THIRD DIVISION appointment of a director, trustee, officer, or manager of such
corporation, partnership, or association. Such controversy, among
MATLING INDUSTRIAL G.R. No. 157802
AND COMMERCIAL CORPORATION,
RICHARD K. SPENCER, Present:
CATHERINE SPENCER,
AND ALEX MANCILLA,
CARPIO MORALES, Chairperson,
Petitioners, BRION,
BERSAMIN,
VILLARAMA, JR., and
-versus - SERENO, JJ.
Promulgated:
RICARDO R. COROS, October 13, 2010
Respondent.
x--------------------------------------------------------------------------------x exercise of its authority may designate the Regional Trial Court
DECISION
Labor Law; Labor Arbiters; Illegal Dismissals; As a rule, the illegal
dismissal of an officer or other employee of a private employer is
properly cognizable by the Labor Arbiter (LA).—As a rule, the illegal
dismissal of an officer or other employee of a private employer is
properly cognizable by the LA. This is pursuant to Article 217 (a) 2
of the Labor Code, as amended.
Same; Same; Same; Where the complaint for illegal dismissal
concerns a corporate officer, however, the controversy falls under
the jurisdiction of the Securities and Exchange Commission
(SEC).—Where the complaint for illegal dismissal concerns a
corporate officer, however, the controversy falls under the
jurisdiction of the Securities and Exchange Commission (SEC),
because the controversy arises out of intra-corporate or partnership
relations between and among stockholders, members, or
associates, or between any 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 the
controversy concerns their individual franchise or right to exist as
such entity; or because the controversy involves the election or
others, is known as an intra-corporate dispute.
Same; Same; Same; Upon the passage of Republic Act No. 8799,
otherwise known as The Securities Regulation Code, the Securities
and Exchange Commission’s (SEC’s) jurisdiction over all intra-
corporate disputes was transferred to the Regional Trial Court
(RTC).—Effective on August 8, 2000, upon the passage of Republic
Act No. 8799, otherwise known as The Securities Regulation Code,
the SEC’s jurisdiction over all intra-corporate disputes was
transferred to the RTC, pursuant to Section 5.2 of RA No. 8799, to
wit: “5.2. The Commission’s jurisdiction over all cases enumerated
under Section 5 of Presidential Decree No. 902-A is hereby
transferred to the Courts of general jurisdiction or the appropriate
Regional Trial Court: Provided, that the Supreme Court in the
branches that shall exercise jurisdiction over these cases. The
Commission shall retain jurisdiction over pending cases involving
intra-corporate disputes submitted for final resolution which should
be resolved within one (1) year from the enactment of this Code.
The Commission shall retain jurisdiction over pending suspension of
payments/rehabilitation cases filed as of 30 June 2000 until finally
disposed.”
Same; Corporation Code; Corporate Officers; The creation of an
office pursuant to or under a By-Law enabling provision is not
enough to make a position a corporate office.—Conformably with
Section 25, a position must be expressly mentioned in the By-Laws
in order to be considered as a corporate office. Thus, the creation of
an office pursuant to or under a By-Law enabling provision is not
enough to make a position a corporate office. Guerrea v. Lezama,
103 Phil. 553 (1958), the first ruling on the matter, held that the only
officers of a corporation were those given that character either by
the Corporation Code or by the By-Laws; the rest of the corporate
officers could be considered only as employees or subordinate
officials.
Same; Same; Same; The power to elect the corporate officers was
a discretionary power that the law exclusively vested in the Board of
Directors, and could not be delegated to subordinate officers or
agents.—The Board of Directors of Matling could not validly
Page | 1
delegate the power to create a corporate office to the President, in This case reprises the jurisdictional conundrum of whether a
light of Section 25 of the Corporation Code requiring the Board of
Directors itself to elect the corporate officers. Verily, the power to complaint for illegal dismissal is cognizable by the Labor Arbiter (LA)
elect the corporate officers was a discretionary power that the law or by the Regional Trial Court (RTC). The determination of whether
exclusively vested in the Board of Directors, and could not be
delegated to subordinate officers or agents. The office of Vice the dismissed officer was a regular employee or a corporate officer
President for Finance and Administration created by Matling’s unravels the conundrum. In the case of the regular employee, the LA
President pursuant to By-Law No. V was an ordinary, not a
has jurisdiction; otherwise, the RTC exercises the legal authority to
corporate, office.
adjudicate.
Same; Same; Same; The statement in Tabang, to the effect that
offices not expressly mentioned in the By-Laws but were created
pursuant to a By-Law enabling provision were also considered In this appeal via petition for review on certiorari, the
corporate offices, was plainly obiter dictum.—The petitioners’ petitioners challenge the decision dated September 13, 2002[1] and
reliance on Tabang, supra, is misplaced. The statement in Tabang,
the resolution dated April 2, 2003,[2] both promulgated in C.A.-G.R.
to the effect that offices not expressly mentioned in the By-Laws but
were created pursuant to a By-Law enabling provision were also SP No. 65714 entitled Matling Industrial and Commercial
considered corporate offices, was plainly obiter dictum due to the Corporation, et al. v. Ricardo R. Coros and National Labor Relations
position subject of the controversy being mentioned in the By-Laws.
Thus, the Court held therein that the position was a corporate office, Commission, whereby by the Court of Appeals (CA) sustained the
and that the determination of the rights and liabilities arising from ruling of the National Labor Relations Commission (NLRC) to the
the ouster from the position was an intra-corporate controversy
within the SEC’s jurisdiction. effect that the LA had jurisdiction because the respondent was not a
corporate officer of petitioner Matling Industrial and Commercial
Same; Same; Same; Elements in order to determine whether a Corporation (Matling).
dispute constitutes an intra-corporate controversy or not.—True it is
that the Court pronounced in Tabang as follows: “Also, an intra- Antecedents
corporate controversy is one which arises between a stockholder
and the corporation. There is no distinction, qualification or any
exemption whatsoever. The provision is broad and covers all kinds
of controversies between stockholders and corporations.” However, After his dismissal by Matling as its Vice President for Finance and
the Tabang pronouncement is not controlling because it is too Administration, the respondent filed on August 10,
sweeping and does not accord with reason, justice, and fair play. In
order to determine whether a dispute constitutes an intra-corporate 2000 a complaint for illegal suspension and illegal dismissal against
controversy or not, the Court considers two elements instead, Matling and some of its corporate officers (petitioners) in the NLRC,
namely: (a) the status or relationship of the parties; and (b) the
Sub-Regional Arbitration Branch XII, Iligan City.[3]
nature of the question that is the subject of their controversy.

The petitioners moved to dismiss the complaint,[4] raising the

BERSAMIN, J.:
ground, among others, that the complaint pertained to the jurisdiction
of the Securities and Exchange Commission (SEC) due to the
Page | 2
controversy being intra-corporate inasmuch as the respondent was a
member of Matlings Board of Directors aside from being its Vice-
President for Finance and Administration prior to his termination.
The respondent opposed the petitioners motion to dismiss,[5] insisting
that his status as a member of Matlings Board of Directors was
doubtful, considering that he had not been formally elected as such;
that he did not own a single share of stock in Matling, considering that
he had been made to sign in blank an undated indorsement of the
certificate of stock he had been given in 1992; that Matling had taken
back and retained the certificate of stock in its custody; and that even
assuming that he had been a Director of Matling, he had been
removed as the Vice President for Finance and Administration, not
as a Director, a fact that the notice of his termination dated April 10,
2000 showed.
On October 16, 2000, the LA granted the petitioners motion
to dismiss,[6] ruling that the respondent was a corporate officer
because he was occupying the position of Vice President for Finance
and Administration and at the same time was a Member of the Board
of Directors of Matling; and that, consequently, his removal was a
corporate act of Matling and the controversy resulting from such
removal was under the jurisdiction of the SEC, pursuant to Section 5,
paragraph (c) of Presidential Decree No. 902.
Ruling of the NLRC
The respondent appealed to the NLRC,[7] urging that:
I
THE HONORABLE LABOR ARBITER COMMITTED
GRAVE ABUSE OF DISCRETION GRANTING
APPELLEES MOTION TO DISMISS WITHOUT
GIVING THE APPELLANT AN OPPORTUNITY TO
FILE HIS OPPOSITION THERETO THEREBY
VIOLATING THE BASIC PRINCIPLE OF DUE
PROCESS.
II
THE HONORABLE LABOR ARBITER COMMITTED
AN ERROR IN DISMISSING THE CASE FOR LACK
OF JURISDICTION.
On March 13, 2001, the NLRC set aside the dismissal, concluding
that the respondents complaint for illegal dismissal was properly
cognizable by the LA, not by the SEC, because he was not a
corporate officer by virtue of his position in Matling, albeit high ranking
and managerial, not being among the positions listed in Matlings
Constitution and By-Laws.[8] The NLRC disposed thuswise:
WHEREFORE, the Order appealed from is SET
ASIDE. A new one is entered declaring and holding
that the case at bench does not involve any
intracorporate matter. Hence, jurisdiction to hear and
act on said case is vested with the Labor Arbiter, not
the SEC, considering that the position of Vice-
President for Finance and Administration being held
by complainant-appellant is not listed as among
respondent's corporate officers.
Accordingly, let the records of this case
be REMANDED to the Arbitration Branch of origin in
order that the Labor Arbiter below could act on the
case at bench, hear both parties, receive their
respective evidence and position papers fully
observing the requirements of due process, and
resolve the same with reasonable dispatch.
SO ORDERED.
Page | 3
The petitioners sought reconsideration,[9] reiterating that the
respondent, being a member of the Board of Directors, was a
corporate officer whose removal was not within the LAs jurisdiction.
The petitioners later submitted to the NLRC in support of
the motion for reconsideration the certified machine copies of
Matlings Amended Articles of Incorporation and By Laws to prove
that the President of Matling was thereby granted full power to create
new offices and appoint the officers thereto, and the minutes of
special meeting held on June 7, 1999 by Matlings Board of Directors
to prove that the respondent was, indeed, a Member of the Board of
Directors.[10]
Nonetheless, on April 30, 2001, the NLRC denied the
petitioners motion for reconsideration.[11]
Ruling of the CA
The petitioners elevated the issue to the CA by petition for certiorari,
docketed as C.A.-G.R. No. SP 65714, contending that the NLRC
committed grave abuse of discretion amounting to lack of jurisdiction
in reversing the correct decision of the LA.
In its assailed decision promulgated on September 13, 2002,[12] the
CA dismissed the petition for certiorari, explaining:
For a position to be considered as a corporate office,
or, for that matter, for one to be considered as a
corporate officer, the position must, if not listed in the
by-laws, have been created by the corporation's board
of directors, and the occupant thereof appointed or
elected by the same board of directors or
stockholders. This is the implication of the ruling
in Tabang v. National Labor Relations Commission,
which reads:
The president, vice president, secretary
and treasurer are commonly regarded as the
principal or executive officers of a
corporation, and modern corporation
statutes usually designate them as the
officers of the corporation. However, other
offices are sometimes created by the charter
or by-laws of a corporation, or the board of
directors may be empowered under the by-
laws of a corporation to create additional
offices as may be necessary.
It has been held that an 'office' is created
by the charter of the corporation and the
officer is elected by the directors or
stockholders. On the other hand, an
'employee' usually occupies no office and
generally is employed not by action of the
directors or stockholders but by the
managing officer of the corporation who also
determines the compensation to be paid to
such employee.
This ruling was reiterated in the subsequent
cases of Ongkingco v. National Labor Relations
Commission and De Rossi v. National Labor
Relations Commission.
The position of vice-president for administration
and finance, which Coros used to hold in the
corporation, was not created by the corporations
board of directors but only by its president or
executive vice-president pursuant to the by-laws of
the corporation. Moreover, Coros appointment to said
position was not made through any act of the board of
directors or stockholders of the corporation.
Consequently, the position to which Coros was
appointed and later on removed from, is not a
corporate office despite its nomenclature, but an
ordinary office in the corporation.
Coros alleged illegal dismissal therefrom is,
therefore, within the jurisdiction of the labor arbiter.
Page | 4
 WHEREFORE, the petition for certiorari is under this Code, the Labor Arbiters shall have
hereby DISMISSED. original and exclusive jurisdiction to hear and
SO ORDERED. decide, within thirty (30) calendar days after the
The CA denied the petitioners motion for submission of the case by the parties for decision
without extension, even in the absence of
[13]
reconsideration on April 2, 2003. stenographic notes, the following cases involving
all workers, whether agricultural or non-
agricultural:
Issue
1. Unfair labor practice cases;
Thus, the petitioners are now before the Court for a review
2. Termination disputes;
on certiorari, positing that the respondent was a stockholder/member
of the Matlings Board of Directors as well as its Vice President for 3. If accompanied with a claim for reinstatement,
those cases that workers may file involving wages,
Finance and Administration; and that the CA consequently erred in rates of pay, hours of work and other terms and
holding that the LA had jurisdiction. conditions of employment;

4. Claims for actual, moral, exemplary and

The decisive issue is whether the respondent was a corporate officer
of Matling or not. The resolution of the issue determines whether the
LA or the RTC had jurisdiction over his complaint for illegal dismissal.
Ruling
The appeal fails.
I household service, involving an amount exceeding
The Law on Jurisdiction in Dismissal Cases
other forms of damages arising from the
employer-employee relations;
5. Cases arising from any violation of Article 264
of this Code, including questions involving the legality
of strikes and lockouts; and
6. Except claims for Employees Compensation,
Social Security, Medicare and maternity benefits, all
other claims arising from employer-employee
relations, including those of persons in domestic or
five thousand pesos (P5,000.00) regardless of
whether accompanied with a claim for reinstatement.

As a rule, the illegal dismissal of an officer or other employee
of a private employer is properly cognizable by the LA. This is
pursuant to Article 217 (a) 2 of the Labor Code, as amended, which
provides as follows:
Article 217. Jurisdiction of the Labor Arbiters and
the Commission. - (a) Except as otherwise provided
(b) The Commission shall have exclusive
appellate jurisdiction over all cases decided by
Labor Arbiters.
(c) Cases arising from the interpretation or
implementation of collective bargaining agreements
and those arising from the interpretation or
enforcement of company personnel policies shall be
Page | 5
 disposed of by the Labor Arbiter by referring the same
to the grievance machinery and voluntary arbitration
as may be provided in said agreements. (As amended
by Section 9, Republic Act No. 6715, March 21, 1989).
Where the complaint for illegal dismissal concerns
corporate officer, however, the controversy falls under the jurisdiction
of the Securities and Exchange Commission (SEC), because the
controversy arises out of intra-corporate or partnership relations
between and among stockholders, members, or associates, or
between any 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 the controversy concerns their
individual franchise or right to exist as such entity; or because the
controversy involves the election or appointment of a director,
trustee, officer, or manager of such corporation, partnership, or
association.[14] Such controversy, among others, is known as an
intra-corporate dispute.
Effective on August 8, 2000, upon the passage of Republic
Act No. 8799,[15] otherwise known as The Securities Regulation
Code, the SECs jurisdiction over all intra-corporate disputes was
transferred to the RTC, pursuant to Section 5.2 of RA No. 8799, to
wit:
5.2. The Commissions jurisdiction over all cases
enumerated under Section 5 of Presidential Decree
No. 902-A is hereby transferred to the Courts of
general jurisdiction or the appropriate Regional
Trial Court: Provided, that the Supreme Court in the
exercise of its authority may designate the Regional
Trial Court branches that shall exercise jurisdiction
over these cases. The Commission shall retain
jurisdiction over pending cases involving intra-
corporate disputes submitted for final resolution
which should be resolved within one (1) year from
the enactment of this Code. The Commission shall
retain jurisdiction over pending suspension of
a payments/rehabilitation cases filed as of 30 June
2000 until finally disposed.
Considering that the respondents complaint for illegal
dismissal was commenced on August 10, 2000, it might come under
the coverage of Section 5.2 of RA No. 8799, supra, should it turn out
that the respondent was a corporate, not a regular, officer of Matling.
II
Was the Respondents Position of Vice President
for Administration and Finance a Corporate Office?
We must first resolve whether or not the respondents position as Vice
President for Finance and Administration was a corporate office. If it
was, his dismissal by the Board of Directors rendered the matter an
intra-corporate dispute cognizable by the RTC pursuant to RA No.
8799.
The petitioners contend that the position of Vice President for
Finance and Administration was a corporate office, having been
created by Matlings President pursuant to By-Law No. V, as
amended,[16] to wit:
BY LAW NO. V
Officers
Page | 6

The President shall be the executive head of the
corporation; shall preside over the meetings of the
stockholders and directors; shall countersign all
certificates, contracts and other instruments of the
corporation as authorized by the Board of Directors;
shall have full power to hire and discharge any or all
employees of the corporation; shall have full power
to create new offices and to appoint the officers
thereto as he may deem proper and necessary in
the operations of the corporation and as the
progress of the business and welfare of the
corporation may demand; shall make reports to the
directors and stockholders and perform all such other
duties and functions as are incident to his office or are
properly required of him by the Board of Directors. In
case of the absence or disability of the President, the
Executive Vice President shall have the power to
exercise his functions.
The petitioners argue that the power to create corporate
offices and to appoint the individuals to assume the offices was
delegated by Matlings Board of Directors to its President through By-
Law No. V, as amended; and that any office the President created,
like the position of the respondent, was as valid and effective a
creation as that made by the Board of Directors, making the office a
corporate office. In justification, they cite Tabang v. National Labor
Relations Commission,[17] which held that other offices are
sometimes created by the charter or by-laws of a corporation, or the
board of directors may be empowered under the by-laws of a
corporation to create additional officers as may be necessary.
The respondent counters that Matlings By-Laws did not list his
position as Vice President for Finance and Administration as one of
the corporate offices; that Matlings By-Law No. III listed only four
corporate officers, namely: President, Executive Vice President,
Secretary, and Treasurer; [18] that the corporate offices contemplated
in the phrase and such other officers as may be provided for in the
by-laws found in Section 25 of the Corporation Code should be
clearly and expressly stated in the By-Laws; that the fact that
Matlings By-Law No. III dealt with Directors & Officers while its By-
Law No. V dealt with Officers proved that there was a differentiation
between the officers mentioned in the two provisions, with those
classified under By-Law No. V being ordinary or non-
corporate officers; and that the officer, to be considered as a
corporate officer, must be elected by the Board of Directors or the
stockholders, for the President could only appoint an employee to a
position pursuant to By-Law No. V.
We agree with respondent.
Section 25 of the Corporation Code provides:
Section 25. Corporate officers, quorum.--
Immediately after their election, the directors of a
corporation must formally organize by the election of
a president, who shall be a director, a treasurer who
may or may not be a director, a secretary who shall be
a resident and citizen of the Philippines, and such
other officers as may be provided for in the by-
laws. Any two (2) or more positions may be held
concurrently by the same person, except that no one
shall act as president and secretary or as president
and treasurer at the same time.
The directors or trustees and officers to be
elected shall perform the duties enjoined on them by
law and the by-laws of the corporation. Unless the
articles of incorporation or the by-laws provide for a
greater majority, a majority of the number of directors
or trustees as fixed in the articles of incorporation shall
Page | 7
 constitute a quorum for the transaction of corporate
business, and every decision of at least a majority of
the directors or trustees present at a meeting at which
there is a quorum shall be valid as a corporate act,
except for the election of officers which shall require
the vote of a majority of all the members of the board.
Directors or trustees cannot attend or vote by
proxy at board meetings.
Conformably with Section 25, a position must be expressly
mentioned in the By-Laws in order to be considered as a corporate
office. Thus, the creation of an office pursuant to or under a By-Law
enabling provision is not enough to make a position a corporate
office. Guerrea v. Lezama,[19] the first ruling on the matter, held that
the only officers of a corporation were those given that character
either by the Corporation Code or by the By-Laws; the rest of the
corporate officers could be considered only as employees or
subordinate officials. Thus, it was held in Easycall Communications
Phils., Inc. v. King:[20]
An office is created by the charter of the corporation
and the officer is elected by the directors or
stockholders. On the other hand, an employee
occupies no office and generally is employed not by
the action of the directors or stockholders but by the
managing officer of the corporation who also
determines the compensation to be paid to such
employee.
In this case, respondent was appointed vice president
for nationwide expansion by Malonzo, petitioner's
general manager, not by the board of directors of
petitioner. It was also Malonzo who determined the
compensation package of respondent. Thus,
respondent was an employee, not a corporate
officer. The CA was therefore correct in ruling that
jurisdiction over the case was properly with the NLRC,
not the SEC (now the RTC).
This interpretation is the correct application of Section 25 of
the Corporation Code, which plainly states that the corporate officers
are the President, Secretary, Treasurer and such other officers as
may be provided for in the By-Laws. Accordingly, the corporate
officers in the context of PD No. 902-A are exclusively those who are
given that character either by the Corporation Code or by the
corporations By-Laws.
A different interpretation can easily leave the way open for the
Board of Directors to circumvent the constitutionally guaranteed
security of tenure of the employee by the expedient inclusion in the
By-Laws of an enabling clause on the creation of just any corporate
officer position.
It is relevant to state in this connection that the SEC, the
primary agency administering the Corporation Code, adopted a
similar interpretation of Section 25 of the Corporation Code in its
Opinion dated November 25, 1993,[21] to wit:
Thus, pursuant to the above provision (Section
25 of the Corporation Code), whoever are the
corporate officers enumerated in the by-laws are
the exclusive Officers of the corporation and the
Board has no power to create other Offices
without amending first the corporate By-
laws. However, the Board may create appointive
positions other than the positions of corporate
Officers, but the persons occupying such
positions are not considered as corporate officers
within the meaning of Section 25 of the
Page | 8
 Corporation Code and are not empowered to rights and liabilities arising from the ouster from the position was an
exercise the functions of the corporate Officers,
except those functions lawfully delegated to them. intra-corporate controversy within the SECs jurisdiction.
Their functions and duties are to be determined by
the Board of Directors/Trustees.
In Nacpil v. Intercontinental Broadcasting Corporation,[23] which may
be the more appropriate ruling, the position subject of the
Moreover, the Board of Directors of Matling could not validly controversy was not expressly mentioned in the By-Laws, but was
delegate the power to create a corporate office to the President, in created pursuant to a By-Law enabling provision authorizing the
light of Section 25 of the Corporation Code requiring the Board of Board of Directors to create other offices that the Board of Directors
Directors itself to elect the corporate officers. Verily, the power to might see fit to create. The Court held there that the position was a
elect the corporate officers was a discretionary power that the law corporate office, relying on the obiter dictum in Tabang.
exclusively vested in the Board of Directors, and could not be Considering that the observations earlier made herein show that the
[22]
delegated to subordinate officers or agents. The office of Vice soundness of their dicta is not
President for Finance and Administration created by Matlings unassailable, Tabang and Nacpil should no longer be controlling.
President pursuant to By Law No. V was an ordinary, not a corporate,
III
office. Did Respondents Status as Director and
Stockholder Automatically Convert his
Dismissal
To emphasize, the power to create new offices and the power to
into an Intra-Corporate Dispute?
appoint the officers to occupy them vested by By-Law No. V merely
allowed Matlings President to create non-corporate offices to be
Yet, the petitioners insist that because the respondent was a
occupied by ordinary employees of Matling. Such powers were
Director/stockholder of Matling, and relying on Paguio v. National
incidental to the Presidents duties as the executive head of Matling
Labor Relations Commission[24] and Ongkingko v. National Labor
to assist him in the daily operations of the business.
Relations Commission,[25] the NLRC had no jurisdiction over
his complaint, considering that any case for illegal dismissal brought
The petitioners reliance on Tabang, supra, is misplaced. The
by a stockholder/officer against the corporation was an intra-
statement in Tabang, to the effect that offices not expressly
corporate matter that must fall under the jurisdiction of the SEC
mentioned in the By-Laws but were created pursuant to a By-Law
conformably with the context of PD No. 902-A.
enabling provision were also considered corporate offices, was
plainly obiter dictum due to the position subject of the controversy
The petitioners insistence is bereft of basis.
being mentioned in the By-Laws. Thus, the Court held therein that
the position was a corporate office, and that the determination of the

Page | 9
To begin with, the reliance on Paguio and Ongkingko is misplaced.
In both rulings, the complainants were undeniably corporate officers
due to their positions being expressly mentioned in the By-Laws,
aside from the fact that both of them had been duly elected by the
respective Boards of Directors. But the herein respondents position
of Vice President for Finance and Administration was not expressly
mentioned in the By-Laws; neither was the position of Vice President
for Finance and Administration created by Matlings Board of
Directors. Lastly, the President, not the Board of Directors, appointed
him.
True it is that the Court pronounced in Tabang as follows:
Also, an intra-corporate controversy is one which
arises between a stockholder and the corporation.
There is no distinction, qualification or any exemption
whatsoever. The provision is broad and covers all
kinds of controversies between stockholders and
corporations.[26]
Movilla,[28] the Court reiterated these determinants thuswise:
However, the Tabang pronouncement is not controlling because it is
too sweeping and does not accord with reason, justice, and fair
play. In order to determine whether a dispute constitutes an intra-
corporate controversy or not, the Court considers two elements
instead, namely: (a) the status or relationship of the parties; and (b)
the nature of the question that is the subject of their controversy. This
was our thrust in Viray v. Court of Appeals:[27]
The establishment of any of the relationships
mentioned above will not necessarily always confer
jurisdiction over the dispute on the SEC to the
exclusion of regular courts. The statement made in
one case that the rule admits of no exceptions or
distinctions is not that absolute. The better policy in
determining which body has jurisdiction over a case
would be to consider not only the status or relationship
of the parties but also the nature of the question that
is the subject of their controversy.
Not every conflict between a corporation and its
stockholders involves corporate matters that only the
SEC can resolve in the exercise of its adjudicatory or
quasi-judicial powers. If, for example, a person leases
an apartment owned by a corporation of which he is a
stockholder, there should be no question that a
complaint for his ejectment for non-payment of rentals
would still come under the jurisdiction of the regular
courts and not of the SEC. By the same token, if one
person injures another in a vehicular accident, the
complaint for damages filed by the victim will not come
under the jurisdiction of the SEC simply because of
the happenstance that both parties are stockholders
of the same corporation. A contrary interpretation
would dissipate the powers of the regular courts and
distort the meaning and intent of PD No. 902-A.
In another case, Mainland Construction Co., Inc. v.
In order that the SEC (now the regular courts) can take
cognizance of a case, the controversy must pertain to
any of the following relationships:
a) between the corporation, partnership or
association and the public;
b) between the corporation, partnership or
association and its stockholders, partners,
members or officers;
c) between the corporation, partnership or
association and the State as far as its
franchise, permit or license to operate is
concerned; and
Page | 10
 d) among the stockholders, partners or
associates themselves.
The fact that the parties involved in the
controversy are all stockholders or that the parties
involved are the stockholders and the corporation
does not necessarily place the dispute within the ambit
of the jurisdiction of SEC. The better policy to be
followed in determining jurisdiction over a case should
be to consider concurrent factors such as the status
or relationship of the parties or the nature of the
question that is the subject of their controversy. In the
absence of any one of these factors, the SEC will not
have jurisdiction. Furthermore, it does not necessarily
follow that every conflict between the corporation and
its stockholders would involve such corporate matters
as only the SEC can resolve in the exercise of its
adjudicatory or quasi-judicial powers.[29]
The criteria for distinguishing between corporate officers who
may be ousted from office at will, on one hand, and ordinary
corporate employees who may only be terminated for just cause, on
the other hand, do not depend on the nature of the services
performed, but on the manner of creation of the office. In the
respondents case, he was supposedly at once an employee, a
stockholder, and a Director of Matling. The circumstances
surrounding his appointment to office must be fully considered to
determine whether the dismissal constituted an intra-corporate
controversy or a labor termination dispute. We must also consider
whether his status as Director and stockholder had any relation at all
to his appointment and subsequent dismissal as Vice President for
Finance and Administration.
Obviously enough, the respondent was not appointed as Vice
President for Finance and Administration because of his being a
stockholder or Director of Matling. He had started working for Matling
on September 8, 1966, and had been employed continuously for 33
years until his termination on April 17, 2000, first as a bookkeeper,
and his climb in 1987 to his last position as Vice President for Finance
and Administration had been gradual but steady, as the following
sequence indicates:
1966 Bookkeeper
1968 Senior Accountant
1969 Chief Accountant
1972 Office Supervisor
1973 Assistant Treasurer
1978 Special Assistant for Finance
1980 Assistant Comptroller
1983 Finance and Administrative Manager
1985 Asst. Vice President for Finance
and Administration
1987 to April 17, 2000 Vice President for
Finance and Administration
Even though he might have become a stockholder of Matling
in 1992, his promotion to the position of Vice President for Finance
and Administration in 1987 was by virtue of the length of quality
service he had rendered as an employee of Matling. His subsequent
acquisition of the status of Director/stockholder had no relation to his
promotion. Besides, his status of Director/stockholder was unaffected
by his dismissal from employment as Vice President for Finance and
Administration.
In Prudential Bank and Trust Company v. Reyes,[30] a case
involving a lady bank manager who had risen from the ranks but was
dismissed, the Court held that her complaint for illegal dismissal was
correctly brought to the NLRC, because she was deemed a regular
employee of the bank. The Court observed thus:
Page | 11
 WHEREFORE, we deny the petition for review on certiorari, and
It appears that private respondent was affirm the decision of the Court of Appeals.
appointed Accounting Clerk by the Bank on July 14,
1963. From that position she rose to become
supervisor. Then in 1982, she was appointed Costs of suit to be paid by the petitioners.
Assistant Vice-President which she occupied until her
illegal dismissal on July 19, 1991. The banks
contention that she merely holds an elective SO ORDERED.
position and that in effect she is not a regular
employee is belied by the nature of her work and
her length of service with the Bank. As earlier
stated, she rose from the ranks and has been
employed with the Bank since 1963 until the
termination of her employment in 1991. As Assistant
Vice President of the Foreign Department of the Bank,
she is tasked, among others, to collect checks drawn
against overseas banks payable in foreign currency
and to ensure the collection of foreign bills or checks
purchased, including the signing of transmittal letters
covering the same. It has been stated that the primary
standard of determining regular employment is the
reasonable connection between the particular activity
performed by the employee in relation to the usual
trade or business of the employer. Additionally, an
employee is regular because of the nature of work and
the length of service, not because of the mode or even
the reason for hiring them. As Assistant Vice-
President of the Foreign Department of the Bank she
performs tasks integral to the operations of the bank
and her length of service with the bank totaling 28
years speaks volumes of her status as a regular
employee of the bank. In fine, as a regular employee,
she is entitled to security of tenure; that is, her services
may be terminated only for a just or authorized cause.
This being in truth a case of illegal dismissal, it is no
wonder then that the Bank endeavored to the very end
to establish loss of trust and confidence and serious
misconduct on the part of private respondent but, as
will be discussed later, to no avail.

Page | 12
 Republic of the Philippines
SUPREME COURT
Manila
SECOND DIVISION
G.R. No. 167291 January 12, 2011
PRINCE TRANSPORT, Inc. and Mr. RENATO
CLAROS, Petitioners,
vs.
DIOSDADO GARCIA, LUISITO GARCIA, RODANTE ROMERO,
REX BARTOLOME, FELICIANO GASCO, JR., DANILO ROJO,
EDGAR SANFUEGO, AMADO GALANTO, EUTIQUIO LUGTU,
JOEL GRAMATICA, MIEL CERVANTES, TERESITA CABANES,
ROE DELA CRUZ, RICHELO BALIDOY, VILMA PORRAS,
MIGUELITO SALCEDO, CRISTINA GARCIA, MARIO
NAZARENO, DINDO TORRES, ESMAEL RAMBOYONG,
ROBETO*MANO, ROGELIO BAGAWISAN, ARIEL SNACHEZ,
ESTAQULO VILLAREAL, NELSON MONTERO, GLORIA
ORANTE, HARRY TOCA, PABLITO MACASAET and RONALD
GARCITA Respondents.
DECISION
Labor Law; Appeals; It is already settled that under Section 9 of
Batas Pambansa Blg. 129, as amended by Republic Act No. 7902,
the Court of Appeals—pursuant to the exercise of its original
jurisdiction over petitions for certiorari—is specifically given the
power to pass upon the evidence, if and when necessary, to resolve
factual issues.—The power of the CA to review NLRC decisions via
a petition for certiorari under Rule 65 of the Rules of Court has been
settled as early as this Court’s decision in St. Martin Funeral Home
v. NLRC, 295 SCRA 494 (1998). In said case, the Court held that
the proper vehicle for such review is a special civil action for
certiorari under Rule 65 of the said Rules, and that the case should
be filed with the CA in strict observance of the doctrine of hierarchy
of courts. Moreover, it is already settled that under Section 9 of
Batas Pambansa Blg. 129, as amended by Republic Act No. 7902,
the CA—pursuant to the exercise of its original jurisdiction over
petitions for certiorari—is specifically given the power to pass upon
the evidence, if and when necessary, to resolve factual issues.
Same; Same; The Court of Appeals (CA) can grant the petition for
certiorari if it finds that the National Labor Relations Commission
(NLRC), in its assailed decision or resolution, made a factual finding
not supported by substantial evidence.—Equally settled is the rule
that factual findings of labor officials, who are deemed to have
acquired expertise in matters within their jurisdiction, are generally
accorded not only respect but even finality by the courts when
supported by substantial evidence, i.e., the amount of relevant
evidence which a reasonable mind might accept as adequate to
justify a conclusion. But these findings are not infallible. When there
is a showing that they were arrived at arbitrarily or in disregard of
the evidence on record, they may be examined by the courts. The
CA can grant the petition for certiorari if it finds that the NLRC, in its
assailed decision or resolution, made a factual finding not supported
by substantial evidence. It is within the jurisdiction of the CA, whose
jurisdiction over labor cases has been expanded to review the
findings of the NLRC.
Same; Same; Parties; Pleadings, Practice and Procedure;
Procedural Rules and Technicalities; Certification of Non-Forum
Shopping; Strict compliance with the provision regarding the
certificate of non-forum shopping underscores its mandatory nature
in that the certification cannot be altogether dispensed with or its
requirements completely disregarded but it does not, however,
prohibit substantial compliance therewith under justifiable
circumstances, considering especially that although it is obligatory,
it is not jurisdictional; When all the petitioners share a common
interest and invoke a common cause of action or defense, the
signature of only one of them in the certification against forum
shopping substantially complies with the rules.—While the general
rule is that the certificate of non-forum shopping must be signed by
all the plaintiffs in a case and the signature of only one of them is
insufficient, the Court has stressed that the rules on forum
shopping, which were designed to promote and facilitate the orderly
administration of justice, should not be interpreted with such
absolute literalness as to subvert its own ultimate and legitimate
objective. Strict compliance with the provision regarding the
certificate of non-forum shopping underscores its mandatory nature
in that the certification cannot be altogether dispensed with or its
requirements completely disregarded. It does not, however, prohibit
substantial compliance therewith under justifiable circumstances,
considering especially that although it is obligatory, it is not
Page | 13
jurisdictional. In a number of cases, the Court has consistently held
that when all the petitioners share a common interest and invoke a
common cause of action or defense, the signature of only one of
them in the certification against forum shopping substantially
complies with the rules. In the present case, there is no question
that respondents share a common interest and invoke a common
cause of action. Hence, the signature of respondent Garcia is a
sufficient compliance with the rule governing certificates of non-
forum shopping. In the first place, some of the respondents actually
executed a Special Power of Attorney authorizing Garcia as their
attorney-in-fact in filing a petition for certiorari with the CA.
Same; Same; Same; Same; Verification; When some of the parties
who undoubtedly have sufficient knowledge and belief to swear to
the truth of the allegations in the petition had signed the verification,
the same is deemed a sufficient assurance that the matters alleged
in the petition have been made in good faith or are true and correct,
and not merely speculative; In any case, the settled rule is that a
pleading which is required by the Rules of Court to be verified, may
be given due course even without a verification if the circumstances
warrant the suspension of the rules in the interest of justice.—With
respect to the absence of some of the workers’ signatures in the
verification, the verification requirement is deemed substantially
complied with when some of the parties who undoubtedly have
sufficient knowledge and belief to swear to the truth of the
allegations in the petition had signed the same. Such verification is
deemed a sufficient assurance that the matters alleged in the
petition have been made in good faith or are true and correct, and
not merely speculative. Moreover, respondents’ Partial Appeal
shows that the appeal stipulated as complainants-appellants “Rizal
Beato, et al.”, meaning that there were more than one appellant
who were all workers of petitioners. In any case, the settled rule is
that a pleading which is required by the Rules of Court to be
verified, may be given due course even without a verification if the
circumstances warrant the suspension of the rules in the interest of
justice. Indeed, the absence of a verification is not jurisdictional, but
only a formal defect, which does not of itself justify a court in
refusing to allow and act on a case. Hence, the failure of some of
the respondents to sign the verification attached to their
Memorandum of Appeal filed with the NLRC is not fatal to their
cause of action.
Same; Corporation Law; Piercing the Veil of Corporate Fiction; A
settled formulation of the doctrine of piercing the corporate veil is
that when two business enterprises are owned, conducted and
controlled by the same parties, both law and equity will, when
necessary to protect the rights of third parties, disregard the legal
fiction that these two entities are distinct and treat them as identical
or as one and the same.—The Court agrees with the CA that Lubas
is a mere agent, conduit or adjunct of PTI. A settled formulation of
the doctrine of piercing the corporate veil is that when two business
enterprises are owned, conducted and controlled by the same
parties, both law and equity will, when necessary to protect the
rights of third parties, disregard the legal fiction that these two
entities are distinct and treat them as identical or as one and the
same. In the present case, it may be true that Lubas is a single
proprietorship and not a corporation. However, petitioners’ attempt
to isolate themselves from and hide behind the supposed separate
and distinct personality of Lubas so as to evade their liabilities is
precisely what the classical doctrine of piercing the veil of corporate
entity seeks to prevent and remedy.
Pleadings, Practice and Procedure; The inclusion of a general
prayer may justify the grant of a remedy different from or together
with the specific remedy sought, if the facts alleged in the complaint
and the evidence introduced so warrant.—In any case, Section 2
(c), Rule 7 of the Rules of Court provides that a pleading shall
specify the relief sought, but may add a general prayer for such
further or other reliefs as may be deemed just and equitable. Under
this rule, a court can grant the relief warranted by the allegation and
the proof even if it is not specifically sought by the injured party; the
inclusion of a general prayer may justify the grant of a remedy
different from or together with the specific remedy sought, if the
facts alleged in the complaint and the evidence introduced so
warrant.
Labor Law; Unfair Labor Practices; The employer is guilty of unfair
labor practice where its transfer of work assignments to one of its
sub-companies was designed as a subterfuge to foil the employees’
right to organize themselves into a union.—As to whether
petitioners are guilty of unfair labor practice, the Court finds no
cogent reason to depart from the findings of the CA that
respondents’ transfer of work assignments to Lubas was designed
Page | 14
by petitioners as a subterfuge to foil the former’s right to organize
themselves into a union.
Under Article 248 (a) and (e) of the Labor Code, an employer is
guilty of unfair labor practice if it interferes with, restrains or coerces
its employees in the exercise of their right to self-organization or if it
discriminates in regard to wages, hours of work and other terms and
conditions of employment in order to encourage or discourage
membership in any labor organization. Indeed, evidence of
petitioners’ unfair labor practice is shown by the established fact
that, after respondents’ transfer to Lubas, petitioners left them high
and dry insofar as the operations of Lubas was concerned. The
Court finds no error in the findings and conclusion of the CA that
petitioners “withheld the necessary financial and logistic support
such as spare parts, and repair and maintenance of the transferred
buses until only two units remained in running condition.” This left
respondents virtually jobless.
PERALTA, J.:
Before the Court is a petition for review on certiorari under Rule 45
of the Rules of Court praying for the annulment of the Decision1 and
Resolution2 of the Court of Appeals (CA) dated December 20, 2004
and February 24, 2005, respectively, in CA-G.R. SP No. 80953. The
assailed Decision reversed and set aside the Resolutions dated
May 30, 20033 and September 26, 20034 of the National Labor
Relations Commission (NLRC) in CA No. 029059-01,while the
disputed Resolution denied petitioners' Motion for Reconsideration.
The present petition arose from various complaints filed by herein
respondents charging petitioners with illegal dismissal, unfair labor
practice and illegal deductions and praying for the award of
premium pay for holiday and rest day, holiday pay, service leave
pay, 13th month pay, moral and exemplary damages and attorney's
fees.
Respondents alleged in their respective position papers and other
related pleadings that they were employees of Prince Transport,
Inc. (PTI), a company engaged in the business of transporting
passengers by land; respondents were hired either as drivers,
conductors, mechanics or inspectors, except for respondent
Diosdado Garcia (Garcia), who was assigned as Operations
Manager; in addition to their regular monthly income, respondents
also received commissions equivalent to 8 to 10% of their wages;
sometime in October 1997, the said commissions were reduced to 7
to 9%; this led respondents and other employees of PTI to hold a
series of meetings to discuss the protection of their interests as
employees; these meetings led petitioner Renato Claros, who is the
president of PTI, to suspect that respondents are about to form a
union; he made known to Garcia his objection to the formation of a
union; in December 1997, PTI employees requested for a cash
advance, but the same was denied by management which resulted
in demoralization on the employees' ranks; later, PTI acceded to the
request of some, but not all, of the employees; the foregoing
circumstances led respondents to form a union for their mutual aid
and protection; in order to block the continued formation of the
union, PTI caused the transfer of all union members and
sympathizers to one of its sub-companies, Lubas Transport
(Lubas); despite such transfer, the schedule of drivers and
conductors, as well as their company identification cards, were
issued by PTI; the daily time records, tickets and reports of the
respondents were also filed at the PTI office; and, all claims for
salaries were transacted at the same office; later, the business of
Lubas deteriorated because of the refusal of PTI to maintain and
repair the units being used therein, which resulted in the virtual
stoppage of its operations and respondents' loss of employment.
Petitioners, on the other hand, denied the material allegations of the
complaints contending that herein respondents were no longer their
employees, since they all transferred to Lubas at their own request;
petitioners have nothing to do with the management and operations
of Lubas as well as the control and supervision of the latter's
employees; petitioners were not aware of the existence of any union
in their company and came to know of the same only in June 1998
when they were served a copy of the summons in the petition for
certification election filed by the union; that before the union was
registered on April 15, 1998, the complaint subject of the present
petition was already filed; that the real motive in the filing of the
complaints was because PTI asked respondents to vacate the
bunkhouse where they (respondents) and their respective families
were staying because PTI wanted to renovate the same.
Page | 15
Subsequently, the complaints filed by respondents were (4) Esmael
consolidated. 221,500.00 30,000.00
Ramboyong
On October 25, 2000, the Labor Arbiter rendered a Decision,5 the
dispositive portion of which reads as follows: (5) Joel Gramatica 221,500.00 60,000.00

WHEREFORE, judgment is hereby rendered: (6) Amado Galanto 130,725.00 29,250.00

1. Dismissing the complaints for Unfair Labor Practice, non- (7) Miel Cervantes 265,800.00 60,000.00
payment of holiday pay and holiday premium, service
incentive leave pay and 13th month pay;
(8) Roberto Mano 221,500.00 50,000.00
Dismissing the complaint of Edgardo Belda for refund of
boundary-hulog; (9) Roe dela Cruz 265,800.00 60,000.00

2. Dismissing the complaint for illegal dismissal against the

(10) Richelo Balidoy 130,725.00 29,250.00
respondents Prince Transport, Inc. and/or Prince Transport
Phils. Corporation, Roberto Buenaventura, Rory Bayona,
Ailee Avenue, Nerissa Uy, Mario Feranil and Peter (11) Vilma Porras 221,500.00 70,000.00
Buentiempo;
(12) Miguelito
3. Declaring that the complainants named below are illegally 265,800.00 60,000.00
Salcedo
dismissed by Lubas Transport; ordering said Lubas
Transport to pay backwages and separation pay in lieu of
reinstatement in the following amount: (13) Cristina Garcia 130,725.00 35,100.00

Separation (14) Luisito Garcia 145,250.00 19,500.00

Complainants Backwages
Pay
(15) Rogelio
265,800.00 60,000.00
(1) Diosdado Garcia ₱222,348.70 ₱79,456.00 Bagawisan

(2) Feliciano Gasco, (16) Rodante H.

203,350.00 54,600.00 221,500.00 60,000.00
Jr. Romero

(3) Pablito (17) Dindo Torres 265,800.00 50,000.00

145,250.00 13,000.00
Macasaet
(18) Edgar
221,500.00 40,000.00
Sanfuego

Page | 16
(19) Ronald Gacita 221,500.00 40,000.00 (34) Alex Lodor 295,000.00 50,000.00

(20) Harry Toca 174,300.00 23,400.00 (35) Glenda

295,000.00 40,000.00
Arguilles
(21) Amado Galanto 130,725.00 17,550.00
(36) Erwin Luces 354,000.00 48,000.00
(22) Teresita
130,725.00 17,550.00
Cabañes (37) Jesse Celle 354,000.00 48,000.00

(23) Rex Bartolome 301,500.00 30,000.00 (38) Roy Adorable 295,000.00 40,000.00

(24) Mario (39) Marlon

221,500.00 30,000.00 295,000.00 40,000.00
Nazareno Bangcoro

(25) Eustaquio (40)Edgardo

145,250.00 19,500.00 354,000.00 36,000.00
Villareal Bangcoro

(26) Ariel Sanchez 265,800.00 60,000.00

4. Ordering Lubas Transport to pay attorney's fees
equivalent to ten (10%) of the total monetary award; and
(27) Gloria Orante 263,100.00 60,000.00
6. Ordering the dismissal of the claim for moral and
(28) Nelson Montero 264,600.00 60,000.00 exemplary damages for lack merit.

(29) Rizal Beato 295,000.00 40,000.00 SO ORDERED.6

The Labor Arbiter ruled that petitioners are not guilty of unfair labor
(30) Eutiquio Lugtu 354,000.00 48,000.00
practice in the absence of evidence to show that they violated
respondents’ right to self-organization. The Labor Arbiter also held
(31) Warlito that Lubas is the respondents’ employer and that it (Lubas) is an
295,000.00 40,000.00
Dickensomn entity which is separate, distinct and independent from PTI.
Nonetheless, the Labor Arbiter found that Lubas is guilty of illegally
dismissing respondents from their employment.
(32) Edgardo Belda 354,000.00 84,000.00
Respondents filed a Partial Appeal with the NLRC praying, among
(33) Tita Go 295,000.00 70,000.00 others, that PTI should also be held equally liable as Lubas.

