of the Philippines; or a partnership or


association wholly owned by citizens of the Philippines; or a corporation organized
under the laws of the Philippines of which at least sixty per cent of the capital
stock outstanding and entitled to vote is owned and held by citizens of the
Philippines; or a trustee of funds for pension or other employee retirement or separation
benefits, where the trustee is a Philippine National and at least sixty per cent of the fund
will accrue to the benefit of Philippine Nationals: Provided, That where a corporation and
its non-Filipino stockholders own stock in a registered enterprise, at least sixty per cent of
the capital stock outstanding and entitled to vote of both corporations must be owned
and held by the citizens of the Philippines and at least sixty per cent of the members of
the Board of Directors of both corporations must be citizens of the Philippines in order
that the corporation shall be considered a Philippine National. (Boldfacing, italicization
and underscoring supplied)

Under Section 3 of Republic Act No. 5455 or the Foreign Business Regulations Act, which
took effect on 30 September 1968, if the investment in a domestic enterprise by non-
Philippine nationals exceeds 30% of its outstanding capital stock, such enterprise must
obtain prior approval from the Board of Investments before accepting such investment.
Such approval shall not be granted if the investment "would conflict with existing
constitutional provisions and laws regulating the degree of required ownership by
Philippine nationals in the enterprise."31 A "non-Philippine national" cannot own and
operate a reserved economic activity like a public utility. Again, this means that only a
"Philippine national" can own and operate a public utility.
The FIA, like all its predecessor statutes, clearly defines a "Philippine national" as a
Filipino citizen, or a domestic corporation "at least sixty percent (60%) of the capital
stock outstanding and entitled to vote" is owned by Filipino citizens. A domestic
corporation is a "Philippine national" only if at least 60% of its voting stock is owned by
Filipino citizens. This definition of a "Philippine national" is crucial in the present case
because the FIA reiterates and clarifies Section 11, Article XII of the 1987 Constitution,
which limits the ownership and operation of public utilities to Filipino citizens or to
corporations or associations at least 60% Filipino-owned.

The FIA is the basic law governing foreign investments in the Philippines, irrespective of
the nature of business and area of investment. The FIA spells out the procedures by which
non-Philippine nationals can invest in the Philippines. Among the key features of this law
is the concept of a negative list or the Foreign Investments Negative List.32 Section 8 of
the law states:

SEC. 8. List of Investment Areas Reserved to Philippine Nationals [Foreign


Investment Negative List]. - The Foreign Investment Negative List shall have
two 2 component lists: A and B:

a. List A shall enumerate the areas of activities reserved to Philippine nationals by


mandate of the Constitution and specific laws.

b. List B shall contain the areas of activities and enterprises regulated pursuant to law:

1. which are defense-related activities, requiring prior clearance and authorization from
the Department of National Defense [DND] to engage in such activity, such as the
manufacture, repair, storage and/or distribution of firearms, ammunition, lethal weapons,
military ordinance, explosives, pyrotechnics and similar materials; unless such
manufacturing or repair activity is specifically authorized, with a substantial export
component, to a non-Philippine national by the Secretary of National Defense; or

2. which have implications on public health and morals, such as the manufacture and
distribution of dangerous drugs; all forms of gambling; nightclubs, bars, beer houses,
dance halls, sauna and steam bathhouses and massage clinics. (Boldfacing, underscoring
and italicization supplied)

Section 8 of the FIA enumerates the investment areas "reserved to Philippine


nationals." Foreign Investment Negative List A consists of "areas of activities
reserved to Philippine nationals by mandate of the Constitution and specific laws,"
where foreign equity participation in any enterprise shall be limited to the
maximum percentage expressly prescribed by the Constitution and other specific
laws. In short, to own and operate a public utility in the Philippines one must be a
"Philippine national" as defined in the FIA. The FIA is abundant notice to foreign
investors to what extent they can invest in public utilities in the Philippines.
To repeat, among the areas of investment covered by the Foreign Investment Negative
List A is the ownership and operation of public utilities, which the Constitution expressly
reserves to Filipino citizens and to corporations at least 60% owned by Filipino
citizens. In other words, Negative List A of the FIA reserves the ownership and
operation of public utilities only to "Philippine nationals," defined in Section 3(a)
of the FIA as "(1) a citizen of the Philippines; x x x or (3) a corporation organized
under the laws of the Philippines of which at least sixty percent (60%) of the
capital stock outstanding and entitled to vote is owned and held by citizens of the
Philippines; or (4) a corporation organized abroad and registered as doing business in
the Philippines under the Corporation Code of which one hundred percent (100%) of the
capital stock outstanding and entitled to vote is wholly owned by Filipinos or a trustee of
funds for pension or other employee retirement or separation benefits, where the trustee
is a Philippine national and at least sixty percent (60%) of the fund will accrue to the
benefit of Philippine nationals."

Clearly, from the effectivity of the Investment Incentives Act of 1967 to the adoption of
the Omnibus Investments Code of 1981, to the enactment of the Omnibus Investments
Code of 1987, and to the passage of the present Foreign Investments Act of 1991, or for
more than four decades, the statutory definition of the term "Philippine national"
has been uniform and consistent: it means a Filipino citizen, or a domestic
corporation at least 60% of the voting stock is owned by Filipinos. Likewise, these
same statutes have uniformly and consistently required that only "Philippine
nationals" could own and operate public utilities in the Philippines. The following
exchange during the Oral Arguments is revealing:

JUSTICE CARPIO:

Counsel, I have some questions. You are aware of the Foreign Investments
Act of 1991, x x x? And the FIA of 1991 took effect in 1991, correct? That’s
over twenty (20) years ago, correct?

COMMISSIONER GAITE:

Correct, Your Honor.

JUSTICE CARPIO:

And Section 8 of the Foreign Investments Act of 1991 states that []only
Philippine nationals can own and operate public utilities[], correct?

COMMISSIONER GAITE:

Yes, Your Honor.


JUSTICE CARPIO:

And the same Foreign Investments Act of 1991 defines a "Philippine


national" either as a citizen of the Philippines, or if it is a corporation at
least sixty percent (60%) of the voting stock is owned by citizens of the
Philippines, correct?

COMMISSIONER GAITE:

Correct, Your Honor.

JUSTICE CARPIO:

And, you are also aware that under the predecessor law of the Foreign
Investments Act of 1991, the Omnibus Investments Act of 1987, the same
provisions apply: x x x only Philippine nationals can own and operate a
public utility and the Philippine national, if it is a corporation, x x x sixty
percent (60%) of the capital stock of that corporation must be owned by
citizens of the Philippines, correct?

COMMISSIONER GAITE:

Correct, Your Honor.

JUSTICE CARPIO:

And even prior to the Omnibus Investments Act of 1987, under the
Omnibus Investments Act of 1981, the same rules apply: x x x only a
Philippine national can own and operate a public utility and a Philippine
national, if it is a corporation, sixty percent (60%) of its x x x voting stock,
must be owned by citizens of the Philippines, correct?

COMMISSIONER GAITE:

Correct, Your Honor.

JUSTICE CARPIO:

And even prior to that, under [the]1967 Investments Incentives Act and the
Foreign Company Act of 1968, the same rules applied, correct?

COMMISSIONER GAITE:

Correct, Your Honor.


JUSTICE CARPIO:

So, for the last four (4) decades, x x x, the law has been very
consistent – only a Philippine national can own and operate a public
utility, and a Philippine national, if it is a corporation, x x x at least
sixty percent (60%) of the voting stock must be owned by citizens of
the Philippines, correct?

COMMISSIONER GAITE:

Correct, Your Honor.33 (Emphasis supplied)

Government agencies like the SEC cannot simply ignore Sections 3(a) and 8 of the FIA
which categorically prescribe that certain economic activities, like the ownership and
operation of public utilities, are reserved to corporations "at least sixty percent (60%) of
the capital stock outstanding and entitled to vote is owned and held by citizens of the
Philippines." Foreign Investment Negative List A refers to "activities reserved to
Philippine nationals by mandate of the Constitution and specific laws." The FIA is the
basic statute regulating foreign investments in the Philippines. Government
agencies tasked with regulating or monitoring foreign investments, as well as counsels of
foreign investors, should start with the FIA in determining to what extent a particular
foreign investment is allowed in the Philippines. Foreign investors and their counsels who
ignore the FIA do so at their own peril. Foreign investors and their counsels who rely on
opinions of SEC legal officers that obviously contradict the FIA do so also at their own
peril.

Occasional opinions of SEC legal officers that obviously contradict the FIA should
immediately raise a red flag. There are already numerous opinions of SEC legal officers
that cite the definition of a "Philippine national" in Section 3(a) of the FIA in determining
whether a particular corporation is qualified to own and operate a nationalized or
partially nationalized business in the Philippines. This shows that SEC legal officers are
not only aware of, but also rely on and invoke, the provisions of the FIA in ascertaining
the eligibility of a corporation to engage in partially nationalized industries. The following
are some of such opinions:

1. Opinion of 23 March 1993, addressed to Mr. Francis F. How;

2. Opinion of 14 April 1993, addressed to Director Angeles T. Wong of the


Philippine Overseas Employment Administration;

3. Opinion of 23 November 1993, addressed to Messrs. Dominador Almeda and


Renato S. Calma;
4. Opinion of 7 December 1993, addressed to Roco Bunag Kapunan Migallos &
Jardeleza;

5. SEC Opinion No. 49-04, addressed to Romulo Mabanta Buenaventura Sayoc &
De Los Angeles;

6. SEC-OGC Opinion No. 17-07, addressed to Mr. Reynaldo G. David; and

7. SEC-OGC Opinion No. 03-08, addressed to Attys. Ruby Rose J. Yusi and Rudyard
S. Arbolado.

The SEC legal officers’ occasional but blatant disregard of the definition of the term
"Philippine national" in the FIA signifies their lack of integrity and competence in
resolving issues on the 60-40 ownership requirement in favor of Filipino citizens in
Section 11, Article XII of the Constitution.

The PSE President argues that the term "Philippine national" defined in the FIA should be
limited and interpreted to refer to corporations seeking to avail of tax and fiscal
incentives under investment incentives laws and cannot be equated with the term
"capital" in Section 11, Article XII of the 1987 Constitution. Pangilinan similarly contends
that the FIA and its predecessor statutes do not apply to "companies which have not
registered and obtained special incentives under the schemes established by those laws."

Both are desperately grasping at straws. The FIA does not grant tax or fiscal incentives to
any enterprise. Tax and fiscal incentives to investments are granted separately under the
Omnibus Investments Code of 1987, not under the FIA. In fact, the FIA expressly repealed
Articles 44 to 56 of Book II of the Omnibus Investments Code of 1987, which articles
previously regulated foreign investments in nationalized or partially nationalized
industries.

The FIA is the applicable law regulating foreign investments in nationalized or partially
nationalized industries. There is nothing in the FIA, or even in the Omnibus Investments
Code of 1987 or its predecessor statutes, that states, expressly or impliedly, that the FIA or
its predecessor statutes do not apply to enterprises not availing of tax and fiscal incentives
under the Code. The FIA and its predecessor statutes apply to investments in all domestic
enterprises, whether or not such enterprises enjoy tax and fiscal incentives under the
Omnibus Investments Code of 1987 or its predecessor statutes. The reason is quite
obvious – mere non-availment of tax and fiscal incentives by a non-Philippine
national cannot exempt it from Section 11, Article XII of the Constitution
regulating foreign investments in public utilities. In fact, the Board of
Investments’ Primer on Investment Policies in the Philippines,34 which is given out
to foreign investors, provides:

PART III. FOREIGN INVESTMENTS WITHOUT INCENTIVES


Investors who do not seek incentives and/or whose chosen activities do not qualify for
incentives, (i.e., the activity is not listed in the IPP, and they are not exporting at least
70% of their production) may go ahead and make the investments without seeking
incentives. They only have to be guided by the Foreign Investments Negative List
(FINL).

The FINL clearly defines investment areas requiring at least 60% Filipino ownership. All
other areas outside of this list are fully open to foreign investors. (Emphasis supplied)

V.
Right to elect directors, coupled with beneficial ownership,
translates to effective control.

The 28 June 2011 Decision declares that the 60 percent Filipino ownership required by the
Constitution to engage in certain economic activities applies not only to voting control of
the corporation, but also to the beneficial ownership of the corporation. To repeat,
we held:

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

This is consistent with Section 3 of the FIA which provides that where 100% of the capital
stock is held by "a trustee of funds for pension or other employee retirement or
separation benefits," the trustee is a Philippine national if "at least sixty percent (60%) of
the fund will accrue to the benefit of Philippine nationals." Likewise, Section 1(b) of the
Implementing Rules of the FIA provides that "for stocks to be deemed owned and held by
Philippine citizens or Philippine nationals, mere legal title is not enough to meet the
required Filipino equity. Full beneficial ownership of the stocks, coupled with
appropriate voting rights, is essential."

Since the constitutional requirement of at least 60 percent Filipino ownership applies not
only to voting control of the corporation but also to the beneficial ownership of the
corporation, it is therefore imperative that such requirement apply uniformly and across
the board to all classes of shares, regardless of nomenclature and category, comprising
the capital of a corporation. Under the Corporation Code, capital stock35 consists of all
classes of shares issued to stockholders, that is, common shares as well as preferred
shares, which may have different rights, privileges or restrictions as stated in the articles
of incorporation.36
The Corporation Code allows denial of the right to vote to preferred and redeemable
shares, but disallows denial of the right to vote in specific corporate matters. Thus,
common shares have the right to vote in the election of directors, while preferred shares
may be denied such right. Nonetheless, preferred shares, even if denied the right to vote
in the election of directors, are entitled to vote on the following corporate matters: (1)
amendment of articles of incorporation; (2) increase and decrease of capital stock; (3)
incurring, creating or increasing bonded indebtedness; (4) sale, lease, mortgage or other
disposition of substantially all corporate assets; (5) investment of funds in another
business or corporation or for a purpose other than the primary purpose for which the
corporation was organized; (6) adoption, amendment and repeal of by-laws; (7) merger
and consolidation; and (8) dissolution of corporation.37

Since a specific class of shares may have rights and privileges or restrictions different from
the rest of the shares in a corporation, the 60-40 ownership requirement in favor of
Filipino citizens in Section 11, Article XII of the Constitution must apply not only to shares
with voting rights but also to shares without voting rights. Preferred shares, denied the
right to vote in the election of directors, are anyway still entitled to vote on the eight
specific corporate matters mentioned above. Thus, if a corporation, engaged in a
partially nationalized industry, issues a mixture of common and preferred non-
voting shares, at least 60 percent of the common shares and at least 60 percent of
the preferred non-voting shares must be owned by Filipinos. Of course, if a
corporation issues only a single class of shares, at least 60 percent of such shares must
necessarily be owned by Filipinos. In short, the 60-40 ownership requirement in
favor of Filipino citizens must apply separately to each class of shares, whether
common, preferred non-voting, preferred voting or any other class of shares. This
uniform application of the 60-40 ownership requirement in favor of Filipino citizens
clearly breathes life to the constitutional command that the ownership and operation of
public utilities shall be reserved exclusively to corporations at least 60 percent of whose
capital is Filipino-owned. Applying uniformly the 60-40 ownership requirement in favor
of Filipino citizens to each class of shares, regardless of differences in voting rights,
privileges and restrictions, guarantees effective Filipino control of public utilities, as
mandated by the Constitution.

Moreover, such uniform application to each class of shares insures that the "controlling
interest" in public utilities always lies in the hands of Filipino citizens. This addresses and
extinguishes Pangilinan’s worry that foreigners, owning most of the non-voting shares,
will exercise greater control over fundamental corporate matters requiring two-thirds or
majority vote of all shareholders.

VI.
Intent of the framers of the Constitution

While Justice Velasco quoted in his Dissenting Opinion38 a portion of the deliberations of
the Constitutional Commission to support his claim that the term "capital" refers to the
total outstanding shares of stock, whether voting or non-voting, the following excerpts of
the deliberations reveal otherwise. It is clear from the following exchange that the term
"capital" refers to controlling interest of a corporation, thus:

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

MR. VILLEGAS. That is right.

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

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

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

MR. VILLEGAS. That is right.

MR. NOLLEDO. Thank you.

With respect to an investment by one corporation in another corporation, say, a


corporation with 60-40 percent equity invests in another corporation which is permitted
by the Corporation Code, does the Committee adopt the grandfather rule?

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

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

MR. VILLEGAS. Yes.39

xxxx

MR. AZCUNA. May I be clarified as to that portion that was accepted by the Committee.

MR. VILLEGAS. The portion accepted by the Committee is the deletion of the phrase
"voting stock or controlling interest."
MR. AZCUNA. Hence, without the Davide amendment, the committee report would read:
"corporations or associations at least sixty percent of whose CAPITAL is owned by such
citizens."

MR. VILLEGAS. Yes.

MR. AZCUNA. So if the Davide amendment is lost, we are stuck with 60 percent of the
capital to be owned by citizens.

MR. VILLEGAS. That is right.

MR. AZCUNA. But the control can be with the foreigners even if they are the
minority. Let us say 40 percent of the capital is owned by them, but it is the voting
capital, whereas, the Filipinos own the nonvoting shares. So we can have a
situation where the corporation is controlled by foreigners despite being the
minority because they have the voting capital. That is the anomaly that would
result here.

MR. BENGZON. No, the reason we eliminated the word "stock" as stated in the 1973
and 1935 Constitutions is that according to Commissioner Rodrigo, there are
associations that do not have stocks. That is why we say "CAPITAL."

MR. AZCUNA. We should not eliminate the phrase "controlling interest."

MR. BENGZON. In the case of stock corporations, it is assumed.40 (Boldfacing and


underscoring supplied)

Thus, 60 percent of the "capital" assumes, or should result in, a "controlling interest" in
the corporation.

The use of the term "capital" was intended to replace the word "stock" because
associations without stocks can operate public utilities as long as they meet the 60-40
ownership requirement in favor of Filipino citizens prescribed in Section 11, Article XII of
the Constitution. However, this did not change the intent of the framers of the
Constitution to reserve exclusively to Philippine nationals the "controlling interest" in
public utilities.

During the drafting of the 1935 Constitution, economic protectionism was "the battle-cry
of the nationalists in the Convention."41 The same battle-cry resulted in the
nationalization of the public utilities.42 This is also the same intent of the framers of the
1987 Constitution who adopted the exact formulation embodied in the 1935 and 1973
Constitutions on foreign equity limitations in partially nationalized industries.
The OSG, in its own behalf and as counsel for the State,43 agrees fully with the Court’s
interpretation of the term "capital." In its Consolidated Comment, the OSG explains that
the deletion of the phrase "controlling interest" and replacement of the word "stock" with
the term "capital" were intended specifically to extend the scope of the entities qualified
to operate public utilities to include associations without stocks. The framers’ omission of
the phrase "controlling interest" did not mean the inclusion of all shares of stock, whether
voting or non-voting. The OSG reiterated essentially the Court’s declaration that the
Constitution reserved exclusively to Philippine nationals the ownership and operation of
public utilities consistent with the State’s policy to "develop a self-reliant and
independent national economy effectively controlled by Filipinos."

As we held in our 28 June 2011 Decision, to construe broadly the term "capital" as the total
outstanding capital stock, treated as a single class regardless of the actual classification of
shares, grossly contravenes the intent and letter of the Constitution that the "State shall
develop a self-reliant and independent national economy effectively controlled by
Filipinos." We illustrated the glaring anomaly which would result in defining the term
"capital" as the total outstanding capital stock of a corporation, treated as a single class of
shares regardless of the actual classification of shares, to wit:

Let us assume that a corporation has 100 common shares owned by foreigners and
1,000,000 non-voting preferred shares owned by Filipinos, with both classes of share
having a par value of one peso (₱ 1.00) per share. Under the broad definition of the term
"capital," such corporation would be considered compliant with the 40 percent
constitutional limit on foreign equity of public utilities since the overwhelming majority,
or more than 99.999 percent, of the total outstanding capital stock is Filipino owned.
This is obviously absurd.

In the example given, only the foreigners holding the common shares have voting rights
in the election of directors, even if they hold only 100 shares. The foreigners, with a
minuscule equity of less than 0.001 percent, exercise control over the public utility. On
the other hand, the Filipinos, holding more than 99.999 percent of the equity, cannot
vote in the election of directors and hence, have no control over the public utility. This
starkly circumvents the intent of the framers of the Constitution, as well as the clear
language of the Constitution, to place the control of public utilities in the hands of
Filipinos. x x x

Further, even if foreigners who own more than forty percent of the voting shares elect an
all-Filipino board of directors, this situation does not guarantee Filipino control and does
not in any way cure the violation of the Constitution. The independence of the Filipino
board members so elected by such foreign shareholders is highly doubtful. As the OSG
pointed out, quoting Justice George Sutherland’s words in Humphrey’s Executor v. US,44 "x
x x it is quite evident that one who holds his office only during the pleasure of another
cannot be depended upon to maintain an attitude of independence against the latter’s
will." Allowing foreign shareholders to elect a controlling majority of the board, even if all
the directors are Filipinos, grossly circumvents the letter and intent of the Constitution
and defeats the very purpose of our nationalization laws.

VII.
Last sentence of Section 11, Article XII of the Constitution

The last sentence of Section 11, Article XII of the 1987 Constitution reads:

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.

During the Oral Arguments, the OSG emphasized that there was never a question on the
intent of the framers of the Constitution to limit foreign ownership, and assure majority
Filipino ownership and control of public utilities. The OSG argued, "while the delegates
disagreed as to the percentage threshold to adopt, x x x the records show they clearly
understood that Filipino control of the public utility corporation can only be and is
obtained only through the election of a majority of the members of the board."

Indeed, the only point of contention during the deliberations of the Constitutional
Commission on 23 August 1986 was the extent of majority Filipino control of public
utilities. This is evident from the following exchange:

THE PRESIDENT. Commissioner Jamir is recognized.

MR. JAMIR. Madam President, my proposed amendment on lines 20 and 21 is to delete


the phrase "two thirds of whose voting stock or controlling interest," and instead
substitute the words "SIXTY PERCENT OF WHOSE CAPITAL" so that the sentence will
read: "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 PERCENT OF
WHOSE CAPITAL is owned by such citizens."

xxxx

THE PRESIDENT: Will Commissioner Jamir first explain?

MR. JAMIR. Yes, in this Article on National Economy and Patrimony, there were two
previous sections in which we fixed the Filipino equity to 60 percent as against 40 percent
for foreigners. It is only in this Section 15 with respect to public utilities that the
committee proposal was increased to two-thirds. I think it would be better to harmonize
this provision by providing that even in the case of public utilities, the minimum equity
for Filipino citizens should be 60 percent.
MR. ROMULO. Madam President.

THE PRESIDENT. Commissioner Romulo is recognized.

MR. ROMULO. My reason for supporting the amendment is based on the discussions I
have had with representatives of the Filipino majority owners of the international record
carriers, and the subsequent memoranda they submitted to me. x x x

Their second point is that under the Corporation Code, the management and control of a
corporation is vested in the board of directors, not in the officers but in the board of
directors. The officers are only agents of the board. And they believe that with 60 percent
of the equity, the Filipino majority stockholders undeniably control the board. Only on
important corporate acts can the 40-percent foreign equity exercise a veto, x x x.

x x x x45

MS. ROSARIO BRAID. Madam President.

THE PRESIDENT. Commissioner Rosario Braid is recognized.

MS. ROSARIO BRAID. Yes, in the interest of equal time, may I also read from a
memorandum by the spokesman of the Philippine Chamber of Communications on why
they would like to maintain the present equity, I am referring to the 66 2/3. They would
prefer to have a 75-25 ratio but would settle for 66 2/3. x x x

xxxx

THE PRESIDENT. Just to clarify, would Commissioner Rosario Braid support the proposal
of two-thirds rather than the 60 percent?

MS. ROSARIO BRAID. I have added a clause that will put management in the hands of
Filipino citizens.

x x x x46

While they had differing views on the percentage of Filipino ownership of capital, it is
clear that the framers of the Constitution intended public utilities to
be majority Filipino-owned and controlled. To ensure that Filipinos control public
utilities, the framers of the Constitution approved, as additional safeguard, the inclusion
of the last sentence of Section 11, Article XII of the Constitution commanding that "[t]he
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."
In other words, the last sentence of Section 11, Article XII of the Constitution mandates
that (1) the participation of foreign investors in the governing body of the corporation or
association shall be limited to their proportionate share in the capital of such entity; and
(2) all officers of the corporation or association must be Filipino citizens.

Commissioner Rosario Braid proposed the inclusion of the phrase requiring the managing
officers of the corporation or association to be Filipino citizens specifically to prevent
management contracts, which were designed primarily to circumvent the Filipinization of
public utilities, and to assure Filipino control of public utilities, thus:

MS. ROSARIO BRAID. x x x They also like to suggest that we amend this provision by
adding a phrase which states: "THE MANAGEMENT BODY OF EVERY CORPORATION
OR ASSOCIATION SHALL IN ALL CASES BE CONTROLLED BY CITIZENS OF THE
PHILIPPINES." I have with me their position paper.

THE PRESIDENT. The Commissioner may proceed.

MS. ROSARIO BRAID. The three major international record carriers in the Philippines,
which Commissioner Romulo mentioned – Philippine Global Communications, Eastern
Telecommunications, Globe Mackay Cable – are 40-percent owned by foreign
multinational companies and 60-percent owned by their respective Filipino partners. All
three, however, also have management contracts with these foreign companies – Philcom
with RCA, ETPI with Cable and Wireless PLC, and GMCR with ITT. Up to the present
time, the general managers of these carriers are foreigners. While the foreigners in these
common carriers are only minority owners, the foreign multinationals are the ones
managing and controlling their operations by virtue of their management contracts and
by virtue of their strength in the governing bodies of these carriers.47

xxxx

MR. OPLE. I think a number of us have agreed to ask Commissioner Rosario Braid to
propose an amendment with respect to the operating management of public utilities, and
in this amendment, we are associated with Fr. Bernas, Commissioners Nieva and Rodrigo.
Commissioner Rosario Braid will state this amendment now.

Thank you.

MS. ROSARIO BRAID. Madam President.

THE PRESIDENT. This is still on Section 15.

MS. ROSARIO BRAID. Yes.

MR. VILLEGAS. Yes, Madam President.


xxxx

MS. ROSARIO BRAID. Madam President, I propose a new section to read: ‘THE
MANAGEMENT BODY OF EVERY CORPORATION OR ASSOCIATION SHALL IN ALL
CASES BE CONTROLLED BY CITIZENS OF THE PHILIPPINES."

This will prevent management contracts and assure control by Filipino


citizens. Will the committee assure us that this amendment will insure that past
activities such as management contracts will no longer be possible under this
amendment?

xxxx

FR. BERNAS. Madam President.

THE PRESIDENT. Commissioner Bernas is recognized.

FR. BERNAS. Will the committee accept a reformulation of the first part?

MR. BENGZON. Let us hear it.

FR. BERNAS. The reformulation will be essentially the formula of the 1973 Constitution
which reads: "THE PARTICIPATION OF FOREIGN INVESTORS IN THE GOVERNING
BODY OF ANY PUBLIC UTILITY ENTERPRISE SHALL BE LIMITED TO THEIR
PROPORTIONATE SHARE IN THE CAPITAL THEREOF AND..."

MR. VILLEGAS. "ALL THE EXECUTIVE AND MANAGING OFFICERS OF SUCH


CORPORATIONS AND ASSOCIATIONS MUST BE CITIZENS OF THE PHILIPPINES."

MR. BENGZON. Will Commissioner Bernas read the whole thing again?

FR. BERNAS. "THE PARTICIPATION OF FOREIGN INVESTORS IN THE GOVERNING


BODY OF ANY PUBLIC UTILITY ENTERPRISE SHALL BE LIMITED TO THEIR
PROPORTIONATE SHARE IN THE CAPITAL THEREOF..." I do not have the rest of the
copy.

MR. BENGZON. "AND ALL THE EXECUTIVE AND MANAGING OFFICERS OF SUCH
CORPORATIONS OR ASSOCIATIONS MUST BE CITIZENS OF THE PHILIPPINES." Is
that correct?

MR. VILLEGAS. Yes.

MR. BENGZON. Madam President, I think that was said in a more elegant language. We
accept the amendment. Is that all right with Commissioner Rosario Braid?
MS. ROSARIO BRAID. Yes.

xxxx

MR. DE LOS REYES. The governing body refers to the board of directors and trustees.

MR. VILLEGAS. That is right.

MR. BENGZON. Yes, the governing body refers to the board of directors.

MR. REGALADO. It is accepted.

MR. RAMA. The body is now ready to vote, Madam President.

VOTING

xxxx

The results show 29 votes in favor and none against; so the proposed amendment is
approved.

xxxx

THE PRESIDENT. All right. Can we proceed now to vote on Section 15?

MR. RAMA. Yes, Madam President.

THE PRESIDENT. Will the chairman of the committee please read Section 15?

MR. VILLEGAS. The entire Section 15, as amended, reads: "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 60 PERCENT OF WHOSE CAPITAL is owned by such
citizens." May I request Commissioner Bengzon to please continue reading.

MR. BENGZON. "THE PARTICIPATION OF FOREIGN INVESTORS IN THE


GOVERNING BODY OF ANY PUBLIC UTILITY ENTERPRISE SHALL BE LIMITED TO
THEIR PROPORTIONATE SHARE IN THE CAPITAL THEREOF AND ALL THE
EXECUTIVE AND MANAGING OFFICERS OF SUCH CORPORATIONS OR
ASSOCIATIONS MUST BE CITIZENS OF THE PHILIPPINES."

MR. VILLEGAS. "NOR SHALL SUCH FRANCHISE, CERTIFICATE OR AUTHORIZATION


BE EXCLUSIVE IN CHARACTER OR FOR A PERIOD LONGER THAN TWENTY-FIVE
YEARS RENEWABLE FOR NOT MORE THAN TWENTY-FIVE 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 Congress when the common good so requires. The
State shall encourage equity participation in public utilities by the general public."

VOTING

xxxx

The results show 29 votes in favor and 4 against; Section 15, as amended, is
approved.48 (Emphasis supplied)

The last sentence of Section 11, Article XII of the 1987 Constitution, particularly the
provision on the limited participation of foreign investors in the governing body of public
utilities, is a reiteration of the last sentence of Section 5, Article XIV of the 1973
Constitution,49 signifying its importance in reserving ownership and control of public
utilities to Filipino citizens.

VIII.
The undisputed facts

There is no dispute, and respondents do not claim the contrary, that (1) foreigners own
64.27% of the common shares of PLDT, which class of shares exercises the sole right to
vote in the election of directors, and thus foreigners control PLDT; (2) Filipinos own only
35.73% of PLDT’s common shares, constituting a minority of the voting stock, and thus
Filipinos do not control PLDT; (3) preferred shares, 99.44% owned by Filipinos, have no
voting rights; (4) preferred shares earn only 1/70 of the dividends that common shares
earn;50 (5) preferred shares have twice the par value of common shares; and (6) preferred
shares constitute 77.85% of the authorized capital stock of PLDT and common shares
only 22.15%.

Despite the foregoing facts, the Court did not decide, and in fact refrained from ruling on
the question of whether PLDT violated the 60-40 ownership requirement in favor of
Filipino citizens in Section 11, Article XII of the 1987 Constitution. Such question
indisputably calls for a presentation and determination of evidence through a hearing,
which is generally outside the province of the Court’s jurisdiction, but well within the
SEC’s statutory powers. Thus, for obvious reasons, the Court limited its decision on the
purely legal and threshold issue on the definition of the term "capital" in Section 11,
Article XII of the Constitution and directed the SEC to apply such definition in
determining the exact percentage of foreign ownership in PLDT.

IX.
PLDT is not an indispensable party;
SEC is impleaded in this case.
In his petition, Gamboa prays, among others:

xxxx

5. For the Honorable Court to issue a declaratory relief that ownership of common or
voting shares is the sole basis in determining foreign equity in a public utility and that
any other government rulings, opinions, and regulations inconsistent with this
declaratory relief be declared unconstitutional and a violation of the intent and spirit of
the 1987 Constitution;

6. For the Honorable Court to declare null and void all sales of common stocks to
foreigners in excess of 40 percent of the total subscribed common shareholdings; and

7. For the Honorable Court to direct the Securities and Exchange Commission and
Philippine Stock Exchange to require PLDT to make a public disclosure of all of its
foreign shareholdings and their actual and real beneficial owners.

Other relief(s) just and equitable are likewise prayed for. (Emphasis supplied)

As can be gleaned from his prayer, Gamboa clearly asks this Court to compel the SEC to
perform its statutory duty to investigate whether "the required percentage of ownership
of the capital stock to be owned by citizens of the Philippines has been complied with [by
PLDT] as required by x x x the Constitution."51 Such plea clearly negates SEC’s argument
that it was not impleaded.

Granting that only the SEC Chairman was impleaded in this case, the Court has ample
powers to order the SEC’s compliance with its directive contained in the 28 June 2011
Decision in view of the far-reaching implications of this case. In Domingo v. Scheer,52 the
Court dispensed with the amendment of the pleadings to implead the Bureau of Customs
considering (1) the unique backdrop of the case; (2) the utmost need to avoid further
delays; and (3) the issue of public interest involved. The Court held:

The Court may be curing the defect in this case by adding the BOC as party-petitioner.
The petition should not be dismissed because the second action would only be a
repetition of the first. In Salvador, et al., v. Court of Appeals, et al., we held that this Court
has full powers, apart from that power and authority which is inherent, to amend the
processes, pleadings, proceedings and decisions by substituting as party-plaintiff the real
party-in-interest. The Court has the power to avoid delay in the disposition of this
case, to order its amendment as to implead the BOC as party-respondent. Indeed,
it may no longer be necessary to do so taking into account the unique backdrop in
this case, involving as it does an issue of public interest. After all, the Office of the
Solicitor General has represented the petitioner in the instant proceedings, as well as in
the appellate court, and maintained the validity of the deportation order and of the BOC’s
Omnibus Resolution. It cannot, thus, be claimed by the State that the BOC was not
afforded its day in court, simply because only the petitioner, the Chairperson of the BOC,
was the respondent in the CA, and the petitioner in the instant recourse. In Alonso v.
Villamor, we had the occasion to state:

There is nothing sacred about processes or pleadings, their forms or contents.