Page | 17
In a Resolution dated May 30, 2003, the NLRC modified the
Decision of the Labor Arbiter and disposed as follows:
WHEREFORE, premises considered, the appeal is
hereby PARTIALLY GRANTED. Accordingly, the Decision
appealed from is SUSTAINED subject to the modification that
Complainant-Appellant Edgardo Belda deserves refund of his
boundary-hulog in the amount of ₱446,862.00; and that
Complainants-Appellants Danilo Rojo and Danilo Laurel should be
included in the computation of Complainants-Appellants claim as
follows:
Complainants Backwages Separation Pay
41. Danilo Rojo ₱355,560.00 ₱48,000.00
42. Danilo Laurel ₱357,960.00 ₱72,000.00
As regards all other aspects, the Decision appealed from
is SUSTAINED.
SO ORDERED.7
Respondents filed a Motion for Reconsideration, but the NLRC
denied it in its Resolution8 dated September 26, 2003.
Respondents then filed a special civil action for certiorari with the
CA assailing the Decision and Resolution of the NLRC.
On December 20, 2004, the CA rendered the herein assailed
Decision which granted respondents' petition. The CA ruled that
petitioners are guilty of unfair labor practice; that Lubas is a mere
instrumentality, agent conduit or adjunct of PTI; and that petitioners’
act of transferring respondents’ employment to Lubas is indicative
of their intent to frustrate the efforts of respondents to organize
themselves into a union. Accordingly, the CA disposed of the case
as follows:
WHEREFORE, the Petition for Certiorari is hereby GRANTED.
Accordingly, the subject decision is hereby REVERSED and SET
ASIDE and another one ENTERED finding the respondents guilty of
unfair labor practice and ordering them to reinstate the petitioners to
their former positions without loss of seniority rights and with full
backwages.
With respect to the portion ordering the inclusion of Danilo Rojo and
Danilo Laurel in the computation of petitioner's claim for backwages
and with respect to the portion ordering the refund of Edgardo
Belda's boundary-hulog in the amount of ₱446,862.00, the NLRC
decision is affirmed and maintained.
SO ORDERED.9
Petitioners filed a Motion for Reconsideration, but the CA denied it
via its Resolution10 dated February 24, 2005.
Hence, the instant petition for review on certiorari based on the
following grounds:
A
THE COURT OF APPEALS COMMITTED GRAVE ABUSE OF
DISCRETION IN GIVING DUE COURSE TO THE
RESPONDENTS' PETITION FOR CERTIORARI
1. THE COURT OF APPEALS SHOULD HAVE
RESPECTED THE FINDINGS OF THE LABOR ARBITER
AND AFFIRMED BY THE NLRC
2. ONLY ONE PETITIONER EXECUTED AND VERIFIED
THE PETITION
3. THE COURT OF APPEALS SHOULD NOT HAVE GIVEN
DUE COURSE TO THE PETITION WITH RESPECT TO
RESPONDENTS REX BARTOLOME, FELICIANO GASCO,
DANILO ROJO, EUTIQUIO LUGTU, AND NELSON
MONTERO AS THEY FAILED TO FILE AN APPEAL TO
THE NLRC
Page | 18
 B The power of the CA to review NLRC decisions via a petition for
THE COURT OF APPEALS SERIOUSLY ERRED IN DECLARING
THAT PETITIONERS PRINCE TRANSPORT, INC. AND MR.
RENATO CLAROS AND LUBAS TRANSPORT ARE ONE AND
THE SAME CORPORATION AND THUS, LIABLE IN SOLIDUM TO
RESPONDENTS.
C as amended by Republic Act No. 7902, the CA — pursuant to the
THE COURT OF APPEALS COMMITTED GRAVE ABUSE OF
DISCRETION IN ORDERING THE REINSTATEMENT OF
RESPONDENTS TO THEIR PREVIOUS POSITION WHEN IT IS
NOT ONE OF THE ISSUES RAISED IN RESPONDENTS'
PETITION FOR CERTIORARI.11
Petitioners assert that factual findings of agencies exercising quasi-
judicial functions like the NLRC are accorded not only respect but
even finality; that the CA should have outrightly dismissed the
petition filed before it because in certiorari proceedings under Rule
65 of the Rules of Court it is not within the province of the CA to
evaluate the sufficiency of evidence upon which the NLRC based its
determination, the inquiry being limited essentially to whether or not
said tribunal has acted without or in excess of its jurisdiction or with
grave abuse of discretion. Petitioners assert that the CA can only
pass upon the factual findings of the NLRC if they are not supported
by evidence on record, or if the impugned judgment is based on
misapprehension of facts — which circumstances are not present in
this case. Petitioners also emphasize that the NLRC and the Labor
Arbiter concurred in their factual findings which were based on
substantial evidence and, therefore, should have been accorded
great weight and respect by the CA.
Respondents, on the other hand, aver that the CA neither exceeded
its jurisdiction nor committed error in re-evaluating the NLRC’s
factual findings since such findings are not in accord with the
evidence on record and the applicable law or jurisprudence.
The Court agrees with respondents.
certiorari under Rule 65 of the Rules of Court has been settled as
early as this Court’s decision in St. Martin Funeral Homes v.
NLRC.12 In said case, the Court held that the proper vehicle for such
review is a special civil action for certiorari under Rule 65 of the said
Rules, and that the case should be filed with the CA in strict
observance of the doctrine of hierarchy of courts. Moreover, it is
already settled that under Section 9 of Batas Pambansa Blg. 129,
exercise of its original jurisdiction over petitions for certiorari — is
specifically given the power to pass upon the evidence, if and when
necessary, to resolve factual issues.13 Section 9 clearly states:
xxxx
The Court of Appeals shall have the power to try cases and conduct
hearings, receive evidence and perform any and all acts necessary
to resolve factual issues raised in cases falling within its original and
appellate jurisdiction, including the power to grant and conduct new
trials or further proceedings. x x x
However, equally settled is the rule that factual findings of labor
officials, who are deemed to have acquired expertise in matters
within their jurisdiction, are generally accorded not only respect but
even finality by the courts when supported by substantial evidence,
i.e., the amount of relevant evidence which a reasonable mind
might accept as adequate to justify a conclusion.14 But these
findings are not infallible. When there is a showing that they were
arrived at arbitrarily or in disregard of the evidence on record, they
may be examined by the courts.15 The CA can grant the petition for
certiorari if it finds that the NLRC, in its assailed decision or
resolution, made a factual finding not supported by substantial
evidence.16 It is within the jurisdiction of the CA, whose jurisdiction
over labor cases has been expanded to review the findings of the
NLRC.17
In this case, the NLRC sustained the factual findings of the Labor
Arbiter. Thus, these findings are generally binding on the appellate
court, unless there was a showing that they were arrived at
arbitrarily or in disregard of the evidence on record. In respondents'
petition for certiorari with the CA, these factual findings were
reexamined and reversed by the appellate court on the ground that
Page | 19
they were not in accord with credible evidence presented in this
case. To determine if the CA's reexamination of factual findings and
reversal of the NLRC decision are proper and with sufficient basis, it
is incumbent upon this Court to make its own evaluation of the
evidence on record.18
After a thorough review of the records at hand, the Court finds that
the CA did not commit error in arriving at its own findings and
conclusions for reasons to be discussed hereunder.
Firstly, petitioners posit that the petition filed with the CA is fatally
defective, because the attached verification and certificate against
forum shopping was signed only by respondent Garcia.
The Court does not agree.
While the general rule is that the certificate of non-forum shopping
must be signed by all the plaintiffs in a case and the signature of
only one of them is insufficient, the Court has stressed that the rules
on forum shopping, which were designed to promote and facilitate
the orderly administration of justice, should not be interpreted with
such absolute literalness as to subvert its own ultimate and
legitimate objective.19 Strict compliance with the provision regarding
the certificate of non-forum shopping underscores its mandatory
nature in that the certification cannot be altogether dispensed with
or its requirements completely disregarded.20 It does not, however,
prohibit substantial compliance therewith under justifiable
circumstances, considering especially that although it is obligatory,
it is not jurisdictional.21
In a number of cases, the Court has consistently held that when all
the petitioners share a common interest and invoke a common
cause of action or defense, the signature of only one of them in the
certification against forum shopping substantially complies with the
rules.22 In the present case, there is no question that respondents
share a common interest and invoke a common cause of action.
Hence, the signature of respondent Garcia is a sufficient
compliance with the rule governing certificates of non-forum
shopping. In the first place, some of the respondents actually
executed a Special Power of Attorney authorizing Garcia as their
attorney-in-fact in filing a petition for certiorari with the CA.23
The Court, likewise, does not agree with petitioners' argument that
the CA should not have given due course to the petition filed before
it with respect to some of the respondents, considering that these
respondents did not sign the verification attached to the
Memorandum of Partial Appeal earlier filed with the NLRC.
Petitioners assert that the decision of the Labor Arbiter has become
final and executory with respect to these respondents and, as a
consequence, they are barred from filing a petition for certiorari with
the CA.
With respect to the absence of some of the workers’ signatures in
the verification, the verification requirement is deemed substantially
complied with when some of the parties who undoubtedly have
sufficient knowledge and belief to swear to the truth of the
allegations in the petition had signed the same. Such verification is
deemed a sufficient assurance that the matters alleged in the
petition have been made in good faith or are true and correct, and
not merely speculative. Moreover, respondents' Partial Appeal
shows that the appeal stipulated as complainants-appellants "Rizal
Beato, et al.", meaning that there were more than one appellant
who were all workers of petitioners.
In any case, the settled rule is that a pleading which is required by
the Rules of Court to be verified, may be given due course even
without a verification if the circumstances warrant the suspension of
the rules in the interest of justice.24 Indeed, the absence of a
verification is not jurisdictional, but only a formal defect, which does
not of itself justify a court in refusing to allow and act on a
case.25 Hence, the failure of some of the respondents to sign the
verification attached to their Memorandum of Appeal filed with the
NLRC is not fatal to their cause of action.
Petitioners also contend that the CA erred in applying the doctrine
of piercing the corporate veil with respect to Lubas, because the
said doctrine is applicable only to corporations and Lubas is not a
corporation but a single proprietorship; that Lubas had been found
by the Labor Arbiter and the NLRC to have a personality which is
separate and distinct from that of PTI; that PTI had no hand in the
management and operation as well as control and supervision of
the employees of Lubas.
The Court is not persuaded.
Page | 20
On the contrary, the Court agrees with the CA that Lubas is a mere
agent, conduit or adjunct of PTI. A settled formulation of the
doctrine of piercing the corporate veil is that when two business
enterprises are owned, conducted and controlled by the same
parties, both law and equity will, when necessary to protect the
rights of third parties, disregard the legal fiction that these two
entities are distinct and treat them as identical or as one and the
same.26 In the present case, it may be true that Lubas is a single
proprietorship and not a corporation. However, petitioners’ attempt
to isolate themselves from and hide behind the supposed separate
and distinct personality of Lubas so as to evade their liabilities is
precisely what the classical doctrine of piercing the veil of corporate
entity seeks to prevent and remedy.
Thus, the Court agrees with the observations of the CA, to wit:
As correctly pointed out by petitioners, if Lubas were truly a
separate entity, how come that it was Prince Transport who made
the decision to transfer its employees to the former? Besides,
Prince Transport never regarded Lubas Transport as a separate
entity. In the aforesaid letter, it referred to said entity as "Lubas
operations." Moreover, in said letter, it did not transfer the
employees; it "assigned" them. Lastly, the existing funds and 201
file of the employees were turned over not to a new company but a
"new management."27
The Court also agrees with respondents that if Lubas is indeed an
entity separate and independent from PTI why is it that the latter
decides which employees shall work in the former?
What is telling is the fact that in a memorandum issued by PTI,
dated January 22, 1998, petitioner company admitted that Lubas is
one of its sub-companies.28 In addition, PTI, in its letters to its
employees who were transferred to Lubas, referred to the latter as
its "New City Operations Bus."29
Moreover, petitioners failed to refute the contention of respondents
that despite the latter’s transfer to Lubas of their daily time records,
reports, daily income remittances of conductors, schedule of drivers
and conductors were all made, performed, filed and kept at the
office of PTI. In fact, respondents’ identification cards bear the
name of PTI.
It may not be amiss to point out at this juncture that in two separate
illegal dismissal cases involving different groups of employees
transferred by PTI to other companies, the Labor Arbiter handling
the cases found that these companies and PTI are one and the
same entity; thus, making them solidarily liable for the payment of
backwages and other money claims awarded to the complainants
therein.30
Petitioners likewise aver that the CA erred and committed grave
abuse of discretion when it ordered petitioners to reinstate
respondents to their former positions, considering that the issue of
reinstatement was never brought up before it and respondents
never questioned the award of separation pay to them.
The Court is not persuaded.
It is clear from the complaints filed by respondents that they are
seeking reinstatement.31
In any case, Section 2 (c), Rule 7 of the Rules of Court provides
that a pleading shall specify the relief sought, but may add a
general prayer for such further or other reliefs as may be deemed
just and equitable. Under this rule, a court can grant the relief
warranted by the allegation and the proof even if it is not specifically
sought by the injured party; the inclusion of a general prayer may
justify the grant of a remedy different from or together with the
specific remedy sought, if the facts alleged in the complaint and the
evidence introduced so warrant.321avvphi1
Moreover, in BPI Family Bank v. Buenaventura,33 this Court ruled
that the general prayer is broad enough "to justify extension of a
remedy different from or together with the specific remedy sought."
Even without the prayer for a specific remedy, proper relief may be
granted by the court if the facts alleged in the complaint and the
evidence introduced so warrant. The court shall grant relief
warranted by the allegations and the proof even if no such relief is
prayed for. The prayer in the complaint for other reliefs equitable
and just in the premises justifies the grant of a relief not otherwise
specifically prayed for.34 In the instant case, aside from their specific
prayer for reinstatement, respondents, in their separate complaints,
prayed for such reliefs which are deemed just and equitable.
Page | 21
As to whether petitioners are guilty of unfair labor practice, the
Court finds no cogent reason to depart from the findings of the CA
that respondents’ transfer of work assignments to Lubas was
designed by petitioners as a subterfuge to foil the former’s right to
organize themselves into a union. Under Article 248 (a) and (e) of
the Labor Code, an employer is guilty of unfair labor practice if it
interferes with, restrains or coerces its employees in the exercise of
their right to self-organization or if it discriminates in regard to
wages, hours of work and other terms and conditions of
employment in order to encourage or discourage membership in
any labor organization.

Indeed, evidence of petitioners' unfair labor practice is shown by the

established fact that, after respondents' transfer to Lubas,
petitioners left them high and dry insofar as the operations of Lubas
was concerned. The Court finds no error in the findings and
conclusion of the CA that petitioners "withheld the necessary
financial and logistic support such as spare parts, and repair and
maintenance of the transferred buses until only two units remained
in running condition." This left respondents virtually jobless.

WHEREFORE, the instant petition is denied. The assailed Decision

and Resolution of the Court of Appeals, dated December 20, 2004
and February 24, 2005, respectively, in CA-G.R. SP No. 80953, are
AFFIRMED.

SO ORDERED.

Page | 22
 Republic of the Philippines
SUPREME COURT
Manila
SECOND DIVISION
G.R. No. 171993 December 12, 2011
MARC II MARKETING, INC. and LUCILA V. JOSON, Petitioners,
vs.
ALFREDO M. JOSON, Respondent.
DECISION
Labor Law; Illegal Dismissals; Corporation Law; Intra-corporate
Controversies; The dismissal of a corporate officer is always
regarded as a corporate and/or an intra-corporate controversy;
Intra-corporate controversies also includes controversies in the
election or appointments of directors, trustees, officers or managers
of such corporations, partnerships or associations.—While Article
217(a)2 of the Labor Code, as amended, provides that it is the
Labor Arbiter who has the original and exclusive jurisdiction over
cases involving termination or dismissal of workers when the person
dismissed or terminated is a corporate officer, the case
automatically falls within the province of the RTC. The dismissal of
a corporate officer is always regarded as a corporate act and/or an
intra-corporate controversy. Under Section 5 of Presidential Decree
No. 902-A, intra-corporate controversies are those controversies
arising out of intra-corporate or partnership relations, between and
among stockholders, members or associates; between any or all of
them and the corporation, partnership or association of which they
are stockholders, members or associates, respectively; and
between such corporation, partnership or association and the State
insofar as it concerns their individual franchise or right to exist as
such entity. It also includes controversies in the election or
appointments of directors, trustees, officers or managers of such
corporations, partnerships or associations.
Same; Same; Same; Same; Corporate Officers; Corporate officers
are those officers of a corporate who are given that character either
by the Corporation Code or by the corporation’s by-laws.—In
Easycall Communications Phils., Inc. v. King, 478 SCRA 102
(2005), this Court held that in the context of Presidential Decree No.
902-A, corporate officers are those officers of a corporation who are
given that character either by the Corporation Code or by the
corporation’s by-laws. Section 25 of the Corporation Code
specifically enumerated who are these corporate officers, to wit: (1)
president; (2) secretary; (3) treasurer; and (4) such other officers as
may be provided for in the by-laws.
Same; Same; Same; Same; Same; The phrase “such other officers
as may be provided for in the by–laws” clarified and elaborated in
Matling Industrial and Commercial Corporation vs. Coros, 633
SCRA 12 (2010).—The aforesaid Section 25 of the Corporation
Code, particularly the phrase “such other officers as may be
provided for in the by-laws,” has been clarified and elaborated in
this Court’s recent pronouncement in Matling Industrial and
Commercial Corporation v. Coros, 633 SCRA 12 (2010), where it
held, thus: Conformably with Section 25, a position must be
expressly mentioned in the [b]y-[l]aws in order to be considered as
a corporate office. Thus, the creation of an office pursuant to or
under a [b]y-[l]aw enabling provision is not enough to make a
position a corporate office. [In] Guerrea v. Lezama [citation omitted]
the first ruling on the matter, held that the only officers of a
corporation were those given that character either by the
Corporation Code or by the [b]y-[l]aws; the rest of the corporate
officers could be considered only as employees or subordinate
officials. Thus, it was held in Easycall Communications Phils., Inc. v.
King [citation omitted]: An “office” is created by the charter of the
corporation and the officer is elected by the directors or
stockholders. On the other hand, an employee occupies no office
and generally is employed not by the action of the directors or
stockholders but by the managing officer of the corporation who
also determines the compensation to be paid to such employee. x x
x x This interpretation is the correct application of Section 25 of the
Corporation Code, which plainly states that the corporate officers
are the President, Secretary, Treasurer and such other officers as
may be provided for in the [b]y-[l]aws. Accordingly, the corporate
officers in the context of PD No. 902-A are exclusively those who
are given that character either by the Corporation Code or by the
corporation’s [b]y[l]aws.
Same; Same; Same; Same; Same; Corporate officers are
composed of (1) Chairman; (2) President; (3) One or more Vice-
Page | 23
President; (4) Treasurer; and (5) Secretary.—A careful perusal of
petitioner corporation’s by-laws, particularly paragraph 1, Section 1,
Article IV, would explicitly reveal that its corporate officers are
composed only of: (1) Chairman; (2) President; (3) one or more
Vice-President; (4) Treasurer; and (5) Secretary. The position of
General Manager was not among those enumerated.
Same; Same; Same; Same; Same; The board of directors has no
power to create other corporate offices without first amending the
corporate by-laws so as to include therein the newly created
corporate office.—With the given circumstances and in conformity
with Matling Industrial and Commercial Corporation v. Coros, 633
SCRA 12 (2010), this Court rules that respondent was not a
corporate officer of petitioner corporation because his position as
General Manager was not specifically mentioned in the roster of
corporate officers in its corporate by-laws. The enabling clause in
petitioner corporation’s by-laws empowering its Board of Directors
to create additional officers, i.e., General Manager, and the alleged
subsequent passage of a board resolution to that effect cannot
make such position a corporate office. Matling clearly enunciated
that the board of directors has no power to create other corporate
offices without first amending the corporate by-laws so as to include
therein the newly created corporate office. Though the board of
directors may create appointive positions other than the positions of
corporate officers, the persons occupying such positions cannot be
viewed as corporate officers under Section 25 of the Corporation
Code.
Same; Same; Same; Same; Same; The corporate officers
enumerated in the by-laws are the exclusive officers of the
corporation while the rest could only be regarded as mere
employees or subordinate officials.—It is also of no moment that
respondent, being petitioner corporation’s General Manager, was
given the functions of a managing director by its Board of Directors.
As held in Matling, the only officers of a corporation are those given
that character either by the Corporation Code or by the corporate
by-laws. It follows then that the corporate officers enumerated in the
by-laws are the exclusive officers of the corporation while the rest
could only be regarded as mere employees or subordinate officials.
Respondent, in this case, though occupying a high ranking and vital
position in petitioner corporation but which position was not
specifically enumerated or mentioned in the latter’s by-laws, can
only be regarded as its employee or subordinate official.
Same; Same; Same; Same; Same; Not all conflicts between the
stockholders and the corporation are classified as intra-corporate;
Other factors such as the status or relationship of the parties and
the nature of the question that is the subject of the controversy must
be considered in determining whether the dispute involves
corporate matters so as to regard them as intra-corporate
controversies.—That respondent was also a director and a
stockholder of petitioner corporation will not automatically make the
case fall within the ambit of intra-corporate controversy and be
subjected to RTC’s jurisdiction. To reiterate, not all conflicts
between the stockholders and the corporation are classified as
intra-corporate. Other factors such as the status or relationship of
the parties and the nature of the question that is the subject of the
controversy must be considered in determining whether the dispute
involves corporate matters so as to regard them as intra-corporate
controversies. As previously discussed, respondent was not a
corporate officer of petitioner corporation but a mere employee
thereof so there was no intra-corporate relationship between them.
With regard to the subject of the controversy or issue involved
herein, i.e., respondent’s dismissal as petitioner corporation’s
General Manager, the same did not present or relate to an intra-
corporate dispute.
Same; Same; Same; Same; Same; Respondent’s dismissal as
petitioner corporation’s General Manager did not amount to an intra-
corporate controversy.—With all the foregoing, this Court is fully
convinced that, indeed, respondent, though occupying the General
Manager position, was not a corporate officer of petitioner
corporation rather he was merely its employee occupying a high-
ranking position. Accordingly, respondent’s dismissal as petitioner
corporation’s General Manager did not amount to an intra-corporate
controversy. Jurisdiction therefor properly belongs with the Labor
Arbiter and not with the RTC.
Same; Same; In termination cases, the burden of proving just and
valid cause for dismissing an employee from his employment rests
upon the employer.—In termination cases, the burden of proving
just and valid cause for dismissing an employee from his
employment rests upon the employer. The latter’s failure to
Page | 24
discharge that burden would necessarily result in a finding that the
dismissal is unjustified.
Same; Same; The closure or cessation of operations of
establishment or undertaking may either be due to serious business
losses or financial reverses or otherwise.—Under Article 283 of the
Labor Code, as amended, one of the authorized causes in
terminating the employment of an employee is the closing or
cessation of operation of the establishment or undertaking. From
the afore-quoted provision, the closure or cessation of operations of
establishment or undertaking may either be due to serious business
losses or financial reverses or otherwise. If the closure or cessation
was due to serious business losses or financial reverses, it is
incumbent upon the employer to sufficiently and convincingly prove
the same. If it is otherwise, the employer can lawfully close shop
anytime as long as it was bona fide in character and not impelled by
a motive to defeat or circumvent the tenurial rights of employees
and as long as the terminated employees were paid in the amount
corresponding to their length of service.
Same; Same; Three Requisites for a Valid Cessation of Business
Operations.—Under Article 283 of the Labor Code, as amended,
there are three requisites for a valid cessation of business
operations: (a) service of a written notice to the employees and to
the Department of Labor and Employment (DOLE) at least one
month before the intended date thereof; (b) the cessation of
business must be bona fide in character; and (c) payment to the
employees of termination pay amounting to one month pay or at
least one-half month pay for every year of service, whichever is
higher.
Same; Same; Due Process; The requirement of due process shall
be deemed complied with upon service of a written notice to the
employee and the appropriate Regional Office of the Department of
Labor and Employment at least thirty days before effectivity of the
termination, specifying the ground or grounds for termination.—As
previously discussed, respondent’s dismissal was due to an
authorized cause, however, petitioner corporation failed to observe
procedural due process in effecting such dismissal. In Culili v.
Eastern Telecommunications Philippines, Inc., 642 SCRA 338
(2011), this Court made the following pronouncements, thus: x x x x
For termination of employment as defined in Article 283 of the Labor
Code, the requirement of due process shall be deemed complied
with upon service of a written notice to the employee and the
appropriate Regional Office of the Department of Labor and
Employment at least thirty days before effectivity of the termination,
specifying the ground or grounds for termination.
Same; Same; Same; The necessary consequence for such failure
to comply with the one-month prior written notice rule which
constitutes a violation of an employee’s right to statutory due
process is the payment of indemnity in the form of nominal
damages.—The records of this case disclosed that there was
absolutely no written notice given by petitioner corporation to the
respondent and to the DOLE prior to the cessation of its business
operations. This is evident from the fact that petitioner corporation
effected respondent’s dismissal on the same date that it decided to
stop and cease its business operations. The necessary
consequence of such failure to comply with the one-month prior
written notice rule, which constitutes a violation of an employee’s
right to statutory due process, is the payment of indemnity in the
form of nominal damages.
Corporate Officers; Corporate Liability; Corporate officers are not
personally liable for their official acts unless it is shown that they
have exceeded their authority.—As a rule, corporation has a
personality separate and distinct from its officers, stockholders and
members such that corporate officers are not personally liable for
their official acts unless it is shown that they have exceeded their
authority. However, this corporate veil can be pierced when the
notion of the legal entity is used as a means to perpetrate fraud, an
illegal act, as a vehicle for the evasion of an existing obligation, and
to confuse legitimate issues. Under the Labor Code, for instance,
when a corporation violates a provision declared to be penal in
nature, the penalty shall be imposed upon the guilty officer or
officers of the corporation.
PEREZ, J.:
In this Petition for Review on Certiorari under Rule 45 of the Rules
of Court, herein petitioners Marc II Marketing, Inc. and Lucila V.
Joson assailed the Decision1 dated 20 June 2005 of the Court of
Page | 25
Appeals in CA-G.R. SP No. 76624 for reversing and setting aside
the Resolution2 of the National Labor Relations Commission
(NLRC) dated 15 October 2002, thereby affirming the Labor
Arbiter’s Decision3 dated 1 October 2001 finding herein respondent
Alfredo M. Joson’s dismissal from employment as illegal. In the
questioned Decision, the Court of Appeals upheld the Labor
Arbiter’s jurisdiction over the case on the basis that respondent was
not an officer but a mere employee of petitioner Marc II Marketing,
Inc., thus, totally disregarding the latter’s allegation of intra-
corporate controversy. Nonetheless, the Court of Appeals
remanded the case to the NLRC for further proceedings to
determine the proper amount of monetary awards that should be
given to respondent.
Assailed as well is the Court of Appeals Resolution4 dated 7 March
2006 denying their Motion for Reconsideration.
Petitioner Marc II Marketing, Inc. (petitioner corporation) is a
corporation duly organized and existing under and by virtue of the
laws of the Philippines. It is primarily engaged in buying, marketing,
selling and distributing in retail or wholesale for export or import
household appliances and products and other items.5 It took over
the business operations of Marc Marketing, Inc. which was made
non-operational following its incorporation and registration with the
Securities and Exchange Commission (SEC). Petitioner Lucila V.
Joson (Lucila) is the President and majority stockholder of petitioner
corporation. She was also the former President and majority
stockholder of the defunct Marc Marketing, Inc.
Respondent Alfredo M. Joson (Alfredo), on the other hand, was the
General Manager, incorporator, director and stockholder of
petitioner corporation.
The controversy of this case arose from the following factual milieu:
Before petitioner corporation was officially
incorporated,6 respondent has already been engaged by petitioner
Lucila, in her capacity as President of Marc Marketing, Inc., to work
as the General Manager of petitioner corporation. It was formalized
through the execution of a Management Contract7 dated 16 January
1994 under the letterhead of Marc Marketing, Inc.8 as petitioner
corporation is yet to be incorporated at the time of its execution. It
was explicitly provided therein that respondent shall be entitled to
30% of its net income for his work as General Manager.
Respondent will also be granted 30% of its net profit to compensate
for the possible loss of opportunity to work overseas.9
Pending incorporation of petitioner corporation, respondent was
designated as the General Manager of Marc Marketing, Inc., which
was then in the process of winding up its business. For occupying
the said position, respondent was among its corporate officers by
the express provision of Section 1, Article IV10 of its by-laws.11
On 15 August 1994, petitioner corporation was officially
incorporated and registered with the SEC. Accordingly, Marc
Marketing, Inc. was made non-operational. Respondent continued
to discharge his duties as General Manager but this time under
petitioner corporation.
Pursuant to Section 1, Article IV12 of petitioner corporation’s by-
laws,13 its corporate officers are as follows: Chairman, President,
one or more Vice-President(s), Treasurer and Secretary. Its Board
of Directors, however, may, from time to time, appoint such other
officers as it may determine to be necessary or proper.
Per an undated Secretary’s Certificate,14 petitioner corporation’s
Board of Directors conducted a meeting on 29 August 1994 where
respondent was appointed as one of its corporate officers with the
designation or title of General Manager to function as a managing
director with other duties and responsibilities that the Board of
Directors may provide and authorized.15
Nevertheless, on 30 June 1997, petitioner corporation decided to
stop and cease its operations, as evidenced by an Affidavit of Non-
Operation16 dated 31 August 1998, due to poor sales collection
aggravated by the inefficient management of its affairs. On the
same date, it formally informed respondent of the cessation of its
business operation. Concomitantly, respondent was apprised of the
termination of his services as General Manager since his services
as such would no longer be necessary for the winding up of its
affairs.17
Page | 26
Feeling aggrieved, respondent filed a Complaint for Reinstatement
and Money Claim against petitioners before the Labor Arbiter which
was docketed as NLRC NCR Case No. 00-03-04102-99.
In his complaint, respondent averred that petitioner Lucila dismissed
him from his employment with petitioner corporation due to the
feeling of hatred she harbored towards his family. The same was
rooted in the filing by petitioner Lucila’s estranged husband, who
happened to be respondent’s brother, of a Petition for Declaration of
Nullity of their Marriage.18
For the parties’ failure to settle the case amicably, the Labor Arbiter
required them to submit their respective position papers.
Respondent complied but petitioners opted to file a Motion to
Dismiss grounded on the Labor Arbiter’s lack of jurisdiction as the
case involved an intra-corporate controversy, which jurisdiction
belongs to the SEC [now with the Regional Trial Court
(RTC)].19 Petitioners similarly raised therein the ground of
prescription of respondent’s monetary claim.
On 5 September 2000, the Labor Arbiter issued an Order20 deferring
the resolution of petitioners’ Motion to Dismiss until the final
determination of the case. The Labor Arbiter also reiterated his
directive for petitioners to submit position paper. Still, petitioners did
not comply. Insisting that the Labor Arbiter has no jurisdiction over
the case, they instead filed an Urgent Motion to Resolve the Motion
to Dismiss and the Motion to Suspend Filing of Position Paper.
In an Order21 dated 15 February 2001, the Labor Arbiter denied
both motions and declared final the Order dated 5 September 2000.
The Labor Arbiter then gave petitioners a period of five days from
receipt thereof within which to file position paper, otherwise, their
Motion to Dismiss will be treated as their position paper and the
case will be considered submitted for decision.
Petitioners, through counsel, moved for extension of time to submit
position paper. Despite the requested extension, petitioners still
failed to submit the same. Accordingly, the case was submitted for
resolution.
On 1 October 2001, the Labor Arbiter rendered his Decision in favor
of respondent. Its decretal portion reads as follows:
WHEREFORE, premises considered, judgment is hereby rendered
declaring [respondent’s] dismissal from employment illegal.
Accordingly, [petitioners] are hereby ordered:
1. To reinstate [respondent] to his former or equivalent
position without loss of seniority rights, benefits, and
privileges;
2. Jointly and severally liable to pay [respondent’s] unpaid
wages in the amount of ₱450,000.00 per month from [26
March 1996] up to time of dismissal in the total amount of
₱6,300,000.00;
3. Jointly and severally liable to pay [respondent’s] full
backwages in the amount of ₱450,000.00 per month from
date of dismissal until actual reinstatement which at the time
of promulgation amounted to ₱21,600,000.00;
4. Jointly and severally liable to pay moral damages in the
amount of ₱100,000.00 and attorney’s fees in the amount of
5% of the total monetary award.22 [Emphasis supplied.]
In the aforesaid Decision, the Labor Arbiter initially resolved
petitioners’ Motion to Dismiss by finding the ground of lack of
jurisdiction to be without merit. The Labor Arbiter elucidated that
petitioners failed to adduce evidence to prove that the present case
involved an intra-corporate controversy. Also, respondent’s money
claim did not arise from his being a director or stockholder of
petitioner corporation but from his position as being its General
Manager. The Labor Arbiter likewise held that respondent was not a
corporate officer under petitioner corporation’s by-laws. As such,
respondent’s complaint clearly arose from an employer-employee
relationship, thus, subject to the Labor Arbiter’s jurisdiction.
The Labor Arbiter then declared respondent’s dismissal from
employment as illegal. Respondent, being a regular employee of
petitioner corporation, may only be dismissed for a valid cause and
upon proper compliance with the requirements of due process. The
records, though, revealed that petitioners failed to present any
evidence to justify respondent’s dismissal.
Page | 27
Aggrieved, petitioners appealed the aforesaid Labor Arbiter’s
Decision to the NLRC.
In its Resolution dated 15 October 2002, the NLRC ruled in favor of
petitioners by giving credence to the Secretary’s Certificate, which
evidenced petitioner corporation’s Board of Directors’ meeting in
which a resolution was approved appointing respondent as its
corporate officer with designation as General Manager. Therefrom,
the NLRC reversed and set aside the Labor Arbiter’s Decision dated
1 October 2001 and dismissed respondent’s Complaint for want of
jurisdiction.23
The NLRC enunciated that the validity of respondent’s appointment
and termination from the position of General Manager was made
subject to the approval of petitioner corporation’s Board of
Directors. Had respondent been an ordinary employee, such board
action would not have been required. As such, it is clear that
respondent was a corporate officer whose dismissal involved a
purely intra-corporate controversy. The NLRC went further by
stating that respondent’s claim for 30% of the net profit of the
corporation can only emanate from his right of ownership therein as
stockholder, director and/or corporate officer. Dividends or profits
are paid only to stockholders or directors of a corporation and not to
any ordinary employee in the absence of any profit sharing scheme.
In addition, the question of remuneration of a person who is not a
mere employee but a stockholder and officer of a corporation is not
a simple labor problem. Such matter comes within the ambit of
corporate affairs and management and is an intra-corporate
controversy in contemplation of the Corporation Code.24
When respondent’s Motion for Reconsideration was denied in
another Resolution25 dated 23 January 2003, he filed a Petition for
Certiorari with the Court of Appeals ascribing grave abuse of
discretion on the part of the NLRC.
On 20 June 2005, the Court of Appeals rendered its now assailed
Decision declaring that the Labor Arbiter has jurisdiction over the
present controversy. It upheld the finding of the Labor Arbiter that
respondent was a mere employee of petitioner corporation, who has
been illegally dismissed from employment without valid cause and
without due process. Nevertheless, it ordered the records of the
case remanded to the NLRC for the determination of the
appropriate amount of monetary awards to be given to respondent.
The Court of Appeals, thus, decreed:
WHEREFORE, the petition is by us PARTIALLY GRANTED. The
Labor Arbiter is DECLARED to have jurisdiction over the
controversy. The records are REMANDED to the NLRC for further
proceedings to determine the appropriate amount of monetary
awards to be adjudged in favor of [respondent]. Costs against the
[petitioners] in solidum.26
Petitioners moved for its reconsideration but to no avail.27
Petitioners are now before this Court with the following assignment
of errors:
THE COURT OF APPEALS ERRED AND COMMITTED
GRAVE ABUSE OF DISCRETION IN DECIDING THAT THE
NLRC HAS THE JURISDICTION IN RESOLVING A
PURELY INTRA-CORPORATE MATTER WHICH IS
COGNIZABLE BY THE SECURITIES AND EXCHANGE
COMMISSION/REGIONAL TRIAL COURT.
ASSUMING, GRATIS ARGUENDO, THAT THE NLRC HAS
JURISDICTION OVER THE CASE, STILL THE COURT OF
APPEALS SERIOUSLY ERRED IN NOT RULING THAT
THERE IS NO EMPLOYER-EMPLOYEE RELATIONSHIP
BETWEEN [RESPONDENT] ALFREDO M. JOSON AND
MARC II MARKETING, INC. [PETITIONER
CORPORATION].
ASSUMING GRATIS ARGUENDO THAT THE NLRC HAS
JURISDICTION OVER THE CASE, THE COURT OF
APPEALS ERRED IN NOT RULING THAT THE LABOR
ARBITER COMMITTED GRAVE ABUSE OF DISCRETION
IN AWARDING MULTI-MILLION PESOS IN
COMPENSATION AND BACKWAGES BASED ON THE
PURPORTED GROSS INCOME OF [PETITIONER
CORPORATION].
THE COURT OF APPEALS SERIOUSLY ERRED AND
COMMITTED GRAVE ABUSE OF DISCRETION IN NOT
Page | 28
 MAKING ANY FINDINGS AND RULING THAT
[PETITIONER LUCILA] SHOULD NOT BE HELD
SOLIDARILY LIABLE IN THE ABSENCE OF EVIDENCE OF
MALICE AND BAD FAITH ON HER PART.28
Petitioners fault the Court of Appeals for having sustained the Labor
Arbiter’s finding that respondent was not a corporate officer under
petitioner corporation’s by-laws. They insist that there is no need to
amend the corporate by-laws to specify who its corporate officers
are. The resolution issued by petitioner corporation’s Board of
Directors appointing respondent as General Manager, coupled with
his assumption of the said position, positively made him its
corporate officer. More so, respondent’s position, being a creation
of petitioner corporation’s Board of Directors pursuant to its by-laws,
is a corporate office sanctioned by the Corporation Code and the
doctrines previously laid down by this Court. Thus, respondent’s
removal as petitioner corporation’s General Manager involved a
purely intra-corporate controversy over which the RTC has
jurisdiction.
Petitioners further contend that respondent’s claim for 30% of the
net profit of petitioner corporation was anchored on the purported
Management Contract dated 16 January 1994. It should be noted,
however, that said Management Contract was executed at the time
petitioner corporation was still nonexistent and had no juridical
personality yet. Such being the case, respondent cannot invoke any
legal right therefrom as it has no legal and binding effect on
petitioner corporation. Moreover, it is clear from the Articles of
Incorporation of petitioner corporation that respondent was its
director and stockholder. Indubitably, respondent’s claim for his
share in the profit of petitioner corporation was based on his
capacity as such and not by virtue of any employer-employee
relationship.
Petitioners further avow that even if the present case does not pose
an intra-corporate controversy, still, the Labor Arbiter’s multi-million
peso awards in favor of respondent were erroneous. The same was
merely based on the latter’s self-serving computations without any
supporting documents.
Finally, petitioners maintain that petitioner Lucila cannot be held
solidarily liable with petitioner corporation. There was neither
allegation nor iota of evidence presented to show that she acted
with malice and bad faith in her dealings with respondent.
Moreover, the Labor Arbiter, in his Decision, simply concluded that
petitioner Lucila was jointly and severally liable with petitioner
corporation without making any findings thereon. It was, therefore,
an error for the Court of Appeals to hold petitioner Lucila solidarily
liable with petitioner corporation.
From the foregoing arguments, the initial question is which between
the Labor Arbiter or the RTC, has jurisdiction over respondent’s
dismissal as General Manager of petitioner corporation. Its
resolution necessarily entails the determination of whether
respondent as General Manager of petitioner corporation is a
corporate officer or a mere employee of the latter.
While Article 217(a)229 of the Labor Code, as amended, provides
that it is the Labor Arbiter who has the original and exclusive
jurisdiction over cases involving termination or dismissal of workers
when the person dismissed or terminated is a corporate officer, the
case automatically falls within the province of the RTC. The
dismissal of a corporate officer is always regarded as a corporate
act and/or an intra-corporate controversy.30
Under Section 531 of Presidential Decree No. 902-A, intra-corporate
controversies are those controversies arising out of intra-corporate
or partnership relations, between and among stockholders,
members or associates; between any or all of them and the
corporation, partnership or association of which they are
stockholders, members or associates, respectively; and between
such corporation, partnership or association and the State insofar
as it concerns their individual franchise or right to exist as such
entity. It also includes controversies in the election or
appointments of directors, trustees, officers or managers of
such corporations, partnerships or associations.32
Accordingly, in determining whether the SEC (now the RTC) has
jurisdiction over the controversy, the status or relationship of the
parties and the nature of the question that is the subject of their
controversy must be taken into consideration.33
In Easycall Communications Phils., Inc. v. King, this Court held that
in the context of Presidential Decree No. 902-A, corporate officers
Page | 29
are those officers of a corporation who are given that character
either by the Corporation Code or by the corporation’s by-laws.
Section 2534 of the Corporation Code specifically enumerated who
are these corporate officers, to wit: (1) president; (2) secretary; (3)
treasurer; and (4) such other officers as may be provided for in the
by-laws.35
The aforesaid Section 25 of the Corporation Code, particularly the
phrase "such other officers as may be provided for in the by-laws,"
has been clarified and elaborated in this Court’s recent
pronouncement in Matling Industrial and Commercial Corporation v.
Coros, where it held, thus:
Conformably with Section 25, a position must be expressly
mentioned in the [b]y-[l]aws in order to be considered as a
corporate office. Thus, the creation of an office pursuant to or under
a [b]y-[l]aw enabling provision is not enough to make a position a
corporate office. [In] Guerrea v. Lezama [citation omitted] the first
ruling on the matter, held that the only officers of a corporation were
those given that character either by the Corporation Code or by the
[b]y-[l]aws; the rest of the corporate officers could be considered
only as employees or subordinate officials. Thus, it was held
in Easycall Communications Phils., Inc. v. King [citation omitted]:
An "office" is created by the charter of the corporation and the
officer is elected by the directors or stockholders. On the other
hand, an employee occupies no office and generally is employed
not by the action of the directors or stockholders but by the
managing officer of the corporation who also determines the
compensation to be paid to such employee.
xxxx
This interpretation is the correct application of Section 25 of the
Corporation Code, which plainly states that the corporate officers
are the President, Secretary, Treasurer and such other officers as
may be provided for in the [b]y-[l]aws. Accordingly, the corporate
officers in the context of PD No. 902-A are exclusively those who
are given that character either by the Corporation Code or by the
corporation’s [b]y[l]aws.
A different interpretation can easily leave the way open for the
Board of Directors to circumvent the constitutionally guaranteed
security of tenure of the employee by the expedient inclusion in the
[b]y-[l]aws of an enabling clause on the creation of just any
corporate officer position.
It is relevant to state in this connection that the SEC, the primary
agency administering the Corporation Code, adopted a similar
interpretation of Section 25 of the Corporation Code in its Opinion
dated November 25, 1993 [citation omitted], to wit:
Thus, pursuant to the above provision (Section 25 of the
Corporation Code), whoever are the corporate officers enumerated
in the by-laws are the exclusive Officers of the corporation and the
Board has no power to create other Offices without amending first
the corporate [b]y-laws. However, the Board may create
appointive positions other than the positions of corporate
Officers, but the persons occupying such positions are not
considered as corporate officers within the meaning of Section
25 of the Corporation Code and are not empowered to exercise
the functions of the corporate Officers, except those functions
lawfully delegated to them. Their functions and duties are to be
determined by the Board of Directors/Trustees.36 [Emphasis
supplied.]
A careful perusal of petitioner corporation’s by-laws, particularly
paragraph 1, Section 1, Article IV,37 would explicitly reveal that its
corporate officers are composed only of: (1) Chairman; (2)
President; (3) one or more Vice-President; (4) Treasurer; and (5)
Secretary.38 The position of General Manager was not among those
enumerated.
Paragraph 2, Section 1, Article IV of petitioner corporation’s by-
laws, empowered its Board of Directors to appoint such other
officers as it may determine necessary or proper.39 It is by virtue of
this enabling provision that petitioner corporation’s Board of
Directors allegedly approved a resolution to make the position of
General Manager a corporate office, and, thereafter, appointed
respondent thereto making him one of its corporate officers. All of
these acts were done without first amending its by-laws so as to
include the General Manager in its roster of corporate officers.
Page | 30
With the given circumstances and in conformity with Matling
Industrial and Commercial Corporation v. Coros, this Court rules
that respondent was not a corporate officer of petitioner corporation
because his position as General Manager was not specifically
mentioned in the roster of corporate officers in its corporate by-laws.
The enabling clause in petitioner corporation’s by-laws empowering
its Board of Directors to create additional officers, i.e., General
Manager, and the alleged subsequent passage of a board
resolution to that effect cannot make such position a corporate
office. Matling clearly enunciated that the board of directors has no
power to create other corporate offices without first amending the
corporate by-laws so as to include therein the newly created
corporate office. Though the board of directors may create
appointive positions other than the positions of corporate officers,
the persons occupying such positions cannot be viewed as
corporate officers under Section 25 of the Corporation Code.40 In
view thereof, this Court holds that unless and until petitioner
corporation’s by-laws is amended for the inclusion of General
Manager in the list of its corporate officers, such position cannot be
considered as a corporate office within the realm of Section 25 of
the Corporation Code.
This Court considers that the interpretation of Section 25 of the
Corporation Code laid down in Matling safeguards the
constitutionally enshrined right of every employee to security of
tenure. To allow the creation of a corporate officer position by a
simple inclusion in the corporate by-laws of an enabling clause
empowering the board of directors to do so can result in the
circumvention of that constitutionally well-protected right.41
It is also of no moment that respondent, being petitioner
corporation’s General Manager, was given the functions of a
managing director by its Board of Directors. As held in Matling, the
only officers of a corporation are those given that character either
by the Corporation Code or by the corporate by-laws. It follows then
that the corporate officers enumerated in the by-laws are the
exclusive officers of the corporation while the rest could only be
regarded as mere employees or subordinate
officials.42 Respondent, in this case, though occupying a high
ranking and vital position in petitioner corporation but which position
was not specifically enumerated or mentioned in the latter’s by-
laws, can only be regarded as its employee or subordinate official.
Noticeably, respondent’s compensation as petitioner corporation’s
General Manager was set, fixed and determined not by the latter’s
Board of Directors but simply by its President, petitioner Lucila. The
same was not subject to the approval of petitioner corporation’s
Board of Directors. This is an indication that respondent was an
employee and not a corporate officer.
To prove that respondent was petitioner corporation’s corporate
officer, petitioners presented before the NLRC an undated
Secretary’s Certificate showing that corporation’s Board of Directors
approved a resolution making respondent’s position of General
Manager a corporate office. The submission, however, of the said
undated Secretary’s Certificate will not change the fact that
respondent was an employee. The certification does not amount to
an amendment of the by-laws which is needed to make the position
of General Manager a corporate office.
Moreover, as has been aptly observed by the Court of Appeals, the
board resolution mentioned in that undated Secretary’s Certificate
and the latter itself were obvious fabrications, a mere afterthought.
Here we quote with conformity the Court of Appeals findings on this
matter stated in this wise:
The board resolution is an obvious fabrication. Firstly, if it had been
in existence since [29 August 1994], why did not [herein petitioners]
attach it to their [M]otion to [D]ismiss filed on [26 August 1999],
when it could have been the best evidence that [herein respondent]
was a corporate officer? Secondly, why did they report the
[respondent] instead as [herein petitioner corporation’s] employee to
the Social Security System [(SSS)] on [11 October 1994] or a later
date than their [29 August 1994] board resolution? Thirdly, why is
there no indication that the [respondent], the person concerned
himself, and the [SEC] were furnished with copies of said board
resolution? And, lastly, why is the corporate [S]ecretary’s
[C]ertificate not notarized in keeping with the customary procedure?
That is why we called it manipulative evidence as it was a
shameless sham meant to be thrown in as a wild card to muddle up
the [D]ecision of the Labor Arbiter to the end that it be overturned as
the latter had firmly pointed out that [respondent] is not a corporate
officer under [petitioner corporation’s by-laws]. Regrettably, the
[NLRC] swallowed the bait hook-line-and sinker. It failed to see
through its nature as a belatedly manufactured evidence. And even
Page | 31
on the assumption that it were an authentic board resolution, it did
not make [respondent] a corporate officer as the board did not first
and properly create the position of a [G]eneral [M]anager by
amending its by-laws.
(2) The scope of the term "officer" in the phrase "and such
other officers as may be provided for in the by-laws["] (Sec.
25, par. 1), would naturally depend much on the provisions
of the by-laws of the corporation. (SEC Opinion, [4
December 1991.]) If the by-laws enumerate the officers to be
elected by the board, the provision is conclusive, and the
board is without power to create new offices without
amending the by-laws. (SEC Opinion, [19 October 1971.])
(3) If, for example, the general manager of a corporation is
not listed as an officer, he is to be classified as an employee
although he has always been considered as one of the
principal officers of a corporation [citing De Leon, H. S., The
Corporation Code of the Philippines Annotated, 1993 Ed., p.
215.]43 [Emphasis supplied.]
That respondent was also a director and a stockholder of petitioner
corporation will not automatically make the case fall within the ambit
of intra-corporate controversy and be subjected to RTC’s
jurisdiction. To reiterate, not all conflicts between the stockholders
and the corporation are classified as intra-corporate. Other factors
such as the status or relationship of the parties and the nature of
the question that is the subject of the controversy44 must be
considered in determining whether the dispute involves corporate
matters so as to regard them as intra-corporate controversies.45 As
previously discussed, respondent was not a corporate officer of
petitioner corporation but a mere employee thereof so there was no
intra-corporate relationship between them. With regard to the
subject of the controversy or issue involved herein, i.e.,
respondent’s dismissal as petitioner corporation’s General
Manager, the same did not present or relate to an intra-corporate
dispute. To note, there was no evidence submitted to show that
respondent’s removal as petitioner corporation’s General Manager
carried with it his removal as its director and stockholder. Also,
petitioners’ allegation that respondent’s claim of 30% share of
petitioner corporation’s net profit was by reason of his being its
director and stockholder was without basis, thus, self-serving. Such
an allegation was tantamount to a mere speculation for petitioners’
failure to substantiate the same.
In addition, it was not shown by petitioners that the position of
General Manager was offered to respondent on account of his
being petitioner corporation’s director and stockholder. Also, in
contrast to NLRC’s findings, neither petitioner corporation’s by-laws
nor the Management Contract stated that respondent’s appointment
and termination from the position of General Manager was subject
to the approval of petitioner corporation’s Board of Directors. If,
indeed, respondent was a corporate officer whose termination was
subject to the approval of its Board of Directors, why is it that his
termination was effected only by petitioner Lucila, President of
petitioner corporation? The records are bereft of any evidence to
show that respondent’s dismissal was done with the conformity of
petitioner corporation’s Board of Directors or that the latter had a
hand on respondent’s dismissal. No board resolution whatsoever
was ever presented to that effect.
With all the foregoing, this Court is fully convinced that, indeed,
respondent, though occupying the General Manager position, was
not a corporate officer of petitioner corporation rather he was merely
its employee occupying a high-ranking position.
Accordingly, respondent’s dismissal as petitioner corporation’s
General Manager did not amount to an intra-corporate controversy.
Jurisdiction therefor properly belongs with the Labor Arbiter and not
with the RTC.
Having established that respondent was not petitioner corporation’s
corporate officer but merely its employee, and that, consequently,
jurisdiction belongs to the Labor Arbiter, this Court will now
determine if respondent’s dismissal from employment is illegal.
It was not disputed that respondent worked as petitioner
corporation’s General Manager from its incorporation on 15 August
1994 until he was dismissed on 30 June 1997. The cause of his
dismissal was petitioner corporation’s cessation of business
operations due to poor sales collection aggravated by the inefficient
management of its affairs.
Page | 32
In termination cases, the burden of proving just and valid cause for
dismissing an employee from his employment rests upon the
employer. The latter's failure to discharge that burden would
necessarily result in a finding that the dismissal is unjustified.46
Under Article 283 of the Labor Code, as amended, one of the
authorized causes in terminating the employment of an employee is
the closing or cessation of operation of the establishment or
undertaking. Article 283 of the Labor Code, as amended, reads,
thus:
ART. 283. Closure of establishment and reduction of personnel. –
The employer may also terminate the employment of any employee
due to the installation of labor saving-devices, redundancy,
retrenchment to prevent losses or the closing or cessation of
operation of the establishment or undertaking unless the closing is
for the purpose of circumventing the provisions of this Title, by
serving a written notice on the workers and the Department of Labor
and Employment at least one (1) month before the intended date
thereof. x x x In case of retrenchment to prevent losses and in
cases of closures or cessation of operations of establishment or
undertaking not due to serious business losses or financial
reverses, the separation pay shall be equivalent to one (1) month
pay or to at least one-half (1/2) month pay for every year of service,
whichever is higher. A fraction of at least six (6) months shall be
considered one (1) whole year. [Emphasis supplied.]
From the afore-quoted provision, the closure or cessation of
operations of establishment or undertaking may either be due to
serious business losses or financial reverses or otherwise. If the
closure or cessation was due to serious business losses or financial
reverses, it is incumbent upon the employer to sufficiently and
convincingly prove the same. If it is otherwise, the employer can
lawfully close shop anytime as long as it was bona fide in character
and not impelled by a motive to defeat or circumvent the tenurial
rights of employees and as long as the terminated employees were
paid in the amount corresponding to their length of service.47
Accordingly, under Article 283 of the Labor Code, as amended,
there are three requisites for a valid cessation of business
operations: (a) service of a written notice to the employees and to
the Department of Labor and Employment (DOLE) at least one
month before the intended date thereof; (b) the cessation of
business must be bona fide in character; and (c) payment to the
employees of termination pay amounting to one month pay or at
least one-half month pay for every year of service, whichever is
higher.
In this case, it is obvious that petitioner corporation’s cessation of
business operations was not due to serious business losses. Mere
poor sales collection, coupled with mismanagement of its affairs
does not amount to serious business losses. Nonetheless,
petitioner corporation can still validly cease or close its business
operations because such right is legally allowed, so long as it was
not done for the purpose of circumventing the provisions on
termination of employment embodied in the Labor Code.48 As has
been stressed by this Court in Industrial Timber Corporation v.
Ababon, thus:
Just as no law forces anyone to go into business, no law can
compel anybody to continue the same. It would be stretching the
intent and spirit of the law if a court interferes with management's
prerogative to close or cease its business operations just because
the business is not suffering from any loss or because of the desire
to provide the workers continued employment.49
A careful perusal of the records revealed that, indeed, petitioner
corporation has stopped and ceased business operations beginning
30 June 1997. This was evidenced by a notarized Affidavit of Non-
Operation dated 31 August 1998. There was also no showing that
the cessation of its business operations was done in bad faith or to
circumvent the Labor Code. Nevertheless, in doing so, petitioner
corporation failed to comply with the one-month prior written notice
rule. The records disclosed that respondent, being petitioner
corporation’s employee, and the DOLE were not given a written
notice at least one month before petitioner corporation ceased its
business operations. Moreover, the records clearly show that
respondent’s dismissal was effected on the same date that
petitioner corporation decided to stop and cease its operation.
Similarly, respondent was not paid separation pay upon termination
of his employment.
As respondent’s dismissal was not due to serious business losses,
respondent is entitled to payment of separation pay equivalent to
Page | 33
one month pay or at least one-half month pay for every year of
service, whichever is higher. The rationale for this was laid down in
Reahs Corporation v. National Labor Relations Commission,50 thus:
The grant of separation pay, as an incidence of termination of
employment under Article 283, is a statutory obligation on the part
of the employer and a demandable right on the part of the
employee, except only where the closure or cessation of operations
was due to serious business losses or financial reverses and there
is sufficient proof of this fact or condition. In the absence of such
proof of serious business losses or financial reverses, the employer
closing his business is obligated to pay his employees and workers
their separation pay.
The rule, therefore, is that in all cases of business closure or
cessation of operation or undertaking of the employer, the affected
employee is entitled to separation pay. This is consistent with the
state policy of treating labor as a primary social economic force,
affording full protection to its rights as well as its welfare. The
exception is when the closure of business or cessation of
operations is due to serious business losses or financial reverses
duly proved, in which case, the right of affected employees to
separation pay is lost for obvious reasons.51 [Emphasis supplied.]
As previously discussed, respondent’s dismissal was due to an
authorized cause, however, petitioner corporation failed to observe
procedural due process in effecting such dismissal. In Culili v.
Eastern Telecommunications Philippines, Inc.,52 this Court made the
following pronouncements, thus:
x x x there are two aspects which characterize the concept of due
process under the Labor Code: one is substantive — whether the
termination of employment was based on the provision of the Labor
Code or in accordance with the prevailing jurisprudence; the other is
procedural — the manner in which the dismissal was effected.
Section 2(d), Rule I, Book VI of the Rules Implementing the Labor
Code provides:
(d) In all cases of termination of employment, the following
standards of due process shall be substantially observed:
xxxx
For termination of employment as defined in Article 283 of the Labor
Code, the requirement of due process shall be deemed complied
with upon service of a written notice to the employee and the
appropriate Regional Office of the Department of Labor and
Employment at least thirty days before effectivity of the termination,
specifying the ground or grounds for termination.
In Mayon Hotel & Restaurant v. Adana, [citation omitted] we
observed:
The requirement of law mandating the giving of notices was
intended not only to enable the employees to look for another
employment and therefore ease the impact of the loss of their jobs
and the corresponding income, but more importantly, to give the
Department of Labor and Employment (DOLE) the opportunity to
ascertain the verity of the alleged authorized cause of
termination.53 [Emphasis supplied].
The records of this case disclosed that there was absolutely no
written notice given by petitioner corporation to the respondent and
to the DOLE prior to the cessation of its business operations. This is
evident from the fact that petitioner corporation effected
respondent’s dismissal on the same date that it decided to stop and
cease its business operations. The necessary consequence of such
failure to comply with the one-month prior written notice rule, which
constitutes a violation of an employee’s right to statutory due
process, is the payment of indemnity in the form of nominal
damages.54 In Culili v. Eastern Telecommunications Philippines,
Inc., this Court further held:
In Serrano v. National Labor Relations Commission [citation
omitted], we noted that "a job is more than the salary that it carries."
There is a psychological effect or a stigma in immediately finding
one’s self laid off from work. This is exactly why our labor laws have
provided for mandating procedural due process clauses. Our laws,
while recognizing the right of employers to terminate employees it
cannot sustain, also recognize the employee’s right to be properly
informed of the impending severance of his ties with the company
he is working for. x x x.
Page | 34
x x x Over the years, this Court has had the opportunity to
reexamine the sanctions imposed upon employers who fail to
comply with the procedural due process requirements in terminating
its employees. In Agabon v. National Labor Relations Commission
[citation omitted], this Court reverted back to the doctrine in Wenphil
Corporation v. National Labor Relations Commission [citation
omitted] and held that where the dismissal is due to a just or
authorized cause, but without observance of the due process
requirements, the dismissal may be upheld but the employer must
pay an indemnity to the employee. The sanctions to be imposed
however, must be stiffer than those imposed in Wenphil to achieve
a result fair to both the employers and the employees.
In Jaka Food Processing Corporation v. Pacot [citation omitted], this
Court, taking a cue from Agabon, held that since there is a clear-cut
distinction between a dismissal due to a just cause and a dismissal
due to an authorized cause, the legal implications for employers
who fail to comply with the notice requirements must also be treated
differently:
Accordingly, it is wise to hold that: (1) if the dismissal is based on a
just cause under Article 282 but the employer failed to comply with
the notice requirement, the sanction to be imposed upon him should
be tempered because the dismissal process was, in effect, initiated
by an act imputable to the employee; and (2) if the dismissal is
based on an authorized cause under Article 283 but the employer
failed to comply with the notice requirement, the sanction should be
stiffer because the dismissal process was initiated by the
employer's exercise of his management prerogative.55 [Emphasis
supplied.]
Thus, in addition to separation pay, respondent is also entitled to an
award of nominal damages. In conformity with this Court’s ruling in
Culili v. Eastern Telecommunications Philippines, Inc. and Shimizu
Phils. Contractors, Inc. v. Callanta, both citing Jaka Food
Processing Corporation v. Pacot,56 this Court fixed the amount of
nominal damages to ₱50,000.00.
With respect to petitioners’ contention that the Management
Contract executed between respondent and petitioner Lucila has no
binding effect on petitioner corporation for having been executed
way before its incorporation, this Court finds the same meritorious.
Section 19 of the Corporation Code expressly provides:
Sec. 19. Commencement of corporate existence. - A private
corporation formed or organized under this Code commences to
have corporate existence and juridical personality and is deemed
incorporated from the date the Securities and Exchange
Commission issues a certificate of incorporation under its official
seal; and thereupon the incorporators, stockholders/members and
their successors shall constitute a body politic and corporate under
the name stated in the articles of incorporation for the period of time
mentioned therein, unless said period is extended or the corporation
is sooner dissolved in accordance with law. [Emphasis supplied.]
Logically, there is no corporation to speak of prior to an entity’s
incorporation. And no contract entered into before incorporation can
bind the corporation.
As can be gleaned from the records, the Management Contract
dated 16 January 1994 was executed between respondent and
petitioner Lucila months before petitioner corporation’s incorporation
on 15 August 1994. Similarly, it was done when petitioner Lucila
was still the President of Marc Marketing, Inc. Undeniably, it cannot
have any binding and legal effect on petitioner corporation. Also,
there was no evidence presented to prove that petitioner
corporation adopted, ratified or confirmed the Management
Contract. It is for the same reason that petitioner corporation cannot
be considered estopped from questioning its binding effect now that
respondent was invoking the same against it. In no way, then, can it
be enforced against petitioner corporation, much less, its provisions
fixing respondent’s compensation as General Manager to 30% of
petitioner corporation’s net profit. Consequently, such percentage
cannot be the basis for the computation of respondent’s separation
pay. This finding, however, will not affect the undisputed fact that
respondent was, indeed, the General Manager of petitioner
corporation from its incorporation up to the time of his dismissal.
Accordingly, this Court finds it necessary to still remand the present
case to the Labor Arbiter to conduct further proceedings for the sole
purpose of determining the compensation that respondent was
actually receiving during the period that he was the General
Manager of petitioner corporation, this, for the proper computation
of his separation pay.
Page | 35
As regards petitioner Lucila’s solidary liability, this Court affirms the
same.
As a rule, corporation has a personality separate and distinct from
its officers, stockholders and members such that corporate officers
are not personally liable for their official acts unless it is shown that
they have exceeded their authority. However, this corporate veil can
be pierced when the notion of the legal entity is used as a means to
perpetrate fraud, an illegal act, as a vehicle for the evasion of an
existing obligation, and to confuse legitimate issues. Under the
Labor Code, for instance, when a corporation violates a provision
declared to be penal in nature, the penalty shall be imposed upon
the guilty officer or officers of the corporation.57
This Court, however, finds it proper to still remand the records to the
Labor Arbiter to conduct further proceedings for the sole purpose of
determining the compensation that respondent was actually
receiving during the period that he was the General Manager of
petitioner corporation for the proper computation of his separation
pay.
Costs against petitioners.
SO ORDERED.