Their sole purpose is to facilitate the application of justice to the rival claims of
contending parties. They were created, not to hinder and delay, but to facilitate and
promote, the administration of justice. They do not constitute the thing itself, which
courts are always striving to secure to litigants. They are designed as the means best
adapted to obtain that thing. In other words, they are a means to an end. When they lose
the character of the one and become the other, the administration of justice is at fault
and courts are correspondingly remiss in the performance of their obvious
duty.53 (Emphasis supplied)

In any event, the SEC has expressly manifested54 that it will abide by the Court’s
decision and defer to the Court’s definition of the term "capital" in Section 11,
Article XII of the Constitution. Further, the SEC entered its special appearance in
this case and argued during the Oral Arguments, indicating its submission to the
Court’s jurisdiction. It is clear, therefore, that there exists no legal impediment
against the proper and immediate implementation of the Court’s directive to the
SEC.

PLDT is an indispensable party only insofar as the other issues, particularly the factual
questions, are concerned. In other words, PLDT must be impleaded in order to fully
resolve the issues on (1) whether the sale of 111,415 PTIC shares to First Pacific violates the
constitutional limit on foreign ownership of PLDT; (2) whether the sale of common
shares to foreigners exceeded the 40 percent limit on foreign equity in PLDT; and (3)
whether the total percentage of the PLDT common shares with voting rights complies
with the 60-40 ownership requirement in favor of Filipino citizens under the Constitution
for the ownership and operation of PLDT. These issues indisputably call for an
examination of the parties’ respective evidence, and thus are clearly within the
jurisdiction of the SEC. In short, PLDT must be impleaded, and must necessarily be
heard, in the proceedings before the SEC where the factual issues will be thoroughly
threshed out and resolved.

Notably, the foregoing issues were left untouched by the Court. The Court did not
rule on the factual issues raised by Gamboa, except the single and purely legal issue on
the definition of the term "capital" in Section 11, Article XII of the Constitution. The Court
confined the resolution of the instant case to this threshold legal issue in deference to the
fact-finding power of the SEC.

Needless to state, the Court can validly, properly, and fully dispose of the fundamental
legal issue in this case even without the participation of PLDT since defining the term
"capital" in Section 11, Article XII of the Constitution does not, in any way, depend on
whether PLDT was impleaded. Simply put, PLDT is not indispensable for a complete
resolution of the purely legal question in this case.55 In fact, the Court, by treating the
petition as one for mandamus,56 merely directed the SEC to apply the Court’s definition of
the term "capital" in Section 11, Article XII of the Constitution in determining whether
PLDT committed any violation of the said constitutional provision. The dispositive
portion of the Court’s ruling is addressed not to PLDT but solely to the SEC, which
is the administrative agency tasked to enforce the 60-40 ownership requirement
in favor of Filipino citizens in Section 11, Article XII of the Constitution.

Since the Court limited its resolution on the purely legal issue on the definition of the
term "capital" in Section 11, Article XII of the 1987 Constitution, and directed the SEC to
investigate any violation by PLDT of the 60-40 ownership requirement in favor of Filipino
citizens under the Constitution,57 there is no deprivation of PLDT’s property or denial of
PLDT’s right to due process, contrary to Pangilinan and Nazareno’s misimpression. Due
process will be afforded to PLDT when it presents proof to the SEC that it complies, as it
claims here, with Section 11, Article XII of the Constitution.

X.
Foreign Investments in the Philippines

Movants fear that the 28 June 2011 Decision would spell disaster to our economy, as it may
result in a sudden flight of existing foreign investors to "friendlier" countries and
simultaneously deterring new foreign investors to our country. In particular, the PSE
claims that the 28 June 2011 Decision may result in the following: (1) loss of more than ₱
630 billion in foreign investments in PSE-listed shares; (2) massive decrease in foreign
trading transactions; (3) lower PSE Composite Index; and (4) local investors not investing
in PSE-listed shares.58

Dr. Bernardo M. Villegas, one of the amici curiae in the Oral Arguments, shared movants’
apprehension. Without providing specific details, he pointed out the depressing state of
the Philippine economy compared to our neighboring countries which boast of growing
economies. Further, Dr. Villegas explained that the solution to our economic woes is for
the government to "take-over" strategic industries, such as the public utilities sector,
thus:

JUSTICE CARPIO:

I would like also to get from you Dr. Villegas if you have additional information on
whether this high FDI59 countries in East Asia have allowed foreigners x x x control [of]
their public utilities, so that we can compare apples with apples.

DR. VILLEGAS:
Correct, but let me just make a comment. When these neighbors of ours find an industry
strategic, their solution is not to "Filipinize" or "Vietnamize" or "Singaporize." Their
solution is to make sure that those industries are in the hands of state
enterprises. So, in these countries, nationalization means the government takes
over. And because their governments are competent and honest enough to the
public, that is the solution. x x x 60 (Emphasis supplied)

If government ownership of public utilities is the solution, then foreign investments in


our public utilities serve no purpose. Obviously, there can never be foreign investments in
public utilities if, as Dr. Villegas claims, the "solution is to make sure that those industries
are in the hands of state enterprises." Dr. Villegas’s argument that foreign investments in
telecommunication companies like PLDT are badly needed to save our ailing economy
contradicts his own theory that the solution is for government to take over these
companies. Dr. Villegas is barking up the wrong tree since State ownership of public
utilities and foreign investments in such industries are diametrically opposed concepts,
which cannot possibly be reconciled.

In any event, the experience of our neighboring countries cannot be used as argument to
decide the present case differently for two reasons. First, the governments of our
neighboring countries have, as claimed by Dr. Villegas, taken over ownership and control
of their strategic public utilities like the telecommunications industry. Second, our
Constitution has specific provisions limiting foreign ownership in public utilities which
the Court is sworn to uphold regardless of the experience of our neighboring countries.

In our jurisdiction, the Constitution expressly reserves the ownership and operation of
public utilities to Filipino citizens, or corporations or associations at least 60 percent of
whose capital belongs to Filipinos. Following Dr. Villegas’s claim, the Philippines appears
to be more liberal in allowing foreign investors to own 40 percent of public utilities,
unlike in other Asian countries whose governments own and operate such industries.

XI.
Prospective Application of Sanctions

In its Motion for Partial Reconsideration, the SEC sought to clarify the reckoning period
of the application and imposition of appropriate sanctions against PLDT if found
violating Section 11, Article XII of the Constitution.1avvphi1

As discussed, the Court has directed the SEC to investigate and determine whether PLDT
violated Section 11, Article XII of the Constitution. Thus, there is no dispute that it is only
after the SEC has determined PLDT’s violation, if any exists at the time of the
commencement of the administrative case or investigation, that the SEC may impose the
statutory sanctions against PLDT. In other words, once the 28 June 2011 Decision becomes
final, the SEC shall impose the appropriate sanctions only if it finds after due hearing
that, at the start of the administrative case or investigation, there is an existing violation
of Section 11, Article XII of the Constitution. Under prevailing jurisprudence, public
utilities that fail to comply with the nationality requirement under Section 11, Article XII
and the FIA can cure their deficiencies prior to the start of the administrative case or
investigation.61

XII.
Final Word

The Constitution expressly declares as State policy the development of an economy


"effectively controlled" by Filipinos. Consistent with such State policy, the Constitution
explicitly reserves the ownership and operation of public utilities to Philippine nationals,
who are defined in the Foreign Investments Act of 1991 as Filipino citizens, or
corporations or associations at least 60 percent of whose capital with voting
rights belongs to Filipinos. The FIA’s implementing rules explain that "[f]or stocks to be
deemed owned and held by Philippine citizens or Philippine nationals, mere legal title is
not enough to meet the required Filipino equity. Full beneficial ownership of the
stocks, coupled with appropriate voting rights is essential." In effect, the FIA
clarifies, reiterates and confirms the interpretation that the term "capital" in Section 11,
Article XII of the 1987 Constitution refers to shares with voting rights, as well as with
full beneficial ownership. This is precisely because the right to vote in the election of
directors, coupled with full beneficial ownership of stocks, translates to effective control
of a corporation.

Any other construction of the term "capital" in Section 11, Article XII of the Constitution
contravenes the letter and intent of the Constitution. Any other meaning of the term
"capital" openly invites alien domination of economic activities reserved exclusively to
Philippine nationals. Therefore, respondents’ interpretation will ultimately result in
handing over effective control of our national economy to foreigners in patent violation of
the Constitution, making Filipinos second-class citizens in their own country.

Filipinos have only to remind themselves of how this country was exploited under the
Parity Amendment, which gave Americans the same rights as Filipinos in the exploitation
of natural resources, and in the ownership and control of public utilities, in the
Philippines. To do this the 1935 Constitution, which contained the same 60 percent
Filipino ownership and control requirement as the present 1987 Constitution, had to be
amended to give Americans parity rights with Filipinos. There was bitter opposition to
the Parity Amendment62 and many Filipinos eagerly awaited its expiration. In late 1968,
PLDT was one of the American-controlled public utilities that became Filipino-controlled
when the controlling American stockholders divested in anticipation of the expiration of
the Parity Amendment on 3 July 1974.63 No economic suicide happened when control of
public utilities and mining corporations passed to Filipinos’ hands upon expiration of the
Parity Amendment.
Movants’ interpretation of the term "capital" would bring us back to the same evils
spawned by the Parity Amendment, effectively giving foreigners parity rights with
Filipinos, but this time even without any amendment to the present Constitution.
Worse, movants’ interpretation opens up our national economy to effective control not
only by Americans but also by all foreigners, be they Indonesians, Malaysians or
Chinese, even in the absence of reciprocal treaty arrangements. At least the Parity
Amendment, as implemented by the Laurel-Langley Agreement, gave the capital-starved
Filipinos theoretical parity – the same rights as Americans to exploit natural resources,
and to own and control public utilities, in the United States of America. Here, movants’
interpretation would effectively mean a unilateral opening up of our national economy
to all foreigners, without any reciprocal arrangements. That would mean that
Indonesians, Malaysians and Chinese nationals could effectively control our mining
companies and public utilities while Filipinos, even if they have the capital, could not
control similar corporations in these countries.

The 1935, 1973 and 1987 Constitutions have the same 60 percent Filipino ownership and
control requirement for public utilities like PLOT. Any deviation from this requirement
necessitates an amendment to the Constitution as exemplified by the Parity Amendment.
This Court has no power to amend the Constitution for its power and duty is only to
faithfully apply and interpret the Constitution.

WHEREFORE, we DENY the motions for reconsideration WITH FINALITY. No further


pleadings shall be entertained.

SO ORDERED.

ANTONIO T. CARPIO
Associate Justice

WE CONCUR:

MARIA LOURDES P.A. SERENO


Chief Justice

TERESITA J. LEONARDO-DE
PRESBITERO J. VELASCO, JR.
CASTRO
Associate Justice
Associate Justice

ARTURO D. BRION DIOSDADO M. PERALTA


Associate Justice Associate Justice

LUCAS P. BERSAMIN MARIANO C. DEL CASTILLO


Associate Justice Associate Justice
ROBERTO A. ABAD MARTIN S. VILLARAMA, JR.
Associate Justice Associate Justice

JOSE PORTUGAL PEREZ JOSE C. MENDOZA


Associate Justice Associate Justice

BIENVENIDO L. REYES ESTELA M. PERLAS-BERNABE


Associate Justice Associate Justice

CERTIFICATION

Pursuant to Section 13, Article VIII of the Constitution, I certify that the conclusions in
the above Resolution had been reached in consultation before the case was assigned to
the writer of the opinion of the Court.

MARIA LOURDES P.A. SERENO


Chief Justice

Footnotes

* The Heirs of Wilson P. Gamboa substituted petitioner Wilson P. Gamboa per


Resolution dated 17 April 2012 which noted the Manifestation of Lauro Gamboa
dated 12 April 2012.

1 Rol/o(Vol.lll),pp.l431-1451. Dated II July2011.

2 Id. at 1563-1613. Dated 14 July 2011.

3 Id. at 1454-1537. Dated 15 July 2011.

4 Id.at 1669-1680. Through its Office of the General Counsel and Commissioner
Manuel llubeiio B. Gaite. In its Manifestation and Omnibus Motion dated 29 July
20 II, the SEC manifested that the position of the OSG on the meaning of the term
"capital" does not reflect the view of the SEC.

The SEC sought a partial re~onsideration praying that the statement on


SEC's unlawful neglect of its statutory duty be expunged and for
clarification on the reckoning period of the imposition of any sanctions
against PLOT.
5 Id.
at 1614-1627. Dated 13 July 2011. On behalfofthe SEC, by special appearance.
The OSG prayed that the Court's decision "be cured of its procedural defect which
however should not prevail over the substantive aspect of the Decision."

6I d. at 2102-2124. Filed on 15 December 20 II.

7 Salvacion v. Central Bank of the Philippines, 343 Phil. 539 (1997).

8 150-B Phil. 380 (1972).

9 Rollo (Vol. III), p. 1583.

10 Addressed to Gov. Lilia Bautista of the Board of Investments.

11 A typographical error in DOJ Opinion No. 130 where it states 80%.

12 Republic Act No. 8799.

13 General
Counsel and Commissioner Manuel Huberto B. Gaite of the Securities
and Exchange Commission.

14 TSN (Oral Arguments), 26 June 2012, pp. 81-83. Emphasis supplied.

15 SEC En Banc Case No. 09-09-177, 25 March 2010.

16 SECOpinion No. 49-04, Re: Corporations considered as Philippine Nationals,


dated 22 December 2004, addressed to Romulo Mabanta Buenaventura Sayoc & De
Los Angeles and signed by General Counsel Vernette G. Umali-Paco; SEC-OGC
Opinion No. 03-08, dated 15 January 2008, addressed to Attys. Ruby Rose J. Yusi
and Rudyard S. Arbolado and signed by General Counsel Vernette G. Umali-Paco;
SEC-OGC Opinion No. 09-09, dated 28 April 2009, addressed to Villaraza Cruz
Marcelo Angangco and signed by General Counsel Vernette G. Umali-Paco;
SECOGC Opinion No. 08-10, dated 8 February 2010, addressed to Mr. Teodoro B.
Quijano and signed by General Counsel Vernette G. Umali-Paco; SEC-OGC
Opinion No. 23-10, dated 18 August 2010, addressed to Castillo Laman Tan
Pantaleon and San Jose and signed by General Counsel Vernette G. Umali-Paco;
SEC-OGC Opinion No. 18-07, dated 28 November 2007, addressed to Mr. Rafael C.
Bueno, Jr. and signed by General Counsel Vernette G. Umali-Paco.

In SEC Opinion No. 32-03, dated 2 June 2003, addressed to National


Telecommunications Commissioner Armi Jane R. Borje, SEC General
Counsel Vernette G. Umali-Paco stated:
In this light, it is imperative that we reiterate the policy of this Commission
(SEC) in refraining from rendering opinions that might prejudice or affect
the outcome of a case, which is subject to present litigation before the
courts, or any other forum for that matter. The opinion, which may be
rendered thereon, would not be binding upon any party who would in all
probability, if the opinion happens to be adverse to his or its interest, take
issue therewith and contest it before the proper venue. The Commission,
therefore, has to refrain from giving categorical answers to your query.

17 370 Phil. 538 (1999).

18 G.R. No. 152685, 4 December 2007, 539 SCRA 365.

19 Rollo (Vol. III), pp. 1392-1393.

20 Supra.

21 Supra.

22 DeLeon, Hector S., TEXTBOOK ON THE PHILIPPINE CONSTITUTION, 2005


Edition, pp. 32, 33.

23 Section 10, Article XII of the 1987 Constitution.

24 Bernas,Joaquin G., S.J., THE 1987 CONSTITUTION OF THE REPUBLIC OF THE


PHILIPPINES: A COMMENTARY, 1996 Edition, p. 1044, citing Smith, Bell and Co.
v. Natividad, 40 Phil. 136, 148 (1919); Luzon Stevedoring Corporation v. Anti-Dummy
Board, 150-B Phil. 380, 403-404 (1972).

25 Issued on 17 July 1987.

26 Articles
44 to 56 of the Omnibus Investments Code of 1987 were later repealed
by the Foreign Investments Act of 1991. See infra, p. 26.

27 Article48. Authority to Do Business. No alien, and no firm association,


partnership, corporation or any other form of business organization formed,
organized, chartered or existing under any laws other than those of the
Philippines, or which is not a Philippine national, or more than forty percent
(40%) of the outstanding capital of which is owned or controlled by aliens shall do
business or engage in any economic activity in the Philippines or be registered,
licensed, or permitted by the Securities and Exchange Commission or by any other
bureau, office, agency, political subdivision or instrumentality of the government,
to do business, or engage in any economic activity in the Philippines without first
securing a written certificate from the Board of Investments to the effect:
xxxx

(3) That such business or economic activity by the applicant would not
conflict with the Constitution or laws of the Philippines;

xxxx

28 Presidential Decree No. 1789.

29 Article69. Authority to Do Business. No alien, and no firm, association,


partnership, corporation or any other form of business organization formed,
organized, chartered or existing under any laws other than those of the
Philippines, or which is not a Philippine national, or more than thirty (30%) per
cent of the outstanding capital of which is owned or controlled by aliens shall do
business or engage in any economic activity in the Philippines, or be registered,
licensed, or permitted by the Securities and Exchange Commission or by any other
bureau, office, agency, political subdivision or instrumentality of the government,
to do business, or engage in any economic activity in the Philippines, without first
securing a written certificate from the Board of Investments to the effect:

xxxx

(3) That such business or economic activity by the applicant would not
conflict with the Constitution or laws of the Philippines;

xxxx

30 An Act Prescribing Incentives And Guarantees To Investments In The


Philippines, Creating A Board Of Investments, Appropriating The Necessary Funds
Therefor And For Other Purposes.

31 Section 3 of RA No. 5455 states:

Section 3. Permissible Investments. If an investment by a non-Philippine


national in an enterprise not registered under the Investment Incentives
Act is such that the total participation by non-Philippine nationals in the
outstanding capital thereof shall exceed thirty per cent, the enterprise must
obtain prior authority from the Board of Investments, which authority shall
be granted unless the proposed investment

(a) Would conflict with existing constitutional provisions and laws


regulating the degree of required ownership by Philippine nationals
in the enterprise; or
(b) Would pose a clear and present danger of promoting monopolies
or combinations in restraint of trade; or

(c) Would be made in an enterprise engaged in an area adequately


being exploited by Philippine nationals; or

(d) Would conflict or be inconsistent with the Investments Priorities


Plan in force at the time the investment is sought to be made; or

(e) Would not contribute to the sound and balanced development of


the national economy on a self-sustaining basis.

xxxx

32 ExecutiveOrder No. 858, Promulgating the Eighth Regular Foreign Investment


Negative List, signed on 5 February 2010,
http://www.boi.gov.ph/pdf/laws/eo/EO%20858.pdf (accessed 17 August 2011).

33 TSN (Oral Arguments), 26 June 2012, pp. 71-74.

34 Published by the Board of Investments. For on-line copy, see


http://www.fdi.net/documents/WorldBank/databases/philippines/primer.htm
(accessed 3 September 2012)

35 In his book, Fletcher explains:

The term "stock" has been used in the same sense as "capital stock" or
"capital," and it has been said that "tis primary meaning is capital, in
whatever form it may be invested. More commonly, it is now being used to
designate shares of the stock in the hands of the individual shareholders, or
the certificates issued by the corporation to them. (Fletcher Cyclopedia of
the Law of Private Corporations, 1995 Revised Volume, Vol. 11, § 5079, p. 13;
citations omitted).

36 SECTION 137. Outstanding capital stock defined. - The term "outstanding capital
stock" as used in this Code, means the total shares of stock issued to subscribers or
stockholders, whether or not fully or partially paid, except treasury shares.

SEC. 6. Classification of shares. - The shares of stock of stock corporations


may be divided into classes or series of shares, or both, any of which classes
or series of shares may have such rights, privileges or restrictions as may be
stated in the articles of incorporation: Provided, That no share may be
deprived of voting rights except those classified and issued as "preferred" or
"redeemable" shares, unless otherwise provided in this Code: Provided,
further, That there shall always be a class or series of shares which have
complete voting rights. Any or all of the shares or series of shares may have
a par value or have no par value as may be provided for in the articles of
incorporation: Provided, however, That banks, trust companies, insurance
companies, public utilities, and building and loan associations shall not be
permitted to issue no-par value shares of stock.

Preferred shares of stock issued by any corporation may be given preference


in the distribution of the assets of the corporation in case of liquidation and
in the distribution of dividends, or such other preferences as may be stated
in the articles of incorporation which are not violative of the provisions of
this Code: Provided, That preferred shares of stock may be issued only with
a stated par value. The board of directors, where authorized in the articles
of incorporation, may fix the terms and conditions of preferred shares of
stock or any series thereof: Provided, That such terms and conditions shall
be effective upon the filing of a certificate thereof with the Securities and
Exchange Commission.

Shares of capital stock issued without par value shall be deemed fully paid
and non-assessable and the holder of such shares shall not be liable to the
corporation or to its creditors in respect thereto: Provided; That shares
without par value may not be issued for a consideration less than the value
of five (₱ 5.00) pesos per share: Provided, further, That the entire
consideration received by the corporation for its no-par value shares shall
be treated as capital and shall not be available for distribution as dividends.

A corporation may, furthermore, classify its shares for the purpose of


insuring compliance with constitutional or legal requirements.

Except as otherwise provided in the articles of incorporation and stated in


the certificate of stock, each share shall be equal in all respects to every
other share.

xxxx

37 Under Section 6 of the Corporation Code.

38 Dissenting Opinion to the 28 June 2011 Decision.

39 Record of the Constitutional Commission, Vol. III, pp. 255-256.

40 Id. at 360.
41 Aruego, Jose M., THE FRAMING OF THE PHILIPPINE CONSTITUTION, Vol. II,
1936, p. 658.

42 Id.

43 The OSG stated, "It must be stressed that when the OSG stated its concurrence
with the Honorable Court’s ruling on the proper definition of capital, it did so, not
on behalf of the SEC, its individual client in this case. Rather, the OSG did so in the
exercise of its discretion not only in its capacity as statutory counsel of the SEC but
as counsel for no less than the State itself."

44 295 U.S. 602, 55 S.Ct. 869, U.S. 1935 (27 May 1935).

45 Record of the Constitutional Commission, Vol. 3, pp. 650-651 (23 August 1986).

46 Record of the Constitutional Commission, Vol. 3, pp. 652-653 (23 August 1986).

47 Record of the Constitutional Commission, Vol. 3, p. 652 (23 August 1986).

48 Record of the Constitutional Commission, Vol. 3, pp. 665-667 (23 August 1986).

49 Section 5, Article XIV of the 1973 Constitution provides:

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


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

50 For the year 2009.

51 SEC.17. Grounds when articles of incorporation or amendment may be rejected or


disapproved. – The Securities and Exchange Commission may reject the articles of
incorporation or disapprove any amendment thereto if the same is not in
compliance with the requirements of this Code: Provided, That the Commission
shall give the incorporators a reasonable time within which to correct or
modify the objectionable portions of the articles or amendment. The
following are grounds for such rejection or disapproval:

xxxx

(4) That the percentage of ownership of the capital stock to be owned


by citizens of the Philippines has not been complied with as required
by existing laws or the Constitution. (Emphasis supplied)

Section 5 of R.A. No. 8799 provides:

Section 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. 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 a
permit issued by the Government;

xxxx

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


statements, and registration and licensing applications;

xxxx

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

xxxx

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

xxxx

(m) Suspend, or revoke, after proper notice and hearing the franchise or
certificate of registration of corporations, partnership or associations, upon
any of the grounds provided by law; and
(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.

52 466 Phil. 235 (2004).

53 Id. at 266-267.

54 Inits Manifestation and Omnibus Motion dated 29 July 2011, the SEC stated:
"The Commission respectfully manifests that the position of the Office of the
Solicitor General (‘OSG’) on the meaning of the term "capital" does not reflect the
view of the Commission. The Commission’s position has been laid down in
countless opinions that needs no reiteration. The Commission, however, would
submit to whatever would be the final decision of this Honorable Court on
the meaning of the term "capital." (Emphasis supplied; citations omitted)

In its Memorandum, the SEC stated: "In the event that this Honorable
Court rules with finality on the meaning of "capital", the SEC will yield to
the Court and follow its interpretation."

55 InLucman v. Malawi, 540 Phil. 289 (2006), the Court defined indispensable
parties as parties ininterest without whom there can be no final determination of
an action.

56 Section 3, Rule 65 of the Rules of Court states:

SEC. 3. Petition for mandamus. – When any tribunal, corporation, board,


officer or person unlawfully neglects the performance of an act which the
law specifically enjoins as a duty resulting from an office, trust, or station,
or unlawfully excludes another from the use and enjoyment of a right or
office to which such other is entitled, and there is no other plain, speedy
and adequate remedy in the ordinary course of law, the person aggrieved
thereby may file a verified petition in the proper court, alleging the facts
with certainty and praying that judgment be rendered commanding the
respondent, immediately or at some other time to be specified by the court,
to do the act required to be done to protect the rights of the petitioner and
to pay the damages sustained by the petitioner by reason of the wrongful
acts of the respondent.

xxxx

57 SeeLucman v. Malawi, supra, where the Court referred to the Department of


Interior and Local Government (though not impleaded) for investigation and
appropriate action the matter regarding the withdrawals of deposits representing
the concerned barangays’ Internal Revenue Allotments.

58 Rollo (Vol. III), pp. 1444-1445.

59 Foreign Direct Investments.

60 TSN (Oral Arguments), 26 June 2012, p. 117.

61 See
Halili v. Court of Appeals, 350 Phil. 906 (1998); United Church Board for
World Ministries v. Sebastian, 242 Phil. 848 (1988).

62 Urbano A. Zafra, The Laurel-Langley Agreement and the Philippine Economy, p.


43 (1973). See also Mabanag v. Lopez Vito, 78 Phil. 1 (1947).

63 SeeHadi Salehi Esfahani, The Political Economy of the Philippines’


Telecommunications Sector, World Bank Policy Research Department (1994).

The Lawphil Project - Arellano Law Foundation

DISSENTING OPINION

VELASCO, JR., J.:

Before Us are separate motions for recon~ideration of the Court's June 28, 2011
Decision, 1 which partially granted the petition for prohibition, injunction and declaratory
relief interposed by Wilson P. Gamboa (petitioner or Gamboa). Very simply, the Court
held that the term "capital" appearing in Section 11, Article XII of the 1987 Constitution
refers only to common shares or shares of stock entitled to vote in the election of the
members of the board of directors of a public utility, and not to the total outstanding
capital stock.

Respondents Manuel V. Pangilinan (Pangilinan) and Napoleon L.Nazare no (Nazareno)


separately moved for reconsideration on procedural and substantive grounds, but
reserved their main arguments against the majority's holding on the meaning of "capital."
The Office of the Solicitor General (OSG), which initially representL:d the Securities and
Exchange Commission (SEC), also requested recon~itkratiun even as it manifested
agreement with the majority's construal ct' the \Vord "capital." Unable to join the OSG's
stand on the determinative issue of capital, the SEC sought leave to join the fray on its
mvn. fn its Jtdotion to Admit A1anifestation and Omnibus Motion, the SEC stated that the
OSG’s position on said issue does not reflect its own and in fact diverges from what the
Commission has consistently adopted prior to this case. And because the decision in
question has a penalty component which it is tasked to impose, SEC requested
clarification as to when the reckoning period of application of the appropriate
sanctions may be imposed on Philippine Long Distance Telephone Company
(PLDT) in case the SEC determines that it has violated Sec. 11, Art. XII of the
Constitution.

To the foregoing motions, the main petitioner, now deceased, filed his Comment and/or
Opposition to Motions for Reconsideration.

Acting on the various motions and comment, the Court conducted and heard the parties
in oral arguments on April 17 and June 26, 2012.

After considering the parties’ positions as articulated during the oral arguments and in
their pleadings and respective memoranda, I vote to grant reconsideration. This
disposition is consistent with my dissent, on procedural and substantive grounds, to the
June 28, 2011 majority Decision.

Conspectus

The core issue is the meaning of the word "capital" in the opening sentence of Sec. 11, Art.
XII of the 1987 Constitution which reads:

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.)

For an easier comprehension of the two contrasting positions on the contentious


meaning of the word "capital," as found in the first sentence of the aforequoted provision,
allow me to present a brief comparative analysis showing the dissimilarities.

The majority, in the June 28, 2011 Decision, as reiterated in the draft resolution, is of the
view that the word "capital" in the first sentence of Sec. 11, Art. XII refers to common
shares or voting shares only; thus limiting foreign ownership of such shares to 40%. The
rationale, as stated in the basic ponencia, is that this interpretation ensures that control of
the Board of Directors stays in the hands of Filipinos, since foreigners can only own a
maximum of 40% of said shares and, accordingly, can only elect the equivalent
percentage of directors. As a necessary corollary, Filipino stockholders can always elect
60% of the Board of Directors which, to the majority, translates to control over the
corporation.

The opposite view is that the word "capital" in the first sentence refers to the entire
capital stock of the corporation or both voting and non-voting shares and NOT solely to
common shares. From this standpoint, 60% control over the capital stock or the
stockholders owning both voting and non-voting shares is assured to Filipinos and, as a
consequence, over corporate matters voted upon and decisions reached during
stockholders’ meetings. On the other hand, the last sentence of Sec. 11, Art. XII, with the
word "capital" embedded in it, is the provision that ensures Filipino control over the
Board of Directors and its decisions.

To resolve the conflicting interpretations of the word "capital," the first sentence of Sec.
11, Art. XII must be read and considered in conjunction with the last sentence of said Sec.
11 which prescribes that "the participation of foreign investors in the governing body of
any public utility enterprise shall be limited to their proportionate share in its capital."
After all, it is an established principle in constitutional construction that provisions in the
Constitution must be harmonized.

It has been made very clear during the oral arguments and even by the parties’ written
submissions that control by Filipinos over the public utility enterprise exists on three (3)
levels, namely:

1. Sixty percent (60%) control of Filipinos over the capital stock which covers both voting
and non-voting shares and inevitably over the stockholders. This level of control is
embodied in the first sentence of Sec. 11, Art. XII which reads:

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 x x x.

The word "capital" in the above provision refers to capital stock or both voting and non-
voting shares. Sixty percent (60%) control over the capital stock translates to control by
Filipinos over almost all decisions by the stockholders during stockholders’ meetings
including ratification of the decisions and acts of the Board of Directors. During said
meetings, voting and even non-voting shares are entitled to vote. The exercise by non-
voting shares of voting rights over major corporate decisions is expressly provided in Sec.
6 of the Corporation Code which reads:
Sec. 6. x x x x

Where the articles of incorporation provide for non-voting shares in the cases allowed by
this Code, the holders of such shares shall nevertheless be entitled to vote on the
following matters:

1. Amendment of the articles of incorporation;

2. Adoption and amendment of by-laws;

3. Sale, lease, exchange, mortgage, pledge or other disposition of all or


substantially all of the corporate property;

4. Incurring, creating or increasing bonded indebtedness;

5. Increase or decrease of capital stock;

6. Merger or consolidation of the corporation with another corporation or


other corporations;

7. Investment of corporate funds in another corporation or business in


accordance with this Code; and

8. Dissolution of the corporation.

Construing the word "capital" in the first sentence of Sec. 11, Art. XII of the Constitution
as capital stock would ensure Filipino control over the public utility with respect to major
corporate decisions. If we adopt the view espoused by Justice Carpio that the word
"capital" means only common shares or voting shares, then foreigners can own even up to
100% of the non-voting shares. In such a situation, foreigners may very well exercise
control over all major corporate decisions as their ownership of the nonvoting shares
remains unfettered by the 40% cap laid down in the first sentence of Sec. 11, Art. XII. This
will spawn an even greater anomaly because it would give the foreigners the opportunity
to acquire ownership of the net assets of the corporation upon its dissolution to include
what the Constitution enjoins––land ownership possibly through dummy corporations.
With the view of Justice Carpio, Filipinos will definitely lose control over major corporate
decisions which are decided by stockholders owning the majority of the non-voting
shares.

2. Sixty percent (60%) control by Filipinos over the common shares or voting shares and
necessarily over the Board of Directors of the public utility. Control on this level is
guaranteed by the last sentence of Sec. 11, Art. XII which reads:
The participation of foreign investors in the governing body of any public utility
enterprise shall be limited to their proportionate share in its "capital" x x x.

In its ordinary signification, "participation" connotes "the action or state of taking part
with others in an activity."2 This participation in its decision-making function can only be
the right to elect board directors. Hence, the last sentence of Sec. 11, Art. XII of the
Constitution effectively restricts the right of foreigners to elect directors to the
board in proportion to the limit on their total shareholdings. Since the first part of
Sec. 11, Art. XII of the Constitution specifies a 40% limit of foreign ownership in the total
capital of the public utility corporation, then the rights of foreigners to be elected to the
board of directors, is likewise limited to 40 percent. If the foreign ownership of common
shares is lower than 40%, the participation of foreigners is limited to their proportionate
share in the capital stock.

In the highly hypothetical public utility corporation with 100 common shares and
1,000,000 preferred non-voting shares, or a total of 1,000,100 shares cited in the June 28,
2011 Decision, foreigners can thus only own up to 400,040 shares of the corporation,
consisting of the maximum 40 (out of the 100) voting shares and 400,000 non-voting
shares. And, assuming a 10- member board, the foreigners can elect only 4 members of
the board using the 40 voting shares they are allowed to own.

Following, in fine, the dictates of Sec. 11, Art. XII, as couched, the foreign
shareholders’ right to elect members of the governing board of a given public
utility corporation is proportional only to their right to hold a part of the total
shareholdings of that entity. Since foreigners can only own, in the maximum, up to
40% of the total shareholdings of the company, then their voting entitlement as to the
numerical composition of the board would depend on the level of their
shareholding in relation to the capital stock, but in no case shall it exceed the 40%
threshold.

Contrary to the view of Justice Carpio that the objective behind the first sentence of Sec.
11, Art. XII is to ensure control of Filipinos over the Board of Directors by limiting foreign
ownership of the common shares or voting shares up to 40%, it is actually the first part
of the aforequoted last sentence of Sec. 11, Art. XII that limits the rights of
foreigners to elect not more than 40% of the board seats thus ensuring a clear
majority in the Board of Directors to Filipinos. If we follow the line of reasoning of Justice
Carpio on the meaning of the word "capital" in the first sentence, then there is no need
for the framers of the Constitution to incorporate the last sentence in Sec. 11, Art. XII on
the 40% maximum participation of the foreigners in the Board of Directors. The last
sentence would be a useless redundancy, a situation doubtless unintended by the framers
of the Constitution. A construction that renders a part of the law or Constitution being
construed superfluous is an aberration,3 for it is at all times presumed that each word
used in the law is intentional and has a particular and special role in the approximation of
the policy sought to be attained, ut magis valeat quam pereat.
3. The third level of control proceeds from the requirement tucked in the second part of
the ultimate sentence that "all the executive and managing officers of the
corporation must be citizens of the Philippines." This assures full Filipino control, at
all times, over the management of the public utility.

To summarize, the Constitution, as enacted, establishes not just one but a three-tiered
control-enhancing-and-locking mechanism in Sec. 11, Article XII to ensure that Filipinos
will always have full beneficial ownership and control of public utility corporations:

1. 40% ceiling on foreign ownership in the capital stock that ensures sixty percent (60%)
Filipino control over the capital stock which covers both voting and non-voting shares. As
a consequence, Filipino control over the stockholders is assured. (First sentence of Sec. 11,
Art. XII). Thus, foreigners can own only up to 40% of the capital stock.

2. 40% ceiling on the right of foreigners to elect board directors that guarantees sixty
percent (60%) Filipino control over the Board of Directors. (First part of last sentence of
Sec. 11, Art. XII).

3. Reservation to Filipino citizens of the executive and managing officers, regardless of the
level of alien equity ownership to secure total Filipino control over the management of
the public utility enterprise (Second part of last sentence of Sec. 11, Art. XII). Thus, all
executive and managing officers must be Filipinos.

Discussion

Undoubtedly there is a clash of conflicting opinions as to what "capital" in the first


sentence of Sec. 11, Art. XII means. The majority says it refers only to common or voting
shares. The minority says it includes both voting and non-voting shares. A resort to
constitutional construction is unavoidable.

It is settled though that the "primary source from which to ascertain constitutional intent
or purpose is the language of the constitution itself."4 To this end, the words used by
the Constitution should as much as possible be understood in their ordinary
meaning as the Constitution is not a lawyer’s document.5 This approach, otherwise
known as the verba legis rule, should be applied save where technical terms are
employed.6

The plain meaning of "capital" in the first


sentence of Sec. 11, Art. XII of the Constitution
includes both voting and non-voting shares

J.M. Tuason & Co., Inc. v. Land Tenure Administration illustrates the verba legis rule.
There, the Court cautions against departing from the commonly understood meaning of
ordinary words used in the Constitution, viz.:
We look to the language of the document itself in our search for its meaning. We do not
of course stop there, but that is where we begin. It is to be assumed that the words in
which constitutional provisions are couched express the objective sought to be
attained. They are to be given their ordinary meaning except where technical terms are
employed in which case the significance thus attached to them prevails. As the
Constitution is not primarily a lawyer's document, it being essential for the rule of law to
obtain that it should ever be present in the people's consciousness, its language as
much as possible should be understood in the sense they have in common use.
What it says according to the text of the provision to be construed compels acceptance
and negates the power of the courts to alter it, based on the postulate that the framers
and the people mean what they say. Thus, there are cases where the need for construction
is reduced to a minimum.7 (Emphasis supplied.)

The primary reason for the verba legis approach, as pointed out by Fr. Joaquin Bernas
during the June 26, 2012 arguments, is that the people who ratified the Constitution voted
on their understanding of the word capital in its everyday meaning. Fr. Bernas elucidated
thus:

x x x Over the years, from the 1935 to the 1973 and finally even under the 1987
Constitution, the prevailing practice has been to base the 60-40 proportion on total
outstanding capital stock, that is, the combined total of common and non-voting
preferred shares. This is what occasioned the case under consideration.

What is the constitutional relevance of this continuing practice? I suggest that it is


relevant for determining what the people in the street voted for when they ratified the
Constitution. When the draft of a Constitution is presented to the people for
ratification, what the people vote on is not the debates in the constituent body
but the text of the draft. Concretely, what the electorate voted on was their
understanding of the word capital in its everyday meaning they encounter in daily
life. We cannot attribute to the voters a jurist’s sophisticated meaning of capital and its
breakdown into common and preferred. What they vote on is what they see. Nor do they
vote on what the drafters saw as assumed meaning, to use Bengzon’s explanation. In the
language of the sophisticates, what voters in a plebiscite vote on is verba legis and
not anima legis about which trained jurists debate.

What then does it make of the contemporary understanding by SEC etc. Is the
contemporary understanding unconstitutional or constitutional? I hesitate to
characterize it as constitutional or unconstitutional. I would merely characterize it as
popular. What I mean is it reflects the common understanding of the ordinary populi,
common but incomplete.8 (Emphasis supplied.)

"Capital" in the first sentence of Sec. 11, Art. XII must then be accorded a meaning
accepted, understood, and used by an ordinary person not versed in the technicalities of
law. As defined in a non-legal dictionary, capital stock or capital is ordinarily taken to
mean "the outstanding shares of a joint stock company considered as an aggregate"9or
"the ownership element of a corporation divided into shares and represented by
certificates."10

The term "capital" includes all the outstanding shares of a company that represent "the
proprietary claim in a business."11 It does not distinguish based on the voting feature
of the stocks but refers to all shares, be they voting or non-voting. Neither is the
term limited to the management aspect of the corporation but clearly refers to the
separate aspect of ownership of the corporate shares thereby encompassing all shares
representing the equity of the corporation.

This plain meaning, as understood, accepted, and used in ordinary parlance, hews with
the definition given by Black who equates capital to capital stock12 and defines it as "the
total number of shares of stock that a corporation may issue under its charter or articles
of incorporation, including both common stock and preferred stock."13 This meaning
is also reflected in legal commentaries on the Corporation Code. The respected
commentator Ruben E. Agpalo defines "capital" as the "money, property or means
contributed by stockholders for the business or enterprise for which the corporation was
formed and generally implies that such money or property or means have been
contributed in payment for stock issued to the contributors."14 Meanwhile, "capital stock"
is "the aggregate of the shares actually subscribed [or] the amount subscribed and
paid-in and upon which the corporation is to conduct its operations, or the amount paid-
in by its stockholders in money, property or services with which it is to conduct its
business."15

This definition has been echoed by numerous other experts in the field of corporation
law. Dean Villanueva wrote, thus:

In defining the relationship between the corporation and its stockholders, the capital
stock represents the proportional standing of the stockholders with respect to the
corporation and corporate matters, such as their rights to vote and to receive dividends.

In financial terms, the capital stock of the corporation as reflected in the financial
statement of the corporation represents the financial or proprietary claims of the
stockholders to the net assets of the corporation upon dissolution. In addition, the
capital stock represents the totality of the portion of the corporation’s assets and
receivables which are covered by the trust fund doctrine and provide for the amount of
assets and receivables of the corporation which are deemed protected for the benefit of
the corporate creditors and from which the corporation cannot declare any
dividends. 16(Emphasis supplied.)

Similarly, renowned author Hector S. de Leon defines "capital" and "capital stock" in the
following manner:
Capital is used broadly to indicate the entire property or assets of the corporation. It
includes the amount invested by the stockholders plus the undistributed earnings less
losses and expenses. In the strict sense, the term refers to that portion of the net assets
paid by the stockholders as consideration for the shares issued to them, which is utilized
for the prosecution of the business of the corporation. It includes all balances or
instalments due the corporation for shares of stock sold by it and all unpaid subscription
for shares.

xxxx

The term is also used synonymously with the words "capital stock," as meaning the
amount subscribed and paid-in and upon which the corporation is to conduct its
operation (11 Fletcher Cyc. Corp., p. 15 [1986 ed.]) and it is immaterial how the stock is
classified, whether as common or preferred.17(Emphasis and underscoring supplied.)

Hence, following the verba legis approach, I see no reason to stray away from what
appears to be a common and settled acceptation of the word "capital," given that, as used
in the constitutional provision in question, it stands unqualified by any restrictive or
expansive word as to reasonably justify a distinction or a delimitation of the meaning of
the word. Ubi lex non distinguit nos distinguere debemus, when the law does not
distinguish, we must not distinguish.18 Using this plain meaning of "capital" within the
context of Sec. 11, Art. XII, foreigners are entitled to own not more than 40% of the
outstanding capital stock, which would include both voting and non-voting shares.

Extraneous aids to ferret out constitutional intent

When the seeming ambiguity on the meaning of "capital" cannot be threshed out by
looking at the language of the Constitution, then resort to extraneous aids has become
imperative. The Court can utilize the following extraneous aids, to wit: (1) proceedings of
the convention; (2) changes in phraseology; (3) history or realities existing at the time of
the adoption of the Constitution; (4) prior laws and judicial decisions; (5)
contemporaneous construction; and (6) consequences of alternative interpretations.19 I
submit that all these aids of constitutional construction affirm that the only acceptable
construction of "capital" in the first sentence of Sec. 11, Art. XII of the 1987 Constitution is
that it refers to all shares of a corporation, both voting and non-voting.

Deliberations of the Constitutional Commission


of 1986 demonstrate that capital means both
voting and non-voting shares (1st extrinsic aid)

The proceedings of the 1986 Constitutional Commission that drafted the 1987
Constitution were accurately recorded in the Records of the Constitutional Commission.
To bring to light the true meaning of the word "capital" in the first line of Sec. 11, Art. XII,
one must peruse, dissect and analyze the entire deliberations of the Constitutional
Commission pertinent to the article on national economy and patrimony, as quoted
below:

August 13, 1986, Wednesday

PROPOSED RESOLUTION NO. 496

RESOLUTION TO INCORPORATE IN THE NEW CONSTITUTION AN ARTICLE ON


NATIONAL ECONOMY AND PATRIMONY

Be it resolved as it is hereby resolved by the Constitutional Commission in session


assembled, To incorporate the National Economy and Patrimony of the new Constitution,
the following provisions:

ARTICLE____
NATIONAL ECONOMY AND PATRIMONY

SECTION 1. The State shall develop a self-reliant and independent national economy. x x
x

xxxx

SEC. 3. x x x The exploration, development, and utilization of natural resources shall be


under the full control and supervision of the State. Such activities may be directly
undertaken by the State, or it may enter into co-production, joint venture, production-
sharing agreements with Filipino citizens or corporations or associations at least sixty
percent of whose voting stock or controlling interest is owned by such citizens. x x
x

xxxx

SEC. 9. The Congress shall reserve to citizens of the Philippines or to corporations or


associations at least sixty per cent of whose voting stock or controlling interest is
owned by such citizens or such higher percentage as Congress may prescribe, certain
areas of investments when the national interest so dictates.

xxxx

SEC. 15. 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 two-thirds of whose
voting stock or controlling interest is owned by such citizens. Neither shall any such
franchise or right be granted except under the condition that it shall be subject to
amendment, alteration, or repeal by Congress when the common good so requires. The
State shall encourage equity participation in public utilities by the general public. (Origin
of Sec. 11, Article XII)

xxxx

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

MR. VILLEGAS. That is right.

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

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

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

MR. VILLEGAS. That is right.

MR. NOLLEDO. Thank you.

With respect to an investment by one corporation in another corporation, say, a


corporation with 60-40 percent equity invests in another corporation which is permitted
by the Corporation Code, does the Committee adopt the grandfather rule?

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

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

MR. VILLEGAS. Yes.20

August 14, 1986, Thursday

MR. FOZ. Mr. Vice-President, in Sections 3 and 9, the provision on equity is both 60
percent, but I notice that this is now different from the provision in the 1973 Constitution
in that the basis for the equity provision is voting stock or controlling interest instead of
the usual capital percentage as provided for in the 1973 Constitution. We would like to
know what the difference would be between the previous and the proposed provisions
regarding equity interest.

MR. VILLEGAS. Commissioner Suarez will answer that.

MR. SUAREZ. Thank you.

As a matter of fact, this particular portion is still being reviewed by this Committee. In
Section 1, Article XIII of the 1935 Constitution, the wording is that the percentage should
be based on the capital which is owned by such citizens. In the proposed draft, this
phrase was proposed: "voting stock or controlling interest." This was a plan submitted by
the UP Law Center.

Three days ago, we had an early morning breakfast conference with the members of the
UP Law Center and precisely, we were seeking clarification regarding the difference. We
would have three criteria to go by: One would be based on capital, which is capital stock
of the corporation, authorized, subscribed or paid up, as employed under the 1935 and the
1973 Constitution. The idea behind the introduction of the phrase "voting stock or
controlling interest" was precisely to avoid the perpetration of dummies, Filipino
dummies of multinationals. It is theoretically possible that a situation may develop where
these multinational interests would not really be only 40 percent but will extend beyond
that in the matter of voting because they could enter into what is known as a voting trust
or voting agreement with the rest of the stockholders and, therefore, notwithstanding the
fact that on record their capital extent is only up to 40-percent interest in the
corporation, actually, they would be managing and controlling the entire company. That
is why the UP Law Center members suggested that we utilize the words "voting interest"
which would preclude multinational control in the matter of voting, independent of the
capital structure of the corporation. And then they also added the phrase "controlling
interest" which up to now they have not been able to successfully define the exact
meaning of. But they mentioned the situation where theoretically the board would be
controlled by these multinationals, such that instead of, say, three Filipino directors out
of five, there would be three foreign directors and, therefore, they would be controlling
the management of the company with foreign interest. That is why they volunteered to
flesh out this particular portion which was submitted by them, but up to now, they have
not come up with a constructive rephrasing of this portion. And as far as I am concerned,
I am not speaking in behalf of the Committee, I would feel more comfortable if we go
back to the wording of the 1935 and the 1973 Constitution, that is to say, the 60-40
percentage could be based on the capital stock of the corporation.

MR. FOZ. I understand that that was the same view of Dean Carale who does not agree
with the others on this panel at the UP Law Center regarding the percentage of the ratio.

MR. SUAREZ. That is right. Dean Carale shares my sentiment about this matter.
MR. BENGZON. I also share the sentiment of Commissioner Suarez in that respect. So
there are already two in the Committee who want to go back to the wording of the 1935
and the 1973 Constitution.21

August 15, 1986, Friday

MR. MAAMBONG. I ask that Commissioner Treñas be recognized for an amendment on


line 14.

THE PRESIDENT. Commissioner Treñas is recognized.

MR. TREÑAS. Madam President, may I propose an amendment on line 14 of Section 3 by


deleting therefrom "whose voting stock and controlling interest." And in lieu thereof,
insert the CAPITAL so the line should read: "associations at least sixty percent of
the CAPITAL is owned by such citizens.

MR. VILLEGAS. We accept the amendment.

MR. TREÑAS. Thank you.

THE PRESIDENT. The amendment of Commissioner Treñas on line 14 has been


accepted by the Committee.

Is there any objection? (Silence) The Chair hears none; the amendment is
approved.

xxxx

THE PRESIDENT. Commissioner Suarez is recognized.

MR. SUAREZ. Thank you, Madam President.

Two points actually are being raised by Commissioner Davide’s proposed amendment.
One has reference to the percentage of holdings and the other one is the basis for that
percentage. Would the body have any objection if we split it into two portions because
there may be several Commissioners who would be willing to accept the Commissioner’s
proposal on capital stock in contradistinction to a voting stock for controlling interest?

MR. VILLEGAS. The proposal has been accepted already.

MR. DAVIDE. Yes, but it was 60 percent.

MR. VILLEGAS. That is right.


MR. SUAREZ. So, it is now 60 percent as against wholly owned?

MR. DAVIDE. Yes.

MR. SUAREZ. Is the Commissioner not insisting on the voting capital stock because that
was already accepted by the Committee?

MR. DAVIDE. Would it mean that it would be 100-percent voting capital stock?

MR. SUAREZ. No, under the Commissioner’s proposal it is just "CAPITAL" not "stock."

MR. DAVIDE. No, I want it to be very clear. What is the alternative proposal of the
Committee? How shall it read?

MR. SUAREZ. It will only read something like: "the CAPITAL OF WHICH IS FULLY
owned."

MR. VILLEGAS. Let me read lines 12 to 14 which state:

… enter into co-production, joint venture, production sharing agreements with


Filipino citizens or corporations or associations at least 60 percent of whose
CAPITAL is owned by such citizens.

We are going back to the 1935 and 1973 formulations.

MR. DAVIDE. I cannot accept the proposal because the word CAPITAL should not
really be the guiding principle. It is the ownership of the corporation. It may be
voting or not voting, but that is not the guiding principle.

MR. SUAREZ. So, the Commissioner is insisting on the use of the term "CAPITAL
STOCK"?

MR. DAVIDE. Yes, to be followed by the phrase "WHOLLY owned."

MR. SUAREZ. Yes, but we are only concentrating on the first point – "CAPITAL
STOCK" or merely "CAPITAL."

MR. DAVIDE. CAPITAL STOCK?

MR. SUAREZ. Yes, it is "CAPITAL STOCK."

SUSPENSION OF SESSION

At 4:42 p.m., the session was resumed.


THE PRESIDENT. The session is resumed.

Commissioner Davide is to clarify his point.

MR. VILLEGAS. Yes, Commissioner Davide has accepted the word "CAPITAL" in
place of "voting stock or controlling interest." This is an amendment already
accepted by the Committee.

We would like to call for a vote on 100-percent Filipino versus 60- percent Filipino.

MR. ALONTO. Is it 60 percent?

MR. VILLEGAS. Sixty percent, yes.

MR. GASCON. Madam President, shall we vote on the proposed amendment of


Commissioner Davide of "ONE HUNDRED PERCENT?"

MR. VILLEGAS. Yes.

MR. GASCON. Assuming that it is lost, that does not prejudice any other Commissioner
to make any recommendations on other percentages?

MR. VILLEGAS. I would suggest that we vote on "sixty," which is indicated in the
committee report.

MR. GASCON. It is the amendment of Commissioner Davide that we should vote on, not
the committee report.

MR. VILLEGAS. Yes, it is all right.

MR. AZCUNA. Madam President.

THE PRESIDENT. Commissioner Azcuna is recognized.

MR. AZCUNA. May I be clarified as to that portion that was accepted by the
Committee?

MR. VILLEGAS. The portion accepted by the Committee is the deletion of the
phrase "voting stock or controlling interest."

MR. AZCUNA. Hence, without the Davide amendment, the committee report
would read: "corporations or associations at least sixty percent of whose CAPITAL
is owned by such citizens."
MR. VILLEGAS. Yes.

MR. AZCUNA. So if the Davide amendment is lost, we are stuck with 60 percent of
the capital to be owned by citizens?

MR. VILLEGAS. That is right.

MR. AZCUNA. But the control can be with the foreigners even if they are the minority.
Let us say 40 percent of the capital is owned by them, but it is the voting capital, whereas,
the Filipinos own the nonvoting shares. So we can have a situation where the corporation
is controlled by foreigners despite being the minority because they have the voting
capital. That is the anomaly that would result there.

MR. BENGZON. No, the reason we eliminated the word "stock" as stated in the 1973 and
1935 Constitutions is that according to Commissioner Rodrigo, there are associations that
do not have stocks. That is why we say "CAPITAL."

MR. AZCUNA. We should not eliminate the phrase "controlling interest."

MR. BENGZON. In the case of stock corporations, it is assumed.

MR. AZCUNA. Yes, but what I mean is that the control should be with the Filipinos.

MR. BENGZON. Yes, that is understood.

MR. AZCUNA. Yes, because if we just say "sixty percent of whose capital is owned by the
Filipinos," the capital may be voting or nonvoting.

MR. BENGZON. That is correct.

MR. AZCUNA. My concern is the situation where there is a voting stock. It is a stock
corporation. What the Committee requires is that 60 percent of the capital should be
owned by Filipinos. But that would not assure control because that 60 percent may be
non-voting.

MS. AQUINO. Madam President.

MR. ROMULO. May we vote on the percentage first?

THE PRESIDENT. Before we vote on this, we want to be clarified first.

MS. AQUINO. Madam President.

THE PRESIDENT. Commissioner Aquino is recognized.


MS. AQUINO. I would suggest that we vote on the Davide amendment which is 100-
percent capital, and if it is voted down, then we refer to the original draft which is "capital
stock" not just "capital."

MR. AZCUNA. The phrase "controlling interest" is an important consideration.

THE PRESIDENT. Let us proceed to vote then.

MR. PADILLA. Madam President.

THE PRESIDENT. The Vice-President, Commissioner Padilla, is recognized.

MR. PADILLA. The Treñas amendment has already been approved. The only one
left is the Davide amendment which is substituting the "sixty percent" to
"WHOLLY owned by Filipinos." (The Treñas amendment deleted the phrase "whose
voting stocks and controlling interest" and inserted the word "capital." It approved the
phrase "associations at least sixty percent of the CAPITAL is owned by such citizens.)(see
page 16)

Madam President, I am against the proposed amendment of Commissioner Davide


because that is an ideal situation where domestic capital is available for the exploration,
development and utilization of these natural resources, especially minerals, petroleum
and other mineral oils. These are not only risky business but they also involve substantial
capital. Obviously, it is an ideal situation but it is not practical. And if we adopt the 100-
percent capital of Filipino citizens, I am afraid that these natural resources, particularly
these minerals and oil, et cetera, may remain hidden in our lands, or in other offshore
places without anyone being able to explore, develop or utilize them. If it were possible to
have a 100-percent Filipino capital, I would prefer that rather than the 60 percent, but if
we adopt the 100 percent, my fear is that we will never be able to explore, develop and
utilize our natural resources because we do not have the domestic resources for that.

MR. DAVIDE. Madam President, may I be allowed to react?

THE PRESIDENT. Commissioner Davide is recognized.

MR. DAVIDE. I am very glad that Commissioner Padilla emphasized minerals, petroleum
and mineral oils. The Commission has just approved the possible foreign entry into the
development, exploration and utilization of these minerals, petroleum and other mineral
oils by virtue of the Jamir amendment. I voted in favour of the Jamir amendment because
it will eventually give way to vesting in exclusively Filipino citizens and corporations
wholly owned by Filipino citizens the right to utilize the other natural resources. This
means that as a matter of policy, natural resources should be utilized and exploited only
by Filipino citizens or corporations wholly owned by such citizens. But by virtue of the
Jamir amendment, since we feel that Filipino capital may not be enough for the
development and utilization of minerals, petroleum and other mineral oils, the President
can enter into service contracts with foreign corporations precisely for the development
and utilization of such resources. And so, there is nothing to fear that we will stagnate in
the development of minerals, petroleum, and mineral oils because we now allow service
contracts. It is, therefore, with more reason that at this time we must provide for a 100-
percent Filipinization generally to all natural resources.

MR. VILLEGAS. I think we are ready to vote, Madam President.

THE PRESIDENT. The Acting Floor Leader is recognized.

MR. MAAMBONG. Madam President, we ask that the matter be put to a vote.

THE PRESIDENT. Will Commissioner Davide please read lines 14 and 15 with his
amendment.

MR. DAVIDE. Lines 14 and 15, Section 3, as amended, will read: "associations whose
CAPITAL stock is WHOLLY owned by such citizens."

VOTING

THE PRESIDENT. As many as are in favour of this proposed amendment of


Commissioner Davide on lines 14 and 15 of Section 3, please raise their hand. (Few
Members raised their hand.)

As many as are against the amendment, please raise their hand. (Several Members raised
their hand.)

The results show 16 votes in favour and 22 against; the amendment is lost.

MR. MAAMBONG. Madam President, I ask that Commissioner Davide be recognized


once more for further amendments.

THE PRESIDENT. Commissioner Davide is recognized.

MR. DAVIDE. Thank you, Madam President.

This is just an insertion of a new paragraph between lines 24 and 25 of Section 3 of the
same page. It will read as follows: THE GOVERNING AND MANAGING BOARDS OF
SUCH CORPORATIONS SHALL BE VESTED EXCLUSIVELY IN CITIZENS OF THE
PHILIPPINES.

MR. VILLEGAS. Which corporations is the Commissioner referring to?


MR. DAVIDE. This refers to corporations 60 percent of whose capital is owned by such
citizens.

MR. VILLEGAS. Again the amendment will read…

MR. DAVIDE. "THE GOVERNING AND MANAGING BODIES OF SUCH


CORPORATIONS SHALL BE VESTED EXCLUSIVELY IN CITIZENS OF THE
PHILIPPINES."

REV. RIGOS. Madam President.

THE PRESIDENT. Commissioner Rigos is recognized.

REV. RIGOS. I wonder if Commissioner Davide would agree to put that sentence
immediately after "citizens" on line 15.

MR. ROMULO. May I ask a question. Presumably, it is 60-40?

MR. DAVIDE. Yes.

MR. ROMULO. What about the 40 percent? Would they not be entitled to a
proportionate seat in the board?

MR. DAVIDE. Under my proposal, they should not be allowed to sit in the board.

MR. ROMULO. Then the Commissioner is really proposing 100 percent which is the
opposite way?

MR. DAVIDE. Not necessarily, because if 40 percent of the capital stock will be owned by
aliens who may sit in the board, they can still exercise their right as ordinary stockholders
and can submit the necessary proposal for, say, a policy to be undertaken by the board.

MR. ROMULO. But that is part of the stockholder’s right – to sit in the board of directors.

MR. DAVIDE. That may be allowed but this is a very unusual and abnormal situation so
the Constitution itself can prohibit them to sit in the board.

MR. ROMULO. But it would be pointless to allow them 40 percent when they cannot sit
in the board nor have a say in the management of the company. Likewise, that would be
extraordinary because both the 1935 and the 1973 Constitutions allowed not only the 40
percent but commensurately they were represented in the board and management only
to the extent of their equity interest, which is 40 percent. The management of a company
is lodged in the board; so if the 60 percent, which is composed of Filipinos, controls the
board, then the Filipino part has control of the company.
I think it is rather unfair to say: "You may have 40 percent of the company, but that is all.
You cannot manage, you cannot sit in the board." That would discourage investments.
Then it is like having a one hundredpercent ownership; I mean, either we allow a 60-40
with full rights to the 40 percent, limited as it is as to a minority, or we do not allow them
at all. This means if it is allowed; we cannot have it both ways.

MR. DAVIDE. The aliens cannot also have everything. While they may be given entry into
subscriptions of the capital stock of the corporation, it does not necessarily follow that
they cannot be deprived of the right of membership in the managing or in the governing
board of a particular corporation. But it will not totally deprive them of a say because they
can still exercise the ordinary rights of stockholders. They can submit their proposal and
they can be heard.

MR. ROMULO. Yes, but they have no vote. That is like being represented in the Congress
but not being allowed to vote like our old resident Commissioners in the United States.
They can be heard; they can be seen but they cannot vote.

MR. DAVIDE. If that was allowed under that situation, why can we not do it now in
respect to our natural resources? This is a very critical and delicate issue.

MR. ROMULO. Precisely, we used to complain how unfair that was. One can be seen and
heard but he cannot vote.

MR. DAVIDE. We know that under the corporation law, we have the rights of the
minority stockholders. They can be heard. As a matter of fact, they can probably allow a
proxy to vote for them and, therefore, they still retain that specific prerogative to
participate just like what we did in the Article on Social Justice.

MR. ROMULO. That would encourage dummies if we give them proxies.

MR. DAVIDE. As a matter of fact, when it comes to encouraging dummies, by allowing


40-percent ownership to come in we will expect the proliferation of corporations actually
owned by aliens using dummies.

MR. ROMULO. No, because 40 percent is a substantial and fair share and, therefore, the
bona fide foreign investor is satisfied with that proportion. He does not have to look for
dummies. In fact, that is what assures a genuine investment if we give a foreign investor
the 40 percent and all the rights that go with it. Otherwise, we are either discouraging the
investment altogether or we are encouraging circumvention. Let us be fair. If it is 60-40,
then we give him the right, limited as to his minority position.

MR. MAAMBONG. Madam President, the body would like to know the position of the
Committee so that we can put the matter to a vote.
MR. VILLEGAS. The Committee does not accept the amendment.

THE PRESIDENT. The Committee does not accept.

Will Commissioner Davide insist on his amendment?

MR. DAVIDE. We request a vote.

THE PRESIDENT. Will Commissioner Davide state his proposed amendment again?

MR. DAVIDE. The proposed amendment would be the insertion of a new paragraph to
Section 3, between lines 24 and 25, page 2, which reads: "THE GOVERNING AND
MANAGING BODIES OF SUCH CORPORATIONS SHALL BE VESTED EXCLUSIVELY IN
CITIZENS OF THE PHILIPPINES."

MR. PADILLA. Madam President.

THE PRESIDENT. Commissioner Padilla is recognized.

MR. PADILLA. Madam President, may I just say that this Section 3 speaks of "co-
production, joint venture, production sharing agreements with Filipino citizens." If the
foreign share of, say, 40 percent will not be represented in the board or in management, I
wonder if there would be any foreign investor who will accept putting capital but without
any voice in management. I think that might make the provision on "coproduction, joint
venture and production sharing" illusory.

VOTING

THE PRESIDENT. If the Chair is not mistaken, that was the same point expressed by
Commissioner Romulo, a member of the Committee.

As many as are in favour of the Davide amendment, please raise their hand. (Few
Members raised their hand.)

As many as are against, please raise their hand. (Several Members raised their hand.)

As many as are abstaining, please raise their hand. (One Member raised his hand.)

xxxx

THE PRESIDENT. Commissioner Garcia is recognized.

MR. GARCIA. My amendment is on Section 3, the same item which Commissioner


Davide tried to amend. It is basically on the share of 60 percent. I would like to
propose that we raise the 60 percent to SEVENTY-FIVE PERCENT so the line would
read: "SEVENTY-FIVE PERCENT of whose CAPITAL is owned by such citizens."

THE PRESIDENT. What does the Committee say?

SUSPENSION OF SESSION

MR. VILLEGAS. The Committee insists on staying with the 60 percent – 60-40.

Madam President, may we ask for a suspension of the session.

THE PRESIDENT. The session is suspended.

It was 5:07 p.m.

RESUMPTION OF SESSION

At 5:31 p.m., the session was resumed.

THE PRESIDENT. The session is resumed.

MR. SARMIENTO. Madam President.

THE PRESIDENT. The Acting Floor Leader, Commissioner Sarmiento, is recognized.

MR. SARMIENTO: Commissioner Garcia still has the floor. May I ask that he be
recognized.

THE PRESIDENT. Commissioner Garcia is recognized.

MR. GARCIA. Thank you very much, Madam President.

I would like to propose the following amendment on Section 3, line 14 on page 2. I


propose to change the word "sixty" to SEVENTY-FIVE. So, this will read: "or it may
enter into co-production, joint venture, production sharing agreements with
Filipino citizens or corporations or associations at least SEVENTY-FIVE percent of
whose CAPITAL stock or controlling interest is owned by such citizens."

MR. VILLEGAS. This is just a correction. I think Commissioner Azcuna is not


insisting on the retention of the phrase "controlling interest," so we will retain
"CAPITAL" to go back really to the 1935 and 1973 formulations.

MR. BENNAGEN. May I suggest that we retain the phrase "controlling interest"?
MR. VILLEGAS. Yes, we will retain it. (The statement of Commissioner Villegas is possibly
erroneous considering his consistent statement, especially during the oral arguments,
that the Constitutional Commission rejected the UP Proposal to use the phrase
"controlling interest.")

THE PRESIDENT. Are we now ready to vote?

MR. SARMIENTO. Yes, Madam President.

VOTING

THE PRESIDENT. As many as are in favour of the proposed amendment of Commissioner


Garcia for "SEVENTY-FIVE" percent, please raise their hand. (Few Members raised their
hand.)

As many as are against the amendment, please raise their hand. (Several Members raised
their hand.)

As many as are abstaining, please raise their hand. (One Member raised his hand.)

The results show 16 votes in favour, 18 against and 1 abstention; the Garcia
amendment is lost.

MR. SARMIENTO. Madam President, may I ask that Commissioner Foz be recognized.

THE PRESIDENT. Commissioner Foz is recognized.

MR. FOZ. After losing by only two votes, I suppose that this next proposal will finally get
the vote of the majority. The amendment is to provide for at least TWO-THIRDS.

MR. SUAREZ. It is equivalent to 66 2/3.

THE PRESIDENT. Will the Commissioner repeat?

MR. FOZ. I propose "TWO-THIRDS of whose CAPITAL is owned by such citizens."


Madam President, we are referring to the same provision to which the previous
amendments have been suggested. First, we called for a 100-percent ownership;
and then, second, we called for a 75-percent ownership by Filipino citizens.

So my proposal is to provide for at least TWO-THIRDS of the capital to be owned by


Filipino citizens. I would like to call the attention of the body that the same ratio or
equity requirement is provided in the case of public utilities. And if we are willing to
provide such equity requirements in the case of public utilities, we should at least
likewise provide the same equity ratio in the case of natural resources.
MR. VILLEGAS. Commissioner Romulo will respond.