Based on the prevailing circumstances in this case, petitioner

Lucila, being the President of petitioner corporation, acted in bad
faith and with malice in effecting respondent’s dismissal from
employment. Although petitioner corporation has a valid cause for
dismissing respondent due to cessation of business operations,
however, the latter’s dismissal therefrom was done abruptly by its
President, petitioner Lucila. Respondent was not given the required
one-month prior written notice that petitioner corporation will already
cease its business operations. As can be gleaned from the records,
respondent was dismissed outright by petitioner Lucila on the same
day that petitioner corporation decided to stop and cease its
business operations. Worse, respondent was not given separation
pay considering that petitioner corporation’s cessation of business
was not due to business losses or financial reverses.

WHEREFORE, premises considered, the Decision and Resolution

dated 20 June 2005 and 7 March 2006, respectively, of the Court of
Appeals in CA-G.R. SP No. 76624 are hereby AFFIRMED with the
MODIFICATION finding respondent’s dismissal from employment
legal but without proper observance of due process. Accordingly,
petitioner corporation, jointly and solidarily liable with petitioner
Lucila, is hereby ordered to pay respondent the following; (1)
separation pay equivalent to one month pay or at least one-half
month pay for every year of service, whichever is higher, to be
computed from the commencement of employment until
termination; and (2) nominal damages in the amount of ₱50,000.00.

Page | 36
 Republic of the Philippines
SUPREME COURT
Manila
FIRST DIVISION
G.R. No. 182397 September 14, 2011
ALERT SECURITY AND INVESTIGATION AGENCY, INC.
AND/OR MANUEL D. DASIG, Petitioners,
vs.
SAIDALI PASAWILAN, WILFREDO VERCELES AND MELCHOR
BULUSAN, Respondents.
DECISION
Labor Law; Termination of Employment; Employers are barred from
arbitrarily removing their workers whenever and however they want;
The law sets the valid grounds for termination as well as the proper
procedure to take when terminating the services of an employee.—
As a rule, employment cannot be terminated by an employer
without any just or authorized cause. No less than the 1987
Constitution in Section 3, Article 13 guarantees security of tenure
for workers and because of this, an employee may only be
terminated for just or authorized causes that must comply with the
due process requirements mandated by law. Hence, employers are
barred from arbitrarily removing their workers whenever and
however they want. The law sets the valid grounds for termination
as well as the proper procedure to take when terminating the
services of an employee.
Same; Same; There must be a valid and lawful reason for
terminating the employment of a worker; otherwise, it is illegal and
would be dealt with by the courts accordingly.—Although we
recognize the right of employers to shape their own work force, this
management prerogative must not curtail the basic right of
employees to security of tenure. There must be a valid and lawful
reason for terminating the employment of a worker. Otherwise, it is
illegal and would be dealt with by the courts accordingly.
Same; Same; Nowhere in the law providing for the just and
authorized causes of termination of employment is there any direct
or indirect reference to filing a legitimate complaint for money claims
against the employer as a valid ground for termination.—In the case
at bar, respondents were relieved from their posts because they
filed with the Labor Arbiter a complaint against their employer for
money claims due to underpayment of wages. This reason is
unacceptable and illegal. Nowhere in the law providing for the just
and authorized causes of termination of employment is there any
direct or indirect reference to filing a legitimate complaint for money
claims against the employer as a valid ground for termination.
Same; Same; An employee asserting his right and asking for
minimum wage is not among the just and authorized causes for a
valid termination of employment; Dismissing an employee on this
ground amounts to retaliation by management for an employee’s
legitimate grievance without due process.—The Labor Code, as
amended, enumerates several just and authorized causes for a
valid termination of employment. An employee asserting his right
and asking for minimum wage is not among those causes.
Dismissing an employee on this ground amounts to retaliation by
management for an employee’s legitimate grievance without due
process. Such stroke of retribution has no place in Philippine Labor
Laws.
Same; Same; Abandonment of Work; Elements for abandonment of
work to constitute as gross and habitual neglect of duties.—For
abandonment of work to fall under Article 282 (b) of the Labor
Code, as amended, as gross and habitual neglect of duties there
must be the concurrence of two elements. First, there should be a
failure of the employee to report for work without a valid or
justifiable reason, and second, there should be a showing that the
employee intended to sever the employer-employee relationship,
the second element being the more determinative factor as
manifested by overt acts.
Same; Same; Same; The failure of an employee to report for work
at the new location cannot be taken against him as an element of
abandonment.—The employer cannot simply conclude that an
employee is ipso facto notified of a transfer when there is no
evidence to indicate that the employee had knowledge of the
transfer order. Hence, the failure of an employee to report for work
Page | 37
at the new location cannot be taken against him as an element of
abandonment.
Same; Same; Transfers; Limitations to the Right to Transfer
Employees.—We acknowledge and recognize the right of an
employer to transfer employees in the interest of the service. This
exercise is a management prerogative which is a lawful right of an
employer. However, like all rights, there are limitations to the right to
transfer employees. As ruled in the case of Blue Dairy Corporation
v. NLRC, 314 SCRA 401 (1999): x x x The managerial prerogative
to transfer personnel must be exercised without grave abuse of
discretion, bearing in mind the basic elements of justice and fair
play. Having the right should not be confused with the manner in
which that right is exercised. Thus, it cannot be used as a
subterfuge by the employer to rid himself of an undesirable worker.
In particular, the employer must be able to show that the transfer is
not unreasonable, inconvenient or prejudicial to the employee; nor
does it involve a demotion in rank or a diminution of his salaries,
privileges and other benefits. x x x
Corporation Law; Liability of Corporate Officers; In exceptional
cases, courts find it proper to breach corporate personality in order
to make directors, officers, or owners solidarily liable for the
companies’ acts.—Basic is the rule that a corporation has a
separate and distinct personality apart from its directors, officers, or
owners. In exceptional cases, courts find it proper to breach this
corporate personality in order to make directors, officers, or owners
solidarily liable for the companies’ acts.
Same; Piercing the Veil of Corporate Fiction; Instances when the
separate and distinct personality of a corporation may be
disregarded in order to hold the directors, officers, or owners of the
corporation liable for corporate debts.—Jurisprudence has been
consistent in defining the instances when the separate and distinct
personality of a corporation may be disregarded in order to hold the
directors, officers, or owners of the corporation liable for corporate
debts. In McLeod v. National Labor Relations Commission, 512
SCRA 222 (2007), the Court ruled: Thus, the rule is still that the
doctrine of piercing the corporate veil applies only when the
corporate fiction is used to defeat public convenience, justify wrong,
protect fraud, or defend crime. In the absence of malice, bad faith,
or a specific provision of law making a corporate officer liable, such
corporate officer cannot be made personally liable for corporate
liabilities. x x x
VILLARAMA, JR., J.:
This petition for review on certiorari assails the Decision1 dated
February 1, 2008 of the Court of Appeals (CA) in CA-G.R. SP No.
99861. The appellate court reversed and set aside the January 31,
2007 Decision2 and March 15, 2007 Resolution3 of the National
Labor Relations Commission (NLRC) and reinstated the Labor
Arbiter’s Decision4finding petitioners guilty of illegal dismissal.
The facts follow.
Respondents Saidali Pasawilan, Wilfredo Verceles and Melchor
Bulusan were all employed by petitioner Alert Security and
Investigation Agency, Inc. (Alert Security) as security guards
beginning March 31, 1996, January 14, 1997, and January 24,
1997, respectively. They were paid 165.00 pesos a day as regular
employees, and assigned at the Department of Science and
Technology (DOST) pursuant to a security service contract between
the DOST and Alert Security.
Respondents aver that because they were underpaid, they filed a
complaint for money claims against Alert Security and its president
and general manager, petitioner Manuel D. Dasig, before Labor
Arbiter Ariel C. Santos. As a result of their complaint, they were
relieved from their posts in the DOST and were not given new
assignments despite the lapse of six months. On January 26, 1999,
they filed a joint complaint for illegal dismissal against petitioners.
Petitioners, on the other hand, deny that they dismissed the
respondents. They claimed that from the DOST, respondents were
merely detailed at the Metro Rail Transit, Inc. at the Light Rail
Transit Authority (LRTA) Compound in Aurora Blvd. because the
wages therein were already adjusted to the latest minimum wage.
Petitioners presented "Duty Detail Orders"5 that Alert Security
issued to show that respondents were in fact assigned to LRTA.
Respondents, however, failed to report at the LRTA and instead
Page | 38
kept loitering at the DOST and tried to convince other security
guards to file complaints against Alert Security. Thus, on August 3,
1998, Alert Security filed a "termination report"6 with the Department
of Labor and Employment relative to the termination of the
respondents.
Upon motion of the respondents, the joint complaint for illegal
dismissal was ordered consolidated with respondents’ earlier
complaint for money claims. The records of the illegal dismissal
case were sent to Labor Arbiter Ariel C. Santos, but later returned to
the Office of the Labor Arbiter hearing the illegal dismissal
complaint because a Decision7 has already been rendered in the
complaint for money claims on July 14, 1999. In that decision, the
complaint for money claims was dismissed for lack of merit but
petitioners were ordered to pay respondents their latest salary
differentials.
On July 28, 2000, Labor Arbiter Melquiades Sol D. Del Rosario
rendered a Decision8 on the complaint for illegal dismissal. The
Labor Arbiter ruled:
CONFORMABLY WITH THE FOREGOING, judgment is hereby
rendered finding complainants to have been illegally dismissed.
Consequently, each complainant should be paid in solidum by the
respondents the individual awards computed in the body of the
decision, which is hereto adopted as part of this disposition.
SO ORDERED.9
Aggrieved, petitioners appealed the decision to the NLRC claiming
that the Labor Arbiter erred in deciding a re-filed case when it was
filed in violation of the prohibitions against litis pendencia and forum
shopping. Further, petitioners argued that complainants were not
illegally dismissed but were only transferred. They claimed that it
was the respondents who refused to report for work in their new
assignment.
On January 31, 2007, the NLRC rendered a Decision10 ruling that
Labor Arbiter Del Rosario did not err in taking cognizance of
respondents’ complaint for illegal dismissal because the July 14,
1999 Decision of Labor Arbiter Santos on the complaint for money
claims did not at all pass upon the issue of illegal dismissal. The
NLRC, however, dismissed the complaint for illegal dismissal after
ruling that the fact of dismissal or termination of employment was
not sufficiently established. According to the NLRC, "[the] sweeping
generalization that the complainants were constructively dismissed
is not sufficient to establish the existence of illegal dismissal."11 The
dispositive portion of the NLRC decision reads:
WHEREFORE, premises considered, the respondents’ appeal is
hereby given due course and the decision dated July 28, 2000 is
hereby REVERSED and SET-ASIDE and a new one entered
DISMISSING the complaint for illegal dismissal for lack of merit.
SO ORDERED.12
Unfazed, respondents filed a petition for certiorari with the CA
questioning the NLRC decision and alleging grave abuse of
discretion.
On February 1, 2008, the CA rendered the assailed
Decision13 reversing and setting aside the NLRC decision and
reinstating the July 28, 2000 Decision of Labor Arbiter Del Rosario.
The CA ruled that Alert Security, as an employer, failed to discharge
its burden to show that the employee’s separation from employment
was not motivated by discrimination, made in bad faith, or effected
as a form of punishment or demotion without sufficient cause. The
CA also found that respondents were never informed of the "Duty
Detail Orders" transferring them to a new post, thereby making the
alleged transfer ineffective. The dispositive portion of the CA
decision states:
WHEREFORE, premises considered, the January 31, 2007
decision of the NLRC is hereby REVERSED and SET ASIDE and
the July 28, 2000 decision of the Labor Arbiter is hereby REVIVED.
SO ORDERED.14
Petitioners filed a motion for reconsideration, but the motion was
denied in a Resolution15 dated March 31, 2008.
Page | 39
Petitioners are now before this Court to seek relief by way of a
petition for review on certiorari under Rule 45 of the 1997 Rules of
Civil Procedure, as amended.
Petitioners argue that the CA erred when it held that the NLRC
committed grave abuse of discretion. According to petitioners, the
NLRC was correct when it ruled that there was no sufficient basis to
rule that respondents were terminated from their employment while
there was proof that they were merely transferred from DOST to
LRTA as shown in the "Duty Detail Orders". Verily, petitioners claim
that there was no termination at all; instead, respondents
abandoned their employment by refusing to report for duty at the
LRTA Compound.
Further, petitioners argue that the CA erred when it reinstated the
July 28, 2000 Decision of Labor Arbiter Del Rosario in its entirety.
The dispositive portion of said decision ruled that respondents
should be paid their monetary awards in solidum by Alert Security
and Manuel D. Dasig, its President and General Manager. They
argue that Alert Security is a duly organized domestic corporation
which has a legal personality separate and distinct from its
members or owners. Hence, liability for whatever compensation or
money claims owed to employees must be borne solely by Alert
Security and not by any of its individual stockholders or officers.
On the other hand, respondents claim that the NLRC committed a
serious error in ruling that they failed to provide factual
substantiation of their claim of constructive dismissal. Respondents
aver that their Complaint Form16sufficiently constitutes the basis of
their claim of illegal dismissal. Also, respondents aver that Alert
Security itself admitted that respondents were relieved from their
posts as security guards in DOST, albeit raising the defense that it
was a mere transfer as shown by "Duty Detail Orders", which,
however, were never received by respondents, as observed by the
Labor Arbiter.
Essentially, the issue for resolution is whether respondents were
illegally dismissed.
We rule in the affirmative.
As a rule, employment cannot be terminated by an employer
without any just or authorized cause. No less than the 1987
Constitution in Section 3, Article 13 guarantees security of tenure
for workers and because of this, an employee may only be
terminated for just17 or authorized18 causes that
must comply with the due process requirements mandated19 by law.
Hence, employers are barred from arbitrarily removing their workers
whenever and however they want. The law sets the valid grounds
for termination as well as the proper procedure to take when
terminating the services of an employee.
In De Guzman, Jr. v. Commission on Elections,20 the Court,
speaking of the Constitutional guarantee of security of tenure to all
workers, ruled:
x x x It only means that an employee cannot be dismissed (or
transferred) from the service for causes other than those provided
by law and after due process is accorded the employee. What it
seeks to prevent is capricious exercise of the power to dismiss. x x
x (Emphasis supplied.)
Although we recognize the right of employers to shape their own
work force, this management prerogative must not curtail the basic
right of employees to security of tenure. There must be a valid and
lawful reason for terminating the employment of a worker.
Otherwise, it is illegal and would be dealt with by the courts
accordingly.
As stated in Bascon v. Court of Appeals:21
x x x The employer’s power to dismiss must be tempered with the
employee’s right to security of tenure. Time and again we have said
that the preservation of the lifeblood of the toiling laborer comes
before concern for business profits. Employers must be reminded to
exercise the power to dismiss with great caution, for the State will
not hesitate to come to the succor of workers wrongly dismissed by
capricious employers.
In the case at bar, respondents were relieved from their posts
because they filed with the Labor Arbiter a complaint against their
Page | 40
employer for money claims due to underpayment of wages. This
reason is unacceptable and illegal. Nowhere in the law providing for
the just and authorized causes of termination of employment is
there any direct or indirect reference to filing a legitimate complaint
for money claims against the employer as a valid ground for
termination.
The Labor Code, as amended, enumerates several just and
authorized causes for a valid termination of employment. An
employee asserting his right and asking for minimum wage is not
among those causes. Dismissing an employee on this ground
amounts to retaliation by management for an employee’s legitimate
grievance without due process. Such stroke of retribution has no
place in Philippine Labor Laws.
Petitioners aver that respondents were merely transferred to a new
post wherein the wages are adjusted to the current minimum wage
standards. They maintain that the respondents voluntarily
abandoned their jobs when they failed to report for duty in the new
location.
Assuming this is true, we still cannot hold that the respondents
abandoned their posts. For abandonment of work to fall under
Article 282 (b) of the Labor Code, as amended, as gross and
habitual neglect of duties there must be the concurrence of two
elements. First, there should be a failure of the employee to report
for work without a valid or justifiable reason, and second, there
should be a showing that the employee intended to sever the
employer-employee relationship, the second element being the
more determinative factor as manifested by overt acts.22
As regards the second element of intent to sever the employer-
employee relationship, the CA correctly ruled that:
x x x the fact that petitioners filed a complaint for illegal dismissal is
indicative of their intention to remain employed with private
respondent considering that one of their prayers in the complaint is
for re-instatement. As declared by the Supreme Court, a complaint
for illegal dismissal is inconsistent with the charge of abandonment,
because when an employee takes steps to protect himself against a
dismissal, this cannot, by logic, be said to be abandonment by him
of his right to be able to work.23
Further, according to Alert Security itself, respondents continued to
report for work and loiter in the DOST after the alleged transfer
order was issued. Such circumstance makes it unlikely that
respondents have clear intention of leaving their respective jobs. In
any case, there is no dispute that in cases of abandonment of work,
notice shall be served at the worker’s last known address.24 This
petitioners failed to do.
On the element of the failure of the employee to report for work, we
also cannot accept the allegations of petitioners that respondents
unjustifiably refused to report for duty in their new posts. A careful
review of the records reveals that there is no showing that
respondents were notified of their new assignments. Granting that
the "Duty Detail Orders" were indeed issued, they served no
purpose unless the intended recipients of the orders are informed of
such.
The employer cannot simply conclude that an employee is ipso
facto notified of a transfer when there is no evidence to indicate that
the employee had knowledge of the transfer order. Hence, the
failure of an employee to report for work at the new location cannot
be taken against him as an element of abandonment.
We acknowledge and recognize the right of an employer to transfer
employees in the interest of the service. This exercise is a
management prerogative which is a lawful right of an employer.
However, like all rights, there are limitations to the right to transfer
employees. As ruled in the case of Blue Dairy Corporation v.
NLRC:25
x x x The managerial prerogative to transfer personnel must be
exercised without grave abuse of discretion, bearing in mind the
basic elements of justice and fair play. Having the right should not
be confused with the manner in which that right is exercised. Thus,
it cannot be used as a subterfuge by the employer to rid himself of
an undesirable worker. In particular, the employer must be able to
show that the transfer is not unreasonable, inconvenient or
prejudicial to the employee; nor does it involve a demotion in rank
or a diminution of his salaries, privileges and other benefits. x x x
In addition to these tests for a valid transfer, there should be proper
and effective notice to the employee concerned. It is the employer’s
Page | 41
burden to show that the employee was duly notified of the transfer.
Verily, an employer cannot reasonably expect an employee to
report for work in a new location without first informing said
employee of the transfer. Petitioners’ insistence on the sufficiency of
mere issuance of the transfer order is indicative of bad faith on their
part.
Besides, according to petitioners, the reason for the transfer to
LRTA of the respondents was that the wages in LRTA were already
adjusted to comply with the minimum wage rates. Now it is hard to
believe that after being ordered to transfer to LRTA where the
wages are better, the respondents would still refuse the transfer.
That would mean that the respondents refused better wages and
instead chose to remain in DOST, underpaid, and go through the
lengthy process of claiming and asking for minimum wage. This
proposed scenario of petitioners simply does not jibe with human
logic and experience.
On the question of the propriety of holding petitioner Manuel D.
Dasig, president and general manager of Alert Security, solidarily
liable with Alert Security for the payment of the money awards in
favor of respondents, we find petitioners’ arguments meritorious.
Basic is the rule that a corporation has a separate and distinct
personality apart from its directors, officers, or owners. In
exceptional cases, courts find it proper to breach this corporate
personality in order to make directors, officers, or owners solidarily
liable for the companies’ acts. Section 31, Paragraph 1 of
the Corporation Code26provides:
Sec. 31. Liability of directors, trustees or officers. - Directors or
trustees who willfully and knowingly vote for or assent to patently
unlawful acts of the corporation or who are guilty of gross
negligence or bad faith in directing the affairs of the corporation or
acquire any personal or pecuniary interest in conflict with their duty
as such directors, or trustees shall be liable jointly and severally for
all damages resulting therefrom suffered by the corporation, its
stockholders or members and other persons.x x x x
Jurisprudence has been consistent in defining the instances when
the separate and distinct personality of a corporation may be
disregarded in order to hold the directors, officers, or owners of the
corporation liable for corporate debts. In McLeod v. National Labor
Relations Commission,27 the Court ruled:
Thus, the rule is still that the doctrine of piercing the corporate veil
applies only when the corporate fiction is used to defeat public
convenience, justify wrong, protect fraud, or defend crime. In the
absence of malice, bad faith, or a specific provision of law making a
corporate officer liable, such corporate officer cannot be made
personally liable for corporate liabilities. x x x
Further, in Carag v. National Labor Relations Commission,28 the
Court clarified the McLeod doctrine as regards labor laws, to wit:
We have already ruled in McLeod v. NLRC29 and Spouses Santos
v. NLRC30 that Article 212(e)31 of the Labor Code, by itself, does
not make a corporate officer personally liable for the debts of
the corporation.1awphi1 The governing law on personal liability of
directors for debts of the corporation is still Section 31 of the
Corporation Code. x x x
In the present case, there is no evidence to indicate that Manuel D.
Dasig, as president and general manager of Alert Security, is using
the veil of corporate fiction to defeat public convenience, justify
wrong, protect fraud, or defend crime. Further, there is no showing
that Alert Security has folded up its business or is reneging in its
obligations. In the final analysis, it is Alert Security that respondents
are after and it is also Alert Security who should take responsibility
for their illegal dismissal.
WHEREFORE, the petition for review on certiorari is DENIED. The
Decision of the Court of Appeals in CA-G.R. SP No. 99861 and the
Decision dated July 28, 2000 of the Labor Arbiter are MODIFIED.
Petitioner Manuel D. Dasig is held not solidarily liable with petitioner
Alert Security and Investigation, Inc. for the payment of the
monetary awards in favor of respondents. Said Decision of the
Court of Appeals in all other aspects is AFFIRMED.
With costs against the petitioners.
SO ORDERED.
Page | 42
 FIRST DIVISION
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
Constitutional Law; Freedom of Expression; Libel; Broadcast
Industry; Radio host’s remarks such as “greed for money on the
part of AMEC’s administrators”; “AMEC is a dumping ground,
garbage of x x x moral and physical misfits”; and AMEC students
who graduate “will be liabilities rather than assets” of the society are
libelous per se.—A libel 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. 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 Alegre’s remarks such as “greed for money on the part of
AMEC’s administrators”; “AMEC is a dumping ground, garbage of
x x x 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.
Same; Same; Same; Same; Hosts of documentary or public affairs
programs should present the public issues “free from inaccurate
and misleading information.”—Every defamatory imputation is
presumed malicious. 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.” Hearing the
students’ alleged complaints a month before the exposé, 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.” This plainly shows
Rima and Alegre’s reckless disregard of whether their report was
true or not.
Same; Same; Same; Same; Privilege of Neutral Reportage; Words
and Phrases; Under the principle of neutral reportage, a republisher
who accurately and disinterestedly reports certain defamatory
statements against public figures is shielded from liability,
regardless of the republisher’s subjective awareness of the truth or
falsity of the accusation; 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.—Contrary to FBNI’s 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 republisher’s subjective
awareness of the truth or falsity of the accusation. 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.
Same; Same; Same; Same; Doctrine of Fair Comment; Under the
doctrine of fair comment, fair commentaries on matters of public
interest are privileged and constitute a valid defense in an action for
libel or slander.—FBNI’s 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
Page | 43
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. (Emphasis supplied)
Same; Same; Same; Same; If the comments made by media
practitioners are 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.—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 AMEC’s 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: x x x 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. However, the
comments of Rima and Alegre were not backed up by facts.
Therefore, the broadcasts are not privileged and remain libelous per
se.
Same; Same; Same; Same; Radio Code of the Kapisanan ng mga
Broadkaster sa Pilipinas, Ink.; The Radio Code lays down the code
of ethical conduct governing practitioners in the radio broadcast
industry; 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, and 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 of the
Civil Code.—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 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 of the Civil
Code.
Libel; Damages; Corporations; Obiter Dictum; The Court’s
statement in Mambulao Lumber Co. v. PNB, 22 SCRA 359 (1968),
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.—A juridical person is generally not entitled to
moral damages because, unlike a natural person, it cannot
experience physical suffering or such sentiments as wounded
feelings, serious anxiety, mental anguish or moral shock. The Court
of Appeals cites Mambulao Lumber Co. v. PNB, et al. to justify the
award of moral damages. However, the Court’s statement in
Mambulao that “a corporation may have a good reputation which, if
besmirched, may also be a ground for the award of moral damages”
is an obiter dictum.
Same; Same; Same; Since Article 2219(7) of the Civil Code does
not qualify whether the plaintiff is a natural or juridical person, a
juridical person such as a corporation may validly complain for libel
or any other form of defamation and claim for moral damages.—
AMEC’s claim for moral damages falls under item 7 of Article 2219
of the Civil Code. This provision expressly authorizes the recovery
of moral damages in cases of libel, slander or any other form of
defamation. 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.
Page | 44
Same; Same; Where the broadcast is libelous per se, the law
implies damages, in which case, evidence of an honest mistake or
the want of character or reputation of the party libeled goes only in
mitigation of damages.—Where the broadcast is libelous per se, the
law implies damages. In such a case, evidence of an honest
mistake or the want of character or reputation of the party libeled
goes only in mitigation of damages. Neither in such a case is the
plaintiff required to introduce evidence of actual damages as a
condition precedent to the recovery of some damages. 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.
Attorney’s Fees; The power of the court to award attorney’s 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.—The award of attorney’s fees is not proper because
AMEC failed to justify satisfactorily its claim for attorney’s fees.
AMEC did not adduce evidence to warrant the award of attorney’s
fees. Moreover, both the trial and appellate courts failed to explicitly
state in their respective decisions the rationale for the award of
attorney’s fees. In Inter-Asia Investment Industries, Inc. v. Court of
Appeals, 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 counsel’s fees are not to be awarded every time a party wins a
suit. The power of the court to award attorney’s 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 attorney’s fees. (Emphasis supplied)
Torts; Damages; Broadcast Industry; 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; The
corporation which operates the radio station, and who is the
employer of the radio hosts, is solidarily liable to pay for damages
arising from libelous broadcasts.—The basis of the present action is
a tort. Joint tort feasors are jointly and severally liable for the tort
which they commit. 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. 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.” 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. In this case,
Rima and Alegre were clearly performing their official duties as
hosts of FBNI’s radio program Exposé 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.
Same; Same; The radio operator’s 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.—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. FBNI’s 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 industry’s code of conduct,
sufficient information on libel laws, and continuous evaluation of the
Page | 45
broadcasters’ performance are but a few of the many ways of
showing diligence in the supervision of broadcasters.
Same; Same; Membership in the Kapisanan ng mga Broadkaster
sa Pilipinas, while voluntary, indicates the broadcaster’s strong
commitment to observe the broadcast industry’s rules and
regulations.—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 FBNI’s “regimented process” of
application. Furthermore, FBNI admits that Rima and Alegre had
deficiencies in their KBP accreditation, which is one of FBNI’s
requirements before it hires a broadcaster. Significantly,
membership in the KBP, while voluntary, indicates the broadcaster’s
strong commitment to observe the broadcast industry’s rules and
regulations. Clearly, these circumstances show FBNI’s lack of
diligence in selecting and supervising Rima and Alegre. Hence,
FBNI is solidarily liable to pay damages together with Rima and
Alegre.
CARPIO, J.:
The Case
This petition for review1 assails the 4 January 1999 Decision2 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 Decision3 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, attorney’s fees and
costs of suit.
The Antecedents
"Exposé" is a radio documentary4 program hosted by Carmelo ‘Mel’
Rima ("Rima") and Hermogenes ‘Jun’ Alegre ("Alegre").5 Exposé is
aired every morning over DZRC-AM which is owned by Filipinas
Broadcasting Network, Inc. ("FBNI"). "Exposé" is heard over Legazpi
City, the Albay municipalities and other Bicol areas.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 AMEC’s College of Medicine, filed a complaint for
damages7 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 AMEC’s 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 you’ll find out that the names
of the buildings there are foreign soundings. There is a McDonald
Page | 46
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, isn’t 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 latter’s
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 I’m 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. Don’t 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 – that’s 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. xxx9 (Emphasis supplied)
The complaint further alleged that AMEC is a reputable learning
institution. With the supposed exposés, FBNI, Rima and Alegre
"transmitted malicious imputations, and as such, destroyed plaintiffs’
(AMEC and Ago) reputation." AMEC and Ago included FBNI as
defendant for allegedly failing to exercise due diligence in the
selection and supervision of its employees, particularly Rima and
Alegre.
On 18 June 1990, FBNI, Rima and Alegre, through Atty. Rozil
Lozares, filed an Answer10 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 Dismiss11 on FBNI’s behalf. The trial court
denied the motion to dismiss. Consequently, FBNI filed a separate
Answer claiming that it exercised due diligence in the selection and
supervision of Rima and Alegre. FBNI claimed that before hiring a
Page | 47
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 Decision12 finding
FBNI and Alegre liable for libel except Rima. The trial court held that
the broadcasts are libelous per se. The trial court rejected the
broadcasters’ claim that their utterances were the result of straight
reporting because it had no factual basis. The broadcasters did not
even verify their reports before airing them to show good faith. In
holding FBNI liable for libel, the trial court found that FBNI failed to
exercise diligence in the selection and supervision of its employees.
In absolving Rima from the charge, the trial court ruled that Rima’s
only participation was when he agreed with Alegre’s exposé. The trial
court found Rima’s statement within the "bounds of freedom of
speech, expression, and of the press." 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
₱300,000.00 moral damages, plus ₱30,000.00 reimbursement of
attorney’s 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 court’s judgment with
modification. The appellate court made Rima solidarily liable with
FBNI and Alegre. The appellate court denied Ago’s claim for
damages and attorney’s fees because the broadcasts were directed
against AMEC, and not against her. 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 court’s 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 Alegre’s 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 AMEC’s
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)
Page | 48
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 Ago’s claim for damages
and attorney’s 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,
attorney’s fees and costs of suit.1awphi1.nét
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 ATTORNEY’S FEES
IS PROPER; and
IV. WHETHER FBNI IS SOLIDARILY LIABLE WITH
RIMA AND ALEGRE FOR PAYMENT OF MORAL
DAMAGES, ATTORNEY’S FEES AND COSTS OF
SUIT.
The Court’s 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 AMEC’s cause of action is
based on Articles 30 and 33 of the Civil Code. Article 3018 authorizes
a separate civil action to recover civil liability arising from a criminal
offense. On the other hand, Article 3319 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
1920 of the Civil Code to justify its claim for damages. AMEC cites
Articles 217621 and 218022 of the Civil Code to hold FBNI solidarily
liable with Rima and Alegre.
I.
Whether the broadcasts are libelous
A libel23 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 Alegre’s remarks such
as "greed for money on the part of AMEC’s 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
AMEC’s side and gave Ago the opportunity to defend AMEC and its
administrators. FBNI concludes that since there is no malice, there is
no libel.
FBNI’s 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
Page | 49
information."26 Hearing the students’ alleged complaints a month
before the exposé,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 Alegre’s reckless disregard of whether their report
was true or not.
Contrary to FBNI’s 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 republisher’s 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.
FBNI’s 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 AMEC’s 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
Page | 50
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.l^vvphi1.net 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 Code35 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
Page | 51
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 1937 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 2138 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 Court’s statement in Mambulao that "a corporation
may have a good reputation which, if besmirched, may also be a
ground for the award of moral damages" is an obiter dictum.42
Nevertheless, AMEC’s claim for moral damages falls under item 7 of
Article 221943 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 ₱300,000 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 ₱300,000 to ₱150,000.
III.
Whether the award of attorney’s fees is proper
FBNI contends that since AMEC is not entitled to moral damages,
there is no basis for the award of attorney’s fees. FBNI adds that the
instant case does not fall under the enumeration in Article 220848 of
the Civil Code.
The award of attorney’s fees is not proper because AMEC failed to
justify satisfactorily its claim for attorney’s fees. AMEC did not adduce
evidence to warrant the award of attorney’s fees. Moreover, both the
trial and appellate courts failed to explicitly state in their respective
decisions the rationale for the award of attorney’s 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 counsel’s fees are
not to be awarded every time a party wins a suit. The power of the
court to award attorney’s 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
attorney’s fees.51 (Emphasis supplied)
Page | 52
While it mentioned about the award of attorney’s 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, attorney’s fees and costs of suit
FBNI contends that it is not solidarily liable with Rima and Alegre for
the payment of damages and attorney’s 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 Alegre’s 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." Rima’s
accreditation lapsed due to his non-payment of the KBP annual fees
while Alegre’s 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.
FBNI’s 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.1a\^/phi1.net
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
FBNI’s radio program Exposé 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. FBNI’s 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 industry’s
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 FBNI’s "regimented process" of
application. Furthermore, FBNI admits that Rima and Alegre had
deficiencies in their KBP accreditation,56 which is one of FBNI’s
requirements before it hires a broadcaster. Significantly, membership
in the KBP, while voluntary, indicates the broadcaster’s strong
commitment to observe the broadcast industry’s rules and
regulations. Clearly, these circumstances show FBNI’s lack of
Page | 53
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 ₱300,000 to
₱150,000 and the award of attorney’s fees is deleted. Costs against
petitioner.