MR. ROMULO. I just want to point out that there is an amendment here filed to also
reduce the ratio in Section 15 to 60-40.

MR. PADILLA. Madam President.

THE PRESIDENT. Commissioner Padilla is recognized.

MR. PADILLA. The 60 percent which appears in the committee report has been
repeatedly upheld in various votings. One proposal was whole – 100 percent; another one
was 75 percent and now it is 66 2/3 percent. Is not the decision of this Commission in
voting to uphold the percentage in the committee report already a decision on this issue?

MR. FOZ. Our amendment has been previously brought to the attention of the body.

MR. VILLEGAS. The Committee does not accept the Commissioner’s amendment. This
has been discussed fully and, with only one-third of the vote, it is like having nothing at
all in decision-making. It can be completely vetoed.

MR. RODRIGO. Madam President.

THE PRESIDENT. Commissioner Rodrigo is recognized.

MR. RODRIGO. This is an extraordinary suggestion. But considering the circumstances


that the proposals from the 100 percent to 75 percent lost, and now it went down to 66
2/3 percent, we might go down to 65 percent next time. So I suggest that we vote between
66 2/3 and 60 percent. Which does the body want? Then that should be the end of it;
otherwise, this is ridiculous. After this, if the 66 2/3 percent will lose, then somebody can
say: "Well, how about 65 percent?"

THE PRESIDENT. The Chair was made to understand that Commissioner Foz’ proposal is
the last proposal on this particular line. Will Commissioner Foz restate his proposal?

MR. FOZ. My proposal is "TWO-THIRDS of whose CAPITAL or controlling interest is


owned by such citizens."

VOTING

THE PRESIDENT. We now put Commissioner Foz’ amendment to a vote.

As many as are in favour of the amendment of Commissioner Foz, please raise their hand.
(Few Members raised their hand.)
As many as are against, please raise their hand. (Several Members raised their hand.)

The results show 17 votes in favour, 20 against, and not abstention; the
amendment is lost.22

xxxx

August 22, 1986, Friday

THE PRESIDENT. Commissioner Nolledo is recognized.

MR. NOLLEDO. Thank you, Madam President.

I would like to propound some questions to the chairman and members of the
committee. I have here a copy of the approved provisions on Article on the
National Economy and Patrimony. On page 2, the first two lines are with respect
to the Filipino and foreign equity and I said: "At least sixty percent of whose
capital or controlling interest is owned by such citizens."

I notice that this provision was amended by Commissioner Davide by changing


"voting stocks" to "CAPITAL," but I still notice that there appears the term
"controlling interest" which seems to refer to assocaitions other than corporations
and it is merely 50 percent plus one percent which is less than 60 percent. Besides,
the wordings may indicate that the 60 percent may be based not only on capital
but also on controlling interest; it could mean 60 percent or 51 percent.

Before I propound the final question, I would like to make a comment in relation
to Section 15 since they are related to each other. I notice that in Section 15, there
still appears the phrase "voting stock or controlling interest." The term "voting
stocks" as the basis of the Filipino equity means that if 60 percent of the voting
stocks belong to Filipinos, foreigners may now own more than 40 percent of the
capital as long as the 40 percent or the excess thereof will cover nonvoting stock.
This is aside from the fact that under the Corporation Code, even nonvoting
shares can vote on certain instances. Control over investments may cover aspects
of management and participation in the fruits of production or exploitation.

So, I hope the committee will consider favorably my recommendation that instead
of using "controlling interests," we just use "CAPITAL" uniformly in cases where
foreign equity is permitted by law, because the purpose is really to help the
Filipinos in the exploitation of natural resources and in the operation of public
utilities. I know the committee, at its own instance, can make the amendment.

What does the committee say?


MR. VILLEGAS. We completely agree with the Commissioner’s views. Actually, it
was really an oversight. We did decide on the word "CAPITAL." I think it was the
opinion of the majority that the phrase "controlling interest" is ambiguous.

So, we do accept the Commissioner’s proposal to eliminate the phrase "or


controlling interest" in all the provisions that talk about foreign participation.

MR. NOLLEDO. Not only in Section 3, but also with respect to Section 15.

Thank you very much.

MR. MAAMBONG. Madam President.

THE PRESIDENT. Commissioner Maambong is recognized.

MR. MAAMBONG. In view of the manifestation of the committee, I would like to be


clarified on the use of the word "CAPITAL."

MR. VILLEGAS. Yes, that was the word used in the 1973 and 1935 Constitutions.

MR. MAAMBONG. Let us delimit ourselves to that word "CAPITAL". In the


Corporation Law, if I remember correctly, we have three types of capital: the
authorized capital stock, the subscribed capital stock and the paid-up capital
stock.

The authorized capital stock could be interpreted as the capital of the corporation
itself because that is the totality of the investment of the corporation as stated in
the articles of incorporation. When we refer to 60 percent, are we referring to the
authorized capital stock or the paid-up capital stock since the determinant as to
who owns the corporation, as far as equity is concerned, is the subscription of the
person?

I think we should delimit ourselves also to what we mean by 60 percent. Are we


referring to the authorized capital stock or to the subscribed capital stock,
because the determination, as I said, on the controlling interest of a corporation
is based on the subscribed capital stock? I would like a reply on that.

MR. VILLEGAS. Commissioner Suarez, a member of the committee, would like to answer
that.

THE PRESIDENT. Commissioner Suarez is recognized.

MR. SUAREZ. Thank you, Madam President.


We stated this because there might be a misunderstanding regarding the interpretation
of the term "CAPITAL" as now used as the basis for the percentage of foreign investments
in appropriate instances and the interpretation attributed to the word is that it should be
based on the paidup capital. We eliminated the use the phrase "voting stock or
controlling interest" because that is only used in connection with the matter of voting. As
a matter of fact, in the declaration of dividends for private corporations, it is usually
based on the paid-up capitalization.

So, what is really the dominant factor to be considered in matters of determining the 60-
40 percentage should really be the paid-up capital of the corporation.

MR. MAAMBONG. I would like to get clarification on this. If I remember my corporation


law correctly, we usually use a determinant in order to find out what the ratio of
ownership is, not really on the paid-up capital stock but on the subscribed capital stock.

For example, if the whole authorized capital stock of the corporation is ₱ 1 million, if the
subscription is 60 percent of ₱ 1 million which is ₱ 600,000, then that is supposed to be
the determinant whether there is a sharing of 60 percent of Filipinos or not. It is not
really on the paid-up capital because once a person subscribes to a capital stock then
whether that capital stock is paid up or not, does not really matter, as far as the books of
the corporation are concerned. The subscribed capital stock is supposed to be owned by
the person who makes the subscription. There are so many laws on how to collect the
delinquency and so on.

I view of the Commissioner’s answer, I would like to know whether he is determined to


put on the record that in order to determine the 60-40 percent sharing, we have to
determine whether we will use a determinant which is the subscribed capital stock or the
paid-up capital stock.

MR SUAREZ. We are principally concerned about the interpretation which would be


attached to it; that is, it should be limited to authorized capital stock, not to subscribed
capital stock.

I will give the Commissioner an illustration of what he is explaining to the Commission.

MR. MAAMBONG. Yes, thank you.

MR. SUAREZ. Let us say the authorized capital stock is ₱ 1 million. Under the present
rules in the Securities and Exchange Commission, at least 25 percent of that amount must
be subscribed and at least 25 percent of this subscribed capital must be paid up.

Now, let us discuss the basis of 60-40. To illustrate the matter further, let us say that 60
percent of the subscriptions would be allocated to Filipinos and 40 percent of the
subscribed capital would be held by foreigners. Then we come to the paid-up
capitalization. Under the present rules in the Securities and Exchange Commission, a
foreign corporation is supposed to subscribe to a 40-percent share which must be fully
paid up.

On the other hand, the 60 percent allocated to Filipinos need not be paid up. However, at
least 25 percent of the subscription must be paid up for purposes of complying with the
Corporation Law. We can illustrate the matter further by saying that the compliance of 25
percent paid-up of the subscribed capital would be fulfilled by the full payment of the 40
percent by the foreigners.

So, we have a situation where the Filipino percentage of 60 may not even comply with the
25-percent requirement because of the totality due to the fully payment of the 40-percent
of the foreign investors, the payment of 25 percent paid-up on the subscription would
have been considered fulfilled. That is exactly what we are trying to avoid.

MR. MAAMBONG I appreciate very much the explanation but I wonder if the committee
would subscribe to that view because I will stick to my thinking that in the computation
of the 60-40 ratio, the basis should be on the subscription. If the subscription is being
done by 60 percent Filipinos, whether it is paid-up or not and the subscription is
accepted by the corporation, I think that is the proper determinant. If we base the 60-40
on the paid-up capital stock, we have a problem here where the 40 percent is fully paid up
and the 60 percent is not fully paid up – this may be contrary to the provisions of the
Constitution. So I would like to ask for the proper advisement from the Committee as to
what should be the proper interpretation because this will cause havoc on the
interpretation of our Corporation Law.

MR. ROMULO. Madam President.

THE PRESIDENT. Commissioner Romulo is recognized.

MR. ROMULO. We go by the established rule which I believe is uniformly held. It is


based on the subscribed capital. I know only of one possible exception and that is where
the bylaws prohibit the subscriber from voting. But that is a very rare provision in bylaws.
Otherwise, my information and belief is that it is based on the subscribed capital.

MR. MAAMBONG. It is, therefore, the understanding of this Member that the
Commissioner is somewhat revising the answer of Commissioner Suarez to that extent?

MR. ROMULO. No, I do not think we contradict each other. He is talking really of the
instance where the subscriber is a non-resident and, therefore, must fully pay. That is
how I understand his position.
MR. MAAMBONG. My understanding is that in the computation of the 60-40 sharing
under the present formulation, the determinant is the paid-up capital stock to which I
disagree.

MR. ROMULO. At least, from my point of view, it is the subscribed capital stock.

MR. MAAMBONG. Then that is clarified.23

xxxx

August 23, 1986, Saturday

MS. ROSARIO BRAID. Madam President, I propose a new section to read: "THE
MANAGEMENT BODY OF EVERY CORPORATION OR ASSOCIATION SHALL IN ALL
CASES BE CONTROLLED BY CITIZENS OF THE PHILIPPINES."

This will prevent management contracts and assure control by Filipino citizens. Will the
committee assure us that this amendment will insure that past activities such as
management contracts will no longer be possible under this amendment?

MR. ROMULO. Madam President, if I may reply.

THE PRESIDENT. Commissioner Romulo is recognized.

MR. ROMULO. May I ask the proponent to read the amendment again.

MS. ROSARIO BRAID. The amendment reads: "THE MANAGEMENT BODY OF EVERY
CORPORATION OR ASSOCIATION SHALL IN ALL CASES BE CONTROLLED BY
CITIZENS OF THE PHILIPPINES."

MR. DE LOS REYES. Madam President, will Commissioner Rosario Braid agree to a
reformulation of her amendment for it to be more comprehensive and all-embracing?

THE PRESIDENT. Commissioner de los Reyes is recognized.

MR. DE LOS REYES. This is an amendment I submitted to the committee which reads:
"MAJORITY OF THE DIRECTORS OR TRUSTEES AND ALL THE EXECUTIVE AND
MANAGING OFFICERS OF SUCH CORPORATION OR ASSOCIATION MUST BE
CITIZENS OF THE PHILIPPINES."

This amendment is more direct because it refers to particular officers to be all-Filipino


citizens.

MR. BENGZON. Madam President.


THE PRESIDENT. Commissioner Bengzon is recognized.

MR. BENGZON. The committee sitting out here accepts the amendment of
Commissioner de los Reyes which subsumes the amendment of Commissioner Rosario
Braid.

THE PRESIDENT. So this will be a joint amendment now of Commissioners Rosario


Braid, de los Reyes and others.

MR. REGALADO. Madam President, I join in that amendment with the request that it
will be the last sentence of Section 15 because we intend to put an anterior amendment.
However, that particular sentence which subsumes also the proposal of Commissioner
Rosario Braid can just be placed as the last sentence of the article.

THE PRESIDENT. Is that acceptable to the committee?

MR. VILLEGAS. Yes, Madam President.

MS. ROSARIO BRAID. Thank you.

MR. RAMA, The body is now ready to vote on the amendment.

FR. BERNAS. Madam President.

THE PRESIDENT. Commissioner Bernas is recognized.

FR. BERNAS. Will the committee accept a reformulation of the first part?

MR. BENGZON. Let us hear it.

FR. BERNAS. The reformulation will be essentially the formula of the 1973
Constitution which reads: "THE PARTICIPATION OF FOREIGN INVESTORS IN
THE GOVERNING BODY OF ANY PUBLIC UTILITY ENTERPRISE SHALL BE
LIMITED TO THEIR PROPORTIONATE SHARE IN THE CAPITAL THEREOF AND…"

MR. VILLEGAS. "ALL THE EXECUTIVE AND MANAGING OFFICERS OF SUCH


CORPORATIONS AND ASSOCIATIONS MUST BE CITIZENS OF THE PHILIPPINES."

MR. BENGZON. Will Commissioner Bernas read the whole thing again?

FR. BERNAS. "THE PARTICIPATION OF FOREIGN INVESTORS IN THE


GOVERNING BODY OF ANY PUBLIC UTILITY ENTERPRISE SHALL BE LIMITED TO
THEIR PROPORTIONATE SHARE IN THE CAPITAL THEREOF…" I do not have the
rest of the copy.
MR. BENGZON. "AND ALL THE EXECUTIVE AND MANAGING OFFICERS OF SUCH
CORPORATIONS OR ASSOCIATIONS MUST BE CITIZENS OF THE PHILIPPINES."
Is that correct?

MR. VILLEGAS. Yes.

MR. BENGZON. Madam President, I think that was said in a more elegant
language. We accept the amendment. Is that all right with Commissioner Rosario
Braid?

MS. ROSARIO BRAID. Yes.

THE PRESIDENT. The original authors of this amendment are Commissioners


Rosario Braid, de los Reyes, Regalado, Natividad, Guingona and Fr. Bernas.

MR. DE LOS REYES. The governing body refers to the board of directors and
trustees.

MR. VILLEGAS. That is right.

MR. BENGZON. Yes, the governing body refers to the board of directors.

MR. REGALADO. It is accepted.

MR. RAMA. The body is now ready to vote, Madam President.

VOTING

THE PRESIDENT. As many as are in favour of this proposed amendment which should be
the last sentence of Section 15 and has been accepted by the committee, pleas raise their
hand. (All Members raised their hand.)

As many as are against, please raise their hand. (No Member raised his hand.)

The results show 29 votes in favour and none against; so the proposed amendment
is approved.24

It can be concluded that the view advanced by Justice Carpio is incorrect as the
deliberations easily reveal that the intent of the framers was not to limit the
definition of the word "capital" as meaning voting shares/stocks.

The majority in the original decision reproduced the CONCOM deliberations held on
August 13 and August 15, 1986, but neglected to quote the other pertinent portions of the
deliberations that would have shed light on the true intent of the framers of the
Constitution.

It is conceded that Proposed Resolution No. 496 on the language of what would be Art.
XII of the Constitution contained the phrase "voting stock or controlling interest," viz:

PROPOSED RESOLUTION NO. 496

RESOLUTION TO INCORPORATE IN THE NEW CONSTITUTION AN ARTICLE ON


NATIONAL ECONOMY AND PATRIMONY

Be it resolved as it is hereby resolved by the Constitutional Commission in session


assembled, To incorporate the National Economy and Patrimony of the new Constitution,
the following provisions:

ARTICLE____
NATIONAL ECONOMY AND PATRIMONY

xxxx

SEC. 15. 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 two-thirds of whose
voting stock or controlling interest is owned by such citizens. Neither shall any such
franchise or right be granted except under the condition that it shall be subject to
amendment, alteration, or repeal by Congress when the common good so requires. The
State shall encourage equity participation in public utilities by the general public.25 (This
became Sec. 11, Art. XII)(Emphasis supplied.)

The aforequoted deliberations disclose that the Commission eventually and


unequivocally decided to use "capital," which refers to the capital stock of the
corporation, "as was employed in the 1935 and 1973 Constitution," instead of the
proposed "voting stock or controlling interest" as the basis for the percentage of
ownership allowed to foreigners. The following exchanges among Commissioners Foz,
Suarez and Bengzon reflect this decision, but the majority opinion in the June 28, 2011
Decision left their statements out:

MR. FOZ. Mr. Vice-President, in Sections 3 and 9,26 the provision on equity is both 60
percent, but I notice that this is now different from the provision in the 1973
Constitution in that the basis for the equity provision is voting stock or
controlling interest instead of the usual capital percentage as provided for in the 1973
Constitution. We would like to know what the difference would be between the
previous and the proposed provisions regarding equity interest.
xxxx

MR. SUAREZ. x x x As a matter of fact, this particular portion is still being reviewed x x x.
In Section 1, Article XIII of the 1935 Constitution, the wording is that the percentage
should be based on the capital which is owned by such citizens. In the proposed
draft, this phrase was proposed: "voting stock or controlling interest." This was a
plan submitted by the UP Law Center.

x x x We would have three criteria to go by: One would be based on capital, which is
capital stock of the corporation, authorized, subscribed or paid up, as employed
under the 1935 and the 1973 Constitution. The idea behind the introduction of the
phrase "voting stock or controlling interest" was precisely to avoid the perpetration of
dummies, Filipino dummies of multinationals. It is theoretically possible that a situation
may develop where these multinational interests would not really be only 40 percent but
will extend beyond that in the matter of voting because they could enter into what is
known as a voting trust or voting agreement with the rest of the stockholders and,
therefore, notwithstanding the fact that on record their capital extent is only up to 40-
percent interest in the corporation, actually, they would be managing and controlling the
entire company. That is why the UP Law Center members suggested that we utilize the
words "voting interest" which would preclude multinational control in the matter of
voting, independent of the capital structure of the corporation. And then they also
added the phrase "controlling interest" which up to now they have not been able to
successfully define the exact meaning of. x x x And as far as I am concerned, I am not
speaking in behalf of the Committee, I would feel more comfortable if we go back
to the wording of the 1935 and the 1973 Constitution, that is to say, the 60-40
percentage could be based on the capital stock of the corporation.

xxxx

MR. BENGZON. I also share the sentiment of Commissioner Suarez in that respect. So
there are already two in the Committee who want to go back to the wording of the 1935
and the 1973 Constitution.27

In fact, in another portion of the CONCOM deliberations conveniently glossed over by


the June 28, 2011 Decision, then Commissioner Davide strongly resisted the retention of
the term "capital" as used in the 1935 and 1973 Constitution on the ground that the term
refers to both voting and nonvoting. Eventually, however, he came around to accept the
use of "CAPITAL" along with the majority of the members of the Committee on Natural
Economy and Patrimony in the afternoon session held on August 15, 1986:

MR. TREÑAS. x x x may I propose an amendment on line 14 of Section 3 by deleting


therefrom "whose voting stock and controlling interest." And in lieu thereof,
insert the CAPITAL so the line should read: "associations at least sixty percent of
the CAPITAL is owned by such citizens.
MR. VILLEGAS. We accept the amendment.

MR. TREÑAS. Thank you.

THE PRESIDENT. The amendment of Commissioner Treñas on line 14 has been


accepted by the Committee.

Is there any objection? (Silence) The Chair hears none; the amendment is
approved.28

xxxx

MR. SUAREZ. x x x Two points are being raised by Commissioner Davide’s proposed
amendment. One has reference to the percentage of holdings and the other one is the
basis for the percentage x x x x Is the Commissioner not insisting on the voting
capital stock because that was already accepted by the Committee?

MR. DAVIDE. Would it mean that it would be 100-percent voting capital stock?

MR. SUAREZ. No, under the Commissioner’s proposal it is just "CAPITAL" not "stock."

MR. DAVIDE. No, I want it to be very clear. What is the alternative proposal of the
Committee? How shall it read?

MR. SUAREZ. It will only read something like: "the CAPITAL OF WHICH IS FULLY
owned."

MR. VILLEGAS. Let me read lines 12 to 14 which state:

… enter into co-production, joint venture, production sharing agreements with Filipino
citizens or corporations or associations at least 60 percent of whose CAPITAL is owned by
such citizens.

We are going back to the 1935 and 1973 formulations.

MR. DAVIDE. I cannot accept the proposal because the word CAPITAL should not
really be the guiding principle. It is the ownership of the corporation. It may be
voting or not voting, but that is not the guiding principle.

xxxx

THE PRESIDENT…. Commissioner Davide is to clarify his point.


MR. VILLEGAS. Yes, Commissioner Davide has accepted the word "CAPITAL" in
place of "voting stock or controlling interest." This is an amendment already
accepted by the Committee.29

The above exchange precedes the clarifications made by then Commissioner Azcuna,
which were cited in the June 28, 2011 Decision. Moreover, the statements made
subsequent to the portion quoted in the June 28, 2011 Decision emphasize the CONCOM’s
awareness of the plain meaning of the term "capital" without the qualification espoused
in the majority’s decision:

MR. AZCUNA. May I be clarified as to [what] was accepted x x x.

MR. VILLEGAS. The portion accepted by the Committee is the deletion of the phrase
"voting stock or controlling interest."

MR. AZCUNA. Hence, without the Davide amendment, the committee report would read:
"corporations or associations at least sixty percent of whose CAPITAL is owned by such
citizens."

MR. VILLEGAS. Yes.

MR. AZCUNA. So if the Davide amendment is lost, we are stuck with 60 percent of
the capital to be owned by citizens?

MR. VILLEGAS. That is right.

MR. AZCUNA. But the control can be with the foreigners even if they are the minority.
Let us say 40 percent of the capital is owned by them, but it is the voting capital, whereas,
the Filipinos own the nonvoting shares. So we can have a situation where the corporation
is controlled by foreigners despite being the minority because they have the voting
capital. That is the anomaly that would result here.

MR. BENGZON. No, the reason we eliminated the word "stock" as stated in the 1973 and
1935 Constitutions is that xxx there are associations that do not have stocks. That is why
we say "CAPITAL."

MR. AZCUNA. We should not eliminate the phrase "controlling interest."

MR. BENGZON. In the case of stock corporation, it is assumed.

MR. AZCUNA. Yes, but what I mean is that the control should be with the Filipinos.

MR. BENGZON. Yes, that is understood.


MR. AZCUNA. Yes, because if we just say "sixty percent of whose capital is owned
by the Filipinos," the capital may be voting or non-voting.

MR. BENGZON. That is correct.30

More importantly, on the very same August 15, 1986 session, Commissioner Azcuna no
longer insisted on retaining the delimiting phrase "controlling interest":

MR. GARCIA. Thank you very much, Madam President.

I would like to propose the following amendment on Section 3, line 14 on page 2. I


propose to change the word "sixty" to SEVENTY-FIVE. So, this will read: "or it may enter
into co-production, joint venture, production sharing agreements with Filipino citizens or
corporations or associations at least SEVENTY-FIVE percent of whose CAPITAL stock or
controlling interest is owned by such citizens."

MR. VILLEGAS. This is just a correction. I think Commissioner Azcuna is not


insisting on the retention of the phrase "controlling interest," so we will retain
"CAPITAL" to go back really to the 1935 and 1973 formulations.31 (Emphasis supplied.)

The later deliberations held on August 22, 1986 further underscore the framers’ true
intent to include both voting and non-voting shares as coming within the pale of the
word "capital." The UP Law Center attempted to limit the scope of the word along the
line then and now adopted by the majority, but, as can be gleaned from the following
discussion, the framers opted not to adopt the proposal of the UP Law Center to
add the more protectionist phrase "voting stock or controlling interest":

MR. NOLLEDO. x x x I would like to propound some questions xxx. I have here a copy of
the approved provisions on Article on the National Economy and Patrimony. x x x

I notice that this provision was amended by Commissioner Davide by changing "voting
stocks" to "CAPITAL," but I still notice that there appears the term "controlling interest" x
x x. Besides, the wordings may indicate that the 60 percent may be based not only on
capital but also on controlling interest; it could mean 60 percent or 51 percent.

Before I propound the final question, I would like to make a comment in relation to
Section 15 since they are related to each other. I notice that in Section 15, there still
appears the phrase "voting stock or controlling interest." The term "voting stocks" as the
basis of the Filipino equity means that if 60 percent of the voting stocks belong to
Filipinos, foreigners may now own more than 40 percent of the capital as long as the 40
percent or the excess thereof will cover nonvoting stock. This is aside from the fact that
under the Corporation Code, even nonvoting shares can vote on certain
instances. Control over investments may cover aspects of management and
participation in the fruits of production or exploitation.
So, I hope the committee will consider favorably my recommendation that instead
of using "controlling interests," we just use "CAPITAL" uniformly in cases where
foreign equity is permitted by law, because the purpose is really to help the
Filipinos in the exploitation of natural resources and in the operation of public
utilities. x x x

What does the committee say?

MR. VILLEGAS. We completely agree with the Commissioner’s views. Actually, it was
really an oversight. We did decide on the word "CAPITAL." I think it was the opinion
of the majority that the phrase "controlling interest" is ambiguous.

So, we do accept the Commissioner’s proposal to eliminate the phrase "or


controlling interest" in all the provisions that talk about foreign participation.

MR. NOLLEDO. Not only in Section 3, but also with respect to Section 15.32 (Emphasis
supplied.)

In fact, on the very same day of deliberations, the Commissioners clarified that the proper
and more specific "interpretation" that should be attached to the word "capital" is that it
refers to the "subscribed capital," a corporate concept defined as "that portion of the
authorized capital stock that is covered by subscription agreements whether fully paid or
not"33 and refers to both voting and non-voting shares:

MR. MAAMBONG. x x x I would like to be clarified on the use of the word


"CAPITAL."

MR. VILLEGAS. Yes, that was the word used in the 1973 and the 1935 Constitutions.

MR. MAAMBONG. Let us delimit ourselves to that word "CAPITAL." In the Corporation
Law, if I remember correctly, we have three types of capital: the authorized capital stock,
the subscribed capital stock and the paid-up capital stock.

xxxx

I would like to get clarification on this. If I remember my corporation law correctly,


we usually use a determinant in order to find out what the ratio of ownership is,
not really on the paid-up capital stock but on the subscribe capital stock.

xxxx

x x x I would like to know whether (Commissioner Suarez) is determined to put on the


record that in order to determine the 60-40 percent sharing, we have to determine
whether we will use a determinant which is the subscribed capital stock or the paid-up
capital stock.

MR. SUAREZ. We are principally concerned about the interpretation which would
be attached to it, that is, it should be limited to authorized capital stock, not to
subscribed capital stock.

I will give the Commissioner an illustration of what he is explaining to the Commission.

xxxx

Let us say authorized capital stock is ₱ 1 million. Under the present rules in the [SEC], at
least 25 percent of that amount must be subscribed and at least 25 percent of this
subscribed capital must be paid up.

Now, let us discuss the basis of 60-40. To illustrate the matter further, let us say that 60
percent of the subscriptions would be allocated to Filipinos and 40 percent of the
subscribed capital stock would be held by foreigners. Then we come to the paid-up
capitalization. Under the present rules in the [SEC], a foreign corporation is supposed to
subscribe to 40-percent share which must be fully paid up.

On the other hand, the 60 percent allocated to Filipinos need not be paid up. However, at
least 25 percent of the subscription must be paid up for purposes of complying with the
Corporation Law. We can illustrate the matter further by saying that the compliance of 25
percent paid-up of the subscribed capital would be fulfilled by the full payment of the 40
percent by the foreigners.

So, we have a situation where the Filipino percentage of 60 may not even comply with the
25-percent requirement because of the totality due to the full payment of the 40-percent
of the foreign investors, the payment of 25 percent paid-up on the subscription would
have been considered fulfilled. That is exactly what we are trying to avoid.

MR. MAAMBONG. I appreciate very much the explanation but I wonder if the committee
would subscribe to that view because I will stick to my thinking that in the computation
of the 60-40 ratio, the basis should be on the subscription. x x x

xxxx

MR. ROMULO. We go by the established rule which I believe is uniformly held. It


is based on the subscribed capital. x x x

xxxx
I do not think that we contradict each other. (Commisioner Suarez) is talking really of the
instance where the subscriber is a non-resident and, therefore, must fully pay. That is
how I understand his position.

MR. MAAMBONG. My understanding is that in the computation of the 60-40 sharing


under the present formulation, the determinant is the paid-up capital stock to which I
disagree.

MR . ROMULO. At least, from my point of view, it is the subscribed capital stock."34

Clearly, while the concept of voting capital as the norm to determine the 60-40 Filipino-
alien ratio was initially debated upon as a result of the proposal to use "at least two-
thirds of whose voting stock or controlling interest is owned by such citizens,"35 in what
would eventually be Sec. 11, Art. XII of the Constitution, that proposal was
eventually discarded. And nowhere in the records of the CONCOM can it be deduced
that the idea of full ownership of voting stocks presently parlayed by the majority was
earnestly, if at all, considered. In fact, the framers decided that the term "capital," as used
in the 1935 and 1973 Constitutions, should be properly interpreted as the "subscribed
capital," which, again, does not distinguish stocks based on their board-membership
voting features.

Indeed, the phrase "voting stock or controlling interest" was suggested for and in fact
deliberated, but was similarly dropped in the approved draft provisions on National
Economy and Patrimony, particularly in what would become Sections 236 and 10,37 Article
XII of the 1987 Constitution. However, the framers expressed preference to the
formulation of the provision in question in the 1935 and 1973 Constitutions, both of which
employed the word "capital" alone. This was very apparent in the aforementioned
deliberations and affirmed by amicus curiae Dr. Bernardo Villegas, Chair of the
Committee on the National Economy and Patrimony in charge of drafting Section 11 and
the rest of Article XII of the Constitution. During the June 26, 2012 oral arguments, Dr.
Villegas manifested that:

x x x Justice Abad was right. [If i]t was not in the minds of the Commissioners to define
capital broadly, these additional provisions would be meaningless. And it would have
been really more or less expressing some kind of a contradiction in terms. So, that is why
I was pleasantly surprised that one of the most pro-Filipino members of the Commission,
Atty. Jose Suarez, who actually voted "NO" to the entire Constitution has only said, was
one of the first to insist, during one of the plenary sessions that we should reject the UP
Law Center recommendation. In his words, I quote "I would feel more comfortable if
we go back to the wording of the 1935 and 1970 Constitutions that is to say the 60-
40 percentage could be based on the capital stock of the corporation." The final
motion was made by Commissioner Efren Treñas, in the same plenary session when he
moved, "Madam President, may I propose an amendment on line 14 of Section 3 by
deleting therefrom ‘whose voting stock and controlling interest’ and in lieu thereof, insert
capital, so the line should read: "associations of at least sixty percent (60%) of the capital
is owned by such citizens." After I accepted the amendment since I was the chairman
of the National Economy Committee, in the name of the Committee, the President
of the Commission asked for any objection. When no one objected, the President
solemnly announced that the amendment had been approved by the Plenary. It is
clear, therefore, that in the minds of the Commissioners the word "capital" in
Section 11 of Article XII refers, not to voting stock, but to total subscribed capital,
both common and preferred.38(Emphasis supplied.)

There was no change in phraseology from the 1935 and


1973 Constitutions, or a transitory provision that signals
such change, with respect to foreign ownership in public
utility corporations (2nd extrinsic aid)

If the framers wanted the word "capital" to mean voting capital stock, their terminology
would have certainly been unmistakably limiting as to leave no doubt about their
intention. But the framers consciously and purposely excluded restrictive phrases,
such as "voting stocks" or "controlling interest," in the approved final draft, the proposal
of the UP Law Center, Commissioner Davide and Commissioner Azcuna notwithstanding.
Instead, they retained "capital" as "used in the 1935 and 1973 Constitutions."39 There was,
therefore, a conscious design to avoid stringent words that would limit the meaning of
"capital" in a sense insisted upon by the majority. Cassus omissus pro omisso habendus
est––a person, object, or thing omitted must have been omitted intentionally. More
importantly, by using the word "capital," the intent of the framers of the Constitution was
to include all types of shares, whether voting or nonvoting, within the ambit of the word.

History or realities or circumstances prevailing during the


drafting of the Constitution validate the adoption of the plain
meaning of "Capital" (3rd extrinsic aid)

This plain, non-exclusive interpretation of "capital" also comes to light considering the
economic backdrop of the 1986 CONCOM when the country was still starting to rebuild
the financial markets and regain the foreign investors’ confidence following the changes
caused by the toppling of the Martial Law regime. As previously pointed out, the Court, in
construing the Constitution, must take into consideration the aims of its framers and the
evils they wished to avoid and address. In Civil Liberties Union v. Executive
Secretary,40 We held:

A foolproof yardstick in constitutional construction is the intention underlying the


provision under consideration. Thus, it has been held that the Court in construing a
Constitution should bear in mind the object sought to be accomplished by its
adoption, and the evils, if any, sought to be prevented or remedied. A doubtful
provision will be examined in the light of the history of the times, and the condition and
circumstances under which the Constitution was framed. The object is to ascertain the
reason which induced the framers of the Constitution to enact the particular
provision and the purpose sought to be accomplished thereby, in order to
construe the whole as to make the words consonant to that reason and calculated
to effect that purpose. (Emphasis supplied.)

It is, thus, proper to revisit the circumstances prevailing during the drafting period. In an
astute observation of the economic realities in 1986, quoted by respondent Pangilinan,
University of the Philippines School of Economics Professor Dr. Emmanuel S. de Dios
examined the nation’s dire need for foreign investments and foreign exchange during the
time when the framers deliberated on what would eventually be the National Economy
and Patrimony provisions of the Constitution:

The period immediately after the 1986 EDSA Revolution is well known to have
witnessed the country’s deepest economic crisis since the Second World
War. Official data readily show this period was characterised by the highest
unemployment, highest interest rates, and largest contractions in output the Philippine
economy experienced in the postwar period. At the start of the Aquino administration in
1986, total output had already contracted by more than seven percent annually for two
consecutive years (1984 and 1985), inflation was running at an average of 35 percent,
unemployment more than 11 percent, and the currency devalued by 35 percent.

The proximate reason for this was the moratorium on foreigndebt payments the
country had called in late 1983, effectively cutting off the country’s access to
international credit markets (for a deeper contemporary analysis of what led to the
debt crisis, see de Dios 1984). The country therefore had to subsist only on its current
earnings from exports, which meant there was a critical shortage of foreign
exchange. Imports especially of capital goods and intermediate goods therefore
had to be drastically curtailed x x x.

For the same reasons, obviously, new foreign investments were unlikely to be
forthcoming. This is recorded by Bautista 2003:158, who writes:

Long-term capital inflows have been rising at double-digit rates since 1980, except
during 1986-1990, a time of great political and economic uncertainty following the
period of martial law under President Marcos.

The foreign-exchange controls then effectively in place will have made importing inputs
difficult for new enterprises, particularly foreign investors (especially Japanese) interested
in relocating some of theirexport-oriented but import-dependent operations to the
Philippines. x x x The same foreign-exchange restrictions would have made the freedom
to remit profits a dicey affairs. Finally, however, the period was also characterised by
extreme political uncertainty, which did not cease even after the Marcos regime was
toppled.41 x x x
Surely, it was far from the minds of the framers to alienate and disenfranchise foreign
investors by imposing an indirect restriction that only exacerbates the dichotomy
between management and ownership without the actual guarantee of giving control and
protection to the Filipino investors. Instead, it can be fairly assumed that the framers
intended to avoid further economic meltdown and so chose to attract foreign investors by
allowing them to 40% equity ownership of the entirety of the corporate shareholdings
but, wisely, imposing limits on their participation in the governing body to ensure that
the effective control and ultimate economic benefits still remained with the Filipino
shareholders.

Judicial decisions and prior laws use and/or treat


"capital" as "capital stock" (4th extrinsic aid)

That the term "capital" in Sec. 11, Art. XII is equivalent to "capital stock," which
encompasses all classes of shares regardless of their nomenclature or voting capacity, is
easily determined by a review of various laws passed prior to the ratification of the 1987
Constitution. In 1936, for instance, the Public Service Act42 established the nationality
requirement for corporations that may be granted the authority to operate a "public
service,"43 which include most of the present-day public utilities, by referring to the paid-
up "capital stock" of a corporation, viz:

Sec. 16. Proceedings of the Commission, upon notice and hearing. – The Commission
shall have power, upon proper notice and hearing in accordance with the rules and
provisions of this Act, subject to the limitations and exceptions mentioned and saving
provisions to the contrary:

(a) To issue certificates which shall be known as certificates of public


convenience, authorizing the operation of public service within the
Philippines whenever the Commission finds that the operation of the public
service proposed and the authorization to do business will promote the
public interest in a proper and suitable manner. Provided, That
thereafter, certificates of public convenience and certificates of public
convenience and necessity will be granted only to citizens of the
Philippines or of the United States or to corporations, co-partnerships,
associations or joint-stock companies constituted and organized
under the laws of the Philippines; Provided, That sixty per centum of
the stock or paid-up capital of any such corporations, co-partnership,
association or joint-stock company must belong entirely to citizens
of the Philippines or of the United States: Provided, further, That no such
certificates shall be issued for a period of more than fifty years. (Emphasis
supplied.)
The heading of Sec. 2 of Commonwealth Act No. (CA) 108, or the Anti-Dummy Law,
which was approved on October 30, 1936, similarly conveys the idea that the term
"capital" is equivalent to "capital stock"44:

Section 2. Simulation of minimum capital stock — In all cases in which a


constitutional or legal provision requires that, in order that a corporation or
association may exercise or enjoy a right, franchise or privilege, not less than a
certain per centum of its capital must be owned by citizens of the Philippines or of
any other specific country, it shall be unlawful to falsely simulate the existence of
such minimum stock or capital as owned by such citizens, for the purpose of evading
said provision. The president or managers and directors or trustees of corporations or
associations convicted of a violation of this section shall be punished by imprisonment of
not less than five nor more than fifteen years, and by a fine not less than the value of the
right, franchise or privilege, enjoyed or acquired in violation of the provisions hereof but
in no case less than five thousand pesos.45 (Emphasis and underscoring supplied.)

Pursuant to these legislative acts and under the aegis of the Constitutional nationality
requirement of public utilities then in force, Congress granted various franchises upon
the understanding that the "capital stock" of the grantee is at least 60% Filipino. In 1964,
Congress, via Republic Act No. (RA) 4147,46 granted Filipinas Orient Airway, Inc. a
legislative franchise to operate an air carrier upon the understanding that its "capital
stock" was 60% percent Filipino-owned. Section 14 of RA 4147, provided:

Sec. 14. This franchise is granted with the understanding that the grantee is a
corporation sixty per cent of the capital stock of which is the bona fide property of
citizens of the Philippines and that the interest of such citizens in its capital stock or in
the capital of the Company with which it may merge shall at no time be allowed to fall
below such percentage, under the penalty of the cancellation of this franchise. (Emphasis
and underscoring supplied.)

The grant of a public utility franchise to Air Manila. Inc. to establish and maintain air
transport in the country a year later pursuant to RA 450147 contained exactly the same
Filipino capitalization requirement imposed in RA 4147:

Sec. 14. This franchise is granted with the understanding that the grantee is a
corporation, sixty per cent of the capital stock of which is owned or the bona fide
property of citizens of the Philippines and that the interest of such citizens in its
capital stock or in the capital of the company with which it may merge shall at no time be
allowed to fall below such percentage, under the penalty of the cancellation of this
franchise. (Emphasis and underscoring supplied.)

In like manner, RA 5514,48 which granted a franchise to the Philippine Communications


Satellite Corporation in 1969, required of the grantee to execute management contracts
only with corporations whose "capital or capital stock" are at least 60% Filipino:
Sec. 9. The grantee shall not lease, transfer, grant the usufruct of, sell or assign this
franchise to any person or entity, except any branch or instrumentality of the
Government, without the previous approval of the Congress of the Philippines: Provided,
That the grantee may enter into management contract with any person or entity, with the
approval of the President of the Philippines: Provided, further, That such person or entity
with whom the grantee may enter into management contract shall be a citizen of the
Philippines and in case of an entity or a corporation, at least sixty per centum of the
capital or capital stock of which is owned by citizens of the Philippines. (Emphasis
supplied.)

In 1968, RA 5207,49 otherwise known as the "Atomic Energy Regulatory Act of 1968,"
considered a corporation sixty percent of whose capital stock as domestic:

Sec. 9. Citizenship Requirement. No license to acquire, own, or operate any atomic


energy facility shall be issued to an alien, or any corporation or other entity which is
owned or controlled by an alien, a foreign corporation, or a foreign government.

For purposes of this Act, a corporation or entity is not owned or controlled by an


alien, a foreign corporation of a foreign government if at least sixty percent (60%) of
its capital stock is owned by Filipino citizens. (Emphasis supplied.)

Anent pertinent judicial decisions, this Court has used the very same definition of capital
as equivalent to the entire capital stockholdings in a corporation in resolving various
other issues. In National Telecommunications Commission v. Court of Appeals,50 this
Court, thus, held:

The term "capital" and other terms used to describe the capital structure of a
corporation are of universal acceptance, and their usages have long been
established in jurisprudence. Briefly, capital refers to the value of the property or
assets of a corporation. The capital subscribed is the total amount of the capital
that persons (subscribers or shareholders) have agreed to take and pay for, which
need not necessarily be, and can be more than, the par value of the shares. In fine,
it is the amount that the corporation receives, inclusive of the premiums if any, in
consideration of the original issuance of the shares. In the case of stock dividends, it
is the amount that the corporation transfers from its surplus profit account to its capital
account. It is the same amount that can loosely be termed as the "trust fund" of the
corporation. The "Trust Fund" doctrine considers this subscribed capital as a trust fund
for the payment of the debts of the corporation, to which the creditors may look for
satisfaction. Until the liquidation of the corporation, no part of the subscribed capital
may be returned or released to the stockholder (except in the redemption of redeemable
shares) without violating this principle. Thus, dividends must never impair the subscribed
capital; subscription commitments cannot be condoned or remitted; nor can the
corporation buy its own shares using the subscribed capital as the consideration
therefor.51
This is similar to the holding in Banco Filipino v. Monetary Board52 where the Court
treated the term "capital" as including both common and preferred stock, which are
usually deprived of voting rights:

It is clear from the law that a solvent bank is one in which its assets exceed its liabilities.
It is a basic accounting principle that assets are composed of liabilities and capital. The
term "assets" includes capital and surplus" (Exley v. Harris, 267 p. 970, 973, 126 Kan., 302).
On the other hand, the term "capital" includes common and preferred stock,
surplus reserves, surplus and undivided profits. (Manual of Examination Procedures,
Report of Examination on Department of Commercial and Savings Banks, p. 3-C). If
valuation reserves would be deducted from these items, the result would merely be the
networth or the unimpaired capital and surplus of the bank applying Sec. 5 of RA 337 but
not the total financial condition of the bank.

In Commissioner of Internal Revenue v. Court of Appeals,53 the Court alluded to the


doctrine of equality of shares in resolving the issue therein and held that all
shares comprise the capital stock of a corporation:

A common stock represents the residual ownership interest in the corporation. It is a


basic class of stock ordinarily and usually issued without extraordinary rights or privileges
and entitles the shareholder to a pro rata division of profits. Preferred stocks are those
which entitle the shareholder to some priority on dividends and asset distribution. Both
shares are part of the corporation’s capital stock. Both stockholders are no
different from ordinary investors who take on the same investment risks.
Preferred and common shareholders participate in the same venture, willing to
share in the profit and losses of the enterprise. Moreover, under the doctrine of
equality of shares --- all stocks issued by the corporation are presumed equal with
the same privileges and liabilities, provided that the Articles of Incorporation is silent
on such differences.54 (Emphasis supplied.)

The SEC has reflected the popular contemporaneous


construction of capital in computing the nationality
requirement based on the total capital stock, not only
the voting stock, of a corporation (5th extrinsic aid)

The SEC has confirmed that, as an institution, it has always interpreted and applied the
40% maximum foreign ownership limit for public utilities to the total capital stock, and
not just its total voting stock.

In its July 29, 2011 Manifestation and Omnibus Motion, the SEC reaffirmed its
longstanding practice and history of enforcement of the 40% maximum foreign
ownership limit for public utilities, viz:
5. The Commission respectfully submits that it has always performed its duty under
Section 17(4) of the Corporation Code to enforce the foreign equity restrictions under
Section 11, Article XII of the Constitution on the ownership of public utilities.

xxxx

8. Thus, in determining compliance with the Constitutional restrictions on foreign


equity, the Commission consistently construed and applied the term "capital" in
its commonly accepted usage, that is – the sum total of the shares subscribed
irrespective of their nomenclature and whether or not they are voting or non-
voting (Emphasis supplied).

9. This commonly accepted usage of the term ‘capital’ is based on persuasive authorities
such as the widely esteemed Fletcher Cyclopedia of the Law of Private Corporations, and
doctrines from American Jurisprudence. To illustrate, in its Opinion dated February 15,
1988 addresses to Gozon, Fernandez, Defensor and Associates, the Commission discussed
how the term ‘capital’ is commonly used:

"Anent thereto, please be informed that the term ‘capital’ as applied to corporations,
refers to the money, property or means contributed by stockholders as the form or basis
for the business or enterprise for which the corporation was formed and generally implies
that such money or property or means have been contributed in payment for stock issued
to the contributors. (United Grocers, Ltd. v. United States F. Supp. 834, cited in 11
Fletcher, Cyc. Corp., 1986, rev. vol., sec. 5080 at 18). As further ruled by the court, ‘capital
of a corporation is the fund or other property, actually or potentially in its
possession, derived or to be derived from the sale by it of shares of its stock or his
exchange by it for property other than money. This fund includes not only money or
other property received by the corporation for shares of stock but all balances of purchase
money, or instalments, due the corporation for shares of stock sold by it, and all unpaid
subscriptions for shares.’" (Williams v. Brownstein, 1F. 2d 470, cited in 11 Fletcher, Cyc.
Corp., 1058 rev. vol., sec. 5080, p. 21).

The term ‘capital’ is also used synonymously with the words ‘capital stock’, as meaning
the amount subscribed and paidin and upon which the corporation is to conduct its
operation. (11 Fletcher, Cyc. Corp. 1986, rev. vol., sec. 5080 at 15). And, as held by the court
in Haggard v. Lexington Utilities Co., (260 Ky 251, 84 SW 2d 84, cited in 11 Fletcher, Cyc.
Corp., 1958 rev. vol., sec. 5079 at 17), ‘The capital stock of a corporation is the amount
paidin by its stockholders in money, property or services with which it is to conduct its
business, and it is immaterial how the stock is classified, whether as common or
preferred.’

The Commission, in a previous opinion, ruled that the term ‘capital’ denotes the sum
total of the shares subscribed and paid by the shareholders or served to be paid,
irrespective of their nomenclature. (Letter to Supreme Technotronics Corporation, dated
April 14, 1987)." (Emphasis ours)

10. Further, in adopting this common usage of the term ‘capital,’ the Commission believed
in good faith and with sound reasons that it was consistent with the intent and purpose of
the Constitution. In an Opinion dated 27 December 1995 addressed to Joaquin Cunanan &
Co. the Commission observed that:

"To construe the 60-40% equity requirement as merely based on the voting shares,
disregarding the preferred non-voting share, not on the total outstanding subscribed
capital stock, would give rise to a situation where the actual foreign interest would not
really be only 40% but may extend beyond that because they could also own even the
entire preferred non-voting shares. In this situation, Filipinos may have the control in the
operation of the corporation by way of voting rights, but have no effective ownership of
the corporate assets which includes lands, because the actual Filipino equity constitutes
only a minority of the entire outstanding capital stock. Therefore, in essence, the
company, although controlled by Filipinos, is beneficially owned by foreigners
since the actual ownership of at least 60% of the entire outstanding capital stocks
would be in the hands of foreigners. Allowing this situation would open the
floodgates to circumvention of the intent of the law to make the Filipinos the
principal beneficiaries in the ownership of alienable lands." (Emphasis ours)

11. The foregoing settled principles and esteemed authorities relied upon by the
Commission show that its interpretation of the term ‘capital’ is reasonable.

12. And, it is well settled that courts must give due deference to an administrative
agency’s reasonable interpretation of the statute it enforces.55

It should be borne in mind that the SEC is the government agency invested with the
jurisdiction to determine at the first instance the observance by a public utility of the
constitutional nationality requirement prescribed vis-à-vis the ownership of public
utilities56 and to interpret legislative acts, like the FIA. The rationale behind the doctrine
of primary jurisdiction lies on the postulate that such administrative agency has the
"special knowledge, experience and tools to determine technical and intricate matters of
fact…"57 Thus, the determination of the SEC is afforded great respect by other executive
agencies, like the Department of Justice (DOJ),58 and by the courts.

Verily, when asked as early as 1988– "Would it be legal for foreigners to own in a public
utility entity more than 40% of the common shares but not more than 40% of the total
outstanding capital stock which would include both common and non-voting preferred
shares?" –the SEC, citing Fletcher, invariably answered in the affirmative, whether the
poser was made in light of the present or previous Constitutions:
The pertinent provision of the Philippine Constitution under Article XII, Section 7, reads
in part thus:

"No franchise, certificate, or any 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. . ." x x x

The issue raised on your letter zeroes in on the meaning of the word "capital" as
used in the above constitutional provision. Anent thereto, please be informed that
the term "capital" as applied to corporations, refers to the money, property or means
contributed by stockholders as the form or basis for the business or enterprise for which
the corporation was formed and generally implies that such money or property or means
have been contributed in payment for stock issued to the contributors. (United Grocers,
Ltd. v. United States F. Supp. 834, cited in 11 Fletcher, Cyc. Corp., 1986, rev. vol., sec. 5080
at 18). As further ruled by the court, "capital of a corporation is the fund or other
property, actually or potentially in its possession, derived or to be derived from the sale
by it of shares of its stock or his exchange by it for property other than money. This fund
includes not only money or other property received by the corporation for shares of stock
but all balances of purchase money, or installments, due the corporation for shares of
stock sold by it, and all unpaid subscriptions for shares." (Williams v. Brownstein, 1F. 2d
470, cited in 11 Fletcher, Cyc. Corp., 1058 rev. vol., sec. 5080, p. 21).

The term "capital" is also used synonymously with the words "capital stock", as meaning
the amount subscribed and paid-in and upon which the corporation is to conduct its
operation. (11 Fletcher, Cyc. Corp. 1986, rev. vol., sec. 5080 at 15). And, as held by the court
in Haggard v. Lexington Utilities Co., (260 Ky 251, 84 SW 2d 84, cited in 11 Fletcher, Cyc.
Corp., 1958 rev. vol., sec. 5079 at 17), "The capital stock of a corporation is the amount
paid-in by its stockholders in money, property or services with which it is to
conduct its business, and it is immaterial how the stock is classified, whether as
common or preferred."

The Commission, in a previous opinion, ruled that the term ‘capital’ denotes the
sum total of the shares subscribed and paid by the shareholders or served to be
paid, irrespective of their nomenclature. (Letter to Supreme Technotronics
Corporation, dated April 14, 1987). Hence, your query is answered in the
affirmative.59 (Emphasis supplied.)

As it were, the SEC has held on the same positive response long before the 1987
Constitution came into effect, a matter of fact which has received due acknowledgment
from this Court. In People v. Quasha,60 a case decided under the 1935 Constitution, this
Court narrated that in 1946 the SEC approved the incorporation of a common carrier, a
public utility, where Filipinos, while not holding the controlling vote, owned the majority
of the capital, viz:
The essential facts are not in dispute. On November 4, 1946, the Pacific Airways
Corporation registered its articles of incorporation with the [SEC]. The articles were
prepared and the registration was effected by the accused, who was in fact the organizer
of the corporation. The articles stated that the primary purpose of the corporation was to
carry on the business of a common carrier by air, land, or water, that its capital stock
was ₱ 1,000,000, represented by 9,000 preferred and 100,000 common shares, each
preferred share being of the par value of ₱ 100 and entitled to 1/3 vote and each
common share, of the par value of ₱ 1 and entitled to one vote; that the amount of
capital stock actually subscribed was ₱ 200,000, and the names of the subscriber were
Arsenio Baylon, Eruin E. Shannahan, Albert W. Onstott, James O’bannon, Denzel J.
Cavin, and William H. Quasha, the first being a Filipino and the other five all
Americans; that Baylon’s subscription was for 1,145 preferred shares, of the total value of
₱ 114,500 and 6,500 common shares, of the total par value of ₱ 6,500, while the aggregate
subscriptions of the American subscribers were for 200 preferred shares, of the total par
value of ₱ 20,000 and 59,000 common shares, of the total par value of ₱ 59,000; and that
Baylon and the American subscribers had already paid 25 percent of their respective
subscriptions. Ostensibly the owner of, or subscriber to, 60.005 per cent of the
subscribed capital stock of the corporation, Baylon, did not have the controlling
vote because of the difference in voting power between the preferred shares and
the common shares. Still, with the capital structure as it was, the articles of
incorporation were accepted for registration and a certificate of incorporation was
issued by the [SEC]. (Emphasis supplied.)

The SEC has, through the years, stood by this interpretation. In an Opinion dated
November 21, 1989, the SEC held that the basis of the computation for the nationality
requirement is the total outstanding capital stock, to wit:

As to the basis of computation of the 60-40 percentage nationality requirement under


existing laws (whether it should be based on the number of shares or the aggregate
amount in pesos of the par value of the shares), the following definitions of corporate
terms are worth mentioning.

"The term capital stock signifies the aggregate of the shares actually subscribed". (11
Fletcher, Cyc. Corps. (1971 Rev. Vol.) sec. 5082, citing Goodnow v. American Writing
Paper Co., 73 NJ Eq. 692, 69 A 1014 aff'g 72 NJ Eq. 645, 66 A, 607).

"Capital stock means the capital subscribed (the share capital)". (Ibid., emphasis
supplied).

"In its primary sense a share of stock is simply one of the proportionate integers or units,
the sum of which constitutes the capital stock of corporation. (Fletcher, sec. 5083).

The equitable interest of the shareholder in the property of the corporation is represented
by the term stock, and the extent of his interest is described by the term shares. The
expression shares of stock when qualified by words indicating number and ownership
expresses the extent of the owner's interest in the corporate property (Ibid, Sec. 5083,
emphasis supplied).

Likewise, in all provisions of the Corporation Code the stockholders’ right to vote and
receive dividends is always determined and based on the "outstanding capital stock",
defined as follows:

"SECTION 137. Outstanding capital stock defined. — The term "outstanding capital stock"
as used in this Code, means the total shares of stock issued to subscribers or stockholders,
whether or not fully or partially paid (as long as there is a binding subscription
agreement, except treasury shares."

The computation, therefore, should be based on the total outstanding capital stock,
irrespective of the amount of the par value of the shares.

Then came SEC-OGC Opinion No. 08-14 dated June 02, 2008:

The instant query now centers on whether both voting and nonvoting shares are included
in the computation of the required percentage of Filipino equity, As a rule, the 1987
Constitution does not distinguish between voting and non-voting shares with regard to
the computation of the percentage interest by Filipinos and non-Filipinos in a
company. In other words, non-voting shares should be included in the
computation of the foreign ownership limit for domestic corporation. This was the
rule applied [in SEC Opinion No. 04-30 x x x It was opined therein that the ownership of
the shares of stock of a corporation is based on the total outstanding or subscribed/issued
capital stock regardless of whether they are classified as common voting shares or
preferred shares without voting rights. This is in line with the policy of the State to
develop an independent national economy effectively controlled by Filipinos. x x x
(Emphasis added.)

The SEC again echoed the same interpretation in an Opinion issued last April 19, 2011
wherein it stated, thus:

This is, thus, the general rule, such that when the provision merely uses the term "capital"
without qualification (as in Section 11, Article XII of the 1987 Constitution, which deals
with equity structure in a public utility company), the same should be interpreted to refer
to the sum total of the outstanding capital stock, irrespective of the nomenclature or
classification as common, preferred, voting or non-voting.61

The above construal is in harmony with the letter and spirit of Sec. 11, Art. XII of the
Constitution and its counterpart provisions in the 1935 and 1973 Constitution and, thus, is
entitled to respectful consideration. As the Court declared in Philippine Global
Communications, Inc. v. Relova:62
x x x As far back as In re Allen, (2 Phil. 630) a 1903 decision, Justice McDonough, as
ponente, cited this excerpt from the leading American case of Pennoyer v. McConnaughy,
decided in 1891: "The principle that the contemporaneous construction of a statute
by the executive officers of the government, whose duty it is to execute it, is
entitled to great respect, and should ordinarily control the construction of the
statute by the courts, is so firmly embedded in our jurisprudence that no authorities
need be cited to support it.’ x x x There was a paraphrase by Justice Malcolm of such a
pronouncement in Molina v. Rafferty, (37 Phil. 545) a 1918 decision:" Courts will and
should respect the contemporaneous construction placed upon a statute by the executive
officers whose duty it is to enforce it, and unless such interpretation is clearly erroneous
will ordinarily be controlled thereby. (Ibid, 555) Since then, such a doctrine has been
reiterated in numerous decisions.63 (Emphasis supplied.)

Laxamana v. Baltazar64 restates this long-standing dictum: "[w]here a statute has


received a contemporaneous and practical interpretation and the statute as interpreted is
re-enacted, the practical interpretation is accorded greater weight than it ordinarily
receives, and is regarded as presumptively the correct interpretation of the law. The rule
here is based upon the theory that the legislature is acquainted with the
contemporaneous interpretation of a statute, especially when made by an administrative
body or executive officers charged with the duty of administering or enforcing the law,
and therefore impliedly adopts the interpretation upon re-enactment."65 Hence, it can be
safely assumed that the framers, in the course of deliberating the 1987 Constitution, knew
of the adverted SEC interpretation.

Parenthetically, it is immaterial whether the SEC opinion was rendered by the banc or by
the SEC-Office of the General Counsel (OGC) considering that the latter has been given
the authority to issue opinions on the laws that the SEC implements under SEC-EXS. Res.
No. 106, Series of 2002.66 The conferment does not violate Sec. 4.667of the Securities and
Regulation Code (SRC) that proscribes the non-delegation of the legislative rule making
power of the SEC, which is in the nature of subordinate legislation. As may be noted, the
same Sec. 4.6 does not mention the SEC’s power to issue interpretative "opinions and
provide guidance on and supervise compliance with such rules,"68 which is incidental to
the SEC’s enforcement functions. A legislative rule and an interpretative rule are two
different concepts and the distinction between the two is established in administrative
law.69 Hence, the various opinions issued by the SEC-OGC deserve as much respect as the
opinions issued by the SEC en banc.

Nonetheless, the esteemed ponente posits that the SEC, contrary to its claim, has been
less than consistent in its construal of "capital." During the oral arguments, he drew
attention to various SEC Opinions, nine (9) to be precise, that purportedly consider
"capital" as referring only to voting stocks.

Refuting this position, the SEC in its Memorandum dated July 25, 2012 explained in some
detail that the Commission has been consistent in applying the term "capital" to
the total outstanding capital stock, whether voting or non-voting. The SEC
Opinions referred to by Justice Carpio, which cited the provisions of the FIA, is not,
however, pertinent or decisive of the issue on the meaning of "capital." The said SEC
Memorandum states:

During the oral arguments held on 26 June 2012, the SEC was directed to explain nine (9)
of its Opinions in relation to the definition of "capital" as used in Section 11, Article XII of
the Constitution, namely: (1) Opinion dated 3 March 1993 for Mr. Francis F. How; (2)
Opinion dated 14 April 1993 for Director Angeles T. Wong; (3) Opinion dated 23
November 1993 for Mssrs. Dominador Almeda and Renato S. Calma; (4) Opinion dated 7
December 1993 for Roco Buñag Kapunan Migallos & Jardeleza Law Offices; (5) Opinion
dated 22 December 2004 for Romulo Mabanta Buenaventura Sayoc & De Los Angeles; (6)
Opinion dated 27 September 2007 for Reynaldo G. David; (7) Opinion dated 28 November
2007 for Santiago & Santiago law Offices; (8) Opinion dated 15 January 2008 for Attys.
Ruby Rose J. Yusi and Rudyard S. Arbolado; and (9) Opinion dated 18 August 2010 for
Castillo Laman Tan Pantaleon & San Jose.

xxxx

With due respect, the issue of whether "capital" refers to outstanding capital stock
or only voting stocks was never raised in the requests for these opinions. In fact,
the definition of "capital" could not have been a relevant and/or a material issue in some
of these opinions because the common and preferred shares involved have the same
voting rights. Also, some Opinions mentioned the FIA to emphasize that the said law
mandates the application of the Control Test. Moreover, these Opinions state they are
based solely on the facts disclosed and relevant only to the issues raised therein.

For one, the Opinion dated 3 March 1993 for Mr. Francis F. How does not discuss
whether "capital" refers to total outstanding capital stock or only voting stocks.
Instead, it talks about the application of the Control test in a mining corporation by
looking into the nationality of its investors. The FIA is not mentioned to provide a
definition of "capital," but to explain the nationality requirement pertinent to
investors of a mining corporation.

The Opinion dated 14 April 1993 for Dir. Angeles T. Wong also does not define "capital"
as referring to total outstanding capital or only to voting shares, but talks about
the application of the Control Test x x x. The FIA is again mentioned only to explain
the nationality required of investors of a corporation engaged in overseas recruitment.

The Opinion dated 23 November 1993 for Mssrs. Dominador Almeda and Renato S.
Calma distinguishes between the nationality of a corporation as an investing
entity and the nationality of a corporation as an investee corporation. The FIA is
mentioned only in the discussion of the nationality of the investors of a
corporation owning land in the Philippines, composed of a trustee for pension or
other employee retirement or separation benefits, where the trustee is a Philippine
national and at least sixty percent (60%) of the fund will accrue to the benefit of
Philippine nationals, and another domestic corporation which is 100% foreign owned.

Unlike the Decision rendered by this Honorable Court on 28 June 2011, the Opinion dated
07 December 1993 for Roco Buñag Kapunan Migallos & Jardeleza does not parley on the
issue of the proper interpretation of "capital" because it is not a relevant and/or a
material issue in this opinion xxx. The FIA is mentioned only to explain the
application of the control test. Note, however, that manufacturing fertilizer is neither a
nationalized or partly nationalized activity, which is another reason why this Opinion has
no relevance in this case.

The Opinion dated 22 December 2004 for Romulo Mabanta Buenaventura Sayoc & De Los
Angeles focuses on the nationality of the investors of a corporation that will acquire land
wherein one of the investors is a foundation. It confirms the view that the test for
compliance with the nationality requirement is based on the total outstanding
capital stock irrespective of the amount of the par value of shares. The FIA is used
merely to justify the application of the Control Test as adopted in the Department of
Justice Opinion, No. 18, Series of 1989, dated 19 January 1989m viz –

xxxx

The Opinion dated 27 September 2007 for Mr. Reynaldo G. David, likewise, does not
discuss whether "capital" refers to total outstanding capital stock or only to voting
stocks, but rather whether the Control Test is applicable in determining the
nationality of the proposed corporate bidder or buyer of PNOC-EDC shares. x x x
The FIA was cited only to emphasize that the said law mandates the application of the
Control Test.

The Opinion dated 28 November 2007 for Santiago & Santiago Law Offices maintains
and supports the position of the Commission that Section 11, Article XII of the
Constitution makes no distinction between common and preferred shares, thus,
both shares should be included in the computation of the foreign equity cap for
domestic corporations. Simply put, the total outstanding capital stock, without regard
to how the shares are classified, should be used as the basis in determining the
compliance by public utilities with the nationality requirement as provided for in Section
11, Article XII of the Constitution. Notably, all shares of the subject corporation, Pilipinas
First, have voting rights, whether common or preferred. Hence, the issue on whether
"capital" refers to total outstanding capital stock or only to voting stocks has no relevance
in this Opinion.

In the same way, the Opinion dated 15 January 2008 for Attys. Ruby Rose J. Yusi and
Rudyard S. Arbolada never discussed whether "capital" refers to outstanding capital
stock or only to voting stocks, but rather whether the Control Test is applicable or
not. The FIA was used merely to justify the application of the Control Test. More
importantly, the term "capital" could not have been relevant and/or material issue in this
Opinion because the common and preferred shares involved have the same voting rights.

The Opinion dated 18 August 2010 for Castillo Laman Tan Pantaleon & San
Jose reiterates that the test for compliance with the nationality requirement is
based on the total outstanding capital stock, irrespective of the amount of the par
value of the shares. The FIA is mentioned only to explain the application of the
Control Test and the Grandfather Rule in a corporation owning land in the
Philippines by looking into the nationality of its investors. (Emphasis supplied).70

In view of the foregoing, it is submitted that the long-established interpretation and


mode of computing by the SEC of the total capital stock strongly recognize the intent of
the framers of the Constitution to allow access to much-needed foreign investments
confined to 40% of the capital stock of public utilities.

Consequences of alternative interpretation: mischievous


effects of the construction proposed in the petition and
sustained in the June 28, 2011 Decision. (6th extrinsic aid)

Filipino shareholders will not


control the fundamental corporate
matters nor own the majority
economic benefits of the public
utility corporation.

Indeed, if the Court persists in adhering to the rationale underlying the majority’s original
interpretation of "capital" found in the first sentence of Section 11, Article XII, We may
perhaps be allowing Filipinos to direct and control the daily business of our public
utilities, but would irrevocably and injudiciously deprive them of effective "control"
over the major and equally important corporate decisions and the eventual
beneficial ownership of the corporate assets that could include, among others,
claim over our soil––our land. This undermines the clear textual commitment under
the Constitution that reserves ownership of disposable lands to Filipino citizens. The
interplay of the ensuing provisions of Article XII is unmistakable:

SECTION 2. All lands of the public domain x x x forests or timber, wildlife, flora and
fauna, and other natural resources are owned by the State. With the exception of
agricultural lands, all other natural resources shall not be alienated. The exploration,
development, and utilization of natural resources shall be under the full control
and supervision of the State. x x x

xxxx
SECTION 3. Lands of the public domain are classified into agricultural, forest or timber,
mineral lands, and national parks. Agricultural lands of the public domain may be further
classified by law according to the uses which they may be devoted. Alienable lands of the
public domain shall be limited to agricultural lands. Private corporations or associations
may not hold such alienable lands except by lease, for a period not exceeding twenty-five
years, renewable for not more than twenty-five years, and not to exceed one thousand
hectares in area. Citizens of the Philippines may lease not more than five hundred
hectares, or acquire not more than twelve hectares thereof by purchase, homestead or
grant.

xxxx

SECTION 7. Save in cases of hereditary succession, no private lands shall be


transferred or conveyed except to individuals, corporations or associations
qualified to acquire or hold lands of the public domain. (Emphasis supplied.)

Consider the hypothetical case presented in the original ponencia:

Let us assume that a corporation has 100 common shares owned by foreigners and
1,000,000 non-voting preferred shares owned by Filipinos, with both classes of share
having a par value of one peso (₱ 1.00) per share. Under the broad definition of the term
"capital," such corporation would be considered compliant with the 40 percent
constitutional limit on foreign equity of public utilities since the overwhelming majority,
or more than 99.999 percent, of the total outstanding capital stock is Filipino owned.
This is obviously absurd.

Albeit trying not to appear to, the majority actually finds fault in the wisdom of, or motive
behind, the provision in question through "highly unlikely scenarios of clinical extremes,"
to borrow from Veterans Federation Party v. COMELEC.71 It is submitted that the flip side
of the ponencia’s hypothetical illustration, which will be exhaustively elucidated in this
opinion, is more anomalous and prejudicial to Filipino interests.