SO ORDERED.

Page | 54
 EN BANC
G.R. No. 176579 June 28, 2011
WILSON P. GAMBOA, Petitioner,
vs.
FINANCE SECRETARY MARGARITO B. TEVES, FINANCE
UNDERSECRETARY JOHN P. SEVILLA, AND COMMISSIONER
RICARDO ABCEDE OF THE PRESIDENTIAL COMMISSION ON
GOOD GOVERNMENT (PCGG) IN THEIR CAPACITIES AS
CHAIR AND MEMBERS, RESPECTIVELY, OF THE
PRIVATIZATION COUNCIL, CHAIRMAN ANTHONI SALIM OF
FIRST PACIFIC CO., LTD. IN HIS CAPACITY AS DIRECTOR OF
METRO PACIFIC ASSET HOLDINGS INC., CHAIRMAN MANUEL
V. PANGILINAN OF PHILIPPINE LONG DISTANCE TELEPHONE
COMPANY (PLDT) IN HIS CAPACITY AS MANAGING
DIRECTOR OF FIRST PACIFIC CO., LTD., PRESIDENT
NAPOLEON L. NAZARENO OF PHILIPPINE LONG DISTANCE
TELEPHONE COMPANY, CHAIR FE BARIN OF THE
SECURITIES EXCHANGE COMMISSION, and PRESIDENT
FRANCIS LIM OF THE PHILIPPINE STOCK EXCHANGE,
Respondents.
PABLITO V. SANIDAD and ARNO V. SANIDAD, Petitioners-in-
Intervention.
DECISION
Special Civil Actions; Declaratory Relief; Mandamus; Court treats
the petition for declaratory relief as one for mandamus if the issue
involved has far-reaching implications.—In short, it is well-settled
that this Court may treat a petition for declaratory relief as one for
mandamus if the issue involved has far-reaching implications. As
this Court held in Salvacion: The Court has no original and
exclusive jurisdiction over a petition for declaratory relief. However,
exceptions to this rule have been recognized. Thus, where the
petition has far-reaching implications and raises questions that
should be resolved, it may be treated as one for mandamus.
(Emphasis supplied)
Actions; Locus Standi; Petitioner being a stockholder of Philippine
Long Distance Telephone (PLDT) has the right to question the
subject sale which he claims to violate the nationality requirement
prescribed in Section 11, Article XII of the Constitution; Court
upheld the right of a citizen to bring a suit on matters of
transcendental importance to the public.—There is no dispute that
petitioner is a stockholder of PLDT. As such, he has the right to
question the subject sale, which he claims to violate the nationality
requirement prescribed in Section 11, Article XII of the Constitution.
If the sale indeed violates the Constitution, then there is a possibility
that PLDT’s franchise could be revoked, a dire consequence
directly affecting petitioner’s interest as a stockholder. More
importantly, there is no question that the instant petition raises
matters of transcendental importance to the public. The
fundamental and threshold legal issue in this case, involving the
national economy and the economic welfare of the Filipino people,
far outweighs any perceived impediment in the legal personality of
the petitioner to bring this action. In Chavez v. PCGG, 299 SCRA
744 (1998), the Court upheld the right of a citizen to bring a suit on
matters of transcendental importance to the public.
Corporation Law; Words and Phrases; “Capital”; The term “capital”
in Section 11, Article XII of the Constitution refers only to shares of
stock entitled to vote in the election of directors, and thus in the
present case only to common shares, and not to the total
outstanding capital stock comprising both common and non-voting
preferred shares.—We agree with petitioner and petitioners-in-
intervention. The term “capital” in Section 11, Article XII of the
Constitution refers only to shares of stock entitled to vote in the
election of directors, and thus in the present case only to common
shares, and not to the total outstanding capital stock comprising
both common and non-voting preferred shares.
Same; Capital; Common shares cannot be deprived of the right to
vote in any corporate meeting, and any provision in the articles of
incorporation restricting the right of common shareholders to vote is
invalid.—Indisputably, one of the rights of a stockholder is the right
to participate in the control or management of the corporation. This
is exercised through his vote in the election of directors because it
is the board of directors that controls or manages the corporation. In
the absence of provisions in the articles of incorporation denying
voting rights to preferred shares, preferred shares have the same
voting rights as common shares. However, preferred shareholders
are often excluded from any control, that is, deprived of the right to
vote in the election of directors and on other matters, on the theory
Page | 55
that the preferred shareholders are merely investors in the
corporation for income in the same manner as bondholders. In fact,
under the Corporation Code only preferred or redeemable shares
can be deprived of the right to vote. Common shares cannot be
deprived of the right to vote in any corporate meeting, and any
provision in the articles of incorporation restricting the right of
common shareholders to vote is invalid.
Same; Same; The term “capital” in Section 11, Article XII of the
Constitution refers only to shares of stock that can vote in the
election of directors.—Considering that common shares have voting
rights which translate to control, as opposed to preferred shares
which usually have no voting rights, the term “capital” in Section 11,
Article XII of the Constitution refers only to common shares.
However, if the preferred shares also have the right to vote in the
election of directors, then the term “capital” shall include such
preferred shares because the right to participate in the control or
management of the corporation is exercised through the right to
vote in the election of directors. In short, the term “capital” in
Section 11, Article XII of the Constitution refers only to shares of
stock that can vote in the election of directors.
Same; Same; The term “capital” in Section 11, Article XII of the
Constitution to include both voting and non-voting shares will result
in the abject surrender of our telecommunications industry to
foreigners, amounting to a clear abdication of the State’s
constitutional duty to limit control of public utilities to Filipino
citizens; The Court should never open to foreign control what the
Constitution has expressly reserved to Filipinos for that would be a
betrayal of the Constitution and of the national interest.—
Indisputably, construing the term “capital” in Section 11, Article XII
of the Constitution to include both voting and non-voting shares will
result in the abject surrender of our telecommunications industry to
foreigners, amounting to a clear abdication of the State’s
constitutional duty to limit control of public utilities to Filipino
citizens. Such an interpretation certainly runs counter to the
constitutional provision reserving certain areas of investment to
Filipino citizens, such as the exploitation of natural resources as
well as the ownership of land, educational institutions and
advertising businesses. The Court should never open to foreign
control what the Constitution has expressly reserved to Filipinos for
that would be a betrayal of the Constitution and of the national
interest. The Court must perform its solemn duty to defend and
uphold the intent and letter of the Constitution to ensure, in the
words of the Constitution, “a self-reliant and independent national
economy effectively controlled by Filipinos.”
Same; Securities and Exchange Commission; The Securities and
Exchange Commission (SEC) is vested with the power and function
to suspend or revoke, after proper notice and hearing, the franchise
or certificate of registration of corporations, partnerships or
associations, upon any of the grounds provided by law.—Under
Section 5(m) of the Securities Regulation Code, the SEC is vested
with the “power and function” to “suspend or revoke, after proper
notice and hearing, the franchise or certificate of registration of
corporations, partnerships or associations, upon any of the grounds
provided by law.” The SEC is mandated under Section 5(d) of the
same Code with the “power and function” to “investigate x x x the
activities of persons to ensure compliance” with the laws and
regulations that SEC administers or enforces. The GIS that all
corporations are required to submit to SEC annually should put the
SEC on guard against violations of the nationality requirement
prescribed in the Constitution and existing laws. This Court can
compel the SEC, in a petition for declaratory relief that is treated as
a petition for mandamus as in the present case, to hear and decide
a possible violation of Section 11, Article XII of the Constitution in
view of the ownership structure of PLDT’s voting shares, as
admitted by respondents and as stated in PLDT’s 2010 GIS that
PLDT submitted to SEC.
VELASCO, JR., J., Separate Dissenting Opinion:
Actions; Locus Standi; Petitioner has not shown any real interest
substantial enough to give him the requisite locus standi to question
the sale of the government’s PTIC shares to First Pacific.—The
Rules of Court specifically requires that “[e]very action must be
prosecuted or defended in the name of the real party in interest.” A
real party in interest is defined as the “party who stands to be
benefited or injured by the judgment in the suit, or the party entitled
to the avails of the suit.” Petitioner has failed to allege any interest
in the 111,415 PTIC shares nor in any of the previous purchase
contracts he now seeks to annul. He is neither a shareholder of
PTIC nor of First Pacific. Also, he has not alleged that he was an
interested bidder in the government’s auction sale of the PTIC
Page | 56
shares. Finally, he has not shown how, as a nominal shareholder of
PLDT, he stands to benefit from the annulment of the sale of the
111,415 PTIC shares or of any of the sales of the PLDT common
shares held by foreigners. In fine, petitioner has not shown any real
interest substantial enough to give him the requisite locus standi to
question the sale of the government’s PTIC shares to First Pacific.
Same; Same; A taxpayer is deemed to have the standing to raise a
constitutional issue when it is established that public funds have
been disbursed in alleged contravention of the law or the
Constitution.—Likewise, petitioner’s assertion that he has standing
to bring the suit as a “taxpayer” must fail. In Gonzales v. Narvasa,
We discussed that “a taxpayer is deemed to have the standing to
raise a constitutional issue when it is established that public funds
have been disbursed in alleged contravention of the law or the
Constitution.” In this case, no public funds have been disbursed. In
fact, the opposite has happened—there is an inflow of funds into the
government coffers.
Same; Jurisdiction; Declaratory Relief; Petitions for declaratory
relief, annulment of sale and injunction do not fall within the
exclusive jurisdiction of this Court; The proper jurisdiction for
declaratory relief is the Regional Trial Court (RTC); Requisites for
an Action for Declaratory Relief.—Based on the foregoing provisos,
it is patently clear that petitions for declaratory relief, annulment of
sale and injunction do not fall within the exclusive original
jurisdiction of this Court. First, the court with the proper jurisdiction
for declaratory relief is the Regional Trial Court (RTC). Sec. 1, Rule
63 of the Rules of Court stresses that an action for declaratory relief
is within the exclusive original jurisdiction of the RTC, viz.: Any
person interested under a deed, will, contract or other written
instrument, whose rights are affected by a statute, executive order
or regulation, ordinance, or any other governmental regulation may,
before breach or violation thereof, bring an action in the appropriate
Regional Trial Court to determine any question of construction or
validity arising, and for a declaration of his rights or duties,
thereunder.(Emphasis supplied.) An action for declaratory relief also
requires the following: (1) a justiciable controversy between persons
whose interests are adverse; (2) the party seeking the relief has a
legal interest in the controversy; and (3) the issue is ripe for judicial
determination. As previously discussed, petitioner lacks any real
interest in this action; thus, no justiciable controversy between
adverse interests exists.
Same; Same; Same; The exercise of such discretion, whether to
treat a petition for declaratory relief as one for mandamus,
presupposes that the petition is otherwise viable or meritorious.—
Despite this, the ponencia decided to treat the petition for
declaratory relief as one for mandamus, citing the rule that “where
the petition has far-reaching implications and raises questions that
should be resolved, it may be treated as one for mandamus.”
However, such rule is not absolute. In Macasiano v. National
Housing Authority, 224 SCRA 236 (1993), the Court explicitly stated
that the exercise of such discretion, whether to treat a petition for
declaratory relief as one for mandamus, presupposes that the
petition is otherwise viable or meritorious. As I shall discuss
subsequently in the substantive portion of this opinion, the petition
in this case is clearly not viable or meritorious.
Same; Mandamus; A petition for mandamus is premature if there
are administrative remedies available to petitioner.—A petition for
mandamus is premature if there are administrative remedies
available to petitioner. Under the doctrine of primary administrative
jurisdiction, “courts cannot or will not determine a controversy where
the issues for resolution demand the exercise of sound
administrative discretion requiring the special knowledge,
experience, and services of the administrative tribunal to determine
technical and intricate matters of fact. In other words, if a case is
such that its determination requires the expertise, specialized
training and knowledge of an administrative body, relief must first be
obtained in an administrative proceeding before resort to the courts
is had even if the matter may well be within their proper jurisdiction.”
Along with this, the doctrine of exhaustion of administrative
remedies also requires that where an administrative remedy is
provided by statute relief must be sought by exhausting this remedy
before the courts will act.
Same; Hierarchy of Courts; The doctrine dictates that when
jurisdiction is shared concurrently with different courts, the proper
suit should first be filed with the lower-ranking court.—Although this
Court, the CA, and the RTC have “concurrent jurisdiction to issue
writs of certiorari, prohibition, mandamus, quo warranto, habeas
corpus and injunction, such concurrence does not give the
Page | 57
petitioner unrestricted freedom of choice of court forum.” The
doctrine of hierarchy of courts dictates that when jurisdiction is
shared concurrently with different courts, the proper suit should first
be filed with the lower-ranking court. Failure to do so is sufficient
cause for the dismissal of a petition.
Corporation Law; Capital; The intent of the framers of the
Constitution was not to limit the application of the word “capital” to
voting or common shares alone.—Contrary to pronouncement of
the ponencia, the intent of the framers of the Constitution was not to
limit the application of the word “capital” to voting or common
shares alone. In fact, the Records of the Constitutional Commission
reveal that even though the UP Law Center proposed the phrase
“voting stock or controlling interest,” the framers of the Constitution
did not adopt this but instead used the word “capital.”
Same; Same; Stockholders, whether holding voting or non-voting
stocks, have all the rights, powers and privileges of ownership over
their stocks; Control is another inherent right of ownership.—
Stockholders, whether holding voting or non-voting stocks, have all
the rights, powers and privileges of ownership over their stocks.
This necessarily includes the right to vote because such is inherent
in and incidental to the ownership of corporate stocks, and as such
is a property right. Additionally, control is another inherent right of
ownership. The circumstances enumerated in Sec. 6 of the
Corporation Code clearly evince this. It gives voting rights to the
stocks deemed as non-voting as to fundamental and major
corporate changes. Thus, the issue should not only dwell on the
daily management affairs of the corporation but also on the equally
important fundamental changes that may need to be voted on. On
this, the “non-voting” shares also exercise control, together with the
voting shares.
Same; Same; Securities and Exchange Commission; Securities and
Exchange Commission (SEC) defined “capital” as to include both
voting and non-voting in the determination of the nationality of a
corporation.—More importantly, the SEC defined “capital” as to
include both voting and non-voting in the determination of the
nationality of a corporation, to wit: In view of the foregoing, it is
opined that the term “capital” denotes the sum total of the shares
subscribed and paid by the shareholders, or secured to be paid,
irrespective of their nomenclature to be issued by the corporation in
the conduct of its operation. Hence, non-voting preferred shares are
considered in the computation of the 60-40% Filipino-alien equity
requirement of certain economic activities under the Constitution.
(Emphasis supplied.)
Same; Same; Outstanding Capital Stock; The Corporation Code
defines “outstanding capital stock” as the “total shares of stock
issued”; It includes all types of shares.—Similarly, the Corporation
Code defines “outstanding capital stock” as the “total shares of
stock issued.” It does not distinguish between common and
preferred shares. It includes all types of shares.
ABAD, J., Dissenting Opinion:
Remedial Law; Actions; Jurisdiction; Gamboa actions for injunction,
declaratory relief, and declaration of nullity of sale are not among
the cases that can be initiated before the Supreme Court; Only
exceptional and compelling circumstances such as cases of
national interest and of serious implications justify direct resort to
the Supreme Court for the extraordinary remedy of writ of certiorari,
prohibition, or mandamus.—Strictly speaking, Gamboa actions for
injunction, declaratory relief, and declaration of nullity of sale are not
among the cases that can be initiated before the Supreme Court.
Those actions belong to some other tribunal. And, although the
Court has original jurisdiction in prohibition cases, the Court shares
this authority with the Court of Appeals and the Regional Trial
Courts. But this concurrence of jurisdiction does not give the parties
absolute and unrestrained freedom of choice on which court the
remedy will be sought. They must observe the hierarchy of courts.
As a rule, the Supreme Court will not entertain direct resort to it
unless the remedy desired cannot be obtained in other tribunals.
Only exceptional and compelling circumstances such as cases of
national interest and of serious implications justify direct resort to
the Supreme Court for the extraordinary remedy of writ of certiorari,
prohibition, or mandamus.
Corporation Law; Capital; The Constitution fails to provide for the
meaning of the term “capital” considering that the shares of stock of
a corporation vary in kinds.—The Constitution fails to provide for the
meaning of the term “capital,” considering that the shares of stock of
a corporation vary in kinds. The usual classification depends on
Page | 58
how profits are to be distributed and which stockholders have the
right to vote the members of the corporation’s board of directors.
Same; Same; The Court should not leave the matter of compliance
with the constitutional limit on foreign ownership in public utilities, a
matter of transcendental importance, to judicial legislation especially
since any ruling the Court makes on the matter could have deep
economic repercussions; It is apt for Congress to build up on this
framework by defining the meaning of “capital.”—Under this
confusing legislative signals, the Court should not leave the matter
of compliance with the constitutional limit on foreign ownership in
public utilities, a matter of transcendental importance, to judicial
legislation especially since any ruling the Court makes on the matter
could have deep economic repercussions. This is not a concern
over which the Court has competence. The 1987 Constitution laid
down the general framework for restricting foreign ownership of
public utilities. It is apt for Congress to build up on this framework by
defining the meaning of “capital,” establishing rules for the
implementation of the State policy, providing sanctions for its
violation, and vesting in the appropriate agency the responsibility for
carrying out the purposes of such policy.
CARPIO, J.:
The Case
This is an original petition for prohibition, injunction, declaratory relief
and declaration of nullity of the sale of shares of stock of Philippine
Telecommunications Investment Corporation (PTIC) by the
government of the Republic of the Philippines to Metro Pacific Assets
Holdings, Inc. (MPAH), an affiliate of First Pacific Company Limited
(First Pacific).
The Antecedents
The facts, according to petitioner Wilson P. Gamboa, a stockholder
of Philippine Long Distance Telephone Company (PLDT), are as
follows:1
On 28 November 1928, the Philippine Legislature enacted Act No.
3436 which granted PLDT a franchise and the right to engage in
telecommunications business. In 1969, General Telephone and
Electronics Corporation (GTE), an American company and a major
PLDT stockholder, sold 26 percent of the outstanding common
shares of PLDT to PTIC. In 1977, Prime Holdings, Inc. (PHI) was
incorporated by several persons, including Roland Gapud and Jose
Campos, Jr. Subsequently, PHI became the owner of 111,415 shares
of stock of PTIC by virtue of three Deeds of Assignment executed by
PTIC stockholders Ramon Cojuangco and Luis Tirso Rivilla. In 1986,
the 111,415 shares of stock of PTIC held by PHI were sequestered
by the Presidential Commission on Good Government (PCGG). The
111,415 PTIC shares, which represent about 46.125 percent of the
outstanding capital stock of PTIC, were later declared by this Court
to be owned by the Republic of the Philippines.2
In 1999, First Pacific, a Bermuda-registered, Hong Kong-based
investment firm, acquired the remaining 54 percent of the outstanding
capital stock of PTIC. On 20 November 2006, the Inter-Agency
Privatization Council (IPC) of the Philippine Government announced
that it would sell the 111,415 PTIC shares, or 46.125 percent of the
outstanding capital stock of PTIC, through a public bidding to be
conducted on 4 December 2006. Subsequently, the public bidding
was reset to 8 December 2006, and only two bidders, Parallax
Venture Fund XXVII (Parallax) and Pan-Asia Presidio Capital,
submitted their bids. Parallax won with a bid of ₱25.6 billion or
US$510 million.
Thereafter, First Pacific announced that it would exercise its right of
first refusal as a PTIC stockholder and buy the 111,415 PTIC shares
by matching the bid price of Parallax. However, First Pacific failed to
do so by the 1 February 2007 deadline set by IPC and instead,
yielded its right to PTIC itself which was then given by IPC until 2
March 2007 to buy the PTIC shares. On 14 February 2007, First
Pacific, through its subsidiary, MPAH, entered into a Conditional Sale
and Purchase Agreement of the 111,415 PTIC shares, or 46.125
percent of the outstanding capital stock of PTIC, with the Philippine
Government for the price of ₱25,217,556,000 or US$510,580,189.
The sale was completed on 28 February 2007.
Since PTIC is a stockholder of PLDT, the sale by the Philippine
Government of 46.125 percent of PTIC shares is actually an indirect
sale of 12 million shares or about 6.3 percent of the outstanding
common shares of PLDT. With the sale, First Pacific’s common
Page | 59
shareholdings in PLDT increased from 30.7 percent to 37
percent, thereby increasing the common shareholdings of
foreigners in PLDT to about 81.47 percent. This violates Section
11, Article XII of the 1987 Philippine Constitution which limits foreign
ownership of the capital of a public utility to not more than 40
percent.3
On the other hand, public respondents Finance Secretary Margarito
B. Teves, Undersecretary John P. Sevilla, and PCGG Commissioner
Ricardo Abcede allege the following relevant facts:
On 9 November 1967, PTIC was incorporated and had since
engaged in the business of investment holdings. PTIC held
26,034,263 PLDT common shares, or 13.847 percent of the total
PLDT outstanding common shares. PHI, on the other hand, was
incorporated in 1977, and became the owner of 111,415 PTIC shares
or 46.125 percent of the outstanding capital stock of PTIC by virtue
of three Deeds of Assignment executed by Ramon Cojuangco and
Luis Tirso Rivilla. In 1986, the 111,415 PTIC shares held by PHI were
sequestered by the PCGG, and subsequently declared by this Court
as part of the ill-gotten wealth of former President Ferdinand Marcos.
The sequestered PTIC shares were reconveyed to the Republic of
the Philippines in accordance with this Court’s decision4 which
became final and executory on 8 August 2006.
The Philippine Government decided to sell the 111,415 PTIC shares,
which represent 6.4 percent of the outstanding common shares of
stock of PLDT, and designated the Inter-Agency Privatization Council
(IPC), composed of the Department of Finance and the PCGG, as
the disposing entity. An invitation to bid was published in seven
different newspapers from 13 to 24 November 2006. On 20
November 2006, a pre-bid conference was held, and the original
deadline for bidding scheduled on 4 December 2006 was reset to 8
December 2006. The extension was published in nine different
newspapers.
During the 8 December 2006 bidding, Parallax Capital Management
LP emerged as the highest bidder with a bid of ₱25,217,556,000. The
government notified First Pacific, the majority owner of PTIC shares,
of the bidding results and gave First Pacific until 1 February 2007 to
exercise its right of first refusal in accordance with PTIC’s Articles of
Incorporation. First Pacific announced its intention to match
Parallax’s bid.
On 31 January 2007, the House of Representatives (HR) Committee
on Good Government conducted a public hearing on the particulars
of the then impending sale of the 111,415 PTIC shares. Respondents
Teves and Sevilla were among those who attended the public
hearing. The HR Committee Report No. 2270 concluded that: (a) the
auction of the government’s 111,415 PTIC shares bore due diligence,
transparency and conformity with existing legal procedures; and (b)
First Pacific’s intended acquisition of the government’s 111,415
PTIC shares resulting in First Pacific’s 100% ownership of PTIC
will not violate the 40 percent constitutional limit on foreign
ownership of a public utility since PTIC holds only 13.847
percent of the total outstanding common shares of PLDT.5 On
28 February 2007, First Pacific completed the acquisition of the
111,415 shares of stock of PTIC.
Respondent Manuel V. Pangilinan admits the following facts: (a) the
IPC conducted a public bidding for the sale of 111,415 PTIC shares
or 46 percent of the outstanding capital stock of PTIC (the remaining
54 percent of PTIC shares was already owned by First Pacific and its
affiliates); (b) Parallax offered the highest bid amounting to
₱25,217,556,000; (c) pursuant to the right of first refusal in favor of
PTIC and its shareholders granted in PTIC’s Articles of Incorporation,
MPAH, a First Pacific affiliate, exercised its right of first refusal by
matching the highest bid offered for PTIC shares on 13 February
2007; and (d) on 28 February 2007, the sale was consummated when
MPAH paid IPC ₱25,217,556,000 and the government delivered the
certificates for the 111,415 PTIC shares. Respondent Pangilinan
denies the other allegations of facts of petitioner.
On 28 February 2007, petitioner filed the instant petition for
prohibition, injunction, declaratory relief, and declaration of nullity of
sale of the 111,415 PTIC shares. Petitioner claims, among others,
that the sale of the 111,415 PTIC shares would result in an increase
in First Pacific’s common shareholdings in PLDT from 30.7 percent
to 37 percent, and this, combined with Japanese NTT DoCoMo’s
common shareholdings in PLDT, would result to a total foreign
common shareholdings in PLDT of 51.56 percent which is over the
40 percent constitutional limit.6 Petitioner asserts:
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If and when the sale is completed, First Pacific’s equity in PLDT will
go up from 30.7 percent to 37.0 percent of its common – or voting-
stockholdings, x x x. Hence, the consummation of the sale will put the
two largest foreign investors in PLDT – First Pacific and Japan’s NTT
DoCoMo, which is the world’s largest wireless telecommunications
firm, owning 51.56 percent of PLDT common equity. x x x With the
completion of the sale, data culled from the official website of the New
York Stock Exchange (www.nyse.com) showed that those foreign
entities, which own at least five percent of common equity, will
collectively own 81.47 percent of PLDT’s common equity. x x x
x x x as the annual disclosure reports, also referred to as Form 20-K
reports x x x which PLDT submitted to the New York Stock Exchange
for the period 2003-2005, revealed that First Pacific and several other
foreign entities breached the constitutional limit of 40 percent
ownership as early as 2003. x x x"7
Petitioner raises the following issues: (1) whether the consummation
of the then impending sale of 111,415 PTIC shares to First Pacific
violates the constitutional limit on foreign ownership of a public utility;
(2) whether public respondents committed grave abuse of discretion
in allowing the sale of the 111,415 PTIC shares to First Pacific; and
(3) whether the sale of common shares to foreigners in excess of 40
percent of the entire subscribed common capital stock violates the
constitutional limit on foreign ownership of a public utility.8
On 13 August 2007, Pablito V. Sanidad and Arno V. Sanidad filed a
Motion for Leave to Intervene and Admit Attached Petition-in-
Intervention. In the Resolution of 28 August 2007, the Court granted
the motion and noted the Petition-in-Intervention.
Petitioners-in-intervention "join petitioner Wilson Gamboa x x x in
seeking, among others, to enjoin and/or nullify the sale by
respondents of the 111,415 PTIC shares to First Pacific or assignee."
Petitioners-in-intervention claim that, as PLDT subscribers, they have
a "stake in the outcome of the controversy x x x where the Philippine
Government is completing the sale of government owned assets in
[PLDT], unquestionably a public utility, in violation of the nationality
restrictions of the Philippine Constitution."
The Issue
This Court is not a trier of facts. Factual questions such as those
raised by petitioner,9 which indisputably demand a thorough
examination of the evidence of the parties, are generally beyond this
Court’s jurisdiction. Adhering to this well-settled principle, the Court
shall confine the resolution of the instant controversy solely on the
threshold and purely legal issue of whether the term "capital" in
Section 11, Article XII of the Constitution refers to the total common
shares only or to the total outstanding capital stock (combined total
of common and non-voting preferred shares) of PLDT, a public utility.
The Ruling of the Court
The petition is partly meritorious.
Petition for declaratory relief treated as petition for mandamus
At the outset, petitioner is faced with a procedural barrier. Among the
remedies petitioner seeks, only the petition for prohibition is within
the original jurisdiction of this court, which however is not exclusive
but is concurrent with the Regional Trial Court and the Court of
Appeals. The actions for declaratory relief,10 injunction, and
annulment of sale are not embraced within the original jurisdiction of
the Supreme Court. On this ground alone, the petition could have
been dismissed outright.
While direct resort to this Court may be justified in a petition for
prohibition,11 the Court shall nevertheless refrain from discussing the
grounds in support of the petition for prohibition since on 28 February
2007, the questioned sale was consummated when MPAH paid IPC
₱25,217,556,000 and the government delivered the certificates for
the 111,415 PTIC shares.
However, since the threshold and purely legal issue on the definition
of the term "capital" in Section 11, Article XII of the Constitution has
far-reaching implications to the national economy, the Court treats
the petition for declaratory relief as one for mandamus.12
In Salvacion v. Central Bank of the Philippines,13 the Court treated
the petition for declaratory relief as one for mandamus considering
the grave injustice that would result in the interpretation of a banking
law. In that case, which involved the crime of rape committed by a
Page | 61
foreign tourist against a Filipino minor and the execution of the final
judgment in the civil case for damages on the tourist’s dollar deposit
with a local bank, the Court declared Section 113 of Central Bank
Circular No. 960, exempting foreign currency deposits from
attachment, garnishment or any other order or process of any court,
inapplicable due to the peculiar circumstances of the case. The Court
held that "injustice would result especially to a citizen aggrieved by a
foreign guest like accused x x x" that would "negate Article 10 of the
Civil Code which provides that ‘in case of doubt in the interpretation
or application of laws, it is presumed that the lawmaking body
intended right and justice to prevail.’" The Court therefore required
respondents Central Bank of the Philippines, the local bank, and the
accused to comply with the writ of execution issued in the civil case
for damages and to release the dollar deposit of the accused to
satisfy the judgment.
In Alliance of Government Workers v. Minister of Labor,14 the Court
similarly brushed aside the procedural infirmity of the petition for
declaratory relief and treated the same as one for mandamus. In
Alliance, the issue was whether the government unlawfully excluded
petitioners, who were government employees, from the enjoyment of
rights to which they were entitled under the law. Specifically, the
question was: "Are the branches, agencies, subdivisions, and
instrumentalities of the Government, including government owned or
controlled corporations included among the four ‘employers’ under
Presidential Decree No. 851 which are required to pay their
employees x x x a thirteenth (13th) month pay x x x ?" The
Constitutional principle involved therein affected all government
employees, clearly justifying a relaxation of the technical rules of
procedure, and certainly requiring the interpretation of the assailed
presidential decree.
In short, it is well-settled that this Court may treat a petition for
declaratory relief as one for mandamus if the issue involved has far-
reaching implications. As this Court held in Salvacion:
The Court has no original and exclusive jurisdiction over a petition for
declaratory relief. However, exceptions to this rule have been
recognized. Thus, where the petition has far-reaching
implications and raises questions that should be resolved, it
may be treated as one for mandamus.15 (Emphasis supplied)
In the present case, petitioner seeks primarily the interpretation of the
term "capital" in Section 11, Article XII of the Constitution. He prays
that this Court declare that the term "capital" refers to common shares
only, and that such shares constitute "the sole basis in determining
foreign equity in a public utility." Petitioner further asks this Court to
declare any ruling inconsistent with such interpretation
unconstitutional.
The interpretation of the term "capital" in Section 11, Article XII of the
Constitution has far-reaching implications to the national economy. In
fact, a resolution of this issue will determine whether Filipinos are
masters, or second class citizens, in their own country. What is at
stake here is whether Filipinos or foreigners will have effective
control of the national economy. Indeed, if ever there is a legal issue
that has far-reaching implications to the entire nation, and to future
generations of Filipinos, it is the threshhold legal issue presented in
this case.
The Court first encountered the issue on the definition of the term
"capital" in Section 11, Article XII of the Constitution in the case of
Fernandez v. Cojuangco, docketed as G.R. No. 157360.16 That case
involved the same public utility (PLDT) and substantially the same
private respondents. Despite the importance and novelty of the
constitutional issue raised therein and despite the fact that the
petition involved a purely legal question, the Court declined to resolve
the case on the merits, and instead denied the same for disregarding
the hierarchy of courts.17 There, petitioner Fernandez assailed on a
pure question of law the Regional Trial Court’s Decision of 21
February 2003 via a petition for review under Rule 45. The Court’s
Resolution, denying the petition, became final on 21 December 2004.
The instant petition therefore presents the Court with another
opportunity to finally settle this purely legal issue which is of
transcendental importance to the national economy and a
fundamental requirement to a faithful adherence to our Constitution.
The Court must forthwith seize such opportunity, not only for the
benefit of the litigants, but more significantly for the benefit of the
entire Filipino people, to ensure, in the words of the Constitution, "a
self-reliant and independent national economy effectively
controlled by Filipinos."18 Besides, in the light of vague and
confusing positions taken by government agencies on this purely
legal issue, present and future foreign investors in this country
Page | 62
deserve, as a matter of basic fairness, a categorical ruling from this
Court on the extent of their participation in the capital of public utilities
and other nationalized businesses.
Despite its far-reaching implications to the national economy, this
purely legal issue has remained unresolved for over 75 years since
the 1935 Constitution. There is no reason for this Court to evade this
ever recurring fundamental issue and delay again defining the term
"capital," which appears not only in Section 11, Article XII of the
Constitution, but also in Section 2, Article XII on co-production and
joint venture agreements for the development of our natural
resources,19 in Section 7, Article XII on ownership of private lands,20
in Section 10, Article XII on the reservation of certain investments to
Filipino citizens,21 in Section 4(2), Article XIV on the ownership of
educational institutions,22 and in Section 11(2), Article XVI on the
ownership of advertising companies.23
Petitioner has locus standi
There is no dispute that petitioner is a stockholder of PLDT. As such,
he has the right to question the subject sale, which he claims to
violate the nationality requirement prescribed in Section 11, Article
XII of the Constitution. If the sale indeed violates the Constitution,
then there is a possibility that PLDT’s franchise could be revoked, a
dire consequence directly affecting petitioner’s interest as a
stockholder.
More importantly, there is no question that the instant petition raises
matters of transcendental importance to the public. The fundamental
and threshold legal issue in this case, involving the national economy
and the economic welfare of the Filipino people, far outweighs any
perceived impediment in the legal personality of the petitioner to bring
this action.
In Chavez v. PCGG,24 the Court upheld the right of a citizen to bring
a suit on matters of transcendental importance to the public, thus:
In Tañada v. Tuvera, the Court asserted that when the issue
concerns a public right and the object of mandamus is to obtain
the enforcement of a public duty, the people are regarded as the
real parties in interest; and because it is sufficient that petitioner
is a citizen and as such is interested in the execution of the laws,
he need not show that he has any legal or special interest in the
result of the action. In the aforesaid case, the petitioners sought to
enforce their right to be informed on matters of public concern, a right
then recognized in Section 6, Article IV of the 1973 Constitution, in
connection with the rule that laws in order to be valid and enforceable
must be published in the Official Gazette or otherwise effectively
promulgated. In ruling for the petitioners’ legal standing, the Court
declared that the right they sought to be enforced ‘is a public right
recognized by no less than the fundamental law of the land.’
Legaspi v. Civil Service Commission, while reiterating Tañada,
further declared that ‘when a mandamus proceeding involves the
assertion of a public right, the requirement of personal interest
is satisfied by the mere fact that petitioner is a citizen and,
therefore, part of the general ‘public’ which possesses the right.’
Further, in Albano v. Reyes, we said that while expenditure of public
funds may not have been involved under the questioned contract for
the development, management and operation of the Manila
International Container Terminal, ‘public interest [was] definitely
involved considering the important role [of the subject contract]
. . . in the economic development of the country and the
magnitude of the financial consideration involved.’ We
concluded that, as a consequence, the disclosure provision in the
Constitution would constitute sufficient authority for upholding the
petitioner’s standing. (Emphasis supplied)
Clearly, since the instant petition, brought by a citizen, involves
matters of transcendental public importance, the petitioner has the
requisite locus standi.
Definition of the Term "Capital" in
Section 11, Article XII of the 1987 Constitution
Section 11, Article XII (National Economy and Patrimony) of the 1987
Constitution mandates the Filipinization of public utilities, to wit:
Section 11. No franchise, certificate, or any other form of
authorization for the operation of a public utility shall be granted
except to citizens of the Philippines or to corporations or
associations organized under the laws of the Philippines, at
Page | 63
least sixty per centum of whose capital is owned by such
citizens; nor shall such franchise, certificate, or authorization be
exclusive in character or for a longer period than fifty years. Neither
shall any such franchise or right be granted except under the
condition that it shall be subject to amendment, alteration, or repeal
by the Congress when the common good so requires. The State shall
encourage equity participation in public utilities by the general public.
The participation of foreign investors in the governing body of any
public utility enterprise shall be limited to their proportionate share in
its capital, and all the executive and managing officers of such
corporation or association must be citizens of the Philippines.
(Emphasis supplied)
The above provision substantially reiterates Section 5, Article XIV of
the 1973 Constitution, thus:
Section 5. No franchise, certificate, or any other form of
authorization for the operation of a public utility shall be granted
except to citizens of the Philippines or to corporations or
associations organized under the laws of the Philippines at least
sixty per centum of the capital of which is owned by such
citizens, nor shall such franchise, certificate, or authorization be
exclusive in character or for a longer period than fifty years. Neither
shall any such franchise or right be granted except under the
condition that it shall be subject to amendment, alteration, or repeal
by the National Assembly when the public interest so requires. The
State shall encourage equity participation in public utilities by the
general public. The participation of foreign investors in the governing
body of any public utility enterprise shall be limited to their
proportionate share in the capital thereof. (Emphasis supplied)
The foregoing provision in the 1973 Constitution reproduced Section
8, Article XIV of the 1935 Constitution, viz:
Section 8. No franchise, certificate, or any other form of
authorization for the operation of a public utility shall be granted
except to citizens of the Philippines or to corporations or other
entities organized under the laws of the Philippines sixty per
centum of the capital of which is owned by citizens of the
Philippines, nor shall such franchise, certificate, or authorization be
exclusive in character or for a longer period than fifty years. No
franchise or right shall be granted to any individual, firm, or
corporation, except under the condition that it shall be subject to
amendment, alteration, or repeal by the Congress when the public
interest so requires. (Emphasis supplied)
Father Joaquin G. Bernas, S.J., a leading member of the 1986
Constitutional Commission, reminds us that the Filipinization
provision in the 1987 Constitution is one of the products of the spirit
of nationalism which gripped the 1935 Constitutional Convention.25
The 1987 Constitution "provides for the Filipinization of public utilities
by requiring that any form of authorization for the operation of public
utilities should be granted only to ‘citizens of the Philippines or to
corporations or associations organized under the laws of the
Philippines at least sixty per centum of whose capital is owned by
such citizens.’ The provision is [an express] recognition of the
sensitive and vital position of public utilities both in the national
economy and for national security."26 The evident purpose of the
citizenship requirement is to prevent aliens from assuming control of
public utilities, which may be inimical to the national interest.27 This
specific provision explicitly reserves to Filipino citizens control of
public utilities, pursuant to an overriding economic goal of the 1987
Constitution: to "conserve and develop our patrimony"28 and ensure
"a self-reliant and independent national economy effectively
controlled by Filipinos."29
Any citizen or juridical entity desiring to operate a public utility must
therefore meet the minimum nationality requirement prescribed in
Section 11, Article XII of the Constitution. Hence, for a corporation to
be granted authority to operate a public utility, at least 60 percent of
its "capital" must be owned by Filipino citizens.
The crux of the controversy is the definition of the term "capital."
Does the term "capital" in Section 11, Article XII of the Constitution
refer to common shares or to the total outstanding capital stock
(combined total of common and non-voting preferred shares)?
Petitioner submits that the 40 percent foreign equity limitation in
domestic public utilities refers only to common shares because such
shares are entitled to vote and it is through voting that control over a
corporation is exercised. Petitioner posits that the term "capital" in
Section 11, Article XII of the Constitution refers to "the ownership of
common capital stock subscribed and outstanding, which class of
shares alone, under the corporate set-up of PLDT, can vote and elect
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members of the board of directors." It is undisputed that PLDT’s non-
voting preferred shares are held mostly by Filipino citizens.30 This
arose from Presidential Decree No. 217,31 issued on 16 June 1973
by then President Ferdinand Marcos, requiring every applicant of a
PLDT telephone line to subscribe to non-voting preferred shares to
pay for the investment cost of installing the telephone line.32
Petitioners-in-intervention basically reiterate petitioner’s arguments
and adopt petitioner’s definition of the term "capital."33 Petitioners-in-
intervention allege that "the approximate foreign ownership of
common capital stock of PLDT x x x already amounts to at least
63.54% of the total outstanding common stock," which means that
foreigners exercise significant control over PLDT, patently violating
the 40 percent foreign equity limitation in public utilities prescribed by
the Constitution.
Respondents, on the other hand, do not offer any definition of the
term "capital" in Section 11, Article XII of the Constitution. More
importantly, private respondents Nazareno and Pangilinan of PLDT
do not dispute that more than 40 percent of the common shares of
PLDT are held by foreigners.
In particular, respondent Nazareno’s Memorandum, consisting of 73
pages, harps mainly on the procedural infirmities of the petition and
the supposed violation of the due process rights of the "affected
foreign common shareholders." Respondent Nazareno does not
deny petitioner’s allegation of foreigners’ dominating the common
shareholdings of PLDT. Nazareno stressed mainly that the petition
"seeks to divest foreign common shareholders purportedly
exceeding 40% of the total common shareholdings in PLDT of
their ownership over their shares." Thus, "the foreign natural and
juridical PLDT shareholders must be impleaded in this suit so that
they can be heard."34 Essentially, Nazareno invokes denial of due
process on behalf of the foreign common shareholders.
While Nazareno does not introduce any definition of the term
"capital," he states that "among the factual assertions that need to
be established to counter petitioner’s allegations is the uniform
interpretation by government agencies (such as the SEC),
institutions and corporations (such as the Philippine National
Oil Company-Energy Development Corporation or PNOC-EDC)
of including both preferred shares and common shares in
"controlling interest" in view of testing compliance with the 40%
constitutional limitation on foreign ownership in public
utilities."35
Similarly, respondent Manuel V. Pangilinan does not define the term
"capital" in Section 11, Article XII of the Constitution. Neither does he
refute petitioner’s claim of foreigners holding more than 40 percent of
PLDT’s common shares. Instead, respondent Pangilinan focuses on
the procedural flaws of the petition and the alleged violation of the
due process rights of foreigners. Respondent Pangilinan emphasizes
in his Memorandum (1) the absence of this Court’s jurisdiction over
the petition; (2) petitioner’s lack of standing; (3) mootness of the
petition; (4) non-availability of declaratory relief; and (5) the denial of
due process rights. Moreover, respondent Pangilinan alleges that the
issue should be whether "owners of shares in PLDT as well as
owners of shares in companies holding shares in PLDT may be
required to relinquish their shares in PLDT and in those companies
without any law requiring them to surrender their shares and also
without notice and trial."
Respondent Pangilinan further asserts that "Section 11, [Article XII
of the Constitution] imposes no nationality requirement on the
shareholders of the utility company as a condition for keeping
their shares in the utility company." According to him, "Section 11
does not authorize taking one person’s property (the shareholder’s
stock in the utility company) on the basis of another party’s alleged
failure to satisfy a requirement that is a condition only for that other
party’s retention of another piece of property (the utility company
being at least 60% Filipino-owned to keep its franchise)."36
The OSG, representing public respondents Secretary Margarito
Teves, Undersecretary John P. Sevilla, Commissioner Ricardo
Abcede, and Chairman Fe Barin, is likewise silent on the definition of
the term "capital." In its Memorandum37 dated 24 September 2007,
the OSG also limits its discussion on the supposed procedural
defects of the petition, i.e. lack of standing, lack of jurisdiction, non-
inclusion of interested parties, and lack of basis for injunction. The
OSG does not present any definition or interpretation of the term
"capital" in Section 11, Article XII of the Constitution. The OSG
contends that "the petition actually partakes of a collateral attack on
PLDT’s franchise as a public utility," which in effect requires a "full-
Page | 65
blown trial where all the parties in interest are given their day in
court."38
Respondent Francisco Ed Lim, impleaded as President and Chief
Executive Officer of the Philippine Stock Exchange (PSE), does not
also define the term "capital" and seeks the dismissal of the petition
on the following grounds: (1) failure to state a cause of action against
Lim; (2) the PSE allegedly implemented its rules and required all
listed companies, including PLDT, to make proper and timely
disclosures; and (3) the reliefs prayed for in the petition would
adversely impact the stock market.
In the earlier case of Fernandez v. Cojuangco, petitioner Fernandez
who claimed to be a stockholder of record of PLDT, contended that
the term "capital" in the 1987 Constitution refers to shares entitled to
vote or the common shares. Fernandez explained thus:
The forty percent (40%) foreign equity limitation in public utilities
prescribed by the Constitution refers to ownership of shares of stock
entitled to vote, i.e., common shares, considering that it is through
voting that control is being exercised. x x x
Obviously, the intent of the framers of the Constitution in imposing
limitations and restrictions on fully nationalized and partially
nationalized activities is for Filipino nationals to be always in control
of the corporation undertaking said activities. Otherwise, if the Trial
Court’s ruling upholding respondents’ arguments were to be given
credence, it would be possible for the ownership structure of a public
utility corporation to be divided into one percent (1%) common stocks
and ninety-nine percent (99%) preferred stocks. Following the Trial
Court’s ruling adopting respondents’ arguments, the common shares
can be owned entirely by foreigners thus creating an absurd situation
wherein foreigners, who are supposed to be minority shareholders,
control the public utility corporation.
xxxx
Thus, the 40% foreign ownership limitation should be interpreted to
apply to both the beneficial ownership and the controlling interest.
xxxx
Clearly, therefore, the forty percent (40%) foreign equity limitation in
public utilities prescribed by the Constitution refers to ownership of
shares of stock entitled to vote, i.e., common shares. Furthermore,
ownership of record of shares will not suffice but it must be shown
that the legal and beneficial ownership rests in the hands of Filipino
citizens. Consequently, in the case of petitioner PLDT, since it is
already admitted that the voting interests of foreigners which would
gain entry to petitioner PLDT by the acquisition of SMART shares
through the Questioned Transactions is equivalent to 82.99%, and
the nominee arrangements between the foreign principals and the
Filipino owners is likewise admitted, there is, therefore, a violation of
Section 11, Article XII of the Constitution.
Parenthetically, the Opinions dated February 15, 1988 and April 14,
1987 cited by the Trial Court to support the proposition that the
meaning of the word "capital" as used in Section 11, Article XII of the
Constitution allegedly refers to the sum total of the shares subscribed
and paid-in by the shareholder and it allegedly is immaterial how the
stock is classified, whether as common or preferred, cannot stand in
the face of a clear legislative policy as stated in the FIA which took
effect in 1991 or way after said opinions were rendered, and as
clarified by the above-quoted Amendments. In this regard, suffice it
to state that as between the law and an opinion rendered by an
administrative agency, the law indubitably prevails. Moreover, said
Opinions are merely advisory and cannot prevail over the clear intent
of the framers of the Constitution.
In the same vein, the SEC’s construction of Section 11, Article XII of
the Constitution is at best merely advisory for it is the courts that
finally determine what a law means.39
On the other hand, respondents therein, Antonio O. Cojuangco,
Manuel V. Pangilinan, Carlos A. Arellano, Helen Y. Dee, Magdangal
B. Elma, Mariles Cacho-Romulo, Fr. Bienvenido F. Nebres, Ray C.
Espinosa, Napoleon L. Nazareno, Albert F. Del Rosario, and Orlando
B. Vea, argued that the term "capital" in Section 11, Article XII of the
Constitution includes preferred shares since the Constitution does
not distinguish among classes of stock, thus:
16. The Constitution applies its foreign ownership limitation on the
corporation’s "capital," without distinction as to classes of shares. x x
x
Page | 66
In this connection, the Corporation Code – which was already in force
at the time the present (1987) Constitution was drafted – defined
outstanding capital stock as follows:
Section 137. Outstanding capital stock defined. – The term
"outstanding capital stock", as used in this Code, means the total
shares of stock issued under binding subscription agreements to
subscribers or stockholders, whether or not fully or partially paid,
except treasury shares.
Section 137 of the Corporation Code also does not distinguish
between common and preferred shares, nor exclude either class of
shares, in determining the outstanding capital stock (the "capital") of
a corporation. Consequently, petitioner’s suggestion to reckon
PLDT’s foreign equity only on the basis of PLDT’s outstanding
common shares is without legal basis. The language of the
Constitution should be understood in the sense it has in common use.
xxxx
17. But even assuming that resort to the proceedings of the
Constitutional Commission is necessary, there is nothing in the
Record of the Constitutional Commission (Vol. III) – which petitioner
misleadingly cited in the Petition x x x – which supports petitioner’s
view that only common shares should form the basis for computing a
public utility’s foreign equity.
xxxx
18. In addition, the SEC – the government agency primarily
responsible for implementing the Corporation Code, and which also
has the responsibility of ensuring compliance with the Constitution’s
foreign equity restrictions as regards nationalized activities x x x –
has categorically ruled that both common and preferred shares are
properly considered in determining outstanding capital stock and the
nationality composition thereof.40
We agree with petitioner and petitioners-in-intervention. The term
"capital" in Section 11, Article XII of the Constitution refers only to
shares of stock entitled to vote in the election of directors, and thus
in the present case only to common shares,41 and not to the total
outstanding capital stock comprising both common and non-voting
preferred shares.
The Corporation Code of the Philippines42 classifies shares as
common or preferred, thus:
Sec. 6. Classification of shares. - The shares of stock of stock
corporations may be divided into classes or series of shares, or both,
any of which classes or series of shares may have such rights,
privileges or restrictions as may be stated in the articles of
incorporation: Provided, That no share may be deprived of voting
rights except those classified and issued as "preferred" or
"redeemable" shares, unless otherwise provided in this Code:
Provided, further, That there shall always be a class or series of
shares which have complete voting rights. Any or all of the shares or
series of shares may have a par value or have no par value as may
be provided for in the articles of incorporation: Provided, however,
That banks, trust companies, insurance companies, public utilities,
and building and loan associations shall not be permitted to issue no-
par value shares of stock.
Preferred shares of stock issued by any corporation may be given
preference in the distribution of the assets of the corporation in case
of liquidation and in the distribution of dividends, or such other
preferences as may be stated in the articles of incorporation which
are not violative of the provisions of this Code: Provided, That
preferred shares of stock may be issued only with a stated par value.
The Board of Directors, where authorized in the articles of
incorporation, may fix the terms and conditions of preferred shares of
stock or any series thereof: Provided, That such terms and conditions
shall be effective upon the filing of a certificate thereof with the
Securities and Exchange Commission.
Shares of capital stock issued without par value shall be deemed fully
paid and non-assessable and the holder of such shares shall not be
liable to the corporation or to its creditors in respect thereto: Provided;
That shares without par value may not be issued for a consideration
less than the value of five (₱5.00) pesos per share: Provided, further,
That the entire consideration received by the corporation for its no-
par value shares shall be treated as capital and shall not be available
for distribution as dividends.
Page | 67
A corporation may, furthermore, classify its shares for the purpose of
insuring compliance with constitutional or legal requirements.
Except as otherwise provided in the articles of incorporation and
stated in the certificate of stock, each share shall be equal in all
respects to every other share.
Where the articles of incorporation provide for non-voting shares in
the cases allowed by this Code, the holders of such shares shall
nevertheless be entitled to vote on the following matters:
1. Amendment of the articles of incorporation;
2. Adoption and amendment of by-laws;
3. Sale, lease, exchange, mortgage, pledge or other
disposition of all or substantially all of the corporate
property;
4. Incurring, creating or increasing bonded
indebtedness;
5. Increase or decrease of capital stock;
6. Merger or consolidation of the corporation with
another corporation or other corporations;
7. Investment of corporate funds in another
corporation or business in accordance with this Code;
and
8. Dissolution of the corporation.
Except as provided in the immediately preceding paragraph, the vote
necessary to approve a particular corporate act as provided in this
Code shall be deemed to refer only to stocks with voting rights.
Indisputably, one of the rights of a stockholder is the right to
participate in the control or management of the corporation. 43 This is
exercised through his vote in the election of directors because it is
the board of directors that controls or manages the corporation. 44 In
the absence of provisions in the articles of incorporation denying
voting rights to preferred shares, preferred shares have the same
voting rights as common shares. However, preferred shareholders
are often excluded from any control, that is, deprived of the right to
vote in the election of directors and on other matters, on the theory
that the preferred shareholders are merely investors in the
corporation for income in the same manner as bondholders.45 In fact,
under the Corporation Code only preferred or redeemable shares can
be deprived of the right to vote.46 Common shares cannot be deprived
of the right to vote in any corporate meeting, and any provision in the
articles of incorporation restricting the right of common shareholders
to vote is invalid.47
Considering that common shares have voting rights which translate
to control, as opposed to preferred shares which usually have no
voting rights, the term "capital" in Section 11, Article XII of the
Constitution refers only to common shares. However, if the preferred
shares also have the right to vote in the election of directors, then the
term "capital" shall include such preferred shares because the right
to participate in the control or management of the corporation is
exercised through the right to vote in the election of directors. In
short, the term "capital" in Section 11, Article XII of the
Constitution refers only to shares of stock that can vote in the
election of directors.
This interpretation is consistent with the intent of the framers of the
Constitution to place in the hands of Filipino citizens the control and
management of public utilities. As revealed in the deliberations of the
Constitutional Commission, "capital" refers to the voting stock or
controlling interest of a corporation, to wit:
MR. NOLLEDO. In Sections 3, 9 and 15, the Committee stated local
or Filipino equity and foreign equity; namely, 60-40 in Section 3, 60-
40 in Section 9 and 2/3-1/3 in Section 15.
MR. VILLEGAS. That is right.
MR. NOLLEDO. In teaching law, we are always faced with this
question: "Where do we base the equity requirement, is it on the
authorized capital stock, on the subscribed capital stock, or on the
paid-up capital stock of a corporation"? Will the Committee please
enlighten me on this?
Page | 68
MR. VILLEGAS. We have just had a long discussion with the
members of the team from the UP Law Center who provided us a
draft. The phrase that is contained here which we adopted from
the UP draft is "60 percent of voting stock."
MR. NOLLEDO. That must be based on the subscribed capital stock,
because unless declared delinquent, unpaid capital stock shall be
entitled to vote.
MR. VILLEGAS. That is right.
MR. NOLLEDO. Thank you.
With respect to an investment by one corporation in another
corporation, say, a corporation with 60-40 percent equity invests in
another corporation which is permitted by the Corporation Code,
does the Committee adopt the grandfather rule?
MR. VILLEGAS. Yes, that is the understanding of the Committee.
MR. NOLLEDO. Therefore, we need additional Filipino capital?
MR. VILLEGAS. Yes. 48
xxxx
MR. AZCUNA. May I be clarified as to that portion that was accepted
by the Committee.
MR. VILLEGAS. The portion accepted by the Committee is the
deletion of the phrase "voting stock or controlling interest."
MR. AZCUNA. Hence, without the Davide amendment, the
committee report would read: "corporations or associations at least
sixty percent of whose CAPITAL is owned by such citizens."
MR. VILLEGAS. Yes.
MR. AZCUNA. So if the Davide amendment is lost, we are stuck with
60 percent of the capital to be owned by citizens.
MR. VILLEGAS. That is right.
MR. AZCUNA. But the control can be with the foreigners even if
they are the minority. Let us say 40 percent of the capital is
owned by them, but it is the voting capital, whereas, the Filipinos
own the nonvoting shares. So we can have a situation where the
corporation is controlled by foreigners despite being the
minority because they have the voting capital. That is the
anomaly that would result here.
MR. BENGZON. No, the reason we eliminated the word "stock"
as stated in the 1973 and 1935 Constitutions is that according to
Commissioner Rodrigo, there are associations that do not have
stocks. That is why we say "CAPITAL."
MR. AZCUNA. We should not eliminate the phrase "controlling
interest."
MR. BENGZON. In the case of stock corporations, it is
assumed.49 (Emphasis supplied)
Thus, 60 percent of the "capital" assumes, or should result in,
"controlling interest" in the corporation. Reinforcing this
interpretation of the term "capital," as referring to controlling interest
or shares entitled to vote, is the definition of a "Philippine national" in
the Foreign Investments Act of 1991,50 to wit:
SEC. 3. Definitions. - As used in this Act:
a. The term "Philippine national" shall mean a citizen of the
Philippines; or a domestic partnership or association wholly owned
by citizens of the Philippines; or a corporation organized under the
laws of the Philippines of which at least sixty percent (60%) of
the capital stock outstanding and entitled to vote is owned and
held by citizens of the Philippines; or a corporation organized
abroad and registered as doing business in the Philippines under the
Corporation Code of which one hundred percent (100%) of the capital
stock outstanding and entitled to vote is wholly owned by Filipinos or
a trustee of funds for pension or other employee retirement or
separation benefits, where the trustee is a Philippine national and at
least sixty percent (60%) of the fund will accrue to the benefit of
Page | 69
Philippine nationals: Provided, That where a corporation and its non-
Filipino stockholders own stocks in a Securities and Exchange
Commission (SEC) registered enterprise, at least sixty percent (60%)
of the capital stock outstanding and entitled to vote of each of both
corporations must be owned and held by citizens of the Philippines
and at least sixty percent (60%) of the members of the Board of
Directors of each of both corporations must be citizens of the
Philippines, in order that the corporation, shall be considered a
"Philippine national." (Emphasis supplied)
In explaining the definition of a "Philippine national," the
Implementing Rules and Regulations of the Foreign Investments Act
of 1991 provide:
b. "Philippine national" shall mean a citizen of the Philippines or a
domestic partnership or association wholly owned by the citizens of
the Philippines; or a corporation organized under the laws of the
Philippines of which at least sixty percent [60%] of the capital
stock outstanding and entitled to vote is owned and held by
citizens of the Philippines; or a trustee of funds for pension or other
employee retirement or separation benefits, where the trustee is a
Philippine national and at least sixty percent [60%] of the fund will
accrue to the benefit of the Philippine nationals; Provided, that where
a corporation its non-Filipino stockholders own stocks in a Securities
and Exchange Commission [SEC] registered enterprise, at least sixty
percent [60%] of the capital stock outstanding and entitled to vote of
both corporations must be owned and held by citizens of the
Philippines and at least sixty percent [60%] of the members of the
Board of Directors of each of both corporation must be citizens of the
Philippines, in order that the corporation shall be considered a
Philippine national. The control test shall be applied for this purpose.
Compliance with the required Filipino ownership of a
corporation shall be determined on the basis of outstanding
capital stock whether fully paid or not, but only such stocks
which are generally entitled to vote are considered.
For stocks to be deemed owned and held by Philippine citizens
or Philippine nationals, mere legal title is not enough to meet the
required Filipino equity. Full beneficial ownership of the stocks,
coupled with appropriate voting rights is essential. Thus,
stocks, the voting rights of which have been assigned or
transferred to aliens cannot be considered held by Philippine
citizens or Philippine nationals.
Individuals or juridical entities not meeting the aforementioned
qualifications are considered as non-Philippine nationals.
(Emphasis supplied)
Mere legal title is insufficient to meet the 60 percent Filipino-owned
"capital" required in the Constitution. Full beneficial ownership of 60
percent of the outstanding capital stock, coupled with 60 percent of
the voting rights, is required. The legal and beneficial ownership of
60 percent of the outstanding capital stock must rest in the hands of
Filipino nationals in accordance with the constitutional mandate.
Otherwise, the corporation is "considered as non-Philippine
national[s]."
Under Section 10, Article XII of the Constitution, Congress may
"reserve to citizens of the Philippines or to corporations or
associations at least sixty per centum of whose capital is owned by
such citizens, or such higher percentage as Congress may prescribe,
certain areas of investments." Thus, in numerous laws Congress has
reserved certain areas of investments to Filipino citizens or to
corporations at least sixty percent of the "capital" of which is owned
by Filipino citizens. Some of these laws are: (1) Regulation of Award
of Government Contracts or R.A. No. 5183; (2) Philippine Inventors
Incentives Act or R.A. No. 3850; (3) Magna Carta for Micro, Small
and Medium Enterprises or R.A. No. 6977; (4) Philippine Overseas
Shipping Development Act or R.A. No. 7471; (5) Domestic Shipping
Development Act of 2004 or R.A. No. 9295; (6) Philippine Technology
Transfer Act of 2009 or R.A. No. 10055; and (7) Ship Mortgage
Decree or P.D. No. 1521. Hence, the term "capital" in Section 11,
Article XII of the Constitution is also used in the same context in
numerous laws reserving certain areas of investments to Filipino
citizens.
To construe broadly the term "capital" as the total outstanding capital
stock, including both common and non-voting preferred shares,
grossly contravenes the intent and letter of the Constitution that the
"State shall develop a self-reliant and independent national economy
effectively controlled by Filipinos." A broad definition unjustifiably
disregards who owns the all-important voting stock, which
necessarily equates to control of the public utility.
Page | 70
We shall illustrate the glaring anomaly in giving a broad definition to
the term "capital." Let us assume that a corporation has 100 common
shares owned by foreigners and 1,000,000 non-voting preferred
shares owned by Filipinos, with both classes of share having a par
value of one peso (₱1.00) per share. Under the broad definition of
the term "capital," such corporation would be considered compliant
with the 40 percent constitutional limit on foreign equity of public
utilities since the overwhelming majority, or more than 99.999
percent, of the total outstanding capital stock is Filipino owned. This
is obviously absurd.
In the example given, only the foreigners holding the common shares
have voting rights in the election of directors, even if they hold only
100 shares. The foreigners, with a minuscule equity of less than
0.001 percent, exercise control over the public utility. On the other
hand, the Filipinos, holding more than 99.999 percent of the equity,
cannot vote in the election of directors and hence, have no control
over the public utility. This starkly circumvents the intent of the
framers of the Constitution, as well as the clear language of the
Constitution, to place the control of public utilities in the hands of
Filipinos. It also renders illusory the State policy of an independent
national economy effectively controlled by Filipinos.
The example given is not theoretical but can be found in the real
world, and in fact exists in the present case.
Holders of PLDT preferred shares are explicitly denied of the right to
vote in the election of directors. PLDT’s Articles of Incorporation
expressly state that "the holders of Serial Preferred Stock shall
not be entitled to vote at any meeting of the stockholders for the
election of directors or for any other purpose or otherwise
participate in any action taken by the corporation or its stockholders,
or to receive notice of any meeting of stockholders."51
On the other hand, holders of common shares are granted the
exclusive right to vote in the election of directors. PLDT’s Articles of
Incorporation52 state that "each holder of Common Capital Stock shall
have one vote in respect of each share of such stock held by him on
all matters voted upon by the stockholders, and the holders of
Common Capital Stock shall have the exclusive right to vote for
the election of directors and for all other purposes."53
In short, only holders of common shares can vote in the election of
directors, meaning only common shareholders exercise control over
PLDT. Conversely, holders of preferred shares, who have no voting
rights in the election of directors, do not have any control over PLDT.
In fact, under PLDT’s Articles of Incorporation, holders of common
shares have voting rights for all purposes, while holders of preferred
shares have no voting right for any purpose whatsoever.
It must be stressed, and respondents do not dispute, that
foreigners hold a majority of the common shares of PLDT. In fact,
based on PLDT’s 2010 General Information Sheet (GIS),54 which is
a document required to be submitted annually to the Securities and
Exchange Commission,55 foreigners hold 120,046,690 common
shares of PLDT whereas Filipinos hold only 66,750,622 common
shares.56 In other words, foreigners hold 64.27% of the total number
of PLDT’s common shares, while Filipinos hold only 35.73%. Since
holding a majority of the common shares equates to control, it is clear
that foreigners exercise control over PLDT. Such amount of control
unmistakably exceeds the allowable 40 percent limit on foreign
ownership of public utilities expressly mandated in Section 11, Article
XII of the Constitution.
Moreover, the Dividend Declarations of PLDT for 2009,57 as
submitted to the SEC, shows that per share the SIP58 preferred
shares earn a pittance in dividends compared to the common shares.
PLDT declared dividends for the common shares at ₱70.00 per
share, while the declared dividends for the preferred shares
amounted to a measly ₱1.00 per share.59 So the preferred shares not
only cannot vote in the election of directors, they also have very little
and obviously negligible dividend earning capacity compared to
common shares.
As shown in PLDT’s 2010 GIS,60 as submitted to the SEC, the par
value of PLDT common shares is ₱5.00 per share, whereas the par
value of preferred shares is ₱10.00 per share. In other words,
preferred shares have twice the par value of common shares but
cannot elect directors and have only 1/70 of the dividends of common
shares. Moreover, 99.44% of the preferred shares are owned by
Filipinos while foreigners own only a minuscule 0.56% of the
preferred shares.61 Worse, preferred shares constitute 77.85% of the
authorized capital stock of PLDT while common shares constitute
only 22.15%.62 This undeniably shows that beneficial interest in PLDT
Page | 71
is not with the non-voting preferred shares but with the common
shares, blatantly violating the constitutional requirement of 60
percent Filipino control and Filipino beneficial ownership in a public
utility.
The legal and beneficial ownership of 60 percent of the outstanding
capital stock must rest in the hands of Filipinos in accordance with
the constitutional mandate. Full beneficial ownership of 60 percent of
the outstanding capital stock, coupled with 60 percent of the voting
rights, is constitutionally required for the State’s grant of authority to
operate a public utility. The undisputed fact that the PLDT preferred
shares, 99.44% owned by Filipinos, are non-voting and earn only
1/70 of the dividends that PLDT common shares earn, grossly
violates the constitutional requirement of 60 percent Filipino control
and Filipino beneficial ownership of a public utility.
In short, Filipinos hold less than 60 percent of the voting stock,
and earn less than 60 percent of the dividends, of PLDT. This
directly contravenes the express command in Section 11, Article XII
of the Constitution that "[n]o franchise, certificate, or any other form
of authorization for the operation of a public utility shall be granted
except to x x x corporations x x x organized under the laws of the
Philippines, at least sixty per centum of whose capital is owned
by such citizens x x x."
To repeat, (1) foreigners own 64.27% of the common shares of
PLDT, which class of shares exercises the sole right to vote in the
election of directors, and thus exercise control over PLDT; (2)
Filipinos own only 35.73% of PLDT’s common shares, constituting a
minority of the voting stock, and thus do not exercise control over
PLDT; (3) preferred shares, 99.44% owned by Filipinos, have no
voting rights; (4) preferred shares earn only 1/70 of the dividends that
common shares earn;63 (5) preferred shares have twice the par value
of common shares; and (6) preferred shares constitute 77.85% of the
authorized capital stock of PLDT and common shares only 22.15%.
This kind of ownership and control of a public utility is a mockery of
the Constitution.
Incidentally, the fact that PLDT common shares with a par value of
₱5.00 have a current stock market value of ₱2,328.00 per share,64
while PLDT preferred shares with a par value of ₱10.00 per share
have a current stock market value ranging from only ₱10.92 to
₱11.06 per share,65 is a glaring confirmation by the market that
control and beneficial ownership of PLDT rest with the common
shares, not with the preferred shares.
Indisputably, construing the term "capital" in Section 11, Article XII of
the Constitution to include both voting and non-voting shares will
result in the abject surrender of our telecommunications industry to
foreigners, amounting to a clear abdication of the State’s
constitutional duty to limit control of public utilities to Filipino citizens.
Such an interpretation certainly runs counter to the constitutional
provision reserving certain areas of investment to Filipino citizens,
such as the exploitation of natural resources as well as the ownership
of land, educational institutions and advertising businesses. The
Court should never open to foreign control what the Constitution has
expressly reserved to Filipinos for that would be a betrayal of the
Constitution and of the national interest. The Court must perform its
solemn duty to defend and uphold the intent and letter of the
Constitution to ensure, in the words of the Constitution, "a self-reliant
and independent national economy effectively controlled by
Filipinos."
Section 11, Article XII of the Constitution, like other provisions of the
Constitution expressly reserving to Filipinos specific areas of
investment, such as the development of natural resources and
ownership of land, educational institutions and advertising business,
is self-executing. There is no need for legislation to implement these
self-executing provisions of the Constitution. The rationale why these
constitutional provisions are self-executing was explained in Manila
Prince Hotel v. GSIS,66 thus:
x x x Hence, unless it is expressly provided that a legislative act is
necessary to enforce a constitutional mandate, the presumption now
is that all provisions of the constitution are self-executing. If the
constitutional provisions are treated as requiring legislation instead of
self-executing, the legislature would have the power to ignore and
practically nullify the mandate of the fundamental law. This can be
cataclysmic. That is why the prevailing view is, as it has always been,
that —
. . . in case of doubt, the Constitution should be considered self-
executing rather than non-self-executing. . . . Unless the contrary is
clearly intended, the provisions of the Constitution should be
Page | 72
considered self-executing, as a contrary rule would give the
legislature discretion to determine when, or whether, they shall
be effective. These provisions would be subordinated to the will of
the lawmaking body, which could make them entirely meaningless by
simply refusing to pass the needed implementing statute. (Emphasis
supplied)
In Manila Prince Hotel, even the Dissenting Opinion of then Associate
Justice Reynato S. Puno, later Chief Justice, agreed that
constitutional provisions are presumed to be self-executing. Justice
Puno stated:
Courts as a rule consider the provisions of the Constitution as self-
executing, rather than as requiring future legislation for their
enforcement. The reason is not difficult to discern. For if they are
not treated as self-executing, the mandate of the fundamental
law ratified by the sovereign people can be easily ignored and
nullified by Congress. Suffused with wisdom of the ages is the
unyielding rule that legislative actions may give breath to
constitutional rights but congressional inaction should not
suffocate them.
Thus, we have treated as self-executing the provisions in the Bill of
Rights on arrests, searches and seizures, the rights of a person under
custodial investigation, the rights of an accused, and the privilege
against self-incrimination. It is recognized that legislation is
unnecessary to enable courts to effectuate constitutional provisions
guaranteeing the fundamental rights of life, liberty and the protection
of property. The same treatment is accorded to constitutional
provisions forbidding the taking or damaging of property for public
use without just compensation. (Emphasis supplied)
Thus, in numerous cases,67 this Court, even in the absence of
implementing legislation, applied directly the provisions of the 1935,
1973 and 1987 Constitutions limiting land ownership to Filipinos. In
Soriano v. Ong Hoo,68 this Court ruled:
x x x As the Constitution is silent as to the effects or consequences
of a sale by a citizen of his land to an alien, and as both the citizen
and the alien have violated the law, none of them should have a
recourse against the other, and it should only be the State that should
be allowed to intervene and determine what is to be done with the
property subject of the violation. We have said that what the State
should do or could do in such matters is a matter of public policy,
entirely beyond the scope of judicial authority. (Dinglasan, et al. vs.
Lee Bun Ting, et al., 6 G. R. No. L-5996, June 27, 1956.) While the
legislature has not definitely decided what policy should be
followed in cases of violations against the constitutional
prohibition, courts of justice cannot go beyond by declaring the
disposition to be null and void as violative of the Constitution. x
x x (Emphasis supplied)
To treat Section 11, Article XII of the Constitution as not self-
executing would mean that since the 1935 Constitution, or over the
last 75 years, not one of the constitutional provisions expressly
reserving specific areas of investments to corporations, at least 60
percent of the "capital" of which is owned by Filipinos, was
enforceable. In short, the framers of the 1935, 1973 and 1987
Constitutions miserably failed to effectively reserve to Filipinos
specific areas of investment, like the operation by corporations of
public utilities, the exploitation by corporations of mineral resources,
the ownership by corporations of real estate, and the ownership of
educational institutions. All the legislatures that convened since 1935
also miserably failed to enact legislations to implement these vital
constitutional provisions that determine who will effectively control
the national economy, Filipinos or foreigners. This Court cannot allow
such an absurd interpretation of the Constitution.
This Court has held that the SEC "has both regulatory and
adjudicative functions."69 Under its regulatory functions, the SEC can
be compelled by mandamus to perform its statutory duty when it
unlawfully neglects to perform the same. Under its adjudicative or
quasi-judicial functions, the SEC can be also be compelled by
mandamus to hear and decide a possible violation of any law it
administers or enforces when it is mandated by law to investigate
such violation.1awphi1
Under Section 17(4)70 of the Corporation Code, the SEC has the
regulatory function to reject or disapprove the Articles of
Incorporation of any corporation where "the required percentage of
ownership of the capital stock to be owned by citizens of the
Philippines has not been complied with as required by existing
laws or the Constitution." Thus, the SEC is the government agency
tasked with the statutory duty to enforce the nationality requirement
Page | 73
prescribed in Section 11, Article XII of the Constitution on the
ownership of public utilities. This Court, in a petition for declaratory
relief that is treated as a petition for mandamus as in the present
case, can direct the SEC to perform its statutory duty under the law,
a duty that the SEC has apparently unlawfully neglected to do based
on the 2010 GIS that respondent PLDT submitted to the SEC.
Under Section 5(m) of the Securities Regulation Code,71 the SEC is
vested with the "power and function" to "suspend or revoke, after
proper notice and hearing, the franchise or certificate of
registration of corporations, partnerships or associations, upon
any of the grounds provided by law." The SEC is mandated under
Section 5(d) of the same Code with the "power and function" to
"investigate x x x the activities of persons to ensure compliance"
with the laws and regulations that SEC administers or enforces. The
GIS that all corporations are required to submit to SEC annually
should put the SEC on guard against violations of the nationality
requirement prescribed in the Constitution and existing laws. This
Court can compel the SEC, in a petition for declaratory relief that is
treated as a petition for mandamus as in the present case, to hear
and decide a possible violation of Section 11, Article XII of the
Constitution in view of the ownership structure of PLDT’s voting
shares, as admitted by respondents and as stated in PLDT’s 2010
GIS that PLDT submitted to SEC.
WHEREFORE, we PARTLY GRANT the petition and rule that the
term "capital" in Section 11, Article XII of the 1987 Constitution refers
only to shares of stock entitled to vote in the election of directors, and
thus in the present case only to common shares, and not to the total
outstanding capital stock (common and non-voting preferred shares).
Respondent Chairperson of the Securities and Exchange
Commission is DIRECTED to apply this definition of the term "capital"
in determining the extent of allowable foreign ownership in
respondent Philippine Long Distance Telephone Company, and if
there is a violation of Section 11, Article XII of the Constitution, to
impose the appropriate sanctions under the law.
SO ORDERED.
EN BANC
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
Remedial Law; Civil Procedure; In Luzon Stevedoring Corp. v. Anti-
Dummy Board, 46 SCRA 474 (1972), 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;
The Supreme Court deemed it necessary to finally dispose of the
case for the guidance of all concerned, despite the apparent
procedural flaw in the petition.―In Luzon Stevedoring Corp. v. Anti-
Dummy Board, 46 SCRA 474 (1972), 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
Page | 74
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.
Constitutional Law; Capital; Words and Phrases; 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.―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.
Securities and Exchange Commission (SEC); Securities Regulation
Code; Under Section 5.1 of the Securities Regulation Code, it is the
Securities and Exchange Commission (SEC) as a collegial body,
and not any of its legal officers, that is empowered to issue opinions
and approve rules and regulations.―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, 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.
Same; Grandfather Rule; The Securities and Exchange
Commission (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.―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.
Capital; Statutory Construction; 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.―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.
Same; Constitutional Law; 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.”―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
Page | 75
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.
Same; Same; Public Utilities; Section 11, Article XII of the 1987
Constitution 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.”―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.”
Same; Same; Same; 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.―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.
Same; Same; Same; Omnibus Investments Code of 1987; Under
Article 48(3) of the Omnibus Investments Code of 1987, no
corporation which is not a ‘Philippine national’ shall do business in
the Philippines without first securing from the Board of Investments
a written certificate to the effect that such business or economic
activity would not conflict with the Constitution or laws of the
Philippines.―Under Article 48(3) 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.” 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.
Same; Same; Same; Foreign Investments Act of 1991 (FIA);
Philippine Nationals; Domestic Corporations; Words and Phrases;
The Foreign Investments Act of 1991, 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.―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
Page | 76
citizens or to corporations or associations at least 60% Filipino-
owned.
Same; Same; Same; Same; 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.―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.”
Same; Same; Same; 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.―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.
Same; Same; Same; 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.―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.
Same; Same; Same; 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.―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, “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.
Same; Same; Same; 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
Page | 77
entity; and (2) all officers of the corporation or association must be
Filipino citizens.―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.
Same; Same; Same; Foreign Investments Act of 1991 (FIA); 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 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.
VELASCO, J., Dissenting Opinion:
Constitutional Law; Capital; Public Utilities; View that “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; It does not distinguish based on the
voting feature of the stocks but refers to all shares, be they voting or
non-voting.―“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” or “the ownership element of a corporation divided
into shares and represented by certificates.” The term “capital”
includes all the outstanding shares of a company that represent “the
proprietary claim in a business.” 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.
Same; Same; Same; View that 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.―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. 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.
Same; Same; Same; View that 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.―If the framers wanted the word “capital” to mean voting
capital stock, their terminology would have certainly been
Page | 78
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.” 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.
Same; Same; Same; View that where 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.―Laxamana v.
Baltazar, 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.” Hence, it can be
safely assumed that the framers, in the course of deliberating the
1987 Constitution, knew of the adverted SEC interpretation.
Same; Same; Same; View that 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.―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.
Same; Same; Same; Amendments; View that the Constitution may
only be amended through the procedure outlined in the basic
document itself. An amendment cannot, therefore, be made through
the expedience of a legislative action that diagonally opposes the
clear provisions of the Constitution.―Justice Carpio parlays the
thesis that the FIA, and its predecessors, the Investments
Incentives Act of 1967 (“1967 IIA”), Omnibus Investments Code of
1981 (“1981 OIC”), and the Omnibus Incentives Code of 1987
(“1987 OIC”), (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. An amendment cannot, therefore, be
made through the expedience of a legislative action that diagonally
opposes the clear provisions of the Constitution.
Statutory Construction; View that 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.―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.
Page | 79
Remedial Law; Civil Procedure; Indispensable Parties; Due
Process; View that since Philippine Long Distance Telephone
Company (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 principle of due process of law contemplates notice and
opportunity to be heard before judgment is rendered, affecting one’s
person or property.―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,” 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.” The principle of due process of law “contemplates
notice and opportunity to be heard before judgment is rendered,
affecting one’s person or property.”
Same; Evidence; Presumptions; View that Article 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.”―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 thereon 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.
Immunity from Suit; View that 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.―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. 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.
Constitutional Law; Capital; Public Utilities; View that 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 fair and equitable treatment (FET)
guarantee.―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
Page | 80
(CPCN) from the National Telecommunications Commission C.
Foreign equity is permitted up to 40 percent. D. x x x
Statutes; Retroactivity of Laws; View that laws have no retroactive
effect unless the contrary is provided.―Lex prospicit, non respicit—
“laws have no retroactive effect unless the contrary is provided.” 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.” 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.
ABAD, J., Dissenting Opinion:
Constitutional Law; Statutory Construction; Capital; View that 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.―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. It may very
well in its wisdom define the limit of foreign ownership in public
utilities.
Same; Same; View that Section 11, Article XII of the 1987
Constitution is one of the constitutional provisions that are not self-
executing and need sufficient details for a meaningful
implementation.―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.”
Same; Same; View that it is a rule that when the operation of the
statute is limited, the law should receive a restricted
construction.―The majority opinion also resorted to the various
investment laws 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.
Capital; Doctrine of Equality of Shares; View that 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.―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.
Constitutional Law; Public Utilities; View that the Filipinization of
public utilities under the 1987 Constitution is a recognition of the
Page | 81
very strategic position of public utilities both in the national economy
and for national security.―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 the national
security. 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. 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.
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,6 declaring 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.
Page | 82
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)
Page | 83
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
Page | 84
en banc from delegating to any individual Commissioner or staff the Novel opinions that [have] to be decided by the
power to adopt rules or regulations. In short, any opinion of En Banc...
individual Commissioners or SEC legal officers does not
constitute a rule or regulation of the SEC. JUSTICE CARPIO:

The SEC admits during the Oral Arguments that only the SEC en What cannot be delegated, among others, is
banc, and not any of its individual commissioners or legal staff, is the power to adopt or amend rules and
empowered to issue opinions which have the same binding effect as regulations, correct?
SEC rules and regulations, thus:
COMMISSIONER GAITE:
JUSTICE CARPIO:
That’s correct, Your Honor.
So, under the law, it is the Commission En
Banc that can issue an JUSTICE CARPIO:

SEC Opinion, correct? So, you combine the two (2), the SEC
officer, if delegated that power, can issue
COMMISSIONER GAITE:13 an opinion but that opinion does not
constitute a rule or regulation, correct?
That’s correct, Your Honor.
COMMISSIONER GAITE:
JUSTICE CARPIO:
Correct, Your Honor.
Can the Commission En Banc delegate this
function to an SEC officer? JUSTICE CARPIO:

COMMISSIONER GAITE: So, all of these opinions that you

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:
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:
Page | 85
 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
Page | 86
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
Page | 87
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
Page | 88
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
Page | 89
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
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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:
Page | 91
 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)
Page | 92
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
Page | 93
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
Page | 94
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."
Page | 95
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,
Page | 96
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
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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.
Page | 98
MS. ROSARIO BRAID. Yes. FR. BERNAS. "THE PARTICIPATION OF FOREIGN INVESTORS
IN THE GOVERNING BODY OF ANY PUBLIC UTILITY
MR. VILLEGAS. Yes, Madam President. ENTERPRISE SHALL BE LIMITED TO THEIR PROPORTIONATE
SHARE IN THE CAPITAL THEREOF..." I do not have the rest of the
xxxx copy.

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. 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?

xxxx MS. ROSARIO BRAID. Yes.

FR. BERNAS. Madam President. xxxx

THE PRESIDENT. Commissioner Bernas is recognized. MR. DE LOS REYES. The governing body refers to the board of
directors and trustees.
FR. BERNAS. Will the committee accept a reformulation of the first
part? MR. VILLEGAS. That is right.

MR. BENGZON. Let us hear it. MR. BENGZON. Yes, the governing body refers to the board of
directors.
FR. BERNAS. The reformulation will be essentially the formula of the
1973 Constitution which reads: "THE PARTICIPATION OF MR. REGALADO. It is accepted.
FOREIGN INVESTORS IN THE GOVERNING BODY OF ANY
PUBLIC UTILITY ENTERPRISE SHALL BE LIMITED TO THEIR MR. RAMA. The body is now ready to vote, Madam President.
PROPORTIONATE SHARE IN THE CAPITAL THEREOF AND..."
VOTING
MR. VILLEGAS. "ALL THE EXECUTIVE AND MANAGING
OFFICERS OF SUCH CORPORATIONS AND ASSOCIATIONS xxxx
MUST BE CITIZENS OF THE PHILIPPINES."
The results show 29 votes in favor and none against; so the proposed
MR. BENGZON. Will Commissioner Bernas read the whole thing amendment is approved.
again?
xxxx

Page | 99
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
Page | 100
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
Page | 101
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
Page | 102
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
Page | 103
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.

Page | 104
 THIRD DIVISION
G.R. No. 101897. March 5, 1993.
LYCEUM OF THE PHILIPPINES, INC., petitioner, vs. COURT OF
APPEALS, LYCEUM OF APARRI, LYCEUM OF CABAGAN,
LYCEUM OF CAMALANIUGAN, INC., LYCEUM OF LALLO, INC.,
LYCEUM OF TUAO, INC., BUHI LYCEUM, CENTRAL LYCEUM OF
CATANDUANES, LYCEUM OF SOUTHERN PHILIPPINES,
LYCEUM OF EASTERN MINDANAO, INC. and WESTERN
PANGASINAN LYCEUM, INC., respondents.
Quisumbing, Torres & Evangelista Law Offices and Ambrosio Padilla
for petitioner.
Antonio M. Nuyles and Purungan, Chato, Chato, Tarriela & Tan Law
Offices for respondents.
Froilan Siobal for Western Pangasinan Lyceum.
DECISION
SYLLABUS
1. CORPORATION LAW; CORPORATE NAMES; REGISTRATION
OF PROPOSED NAME WHICH IS IDENTICAL OR CONFUSINGLY
SIMILAR TO THAT OF ANY EXISTING CORPORATION,
PROHIBITED; CONFUSION AND DECEPTION EFFECTIVELY
PRECLUDED BY THE APPENDING OF GEOGRAPHIC NAMES TO
THE WORD "LYCEUM". — The Articles of Incorporation of a
corporation must, among other things, set out the name of the
corporation. Section 18 of the Corporation Code establishes a
restrictive rule insofar as corporate names are concerned: "Section
18. Corporate name. — No corporate name may be allowed by the
Securities an Exchange Commission if the proposed name is
identical or deceptively or confusingly similar to that of any existing
corporation or to any other name already protected by law or is
patently deceptive, confusing or contrary to existing laws. When a
change in the corporate name is approved, the Commission shall
issue an amended certificate of incorporation under the amended
name." The policy underlying the prohibition in Section 18 against the
registration of a corporate name which is "identical or deceptively or
confusingly similar" to that of any existing corporation or which is
"patently deceptive" or "patently confusing" or "contrary to existing
laws," is the avoidance of fraud upon the public which would have
occasion to deal with the entity concerned, the evasion of legal
obligations and duties, and the reduction of difficulties of
administration and supervision over corporations. We do not consider
that the corporate names of private respondent institutions are
"identical with, or deceptively or confusingly similar" to that of the
petitioner institution. True enough, the corporate names of private
respondent entities all carry the word "Lyceum" but confusion and
deception are effectively precluded by the appending of geographic
names to the word "Lyceum." Thus, we do not believe that the
"Lyceum of Aparri" can be mistaken by the general public for the
Lyceum of the Philippines, or that the "Lyceum of Camalaniugan"
would be confused with the Lyceum of the Philippines.
2. ID.; ID.; DOCTRINE OF SECONDARY MEANING; USE OF
WORD "LYCEUM," NOT ATTENDED WITH EXCLUSIVITY. — It is
claimed, however, by petitioner that the word "Lyceum" has acquired
a secondary meaning in relation to petitioner with the result that word,
although originally a generic, has become appropriable by petitioner
to the exclusion of other institutions like private respondents herein.
The doctrine of secondary meaning originated in the field of
trademark law. Its application has, however, been extended to
corporate names sine the right to use a corporate name to the
exclusion of others is based upon the same principle which underlies
the right to use a particular trademark or tradename. In Philippine Nut
Industry, Inc. v. Standard Brands, Inc., the doctrine of secondary
meaning was elaborated in the following terms: " . . . a word or phrase
originally incapable of exclusive appropriation with reference to an
article on the market, because geographically or otherwise
descriptive, might nevertheless have been used so long and so
exclusively by one producer with reference to his article that, in that
trade and to that branch of the purchasing public, the word or phrase
has come to mean that the article was his product." The question
which arises, therefore, is whether or not the use by petitioner of
"Lyceum" in its corporate name has been for such length of time and
with such exclusivity as to have become associated or identified with
the petitioner institution in the mind of the general public (or at least
that portion of the general public which has to do with schools). The
Court of Appeals recognized this issue and answered it in the
Page | 105
negative: "Under the doctrine of secondary meaning, a word or
phrase originally incapable of exclusive appropriation with reference
to an article in the market, because geographical or otherwise
descriptive might nevertheless have been used so long and so
exclusively by one producer with reference to this article that, in that
trade and to that group of the purchasing public, the word or phrase
has come to mean that the article was his produce (Ana Ang vs.
Toribio Teodoro, 74 Phil. 56). This circumstance has been referred to
as the distinctiveness into which the name or phrase has evolved
through the substantial and exclusive use of the same for a
considerable period of time. . . . No evidence was ever presented in
the hearing before the Commission which sufficiently proved that the
word 'Lyceum' has indeed acquired secondary meaning in favor of
the appellant. If there was any of this kind, the same tend to prove
only that the appellant had been using the disputed word for a long
period of time. . . . In other words, while the appellant may have
proved that it had been using the word 'Lyceum' for a long period of
time, this fact alone did not amount to mean that the said word had
acquired secondary meaning in its favor because the appellant failed
to prove that it had been using the same word all by itself to the
exclusion of others. More so, there was no evidence presented to
prove that confusion will surely arise if the same word were to be
used by other educational institutions. Consequently, the allegations
of the appellant in its first two assigned errors must necessarily fail."
We agree with the Court of Appeals. The number alone of the private
respondents in the case at bar suggests strongly that petitioner's use
of the word "Lyceum" has not been attended with the exclusivity
essential for applicability of the doctrine of secondary meaning.
Petitioner's use of the word "Lyceum" was not exclusive but was in
truth shared with the Western Pangasinan Lyceum and a little later
with other private respondent institutions which registered with the
SEC using "Lyceum" as part of their corporation names. There may
well be other schools using Lyceum or Liceo in their names, but not
registered with the SEC because they have not adopted the
corporate form of organization.
3. ID.; ID.; MUST BE EVALUATED IN THEIR ENTIRETY TO
DETERMINE WHETHER THEY ARE CONFUSINGLY OR
DECEPTIVELY SIMILAR TO ANOTHER CORPORATE ENTITY'S
NAME. — petitioner institution is not entitled to a legally enforceable
exclusive right to use the word "Lyceum" in its corporate name and
that other institutions may use "Lyceum" as part of their corporate
names. To determine whether a given corporate name is "identical"
or "confusingly or deceptively similar" with another entity's corporate
name, it is not enough to ascertain the presence of "Lyceum" or
"Liceo" in both names. One must evaluate corporate names in their
entirety and when the name of petitioner is juxtaposed with the
names of private respondents, they are not reasonably regarded as
"identical" or "confusingly or deceptively similar" with each other.
Corporation Law; Names; Fact that other schools use "Lyceum" as
part of their school's name is not a deceptive use thereof relative to
Lyceum of the Philippines.—We do not consider that the corporate
names of private respondent institutions are "identical with, or
deceptively or confusingly similar" to that of the petitioner institution.
True enough, the corporate names of private respondent entities all
carry the word "Lyceum" but confusion and deception are effectively
precluded by the appending of geographic names to the word
"Lyceum." Thus, we do not believe that the "Lyceum of Aparri" can
be mistaken by the general public for the Lyceum of the Philippines,
or that the "Lyceum of Camalaniugan" would be confused with the
Lyceum of the Philippines.
Same; Same; Words and Phrases; "Lyceum" is a generic name.—
Etymologically, the word "Lyceum" is the Latin word for the Greek
lykeion which in turn referred to a locality on the river Ilissius in
ancient Athens "comprising an enclosure dedicated to Apollo and
adorned with fountains and buildings erected by Pisistratus,
Pericles and Lycurgus frequented by the youth for exercise and by
the philosopher Aristotle and his followers for teaching." In time, the
word "Lyceum" became associated with schools and other
institutions providing public lectures and concerts and public
discussions. Thus today, the word "Lyceum" generally refers to a
school or an institution of learning. While the Latin word "lyceum"
has been incorporated into the English language, the word is also
found in Spanish (liceo) and in French (lycee). As the Court of
Appeals noted in its Decision, Roman Catholic schools frequently
use the term; e.g., "Liceo de Manila," "Liceo de Baleno" (in Baleno
Masbate), "Liceo de Masbate," "Liceo de Albay." "Lyceum" is in fact
as generic in character as the word "university." In the name of the
petitioner, "Lyceum" appears to be a substitute for "university;" in
other places, however, "Lyceum," or "Liceo" or "Lycee" frequently
denotes a secondary school or a college. It may be (though this is a
question of fact which we need not resolve) that the use of the word
Page | 106
"Lyceum" may not yet be as widespread as the use of "university,"
but it is clear that a not inconsiderable number of educational
institutions have adopted "Lyceum" or "Liceo" as part of their
corporate names. Since "Lyceum" or "Liceo" denotes a school or
institution of learning, it is not unnatural to use this word to
designate an entity which is organized and operating as an
educational institution.
Same; Same; Same; Trademarks; "Secondary meaning," defined.—
In Philippine Nut Industry, Inc. v. Standard Brands, Inc., the doctrine
of secondary meaning was elaborated in the following terms: "x x x
a word or phrase originally incapable of exclusive appropriation with
reference to an article on the market, because geographically or
otherwise descriptive, might nevertheless have been used so long
and so exclusively by one producer with reference to his article that,
in that trade and to that branch of the purchasing public, the word or
phrase has come to mean that the article was his product."
Same; Same; Same; Same; Lyceum of the Philippines has not
gained exclusive use of "Lyceum" by long passage of time.—We
agree with the Court of Appeals. The number alone of the private
respondents in the case at bar suggests strongly that petitioner's
use of the word "Lyceum" has not been attended with the exclusivity
essential for applicability of the doctrine of secondary meaning. It
may be noted also that at least one of the private respondents, i.e.,
the Western Pangasinan Lyceum, Inc., used the term "Lyceum"
seventeen (17) years before the petitioner registered its own
corporate name with the SEC and began using the word "Lyceum."
It follows that if any institution had acquired an exclusive right to the
word "Lyceum," that institution would have been the Western
Pangasinan Lyceum, Inc. rather than the petitioner institution.
On 24 February 1984, petitioner instituted proceedings before the
SEC to compel the private respondents, which are also educational
institutions, to delete the word "Lyceum" from their corporate names
and permanently to enjoin them from using "Lyceum" as part of their
respective names.
Some of the private respondents actively participated in the
proceedings before the SEC. These are the following, the dates of
their original SEC registration being set out below opposite their
respective names:
Western Pangasinan Lyceum — 27 October 1950
Lyceum of Cabagan — 31 October 1962
Lyceum of Lallo, Inc. — 26 March 1972
Lyceum of Aparri — 28 March 1972
Lyceum of Tuao, Inc. — 28 March 1972
Lyceum of Camalaniugan — 28 March 1972
The following private respondents were declared in default for failure
to file an answer despite service of summons:
Buhi Lyceum;
Central Lyceum of Catanduanes;
Lyceum of Eastern Mindanao, Inc.; and