For instance, let us suppose that the authorized capital stock of a public utility
corporation is divided into 100 common shares and 1,000,000 non-voting preferred
shares. Since, according to the Court’s June 28, 2011 Decision, the word "capital" in Sec. 11,
Art. XII refers only to the voting shares, then the 40% cap on foreign ownership applies
only to the 100 common shares. Foreigners can, therefore, own 100% of the 1,000,000
nonvoting preferred shares. But then again, the ponencia continues, at least, the "control"
rests with the Filipinos because the 60% Filipino-owned common shares will necessarily
ordain the majority in the governing body of the public utility corporation, the board of
directors/trustees. Hence, Filipinos are assured of control over the day-to-day activities of
the public utility corporation.
Let us, however, take this corporate scenario a little bit farther and consider the
irresistible implications of changes and circumstances that are inevitable and common in
the business world. Consider the simple matter of a possible investment of corporate
funds in another corporation or business, or a merger of the public utility corporation, or
a possible dissolution of the public utility corporation. Who has the "control" over
these vital and important corporate matters? The last paragraph of Sec. 6 of the
Corporation Code provides:

Where the articles of incorporation provide for non-voting shares in the cases allowed by
this Code, the holders of such (non-voting) shares shall nevertheless be entitled to
vote on the following matters:

1. Amendment of the articles of incorporation;

2. Adoption and amendment of by-laws;

3. Sale, lease, exchange, mortgage, pledge or other disposition of all or substantially all of
the corporate property;

4. Incurring, creating or increasing bonded indebtedness;

5. Increase or decrease of capital stock;

6. Merger or consolidation of the corporation with another corporation or other


corporations;

7. Investment of corporate funds in another corporation or business in accordance with


this Code; and

8. Dissolution of the corporation."(Emphasis and underscoring supplied.)

In our hypothetical case, all 1,000,100 (voting and non-voting) shares are entitled to vote
in cases involving fundamental and major changes in the corporate structure, such as
those listed in Sec. 6 of the Corporation Code. Hence, with only 60 out of the 1,000,100
shares in the hands of the Filipino shareholders, control is definitely in the hands of the
foreigners. The foreigners can opt to invest in other businesses and corporations, increase
its bonded indebtedness, and even dissolve the public utility corporation against the
interest of the Filipino holders of the majority voting shares. This cannot plausibly be the
constitutional intent.

Consider further a situation where the majority holders of the total outstanding capital
stock, both voting and non-voting, decide to dissolve our hypothetical public utility
corporation. Who will eventually acquire the beneficial ownership of the corporate
assets upon dissolution and liquidation? Note that Sec. 122 of the Corporation Code
states:

Section 122. Corporate liquidation.–Every corporation whose charter expires by its own
limitation or is annulled by forfeiture or otherwise, or whose corporate existence for other
purposes is terminated in any other manner, shall nevertheless be continued as a body
corporate for three (3) years… to dispose of and convey its property and to distribute
its assets, but not for the purpose of continuing the business for which it was
established.

At any time during said three (3) years, the corporation is authorized and empowered to
convey all of its property to trustees for the benefit of stockholders,
members, creditors, and other persons in interest. From and after any such conveyance
by the corporation of its property in trust for the benefit of its stockholders, members,
creditors and others in interest, all interest which the corporation had in the
property terminates, the legal interest vests in the trustees, and the beneficial
interest in the stockholders, members , creditors or other persons in
interest. (Emphasis and underscoring supplied.)

Clearly then, the bulk of the assets of our imaginary public utility corporation, which may
include private lands, will go to the beneficial ownership of the foreigners who can hold
up to 40 out of the 100 common shares and the entire 1,000,000 preferred non-voting
shares of the corporation. These foreign shareholders will enjoy the bulk of the proceeds
of the sale of the corporate lands, or worse, exercise control over these lands behind the
façade of corporations nominally owned by Filipino shareholders. Bluntly, while the
Constitution expressly prohibits the transfer of land to aliens, foreign stockholders may
resort to schemes or arrangements where such land will be conveyed to their dummies or
nominees. Is this not circumvention, if not an outright violation, of the fundamental
Constitutional tenet that only Filipinos can own Philippine land?

A construction of "capital" as referring to the total shareholdings of the company is an


acknowledgment of the existence of numerous corporate control-enhancing mechanisms,
besides ownership of voting rights, that limits the proportion between the separate and
distinct concepts of economic right to the cash flow of the corporation and the right to
corporate control (hence, they are also referred to as proportionality-limiting measures).
This corporate reality is reflected in SRC Rule 3(E) of the Amended Implementing Rules
and Regulations (IRR) of the SRC and Sec. 3(g) of The Real Estate Investment Trust Act
(REIT) of 2009,72 which both provide that control can exist regardless of ownership of
voting shares. The SRC IRR states:

Control is the power to govern the financial and operating policies of an enterprise
so as to obtain benefits from its activities. Control is presumed to exist when the parent
owns, directly or indirectly through subsidiaries, more than one half of the voting power
of an enterprise unless, in exceptional circumstances, it can be clearly demonstrated that
such ownership does not constitute control. Control also exists even when the parent
owns one half or less of the voting power of an enterprise when there is:

i. Power over more than one half of the voting rights by virtue of
an agreement with other investors;

ii. Power to govern the financial and operating policies of the


enterprise under a statute or an agreement;

iii. Power to appoint or remove the majority of the members of the


board of directors or equivalent governing body;

iv. Power to cast the majority of votes at meetings of the board of


directors or equivalent governing body. (Emphasis and underscoring
supplied.)

As shown above, ownership of voting shares or power alone without economic


control of the company does not necessarily equate to corporate control.
A shareholder’s agreement can effectively clip the voting power of a shareholder holding
voting shares. In the same way, a voting right ceiling, which is "a restriction prohibiting
shareholders to vote above a certain threshold irrespective of the number of voting shares
they hold,"73 can limit the control that may be exerted by a person who owns voting
stocks but who does not have a substantial economic interest over the company. So also
does the use of financial derivatives with attached conditions to ensure the acquisition of
corporate control separately from the ownership of voting shares, or the use
of supermajority provisions in the bylaws and articles of incorporation or association.
Indeed, there are innumerable ways and means, both explicit and implicit, by which
the control of a corporation can be attained and retained even with very limited voting
shares, i.e.., there are a number of ways by which control can be disproportionately
increased compared to ownership74 so long as economic rights over the majority of the
assets and equity of the corporation are maintained.

Hence, if We follow the construction of "capital" in Sec. 11, Art. XII stated in
the ponencia of June 28, 2011 and turn a blind eye to these realities of the business
world, this Court may have veritably put a limit on the foreign ownership of
common shares but have indirectly allowed foreigners to acquire greater
economic right to the cash flow of public utility corporations, which is a leverage to
bargain for far greater control through the various enhancing mechanisms or
proportionality-limiting measures available in the business world.

In our extremely hypothetical public utility corporation with the equity structure as thus
described, since the majority recognized only the 100 common shares as the "capital"
referred to in the Constitution, the entire economic right to the cash flow arising from the
1,000,000 non-voting preferred shares can be acquired by foreigners. With this economic
power, the foreign holders of the minority common shares will, as they easily can, bargain
with the holders of the majority common shares for more corporate control in order to
protect their economic interest and reduce their economic risk in the public utility
corporation. For instance, they can easily demand the right to cast the majority of votes
during the meeting of the board of directors. After all, money commands control.

The court cannot, and ought not, accept as correct a holding that routinely disregards
legal and practical considerations as significant as above indicated. Committing an error
is bad enough, persisting in it is worse.

Foreigners can be owners of fully


nationalized industries

Lest it be overlooked, "capital" is an oft-used term in the Constitution and various


legislative acts that regulate corporate entities. Hence, the meaning assigned to it within
the context of a constitutional provision limiting foreign ownership in corporations can
affect corporations whose ownership is reserved to Filipinos, or whose foreign equity is
limited by law pursuant to Sec. 10, Art. XII of the Constitution which states:

SECTION 10. The Congress shall, upon recommendation of the economic and planning
agency, when the national interest dictates, reserve to citizens of the Philippines or to
corporations or associations at least sixty per centum of whose capital is owned by
such citizens, or such higher percentage as Congress may prescribe, certain areas
of investments. The Congress shall enact measures that will encourage the
formation and operation of enterprises whose capital is wholly owned by
Filipinos. (Emphasis supplied).

For instance, Republic Act No. 7042, also known as the Foreign Investments Act of
199175 (FIA), provides for the formation of a Regular Foreign Investment Negative List
(RFINL) covering investment areas/activities that are partially or entirely reserved to
Filipinos. The 8th RFINL76 provides that "No Foreign Equity" is allowed in the following
areas of investments/activities:

1. Mass Media except recording (Article XVI, Section 1 of the Constitution and
Presidential Memorandum dated May 4, 1994);

2. Practice of all professions (Article XII, Section 14 of the Constitution and Section 1, RA
5181);77

3. Retail trade enterprises with paid-up capital of less than $2,500,000 (Section 5, RA
8762);

4. Cooperatives (Chapter III, Article 26, RA 6938);


5. Private Security Agencies (Section 4, RA 5487);

6. Small-scale Mining (Section 3, RA 7076)

7. Utilization of Marine Resources in archipelagic waters, territorial sea, and exclusive


economic zone as well as small scale utilization of natural resources in rivers, lakes, bays,
and lagoons (Article XII, Section 2 of the Constitution);

8. Ownership, operation and management of cockpits (Section 5, PD 449);

9. Manufacture, repair, stockpiling and/or distribution of nuclear weapons (Article II,


Section 8 of the Constitution);

10. Manufacture, repair, stockpiling and/or distribution of biological, chemical and


radiological weapons and anti-personnel mines (Various treaties to which the Philippines
is a signatory and conventions supported by the Philippines);

11. Manufacture of fire crackers and other pyrotechnic devices (Section 5, RA 7183).

If the construction of "capital," as espoused by the June 28, 2011 Decision, were to be
sustained, the reservation of the full ownership of corporations in the foregoing industries
to Filipinos could easily be negated by the simple expedience of issuing and making
available non-voting shares to foreigners. After all, these non-voting shares do not,
following the June 28, 2011 Decision, form part of the "capital" of these supposedly fully
nationalized industries. Consequently, while Filipinos can occupy all of the seats in the
board of directors of corporations in fully nationalized industries, it is possible for
foreigners to own the majority of the equity of the corporations through "non-voting"
shares, which are nonetheless allowed to determine fundamental corporate matters
recognized in Sec. 6 of the Corporation Code. Filipinos may therefore be unwittingly
deprived of the "effective" ownership of corporations supposedly reserved to them by the
Constitution and various laws.

The Foreign Investments Act of 1991 does


not qualify or restrict the meaning of "capital"
in Sec. 11, Art. XII of the Constitution.

Nonetheless, Justice Carpio parlays the thesis that the FIA, and its predecessors, the
Investments Incentives Act of 1967 ("1967 IIA"),78 Omnibus Investments Code of 1981
("1981 OIC"),79 and the Omnibus Incentives Code of 1987 ("1987 OIC"),80 (collectively,
"Investment Incentives Laws") more particularly their definition of the term "Philippine
National," constitutes a good guide for ascertaining the intent behind the use of the term
"capital" in Sec. 11, Art. XII—that it refers only to voting shares of public utility
corporations.
I cannot share this posture. The Constitution may only be amended through the
procedure outlined in the basic document itself.81 An amendment cannot,
therefore, be made through the expedience of a legislative action that diagonally
opposes the clear provisions of the Constitution.

Indeed, the constitutional intent on the equity prescribed by Sec. 11, Art. XII cannot
plausibly be fleshed out by a look through the prism of economic statutes passed
after the adoption of the Constitution, such as the cited FIA, the Magna Carta for
Micro, Small and Medium Industries (Republic Act No. 6977) and other kindred laws
envisaged to Filipinize certain areas of investment. It should be the other way around.
Surely, the definition of a "Philippine National" in the FIA, or for that matter, the 1987
OIC82 could not have influenced the minds of the 1986 CONCOM or the people when
they ratified the Constitution. As heretofore discussed, the primary source whence to
ascertain constitutional intent or purpose is the constitutional text, or, to be more
precise, the language of the provision itself,83 as inquiry on any controversy arising out of
a constitutional provision ought to start and end as much as possible with the provision
itself.84 Legislative enactments on commerce, trade and national economy must be
so construed, when appropriate, to determine whether the purpose underlying
them is in accord with the policies and objectives laid out in the Constitution.
Surely, a law cannot validly broaden or restrict the thrust of a constitutional
provision unless expressly sanctioned by the Constitution itself. And the Court may
not read into the Constitution an intent or purpose that is not there. Any attempt to
enlarge the breadth of constitutional limitations beyond what its provision dictates
should be stricken down.

In fact, it is obvious from the FIA itself that its framers deemed it necessary to qualify the
term "capital" with the phrase "stock outstanding and entitled to vote" in defining a
"Philippine National" in Sec. 3(a). This only supports the construal that the term "capital,"
standing alone as in Sec. 11, Art. XII of the Constitution, applies to all shares, whether
classified as voting or non-voting, and this is the interpretation in harmony with the
Constitution.

In passing the FIA, the legislature could not have plausibly intended to restrict the 40%
foreign ownership limit imposed by the Constitution on all capital stock to only voting
stock. Precisely, Congress enacted the FIA to liberalize the laws on foreign investments.
Such intent is at once apparent in the very title of the statute, i.e., "An Act to Promote
Foreign Investments," and the policy: "attract, promote and welcome productive
investments from foreign individuals, partnerships, corporations, and
government,"85 expresses the same.

The Senate, through then Senator Vicente Paterno, categorically stated that the FIA is
aimed at "liberalizing foreign investments"86 because "Filipino investment is not going to
be enough [and] we need the support and the assistance of foreign investors x x x."87 The
senator made clear that "the term ‘Philippine national’" means either Filipino citizens or
enterprises of which the "total Filipino ownership" is 60 percent or greater, thus:

Senator Paterno. May I first say that the term "Philippine national" means either
Filipino citizens or enterprises of which the total Filipino ownership is 60 percent
or greater. In other words, we are not excluding foreign participation in domestic market
enterprises with total assets of less than ₱ 25 million. We are merely limiting foreign
participation to not more than 40 percent in this definition.88

Even granting, arguendo, that the definition of a "Philippine National" in the FIA was
lifted from the Investment Incentives Laws issued in 1967, 1981, and 1987 that defined
"Philippine National" as a corporation 60% of whose voting stocks is owned by Filipino
citizens, such definition does not limit or qualify the nationality requirement prescribed
for public utility corporations by Sec. 11, Art. XII of the 1987 Constitution. The latter does
not refer to the definition of a "Philippine National." Instead, Sec. 11, Art. XII reiterates the
use of the unqualified term "capital" in the 1935 and 1973 Constitutions. In fact, neither
the 1973 Constitutional Convention nor the 1986 CONCOM alluded to the Investment
Incentives Laws in their deliberations on the nationality requirement of public utility
corporations. With the unequivocal rejection of the UP Law Center proposal to use the
qualifying "voting stock or controlling interest," the non-consideration of the Investment
Incentives Laws means that these laws are not pertinent to the issue of the Filipino-
foreign capital ratio in public utility corporations.

Besides, none of the Investment Incentives Laws defining a "Philippine National" has
sought to expand or modify the definition of "capital," as used in the Constitutions then
existing. The definition of a "Philippine National" in these laws was, to stress, only
intended to identify the corporations qualified for registration to avail of the incentives
prescribed therein. The definition was not meant to find context outside the scope of the
various Investment Incentives Laws, much less to modify a nationality requirement set by
the then existing Constitution. This much is obvious in the very heading of the first of
these Investment Incentives Laws, 1967 IIA :

SECTION 3. Definition of Terms. - For purposes of this Act:

xxxx

(f) "Philippine National" shall mean a citizen of the Philippines; or a partnership or


association wholly owned by citizens of the Philippines; or a corporation organized and
existing under the laws of the Philippines of which at least sixty per cent of the capital
stock outstanding and entitled to vote is owned and held by citizens of the Philippines
xxxx (Emphasis and underscoring supplied.)

Indeed, the definition of a "Philippine National" in the FIA cannot apply to the ownership
structure of enterprises applying for, and those granted, a franchise to operate as a public
utility under Sec. 11, Art. XII of the Constitution. As aptly observed by the SEC, the
definition of a "Philippine National" provided in the FIA refers only to a corporation that
is permitted to invest in an enterprise as a Philippine citizen (investorcorporation). The
FIA does not prescribe the equity ownership structure of the enterprise granted
the franchise or the power to operate in a fully or partially nationalized
industry (investee-corporation). This is apparent from the FIA itself, which also defines
the act of an "investment" and "foreign investment":

Section 3. Definitions. – As used in this Act:

a) The term "Philippine national" shall mean a citizen of the Philippines, or a domestic
partnership or association wholly owned by citizens of the Philippines; or a corporation
organized under the laws of the Philippines of which at least sixty percent [60%] of the
capital stock outstanding and entitled to vote is owned and held by citizens of the
Philippines x x x

b) The term "investment" shall mean equity participation in any enterprise organized
or existing the laws of the Philippines;

c) The term "foreign investment" shall mean as equity investment made by a non-
Philippine national in the form of foreign exchange and/or other assets actually
transferred to the Philippines and duly registered with the Central Bank which shall
assess and appraise the value of such assets other than foreign exchange.

In fact, Sec. 7 of the FIA, as amended, allows aliens or non-Philippine nationals to own an
enterprise up to the extent provided by the Constitution, existing laws or the FINL:

Sec. 7. Foreign investments in domestic market enterprises. – Non- Philippine nationals


may own up to one hundred percent [100%] of domestic market enterprises unless
foreign ownership therein is prohibited or limited by the Constitution and existing laws
or the Foreign Investment Negative List under Section 8 hereof. (Emphasis supplied.)

Hence, pursuant to the Eight Regular FINL, List A, the foreign "equity" is up to 40% in
enterprises engaged in the operation and management of public utilities while the
remaining 60% of the "equity" is reserved to Filipino citizens and "Philippine Nationals"
as defined in Sec. 3(a) of the FIA. Notably, the term "equity" refers to the
"ownership interest in… a business"89 or a "share in a publicly traded company,"90 and
not to the "controlling" or "management" interest in a company. It necessarily includes all
and every share in a corporation, whether voting or non-voting.

Again, We must recognize the distinction of the separate concepts of "ownership" and
"control" in modern corporate governance in order to realize the intent of the framers of
our Constitution to reserve for Filipinos the ultimate and all-encompassing control of
public utility entities from their daily administration to the acts of ownership enumerated
in Sec. 6 of the Corporation Code.91 As elucidated, by equating the word "capital" in Sec.
11, Art. XII to the limited aspect of the right to control the composition of the board of
directors, the Court could very well be depriving Filipinos of the majority economic
interest in the public utility corporation and, thus, the effective control and ownership of
such corporation.

The Court has no jurisdiction over PLDT and foreign


stockholders who are indispensable parties in interest

More importantly, this Court cannot apply a new doctrine adopted in a precedent-setting
decision to parties that have never been given the chance to present their own views on
the substantive and factual issues involved in the precedent-setting case.

To recall, the instant controversy arose out of an original petition filed in February 2007
for, among others, declaratory relief on Sec. 11, Art. XII of the 1987 Constitution "to
clarify the intent of the Constitutional Commission that crafted the 1987 Constitution to
determine the very nature of such limitation on foreign ownership."92

The petition impleaded the following personalities as the respondents: (1) Margarito B.
Teves, then Secretary of Finance and Chair of the Privatization Council; (2) John P.
Sevilla, then undersecretary for privatization of the Department of Finance; (3) Ricardo
Abcede, commissioner of the Presidential Commission on Good Government; (4) Anthoni
Salim, chair of First Pacific Co. Ltd. and director of Metro Pacific Asset Holdings, Inc.
(MPAH); (5) Manuel V. Pangilinan, chairman of the board of PLDT; (6) Napoleon L.
Nazareno, the president of PLDT; (7) Fe Barin (Barin), then chair of the SEC; and (8)
Francis Lim (Lim), then president of the PSE.

Notably, neither PLDT itself nor any of its stockholders were named as respondents in the
petition, albeit it sought from the Court the following main reliefs:

5. x x x to issue a declaratory relief that ownership of common or voting shares is the sole
basis in determining foreign equity in a public utility and that any other government
rulings, opinions, and regulations inconsistent with this declaratory relief be declared as
unconstitutional and a violation of the intent and spirit of the 1987 Constitution;

6. x x x to declare null and void all sales of common stocks to foreigners in excess of 40
percent of the total subscribed common shareholdings; and

7. x x x to direct the [SEC] and [PSE] to require PLDT to make a public disclosure of all of
its foreign shareholdings and their actual and real beneficial owners."

Clearly, the petition seeks a judgment that can adversely affect PLDT and its foreign
shareholders. If this Court were to accommodate the petition’s prayer, as the majority did
in the June 28, 2011 Decision and proposes to do presently, PLDT stands to lose its
franchise, while the foreign stockholders will be compelled to divest their voting shares in
excess of 40% of PLDT’s voting stock, if any, even at a loss. It cannot, therefore, be
gainsaid that PLDT and its foreign shareholders are indispensable parties to the instant
case under the terms of Secs. 2 and 7, Rule 3 of the Rules of Civil Procedure, which read:

Section 2. Parties in interest.–Every action must be prosecuted and defended in the name
of the real party in interest. All persons having an interest in the subject of the action and
in obtaining the relief demanded shall be joined as plaintiffs. All persons who claim an
interest in the controversy or the subject thereof adverse to the plaintiff, or who are
necessary to a complete determination or settlement of the questions involved therein,
shall be joined as defendants.

xxxx

Section 7. Compulsory joinder of indispensable parties.– Parties in interest without whom


no final determination can be had of an action shall be joined either as plaintiffs or
defendants.

Yet, again, PLDT and its foreign shareholders have not been given notice of this petition
to appear before, much less heard by, this Court. Nonetheless, the majority has allowed
such irregularity in contravention of the settled jurisprudence that an action cannot
proceed unless indispensable parties are joined93 since the non-joinder of these
indispensable parties deprives the court the jurisdiction to issue a decision binding on the
indispensable parties that have not been joined or impleaded. In other words, if an
indispensable party is not impleaded, any personal judgment would have no
effectiveness94 as to them for the tribunal’s want of jurisdiction.

In Arcelona v. Court of Appeals,95 We explained that the basic notions of due process
require the observance of this rule that refuses the effectivity of a decision that was
rendered despite the non-joinder of indispensable parties:

Basic considerations of due process, however, impel a similar holding in cases involving
jurisdiction over the persons of indispensable parties which a court must acquire before it
can validly pronounce judgments personal to said defendants. Courts acquire jurisdiction
over a party plaintiff upon the filing of the complaint. On the other hand, jurisdiction
over the person of a party defendant is assured upon the service of summons in the
manner required by law or otherwise by his voluntary appearance. As a rule, if a
defendant has not been summoned, the court acquires no jurisdiction over his person,
and a personal judgment rendered against such defendant is null and void. A decision
that is null and void for want of jurisdiction on the part of the trial court is not a
decision in the contemplation of law and, hence, it can never become final and
executory.
Rule 3, Section 7 of the Rules of Court, defines indispensable parties as parties-in-interest
without whom there can be no final determination of an action. As such, they must be
joined either as plaintiffs or as defendants. The general rule with reference to the
making of parties in a civil action requires, of course, the joinder of all necessary
parties where possible, and the joinder of all indispensable parties under any and
all conditions, their presence being a sine qua non for the exercise of judicial
power. It is precisely "when an indispensable party is not before the court (that)
the action should be dismissed." The absence of an indispensable party renders all
subsequent actions of the court null and void for want of authority to act, not only
as to the absent parties but even as to those present.96

Hence, the June 28, 2011 Decision having been rendered in a case where the indispensable
parties have not been impleaded, much less summoned or heard, cannot be given any
effect and is, thus, null and void. Ergo, the assailed June 28, 2011 Decision is virtually a
useless judgment, at least insofar as it tends to penalize PLDT and its foreign
stockholders. It cannot bind and affect PLDT and the foreign stockholders or be enforced
and executed against them. It is settled that courts of law "should not render
judgments which cannot be enforced by any process known to the law,"97 hence,
this Court should have refused to give cognizance to the petition.

The ineffectivity caused by the non-joinder of the indispensable parties, the deprivation
of their day in court, and the denial of their right to due process, cannot be cured by the
sophistic expedience of naming PLDT in the fallo of the decision as a respondent. The
dispositive portion of the June 28, 2011 Decision all the more only highlights the
unenforceability of the majority’s disposition and serves as an implied admission of this
Court’s lack of jurisdiction over the persons of PLDT and its foreign stockholders when it
did not directly order the latter to dispose the common shares in excess of the 40% limit.
Instead, it took the circuitous route of ordering the SEC, in the fallo of the assailed
decision, "to apply this definition of the term ‘capital’ in determining the extent of
allowable ownership in respondent PLDT and, if there is a violation of Sec. 11, Art. XII of
the Constitution, to impose the appropriate sanctions under the law."98

Clearly, since PLDT and the foreign stockholders were not impleaded as
indispensable parties to the case, the majority would want to indirectly execute its
decision which it could not execute directly. The Court may be criticized for
violating the very rules it promulgated and for trenching the provisions of Sec. 5,
Art. VIII of the Constitution, which defines the powers and jurisdiction of this
Court.

It is apropos to stress, as a reminder, that the Rules of Court is not a mere body of
technical rules that can be disregarded at will whenever convenient. It forms an integral
part of the basic notion of fair play as expressed in this Constitutional caveat: "No person
shall be deprived of life, liberty or property without due process of law,"99 and obliges this
Court, as well as other courts and tribunals, to hear a person first before rendering a
judgment for or against him. As Daniel Webster explained, "due process of law is more
clearly intended the general law, a law which hears before it condemns; which proceeds
upon enquiry, and renders judgment only after trial."100 The principle of due process of
law "contemplates notice and opportunity to be heard before judgment is rendered,
affecting one’s person or property."101 Thus, this Court has stressed the strict observance
of the following requisites of procedural due process in judicial proceedings in order to
comply with this honored principle:

(1) There must be a court or tribunal clothed with judicial power to hear and determine
the matter before it;

(2) Jurisdiction must be lawfully acquired over the person of the defendant or over the
property which is the subject of the proceedings;

(3) The defendant must be given an opportunity to be heard; and

(4) Judgment must be rendered upon lawful hearing.102

Apparently, not one of these requisites has been complied with before the June 28, 2011
Decision was rendered. Instead, PLDT and its foreign stockholders were not given their
day in court, even when they stand to lose their properties, their shares, and even the
franchise to operate as a public utility. This stands counter to our discussion in Agabon v.
NLRC,103 where We emphasized that the principle of due process comports with the
simplest notions of what is fair and just:

To be sure, the Due Process Clause in Article III, Section 1 of the Constitution embodies a
system of rights based on moral principles so deeply imbedded in the traditions and
feelings of our people as to be deemed fundamental to a civilized society as conceived by
our entire history. Due process is that which comports with the deepest notions of
what is fair and right and just. It is a constitutional restraint on the legislative as
well as on the executive and judicial powers of the government provided by the Bill
of Rights.104

Parenthetically, the present petition partakes of a collateral attack on PLDT’s franchise as


a public utility. Giving due course to the recourse is contrary to the Court’s ruling
in PLDT v. National Telecommunications Commission,105where We declared a
franchise to be a property right that can only be questioned in a direct
proceeding.106 Worse, the June 28, 2011 Decision facilitates and guarantees the success
of that unlawful attack by allowing it to be undertaken in the absence of PLDT.

The Philippine Government is barred by estoppel from


ordering foreign investors to divest voting shares
in public utilities in excess of the 40 percent cap
The Philippine government’s act of pushing for and approving the sale of the PTIC shares,
which is equivalent to 12 million PLDT common shares, to foreign investors precludes it
from asserting that the purchase violates the Constitutional limit on foreign ownership of
public utilities so that the foreign investors must now divest the common PLDT shares
bought. The elementary principle that a person is prevented from going back on his own
act or representation to the prejudice of another who relied thereon107 finds application in
the present case.

Art. 1431 of the Civil Code provides that an "admission or representation is rendered
conclusive upon the person making it, and cannot be denied or disproved as against a
person relying thereon." This rule is supported by Section 2(a) of Rule 131 of the Rules of
Court on the burden of proof and presumptions, which states:

Section 2. Conclusive presumptions. – The following are instances of conclusive


presumptions:

(a) Whenever a party has, by his own declaration, act, or omission, intentionally and
deliberately led another to believe a particular thing true, and to act upon such belief, he
cannot, in any litigation arising out of such declaration, act or omission, be permitted to
falsify it.

The government cannot plausibly hide behind the mantle of its general immunity to
resist the application of this equitable principle for "the rule on non-estoppel of the
government is not designed to perpetrate an injustice."108Hence, this Court has allowed
several exceptions to the rule on the government’s non-estoppel. As succinctly explained
in Republic of the Philippines v. Court of Appeals:109

The general rule is that the State cannot be put in estoppel by the mistakes or errors of its
officials or agents. However, like all general rules, this is also subject to exceptions, viz.:

"Estoppel against the public are little favored. They should not be invoked except in rare
and unusual circumstances and may not be invoked where they would operate to defeat
the effective operation of a policy adopted to protect the public. They must be applied
with circumspection and should be applied only in those special cases where the interests
of justice clearly require it. Nevertheless, the government must not be allowed to deal
dishonorably or capriciously with its citizens, and must not play an ignoble part
or do a shabby thing; and subject to limitations . . ., the doctrine of equitable
estoppel may be invoked against public authorities as well as against private
individuals."

In Republic v. Sandiganbayan, the government, in its effort to recover ill-gotten wealth,


tried to skirt the application of estoppel against it by invoking a specific constitutional
provision. The Court countered:
"We agree with the statement that the State is immune from estoppel, but this concept is
understood to refer to acts and mistakes of its officials especially those which are irregular
(Sharp International Marketing vs. Court of Appeals, 201 SCRA 299; 306 1991; Republic v.
Aquino, 120 SCRA 186 1983), which peculiar circumstances are absent in the case at bar.
Although the State's right of action to recover ill-gotten wealth is not vulnerable to
estoppel[;] it is non sequitur to suggest that a contract, freely and in good faith
executed between the parties thereto is susceptible to disturbance ad infinitum. A
different interpretation will lead to the absurd scenario of permitting a party to
unilaterally jettison a compromise agreement which is supposed to have the
authority of res judicata (Article 2037, New Civil Code), and like any other
contract, has the force of law between parties thereto (Article 1159, New Civil Code;
Hernaez vs. Kao, 17 SCRA 296 1966; 6 Padilla, Civil Code Annotated, 7th ed., 1987, p. 711; 3
Aquino, Civil Code, 1990 ed., p. 463) . . ."

The Court further declared that "(t)he real office of the equitable norm of estoppel is
limited to supply[ing] deficiency in the law, but it should not supplant positive
law."110 (Emphasis supplied.)

Similarly, in Ramos v. Central Bank of the Philippines,111 this Court berated the
government for reneging on its representations and urged it to keep its word, viz:

Even in the absence of contract, the record plainly shows that the CB [Central Bank]
made express representations to petitioners herein that it would support the OBM
[Overseas Bank of Manila], and avoid its liquidation if the petitioners would execute (a)
the Voting Trust Agreement turning over the management of OBM to the CB or its
nominees, and (b) mortgage or assign their properties to the Central Bank to cover the
overdraft balance of OBM. The petitioners having complied with these conditions and
parted with value to the profit of the CB (which thus acquired additional security for its
own advances), the CB may not now renege on its representations and liquidate the
OBM, to the detriment of its stockholders, depositors and other creditors, under the rule
of promissory estoppel (19 Am. Jur., pages 657-658; 28 Am. Jur. 2d, 656-657; Ed. Note, 115
ALR, 157).

"The broad general rule to the effect that a promise to do or not to do something in the
future does not work an estoppel must be qualified, since there are numerous cases in
which an estoppel has been predicated on promises or assurances as to future conduct.
The doctrine of ‘promissory estoppel’ is by no means new, although the name has been
adopted only in comparatively recent years. According to that doctrine, an estoppel may
arise from the making of a promise even though without consideration, if it was intended
that the promise should be relied upon and in fact it was relied upon, and if a refusal to
enforce it would be virtually to sanction the perpetration of fraud or would result in other
injustice. In this respect, the reliance by the promises is generally evidenced by action or
forbearance on his part, and the idea has been expressed that such action or forbearance
would reasonably have been expected by the promisor. Mere omission by the promisee to
do whatever the promisor promised to do has been held insufficient ‘forbearance’ to give
rise to a promissory estoppel." (19 Am. Jur., loc. cit.)

The exception established in the foregoing cases is particularly appropriate presently


since the "indirect" sale of PLDT common shares to foreign investors partook of a
propriety business transaction of the government which was not undertaken as an
incident to any of its governmental functions. Accordingly, the government, by
concluding the sale, has descended to the level of an ordinary citizen and stripped itself of
the vestiges of immunity that is available in the performance of governmental acts.112

Ergo, the government is vulnerable to, and cannot hold off, the application of the
principle of estoppel that the foreign investors can very well invoke in case they are
compelled to divest the voting shares they have previously acquired through the
inducement of no less the government. In other words, the government is precluded from
penalizing these alien investors for an act performed upon its guarantee, through its
facilities, and with its imprimatur.

Under the "fair and equitable treatment" clause of our bilateral


investment treaties and fair trade agreements, foreign investors
have the right to rely on the same legal framework existing at the
time they made their investments

Not only is the government put in estoppel by its acts and representations during the sale
of the PTIC shares to MPAH, it is likewise bound by its guarantees in the Bilateral
Investment Treaties (BITs) and Free Trade Agreements (FTAs) with other countries.

To date, the Philippines has concluded numerous BITs and FTAs to encourage and
facilitate foreign direct investments in the country. These BITs and FTAs invariably
contain guarantees calculated to ensure the safety and stability of these foreign
investments. Foremost of these is the commitment to give fair and equitable treatment
(FET) to the foreign investors and investments in the country.

Take for instance the BIT concluded between the Philippines and China,113 Article 3(1)
thereof provides that "investments and activities associated with such investments of
investors of either Contracting Party shall be accorded equitable treatment and shall
enjoy protection in the territory of the other Contracting Party."114 The same assurance
is in the Agreement on Investment of the Framework Agreement on Comprehensive
Economic Cooperation Between the Association of Southeast Asian Nations and the
People’s Republic of China (ASEAN-China Investment Agreement)115 where the
Philippines assured Chinese investors that the country "shall accord to [them] fair and
equitable treatment and full protection and security."116 In the same manner, the
Philippines agreed to "accord investments [made by Japanese investors] treatment in
accordance with international law, including fair and equitable treatment and full
protection and security"117 in the Agreement between the Republic of the Philippines and
Japan for Economic Partnership (JPEPA).118

Similar provisions are found in the ASEAN Comprehensive Investment Agreement


(ACIA)119 and the BITs concluded by the Philippines with, among others, the Argentine
Republic,120 Australia,121 Austria,122Bangladesh,123 Belgium,124 Cambodia,125 Canada,126 Chile,
127 the Czech

Republic,128 Denmark,129 Finland,130France,131 Germany,132 India,133 Indonesia,134 Iran,135 Italy


,136 Mongolia,137 Myanmar,138 Netherlands,139Pakistan,140 Portuguese
Republic,141 Romania,142 Russia,143 Saudi
Arabia,144 Spain,145 Sweden,146Switzerland,147 Thailand,148 Turkey,149 United
Kingdom,150 and Vietnam.151

Explaining the FET as a standard concordant with the rule of law, Professor Vandevelde
wrote that it requires the host county to treat foreign investments with consistency,
security, non-discrimination and reasonableness:

The thesis is that the awards issued to date implicitly have interpreted the fair and
equitable treatment standard as requiring treatment in accordance with the concept of
the rule of law. That is, the concept of legality is the unifying theory behind the fair
and equitable treatment standard.

xxxx

Thus, international arbitral awards interpreting the fair and equitable treatment standard
have incorporated the substantive and procedural principles of the rule of law into that
standard. The fair and equitable treatment standard in BITs has been interpreted
as requiring that covered investment or investors receive treatment that is
reasonable, consistent, non-discriminatory, transparent, and in accordance with
due process. As will be seen, these principles explain virtually all of the awards applying
the fair and equitable treatment standard. No award is inconsistent with this theory of
the standard.

Understanding fair and equitable treatment as legality is consistent with the purposes of
the BITs. BITs essentially are instruments that impose legal restraints on the treatment of
covered investments and investors by host states. The very essence of a BIT is a partial
subordination of the sovereign's power to the legal constraints of the treaty. Further,
individual BIT provisions are themselves a reflection of the principles of the rule of law.
(Emphasis and underscoring supplied.)152

On the requirement of consistency, the International Centre for the Settlement of


Investment Disputes (ICSID) explained in Tecnicas Medioambientales Tecmed S.A. v.
The united Mexican States153 that the host country must maintain a
stable and predictable legal and business environment to accord a fair and equitable
treatment to foreign investors.

153. The Arbitral Tribunal finds that the commitment of fair and equitable
treatment included in Article 4(1) of the Agreement is an expression and part of
the bona fide principle recognized in international law, although bad faith from the
State is not required for its violation:

To the modern eye, what is unfair or inequitable need not equate with the outrageous or
the egregious. In particular, a State may treat foreign investment unfairly and inequitably
without necessarily acting in bad faith.

154. The Arbitral Tribunal considers that this provision of the Agreement, in light of the
good faith principle established by international law, requires the Contracting Parties
to provide to international investments treatment that does not affect the basic
expectations that were taken into account by the foreign investor to make the
investment. The foreign investor expects the host State to act in a consistent
manner, free from ambiguity and totally transparently in its relations with the
foreign investor, so that it may know beforehand any and all rules and regulations
that will govern its investments, as well as the goals of the relevant policies and
administrative practices or directives, to be able to plan its investment and
comply with such regulations. Any and all State actions conforming to such criteria
should relate not only to the guidelines, directives or requirements issued, or the
resolutions approved thereunder, but also to the goals underlying such regulations. The
foreign investor also expects the host State to act consistently, i.e. without
arbitrarily revoking any preexisting decisions or permits issued by the State that
were relied upon by the investor to assume its commitments as well as to plan and
launch its commercial and business activities. The investor also expects the State
to use the legal instruments that govern the actions of the investor or the
investment in conformity with the function usually assigned to such instruments,
and not to deprive the investor of its investment without the required
compensation. In fact, failure by the host State to comply with such pattern of conduct
with respect to the foreign investor or its investments affects the investor’s ability to
measure the treatment and protection awarded by the host State and to determine
whether the actions of the host State conform to the fair and equitable treatment
principle. Therefore, compliance by the host State with such pattern of conduct is
closely related to the above-mentioned principle, to the actual chances of
enforcing such principle, and to excluding the possibility that state action be
characterized as arbitrary; i.e. as presenting insufficiencies that would be recognized
"…by any reasonable and impartial man," or, although not in violation of specific
regulations, as being contrary to the law because:

...(it) shocks, or at least surprises, a sense of juridical propriety. (Emphasis and


underscoring supplied added.)
The Philippines, therefore, cannot, without so much as a notice of policy shift,
alter and change the legal and business environment in which the foreign
investments in the country were made in the first place. These investors obviously
made the decision to come in after studying the country’s legal framework-its restrictions
and incentives––and so, as a matter of fairness, they must be accorded the right to expect
that the same legal climate and the same substantive set of rules will remain during the
period of their investments.

The representation that foreigners can invest up to 40% of the entirety of the total
stockholdings, and not just the voting shares, of a public utility corporation is an implied
covenant that the Philippines cannot renege without violating the FET guarantee.
Especially in this case where the Philippines made specific commitments to countries like
Japan and China that their investing nationals can own up to 40% of the equity of a
public utility like a telecommunications corporation. In the table contained in Schedule
1(B), Annex 6 of the JPEPA, the Philippines categorically represented that Japanese
investors’ entry into the Philippine telecommunications industry, specifically
corporations offering "voice telephone services," is subject to only the following
requirements and conditions:

A. Franchise from Congress of the Philippines

B. Certificate of Public Convenience and Necessity (CPCN) from the National


Telecommunications Commission

C. Foreign equity is permitted up to 40 percent.

D. x x x154 (Emphasis supplied.)

The same representation is made in the Philippines’ Schedule of Specific Commitments


appended to the ASEAN-China Agreement on Trade in Services.155

Further, as previously pointed out, it was the Philippine government that pushed for and
approved the sale of the 111,415 PTIC shares to MPAH, thereby indirectly transferring the
ownership of 6.3 percent of the outstanding common shares of PLDT, to a foreign firm
and so increasing the foreign voting shareholding in PLDT. Hence, the presence of good
faith may not be convincingly argued in favour of the Philippine government in a suit for
violation of its FET guarantee.

In fact, it has been held that a bona fide change in policy by a branch of government does
not excuse compliance with the FET obligations. In Occidental Exploration and
Production Company (OEPC) v. the Republic of Ecuador,156 the United Nations
Commission on International Trade Law (UNCITRAL) ruled that Ecuador violated the
US/Ecuador BIT by denying OEPC fair and equitable treatment when it failed to provide a
predictable framework for its investment planning. Ruling thus, the tribunal cited
Ecuador’s change in tax law and its tax authority’s unsatisfactory and vague response to
OEPC’s consulta, viz:

183. x x x The stability of the legal and business framework is thus an essential element of
fair and equitable treatment.

184. The tribunal must note in this context that the framework under which the
investment was made and operates has been changed in an important manner by
actions adopted by [the Ecuadorian tax authority]. … The clarifications that OEPC
sought on the applicability of VAT by means of "consulta" made to [the Ecuadorian tax
authority] received a wholly unsatisfactory and thoroughly vague answer. The tax law
was changed without providing any clarity abut its meaning and extend and the
practice and regulations were also inconsistent with such changes.

185. Various arbitral tribunals have recently insisted on the need for this stability. The
tribunal in Metalcad held that the Respondent "failed to ensure a transparent and
predictable framework for Metalcad’s business planning and investment. The totality of
these circumstances demonstrate a lack of orderly process and timely disposition in
relation to an investor of a Party acting in the expectation that it would be treated fairly
and justly…" x x x

186. It is quite clear from the record of this case and from the events discussed in this
Final Award that such requirements were not met by Ecuador. Moreover, this is an
objective requirement that does not depend on whether the Respondent has
proceeded in good faith or not.

187. The Tribunal accordingly holds that the Respondent has breached its obligations to
accord fair and equitable treatment under Article II (3)

(a) of the Treaty. x x x

xxxx

191. The relevant question for international law in this discussion is not whether there is
an obligation to refund VAT, which is the point on which the parties have argued most
intensely, but rather whether the legal and business framework meets the
requirements of stability and predictability under international law. It was earlier
concluded that there is not a VAT refund obligation under international law, except in
the specific case of the Andean Community Law, which provides for the option of either
compensation or refund, but there is certainly an obligation not to alter the legal
and business environment in which the investment has been made. In this case it
is the latter question that triggers a treatment that is not fair and equitable.
(Emphasis supplied.)
To maintain the FET guarantee contained in the various BITs and FTAs concluded by the
country and avert a deluge of investor suits before the ICSID, the UNCITRAL or
other fora, any decision of this court that tends to drastically alter the foreign
investors’ basic expectations when they made their investments, taking into
account the consistent SEC Opinions and the executive and legislative branches’ Specific
Commitments, must be applied prospectively.

This Court cannot turn oblivious to the fact that if We diverge from the prospectivity rule
and implement the resolution on the present issue immediately and, without giving due
deference to the foreign investors’ rights to due process and the equal protection of the
laws, compel the foreign stockholders to divest their voting shares against their wishes at
prices lower than the acquisition costs, these foreign investors may very well shy away
from Philippine stocks and avoid investing in the Philippines. Not to mention, the validity
of the franchise granted to PLDT and similarly situated public utilities will be put under a
cloud of doubt. Such uncertainty and the unfair treatment of foreign investors who
merely relied in good faith on the policies, rules and regulations of the PSE and the SEC
will likely upset the volatile capital market as it would have a negative impact on the
value of these companies that will discourage investors, both local and foreign, from
purchasing their shares. In which case, foreign direct investments (FDIs) in the country
(which already lags behind our Asian neighbors) will take a nosedive. Indeed, it cannot be
gainsaid that a sudden and unexpected deviation from the accepted and consistent
construction of the term "capital" will create a domino effect that may cripple our capital
markets.

Therefore, in applying the new comprehensive interpretation of Sec. 11, Art. XII of the
Constitution, the current voting shares of the foreign investors in public utilities in excess
of the 40% capital shall be maintained and honored. Otherwise the due process guarantee
under the Constitution and the long established precepts of justice, equity and fair play
would be impaired.

Prospective application of new laws or changes in interpretation

The June 28, 2011 Decision construed "capital" in the first sentence of Section 11, Article
XII of the Constitution as "full beneficial ownership of 60 percent of the outstanding
capital stocks coupled with 60 percent of the voting rights." In the Resolution denying the
motions for reconsideration, it further amplified the scope of the word "capital" by
clarifying that "the 60- 40 ownership requirement in favor of Filipino citizens must apply
separately to each class of shares whether common, preferred, preferred voting or any
other class of shares." This is a radical departure from the clear intent of the framers of
the 1987 Constitution and the long established interpretation ascribed to said word by the
Securities and Exchange Commission—that "capital" in the first sentence of Sec. 11, Art.
XII means capital stock or BOTH voting and non-voting shares. The recent interpretation
enunciated in the June 28, 2011 and in the Resolution at hand can only be applied
PROSPECTIVELY. It cannot be applied retroactively to corporations such as PLDT and its
investors such as its shareholders who have all along relied on the consistent reading of
"capital" by SEC and the Philippine government to apply it to a public utility’s total
capital stock.

Lex prospicit, non respicit – "laws have no retroactive effect unless the contrary is
provided."157 As a necessary corollary, judicial rulings should not be accorded retroactive
effect since "judicial decisions applying or interpreting the laws or the Constitution shall
form part of the legal system of the Philippines."158 It has been the constant holding of the
Court that a judicial decision setting a new doctrine or principle ("precedent-setting
decision") shall not retroactively apply to parties who relied in good faith on the
principles and doctrines standing prior to the promulgation thereof ("old
principles/doctrines"), especially when a retroactive application of the precedent-setting
decision would impair the rights and obligations of the parties. So it is that as early as
1940, the Court has refused to apply the new doctrine of jus sanguinis to persons who
relied in good faith on the principle of jus soli adopted in Roa v. Collector of
Customs.159 Similarly, in Co v. Court of Appeals,160 the Court sustained petitioner Co’s
bona fide reliance on the Minister of Justice’s Opinion dated December 15, 1981 that the
delivery of a "rubber" check as guarantee for an obligation is not a punishable offense
despite the Court’s pronouncement on September 21, 1987 in Que v. People that Batas
Pambansa Blg. (BP) 22 nonetheless covers a check issued to guarantee the payment of an
obligation. In so ruling, the Court quoted various decisions applying precedent-setting
decisions prospectively. We held:

Judicial decisions applying or interpreting the laws or the Constitution shall form
a part of the legal system of the Philippines," according to Article 8 of the Civil
Code. "Laws shall have no retroactive effect, unless the contrary is provided,"
declares Article 4 of the same Code, a declaration that is echoed by Article 22 of the
Revised Penal Code: "Penal laws shall have a retroactive effect insofar as they favor the
person guilty of a felony, who is not a habitual criminal . . ."

xxxx

The principle of prospectivity has also been applied to judicial decisions which,
"although in themselves not laws, are nevertheless evidence of what the laws
mean, . . . (this being) the reason why under Article 8 of the New Civil Code,
'Judicial decisions applying or interpreting the laws or the Constitution shall form
a part of the legal system . . .' "

So did this Court hold, for example, in Peo. v. Jabinal, 55 SCRA 607, 611:

xxxx
So, too, did the Court rule in Spouses Gauvain and Bernardita Benzonan v. Court of
Appeals, et al. (G.R. No. 97973) and Development Bank of the Philippines v. Court of
Appeals, et al. (G.R. No 97998), Jan. 27, 1992, 205 SCRA 515, 527-528:

xxxx

A compelling rationalization of the prospectivity principle of judicial decisions is well set


forth in the oft-cited case of Chicot County Drainage Dist. v. Baxter States Bank, 308 US
371, 374 1940. The Chicot doctrine advocates the imperative necessity to take account of
the actual existence of a statute prior to its nullification, as an operative fact
negating acceptance of "a principle of absolute retroactive invalidity."

xxxx

Much earlier, in De Agbayani v. PNB, 38 SCRA 429 xxx the Court made substantially the
same observations…

xxxx

Again, treating of the effect that should be given to its decision in Olaguer v. Military
Commission No 34, — declaring invalid criminal proceedings conducted during the
martial law regime against civilians, which had resulted in the conviction and
incarceration of numerous persons — this Court, in Tan vs. Barrios, 190 SCRA 686, at p.
700, ruled as follows:

"In the interest of justice and consistency, we hold that Olaguer should, in
principle, be applied prospectively only to future cases and cases still ongoing or
not yet final when that decision was promulgated. x x x"

It would seem, then, that the weight of authority is decidedly in favor of the
proposition that the Court’s decision of September 21, 1987 in Que v. People, 154 SCRA
160 (1987) — i.e., that a check issued merely to guarantee the performance of an
obligation is nevertheless covered by B.P. Blg. 22 — should not be given retrospective
effect to the prejudice of the petitioner and other persons similarly situated, who
relied on the official opinion of the Minister of Justice that such a check did not fall
within the scope of B.P. Blg. 22. (Emphasis supplied).

Indeed, pursuant to the doctrine of prospectivity, new doctrines and principles must be
applied only to acts and events transpiring after the precedent-setting judicial decision,
and not to those that occurred and were caused by persons who relied on the "old"
doctrine and acted on the faith thereof.

Not content with changing the rule in the middle of the game, the majority, in the June
28, 2011 Decision, went a little further by ordering respondent SEC Chairperson "to apply
this definition of the term ‘capital’ in determining the extent of allowable foreign
ownership in respondent Philippine Long Distance Telephone Company, and if there is a
violation of Section 11, Article XII of the Constitution, to impose the appropriate sanctions
under the law." This may be viewed as unreasonable and arbitrary. The Court in the
challenged June 28, 2011 Decision already made a finding that foreigners hold 64.27% of
the total number of PLDT common shares while Filipinos hold only 35.73%.161 In this
factual setting, PLDT will, as clear as day, face sanctions since its present capital structure
is presently in breach of the rule on the 40% cap on foreign ownership of voting shares
even without need of a SEC investigation.

In answering the SEC’s query regarding the proper period of application and imposition
of appropriate sanctions against PLDT, Justice Carpio tersely stated that "once the 28 June
2011 Decision becomes final, the SEC shall impose the appropriate sanctions only if it
finds after due hearing that, at the start of the administrative cases or investigation, there
is an existing violation of Sec. 11, Art. XII of the Constitution."162 As basis therefor, Justice
Carpio cited Halili v. Court of Appeals163 and United Church Board for World Ministries
(UCBWM) v. Sebastian.164However, these cases do not provide a jurisprudential
foundation to this mandate that may very well deprive PLDT foreign shareholders of their
voting shares. In fact, UCBWM v. Sebastian respected the voluntary transfer in a will by
an American of his shares of stocks in a land-holding corporation. In the same
manner, Halili v. Court of Appeals sustained as valid the waiver by an alien of her right of
inheritance over a piece of land in favour of her son. Nowhere in these cases did this
Court order the involuntary dispossession of corporate stocks by alien stockholders. At
most, these two cases only recognized the principle validating the transfer of land to an
alien who, after the transfer, subsequently becomes a Philippine citizen or transfers the
land to a Filipino citizen. They do not encompass the situation that will eventually ensue
after the investigation conducted by the SEC in accordance with the June 28, 2011 and the
present resolution. They do not justify the compulsory deprivation of voting shares in
public utility corporations from foreign stockholders who had legally acquired these
stocks in the first instance.

The abrupt application of the construction of Sec. 11, Art. XII of the Constitution to
foreigners currently holding voting shares in a public utility corporation is not only
constitutionally problematic; it is likewise replete with pragmatic difficulties that could
hinder the real-world translation of this Court’s Resolution. Although apparently
benevolent, the majority’s concession to allow "public utilities that fail to comply with the
nationality requirement under Section 11, Article XII and the FIA [to] cure their
deficiencies prior to the start of the administrative case or investigation"165 could
indirectly occasion a compulsory deprivation of the public utilities’ foreign stockholders
of their voting shares. Certainly, these public utilities must immediately pare down their
foreign-owned voting shares to avoid the imposable sanctions. This holds true especially
for PLDT whose 64.27% of its common voting shares are foreign-subscribed and held.
PLDT is, therefore, forced to immediately deprive, or at the very least, dilute the property
rights of their foreign stockholders before the commencement of the administrative
proceedings, which would be a mere farce considering the transparency of the public
utility from the onset.

Even with the chance granted to the public utilities to remedy their supposed deficiency,
the nebulous time-frame given by the majority, i.e., "prior to the start of the
administrative case or investigation,"166 may very well prove too short for these public
utilities to raise the necessary amount of money to increase the number of their
authorized capital stock in order to dilute the property rights of their foreign
stockholders holding voting shares.167 Similarly, if they induce their foreign stockholders
to transfer the excess voting shares to qualified Philippine nationals, this period before
the filing of the administrative may not be sufficient for these stockholders to find
Philippine nationals willing to purchase these voting shares at the market price. This
Court cannot ignore the fact that the voting shares of Philippine public utilities like PLDT
are listed and sold at large in foreign capital markets. Hence, foreigners who have
previously purchased their voting shares in these markets will not have a ready Philippine
market to immediately transfer their shares. More than likely, these foreign stockholders
will be forced to sell their voting shares at a loss to the few Philippine nationals with
money to spare, or the public utility itself will be constrained to acquire these voting
shares to the prejudice of its retained earnings.168

Whatever means the public utilities choose to employ in order to cut down the foreign
stockholdings of voting shares, it is necessary to determine who among the foreign
stockholders of these public utilities must bear the burden of unloading the voting shares
or the dilution of their property rights. In a situation like this, there is at present no
settled rule on who should be deprived of their property rights. Will it be the foreign
stockholders who bought the latest issuances? Or the first foreign stockholders of the
public utility corporations? This issue cannot be realistically settled within the time-
frame given by the majority without raising more disputes. With these loose ends, the
majority cannot penalize the public utilities if they should fail to comply with the
directive of complying with the "nationality requirement under Section 11, Article XII and
the FIA" within the unreasonably nebulous and limited period "prior to the start of the
administrative case or investigation."169

In the light of the new pronouncement of the Court that public utilities that fail to
comply with the nationality requirement under Section 11, Article XII of the Constitution
CAN CURE THEIR DEFICIENCIES prior to the start of the administrative case or
investigation, I submit that affected companies like PLDT should be given reasonable
time to undertake the necessary measures to make their respective capital structure
compliant, and the SEC, as the regulatory authority, should come up with the appropriate
guidelines on the process and supervise the same. SEC should likewise adopt the
necessary rules and regulations to implement the prospective compliance by all affected
companies with the new ruling regarding the interpretation of the provision in question.
Such rules and regulations must respect the due process rights of all affected corporations
and define a reasonable period for them to comply with the June 28, 2011 Decision.
A final note.

Year in and year out, the government’s trade managers attend economic summits
courting businessmen to invest in the country, doubtless promising them a playing field
where the rules are friendly as they are predictable. So it would appear odd if a branch of
government would make business life complicated for investors who are already here.
Indeed, stability and predictability are the key pillars on which our legal system must be
founded and run to guarantee a business environment conducive to the country’s
sustainable economic growth. Hence, it behoves this Court to respect the basic
expectations taken into account by the investors at the time they made the investments.
In other words, it is the duty of this Court to stand guard against any untoward change of
the rules in the middle of the game.

I, therefore, vote to GRANT the motions for reconsideration and


accordingly REVERSE and SET ASIDE the June 28, 2011 Decision. The Court should
declare that the word "capital" in the first sentence of Section 11, Article Xll of the 1987
Constitution means the entire capital stock or both voting and non-voting shares.

Since the June 28, 2011 Decision was however sustained, I submit that said decision should
take effect only on the date of its finality and should be applied prospectively.

PLDT should be given time to umkrtake the nec~ssary meast1res to make its capital
structure compliant, and th~ Securities and Exchange Commission should formulalc
appropriate guidelines and supervise the process. Said Commission should also adopt
ruks and regulations to implement the prospective compliance by all affected companies
with the new ruling on the interpretation of Sec. 11, Art. XII of the Constitution. Such
rules and regulations must respect the due process rights of all affected corporations and
provide a reasonable period for them to com pi y with the June 28, 2011 Decision. The
rights of foreigners over the voting shares they presently own in excess of 40% of said
shares should, in the meantime, be respected.

PRESBITERO J. VELASCO, JR.


Associate Justice

Footnotes

1 Penned by Justice Antonio T. Carpio.

2Webster’s Third New International Dictionary of the English Language:


Unabridged (1981), Springfield, MA, p. 1646.
3Allied Banking Corporation v. Court of Appeals, G.R. No. 124290, January 16, 1998,
284 SCRA 327, 367 and Inding v. Sandiganbayan, G.R. No. 143047, July 14, 2004, 434
SCRA 388, 403.

4 Agpalo, Ruben E. Statutory Construction, 6th ed. (2009), p. 585.

5 Id.; citations omitted.

6 See also Macalintal v. Presidential Electoral Tribunal, G.R. No. 191618, November
23, 2010, 635 SCRA 783; La Bugal-B’Laan Tribal Assn., Inc. v. Ramos, G.R. No.
127882, December 1, 2002; Francisco v. House of Representatives, November 10,
2010; Victoria v. COMELEC, G.R. No. 109005, January 10, 1994.

7 No. L-21064, February 18, 1970, 31 SCRA 413, 422-423.

8Memorandum, The Meaning of "Capital," p. 10, read by Fr. Bernas as amicus


curiae in the June 26, 2012 Oral Argument.

9Webster’s Third New International Dictionary Unabridged, Merriam-Websters


Inc., Springfield, MA. 1981, p. 322.

10 Id.; emphasis supplied.

11 Id.

12Black’s law Dictionary, 9th Ed., for the iPhone/iPad/iPod touch, Version 2.0.0
(B10239), p. 236.

13 Id.; emphasis supplied.

14Agpalo, Ruben E. Agpalo’s Legal Words and Phrases, 1987 Ed., p. 96 citing Ruben
E. Agpalo Comments on the Corporation Code, 1993 ed., p. 45.

15 Id.

16Villanueva, Cesar Lapuz. Philippine Corporate Law. 2003 Ed., p. 537. Emphasis
and underscoring supplied.

17De Leon, Hector S. The Corporation Code of the Philippines Annotated, 2002 Ed.
Manila, Phil. P. 71-72 citing (SEC Opinion, Feb. 15, 1988 which states: The term
"capital" denotes the sum total of the shares subscribed and paid by the
stockholders or agreed to be paid irrespective of their nomenclature. It would,
therefore, be legal for foreigners to own more than 40% of the common shares but
not more than the 40% constitutional limit of the outstanding capital stock which
would include both common and non-voting preferred shares." (Emphasis and
underscoring supplied.)

18 Tongson v. Arellano, G.R. No. 77104, November 6, 1992, 215 SCRA 426.

19 Agpalo, Ruben E. Statutory Construction, 6th ed. (2009), p. 588.

20 Record of the (1986) Constitutional Commission, Vol. III, pp. 250-256.

21 Id. at 326-327.

22 Id. at 357-365.

23 Id. at 582-584.

24 Id. at 665-666.

25 Record of the (1986) Constitutional Commission, Vol. III, pp. 250-251.

26 Referring to Sections 2 and 10, Article XII of the 1987 Constitution.

27 Records of the Constitutional Commission, Volume III, pp. 326-327.

28 Id. at 357.

29 Records of the Constitutional Commission, Volume III, pp. 357-360.

30 Records of the Constitutional Commission, Volume III, p. 360.

31 Id. at 364.

32 Id. at 582.

33Sundiang Jose, R. and Aquino, Timoteo B. Reviewer on Commercial Law, 2006


Ed., p. 257.

34 Records of the Constitutional Commission, Volume III, pp. 583-584.

35 See Bernas, S.J., The Intent of the 1986 Constitution Writers, 1995 ed., p. 849.

36 Section 2, Article XII, 1987 Constitution:

Section 2. All lands of the public domain, waters, minerals, coal, petroleum,
and other mineral oils, all forces of potential energy, fisheries, forests or
timber, wildlife, flora and fauna, and other natural resources are owned by
the State. With the exception of agricultural lands, all other natural
resources shall not be alienated. The exploration, development, and
utilization of natural resources shall be under the full control and
supervision of the State. The State may directly undertake such activities, or
it may enter into coproduction, joint venture, or production-sharing
agreements with Filipino citizens, or corporations or associations at least
sixty per centum of whose capital is owned by such citizens. x x x x
(Emphasis supplied.)

37 Section 10, Article XII, 1987 Constitution:

Section 10. The Congress shall, upon recommendation of the economic and
planning agency, when the national interest dictates, reserve to citizens of
the Philippines or to corporations or associations at least sixty per centum
of whose capital is owned by such citizens, or such higher percentage as
Congress may prescribe, certain areas of investments. The Congress shall
enact measures that will encourage the formation and operation of
enterprises whose capital is wholly owned by Filipinos. (Emphasis
supplied.)

38 June 26, 2012 Oral Arguments TSN, pp. 115-116.

39 Records of the Constitutional Commission, Volume III, pp. 326, 583.

40 G.R. No. 83896, February 22, 1991, 194 SCRA 317.

41Respondent Pangilinan’s Motion for Reconsideration dated July 14, 2011, pp. 36-
37 citing Philippine Institute of Development Studies, "Key Indicators of the
Philippines, 1970-2011", at http://econdb.pids.gov.ph/tablelists/table/326 and de
Dios, E. (ed.) 1984 An Analysis of the Philippine Economic Crisis. A workshop
report. Quezon City: University of the Philippines; also de Dios, E. 2009"Governance,
institutions, and political economy" in: D. Canlas, M.E. Khan and J. Zhuang,
eds. Diagnosing the Philippine economy: toward inclusive growth. London: Anthem
Press and Asian Development Bank. 295-336 and Bautista, R. 2003 "International
dimensions", in: A. Balisacan and H. Hill Eds. The Philippine economy:
development, policies, and challenges. Oxford University Press. 136- 171.

42 Commonwealth Act No. (CA) 146, as amended and modified by Presidential


Decree No. 1, Integrated Reorganization Plan and EO 546; Approved on November
7, 1936.

43Sec. 13(b), CA 146: The term "public service" includes every person that now or
hereafter may own, operate, manage, or control in the Philippines, for hire or
compensation, with general or limited clientele, whether permanent, occasional or
accidental, and done for general business purposes, any common carrier, railroad,
street railway, traction railway, sub-way motor vehicle, either for freight or
passenger, or both with or without fixed route and whether may be its
classification, freight or carrier service of any class, express service, steamboat or
steamship line, pontines, ferries, and water craft, engaged in the transportation of
passengers or freight or both, shipyard, marine railways, marine repair shop,
[warehouse] wharf or dock, ice plant, ice-refrigeration plant, canal, irrigation
system, gas, electric light, heat and power water supply and power, petroleum,
sewerage system, wire or wireless communications system, wire or wireless
broadcasting stations and other similar public services x x x.

44"Headnotes, heading or epigraphs of sections of a statute are convenient index


to the contents of its provisions." (Agpalo, Ruben, Statutory Construction, Sixth
Edition 2009, p. 166 citing In re Estate of Johnson, 39 Phil. 156 1918; Kare v. Platon, 56
Phil. 248 1931).

45 As amended by Republic Act No. 134, which was approved on June 14, 1947.

46Entitled "An Act Granting A Franchise To Filipinas Orient Airways,


Incorporated, To Establish And Maintain Air Transport Service In The Philippines
And Between The Philippines And Other Countries." Approved on June 20, 1964.

47Entitled "An Act Granting A Franchise To Air Manila, Incorporated, To Establish


And Maintain Air Transport Service In The Philippines And Between The
Philippines And Other Countries." Approved on June 19, 1965.

48Entitled "An Act Granting The Philippine Communications Satellite Corporation


A Franchise To Establish And Operate Ground Satellite Terminal Station Or
Stations For Telecommunication With Satellite Facilities And Delivery To
Common Carriers." Approved on June 21, 1969

49Entitled "An Act Providing For The Licensing And Regulation Of Atomic Energy
Facilities And Materials, Establishing The Rules On Liability For Nuclear Damage,
And For Other Purposes," as amended by PD 1484. Approved on June 15, 1968 and
published in the Official Gazette on May 5, 1969.

50 G.R. No. 127937 July 28, 1999, 311 SCRA 508.

51 Emphasis supplied.

52G.R. No. 70054, December 11, 1991, 204 SCRA 767. Emphasis and underscoring
supplied.

53 G.R. No. 108576, January 20, 1999, 301 SCRA 152.


54See also Republic Planters Bank v. Agana, G.R. No. 51765, March 3, 1997, 269
SCRA 1, where this Court stated that "Shareholders, both common and preferred,
are considered risk takers who invest capital in the business and who can look only
to what is left after corporate debts and liabilities are fully paid."

55 Citations omitted.

56 Ponencia, pp. 30-31.

57
Office of the Ombudsman v. Heirs of Margarita Vda. De Ventura, G.R. No. 151800,
November 5, 2009, 605 SCRA 1.

58In numerous Opinions, the DOJ refused to construe the Constitutional


provisions on the nationality requirement imposed by various legislative
acts like the FIA, in relation to the 1987 Constitution, on the ground that the
interpretation and application of the said law properly fall within the
jurisdiction of the National Economic Development Authority (NEDA), in
consultation with the Bureau of Investments (BOI) and the Securities and
Exchange Commission. (Opinion No. 16, Series 1999, February 2, 1999 citing Sec.
of Justice Opn. No. 3, current series; Nos. 16, 44 and 45, s. 1998; Opinion No. 13,
Series of 2008, March 12, 2008 citing Sec. of Justice Op. NO. 53, current series No.
75, s. 2006.

59 SEC Opinion dated February 15, 1988.

60 93 Phil. 333 (1953).

61 SEC-OGC Opinion No. 26-11.

62Philippine Global Communications, Inc. v. Relova, No. L-60548, November 10,


1986, 145 SCRA 385; citing Philippine Association of Free Labor Unions [PAFLU] v.
Bureau of Labor Relations, August 21, 1976, 72 SCRA 396, 402.