Lyceum of Southern Philippines

FELICIANO, J:
Petitioner's original complaint before the SEC had included three (3)
Petitioner is an educational institution duly registered with the other entities:
Securities and Exchange Commission ("SEC"). When it first
registered with the SEC on 21 September 1950, it used the corporate 1. The Lyceum of Malacanay;
name Lyceum of the Philippines, Inc. and has used that name ever
since. 2. The Lyceum of Marbel; and

Page | 107
3. The Lyceum of Araullo
The complaint was later withdrawn insofar as concerned the Lyceum
of Malacanay and the Lyceum of Marbel, for failure to serve
summons upon these two (2) entities. The case against the Liceum
of Araullo was dismissed when that school motu proprio change its
corporate name to "Pamantasan ng Araullo."
The background of the case at bar needs some recounting. Petitioner
had sometime before commenced in the SEC a proceeding (SEC-
Case No. 1241) against the Lyceum of Baguio, Inc. to require it to
change its corporate name and to adopt another name not "similar
[to] or identical" with that of petitioner. In an Order dated 20 April
1977, Associate Commissioner Julio Sulit held that the corporate
name of petitioner and that of the Lyceum of Baguio, Inc. were
substantially identical because of the presence of a "dominant" word,
i.e., "Lyceum," the name of the geographical location of the campus
being the only word which distinguished one from the other corporate
name. The SEC also noted that petitioner had registered as a
corporation ahead of the Lyceum of Baguio, Inc. in point of time, 1
and ordered the latter to change its name to another name "not
similar or identical [with]" the names of previously registered entities.
The Lyceum of Baguio, Inc. assailed the Order of the SEC before the
Supreme Court in a case docketed as G.R. No. L-46595. In a Minute
Resolution dated 14 September 1977, the Court denied the Petition
for Review for lack of merit. Entry of judgment in that case was made
on 21 October 1977. 2
Armed with the Resolution of this Court in G.R. No. L-46595,
petitioner then wrote all the educational institutions it could find using
the word "Lyceum" as part of their corporate name, and advised them
to discontinue such use of "Lyceum." When, with the passage of time,
it became clear that this recourse had failed, petitioner instituted
before the SEC SEC-Case No. 2579 to enforce what petitioner claims
as its proprietary right to the word "Lyceum." The SEC hearing officer
rendered a decision sustaining petitioner's claim to an exclusive right
to use the word "Lyceum." The hearing officer relied upon the SEC
ruling in the Lyceum of Baguio, Inc. case (SEC-Case No. 1241) and
held that the word "Lyceum" was capable of appropriation and that
petitioner had acquired an enforceable exclusive right to the use of
that word.
On appeal, however, by private respondents to the SEC En Banc, the
decision of the hearing officer was reversed and set aside. The SEC
En Banc did not consider the word "Lyceum" to have become so
identified with petitioner as to render use thereof by other institutions
as productive of confusion about the identity of the schools
concerned in the mind of the general public. Unlike its hearing officer,
the SEC En Banc held that the attaching of geographical names to
the word "Lyceum" served sufficiently to distinguish the schools from
one another, especially in view of the fact that the campuses of
petitioner and those of the private respondents were physically quite
remote from each other. 3
Petitioner then went on appeal to the Court of Appeals. In its Decision
dated 28 June 1991, however, the Court of Appeals affirmed the
questioned Orders of the SEC En Banc. 4 Petitioner filed a motion for
reconsideration, without success.
Before this Court, petitioner asserts that the Court of Appeals
committed the following errors:
1. The Court of Appeals erred in holding that the Resolution of the
Supreme Court in G.R. No. L-46595 did not constitute stare decisis
as to apply to this case and in not holding that said Resolution bound
subsequent determinations on the right to exclusive use of the word
Lyceum.
2. The Court of Appeals erred in holding that respondent Western
Pangasinan Lyceum, Inc. was incorporated earlier than petitioner.
3. The Court of Appeals erred in holding that the word Lyceum has
not acquired a secondary meaning in favor of petitioner.
4. The Court of Appeals erred in holding that Lyceum as a generic
word cannot be appropriated by the petitioner to the exclusion of
others. 5
We will consider all the foregoing ascribed errors, though not
necessarily seriatim. We begin by noting that the Resolution of the
Court in G.R. No. L-46595 does not, of course, constitute res
adjudicata in respect of the case at bar, since there is no identity of
parties. Neither is stare decisis pertinent, if only because the SEC En
Page | 108
Banc itself has re-examined Associate Commissioner Sulit's ruling in
the Lyceum of Baguio case. The Minute Resolution of the Court in
G.R. No. L-46595 was not a reasoned adoption of the Sulit ruling.
The Articles of Incorporation of a corporation must, among other
things, set out the name of the corporation. 6 Section 18 of the
Corporation Code establishes a restrictive rule insofar as corporate
names are concerned:
"SECTION 18. Corporate name. — No corporate name may be
allowed by the Securities an Exchange Commission if the proposed
name is identical or deceptively or confusingly similar to that of any
existing corporation or to any other name already protected by law or
is patently deceptive, confusing or contrary to existing laws. When a
change in the corporate name is approved, the Commission shall
issue an amended certificate of incorporation under the amended
name." (Emphasis supplied)
The policy underlying the prohibition in Section 18 against the
registration of a corporate name which is "identical or deceptively or
confusingly similar" to that of any existing corporation or which is
"patently deceptive" or "patently confusing" or "contrary to existing
laws," is the avoidance of fraud upon the public which would have
occasion to deal with the entity concerned, the evasion of legal
obligations and duties, and the reduction of difficulties of
administration and supervision over corporations. 7
We do not consider that the corporate names of private respondent
institutions are "identical with, or deceptively or confusingly similar"
to that of the petitioner institution. True enough, the corporate names
of private respondent entities all carry the word "Lyceum" but
confusion and deception are effectively precluded by the appending
of geographic names to the word "Lyceum." Thus, we do not believe
that the "Lyceum of Aparri" can be mistaken by the general public for
the Lyceum of the Philippines, or that the "Lyceum of Camalaniugan"
would be confused with the Lyceum of the Philippines.
Etymologically, the word "Lyceum" is the Latin word for the Greek
lykeion which in turn referred to a locality on the river Ilissius in
ancient Athens "comprising an enclosure dedicated to Apollo and
adorned with fountains and buildings erected by Pisistratus, Pericles
and Lycurgus frequented by the youth for exercise and by the
philosopher Aristotle and his followers for teaching." 8 In time, the
word "Lyceum" became associated with schools and other
institutions providing public lectures and concerts and public
discussions. Thus today, the word "Lyceum" generally refers to a
school or an institution of learning. While the Latin word "lyceum" has
been incorporated into the English language, the word is also found
in Spanish (liceo) and in French (lycee). As the Court of Appeals
noted in its Decision, Roman Catholic schools frequently use the
term; e.g., "Liceo de Manila," "Liceo de Baleno" (in Baleno, Masbate),
"Liceo de Masbate," "Liceo de Albay." 9 "Lyceum" is in fact as generic
in character as the word "university." In the name of the petitioner,
"Lyceum" appears to be a substitute for "university;" in other places,
however, "Lyceum," or "Liceo" or "Lycee" frequently denotes a
secondary school or a college. It may be (though this is a question of
fact which we need not resolve) that the use of the word "Lyceum"
may not yet be as widespread as the use of "university," but it is clear
that a not inconsiderable number of educational institutions have
adopted "Lyceum" or "Liceo" as part of their corporate names. Since
"Lyceum" or "Liceo" denotes a school or institution of learning, it is
not unnatural to use this word to designate an entity which is
organized and operating as an educational institution.
It is claimed, however, by petitioner that the word "Lyceum" has
acquired a secondary meaning in relation to petitioner with the result
that that word, although originally a generic, has become
appropriable by petitioner to the exclusion of other institutions like
private respondents herein.
The doctrine of secondary meaning originated in the field of
trademark law. Its application has, however, been extended to
corporate names sine the right to use a corporate name to the
exclusion of others is based upon the same principle which underlies
the right to use a particular trademark or tradename. 10 In Philippine
Nut Industry, Inc. v. Standard Brands, Inc., 11 the doctrine of
secondary meaning was elaborated in the following terms:
" . . . a word or phrase originally incapable of exclusive appropriation
with reference to an article on the market, because geographically or
otherwise descriptive, might nevertheless have been used so long
and so exclusively by one producer with reference to his article that,
in that trade and to that branch of the purchasing public, the word or
phrase has come to mean that the article was his product." 12
Page | 109
The question which arises, therefore, is whether or not the use by
petitioner of "Lyceum" in its corporate name has been for such length
of time and with such exclusivity as to have become associated or
identified with the petitioner institution in the mind of the general
public (or at least that portion of the general public which has to do
with schools). The Court of Appeals recognized this issue and
answered it in the negative:
"Under the doctrine of secondary meaning, a word or phrase
originally incapable of exclusive appropriation with reference to an
article in the market, because geographical or otherwise descriptive
might nevertheless have been used so long and so exclusively by
one producer with reference to this article that, in that trade and to
that group of the purchasing public, the word or phrase has come to
mean that the article was his produce (Ana Ang vs. Toribio Teodoro,
74 Phil. 56). This circumstance has been referred to as the
distinctiveness into which the name or phrase has evolved through
the substantial and exclusive use of the same for a considerable
period of time. Consequently, the same doctrine or principle cannot
be made to apply where the evidence did not prove that the business
(of the plaintiff) has continued for so long a time that it has become
of consequence and acquired a good will of considerable value such
that its articles and produce have acquired a well-known reputation,
and confusion will result by the use of the disputed name (by the
defendant) (Ang Si Heng vs. Wellington Department Store, Inc., 92
Phil. 448).
With the foregoing as a yardstick, [we] believe the appellant failed to
satisfy the aforementioned requisites. No evidence was ever
presented in the hearing before the Commission which sufficiently
proved that the word 'Lyceum' has indeed acquired secondary
meaning in favor of the appellant. If there was any of this kind, the
same tend to prove only that the appellant had been using the
disputed word for a long period of time. Nevertheless, its (appellant)
exclusive use of the word (Lyceum) was never established or proven
as in fact the evidence tend to convey that the cross-claimant was
already using the word 'Lyceum' seventeen (17) years prior to the
date the appellant started using the same word in its corporate name.
Furthermore, educational institutions of the Roman Catholic Church
had been using the same or similar word like 'Liceo de Manila,' 'Liceo
de Baleno' (in Baleno, Masbate), 'Liceo de Masbate,' 'Liceo de Albay'
long before appellant started using the word 'Lyceum'. The appellant
also failed to prove that the word 'Lyceum' has become so identified
with its educational institution that confusion will surely arise in the
minds of the public if the same word were to be used by other
educational institutions.
In other words, while the appellant may have proved that it had been
using the word 'Lyceum' for a long period of time, this fact alone did
not amount to mean that the said word had acquired secondary
meaning in its favor because the appellant failed to prove that it had
been using the same word all by itself to the exclusion of others. More
so, there was no evidence presented to prove that confusion will
surely arise if the same word were to be used by other educational
institutions. Consequently, the allegations of the appellant in its first
two assigned errors must necessarily fail." 13 (Underscoring partly in
the original and partly supplied)
We agree with the Court of Appeals. The number alone of the private
respondents in the case at bar suggests strongly that petitioner's use
of the word "Lyceum" has not been attended with the exclusivity
essential for applicability of the doctrine of secondary meaning. It may
be noted also that at least one of the private respondents, i.e., the
Western Pangasinan Lyceum, Inc., used the term "Lyceum"
seventeen (17) years before the petitioner registered its own
corporate name with the SEC and began using the word "Lyceum." It
follows that if any institution had acquired an exclusive right to the
word "Lyceum," that institution would have been the Western
Pangasinan Lyceum, Inc. rather than the petitioner institution.
In this connection, petitioner argues that because the Western
Pangasinan Lyceum, Inc. failed to reconstruct its records before the
SEC in accordance with the provisions of R.A. No. 62, which records
had been destroyed during World War II, Western Pangasinan
Lyceum should be deemed to have lost all rights it may have acquired
by virtue of its past registration. It might be noted that the Western
Pangasinan Lyceum, Inc. registered with the SEC soon after
petitioner had filed its own registration on 21 September 1950.
Whether or not Western Pangasinan Lyceum, Inc. must be deemed
to have lost its rights under its original 1933 registration, appears to
us to be quite secondary in importance; we refer to this earlier
registration simply to underscore the fact that petitioner's use of the
word "Lyceum" was neither the first use of that term in the Philippines
nor an exclusive use thereof. Petitioner's use of the word "Lyceum"
Page | 110
was not exclusive but was in truth shared with the Western
Pangasinan Lyceum and a little later with other private respondent
institutions which registered with the SEC using "Lyceum" as part of
their corporation names. There may well be other schools using
Lyceum or Liceo in their names, but not registered with the SEC
because they have not adopted the corporate form of organization.

We conclude and so hold that petitioner institution is not entitled to a

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

WHEREFORE, the petitioner having failed to show any reversible

error on the part of the public respondent Court of Appeals, the
Petition for Review is DENIED for lack of merit, and the Decision of
the Court of Appeals dated 28 June 1991 is hereby AFFIRMED. No
pronouncement as to costs.

SO ORDERED.

Page | 111
 FIRST DIVISION
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.
Legal Ethics; Attorneys; Due Process; The negligence of counsel
binds the client, except where the reckless or gross negligence of
the counsel deprives the client of due process of law.—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. An
exception to the foregoing is where the reckless or gross negligence
of the counsel deprives the client of due process of law. Said
exception, however, does not obtain in the present case.
Corporation Law; Actions; Prescription; The failure of a party to
raise prescription before the Securities and Exchange Commission
can only be construed as a waiver of that defense.—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. 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.
Same; Corporate Names; Parties organizing a corporation must
choose a name at their peril.—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.
Same; Same; Words and Phrases; The additional words in a
corporation’s name—“Ang Mga Kaanib” and “Sa Bansang Pilipinas,
Inc.”—which are merely descriptive of and also referring to the
members, or kaanib, of a preexisting corporation who are likewise
residing in the Philippines, can hardly serve as an effective
differentiating medium necessary to avoid confusion or difficulty in
distinguishing the former from the latter.—The additional words
“Ang Mga Kaanib” and “Sa Bansang Pilipinas, Inc.” in petitioner’s
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.; 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.”
Same; Same; Same; The only difference between the corporate
names of petitioner and respondent are the words “Saligan” and
“Suhay,” which words are synonymous—both mean ground,
foundation or support.—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., 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.
Same; Same; Freedom of Religion; Ordering a religious society or
corporation to change its corporate name is not a violation of its
constitutionally guaranteed right to religious freedom.—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
Page | 112
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.
YNARES-SANTIAGO, J.:
This is a petition for review assailing the Decision dated October 7,
19971 and the Resolution dated February 16, 19992 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 respondent's corporate name.8
Page | 113
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. Petitioner's 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 authority is regarded as an act of his client.11 An exception to the
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
INTERPRETATION 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 PETITIONER'S 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
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 client's 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
Page | 114
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 petitioner's 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.
Page | 115
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.

Page | 116
 SECOND DIVISION
G.R. No. 150416 July 21, 2006
SEVENTH DAY ADVENTIST CONFERENCE CHURCH OF
SOUTHERN PHILIPPINES, INC., and/or represented by
MANASSEH C. ARRANGUEZ, BRIGIDO P. GULAY, FRANCISCO
M. LUCENARA, DIONICES O. TIPGOS, LORESTO C.
MURILLON, ISRAEL C. NINAL, GEORGE G. SOMOSOT, JESSIE
T. ORBISO, LORETO PAEL and JOEL BACUBAS, petitioners,
vs.
NORTHEASTERN MINDANAO MISSION OF SEVENTH DAY
ADVENTIST, INC., and/or represented by JOSUE A. LAYON,
WENDELL M. SERRANO, FLORANTE P. TY and JETHRO
CALAHAT and/or SEVENTH DAY ADVENTIST CHURCH [OF]
NORTHEASTERN MINDANAO MISSION,* Respondents.
DECISION
Donations; Ownership; Donation is undeniably one of the modes of
acquiring ownership of real property.—Donation is undeniably one
of the modes of acquiring ownership of real property. Likewise,
ownership of a property may be transferred by tradition as a
consequence of a sale.
Same; The donation could not have been made in favor of an entity
yet inexistent at the time it was made.—Donation is an act of
liberality whereby a person disposes gratuitously of a thing or right
in favor of another person who accepts it. The donation could not
have been made in favor of an entity yet inexistent at the time it was
made. Nor could it have been accepted as there was yet no one to
accept it. The deed of donation was not in favor of any informal
group of SDA members but a supposed SPUM-SDA Bayugan (the
local church) which, at the time, had neither juridical personality nor
capacity to accept such gift.
Same; Ownership; The execution of a public instrument x x x
transfers the ownership from the vendor to the vendee who may
thereafter exercise the rights of an owner over the same.—
According to Art. 1477 of the Civil Code, the ownership of the thing
sold shall be transferred to the vendee upon the actual or
constructive delivery thereof. On this, the noted author Arturo
Tolentino had this to say: The execution of [a] public instrument x x
x transfers the ownership from the vendor to the vendee who may
thereafter exercise the rights of an owner over the same. Here,
transfer of ownership from the spouses Cosio to SDA-NEMM was
made upon constructive delivery of the property on February 28,
1980 when the sale was made through a public instrument. TCT
No. 4468 was thereafter issued and it remains in the name of SDA-
NEMM.
CORONA, J.:
This petition for review on certiorari assails the Court of Appeals (CA)
decision1 and resolution2 in CA-G.R. CV No. 41966 affirming, with
modification, the decision of the Regional Trial Court (RTC) of
Bayugan, Agusan del Sur, Branch 7 in Civil Case No. 63.
This case involves a 1,069 sq. m. lot covered by Transfer Certificate
of Title (TCT) No. 4468 in Bayugan, Agusan del Sur originally owned
by Felix Cosio and his wife, Felisa Cuysona.
On April 21, 1959, the spouses Cosio donated the land to the South
Philippine Union Mission of Seventh Day Adventist Church of
Bayugan Esperanza, Agusan (SPUM-SDA Bayugan).3 Part of the
deed of donation read:
KNOW ALL MEN BY THESE PRESENTS:
That we Felix Cosio[,] 49 years of age[,] and Felisa Cuysona[,] 40
years of age, [h]usband and wife, both are citizen[s] of the
Philippines, and resident[s] with post office address in the Barrio of
Bayugan, Municipality of Esperanza, Province of Agusan,
Philippines, do hereby grant, convey and forever quit claim by way of
Donation or gift unto the South Philippine [Union] Mission of Seventh
Day Adventist Church of Bayugan, Esperanza, Agusan, all the rights,
title, interest, claim and demand both at law and as well in possession
as in expectancy of in and to all the place of land and portion situated
in the Barrio of Bayugan, Municipality of Esperanza, Province of
Agusan, Philippines, more particularly and bounded as follows, to wit:
Page | 117
1. a parcel of land for Church Site purposes only.
2. situated [in Barrio Bayugan, Esperanza].
3. Area: 30 meters wide and 30 meters length or 900 square meters.
4. Lot No. 822-Pls-225. Homestead Application No. V-36704, Title
No. P-285.
5. Bounded Areas
North by National High Way; East by Bricio Gerona; South by Serapio
Abijaron and West by Feliz Cosio xxx. 4
The donation was allegedly accepted by one Liberato Rayos, an
elder of the Seventh Day Adventist Church, on behalf of the donee.
Twenty-one years later, however, on February 28, 1980, the same
parcel of land was sold by the spouses Cosio to the Seventh Day
Adventist Church of Northeastern Mindanao Mission (SDA-NEMM).5
TCT No. 4468 was thereafter issued in the name of SDA-NEMM.6
Claiming to be the alleged donee’s successors-in-interest, petitioners
asserted ownership over the property. This was opposed by
respondents who argued that at the time of the donation, SPUM-SDA
Bayugan could not legally be a donee
because, not having been incorporated yet, it had no juridical
personality. Neither were petitioners members of the local church
then, hence, the donation could not have been made particularly to
them.
On September 28, 1987, petitioners filed a case, docketed as Civil
Case No. 63 (a suit for cancellation of title, quieting of ownership and
possession, declaratory relief and reconveyance with prayer for
preliminary injunction and damages), in the RTC of Bayugan, Agusan
del Sur. After trial, the trial court rendered a decision7 on November
20, 1992 upholding the sale in favor of respondents.
On appeal, the CA affirmed the RTC decision but deleted the award
of moral damages and attorney’s fees.8 Petitioners’ motion for
reconsideration was likewise denied. Thus, this petition.
The issue in this petition is simple: should SDA-NEMM’s ownership
of the lot covered by TCT No. 4468 be upheld?9 We answer in the
affirmative.
The controversy between petitioners and respondents involves two
supposed transfers of the lot previously owned by the spouses Cosio:
(1) a donation to petitioners’ alleged predecessors-in-interest in 1959
and (2) a sale to respondents in 1980.
Donation is undeniably one of the modes of acquiring ownership of
real property. Likewise, ownership of a property may be transferred
by tradition as a consequence of a sale.
Petitioners contend that the appellate court should not have ruled on
the validity of the donation since it was not among the issues raised
on appeal. This is not correct because an appeal generally opens the
entire case for review.
We agree with the appellate court that the alleged donation to
petitioners was void.
Donation is an act of liberality whereby a person disposes
gratuitously of a thing or right in favor of another person who accepts
it. The donation could not have been made in favor of an entity yet
inexistent at the time it was made. Nor could it have been accepted
as there was yet no one to accept it.
The deed of donation was not in favor of any informal group of SDA
members but a supposed SPUM-SDA Bayugan (the local church)
which, at the time, had neither juridical personality nor capacity to
accept such gift.
Declaring themselves a de facto corporation, petitioners allege that
they should benefit from the donation.
But there are stringent requirements before one can qualify as a de
facto corporation:
Page | 118
(a) the existence of a valid law under which it may be incorporated;
(b) an attempt in good faith to incorporate; and
(c) assumption of corporate powers.10
11
While there existed the old Corporation Law (Act 1459), a law under
which SPUM-SDA Bayugan could have been organized, there is no
proof that there was an attempt to incorporate at that time.
The filing of articles of incorporation and the issuance of the
certificate of incorporation are essential for the existence of a de facto
corporation.12 We have held that an organization not registered with
the Securities and Exchange Commission (SEC) cannot be
considered a corporation in any concept, not even as a corporation
de facto.13 Petitioners themselves admitted that at the time of the
donation, they were not registered with the SEC, nor did they even
attempt to organize14 to comply with legal requirements.
Corporate existence begins only from the moment a certificate of
incorporation is issued. No such certificate was ever issued to
petitioners or their supposed predecessor-in-interest at the time of
the donation. Petitioners obviously could not have claimed
succession to an entity that never came to exist. Neither could the
principle of separate juridical personality apply since there was never
any corporation15 to speak of. And, as already stated, some of the
representatives of petitioner Seventh Day Adventist Conference
Church of Southern Philippines, Inc. were not even members of the
local church then, thus, they could not even claim that the donation
was particularly for them.16
"The de facto doctrine thus effects a compromise between two
conflicting public interest[s]—the one opposed to an unauthorized
assumption of corporate privileges; the other in favor of doing justice
to the parties and of establishing a general assurance of security in
business dealing with corporations."17
Generally, the doctrine exists to protect the public dealing with
supposed corporate entities, not to favor the defective or non-existent
corporation.18
In view of the foregoing, petitioners’ arguments anchored on their
supposed de facto status hold no water. We are convinced that there
was no donation to petitioners or their supposed predecessor-in-
interest.
On the other hand, there is sufficient basis to affirm the title of SDA-
NEMM. The factual findings of the trial court in this regard were not
convincingly disputed. This Court is not a trier of facts. Only questions
of law are the proper subject of a petition for review on certiorari.19
Sustaining the validity of respondents’ title as well as their right of
ownership over the property, the trial court stated:
[W]hen Felix Cosio was shown the Absolute Deed of Sale during the
hearing xxx he acknowledged that the same was his xxx but that it
was not his intention to sell the controverted property because he had
previously donated the same lot to the South Philippine Union
Mission of SDA Church of Bayugan-Esperanza. Cosio avouched that
had it been his intendment to sell, he would not have disposed of it
for a mere P2,000.00 in two installments but for P50,000.00 or
P60,000.00. According to him, the P2,000.00 was not a consideration
of the sale but only a form of help extended.
A thorough analysis and perusal, nonetheless, of the Deed of
Absolute Sale disclosed that it has the essential requisites of
contracts pursuant to xxx Article 1318 of the Civil Code, except
that the consideration of P2,000.00 is somewhat insufficient for a
[1,069-square meter] land. Would then this inadequacy of the
consideration render the contract invalid?
Article 1355 of the Civil Code provides:
Except in cases specified by law, lesion or inadequacy of cause shall
not invalidate a contract, unless there has been fraud, mistake or
undue influence.
No evidence [of fraud, mistake or undue influence] was adduced
by [petitioners].
xxx
Page | 119
Well-entrenched is the rule that a Certificate of Title is generally a
conclusive evidence of [ownership] of the land. There is that
strong and solid presumption that titles were legally issued and that
they are valid. It is irrevocable and indefeasible and the duty of the
Court is to see to it that the title is maintained and respected unless
challenged in a direct proceeding. xxx The title shall be received as
evidence in all the Courts and shall be conclusive as to all matters
contained therein.

[This action was instituted almost seven years after the certificate of
title in respondents’ name was issued in 1980.]20

According to Art. 1477 of the Civil Code, the ownership of the thing
sold shall be transferred to the vendee upon the actual or constructive
delivery thereof. On this, the noted author Arturo Tolentino had this
to say:

The execution of [a] public instrument xxx transfers the ownership

from the vendor to the vendee who may thereafter exercise the rights
of an owner over the same21

Here, transfer of ownership from the spouses Cosio to SDA-NEMM

was made upon constructive delivery of the property on February 28,
1980 when the sale was made through a public instrument.22 TCT
No. 4468 was thereafter issued and it remains in the name of SDA-
NEMM.

WHEREFORE, the petition is hereby DENIED.

Costs against petitioners.

SO ORDERED.