63 Id.

64 No. L-5955, September 19, 1952.

65 Id.

66Annex "B" of the SEC Memorandum dated July 25, 2012 wherein the Commission
Secretary certified that: "During the Commission En Banc meeting held on July 2,
2002 at the Commission Room, 8th Florr, SEC Building, EDSA, Greenhills,
Mandaluyong City, the Commission En Banc approved the following:
"RESOLVED, That all opinions to be issues by the SEC pursuant to a formal
request, prepared and acted upon by the appropriate operating departments
shall be reviewed by the OGC and be issued under the signature of the SEC
General Counsel. Henceforth, all opinions to be issues by the SEC shall be
numbered accordingly

(SEC-EXS. RES. NO. 106 s, of 2002)

67 SEC. 4.6, SRC: The Commission may, for purposes of efficiency, delegate any of
its functions to any department or office of the Commission, an individual
Commissioner or staff member of the Commission except its review or appellate
authority and its power to adopt, alter and supplement any rule or regulation.

The Commission may review upon its own initiative or upon the petition of
any interested party any action of any department or office, individual
Commissioner, or staff member of the Commission.

68 Sec. 5.1 (g), SRC.

69Misamis Oriental Association of Coco Traders, Inc. v. Department of Finance


Secretary, G.R. No. 108524, November 10, 1994, 238 SCRA 63; citing Victorias
Milling Co. v. Social Security Commission, 114 Phil. 555 (1962) and Philippine
Blooming Mills v. Social Security System, 124 Phil. 499 (1966).

70 SEC Memorandum dated July 25, 2012, pp. 33-36.

71 G.R. Nos. 136781, 136786, 136795, October 6, 2000, 342 SCRA 244, 270.

72 Republic Act 9856, Lapsed into law on December 17, 2009.

73
Report on the Proportionality Principle in the European Union: External Study
Commissioned by the European Commission, p. 7.

74
This fact is recognized even by the Organisation for Economic Cooperation and
Development (OECD), viz.:

"Economic literature traditionally identifies two main channels through


which corporate investors may decouple the cash flows and voting rights of
shares, including the leveraging of voting power and mechanisms to "lock
in" control. The most commonly used such mechanisms are listed below.
Not covered by the present section are a number of company-internal
arrangements that can in some circumstances also be employed to leverage
the control of certain shareholders. For instance, the ongoing discussions in
the United States about corporate proxies and the voting arrangements at
general meetings (e.g. majority versus plurality vote) may have important
ramifications for the allocation of control rights in US companies. In
addition, a number of marketed financial instruments are increasingly
available that can be used by investors, including incumbent management,
to hedge their financial interest in a company while retaining voting rights.

Leveraging of voting power. The two main types PLMs used to bolster the
voting powers of individuals, hence creating controlling shareholders, are
differentiated voting rights on company shares and multi-firm structures.
Mechanisms include:

Differentiated voting rights. The most straightforward – and, as the case


may be, transparent – way of leveraging voting power is to stipulate
differential voting rights in the corporate charter or bylaws. Companies
have gone about this in a number of ways, including dualclass share
structures and, in addition to common stock, issuing non-voting shares or
preference shares without or with limited voting rights. The latter is a
borderline case: preference shares have common characteristics with debt
as well as equity, and in most jurisdictions they assume voting rights if the
issuers fail to honour their preference commitments.

 Multi-firm structures. Voting rights can be separated from cash-flow


rights even with a single class of shares by creating a set of cascading
shareholdings or a pyramidal hierarchy in which higher-tier companies own
shares in lower-tier companies. Pyramids are complementary to dual-class
share structures insofar as almost any pyramidal control structure can be
reproduced through dual (or, rather, multiple) share classes. However, for
complex control structures, the controlling shareholders may prefer
pyramids since the underlying shares tend to be more liquid than stocks
split into several classes. (In the remainder of this paper the word "pyramid"
is used jointly to denote truly pyramidal structures and cascading
shareholdings.)

Lock-in mechanisms. The other main category of PLMs consists of


instruments that lock in control – that is cut off, or in some cases bolster,
the voting rights of common stock. A clear-cut lock-in mechanism is voting
right ceilings prohibiting shareholders from voting about a certain
threshold irrespective of the Corporate Affairs Division, Directorate for
Financial and Enterprise Affairs Organisation for Economic Co-operation
and Development 2 rue André-Pascal, Paris 75116, France
www.oecd.org/daf/corporate-affairs/ number of voting shares they hold.
Secondly, a type of lock-in mechanism that confers greater voting right on
selected shareholders is priority shares, which grant their holders
extraordinary power over specific types of corporate decisions. This type of
lock-in mechanism, when held by the state, is commonly referred to as a
"golden share". Finally, company bylaws or national legislation may contain
supermajority provisions according to which a simple majority is
insufficient to approve certain major corporate changes.

Related or complementary instruments. Other instruments, while not


themselves sources of disproportionality, may either compound the effect
of PLMs or produce some of the same corporate governance consequences
as PLMs. One example is cross-shareholdings, which can be used to
leverage the effectiveness of PLMs and, in consequence, are often an
integral part of pyramidal structures. A second such instrument is
shareholder agreements that, while their effects can be replicated by
shareholders acting in concert of their own accord, nevertheless add an
element of certainty to voting coalitions…" (Lack of Proportionality between
Ownership and Control: Overview and Issues for Discussion. Issued by the
Organisation for Economic Co-Operation and Development (OECD)
Steering Group on Corporate Governance, December 2007, pp. 12-13.
Available from http://www.oecd.org/dataoecd/21/32/40038351.pdf, last
accessed February 7, 2012. See also Clarke, Thomas and Chanlat, Jean
Francois. European Corporate Governance: Readings and Perspectives.
(2009) Routledge, New York, p. 33; Report on the Proportionality Principle
in the European Union: External Study Commissioned by the European
Commission. See also Hu and Black, supra.

75 Approved on June 13, 1991, and amended by Republic Act No. 8179.

76 Executive Order No. 858, February 5, 2010.

77See also PD 1570 (Aeronautical engineering); RA 8559 (Agricultural Engineering);


RA 9297 (Chemical engineering); RA 1582 (Civil engineering) RA 7920 (Electrical
Engineering); RA 9292 (Electronics and Communication Engineering); RA 8560
(Geodetic Engineering); RA 8495 (Mechanical Engineering); PD 1536 (Metallurgical
Engineering); RA 4274 (Mining Engineering); RA 4565 (Naval Architecture and
Marine Engineering); RA 1364 (Sanitary Engineering; RA 2382 as amended by RA
4224 (Medicine); RA 5527 as amended by RA 6318, PD 6138, PD 498 and PD 1534
(Medical Technology); RA 9484 (Dentistry); RA 7392 (Midwifery); RA 9173
(Nursing); PD 1286 (Nutrition and Dietetics); RA 8050 (Optometry); RA 5921
(Pharmacy); RA 5680 (Physical and Occupational Therapy); RA 7431 (Radiologic
and X-ray Technology); RA 9268 (Veterinary Medicine); RA 9298 (Accountancy);
RA 9266 (Architecture); RA 6506 (Criminology); RA 754 (Chemistry); RA 9280
(Customs Brokerage); PD 1308 (Environmental Planning); RA 6239 (Forestry); RA
4209 (Geology); RA 8534 (Interior Design); RA 9053 (Landscape Architecture);
Article VIII, Section 5 of the Constitution, Rule 138, Section 2 of the Rules of Court
of the Philippines (Law); RA 9246 (Librarianship); RA 8544 (Marine Deck Officers
and Marine Engine Officers); RA 1378 (Master Plumbing): RA 5197 (Sugar
Technology); RA 4373 (Social Work); RA 7836 (Teaching); RA 8435 (Agriculture);
RA 8550 (Fisheries); and RA 9258 (Guidance Counselling).

78 Republic Act No. 5186, approved on September 16, 1967.

79Presidential Decree 1789, Published in the Daily Express dated April 1, 1981 and
Amended by Batas Pambansa Blg. 391 otherwise known as "Investment Incentive
Policy Act of 1983," approved April 28, 1983.

80Executive Order (s1987) No. 226, known as the "Omnibus Investments Code of
1987," approved on July 16, 1987.

81Section 1, Article XVII. Any amendment to, or revision of, this Constitution may
be proposed by:

(1) The Congress, upon a vote of three-fourths of all its Members; or

(2) A constitutional convention.

Section 2. Amendments to this Constitution may likewise be directly


proposed by the people through initiative….

xxx xxx xxx

Section 4. Any amendment to, or revisions of, this Constitution under


Section 1 hereof shall be valid when ratified by a majority vote of the votes
cast in a plebiscite which shall be held not earlier than sixty days nor later
than ninety days after the approval of such amendment or revision.

82The 1987 OIC was enacted as EO 226 on July 16, 1987, or after the ratification of
the 1987 Constitution.

83 Ang Bagong Bayani v. COMELEC, 412 Phil. 308 (2001).

84See Dissenting Opinion of Justice Padilla in Romualdez-Marcos v. COMELEC,


G.R. No. 119976, September 18, 1995, 248 SCRA 300, 369.

85 Republic Act No. 7042, Section 2.

86 Record of the Senate, Vol. II, No. 57, p. 1965.

87 Id. at 1964.
88 Id. Vol. 3, No. 76, p. 205.

89Black’s Law Dictionary, 9th Ed., for the iPhone/iPad/iPod touch. Version: 2.1.0
(B12136), p. 619.

90 Id.

91As early as 1932, Adolf A. Berle and Gardine C. Means in their book "The Modern
Corporation and Private Property" explained that the large business corporation is
characterized by "separation of ownership and control." See also Hu, Henry T.C.
and Black, Bernard S., Empty Voting and Hidden (Morphable) Ownership:
Taxonomy, Implications, and Reforms. As published in Business Lawyer, Vol. 61,
pp. 1011-1070, 2006; European Corporate Governance Institute - Law Research
Paper No. 64/2006; University of Texas Law, Law and Economics Research Paper
No. 70. Available at SSRN: http://ssrn.com/abstract=887183; Ringe, Wolf-Georg,
Deviations from Ownership-Control Proportionality - Economic Protectionism
Revisited (2010). COMPANY LAW AND ECONOMIC PROTECTIONISM - NEW
CHALLENGES TO EUROPEAN INTEGRATION, U. Bernitz and W.G. Ringe, eds.,
OUP, 2010; Oxford Legal Studies Research Paper No. 23/2011. Available at SSRN:
http://ssrn.com/abstract=1789089.

92 Rollo, p. 11.

93 Cortez v. Avila, 101 Phil 705 (1957); Borlasa v. Polistico, 47 Phil. 345 (1925).

94 Regalado, Remedial Law Compendium, p. 91.

95 G.R. No. 102900, October 2, 1997, 280 SCRA 20.

96Id.; citing Echevarria v. Parsons Hardware Co., 51 Phil. 980, 987 (1927); Borlasa v.
Polistico, 47 Phil. 345, 347 (1925); People et al. v. Hon. Rodriguez, et al., 106 Phil 325,
327 (1959), among others. Emphasis and underscoring supplied.

97Board of Ed. of City of San Diego v. Common Council of City of San Diego, 1
Cal.App. 311, 82 P. 89, Cal.App. 2 Dist. 1905, July 13, 1905 citing Johnson v. Malloy,
74 Cal. 432. See also Kilberg v. Louisiana Highway Commission, 8 La.App. 441 cited
in Perry v. Louisiana Highway Commission 164 So. 335 La.App. 2 Cir. 1935.
December 13, 1935 and Oregon v. Louisiana Power & Light Co., 19 La.App. 628, 140
So. 282; Succession of Carbajal, 154 La. 1060, 98 So. 666 (1924) cited in In re Gulf
Oxygen Welder's Supply Profit Sharing Plan and Trust Agreement 297 So.2d 663 LA
1974. July 1, 1974 .

98 Gamboa v. Teves, G.R. No. 176579, June 28, 2011, 652 SCRA 690, 744.
99 Section 1, Article III, 1987 Constitution.

100
Oscar Palma Pagasian v. Cesar Azura, A.M. No. RTJ-89-425, April 17, 1990, 184
SCRA 391.

101 Lopez v. Director of Lands, 47 Phil. 23, 32 (1924); emphasis supplied.

102 Banco Español Filipino v. Palanca, 37 Phil. 921, 934 (1918).

103 G.R. No. 158693, November 17, 2004, 442 SCRA 573.

104 G.R. No. 158693, November 17, 2004, 442 SCRA 573. Emphasis supplied.

105 G.R. No. 84404, October 18, 1990, 190 SCRA 717.

106 Id. at 729.

107PNB v. Palma, G.R. No. 157279, August 9, 2005; citing Laurel v. Civil Service
Commission, G.R. No. 71562, October 28, 1991, 203 SCRA 195; Stokes v. Malayan
Insurance Inc., 212 Phil. 705 (1984); Medija v. Patcho, 217 Phil. 509 (1984); Llacer v.
Muñoz, 12 Phil. 328 (1908).

108
Leca Realty Corporation v. Republic of the Philippines, represented by the
Department of Public Works and Highways, G.R. No. 155605, September 27, 2006,
503 SCRA 563.

109 G.R. No. 116111, January 21, 1999, 301 SCRA 366.

110
Citing 31 CJS 675-676; Republic v. Sandiganbayan, G.R. No. 108292, September 10,
1993, 226 SCRA 314.

111
No. L-29352, October 4, 1971, 41 SCRA 565; see also San Roque Realty and
Development Corporation v. Republic of the Philippines (through the Armed Forced
of the Philippines), G.R. No. 155605, September 27, 2006.

112Republic v. Vinzon, G.R. No. 154705, June 26, 2003, 405 SCRA 126; Air
Transportation Office v. David and Ramos. G.R. No. 159402, February 23, 2011. See
also Minucher v. Court of Appeals, G.R. No. 142396, February 11, 2003 citing Gary L.
Maris’, ‘International Law, An Introduction,"

University Press of America, 1984, p. 119; D.W. Grieg, ‘International


Law," London Butterworths, 1970, p. 221.
113
Particularly relevant in the case of PLDT whose biggest group of foreign
shareholders is Chinese, followed by the Japanese and the Americans. Per the
General Information Sheet (GIS) of PLDT as of June 14, 2012, the following are the
foreign shareholders of PLDT: (1) Hong-Kong based J.P. Morgan Asset Holdings
(HK) Limited owns 49,023,801 common shares [including 8,533,253, shares of
PLDT common stock underlying ADS beneficially owned by NTT DoCoMo and
7,653,703 shares of PLDT common stock underlying ADS beneficially-owned by
non-Philippine wholly-owned subsidiaries of First Pacific Company, Limited]; the
Japanese firms, (2) NTT DoCoMo, Inc. holding 22,796,902 common shares; (3)
NTT Communications Corporation with 12,633,487 common shares; and the
Americans, (4) HSBC OBO A/C 000-370817-550 with 2,690,316 common shares; (5)
Edward Tortorici and/or Anita R. Tortorici with 96,874 common shares; (6) Hare
and Co., holding 34,811 common shares; and (7) Maurice Verstraete, with 29,744
common shares.

(http://www.pldt.com.ph/investor/Documents/GIS_(as%20of%2006%2029
%2012)_final.pdf last accessed September 25, 2012)

114
1992 Agreement Between the Government of The People’s Republic Of China
and The Government of the Republic of the Philippines Concerning
Encouragement and Reciprocal Protection of Investments, Signed in Manila,
Philippines on July 20, 1992. Emphasis and underscoring supplied.

115 January 14, 2007.

116
ASEAN-China Investment Agreement, Article 7(1), emphasis and underscoring
supplied. See also the ASEAN-Korea Investment Agreement, Article 5 (1).

117 JPEPA, Article 91. Emphasis and underscoring supplied.

118 Signed on September 9, 2006.

119
ACIA, Article II (1) requires that the parties thereto must give "investments of
investors of [the other parties] fair and equitable treatment and full protection
and security." Emphasis and underscoring supplied.

120
Article III (1) – Each Contracting Party shall at all times ensure fair and
equitable treatment of the investments by investors of the other Contracting Party
and shall not impair the management, maintenance, use, enjoyment or disposal
thereof, through unjustified and discriminatory measures. (Emphasis and
underscoring supplied.)

121
Article 3(2) thereof provides that the Philippines "shall ensure that [Australian]
investments are accorded fair and equitable treatment."
122Article 2 (1) – Each Contracting Party shall in its territory promote, as far as
possible, investments of investors of the other Contracting Party, admit such
investments in accordance with its legislation and in any case accord such
investments fair and equitable treatment. (Emphasis and underscoring supplied.)

123
Article III (1) – Investments and returns of investors of each Contracting Party
shall at all times be accorded fair and equitable treatment and shall enjoy full
protection and security in the territory of the other Contracting Party. (Emphasis
and underscoring supplied.)

124Article II – Each Contracting Party shall promote investments in its territory by


investors of the other Contracting Party and shall admit such investments in
accordance with its Constitution, laws, and regulations. Such investments shall be
accorded fair and equitable treatment. (Emphasis and underscoring supplied.)

125Article II (2) – Investments of nationals of either Contracting Party shall at all


times be accorded fair and equitable treatment and shall enjoy adequate
protection and security in the territory of the other Contracting Party. Emphasis
and underscoring supplied.)

126Article II (2) – Each Contracting Party shall accord investments or returns of


investors of the other Contracting Party [:] (a) fair and equitable treatment in
accordance with the principles of international law, and (b) full protection and
security. (Emphasis and underscoring supplied.)

127Article IV (1) – Each Contracting Party shall guarantee fair and equitable
treatment to investments made by investors of the other Contracting Party on its
territory and shall ensure that the exercise of the right thus recognized shall not be
hindered in practice. (Emphasis and underscoring supplied.)

128Article II (2) – Investment[s[] of investors of [the] other Contracting Party shall


at all times be accorded fair and equitable treatment and enjoy full protection and
security in the territory of the other Contracting Party. (Emphasis and
underscoring supplied.)

129Article III (1) – Each Contracting Party shall accord to investments made by
investors of the other Contracting Party fair and equitable treatment. (Emphasis
and underscoring supplied.)

130Article 3(1) – Each Contracting Party shall guarantee fair and equitable
treatment to investments made by investors of the other Contracting Party in its
territory. Emphasis and underscoring supplied.)
131
Article 3 – Either Contracting Party shall extend fair and equitable treatment in
accordance with the principles of International Law to investments made by
nationals and companies of the other Contracting Party in its territory and shall
ensure that the exercise of the right thus recognized shall not be hindered.
Emphasis and underscoring supplied.)

132Article 2 (1) – Each Contracting State shall promote as far as possible


investments in its territory by investors of the other Contracting Party and admit
such investments in accordance with its Constitution, laws and regulations as
referred to in Article 1 paragraph 1. Such investments shall be accorded fair and
equitable treatment. (Emphasis and underscoring supplied.)

133Article IV (1) – Each Contracting Party shall accord fair and equitable treatment
to investments made by investors of the other Contracting Party in its territory.
(Emphasis and underscoring supplied)

134Article II (2) – Investments of investors of either Contracting party shall at all


times be accorded fair and equitable treatment and shall enjoy adequate
protection and security in the territory of the other Contracting Party. (Emphasis
and underscoring supplied)

135Article 4(1) – Admitted investments of investors of one Contracting Party


effected within the territory of the other Contracting Party in accordance with the
laws and regulations of the latter, shall receive in the other Contracting Party full
legal protection and fair treatment not less favourable than that accorded to its
own investor or investors of any third state which are in a comparable situation.

136Article I – Each Contracting Party shall promote as far as possible the


investments in its territory by investors of the other Contracting party admit such
investments according to its laws and regulations and accord such investments
equitable and reasonable treatment. (Emphasis and underscoring supplied)

137
Article IV (2) – Each Contracting Party shall ensure fair and equitable treatment
within its territory of the investments of the investors of the other Contracting
Party… (Emphasis and underscoring supplied)

138Article I(1) – Each Contracting Party shall promote as far as possible investments
in its territory by nationals and companies of one Contracting Party and shall
admit such investments in accordance with its Constitution, laws and regulations.
Such investments shall be accorded equitable and reasonable treatment.
((Emphasis and underscoring supplied)

139
Article 3 (2) – Investments of nationals of either Contracting Party shall, in their
entry, operation, management, maintenance, use enjoyment or disposal, be
accorded fair and equitable treatment and shall enjoy full protection and security
in the territory of the other Contracting party. (Emphasis and underscoring
supplied)

140Article I – Each Contracting Party shall promote as far as possible investments


in its territory by investors of the other Contracting Party and shall admit such
investments in accordance with its Constitution, laws, and regulations. Such
investments shall be accorded equitable and reasonable treatment. (Emphasis
supplied)

141
Article 2(1) – Each contracting party shall promote and encourage, as far as
possible, within its territory investments made by investors of the other
Contracting Party and shall admit such investments into its territory in accordance
with its laws and regulations. It shall in any case accord such investments fair and
equitable treatment. (Emphasis and underscoring supplied)

142Article 2(3) – Each Contracting Party undertakes to provide in its territory a fair
and equitable treatment for investments of investors of the other Contracting
Party. Neither Contracting Party shall in any way impair by arbitrary, unreasonable
or discriminatory measures the management, maintenance or use of investments
as well as the right to the disposal thereof. (Emphasis and underscoring supplied)

143
Article III (1) – Each Contracting Party shall ensure in its territory fair and
equitable treatment of the investments made by the investor of the other
Contracting Party and any activities in connection with such investments exclude
the use of discriminatory measures that might hinder management and
administration of investments. (Emphasis and underscoring supplied)

144Article @(1) – Each Contracting Party shall in its territory promote as far as
possible investments by investors of the other Contracting Party and admit such
investments in accordance with its legislation. It shall in any case accord such
investments free and equitable treatment. (Emphasis supplied)

145Article II – Each party shall promote, as far as possible, investments in its


territory by investors of the other Party and shall admit such investments in
accordance with its existing laws and regulation. Such investments shall be
accorded equitable and fair treatment.(Emphasis and underscoring supplied)

146Article III (1) – Each Contracting Party shall at all times ensure fair and
equitable treatment of the investments by investors of the other contracting party
and shall not impair the management, maintenance, use, enjoyment or disposal
thereof nor the acquisition of goods and services or the sale of their production,
through unreasonable or discriminatory measures. (Emphasis and underscoring
supplied)
147
Article IV (1) – Investments and returns of investors of each Contracting Party
shall at all times be accorded fair and equitable treatment and shall enjoy full
protection and security in the territory of the other Contracting Party. (Emphasis
and underscoring supplied)

148Article III (2) – Investments of national or companies of one Contracting Party


in the territory of the other Contracting Party, and also the returns therefrom,
shall at all times be accorded fair and equitable treatment and shall enjoy the
constant protection and security in the territory of the host country. (Emphasis
and underscoring supplied)

149Article II (1) – Each Contracting Party shall promote as far as possible


investments in its territory of one Contracting Party and shall admit, on a basis no
less favourable than that accorded in similar situations to investments of any third
country, in accordance with its Constitution, laws and regulations. Such
investments shall be accorded equitable and reasonable treatment. (Emphasis and
underscoring supplied)

150
Article III (2) – Investments of nationals or companies of either Contracting
Party shall at all times be accorded fair and equitable treatment and shall enjoy full
protection and security in the territory of the other contracting party. (Emphasis
and underscoring supplied)

151
Article II (2) – Investments of investors of each Contracting Party shall at all
times be accorded fair and equitable treatment and shall enjoy adequate
protection and security in the territory of the other Contracting Party. (Emphasis
and underscoring supplied)

152
Kenneth J. Vandevelde, A Unified Theory of Fair and Equitable Treatment, 43
N.Y.U. J. Int'l L. & Pol. 43.

153 ICSID Case No. ARB AF/00/2, Award of May 29, 2003.

154Annex 6 Referred to in Chapter 7 of the JPEPA: Schedule of Specific


Commitments and List of Most-Favored-Nation Treatment Exemptions. Last
accessed at
http://www.mofa.go.jp/region/asiapaci/philippine/epa0609/annex6.pdf on August
30, 20112.

155
Annex 1/SC1, ASEAN-China Agreement on Trade in Services. Last accessed at
http://www.asean.org/22160.htm on August 30, 2012.

156 London Court of International Arbitration Administered Case No. UN 3467, July
1, 2004. Last accessed at
http://arbitrationlaw.com/files/free_pdfs/Occidental%20v%20Ecuador%20-
%20Award.pdf on August 30, 2012.

157 Article 4, Civil Code of the Philippines.

158 Article 8, Civil Code of the Philippines.

159 23 Phil. 315 (1912).

160
G.R. No. 100776, October 28, 1993, 227 SCRA 444, 448-455; Monge, et al. v.
Angeles, et al., 101 Phil. 563 (1957); among others.

161 Decision, G.R. No. 176579, June 28, 2011.

162 Resolution, p. 47.

163 350 Phil. 906 (1998).

164 242 Phil. 848 (1988).

165 Resolution, p. 47.

166 Id.

167Sec. 38, Corporation Code. 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.

xxxx

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. (Emphasis supplied.)

168
Sec. 41, Corporation Code. 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.

169 Resolution, p. 47.

The Lawphil Project - Arellano Law Foundation


DISSENTING OPINION

ABAD, J.:

In the Decision dated June 28, 2011, the Court partially granted the petition for
prohibition, injunction, declaratory relieC and declaration of nullity of sale, of Wilson P.
Gamboa, a Philippine Long Distance Telephone Company (PLDT) stockholder, and ruled
that the term "capital" in Section 11, Article XII of the 1987 Constitution refers only to
shares of stock entitled to vote in the election of directors, and thus only to common
shares, and not to the total outstanding capital stock (common and non-voting preferred
shares). The Court also directed the Chairperson of the Securities and Exchange
Commission (SEC) to apply this definition of the term "capital" in determining the extent
of allowable hm~ign ownership in PLDT, and to impose the appropriate sanctions if there
is a violation of Section 11, Article XII ofthe 1987 Constitution.

Respondents Manuel V. Pangilinan, Napoleon L. Nazareno, Francis Lim, Pablito V.


Sanidad, Arno V. Sanidad, and the SEC filed their respective motions for reconsideration.

Thereafter, the Court conducted oral arguments to hear the parties on the following
issues:

1. Whether the term ''capital" in Section ll, Article XII of the 1987 Constitution
refers only to shares of stock with the right to vote in the election of directors
(common shares), or to all kinds of shares of stock, including those with no right
to vote in the election of directors;

2. Assuming the term "capital" refers only to shares of stock with the right to vote
in the election of directors, whether this ruling of the Court should have
retroactive effect to affect such shares of stock owned by foreigners prior to this
ruling;

3. Whether PLDT and its foreign stockholders are indispensable parties in the
resolution of the legal issue on the definition of the term "capital" in Section 11,
Article XII of the 1987 Constitution; and

3.1. If so, whether the Court has acquired jurisdiction over the persons of
PLDT and its foreign stockholders.

I am constrained to maintain my dissent to the majority opinion.

One. To reiterate, the authority to define and interpret the meaning of "capital" in
Section 11, Article XII of the 1987 Constitution belongs, not to the Court, but to Congress,
as part of its policy making powers. This matter is addressed to the sound discretion of
the lawmaking department of government since the power to authorize and control a
public utility is admittedly a prerogative that stems from Congress.1 It may very well in its
wisdom define the limit of foreign ownership in public utilities.

Section 11, Article XII of the 1987 Constitution which reads:

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.

is one of the constitutional provisions that are not self-executing and need sufficient
details for a meaningful implementation. While the provision states that no franchise for
the operation of a public utility shall be granted to a corporation organized under
Philippine laws unless at least 60% of its capital is owned by Filipino citizens, it does not
provide for the meaning of the term "capital."

As Fr. Joaquin G. Bernas, S.J. explained, acting as Amicus Curiae, the result of the absence
of a clear definition of the term "capital," was to base the 60-40 proportion on the total
outstanding capital stock, that is, the combined total of both common and non-voting
preferred shares. But while this has become the popular and common understanding of
the people, it is still incomplete. He added that in the Foreign Investments Act of 1991
(FIA), Congress tried to clarify this understanding by specifying what capital means for
the purpose of determining corporate citizenship, thus:

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

a. The term "Philippine national" shall mean a citizen of the Philippines; of a domestic
partnership or association wholly owned by citizens of the Philippines; or a corporation
organized under the laws of the Philippines of which at least sixty percent (60%) of the
capital stock outstanding and entitled to vote is owned and held by citizens of the
Philippines; or a corporation organized abroad and registered as doing business in the
Philippines under the Corporation Code of which one hundred percent (100%) of the
capital stock outstanding and entitled to vote is wholly owned by Filipinos or a trustee of
funds for pension or other employee retirement or separation benefits, where the trustee
is a Philippine national and at least sixty percent (60%) of the fund will accrue to the
benefit of Philippine nationals: Provided, That where a corporation and its non-Filipino
stockholders own stocks in a Securities and Exchange Commission (SEC) registered
enterprise, at least sixty percent (60%) of the capital stock outstanding and entitled to
vote of each of both corporations must be owned and held by citizens of the Philippines
and at least sixty percent (60%) of the members of the Board of Directors of each of both
corporations must be citizens of the Philippines, in order that the corporation, shall be
considered a "Philippine national." (As amended by Republic Act 8179)

Indeed, the majority opinion also resorted to the various investment Laws2 in construing
the term "capital." But while these laws admittedly govern foreign investments in the
country, they do not expressly or impliedly seek to supplant the ambiguity in the
definition of the term "capital" nor do they seek to modify foreign ownership limitation in
public utilities. It is a rule that when the operation of the statute is limited, the law
should receive a restricted construction.3

More particularly, much discussion was made on the FIA since it was enacted after the
1987 Constitution took effect. Yet it does not seem to be a supplementary or enabling
legislation which accurately defines the term "capital."

For one, it specifically applies only to companies which intend to invest in certain areas of
investment. It does not apply to companies which intend to apply for a franchise, much
less to those which are already enjoying their franchise. It aims "to attract, promote or
welcome productive investments from foreign individuals, partnerships, corporations and
government, including their political subdivisions, in activities which significantly
contribute to national industrialization and socio-economic development."4 What the FIA
provides are new rules for investing in the country.

Moreover, with its adoption of the definition of the term "Philippine national," has the
previous understanding that the term "capital" referred to the total outstanding capital
stock, as Fr. Bernas explained, been supplanted or modified? While it is clear that the
term "Philippine national" shall mean a corporation organized under Philippine laws at
least 60% of the capital stock outstanding and entitled to vote is owned and held by
Filipino citizens "as used in the FIA," it is not evident whether Congress intended this
definition to be used in all other cases where the term "capital" presents itself as an issue.

Two. Granting that it is the Court, and not Congress, which must define the meaning of
"capital," I submit that it must be interpreted to encompass the entirety of a corporation’s
outstanding capital stock (both common and preferred shares, voting or non-voting).

First, the term "capital" is also used in the fourth sentence of Section 11, Article XII, as
follows:

Section 11. xxx 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.

If the term "capital" as used in the first sentence is interpreted as pertaining only to shares
of stock with the right to vote in the election of directors, then such sentence will already
prescribe the limit of foreign participation in the election of the board of directors. On
the basis of the first sentence alone, the capacity of foreign stockholders to elect the
directors will already be limited by their ownership of 40% of the voting shares. This will
then render the fourth sentence meaningless and will run counter to the principle that
the provisions of the Constitution should be read in consonance with its other related
provisions.

Second, Dr. Bernardo M. Villegas, also an Amicus Curiae, who was the Chairman of the
Committee on the National Economy that drafted Article XII of the 1987 Constitution,
emphasized that by employing the term "capital," the 1987 Constitution itself did not
distinguish among classes of shares.

During their Committee meetings, Dr. Villegas explained that in both economic and
business terms, the term "capital" found in the balance sheet of any corporation always
meant the entire capital stock, both common and preferred. He added that even the non-
voting shares in a corporation have a great influence in its major decisions such as: (1) the
amendment of the articles of incorporation; (2) the adoption and amendment of by-laws;
(3) the sale, lease, exchange, mortgage, pledge or other disposition of all or substantially
all of the corporate property; (4) incurring, creating or increasing bonded indebtedness;
(5) the increase or decrease of capital stock; (6) the merger or consolidation of the
corporation with another corporation or other corporations; (7) the investment of
corporate funds in another corporation or business in accordance with this Code; and (8)
the dissolution of the corporation.

Thus, the Committee decisively rejected in the end the proposal of the UP Law Center to
define the term "capital" as voting stock or controlling interest. To quote Dr. Villegas, "in
the minds of the Commissioners the word ‘capital’ in Section 11 of Article XII refers, not to
voting stock, but to total subscribed capital, both common and preferred."

Finally, Dr. Villegas observed that our existing policy on foreign ownership in public
utilities already discourages, as it is, foreign investments to come in. To impose additional
restrictions, such as the restrictive interpretation of the term "capital," will only aggravate
our already slow economic growth and incapacity to compete with our East Asian
neighbours.

The Court can simply adopt the interpretations given by Fr. Bernas and Dr. Villegas since
they were both part of the Constitutional Commission that drafted the 1987 Constitution.
No one is in a better position to determine the intent of the framers of the questioned
provision than they are. Furthermore, their interpretations also coincide with the long-
standing practice to base the 60-40 proportion on the total outstanding capital stock, that
is, both common and preferred shares.

For sure, both common and preferred shares have always been considered part of the
corporation’s capital stock. Its shareholders are no different from ordinary investors who
take on the same investment risks. They participate in the same venture, willing to share
in the profits and losses of the enterprise. Under the doctrine of equality of shares – all
stocks issued by the corporation are presumed equal with the same privileges and
liabilities, provided that the Articles of Incorporation is silent on such differences.5

As a final note, the Filipinization of public utilities under the 1987 Constitution is a
recognition of the very strategic position of public utilities both in the national economy
and for national security.6 The participation of foreign capital is enjoined since the
establishment and operation of public utilities may require the investment of substantial
capital which Filipino citizens may not afford. But at the same time, foreign involvement
is limited to prevent them from assuming control of public utilities which may be
inimical to national interest.7 Section 11, Article XII of the 1987 Constitution already
provides three limitations on foreign participation in public utilities. The Court need not
add more by further restricting the meaning of the term ''capital" when none was
intended by the flamers of the 1987 Constitution.

Bas