Page | 120
 EN BANC
G.R. No. L-2598 June 29, 1950
C. ARNOLD HALL and BRADLEY P. HALL, petitioners,
vs.
EDMUNDO S. PICCIO, Judge of the Court of First Instance of
Leyte, FRED BROWN, EMMA BROWN, HIPOLITA CAPUCIONG,
in his capacity as receiver of the Far Eastern Lumber and
Commercial Co., Inc., respondents.
Claro M. Recto for petitioners.
Ramon Diokno and Jose W. Diokno for respondents.
1.CORPORATION "DE FACTO"; DISSOLUTION BY SUIT OF
STOCKHOLDERS; JURISDICTION OF COURT.—An entity whose
certificate of incorporation had not been obtained may be
terminated in a private suit for its dissolution between stockholders,
without 'the intervention of the state. The question as to the right of
minority stockholders to sue for dissolution does not affect the
court's jurisdiction, and is a matter for decision by the judge, subject
to review on appeal by the aggrieved party at the proper time.
2.ID.; RIGHTS OF.—Persons acting as corporation may not claim
rights of "de facto" corporation if they have not obtained certificate
of incorporation.
BENGZON, J.:
This is petition to set aside all the proceedings had in civil case No.
381 of the Court of First Instance of Leyte and to enjoin the
respondent judge from further acting upon the same.
Facts: (1) on May 28, 1947, the petitioners C. Arnold Hall and Bradley
P. Hall, and the respondents Fred Brown, Emma Brown, Hipolita D.
Chapman and Ceferino S. Abella, signed and acknowledged in Leyte,
the article of incorporation of the Far Eastern Lumber and
Commercial Co., Inc., organized to engage in a general lumber
business to carry on as general contractors, operators and
managers, etc. Attached to the article was an affidavit of the treasurer
stating that 23,428 shares of stock had been subscribed and fully
paid with certain properties transferred to the corporation described
in a list appended thereto.
(2) Immediately after the execution of said articles of incorporation,
the corporation proceeded to do business with the adoption of by-
laws and the election of its officers.
(3) On December 2, 1947, the said articles of incorporation were filed
in the office of the Securities and Exchange Commissioner, for the
issuance of the corresponding certificate of incorporation.
(4) On March 22, 1948, pending action on the articles of incorporation
by the aforesaid governmental office, the respondents Fred Brown,
Emma Brown, Hipolita D. Chapman and Ceferino S. Abella filed
before the Court of First Instance of Leyte the civil case numbered
381, entitled "Fred Brown et al. vs. Arnold C. Hall et al.", alleging
among other things that the Far Eastern Lumber and Commercial Co.
was an unregistered partnership; that they wished to have it dissolved
because of bitter dissension among the members, mismanagement
and fraud by the managers and heavy financial losses.
(5) The defendants in the suit, namely, C. Arnold Hall and Bradley P.
Hall, filed a motion to dismiss, contesting the court's jurisdiction and
the sufficiently of the cause of action.
(6) After hearing the parties, the Hon. Edmund S. Piccio ordered the
dissolution of the company; and at the request of plaintiffs, appointed
of the properties thereof, upon the filing of a P20,000 bond.
(7) The defendants therein (petitioners herein) offered to file a
counter-bond for the discharge of the receiver, but the respondent
judge refused to accept the offer and to discharge the receiver.
Whereupon, the present special civil action was instituted in this
court. It is based upon two main propositions, to wit:
(a) The court had no jurisdiction in civil case No. 381 to decree the
dissolution of the company, because it being a de facto corporation,
dissolution thereof may only be ordered in a quo warranto proceeding
instituted in accordance with section 19 of the Corporation Law.
Page | 121
(b) Inasmuch as respondents Fred Brown and Emma Brown had
signed the article of incorporation but only a partnership.
Discussion: The second proposition may at once be dismissed. All
the parties are informed that the Securities and Exchange
Commission has not, so far, issued the corresponding certificate of
incorporation. All of them know, or sought to know, that the
personality of a corporation begins to exist only from the moment
such certificate is issued — not before (sec. 11, Corporation Law).
The complaining associates have not represented to the others that
they were incorporated any more than the latter had made similar
representations to them. And as nobody was led to believe anything
to his prejudice and damage, the principle of estoppel does not apply.
Obviously this is not an instance requiring the enforcement of
contracts with the corporation through the rule of estoppel.
The first proposition above stated is premised on the theory that,
inasmuch as the Far Eastern Lumber and Commercial Co., is a de
facto corporation, section 19 of the Corporation Law applies, and
therefore the court had not jurisdiction to take cognizance of said civil
case number 381. Section 19 reads as follows:
. . . The due incorporation of any corporations claiming
in good faith to be a corporation under this Act and its
right to exercise corporate powers shall not be
inquired into collaterally in any private suit to which the
corporation may be a party, but such inquiry may be
had at the suit of the Insular Government on
information of the Attorney-General.
There are least two reasons why this section does not govern the
situation. Not having obtained the certificate of incorporation, the Far
Eastern Lumber and Commercial Co. — even its stockholders — may
not probably claim "in good faith" to be a corporation.
Under our statue it is to be noted (Corporation Law,
sec. 11) that it is the issuance of a certificate of
incorporation by the Director of the Bureau of
Commerce and Industry which calls a corporation into
being. The immunity if collateral attack is granted to
corporations "claiming in good faith to be a corporation
under this act." Such a claim is compatible with the
existence of errors and irregularities; but not with a
total or substantial disregard of the law. Unless there
has been an evident attempt to comply with the law
the claim to be a corporation "under this act" could not
be made "in good faith." (Fisher on the Philippine Law
of Stock Corporations, p. 75. See also Humphreys vs.
Drew, 59 Fla., 295; 52 So., 362.)
Second, this is not a suit in which the corporation is a party. This is a
litigation between stockholders of the alleged corporation, for the
purpose of obtaining its dissolution. Even the existence of a de jure
corporation may be terminated in a private suit for its dissolution
between stockholders, without the intervention of the state.
There might be room for argument on the right of minority
stockholders to sue for dissolution;1 but that question does not affect
the court's jurisdiction, and is a matter for decision by the judge,
subject to review on appeal. Whkch brings us to one principal reason
why this petition may not prosper, namely: the petitioners have their
remedy by appealing the order of dissolution at the proper time.
There is a secondary issue in connection with the appointment of a
receiver. But it must be admitted that receivership is proper in
proceedings for dissolution of a company or corporation, and it was
no error to reject the counter-bond, the court having declared the
dissolution. As to the amount of the bond to be demanded of the
receiver, much depends upon the discretion of the trial court, which
in this instance we do not believe has been clearly abused.
Judgment: The petition will, therefore, be dismissed, with costs. The
preliminary injunction heretofore issued will be dissolved.
Ozaeta, Pablo, Tuason, Montemayor, and Reyes, JJ., concur.
Page | 122
 FIRST DIVISION
[ G.R. No. 188769, August 03, 2016 ]
JOSEPH OMAR O. ANDAY A, Petitioner, vs. RURAL BANK OF
CABADBARAN, INC., DEMOSTHENES P. ORAIZ and RICARDO
D. GONZALEZ, Respondents.
RESOLUTION
Corporation Law; The registration of a transfer of shares of stock is
a ministerial duty on the part of the corporation.—It is already
settled jurisprudence that the registration of a transfer of shares of
stock is a ministerial duty on the part of the corporation. Aggrieved
parties may then resort to the remedy of mandamus to compel
corporations that wrongfully or unjustifiably refuse to record the
transfer or to issue new certificates of stock.
Remedial Law; Special Civil Actions; Mandamus; Ministerial Acts; A
writ of mandamus to enforce a ministerial act may issue only when
petitioner is able to establish the presence of the following: (1) right
clearly founded in law and is not doubtful; (2) a legal duty to perform
the act; (3) unlawful neglect in performing the duty enjoined by law;
(4) the ministerial nature of the act to be performed; and (5) the
absence of other plain, speedy, and adequate remedy in the
ordinary course of law.—A writ of mandamus to enforce a
ministerial act may issue only when petitioner is able to establish
the presence of the following: (1) right clearly founded in law and is
not doubtful; (2) a legal duty to perform the act; (3) unlawful neglect
in performing the duty enjoined by law; (4) the ministerial nature of
the act to be performed; and (5) the absence of other plain, speedy,
and adequate remedy in the ordinary course of law.
SERENO, C.J.:
This case concerns the dismissal[1] of an action for mandamus that
sought to compel respondents Rural Bank of Cabadbaran, Inc.,
Demosthenes P. Oraiz, and Ricardo D. Gonzalez to register the
transfer of shares of stock and issue the corresponding stock
certificates in favor of petitioner Joseph Omar O. Andaya. The
Cabadbaran City Regional Trial Court (RTC) ifuled that petitioner
Andaya was not entitled to the remedy of mandamus, s|ince the
transfer of the subject shares of stock had not yet been recorded in
the corporation's stock and transfer book, and the registered owner,
Conception O. Chute, had not given him a special power of attorney
to makq the transfer. Andaya has filed a Rule 45 petition directly
before this Court, insisting that he has a cause of action to institute
the suit.
FACTS
Andaya bought from Chute 2,200 shares of stock in the Rural Bank
of Cabadbaran for P220,000.[2] The transaction was evidenced by
a notarized document denominated as Sale of Shares of Stocks.[3]
Chute duly endorsed and delivered the certificates of stock to Andaya
and, subsequently, requested the bank to register the transfer and
issue new stock certificates in favor of the latter.[4] Andaya also
separately communicated[5] with the bank's corporate secretary,
respondent Oraiz, reiterating Chute's request for the issuance of new
stock certificates in petitioner's favor.
A few days later, the bank's corporate secretary wrote[6] Chute to
inform her that he could not register the transfer. He explained that
under a previous stockholders' Resolution, existing stockholders
were given priority to buy the shares of others in the event that the
latter offered those shares for sale (i.e., a right of first refusal). He
then asked Chute if she, instead, wished to have her shares offered
to existing stockholders. He told her that if no other stockholder would
buy them, she could then proceed to sell her shares to outsiders.
Meanwhile, the bank's legal counsel, respondent Gonzalez,
informed[7] Andaya that the latter's request had been referred to the
bank's board of directors for evaluation. Gonzalez also furnished him
a copy of the bank's previous reply to Chute concerning a similar
request from her. Andaya responded[8] by reiterating his earlier
request for the registration of the transfer and the issuance of new
certificates of stock in his favor. Citing Section 98 of the Corporation
Code, he claimed that the purported restriction on the transfer of
shares of stock agreed upon during the 2001 stockholders' meeting
could not deprive him of his right as a transferee. He pointed out that
the restriction did not appear in the bank's articles of incorporation,
bylaws, or certificates of stock.
The bank eventually denied the request of Andaya.[9] It reasoned that
Page | 123
he had a conflict of interest, as he was then president and chief
executive officer of the Green Bank of Caraga, a competitor bank.
Respondent bank concluded that the purchase of shares was not in
good faith, and that the purchase "could be the beginning of a hostile
bid to take-over control of the [Rural Bank of Cabadbaran]."[10] Citing
Gokongwei v. Securities and Exchange Commission,[11] respondent
insisted that it may refuse to accept a competitor as one of its
stockholders. It also maintained that Chute should have first offered
her shares to the other stockholders, as agreed upon during the 2001
stockholders' meeting.
Consequently, Andaya instituted an action for mandamus and
damages[12] against the Rural Bank of Cabadbaran; its corporate
secretary, Oraiz; and its legal counsel, Gonzalez. Petitioner sought
to compel them to record the transfer in the bank's stock and transfer
book and to issue new certificates of stock in his name.
The RTC issued a Decision dismissing the complaint. Citing Porice
v. Alsons Cement Corporation[13] the trial court ruled that Andaya had
no standing to compel the bank to register the transfer and issue
stock certificates in his name.[14] It explained that he had failed "[to
show] that the transfer of subject shares of stock [was] recorded in
the stock and transfer book of [the] bank or that [he was] authorized
by [Chute] to make the transfer."[15] According to the trial court, Ponce
requires that a person seeking to transfer shares must appear to have
an express instruction and a specific authority from the registered
stockholder, such as a special power of attorney, to cause the
disposition of stocks registered in the stockholder's name. It ruled that
"[w]ithout the sale first registered or an authority from the transferor,
it [was] therefore unmistakably clear that [Andaya had] no cause of
action for mandamus against [the] bank."
Consequently, Andaya directly filed with this Court a Rule 45 petition
for review on certiorari assailing the RTC Decision on pure questions
of law.
ISSUES
The Court culls the issues raised by petitioner as follows:
1. Whether Andaya, as a transferee of shares of stock, may
initiate an action for mandamus compelling
the Rural Bank of Cabadbaran to record the transfer of
shares in its stock and transfer book, as well as issue new
stock certificates in his name
2. Whether a writ of mandamus should issue in favor of
petitioner
OUR RULING
The petition is partly meritorious.
It is already settled jurisprudence[16] that the registration of a transfer
of shares of stock is a ministerial duty on the part of the corporation.
Aggrieved parties may then resort to the remedy of mandamus to
compel corporations that wrongfully or unjustifiably refuse to record
the transfer or to issue new certificates of stock. This remedy is
available even upon the instance of a bona fide transferee[17] who is
able to establish a clear legal right to the registration of the transfer.[18]
This legal right inherently flows from the transferee's established
ownership of the stocks, a right that has been recognized by this
Court as early as in Price v. Martin:[19]
A person who has purchased stock, and who desires to be
recognized as a stockholder, for the purpose of voting, must
secure a standing by having the transfer recorded upon the books.
If the transfer is not duly made upon request, he has, as his remedy,
to compel it to be made.[20] (Emphases supplied)
Thus, in Pacific Basin Securities Co., Inc., v. Oriental Petroleum and
Minerals Corp.,[21]this Court stressed that the registration of a transfer
of shares is ministerial on the part of the corporation:
Clearly, the right of a transferee/assignee to have stocks
transferred to his name is an inherent right flowing from his
ownership of the stocks. The Court had ruled in Rural Bank of
Salinas, Inc. v. Court of Appeals that the corporation's obligation
to register is ministerial, citing Fletcher, to wit:
In transferring stock, the secretary of a corporation acts in purely
ministerial capacity, and does not try to decide the question of
ownership.
The duty of the corporation to transfer is a ministerial one and if it
refuses to make such transaction without good cause, it may be
compelled to do so by mandamus.
Page | 124
The Court further held in Rural Bank of Salinas that the only
limitation imposed by Section 63 of the Corporation Code is
when the corporation holds any unpaid claim against the shares
intended to be transferred.[22] (Emphasis supplied; citations
omitted)
Consequently, transferees of shares of stock are real parties in
interest having a cause of action for mandamus to compel the
registration of the transfer and the corresponding issuance of stock
certificates.
We also rule that Andaya has been able to establish that he is a bona
fide transferee of the shares of stock of Chute. In proving this fact, he
presented to the RTC the following documents evidencing the sale:
(1) a notarized Sale of Shares of Stocks[23] showing Chute's sale of
2,200 shares of stock to petitioner; (2) a Documentary Stamp Tax
Declaration/Return[24] (3) Capital Gains Tax Return;[25] and (4) stock
certificates[26] covering the subject shares duly endorsed
by Chute. The existence, genuineness, and due execution of
these documents have been admitted[27] and remain undisputed.
There is no doubt that Andaya had the standing to initiate an action
for mandamus to compel the Rural Bank of Cabadbaran to record the
transfer of shares in its stock and transfer book and to issue new
stock certificates in his name. As the transferee of the shares,
petitioner stands to be benefited or injured by the judgment in the
instant petition, a judgment that will either order the bank to recognize
the legitimacy of the transfer and petitioner's status as stockholder or
to deny the legitimacy thereof.
This Court further finds that the reliance of the RTC on Ponce in
finding that petitioner had no cause of action for mandamus against
the defendant bank was misplaced. In Ponce, the issue resolved by
this Court was whether the petitioner therein had a cause of action
for mandamus to compel the issuance of stock certificates, not the
registration of the transfer. Ruling in the negative, the Court said in
that case that without any record of the transfer of shares in the stock
and transfer book of the corporation, there would be no clear basis to
compel that corporation to issue a stock certificate. By the import of
Section 63 of the Corporation Code, the stock and transfer book
would be the main reference book in ascertaining a person's
entitlement to the rights of a stockholder. Consequently, without the
registration of the transfer, the alleged transferee could not yet be
recognized as a stockholder who is entitled to be given a stock
certificate.
In contrast, at the crux of this petition are the registration of the
transfer and the issuance of the corresponding stock certificates.
Requiring petitioner to register the transaction before he could
institute a mandamus suit in supposed abidance by the ruling in
Ponce was a palpable error. It led to an absurd, circuitous situation
in which Andaya was prevented from causing the registration of the
transfer, ironically because the shares had not been registered. With
the logic resorted to by the RTC, transferees of shares of stock would
never be able to compel the registration of the transfer and the
issuance of new stock certificates in their favor. They would first be
required to show the registration of the transfer in their names — the
ministerial act that is the subject of the mandamus suit in the first
place. The trial court confuses the application of the dicta in Ponce,
which is pertinent only to the issuance of new stock certificates, and
not to the registration of a transfer of shares. As Ponce itself provides,
these two are entirely different events. The RTC's anomalous
reasoning cannot be given legal imprimatur by this Court.
With regard to the requisite authorization from the transferor, the
Court stresses that the concern in Ponce was rooted in whether or
not the alleged right of the petitioner therein to compel the issuance
of new stock certificates was clearly established. Reiterating the
ruling in Rivera v. FIorendo[28] and Eager v. Bryan,[29] the Court
therein maintained that a mere endorsement of stock certificates by
the supposed owners of the stock could not be the basis of an action
for mandamus in the absence of express instructions from them.
According to the Court, the reason behind this ruling was that the
corporation's duty and legal obligation therein were not so clear and
indisputable as to justify the issuance of the writ. The ambiguity of the
alleged transferee's deed of undertaking with endorsement led the
Court in Ponce to rule that mandamus would have issued had the
registered owner himself requested the registration of the transfer, or
had the person requesting the registration secured a special power
of attorney from the registered owner.
In the instant case, however, the submitted documents did not merely
consist of an endorsement. Rather, petitioner presented several
undisputed documents,[30] among which was respondent Oraiz's
letter to Chute denying her request to transfer the stock standing in
her name in favor of Andaya. This letter clearly indicated that the
Page | 125
registered owner herself had requested the registration of the transfer
of shares of stock. There was therefore no sensible reason for the
RTC to perfunctorily extract the pronouncement in Ponce and then
disregard it in the face of admitted facts in addition to the duly
endorsed stock certificates.
On whether the writ of mandamus should issue, Section 3, Rule 65
of the Rules of Court, provides for the rules governing a petition for
mandamus, viz:
SECTION 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.
The petition shall also contain a sworn certification of non-forum
shopping as provided in the third paragraph of Section 3, Rule 46.
(Emphases supplied)
Accordingly, a writ of mandamus to enforce a ministerial act may
issue only when petitioner is able to establish the presence of the
following: (1) right clearly founded in law and is not doubtful; (2) a
legal duty to perform the act; (3) unlawful neglect in performing the
duty enjoined by law; (4) the ministerial nature of the act to be
performed; and (5) the absence of other plain, speedy, and adequate
remedy in the ordinary course of law.[31]
Respondents primarily challenge the mandamus suit on the grounds
that the transfer violated the bank stockholders' right of first refusal
and that petitioner was a buyer in bad faith. Both parties refer to
Section 98 of the Corporation Code to support their arguments, which
reads as follows:
SECTION 98. Validity of restrictions on transfer of shares. —
Restrictions on the right to transfer shares must appear in the
articles of incorporation and in the by-laws as well as in the
certificate of stock; otherwise, the same shall not be binding on
any purchaser thereof in good faith. Said restrictions shall not be
more than onerous than granting the existing stockholders or the
corporation the option to purchase the shares of the transferring
stockholder with such reasonable terms, conditions or period stated
therein. If upon the expiration of said period, the existing
stockholders or the corporation fails to exercise the option
to purchase, the transferring stockholder may sell his shares to any
third person. (Emphases supplied)
It must be noted that Section 98 applies only to close corporations.
Hence, before the Court can allow the operation of this section in the
case at bar, there must first be a factual determination that
respondent Rural Bank of Cabadbaran is indeed a close corporation.
There needs to be a presentation of evidence on the relevant
restrictions in the articles of incorporation j and bylaws of the said
bank. From the records or the RTC Decision, there is apparently no
such determination or even allegation that would assist this Court in
ruling on these two major factual matters. With the foregoing, the
validity of the transfer cannot yet be tested using that provision.
These are the factual matters that the parties must first thresh out
before the RTC.
After finding that petitioner has legal standing to initiate an action for
mandamus, the Court now reinstates the action he filed and remands
the case to the RTC to resolve the propriety of issuing a writ of
mandamus. The resolution of the case must include the
determination of all relevant factual matters in connection with the
issues at bar. The RTC must also resolve petitioner's prayer for the
payment of attorney's fees, litigation expenses, moral damages, and
exemplary damages.
WHEREFORE, premises considered, the instant petition I is
GRANTED. The Decision dated 17 April 2009 and the Order dated
15 July 2009 of the Regional Trial Court, Branch 34, Cabadbaran
City, which dismissed petitioner's action for mandamus, are SET
ASIDE. The action is hereby REINSTATED and the case
REMANDED to the court of origin for further proceedings. The trial
court is further enjoined to proceed with [the resolution of this case
with dispatch.
SO ORDERED.
Page | 126
 THIRD DIVISION
G.R. Nos. 188642 & 189425, October 17, 2016
AGDAO RESIDENTS INC., THE DIRECTORS LANDLESS
LANDLESS ASSOCIATION, BOARD OF OF AGDAO
ASSOCIATION, INC., IN THEIR PERSONAL CAPACITY
NAMELY: ARMANDO JAVONILLO, MA. ACELITA ARMENTANO,
ALEX JOSOL, ANTONIA AMORADA, JULIUS ALINSUB,
POMPENIANO ESPINOSA, JR., SALCEDO DE LA CRUZ,
CLAUDIO LAO, CONSORCIO DELGADO, ROMEO CABILLO,
RICARDO BACONG, RODOLFO GALENZOGA, BENJAMIN
LAMIGO, AND ASUNCION A. ALCANTARA, Petitioners, v.
ROLANDO MARAMION, LEONIDAS JAMISOLA, VIRGINIA
CANOY, ELIZABETH GONZALES, CRISPINIANO QUIRE-QUIRE,
ERNESTINO DUNLAO, ELLA DEMANDANTE, ELLA RIA
DEMANDANTE, ELGIN DEMANDANTE, SATURNINA WITARA,
VIRGILIO DAYONDON, MELENCIA MARAMION, ANGELICA
PENKIAN, PRESENTACION TAN, HERNANI GREGORY, RUDY
GIMARINO, VALENTIN CAMEROS, RODEL CAMEROS, ZOLLO
JABONETE, LUISITO TAN, JOSEPH QUIRE-QUIRE, ERNESTO
DUNLAO, JR., FRED DUNLAO, LIZA MARAMION, CLARITA
ROBILLA, RENATO DUNLAO AND PRUDENCIO JUARIZA, JR.,
Respondents.
G.R. NOS. 188888-89
ROLANDO MARAMION, LEONIDAS JAMISOLA, VIRGINIA
CANOY, ERNESTINO DUNLAO, ELLA DEMANDANTE, ELLA
RIA DEMANDANTE, ELGIN DEMANDANTE, SATURNINA
WITARA, MELENCIA MARAMION, LIZA MARAMION, ANGELICA
PENKIAN, PRESENTACION TAN, AS SUBSTITUTED BY HIS
LEGAL HEIRS: HERNANI GREGORY, RUDY GIMARINO, RODEL
CAMEROS, VALENTIN CAMEROS, VIRGILIO DAYONDON,
PRUDENCIO JUARIZA, JR., ZOILO JABONETE, LUISITO TAN,
ERNESTINO DUNLAO, JR., FRED DUNLAO, CLARITA
ROBILLA, AND RENATO DUNLAO, Petitioners, v. AGDAO
LANDLESS RESIDENTS ASSOCIATION, INC., THE DIRECTORS
LANDLESS BOARD OF OF AGDAO RESIDENTS ASSOCIATION,
INC., IN THEIR PERSONAL CAPACITY, NAMELY: ARMANDO
JAVONILLO, MA. ACELITA ARMENTANO, ALEX JOSOL,
ANTONIA AMORADA, JULIUS ALINSUB, POMPENIANO
ESPINOSA, JR. JACINTO BO-OC, HERMENIGILDO DUMAPIAS,
SALCEDO DE LA CRUZ, CLAUDIO LAO, CONSORCIO
DELGADO, ROMEO CABILLO, RICARDO BACONG, RODOLFO
GALENZOGA, BENJAMIN LAMIGO, ROMEO DE LA CRUZ,
ASUNCION ALCANTARA AND LILY LOY, Respondents.
DECISION
Remedial Law; Civil Procedure; Petition for Review on Certiorari;
Only questions of law may be raised in a petition for review on
certiorari under Rule 45 of the Rules of Court, since “the Supreme
Court (SC) is not a trier of facts.”—We stress that only questions of
law may be raised in a petition for review on certiorari under Rule
45 of the Rules of Court, since “the Supreme Court is not a trier of
facts.” It is not our function to review, examine and evaluate or
weigh the probative value of the evidence presented. When
supported by substantial evidence, the findings of fact of the CA are
conclusive and binding on the parties and are not reviewable by this
Court, unless the case falls under any of the recognized exceptions
in jurisprudence.
Mercantile Law; Corporations; Non-stock Corporations; Section 91
of the Corporation Code of the Philippines provides that
membership in a non-stock, nonprofit corporation shall be
terminated in the manner and for the cases provided in its articles of
incorporation or the bylaws.—Section 91 of the Corporation Code of
the Philippines (Corporation Code) provides that membership in a
non-stock, nonprofit corporation (as in petitioner ALRAI in this case)
shall be terminated in the manner and for the cases provided in its
articles of incorporation or the bylaws.
Constitutional Law; Due Process; Respondents’ expulsion
constitutes an infringement of their constitutional right to due
process of law and is not in accord with the principles established in
Article 19 of the Civil Code.—Clearly, members proved to be in
arrears in the payment of monthly dues, contributions, or
assessments shall only be automatically suspended; while
members who shall be absent from any meeting without any
justifiable cause shall only be liable for a fine. Nowhere in the
ALRAI Constitution does it say that the foregoing actions shall
Page | 127
cause the automatic termination of membership. Thus, the CA
correctly ruled that “respondents’ expulsion constitutes an
infringement of their constitutional right to due process of law and is
not in accord with the principles established in Article 19 of the Civil
Code, x x x.” There being no valid termination of respondents’
membership in ALRAI, respondents remain as its existing members.
It follows that as members, respondents are entitled to inspect the
records and books of accounts of ALRAI subject to Section 1,
Article VII of ALRAI’s Constitution, and they can demand the
accounting of its funds in accordance with Section 6, Article V of the
ALRAI Constitution. In addition, Sections 74 and 75 of the
Corporation Code also sanction the right of respondents to inspect
the records and books of accounts of ALRAI and demand the
accounting of its funds.
Actions; Corporations; Individual Suits; Individual suits are filed
when the cause of action belongs to the stockholder personally, and
not to the stockholders as a group, or to the corporation, e.g., denial
of right to inspection and denial of dividends to a stockholder.—
Individual suits are filed when the cause of action belongs to the
stockholder personally, and not to the stockholders as a group, or to
the corporation, e.g., denial of right to inspection and denial of
dividends to a stockholder. If the cause of action belongs to a group
of stockholders, such as when the rights violated belong to
preferred stockholders, a class or representative suit may be filed to
protect the stockholders in the group.
Same; Same; Derivative Suits; A derivative suit is one which is
instituted by a shareholder or a member of a corporation, for and in
behalf of the corporation for its protection from acts committed by
directors, trustees, corporate officers, and even third persons.—A
derivative suit, on the other hand, is one which is instituted by a
shareholder or a member of a corporation, for and in behalf of the
corporation for its protection from acts committed by directors,
trustees, corporate officers, and even third persons. The whole
purpose of the law authorizing a derivative suit is to allow the
stockholders/members to enforce rights which are derivative
(secondary) in nature, i.e., to enforce a corporate cause of action.
Mercantile Law; Corporations; The Corporation Code therefore tells
us that the power of a corporation to validly grant or convey any of
its real or personal properties is circumscribed by its primary
purpose.—The Corporation Code therefore tells us that the power
of a corporation to validly grant or convey any of its real or personal
properties is circumscribed by its primary purpose. It is therefore
important to determine whether the grant or conveyance is pursuant
to a legitimate corporate purpose, or is at least reasonable and
necessary to further its purpose. Based on the records of this case,
we find that the transfers of the corporate properties to Javonillo,
Armentano, Dela Cruz, Alcantara and Loy are bereft of any
legitimate corporate purpose, nor were they shown to be reasonably
necessary to further ALRAI’s purposes. This is principally because,
as respondents argue, petitioners “personally benefitted themselves
by allocating among themselves vast track of lands at the dire
expense of the landless general membership of the Association.”
Attorney’s Fees; Contingent Fees; Contingent fee is generally
recognized as valid and binding, but must be laid down in an
express contract.—In Rayos v. Hernandez, 515 SCRA 517 (2007),
we held that a contingent fee arrangement is valid in this
jurisdiction. It is generally recognized as valid and binding, but must
be laid down in an express contract. In the same case, we have
identified the circumstances to be considered in determining the
reasonableness of a claim for attorney’s fees as follows: (1) the
amount and character of the service rendered; (2) labor, time, and
trouble involved; (3) the nature and importance of the litigation or
business in which the services were rendered; (4) the responsibility
imposed; (5) the amount of money or the value of the property
affected by the controversy or involved in the employment; (6) the
skill and experience called for in the performance of the services;
(7) the professional character and social standing of the attorney;
(8) the results secured; (9) whether the fee is absolute or
contingent, it being recognized that an attorney may properly
charge a much larger fee when it is contingent than when it is not;
and (10) the financial capacity and economic status of the client
have to be taken into account in fixing the reasonableness of the
fee.
Mercantile Law; Corporation Law; Board of Directors; It is well-
settled that directors of corporations presumptively serve without
compensation; so that while the directors, in assigning themselves
additional duties, act within their power, they nonetheless act in
excess of their authority by voting for themselves compensation for
such additional duties.—Petitioners cannot argue that the properties
Page | 128
transferred to them will serve as reimbursements of the amounts
they advanced for ALRAI. There is no evidence to show that they
indeed paid the realty tax on the donated lands. Neither did
petitioners present any proof of actual disbursements they incurred
whenever Javonillo and Armentano allegedly helped Atty. Pedro
Alcantara in handling the cases involving ALRAI. Like in the cases
of Dela Cruz and Alcantara, absent proof, there was no basis by
which it could have been determined whether the transfer of
properties to Javonillo and Armentano was reasonable under the
circumstances at that time. Second, petitioners cannot argue that
the properties are transferred as compensation for Javonillo. It is
well-settled that directors of corporations presumptively serve
without compensation; so that while the directors, in assigning
themselves additional duties, act within their power, they
nonetheless act in excess of their authority by voting for themselves
compensation for such additional duties. Even then, aside from the
claim of petitioners, there is no showing that Javonillo rendered
extraordinary or unusual services to ALRAI.
JARDELEZA, J.:
These are consolidated petitions for review on certiorari assailing
the Court of Appeals' (CA) Decision1 and Resolution2 dated
November 24, 2008 and June 19, 2009, respectively, in CA-G.R.
SP No. 01858-MIN and CA-G.R. SP No. 01861-MIN. The CA
affirmed with modification the Decision3 of the Regional Trial Court
(court a quo) dated July 11, 2007 which ruled in favor of
respondents.
The Parties
Petitioners are Agdao Landless Residents Association, Inc.
(ALRAI), a non-stock, non-profit corporation duly organized and
existing under and by virtue of the laws of the Republic of the
Philippines,4 and its board of directors,5 namely, Armando Javonillo
(Javonillo), Ma. Acelita Armentano (Armentano), Alex Josol,
Salcedo de la Cruz, Jr., Claudio Lao, Antonia Amorada, Julius
Alinsub, Pompeniano Espinosa, Consorcio Delgado, Romeo
Cabillo, Benjamin Lamigo, Ricardo Bacong, Rodolfo Galenzoga,
and Asuncion Alcantara (Alcantara).6 Respondents are allegedly
ousted members of ALRAI, namely, Rolando Maramion, Leonidas
Jamisola, Virginia Canoy (Canoy), Elizabeth Gonzales, Crispiniano
Quire-Quire, Emestino Dunlao, Ella Demandante, Ella Ria
Demandante, Elgin Demandante, Satumina Witara (Witara), Virgilio
Dayondon (Dayondon), Melencia Maramion, Angelica Penkian
(Penkian), Presentacion Tan, Hemani Gregory (Gregory), Rudy
Gimarino (Gimarino), Valentin Cameros, Radel Cameros
(Cameros), Zoilo Jabonete, Luisito Tan (Tan), Joseph Quire Quire,
Emestino Dunlao, Jr., Fred Dunlao, Liza Maramion, Clarita Robilla
(Robilla), Renata Dunlao and Prudencio Juariza, Jr.
(Juariza).7chanrobleslaw
The Antecedents
Dakudao & Sons, Inc. (Dakudao) executed six Deeds of Donation8
in favor of ALRAI covering 46 titled lots (donated lots).9 One Deed
of Donation10 prohibits ALRAI, as donee, from partitioning or
distributing individual certificates of title of the donated lots to its
members, within a period of five years from execution, unless a
written authority is secured from Dakudao.11 A violation of the
prohibition will render the donation void, and title to and possession
of the donated lot will revert to Dakudao.12 The other five Deeds of
Donation do not provide for the five-year restriction.
In the board of directors and stockholders meetings held on January
5, 2000 and January 9, 2000, respectively, members of ALRAI
resolved to directly transfer 10 of the donated lots to individual
members and non members of ALRAI.13 Transfer Certificate of Title
(TCT) Nos. T-62124 (now T-322968), T-297811 (now TCT No. T-
322966), T-297813 (now TCT No. T-322967) and T-62126 (now
TCT No. T-322969) were transferred to Romeo Dela Cruz (Dela
Cruz). TCT Nos. T-41374 (now TCT No. T-322963) and T-41361
(now TCT No. T-322962) were transferred to petitioner Javonillo,
the president of ALRAI. TCT Nos. T-41365 (now TCT No. T-
322964) and T-41370 (now TCT No. T-322964) were transferred to
petitioner Armentano, the secretary of ALRAI. TCT Nos. T-41367
(now TCT No. T-322971) and T-41366 were transferred to petitioner
Alcantara, the widow of the fanner legal counsel of ALRAI. The
Page | 129
donated lot covered by TCT No. T-41366 (replaced by TCT No. T-
322970) was sold to Lily Loy (Loy) and now covered by TCT No. T-
338403.14chanrobleslaw
Respondents filed a Complaint15 against petitioners. Respondents
alleged that petitioners expelled them as members of ALRAI, and
that petitioners are abusing their powers as officers.16 Respondents
further alleged that petitioners were engaged in the following
anomalous and illegal acts: (1) requiring ALRAI's members to pay
exorbitant arrear fees when ALRAI's By-Laws only set membership
dues at P1.00 per month;17 (2) partially distributing the lands
donated by Dakudao to some officers of ALRAI and to some non-
members in violation of the Deeds of Donation;18 (3) illegally
expelling them as members of ALRAI without due process;19 and (4)
being unable to show the books of accounts of ALRAI.20 They also
alleged that Loy (who bought one of the donated lots from
Alcantara) was a buyer in bad faith, having been aware of the status
of the land when she bought it.21chanrobleslaw
Thus, respondents prayed for: (1) the restoration of their
membership to ALRAI; (2) petitioners to stop selling the donated
lands and to annul the titles transferred to Javonillo, Armentano,
Dela Cruz, Alcantara and Loy; (3) the production of the accounting
books of ALRAI and receipts of payments from ALRAI's members;
(4) the accounting of the fees paid by ALRAI's members; and (5)
damages.22chanrobleslaw
In their Answer,23 petitioners alleged that ALRAI transferred lots to
Alcantara as attorney's fees ALRAI owed to her late husband, who
was the legal counsel of ALRAI.24 On the other hand, Javonillo and
Armentano, as president and secretary of ALRAI, respectively,
made a lot of sacrifices for ALRAI, while Dela Cruz provided
financial assistance to ALRAI.25cralawredchanrobleslaw
Petitioners also alleged that respondents who are non-members of
ALRAI have no personality to sue. They also claimed that the
members who were removed were legally ousted due to their
absences in meetings.26chanrobleslaw
The Ruling of the RTC
On July 11, 2007, the court a quo promulgated its Decision,27 the
decretal portion of which reads:
chanRoblesvirtualLawlibrary
After weighing the documentary and testimonial evidence
presented, as well as the arguments propounded by the counsels,
this Court tilts the scale of justice in favor of complainants and
hereby grants the following:ChanRoblesVirtualawlibrary
Defendants are enjoined from disposing or selling further the
donated lands to the detriment of the beneficiary-members of the
Association;
The Complainants and/or the ousted members are hereby restored
to their membership with ALRAI, and a complete list of all bona fide
members should be made and submitted before this Court;
The Register of Deeds of the City of Davao is directed to annul the
Land Titles transferred to Armando Javonillo, Ma. Acelita
Armentano, Romeo dela Cruz, Asuncion Alcantara and Lily Loy with
TCT Nos. T-322962, T-322963, T-322964, T-322965, T-322966, T-
322967, T-322968, T-322969, T-322971 and T-338403 (formerly T-
322970), respectively; and to register said titles to the appropriate
donee provided in the Deeds of Donation; and cralawlawlibrary
Defendants are further directed to produce all the Accounting Books
of the Association, receipts of the payments made by all the
members, and for an accounting of the fees paid by the members
from the time of its incorporation up to the present;
Moral, exemplary and attorney's fees being unsubstantiated, the
same cannot be given due course; and cralawlawlibrary
Defendants are ordered to shoulder the costs of suit.
SO ORDERED.28
The court a quo treated the case as an intra-corporate dispute.29 It
found respondents to be bona fide members of ALRAI.30 Being
Page | 130
bona fide members, they are entitled to notices of meetings held for
the purpose of suspending or expelling them from ALRAI.31 The
court a quo however found that respondents were expelled without
due process.32 It also annulled all transfers of the donated lots
because these violated the five-year prohibition under the Deeds of
Donation.33 It also found Loy a purchaser in bad
faith.34chanrobleslaw
Both Loy and petitioners filed separate appeals with the CA. Loy's
appeal was docketed as CA-G.R. SP No. 01858;35 while petitioners'
appeal was docketed as CA-G.R. SP No. 1861.36 In its Resolution37
dated October 19, 2007, the CA ordered the consolidation of the
appeals.
The Ruling of the Court of Appeals
The CA affirmed with modification the court a quo's Decision. The
decretal portion of the CA Decision38 dated November 24, 2008
reads:
chanRoblesvirtualLawlibrary
WHEREFORE, the consolidated petitions are PARTLY GRANTED.
The assailed Decision dated July 11,2007 of the Regional Trial
Court (RTC), Eleventh (11th)Judicial Region, Branch No. 10 of
Davao City in Civil Case No. 29,047-02 is hereby AFFIRMED with
MODIFICATION.
The following Transfer Certificates of Title are declared VALID:
TCT Nos. T-322966, T-322967, T-322968 and T-322969 in the
name of petitioner Romeo C. DelaCruz; and
TCT No. T-338403 in the name of petitioner Lily Loy.
The following Transfer Certificates of Title are declared VOID:
TCT Nos. T-322963 and T-322962 in the name of Petitioner
Armando Javonillo;
TCT Nos. T-322964 and T-322965 in the name of petitioner Ma.
Acelita Armentano; and
TCT No. T-322971 in the name of petitioner Asuncion A. Alcantara.
Petitioners who are members of ALRAI may inspect all the records
and books of accounts of ALRAI and demand accounting of its
funds in accordance with Section 1, Article VII and Section 6, Article
V of ALRAI's Constitution and By-Laws.
SO ORDERED.39
Under Section 2, Article III of ALRAI's Amended Constitution and
By-Laws (ALRAI Constitution), the corporate secretary should give
written notice of all meetings to all members at least three days
before the date of the meeting.40 The CA found that respondents
were not given notices of the meetings held for the purpose of their
termination from ALRAI at least three days before the date of the
meeting.41 Being existing members of ALRAI, respondents are
entitled to inspect corporate books and demand accounting of
corporate funds in accordance with Section 1, Article VII and
Section 6, Article V ofthe ALRAI Constitution.42chanrobleslaw
The CA also noted that among the donated lots transferred, only
one [under TCT No. T-41367 (now TCT No. 322971) and
transferred to Alcantara] was covered by the five-year prohibition.43
Although petitioners attached to their Memorandum44 dated
November 19, 2007 a Secretary's Certificate45 of Dakudao resolving
to remove the restriction from the land covered by TCT No. T-
41367, the CA did not take this certificate into consideration
because petitioners never mentioned its existence in any of their
pleadings before the court a quo. Thus, without the required written
authority from the donor, the CA held that the disposition of the land
covered by TCT No. T-41367 is prohibited and the land's
subsequent registration under TCT No. T-322971 is
void.46chanrobleslaw
However, the CA nullified the transfers made to Javonillo and
Armentano because these transfers violated Section 6 of Article IV
Page | 131
of the ALRAI Constitution. Section 6 prohibits directors from
receiving any compensation, except for per diems, for their services
to ALRAI.47 The CA upheld the validity of the transfers to Dela Cruz
and Alcantara48 because the ALRAI Constitution does not prohibit
the same. The CA held that as a consequence, the subsequent
transfer of the lot covered by TCT No. T-41366 to Loy from
Alcantara was also valid.49chanrobleslaw
Both parties filed separate motions for reconsideration with the CA
but these were denied in a Resolution50 dated June 19, 2009.
Thus, the parties filed separate petitions for review on certiorari
under Rule 45 of the Rules of Court with this Court. In a
Resolution51 dated September 30, 2009, we resolved to consolidate
the petitions considering they assail the same CA Decision and
Resolution dated November 24, 2008 and June 19, 2009,
respectively. The petitions also involve the same parties and raise
interrelated issues.
The Issues
Petitioners raise the following issues for resolution of the Court, to
wit:
Whether respondents should be reinstated as members of ALRAI;
and
Whether the transfers of the donated lots are valid.
Our Ruling
We find the petition partly meritorious.
I. Legality of respondents' termination
Petitioners argue that respondents were validly dismissed for
violation of the ALRAI Constitution particularly for non-payment of
membership dues and absences in the meetings.52chanrobleslaw
Petitioners' argument is without merit. We agree with the CA's
finding that respondents were illegally dismissed from ALRAI.
We stress that only questions of law may be raised in a petition for
review on certiorari under Rule 45 of the Rules of Court, since "the
Supreme Court is not a trier of facts."53 It is not our function to
review, examine and evaluate or weigh the probative value of the
evidence presented.
When supported by substantial evidence, the findings of fact of the
CA are conclusive and binding on the parties and are not
reviewable by this Court, unless the case falls under any of the
recognized exceptions in Jurisprudence.54chanrobleslaw
The court a quo held that respondents are bona fide members of
ALRAL55 This finding was not disturbed by the CA because it was
not raised as an issue before it and thus, is binding and conclusive
on the parties and upon this Court.56 In addition, both the court a
quo and the CA found that respondents were illegally removed as
members of ALRAI. Both courts found that in terminating
respondents from ALRAI, petitioners deprived them of due
process.57chanrobleslaw
Section 9158 of the Corporation Code of the Philippines (Corporation
Code)59 provides that membership in a non-stock, non-profit
corporation (as in petitioner ALRAI in this case) shall be terminated
in the manner and for the cases provided in its articles of
incorporation or the by-laws.
In tum, Section 5, Article II of the ALRAI Constitution60 states:
Sec. 5. - Termination of Membership - Membership may be lost in
any of the following: a) Delinquent in the payment of monthly
dues; b) failure to [attend] any annual or special meeting of the
association for three consecutive times without justifiable
Page | 132
cause, and c) expulsion may be exacted by majority vote of the
entire members, on causes which herein enumerated: 1) Act and
utterances which are derogatory and harmful to the best interest of
the association; 2) Failure to attend any annual or special meeting
of the association for six (6) consecutive months, which shall be
construed as lack of interest to continue his membership, and 3)
any act to conduct which are contrary to the objectives, purpose
and aims of the association as embodied in the charter[.]61
Petitioners allege that the membership of respondents in ALRAI
was terminated due to (a) non-payment of membership dues and
(b) failure to consecutively attend meetings.62 However, petitioners
failed to substantiate these allegations. In fact, the court a quo
found that respondents submitted several receipts showing their
compliance with the payment of monthly dues.63 Petitioners likewise
failed to prove that respondents' absences from meetings were
without any justifiable grounds to result in the loss of their
membership in ALRAI.
Even assuming that petitioners were able to prove these
allegations, the automatic termination of respondents' membership
in ALRAI is still not warranted. As shown above, Section 5 of the
ALRAI Constitution does not state that the grounds relied upon by
petitioners will cause the automatic termination of respondents'
membership. Neither can petitioners argue that respondents'
memberships in ALRAI were terminated under letter (c) of Section
5, to wit:
x x x c) expulsion may be exacted by majority vote of the entire
members, on causes which herein enumerated: 1) Act and
utterances which are derogatory and harmful to the best interest of
the association; 2) Failure to attend any annual or special meeting
of the association for six (6) consecutive months, which shall be
construed as lack of interest to continue his membership, and 3)
any act to conduct which are contrary to the objectives, purpose
and aims of the association as embodied in the charter; x x
x64chanroblesvirtuallawlibrary
Although termination of membership from ALRAI may be made by a
majority of the members, the court a quo found that the "guideline
(referring to Section 2, Article III of the ALRAI Constitution) was not
followed, hence, complainants' ouster from the association was
illegally done."65 The court a quo cited Section 2, Article III of the
ALRAI Constitution which provides, thus:
Sec. 2. -Notice- The Secretary shall give or cause to be given
written notice of all meetings, regular or special to all members of
the association at least three (3) days before the date of each
meetings either by mail or personally. Notice for special meetings
shall specify the time and the purposes or purpose for which it was
called; x x x 66
The CA concurred with the finding of the court a quo.67 The CA
noted that the evidence presented revealed that the General
Meeting for the termination of membership was to be held on July
29, 2001, at 2 o'clock in the afternoon; but the Notice to all officers
and members of ALRAI informing them about the General Meeting
appeared to have been signed by ALRAI's President only on July
27, 2001.68 Thus, the CA held that the "notice for the July 29, [2001]
meeting where the general membership of ALRAI approved the
expulsion of some of the respondents was short of the three (3)-day
notice requirement. More importantly, the petitioners have failed to
adduce evidence showing that the expelled members were indeed
notified of any meeting or investigation proceeding where they are
given the opportunity to be heard prior to the termination of their
membership."69chanrobleslaw
The requirement of due notice becomes more essential especially
so since the ALRAI Constitution provides for the penalties to be
imposed in cases where any member is found to be in arrears in
payment of contributions, or is found to be absent from any meeting
without any justifiable cause. Section 3, Article II and Section 3,
Article III of the ALRAI Constitution provide, to wit:
Page | 133

chanRoblesvirtualLawlibrary
Article II
xxx
Sec. 3. - Suspension of members Any member who shall be six (6)
months in arrears in the payment of monthly dues or additional
contributions or assessments shall be automatically suspended and
may be reinstated only upon payment of the corresponding dues in
arrears or additional contributions and after approval of the board of
Directors.70chanrobleslaw
xxx
Article III
xxx
Sec. 3. - Any member who shall be absent from any meeting
without justifiable causes shall be liable to a fine of Two Pesos (P
2.00);71
Clearly, members proved to be in arrears in the payment of monthly
dues, contributions, or assessments shall only be automatically
suspended; while members who shall be absent from any meeting
without any justifiable cause shall only be liable for a fine. Nowhere
in the ALRAI Constitution does it say that the foregoing actions shall
cause the automatic termination of membership. Thus, the CA
correctly ruled that "respondents' expulsion constitutes an
infringement of their constitutional right to due process of law and is
not in accord with the principles established in Article 19 of the Civil
Code, x x x."72chanrobleslaw
There being no valid termination of respondents' membership m
ALRAI, respondents remain as its existing members.73 It follows that
as members, respondents are entitled to inspect the records and
books of accounts of ALRAI subject to Section 1, Article VII74 of
ALRAI's Constitution, and they can demand the accounting of its
funds in accordance with Section 6, Article V of the ALRAI
Constitution.75 In addition, Sections 7476 and 7577 of the Corporation
Code also sanction the right of respondents to inspect the records
and books of accounts of ALRAI and demand the accounting of its
funds.
II. On the validity of the donated lots
We modify the decision of the CA.
At the onset, we find that the cause of action and the reliefs sought
in the complaint pertaining to the donated lands (ALRAI's corporate
property) strictly call for the filing of a derivative suit, and not an
individual suit which respondents filed.
Individual suits are filed when the cause of action belongs to the
stockholder personally, and not to the stockholders as a group, or to
the corporation, e.g. denial of right to inspection and denial of
dividends to a stockholder. If the cause of action belongs to a group
of stockholders, such as when the rights violated belong to
preferred stockholders, a class or representative suit may be filed to
protect the stockholders in the group.78chanrobleslaw
A derivative suit, on the other hand, is one which is instituted by a
shareholder or a member of a corporation, for and in behalf of the
corporation for its protection from acts committed by directors,
trustees, corporate officers, and even third persons.79 The whole
purpose of the law authorizing a derivative suit is to allow the
stockholders/members to enforce rights which are derivative
(secondary) in nature, i.e., to enforce a corporate cause of
action.80chanrobleslaw
The nature of the action, as well as which court or body has
jurisdiction over it, is determined based on the allegations contained
in the complaint of the plaintiff, irrespective of whether or not the
plaintiff is entitled to recover upon all or some of the claims asserted
therein.81chanrobleslaw
Page | 134
In this case, the complaint alleged, thus:
FIRST CAUSE OF ACTION
9. Sometime in 2001, Complainants accidentally discovered that
portions of the aforementioned donated lands were partially
distributed by the Officers of said association, AMONG
THEMSELVES, without knowledge of its members.
xxx
11. Then there was illegal partial distribution of the donated lands.
Not only the President and Secretary of the Association, but also
some personalities who are not members of the association and
who themselves own big tracts of land, are the recipients of the
donated lands, which acts are contrary to the clear intents as
indicated in the deed of donation. x x x82
In the same complaint, respondents prayed .for the following reliefs,
among others, to wit:
chanRoblesvirtualLawlibrary
a) An Order for a writ of PRELIMINARY PROHIBITORY
MANDATORY INJUNCTION to stop the Defendants from disposing
the donated lands to the detriment of the beneficiary-members of
the Association[.]
xxx
c) To cease and desist from selling donated lands subject of this
case and to annul the titles transferred x x x.
d) To annul the Land Titles fraudulently and directly transferred from
the Dacudao in the names of Defendants Javonillo, Armentano,
Romeo de la Cruz and Alcantara, and subsequently to defendant
Lily Loy in the name of Agdao Landless Associatidn.83
In a strict sense, the first cause of action, and:the reliefs sought,
should have been brought through a derivative suit. The first cause
of action pertains to the corporate right of ALRAI involving its
corporate properties which it owned by virtue of the Deeds of
Donation. In derivative suits, the real party-in-interest is the
corporation, and the suing stockholder is a mere nominal party.84 A
derivative suit, therefore, concerns "a wrong to the corporation
itself."85chanrobleslaw
However, we liberally treat this case (in relation to the cause of
action pertaining to ALRAI's corporate properties) as one pursued
by the corporation itself, for the following reasons.
First, the court a quo has jurisdiction to hear and decide this
controversy. Republic Act No. 8799,86 in relation to Section 5 of
Presidential Decree No. 902-A,87 vests the court a quo with original
and exclusive jurisdiction to hear and decide cases involving:
chanRoblesvirtualLawlibrary
Sec. 5. x x x
(a) Devices or schemes employed by or any acts, of the board of
directors, business associates, its officers or partnership, amounting
to fraud and misrepresentation which may be detrimental to the
interest of the public and/or of the stockholders, partners, members
of associations or organizations registered with the Commission.
Second, we note that petitioners did not object to the institution of
the case (on the ground that a derivative suit should have been
lodged instead of an individual suit) in any of the proceedings
before the court a quo or before the CA.88chanrobleslaw
Third, a reading of the complaint (in relation to the cause of action
pertaining to ALRAI's corporate properties) shows that respondents
do not pray for reliefs for their personal benefit; but in fact, for the
benefit of the ALRAI, to wit:
Page | 135
c) To cease and desist from selling donated lands subject of this
case and to annul the titles transferred to Armando Javonillo, Ma.
Acelita Armentano, Romeo de Ia Cruz, Asuncion Alcantara and Lily
Loy x x x.
d) To annul the Land Titles fraudulently and directly transferred from
the (sic) Dacudao in the names of Defendants Javonillo,
Armentano, Romeo de la Cruz and Alcantara, and subsequently to
Defendant Lily Loy in the name of Agdao Landless Assiociation.89
The reliefs sought show that the complaint was filed ultimately to
curb the alleged mismanagement of ALRAI's corporate properties.
We note that the danger sought to be avoided in Evangelista v.
Santos90 does not exist in this case. In Santos, plaintiff stockholders
sought damages against the principal officer of the corporation,
alleging that the officer's mismanagement of the affairs and assets
of the corporation brought about the loss of the value of its stocks.
In ruling against the plaintiff-stockholders, this Court held that "[t]he
stockholders may not directly claim those damages for themselves
for that would result in the appropriation by, and the distribution
among them of part of the corporate assets before the dissolution of
the corporation x x x."91 More, in Santos, if only the case was
brought before the proper venue, this Court added, "we note that
the action stated in their complaint is susceptible of being converted
into a derivative suit for the benefit of the corporation by a mere
change in the prayer."92chanrobleslaw
In this case, the reliefs sought do not entail the premature
distribution of corporate assets. On the contrary, the reliefs seek to
preserve them for the corporate interest of ALRAI. Clearly then, any
benefit that may be recovered is accounted for, not in favor of
respondents, but for the corporation, who is the real party-in-interest
Therefore, the occasion for the strict application of the rule that a
derivative suit should be brought in order to protect and vindicate
the interest of the corporation does not obtain under the
circumstances of this case.
Commart (Phils.), Inc. v. Securities and Exchange Commission
(SEC)93 upholds the same principle. In that case, the chairman and
board of directors of Commart were sued for diverting into their
private accounts amounts due to Commart as commissions.
Respondents argued that the Hearing Panel of the SEC should
dismiss the case·on the ground that it has no jurisdiction over the
matter because the case is not a derivative suit The Hearing Panel
denied the motion, and was affirmed by the SEC. Upon appeal, this
Court affirmed the decision of the SEC, to wit:
chanRoblesvirtualLawlibrary
The complaint in SEC Case No. 2673, particularly paragraphs 2 to 9
under First Cause of Action, readily shows that it avers the diversion
of corporate income into the private bank accounts of petitioner x x
x and his wife. Likewise, the principal relief prayed for in the
complaint is the recovery of a sum of money in favor of the
corporation. This being the case, the complaint is definitely a
derivative suit. xxx
xxx
In any case, the suit is for the benefit of Commart itself, for a
judgment in favor of the complainants will necessarily mean
recovery by the corporation of the US$2.5 million alleged to have
been diverted from its coffers to the private bank accounts of its top
managers and directors. Thus, the prayer in the Amended
Complaint is for judgment ordering respondents x x x, "to account
for and to, turn over or deliver to the Corporation" the aforesaid
sum, with legal interest, and "ordering all the respondents, as
members of the Board of Directors to take such remedial steps as
would protect the corporation from further depredation of the funds
and property."94
Fourth, based on the records, we find that there is substantial
compliance with the requirements of a derivative suit, to wit:
chanRoblesvirtualLawlibrary
a) [T]he party bringing suit should be a shareholder as of the time of
the act or transaction complained of, the number of his shares not
Page | 136
being material;
b) [H]e has tried to exhaust intra-corporate remedies, i.e., has made
a demand on the board of directors for the appropriate relief but the
latter has failed or refused to heed his plea; and cralawlawlibrary
c) [T]he cause of action actually devolves on the corporation, the
wrongdoing or harm having been, or being caused to the
corporation and not to the particular stockholder bringing the suit.95
Here, the court a quo found that respondents are bona fide
members of ALRAI.96 As for the second requisite, respondents also
have tried to demand appropriate relief within the corporation, but
the demand was unheeded. In their Memorandum before the CA,
respondents alleged, thus:
chanRoblesvirtualLawlibrary
4.18 The occurrence of the series of distressing revelation
prompted Respondents to confront Defendant Armentano on the
accounting of all payments made including the justification for the
illegal distribution of the Donated Land to four persons mentioned in
preceding paragraph (4.12) of this memorandum. Unfortunately,
Petitioner Armentano merely reasoned their (referring to the four
persons) right to claim ownership of the land as compensation for
their service and attorney's fees;
4.19 Anxious of the plan of action taken by the Respondents
against the Petitioners, the latter started harassing the unschooled
Respondents by unduly threatening them. Respondents simply
wanted the land due them, an accounting of the finances of the
Association and justification of the illegal disposition of the Donated
Land which was donated for the landless members of the
Association;
4.20 As a consequence, Petitioners on their own, with grave abuse
of power and in violation of the Constitution and By-Laws of the
Association maliciously expelled the Respondents particularly those
persistently inquisitive about Petitioners' moves and acts which only
emphasized their practice of upholding the MOB RULE by
presenting solicited signatures of alleged members and non-
members written on a scrap of paper signifying confirmation of the
ouster (sic) members. x x x97
We note that respondents' demand on Armentano substantially
complies with the second requirement. While it is true that the
complaining stockholder must show that he has exhausted all the
means within his reach to attain within the corporation the redress
for his grievances, demand is unnecessary if the exercise will result
in futility.98 Here, after respondents demanded Armentano to justify
the transfer of ALRAI's properties to the individual petitioners,
respondents were expelled from the corporation, which termination
we have already ruled as invalid. To our mind, the threat of
expulsion against respondents is sufficient to forestall any
expectation of further demand for relief from petitioners. Ultimately,
to make an effort to demand redress within the corporation will only
result in futility, rendering the exhaustion of other remedies
unnecessary.
Finally, the third requirement for the institution of a derivative suit is
clearly complied with. As discussed in the previous paragraphs, the
cause of action and the reliefs sought ultimately redound to the
benefit of ALRAI. In this case, and as in a proper derivative suit,
ALRAI is the party-in-interest and respondents are merely nominal
parties.
In view of the foregoing, and considering further the interest of
justice, and the length of time that this case has been pending, we
liberally treat this case as one pursued by the corporation to protect
its corporate rights. As the court a quo noted, this case
"commenced [on] April 2, 2002, blossomed in a full-blown trial and
ballooned into seven (7) voluminous rollos."99chanrobleslaw
We now proceed to resolve the issue of the validity of the transfers
of the donated lots to Javonillo, Armentano, DelaCruz, Alcantara
and Loy. We agree with the CA in ruling that the TCTs issued in the
names of Javonillo, Armentano and Alcantara are void.100 We
modify the ruling of the CA insofar as we rule that the TCTs issued
Page | 137
in the names of Dela Cruz and Loy are also void.101chanrobleslaw
One of the primary purposes of ALRAI is the giving of assistance in
uplifting and promoting better living conditions to all members in
particular and the public in general.102 One of its objectives includes
"to uplift and promote better living condition, education, health and
general welfare of all members in particular and the public in
general by providing its members humble shelter and decent
housing."103 Respondents maintain that it is pursuant to this purpose
and objective that the properties subject of this case were donated
to ALRAI.104chanrobleslaw
Section 36, paragraphs 7 and 11 of the Corporation Code provide:
chanRoblesvirtualLawlibrary
Sec. 36. Corporate powers and capacity. - Every corporation
incorporated under this Code has the power and
capacity:ChanRoblesVirtualawlibrary
xxx
7. To purchase, receive, take or grant, hold, convey, sell, lease,
pledge, mortgage and otherwise deal with such real and personal
property, including securities and bonds of other corporations, as
the transaction of the lawful business of the corporation may
reasonably and necessarily require, subject to the limitations
prescribed by law and the Constitution.
xxx
11. To exercise such other powers as may be essential or
necessary to carry out its purpose or purposes as stated in the
articles of incorporation.105chanroblesvirtuallawlibrary
The Corporation Code therefore tells us that the power of a
corporation to validly grant or convey any of its real or personal
properties is circumscribed by its primary purpose. It is therefore
important to determine whether the grant or conveyance is pursuant
to a legitimate corporate purpose, or is at least reasonable and
necessary to further its purpose.
Based on the records of this case, we find that the transfers of the
corporate properties to Javonillo, Armentano, Dela Cruz, Alcantara
and Loy are bereft of any legitimate corporate purpose, nor were
they shown to be reasonably necessary to further ALRAI's
purposes. This is principally because, as respondents argue,
petitioners "personally benefitted themselves by allocating among
themselves vast track of lands at the dire expense of the landless
general membership of the Association."106chanrobleslaw
We take first the cases of Dela Cruz, Alcantara and Loy.
We disagree with theCA in ruling that the TCTs issued in the name
of Dela Cruz are valid. The transfer of property to him does not
further the corporate purpose of ALRAI. To justify the transfer to
Dela Cruz, petitioners merely allege that, "[o]n the other hand, the
lots given by ALRAI to Romeo de la Cruz were compensation for
the financial assistance he had been extending to ALRAI."107
Records of this case do not bear any evidence to show how much
Dela Cruz has extended to ALRAI as financial assistance. The want
of evidence to support this allegation cannot allow a determination
whether the amount of the financial help that Dela Cruz extended to
ALRAI is commensurate to the amount of the property transferred to
him. The lack of evidence on this point is prejudicial to ALRAI
because ALRAI had parted with its property without any means by
which to determine whether the transfer is fair and reasonable
under the circumstances.
The same is true with the transfer of properties to Alcantara.
Petitioners allege that Alcantara's husband, Atty. Pedro Alcantara,
"handled all the legal work both before the Regional Trial Court in
Davao City (Civil Case No. 16192) and the Court of Appeals in
Manila (CA GR No. 13744). He agreed to render his services
although he was being paid intermittently, with just small amounts,
in the hope that he will be compensated when ALRAI triumphs in
the litigation."108 Petitioners thus claim that "[b]ecause of the legal
services of her husband, who is now deceased, petitioner Alcantara
Page | 138
was given by ALRAI two (2) lots x x x."109chanrobleslaw
Petitioners admit that Atty. Pedro Alcantara represented ALRAI as
counsel on part contingency basis.110 In their Memorandum before
the court a quo, respondents alleged that, "[i]n fact, Complainants
have duly paid Atty. Alcantara's legal fees as evidence (sic) by
corresponding receipts issued by the receiving Officer of the
Association."111 The aforementioned receipts112 show that Atty.
Pedro Alcantara had already been paid the total amount of
P16,845.00.
In Rayos v. Hernandez,113 we held that a contingent fee
arrangement is valid in this jurisdiction. It is generally recognized as
valid and binding, but must be laid down in an express contract. In
the same case, we have identified the circumstances to be
considered in determining the reasonableness of a claim for
attorney's fees as follows: (1) the amount and character of the
service rendered; (2) labor, time, and trouble involved; (3) the
nature and importance of the litigation or business in which the
services were rendered; (4) the responsibility imposed; (5) the
amount of money or the value of the property affected by the
controversy or involved in the employment; (6) the skill and
experience called for in the performance of the services; (7) the
professional character and social standing of the attorney; (8) the
results secured; (9) whether the fee is absolute or contingent, it
being recognized that an attorney may properly charge a much
larger fee when it is contingent than when it is not; and (10) the
financial capacity and economic status of the client have to be taken
into account in fixing the reasonableness of the
fee.114chanrobleslaw
In this case however, petitioners did not substantiate the extent of
the services that Atty. Pedro Alcantara rendered for ALRAL In fact,
no engagement or retainer contract was ever presented to prove
the terms of their agreement. Petitioners did not also present
evidence as to the value of the ALRAI properties at the time of
transfer to Alcantara. There is therefore no proof that the amount of
the properties transferred to Alcantara, in addition to the legal fees
he received, is commensurate (as compensation) to the reasonable
value of his legal services. Using the guidelines set forth in Rayos,
absent proof, there is no basis to determine whether the transfer of
the property to Alcantara is reasonable under the
circumstances.115chanrobleslaw
The importance of this doctrine in Rayos is emphasized in the
Canons of Professional Ethics116 and the Rules of Court.117 In both,
the overriding consideration is the reasonableness of the terms of
the contingent fee agreement, so much so that the grant of the
contingent fee is subject to the supervision of the
court.118chanrobleslaw
Spouses Cadavedo v. Lacaya119 further illustrates this principle. In
that case, this Court was confronted with the issue of whether the
contingent attorney's fees consisting of one-half of the property that
was subject of litigation was valid and reasonable. This Court ruled
that the attorney's fee is excessive and unconscionable, and is
therefore void. The Court said that as "matters then stood, [there]
was not a sufficient reason to justify a large fee in the absence of
any showing that special skills and additional work had been
involved."120 The Court also noted that Spouses Cadavedo and Atty.
Lacaya already made arrangements for the cost and expenses for
the cases handled.121chanrobleslaw
Similarly in this case, there is no proof that special skills and
additional work have been put in by Atty. Pedro Alcantara. Further,
as adverted to in previous paragraphs, receipts show that
intermittent payments as legal fees have already been paid to him.
We also note that in this case, not only one-half of a property was
transferred to Alcantara as compensation; but two whole parcels of
land - one with more or less 400 square meters (TCT No. 41366),
and the other with more or less 395 square meters (TCT No.
41367). 122 The amount of fee contracted for, standing alone and
unexplained would be sufficient to show that an unfair advantage
had been taken of the client, or that a legal fraud had been
perpetrated on him.123chanrobleslaw
Consequently, we also find that Alcantara's subsequent sale to Loy
is not valid. Alcantara cannot sell the property, over which she did
Page | 139
not have the right to own, in the first place. More, based on the
records, the court a quo had already made a finding that Loy is
guilty of bad faith as to render her purchase of the property from
Alcantara void. 124chanrobleslaw
We likewise find that there is failure to show any legitimate
corporate purpose in the transfer of ALRAI's corporate properties to
Javonillo and Armentano.
The Board Resolution125 confirming the transfer of ALRAI's
corporate properties to Javonillo and Armentano merely read, "[t]hat
the herein irrevocable confirmation is made in recognition of, and
gratitude for the outstanding services rendered by x x x Mr.
Armando Javonillo, our tireless President and Mrs. Acelita
Armentano, our tactful, courageous, and equally tireless Secretary,
without whose efforts and sacrifices to acquire a portion of the realty
of Dacudao & Sons, Inc., would not have been attained."126 In their
Memorandum, petitioners also alleged that "[t]he most difficult part
of their (Javonillo and Armentano) job was to raise money to meet
expenses. x x x It was very difficult for petitioners Javonillo and
Armentano when they needed to pay P300,000.00 for realty tax on
the land donated by Dakudao and Sons, Inc. to ALRAI. It became
more difficult when the Bureau of Internal Revenue was demanding
P6,874,000.00 as donor's tax on the donated lands. Luckily, they
were able to make representation with the BIR to waive the
tax."127chanrobleslaw
These reasons cannot suffice to prove any legitimate corporate
purpose in the transfer of the properties to Javonillo and
Armentano. For one, petitioners cannot argue that the properties
transferred to them will serve as reimbursements of the amounts
they advanced for ALRAL There is no evidence to show that they
indeed paid the realty tax on the donated lands. Neither did
petitioners present any proof of actual disbursements they incurred
whenever Javonillo and Armentano allegedly helped Atty. Pedro
Alcantara in handling the cases involving ALRAI.128 Like in the
cases of Dela Cruz and Alcantara, absent proof, there was no basis
by which it could have been determined whether the transfer of
properties to Javonillo and Armentano was reasonable under the
circumstances at that time. Second, petitioners cannot argue that
the properties are transferred as compensatioh for Javonillo. It is
well settled that directors of corporations presumptively serve
without compensation; so that while the directors, in assigning
themselves additional duties, act within their power, they
nonetheless act in excess of their authority by voting for themselves
compensation for such additional duties.129 Even then, aside from
the claim of petitioners, there is no showing that Javonillo rendered
extraordinary or unusual services to ALRAI.
The lack of legitimate corporate purpose is even more emphasized
when Javonillo and Armentano, as a director and an officer of
ALRAI, respectively, violated the fiduciary nature130 of their positions
in the corporation.
Section 32 of the Corporation Code provides, thus:
chanRoblesvirtualLawlibrary
Sec. 32. Dealings of directors, trustees or officers with the
corporation. —A contract of the corporation with one or more of its
directors or trustees or officers is voidable, at the option of such
corporation, unless all of the following conditions are present:
chanRoblesvirtualLawlibrary1. That the presence of such director or
trustee in the board meeting in which the contract was approved
was not necessary to constitute a quorum for such meeting;
2. That the vote of such director or trustee was not necessary for
the approval of the contract;
3. That the contract is fair and reasonable under the circumstances;
and
4. That in case of an officer, the contract has been previously
authorized by the board of directors.
Where any of the first two conditions set forth in the preceding
paragraph is absent, in the case of a contract with a director or
trustee, such contract may be ratified by the vote of the
stockholders representing at least two-thirds (2/3) of the outstanding
capital stock or of at least two thirds (2/3) of the members in a
meeting called for the purpose: Provided, That full disclosure of the
Page | 140
adverse interest of the directors or trustees involved is made at
such meeting: Provided, however, That the contract is fair and
reasonable under the circumstances.
Being the corporation's agents and therefore, entrusted with the
management of its affairs, the directors or trustees and other
officers of a corporation occupy a fiduciary relation towards it, and
cannot be allowed to contract with the corporation, directly or
indirectly, or to sell property to it, or purchase property from it,
where they act both for the corporation and for themselves.131 One
situation where a director may gain undue advantage over his
corporation is when he enters into a contract with the latter.
132
chanrobleslaw
Here, we note that Javonillo, as a director, signed the Board
Resolutions133 confirming the transfer of the corporate properties to
himself, and to Armentano. Petitioners cannot argue that the
transfer of the corporate properties to them is valid by virtue of the
Resolution134 by the general membership of ALRAI confirming the
transfer for three reasons.
First, as cited, Section 32 requires that the contract should be
ratified by a vote representing at least two-thirds of the members in
a meeting called for the purpose. Records of this case do not show
whether the Resolution was indeed voted by the required
percentage of membership. In fact, respondents take exception to
the credibility of the signatures of the persons who voted in the
Resolution. They argue that, "from the alleged 134 signatures, 24 of
which are non-members, 4 of which were signed twice under
different numbers, and 27 of which are apparently proxies
unequipped with the proper authorization. Obviously, on such
alleged general membership meeting the majority of the entire
membership was not attained."135chanrobleslaw
Second, there is also no showing that there was full disclosure of
the adverse interest of the directors involved when the Resolution
was approved. Full disclosure is required under the aforecited
Section 32 of the Corporation Code.136chanrobleslaw
Third, Section 32 requires that the contract be fair and reasonable
under the circumstances. As previously discussed, we find that the
transfer of the corporate properties to the individual petitioners is
not fair and reasonable for (1) want of legitimate corporate purpose,
and for (2) the breach of the fiduciary nature of the positions held by
Javonillo and Armentano. Lacking any of these (full disclosure and
a showing that the contract is fair and reasonable), ratification by
the two-thirds vote would be of no avail.137chanrobleslaw
In view of the foregoing, we rule that the transfers of ALRAI's
corporate properties to Javonillo, Armentano, Dela Cruz, Alcantara
and Loy are void. We affirm the finding of the court a quo when it
ruled that "[n]o proof was shown to justify the transfer of the titles,
hence, said transfer should be annulled."138chanrobleslaw
WHEREFORE, in view of the foregoing, the petitions for review on
certiorari in G.R. Nos. 188642 & 189425 and in G.R. Nos. 188888-
89 are PARTIALLY GRANTED. The Decision of the CA dated
November 24, 2008 and its Resolution dated June 19, 2009 ruling
that respondents are reinstated as members of ALRAI are hereby
AFFIRMED. The Decision of theCA dated November 24, 2008 and
its Resolution dated June 19, 2009 are MODIFIED as follows:
chanRoblesvirtualLawlibraryThe following Transfer Certificates of
Title are VOID:ChanRoblesVirtualawlibrary
(1) TCT Nos. T-322962 and T-322963 in the name of Armando
Javonillo;
(2) TCT Nos. T-322964 and T-322965 in the name of Ma. Acelita
Armentano;
(3) TCT Nos. T-322966, T-322967, T-322968, and T-322969 in the
name of Romeo Dela Cruz;
(4) TCT No. T-338403 in the name of Lily Loy; and
(5) TCT No. T-322971 in the name of Asuncion Alcantara.
SO ORDERED.chanRoblesvirtualLawlibrary
Page | 141
 SECOND DIVISION
January 11, 2016
G.R. No. 194964-65
UNIVERSITY OF MINDANAO, INC., Petitioner,
vs.
BANGKO SENTRAL NG PILIPINAS, ET AL., Respondents.
DECISION
Civil Law; Mortgages; Prescription; The prescriptive period for
actions on mortgages is ten (10) years from the day they may be
brought. Actions on mortgages may be brought not upon the
execution of the mortgage contract but upon default in payment of
the obligation secured by the mortgage.—Prescription is the mode
of acquiring or losing rights through the lapse of time. Its purpose is
“to protect the diligent and vigilant, not those who sleep on their
rights.” The prescriptive period for actions on mortgages is ten (10)
years from the day they may be brought. Actions on mortgages may
be brought not upon the execution of the mortgage contract but
upon default in payment of the obligation secured by the mortgage.
A debtor is considered in default when he or she fails to pay the
obligation on due date and, subject to exceptions, after demands for
payment were made by the creditor.
Same; Same; Same; Prescriptive period runs from the date of
demand, subject to certain exceptions.—As a general rule, a person
defaults and prescriptive period for action runs when (1) the
obligation becomes due and demandable; and (2) demand for
payment has been made. The prescriptive period neither runs from
the date of the execution of a contract nor does the prescriptive
period necessarily run on the date when the loan becomes due and
demandable. Prescriptive period runs from the date of demand,
subject to certain exceptions. In other words, ten (10) years may
lapse from the date of the execution of contract, without barring a
cause of action on the mortgage when there is a gap between the
period of execution of the contract and the due date or between the
due date and the demand date in cases when demand is
necessary.
Same; Same; Same; Under Article 1155 of the Civil Code,
prescription of actions may be interrupted by (1) the filing of a court
action; (2) a written extrajudicial demand; and (3) the written
acknowledgment of the debt by the debtor.—Under Article 1155 of
the Civil Code, prescription of actions may be interrupted by (1) the
filing of a court action; (2) a written extrajudicial demand; and (3) the
written acknowledgment of the debt by the debtor. Therefore, the
running of the prescriptive period was interrupted when respondent
sent its demand letter to petitioner on June 18, 1999. This
eventually led to petitioner’s filing of its annulment of mortgage
complaints before the Regional Trial Courts of Iligan City and
Cagayan de Oro City on July 16, 1999. Assuming that demand was
necessary, respondent’s action was within the ten (10)-year
prescriptive period. Respondent demanded payment of the loans in
1999 and filed an action in the same year.
Mercantile Law; Corporations; Ultra Vires Acts; A corporation may
exercise its powers only within those definitions. Corporate acts that
are outside those express definitions under the law or articles of
incorporation or those “committed outside the object for which a
corporation is created” are ultra vires.—Corporations are artificial
entities granted legal personalities upon their creation by their
incorporators in accordance with law. Unlike natural persons, they
have no inherent powers. Third persons dealing with corporations
cannot assume that corporations have powers. It is up to those
persons dealing with corporations to determine their competence as
expressly defined by the law and their articles of incorporation. A
corporation may exercise its powers only within those definitions.
Corporate acts that are outside those express definitions under the
law or articles of incorporation or those “committed outside the
object for which a corporation is created” are ultra vires. The only
exception to this rule is when acts are necessary and incidental to
carry out a corporation’s purposes, and to the exercise of powers
conferred by the Corporation Code and under a corporation’s
articles of incorporation.
Same; Same; Same; Schools; Securing loans is not an adjunct of
the educational institution’s conduct of business.—Petitioner does
not have the power to mortgage its properties in order to secure
loans of other persons. As an educational institution, it is limited to
developing human capital through formal instruction. It is not a
corporation engaged in the business of securing loans of others.
Page | 142
Hiring professors, instructors, and personnel; acquiring equipment
and real estate; establishing housing facilities for personnel and
students; hiring a concessionaire; and other activities that can be
directly connected to the operations and conduct of the education
business may constitute the necessary and incidental acts of an
educational institution. Securing FISLAI’s loans by mortgaging
petitioner’s properties does not appear to have even the remotest
connection to the operations of petitioner as an educational
institution. Securing loans is not an adjunct of the educational
institution’s conduct of business. It does not appear that securing
third party loans was necessary to maintain petitioner’s business of
providing instruction to individuals.
Remedial Law; Evidence; Presumptions; Presumptions are
“inference[s] as to the existence of a fact not actually known, arising
from its usual connection with another which is known, or a
conjecture based on past experience as to what course human
affairs ordinarily take.”—Presumptions are “inference[s] as to the
existence of a fact not actually known, arising from its usual
connection with another which is known, or a conjecture based on
past experience as to what course human affairs ordinarily take.”
Presumptions embody values and revealed behavioral expectations
under a given set of circumstances.
Same; Same; Same; Conclusive Presumptions; Conclusive
presumptions are presumptions that may not be overturned by
evidence, however strong the evidence is.—Conclusive
presumptions are presumptions that may not be overturned by
evidence, however strong the evidence is. They are made
conclusive not because there is an established uniformity in
behavior whenever identified circumstances arise. They are
conclusive because they are declared as such under the law or the
rules. Rule 131, Section 2 of the Rules of Court identifies two (2)
conclusive presumptions: SEC. 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; (b) The tenant
is not permitted to deny the title of his landlord at the time of the
commencement of the relation of landlord and tenant between
them.
Same; Same; Same; Disputable Presumptions; Disputable
presumptions are presumptions that may be overcome by contrary
evidence.—Disputable presumptions are presumptions that may be
overcome by contrary evidence. They are disputable in recognition
of the variability of human behavior. Presumptions are not always
true. They may be wrong under certain circumstances, and courts
are expected to apply them, keeping in mind the nuances of every
experience that may render the expectations wrong. Thus, the
application of disputable presumptions on a given circumstance
must be based on the existence of certain facts on which they are
meant to operate. “[P]resumptions are not allegations, nor do they
supply their absence[.]” Presumptions are conclusions. They do not
apply when there are no facts or allegations to support them.
Mercantile Law; Corporations; Ultra Vires Acts; Appropriate
amendments must be made either to the law or the articles of
incorporation before a corporation can validly exercise powers
outside those provided in law or the articles of incorporation. In
other words, without an amendment, what is ultra vires before a
corporation acquires shares in other corporations is still ultra vires
after such acquisition.—Acquiring shares in another corporation is
not a means to create new powers for the acquiring corporation.
Being a shareholder of another corporation does not automatically
change the nature and purpose of a corporation’s business.
Appropriate amendments must be made either to the law or the
articles of incorporation before a corporation can validly exercise
powers outside those provided in law or the articles of incorporation.
In other words, without an amendment, what is ultra vires before a
corporation acquires shares in other corporations is still ultra vires
after such acquisition.
Same; Same; Separate Legal Personality; The separate personality
of corporations means that they are “vest[ed] [with] rights, powers,
and attributes [of their own] as if they were natural persons”;
Corporate interests are separate from the personal interests of the
natural persons that comprise corporations.—The separate
personality of corporations means that they are “vest[ed] [with]
rights, powers, and attributes [of their own] as if they were natural
persons[.]” Their assets and liabilities are their own and not their
officers’, shareholders’, or another corporation’s. In the same vein,
the assets and liabilities of their officers and shareholders are not
the corporations’. Obligations incurred by corporations are not
Page | 143
obligations of their officers and shareholders. Obligations of officers
and shareholders are not obligations of corporations. In other
words, corporate interests are separate from the personal interests
of the natural persons that comprise corporations. Corporations are
given separate personalities to allow natural persons to balance the
risks of business as they accumulate capital. They are, however,
given limited competence as a means to protect the public from
fraudulent acts that may be committed using the separate juridical
personality given to corporations.
Same; Same; Same; Piercing the Veil of Corporate Fiction; There
are instances when we disregard the separate corporate
personalities of the corporation and its stockholders, directors, or
officers. This is called piercing of the corporate veil.—Indeed, there
are instances when we disregard the separate corporate
personalities of the corporation and its stockholders, directors, or
officers. This is called piercing of the corporate veil. Corporate veil
is pierced when the separate personality of the corporation is being
used to perpetrate fraud, illegalities, and injustices. In Lanuza, Jr. v.
BF Corporation, 737 SCRA 275 (2014): Piercing the corporate veil
is warranted when “[the separate personality of a corporation] is
used as a means to perpetrate fraud or an illegal act, or as a vehicle
for the evasion of an existing obligation, the circumvention of
statutes, or to confuse legitimate issues.” It is also warranted in alter
ego cases “where a corporation is merely a farce since it is a mere
alter ego or business conduit of a person, or where the corporation
is so organized and controlled and its affairs are so conducted as to
make it merely an instrumentality, agency, conduit or adjunct of
another corporation.”
Same; Same; Being a juridical person, petitioner cannot conduct its
business, make decisions, or act in any manner without action from
its Board of Trustees; The corporation may, however, delegate
through a board resolution its corporate powers or functions to a
representative, subject to limitations under the law and the
corporation’s articles of incorporation.—Being a juridical person,
petitioner cannot conduct its business, make decisions, or act in any
manner without action from its Board of Trustees. The Board of
Trustees must act as a body in order to exercise corporate powers.
Individual trustees are not clothed with corporate powers just by
being a trustee. Hence, the individual trustee cannot bind the
corporation by himself or herself. The corporation may, however,
delegate through a board resolution its corporate powers or
functions to a representative, subject to limitations under the law
and the corporation’s articles of incorporation. The relationship
between a corporation and its representatives is governed by the
general principles of agency. Article 1317 of the Civil Code provides
that there must be authority from the principal before anyone can
act in his or her name: ART. 1317. No one may contract in the
name of another without being authorized by the latter, or unless he
has by law a right to represent him.
Same; Same; Ultra Vires Acts; Contracts entered into by persons
without authority from the corporation shall generally be considered
ultra vires and unenforceable against the corporation.—The
unenforceable status of contracts entered into by an unauthorized
person on behalf of another is based on the basic principle that
contracts must be consented to by both parties. There is no contract
without meeting of the minds as to the subject matter and cause of
the obligations created under the contract. Consent of a person
cannot be presumed from representations of another, especially if
obligations will be incurred as a result. Thus, authority is required to
make actions made on his or her behalf binding on a person.
Contracts entered into by persons without authority from the
corporation shall generally be considered ultra vires and
unenforceable against the corporation.
Same; Same; Same; Not having the proper board resolution to
authorize Saturnino Petalcorin to execute the mortgage contracts
for petitioner, the contracts he executed are unenforceable against
petitioner.—Well-entrenched is the rule that this court, not being a
trier of facts, is bound by the findings of fact of the trial courts and
the Court of Appeals when such findings are supported by evidence
on record. Hence, not having the proper board resolution to
authorize Saturnino Petalcorin to execute the mortgage contracts
for petitioner, the contracts he executed are unenforceable against
petitioner. They cannot bind petitioner.
Same; Same; Same; Personal liabilities may be incurred by
directors who assented to such unauthorized act and by the person
who contracted in excess of the limits of his or her authority without
the corporation’s knowledge.—Personal liabilities may be incurred
by directors who assented to such unauthorized act and by the
Page | 144
person who contracted in excess of the limits of his or her authority
without the corporation’s knowledge.
Ratification; Words and Phrases; Ratification is a voluntary and
deliberate confirmation or adoption of a previous unauthorized
act.—Ratification is a voluntary and deliberate confirmation or
adoption of a previous unauthorized act. It converts the
unauthorized act of an agent into an act of the principal. It cures the
lack of consent at the time of the execution of the contract entered
into by the representative, making the contract valid and
enforceable. It is, in essence, consent belatedly given through
express or implied acts that are deemed a confirmation or waiver of
the right to impugn the unauthorized act. Ratification has the effect
of placing the principal in a position as if he or she signed the
original contract.
Same; Implied Ratification; Implied ratification may take the form of
silence, acquiescence, acts consistent with approval of the act, or
acceptance or retention of benefits.—Implied ratification may take
the form of silence, acquiescence, acts consistent with approval of
the act, or acceptance or retention of benefits. However, silence,
acquiescence, retention of benefits, and acts that may be
interpreted as approval of the act do not by themselves constitute
implied ratification. For an act to constitute an implied ratification,
there must be no acceptable explanation for the act other than that
there is an intention to adopt the act as his or her own. “[It] cannot
be inferred from acts that a principal has a right to do independently
of the unauthorized act of the agent.”
Same; Same; Corporations; The rule that knowledge of an officer is
considered knowledge of the corporation applies only when the
officer is acting within the authority given to him or her by the
corporation.—The rule that knowledge of an officer is considered
knowledge of the corporation applies only when the officer is acting
within the authority given to him or her by the corporation. In
Francisco v. Government Service Insurance System, 7 SCRA 577
(1963): Knowledge of facts acquired or possessed by an officer or
agent of a corporation in the course of his employment, and in
relation to matters within the scope of his authority, is notice to the
corporation, whether he communicates such knowledge or not. The
public should be able to rely on and be protected from the
representations of a corporate representative acting within the
scope of his or her authority. This is why an authorized officer’s
knowledge is considered knowledge of corporation. However, just
as the public should be able to rely on and be protected from
corporate representations, corporations should also be able to
expect that they will not be bound by unauthorized actions made on
their account.
Mercantile Law; Corporations; Doctrine of Apparent Authority; The
doctrine of apparent authority does not go into the question of the
corporation’s competence or power to do a particular act. It involves
the question of whether the officer has the power or is clothed with
the appearance of having the power to act for the corporation.—The
doctrine of apparent authority does not go into the question of the
corporation’s competence or power to do a particular act. It involves
the question of whether the officer has the power or is clothed with
the appearance of having the power to act for the corporation. A
finding that there is apparent authority is not the same as a finding
that the corporate act in question is within the corporation’s limited
powers. The rule on apparent authority is based on the principle of
estoppel. The Civil Code provides: ART. 1431. Through estoppel an
admission or representation is rendered conclusive upon the person
making it, and cannot be denied or disproved as against the person
relying thereon. . . . . ART. 1869. Agency may be express, or
implied from the acts of the principal, from his silence or lack of
action, or his failure to repudiate the agency, knowing that another
person is acting on his behalf without authority. Agency may be
oral, unless the law requires a specific form. A corporation is
estopped by its silence and acts of recognition because we
recognize that there is information asymmetry between third
persons who have little to no information as to what happens during
corporate meetings, and the corporate officers, directors, and
representatives who are insiders to corporate affairs.
Same; Same; Same; There can be no apparent authority and the
corporation cannot be estopped from denying the binding affect of
an act when there is no evidence pointing to similar acts and other
circumstances that can be interpreted as the corporation holding out
a representative as having authority to contract on its behalf.—
There can be no apparent authority and the corporation cannot be
estopped from denying the binding affect of an act when there is no
evidence pointing to similar acts and other circumstances that can
be interpreted as the corporation holding out a representative as
Page | 145
having authority to contract on its behalf. In Advance Paper
Corporation v. Arma Traders Corporation, 712 SCRA 313 (2013),
this court had the occasion to say: The doctrine of apparent
authority does not apply if the principal did not commit any acts or
conduct which a third party knew and relied upon in good faith as a
result of the exercise of reasonable prudence. Moreover, the
agent’s acts or conduct must have produced a change of position to
the third party’s detriment.
Remedial Law; Evidence; Notarized Documents; Notarization
creates a presumption of regularity and authenticity on the
document.—Notarization creates a presumption of regularity and
authenticity on the document. This presumption may be rebutted by
“strong, complete and conclusive proof” to the contrary. While
notarial acknowledgment “attaches full faith and credit to the
document concerned[,]” it does not give the document its validity or
binding effect. When there is evidence showing that the document
is invalid, the presumption of regularity or authenticity is not
applicable.
Banks and Banking; Banks are required to exercise the highest
degree of diligence in their transactions.—The banking institution is
“impressed with public interest” such that the public’s faith is “of
paramount importance.” Thus, banks are required to exercise the
highest degree of diligence in their transactions. In China Banking
Corporation v. Lagon, 494 SCRA 560 (2006), this court found that
the bank was not a mortgagee in good faith for its failure to question
the due execution of a Special Power of Attorney that was
presented to it in relation to a mortgage contract. This court said:
Though petitioner is not expected to conduct an exhaustive
investigation on the history of the mortgagor’s title, it cannot be
excused from the duty of exercising the due diligence required of a
banking institution. Banks are expected to exercise more care and
prudence than private individuals in their dealings, even those that
involve registered lands, for their business is affected with public
interest.
Civil Law; Land Titles and Deeds; Certificates of Title; Annotations
of adverse claims on certificates of title to properties operate as
constructive notice only to third parties — not to the court or the
registered owner.—Annotations of adverse claims on certificates of
title to properties operate as constructive notice only to third parties
— not to the court or the registered owner. In Sajonas v. Court of
Appeals, 258 SCRA 79 (1996): [A]nnotation of an adverse claim is a
measure designed to protect the interest of a person over a piece of
real property where the registration of such interest or right is not
otherwise provided for by the Land Registration Act or Act 496 (now
[Presidential Decree No.] 1529 or the Property Registration
Decree), and serves a warning to third parties dealing with said
property that someone is claiming an interest on the same or a
better right than that of the registered owner thereof. (Emphasis
supplied) Annotations are merely claims of interest or claims of the
legal nature and incidents of relationship between the person whose
name appears on the document and the person who caused the
annotation. It does not say anything about the validity of the claim or
convert a defective claim or document into a valid one. These
claims may be proved or disproved during trial.
LEONEN, J.:
Acts of an officer that are not authorized by the board of
directors/trustees do not bind the corporation unless the corporation
ratifies the acts or holds the officer out as a person with authority to
transact on its behalf.
This is a Petition for Review on Certiorari1 of the Court of Appeals'
December 17, 2009 Decision2 and December 20, 2010 Resolution.3
The Court of Appeals reversed the Cagayan De Oro City trial court’s
and the Iligan City trial court’s Decisions to nullify mortgage contracts
involving University of Mindanao’s properties.4
University of Mindanao is an educational institution. For the year
1982, its Board of Trustees was chaired by Guillermo B. Torres. His
wife, Dolores P. Torres, sat as University of Mindanao’s Assistant
Treasurer.5
Before 1982, Guillermo B. Torres and Dolores P. Torres incorporated
and operated two (2) thrift banks: (1) First Iligan Savings & Loan
Association, Inc. (FISLAI); and (2) Davao Savings and Loan
Association, Inc. (DSLAI). Guillermo B. Torres chaired both thrift
banks. He acted as FISLAI’s President, while his wife, Dolores P.
Torres, acted as DSLAI’s President and FISLAI’s Treasurer.6
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Upon Guillermo B. Torres’ request, Bangko Sentral ng Pilipinas
issued a P1.9 million standby emergency credit to FISLAI. The
release of standby emergency credit was evidenced by three (3)
promissory notes dated February 8, 1982, April 7, 1982, and May 4,
1982 in the amounts of P500,000.00, P600,000.00, and
P800,000.00, respectively. All these promissory notes were signed
by Guillermo B. Torres, and were co-signed by either his wife,
Dolores P. Torres, or FISLAI’s Special Assistant to the President,
Edmundo G. Ramos, Jr.7
On May 25, 1982, University of Mindanao’s Vice President for
Finance, Saturnino Petalcorin, executed a deed of real estate
mortgage over University of Mindanao’s property in Cagayan de Oro
City (covered by Transfer Certificate of Title No. T-14345) in favor of
Bangko Sentral ng Pilipinas.8 "The mortgage served as security for
FISLAI’s P1.9 Million loan[.]"9 It was allegedly executed on University
of Mindanao’s behalf.10
As proof of his authority to execute a real estate mortgage for
University of Mindanao, Saturnino Petalcorin showed a Secretary’s
Certificate signed on April 13, 1982 by University of Mindanao’s
Corporate Secretary, Aurora de Leon.11 The Secretary’s Certificate
stated:
That at the regular meeting of the Board of Trustees of the aforesaid
corporation [University of Mindanao] duly convened on March 30,
1982, at which a quorum was present, the following resolution was
unanimously adopted:
"Resolved that the University of Mindanao, Inc.
be and is hereby authorized, to mortgage real
estate properties with the Central Bank of the
Philippines to serve as security for the credit
facility of First Iligan Savings and Loan
Association, hereby authorizing the President
and/or Vice-president for Finance, Saturnino
R. Petalcorin of the University of Mindanao,
Inc. to sign, execute and deliver the covering
mortgage document or any other documents
which may be proper[l]y required."12
The Secretary’s Certificate was supported by an excerpt from the
minutes of the January 19, 1982 alleged meeting of University of
Mindanao’s Board of Trustees. The excerpt was certified by Aurora
de Leon on March 13, 1982 to be a true copy of University of
Mindanao’s records on file.13 The excerpt reads:
3 – Other Matters:
(a) Cagayan de Oro and Iligan properties: Resolution No. 82-1-8
Authorizing the Chairman to appoint Saturnino R. Petalcorin, Vice-
President for Finance, to represent the University of Mindanao to
transact, transfer, convey, lease, mortgage, or otherwise
hypothecate any or all of the following properties situated at Cagayan
de Oro and Iligan City and authorizing further Mr. Petalcorin to sign
any or all documents relative thereto:
1. A parcel of land situated at Cagayan de Oro
City, covered and technically described in
TRANSFER CERTIFICATE OF TITLE No. T-
14345 of the Registry of Deeds of Cagayan de
Oro City;
2. A parcel of land situated at Iligan City,
covered and technically described in
TRANSFER CERTIFICATE OF TITLE NO. T-
15696 (a.t.) of the Registry of Deeds of Iligan
City; and
3. A parcel of land situated at Iligan City,
covered and technically described in
TRANSFER CERTIFICATE OF TITLE NO. T-
15697 (a.f.) of the Registry of Deeds of Iligan
City.14
The mortgage deed executed by Saturnino Petalcorin in favor of
Bangko Sentral ng Pilipinas was annotated on the certificate of title
of the Cagayan de Oro City property (Transfer Certificate of Title No.
14345) on June 25, 1982. Aurora de Leon’s certification was also
annotated on the Cagayan de Oro City property’s certificate of title
(Transfer Certificate of Title No. 14345).15
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On October 21, 1982, Bangko Sentral ng Pilipinas granted FISLAI an
additional loan of P620,700.00. Guillermo B. Torres and Edmundo
Ramos executed a promissory note on October 21, 1982 to cover
that amount.16
On November 5, 1982, Saturnino Petalcorin executed another deed
of real estate mortgage, allegedly on behalf of University of
Mindanao, over its two properties in Iligan City.1âwphi1 This
mortgage served as additional security for FISLAI’s loans. The two
Iligan City properties were covered by Transfer Certificates of Title
Nos. T-15696 and T-15697.17
On January 17, 1983, Bangko Sentral ng Pilipinas’ mortgage lien
over the Iligan City properties and Aurora de Leon’s certification were
annotated on Transfer Certificates of Title Nos. T-15696 and T-
15697.18 On January 18, 1983, Bangko Sentral ng Pilipinas’
mortgage lien over the Iligan City properties was also annotated on
the tax declarations covering the Iligan City properties.19
Bangko Sentral ng Pilipinas also granted emergency advances to
DSLAI on May 27, 1983 and on August 20, 1984 in the amounts of
P1,633,900.00 and P6,489,000.00, respectively.20
On January 11, 1985, FISLAI, DSLAI, and Land Bank of the
Philippines entered into a Memorandum of Agreement intended to
rehabilitate the thrift banks, which had been suffering from their
depositors’ heavy withdrawals. Among the terms of the agreement
was the merger of FISLAI and DSLAI, with DSLAI as the surviving
corporation. DSLAI later became known as Mindanao Savings and
Loan Association, Inc. (MSLAI).21
Guillermo B. Torres died on March 2, 1989.22
MSLAI failed to recover from its losses and was liquidated on May
24, 1991.23
On June 18, 1999, Bangko Sentral ng Pilipinas sent a letter to
University of Mindanao, informing it that the bank would foreclose its
properties if MSLAI’s total outstanding obligation of P12,534,907.73
remained unpaid.24
In its reply to Bangko Sentral ng Pilipinas’ June 18, 1999 letter,
University of Mindanao, through its Vice President for Accounting,
Gloria E. Detoya, denied that University of Mindanao’s properties
were mortgaged. It also denied having received any loan proceeds
from Bangko Sentral ng Pilipinas.25
On July 16, 1999, University of Mindanao filed two Complaints for
nullification and cancellation of mortgage. One Complaint was filed
before the Regional Trial Court of Cagayan de Oro City, and the other
Complaint was filed before the Regional Trial Court of Iligan City.26
University of Mindanao alleged in its Complaints that it did not obtain
any loan from Bangko Sentral ng Pilipinas. It also did not receive any
loan proceeds from the bank.27
University of Mindanao also alleged that Aurora de Leon’s
certification was anomalous. It never authorized Saturnino Petalcorin
to execute real estate mortgage contracts involving its properties to
secure FISLAI’s debts. It never ratified the execution of the mortgage
contracts. Moreover, as an educational institution, it cannot mortgage
its properties to secure another person’s debts.28
On November 23, 2001, the Regional Trial Court of Cagayan de Oro
City rendered a Decision in favor of University of Mindanao,29 thus:
WHEREFORE, premises considered, judgment is hereby rendered
in favor of plaintiff and against defendants:
1. DECLARING the real estate mortgage
Saturnino R. Petalcorin executed in favor of
BANGKO SENTRAL NG PILIPINAS involving
Lot 421-A located in Cagayan de Oro City with
an area of 482 square meters covered by TCT
No. T-14345 as annuled [sic];
2. ORDERING the Register of Deeds of
Cagayan de Oro City to cancel Entry No. 9951
and Entry No. 9952 annotated at the back of
said TCT No. T-14345, Registry of Deeds of
Cagayan de Oro City;
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Prayer for attorney’s fee [sic] is hereby denied there being no proof
that in demanding payment of the emergency loan, defendant
BANGKO SENTRAL NG PILIPINAS was motivated by evident bad
faith,
SO ORDERED.30 (Citation omitted)
The Regional Trial Court of Cagayan de Oro City found that there
was no board resolution giving Saturnino Petalcorin authority to
execute mortgage contracts on behalf of University of Mindanao. The
Cagayan de Oro City trial court gave weight to Aurora de Leon’s
testimony that University of Mindanao’s Board of Trustees did not
issue a board resolution that would support the Secretary’s Certificate
she issued. She testified that she signed the Secretary’s Certificate
only upon Guillermo B. Torres’ orders.31
Saturnino Petalcorin testified that he had no authority to execute a
mortgage contract on University of Mindanao’s behalf. He merely
executed the contract because of Guillermo B. Torres’ request.32
Bangko Sentral ng Pilipinas’ witness Daciano Pagui, Jr. also admitted
that there was no board resolution giving Saturnino Petalcorin
authority to execute mortgage contracts on behalf of University of
Mindanao.33
The Regional Trial Court of Cagayan de Oro City ruled that Saturnino
Petalcorin was not authorized to execute mortgage contracts for
University of Mindanao. Hence, the mortgage of University of
Mindanao’s Cagayan de Oro City property was unenforceable.
Saturnino Petalcorin’s unauthorized acts should be annulled.34
Similarly, the Regional Trial Court of Iligan City rendered a Decision
on December 7, 2001 in favor of University of Mindanao.35 The
dispositive portion of the Decision reads:
WHEREFORE, premises considered, judgment is hereby rendered
in favor of the plaintiff and against the defendants, as follows:
1. Nullifying and canceling [sic] the subject Deed of
Real Estate Mortgage dated November 5, 1982 for
being unenforceable or void contract;
2. Ordering the Office of the Register of Deeds of
Iligan City to cancel the entries on TCT No. T-15696
and TCT No. T-15697 with respect to the aforesaid
Deed of Real Estate Mortgage dated November 5,
1982 and all other entries related thereto;
3. Ordering the defendant Bangko Sentral ng Pilipinas
to return the owner’s duplicate copies of TCT No. T-
15696 and TCT No. 15697 to the plaintiff;
4. Nullifying the subject [f]oreclosure [p]roceedings
and the [a]uction [s]ale conducted by defendant Atty.
Gerardo Paguio, Jr. on October 8, 1999 including all
the acts subsequent thereto and ordering the Register
of Deeds of Iligan City not to register any Certificate of
Sale pursuant to the said auction sale nor make any
transfer of the corresponding titles, and if already
registered and transferred, to cancel all the said
entries in TCT No. T-15696 and TCT No. T-15697
and/or cancel the corresponding new TCTs in the
name of defendant Bangko Sentral ng Pilipinas;
5. Making the Preliminary Injunction per Order of this
Court dated October 13, 2000 permanent.
No pronouncement as to costs.36 (Citation omitted)
The Iligan City trial court found that the Secretary’s Certificate issued
by Aurora de Leon was fictitious37 and irregular for being
unnumbered.38 It also did not specify the identity, description, or
location of the mortgaged properties.39
The Iligan City trial court gave credence to Aurora de Leon’s
testimony that the University of Mindanao’s Board of Trustees did not
take up the documents in its meetings. Saturnino Petalcorin
corroborated her testimony.40
The Iligan City trial court ruled that the lack of a board resolution
authorizing Saturnino Petalcorin to execute documents of mortgage
on behalf of University of Mindanao made the real estate mortgage
contract unenforceable under Article 140341 of the Civil Code.42 The
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mortgage contract and the subsequent acts of foreclosure and
auction sale were void because the mortgage contract was executed
without University of Mindanao’s authority.43
The Iligan City trial court also ruled that the annotations on the titles
of University of Mindanao’s properties do not operate as notice to the
University because annotations only bind third parties and not
owners.44 Further, Bangko Sentral ng Pilipinas’ right to foreclose the
University of Mindanao’s properties had already prescribed.45
Bangko Sentral ng Pilipinas separately appealed the Decisions of
both the Cagayan de Oro City and the Iligan City trial courts.46
After consolidating both cases, the Court of Appeals issued a
Decision on December 17, 2009 in favor of Bangko Sentral ng
Pilipinas, thus:
FOR THE REASONS STATED, the Decision dated 23 November
2001 of the Regional Trial Court of Cagayan de Oro City, Branch 24
in Civil Case No. 99-414 and the Decision dated 7 December 2001
of the Regional Trial Court of Iligan City, Branch 1 in Civil Case No.
4790 are REVERSED and SET ASIDE. The Complaints in both
cases before the trial courts are DISMISSED. The Writ of Preliminary
Injunction issued by the Regional Trial Court of Iligan City, Branch 1
in Civil Case No. 4790 is LIFTED and SET ASIDE.
SO ORDERED.47
The Court of Appeals ruled that "[a]lthough BSP failed to prove that
the UM Board of Trustees actually passed a Board Resolution
authorizing Petalcorin to mortgage the subject real properties,"48
Aurora de Leon’s Secretary’s Certificate "clothed Petalcorin with
apparent and ostensible authority to execute the mortgage deed on
its behalf[.]"49 Bangko Sentral ng Pilipinas merely relied in good faith
on the Secretary’s Certificate.50 University of Mindanao is estopped
from denying Saturnino Petalcorin’s authority.51
Moreover, the Secretary’s Certificate was notarized. This meant that
it enjoyed the presumption of regularity as to the truth of its
statements and authenticity of the signatures.52 Thus, "BSP cannot
be faulted for relying on the [Secretary’s Certificate.]"53
The Court of Appeals also ruled that since University of Mindanao’s
officers, Guillermo B. Torres and his wife, Dolores P. Torres, signed
the promissory notes, University of Mindanao was presumed to have
knowledge of the transaction.54 Knowledge of an officer in relation to
matters within the scope of his or her authority is notice to the
corporation.55
The annotations on University of Mindanao’s certificates of title also
operate as constructive notice to it that its properties were
mortgaged.56 Its failure to disown the mortgages for more than a
decade was implied ratification.57
The Court of Appeals also ruled that Bangko Sentral ng Pilipinas’
action for foreclosure had not yet prescribed because the due date
extensions that Bangko Sentral ng Pilipinas granted to FISLAI
extended the due date of payment to five (5) years from February 8,
1985.58 The bank’s demand letter to Dolores P. Torres on June 18,
1999 also interrupted the prescriptive period.59
University of Mindanao and Bangko Sentral ng Pilipinas filed a Motion
for Reconsideration60 and Motion for Partial Reconsideration
respectively of the Court of Appeals’ Decision. On December 20,
2010, the Court of Appeals issued a Resolution, thus:
Acting on the foregoing incidents, the Court RESOLVES to:
1. GRANT the appellant’s twin motions for
extension of time to file comment/opposition
and NOTE the Comment on the appellee’s
Motion for Reconsideration it subsequently
filed on June 23, 2010;
2. GRANT the appellee’s three (3) motions for
extension of time to file comment/opposition
and NOTE the Comment on the appellant’s
Motion for Partial Reconsideration it filed on
July 26, 2010;
3. NOTE the appellant’s "Motion for Leave to
File Attached Reply Dated August 11, 2010"
filed on August 13, 2010 and DENY the
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 attached "Reply to Comment Dated July 26,
2010";
4. DENY the appellee’s Motion for
Reconsideration as it does not offer any
arguments sufficiently meritorious to warrant
modification or reversal of the Court’s 17
December 2009 Decision. The Court finds that
there is no compelling reason to reconsider its
ruling; and
5. GRANT the appellant’s Motion for Partial
Reconsideration, as the Court finds it
meritorious, considering that it ruled in its
Decision that "BSP can still foreclose on the
UM’s real property in Cagayan de Oro City
covered by TCT No. T-14345." It then follows
that the injunctive writ issued by the RTC of
Cagayan de Oro City, Branch 24 must be
lifted. The Court’s 17 December 2009 Decision
is accordingly MODIFIED and AMENDED to
read as follows:
"FOR THE REASONS STATED, the
Decision dated 23 November 2001 of
the Regional Trial Court of Cagayan de
Oro City, Branch 24 in Civil Case No.
99-414 and the Decision dated 7
December 2001 of the Regional Trial
Court of Iligan City, Branch 1 in Civil
Case No. 4790 are REVERSED and
SET ASIDE. The Complaints in both
cases before the trial courts are
DISMISSED. The Writs of Preliminary
Injunction issued by the Regional Trial
Court of Iligan City, Branch 1 in Civil
Case No. 4790 and in the Regional
Trial Court of Cagayan de Oro City,
Branch 24 in Civil Case No. 99-414 are
LIFTED and SET ASIDE."
SO ORDERED.61 (Citation omitted)
Hence, University of Mindanao filed this Petition for Review.
The issues for resolution are:
First, whether respondent Bangko Sentral ng Pilipinas’ action to
foreclose the mortgaged properties had already prescribed; and
Second, whether petitioner University of Mindanao is bound by the
real estate mortgage contracts executed by Saturnino Petalcorin.
We grant the Petition.
I
Petitioner argues that respondent’s action to foreclose its mortgaged
properties had already prescribed.
Petitioner is mistaken.
Prescription is the mode of acquiring or losing rights through the
lapse of time.62 Its purpose is "to protect the diligent and vigilant, not
those who sleep on their rights."63
The prescriptive period for actions on mortgages is ten (10) years
from the day they may be brought.64 Actions on mortgages may be
brought not upon the execution of the mortgage contract but upon
default in payment of the obligation secured by the mortgage.65
A debtor is considered in default when he or she fails to pay the
obligation on due date and, subject to exceptions, after demands for
payment were made by the creditor. Article 1169 of the Civil Code
provides:
ART. 1169. Those obliged to deliver or to do something incur in delay
from the time the obligee judicially or extrajudicially demands from
them the fulfillment of their obligation.
However, the demand by the creditor shall not be necessary in order
that delay may exist:
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 (1) When the obligation or the law expressly so
declare; or
(2) When from the nature and the
circumstances of the obligation it appears that
the designation of the time when the thing is to
be delivered or the service is to be rendered
was a controlling motive for the establishment
of the contract; or
(3) When demand would be useless, as when
the obligor has rendered it beyond his power
to perform.
Article 1193 of the Civil Code provides that an obligation is
demandable only upon due date. It provides:
ART. 1193. Obligations for whose fulfillment a day certain has been
fixed, shall be demandable only when that day comes.
Obligations with a resolutory period take effect at once, but terminate
upon arrival of the day certain.
A day certain is understood to be that which must necessarily come,
although it may not be known when.
If the uncertainty consists in whether the day will come or not, the
obligation is conditional, and it shall be regulated by the rules of the
preceding Section.
In other words, as a general rule, a person defaults and prescriptive
period for action runs when (1) the obligation becomes due and
demandable; and (2) demand for payment has been made.
The prescriptive period neither runs from the date of the execution of
a contract nor does the prescriptive period necessarily run on the
date when the loan becomes due and demandable.66 Prescriptive
period runs from the date of demand,67 subject to certain exceptions.
In other words, ten (10) years may lapse from the date of the
execution of contract, without barring a cause of action on the
mortgage when there is a gap between the period of execution of the
contract and the due date or between the due date and the demand
date in cases when demand is necessary.68
The mortgage contracts in this case were executed by Saturnino
Petalcorin in 1982. The maturity dates of FISLAI’s loans were
repeatedly extended until the loans became due and demandable
only in 1990.69 Respondent informed petitioner of its decision to
foreclose its properties and demanded payment in 1999.
The running of the prescriptive period of respondent’s action on the
mortgages did not start when it executed the mortgage contracts with
Saturnino Petalcorin in 1982.
The prescriptive period for filing an action may run either (1) from
1990 when the loan became due, if the obligation was covered by the
exceptions under Article 1169 of the Civil Code; (2) or from 1999
when respondent demanded payment, if the obligation was not
covered by the exceptions under Article 1169 of the Civil Code.
In either case, respondent’s Complaint with cause of action based on
the mortgage contract was filed well within the prescriptive period.
Given the termination of all traces of FISLAI’s existence,70 demand
may have been rendered unnecessary under Article 1169(3)71 of the
Civil Code. Granting that this is the case, respondent would have had
ten (10) years from due date in 1990 or until 2000 to institute an action
on the mortgage contract.
However, under Article 115572 of the Civil Code, prescription of
actions may be interrupted by (1) the filing of a court action; (2) a
written extrajudicial demand; and (3) the written acknowledgment of
the debt by the debtor.
Therefore, the running of the prescriptive period was interrupted
when respondent sent its demand letter to petitioner on June 18,
1999. This eventually led to petitioner’s filing of its annulment of
mortgage complaints before the Regional Trial Courts of Iligan City
and Cagayan De Oro City on July 16, 1999.
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Assuming that demand was necessary, respondent’s action was
within the ten (10)-year prescriptive period. Respondent demanded
payment of the loans in 1999 and filed an action in the same year.
II
Petitioner argues that the execution of the mortgage contract was
ultra vires. As an educational institution, it may not secure the loans
of third persons.73 Securing loans of third persons is not among the
purposes for which petitioner was established.74
Petitioner is correct.
Corporations are artificial entities granted legal personalities upon
their creation by their incorporators in accordance with law. Unlike
natural persons, they have no inherent powers. Third persons dealing
with corporations cannot assume that corporations have powers. It is
up to those persons dealing with corporations to determine their
competence as expressly defined by the law and their articles of
incorporation.75
A corporation may exercise its powers only within those definitions.
Corporate acts that are outside those express definitions under the
law or articles of incorporation or those "committed outside the object
for which a corporation is created"76 are ultra vires.
The only exception to this rule is when acts are necessary and
incidental to carry out a corporation’s purposes, and to the exercise
of powers conferred by the Corporation Code and under a
corporation’s articles of incorporation.77 This exception is specifically
included in the general powers of a corporation under Section 36 of
the Corporation Code:
SEC. 36. Corporate powers and capacity.—Every corporation
incorporated under this Code has the power and capacity:
1. To sue and be sued in its corporate name;
2. Of succession by its corporate name for the period
of time stated in the articles of incorporation and the
certificate of incorporation;
3. To adopt and use a corporate seal;
4. To amend its articles of incorporation in accordance
with the provisions of this Code;
5. To adopt by-laws, not contrary to law, morals, or
public policy, and to amend or repeal the same in
accordance with this Code;
6. In case of stock corporations, to issue or sell stocks
to subscribers and to sell treasury stocks in
accordance with the provisions of this Code; and to
admit members to the corporation if it be a non-stock
corporation;
7. To purchase, receive, take or grant, hold, convey,
sell, lease, pledge, mortgage and otherwise deal with
such real and personal property, including securities
and bonds of other corporations, as the transaction of
the lawful business of the corporation may reasonably
and necessarily require, subject to the limitations
prescribed by law and the Constitution;
8. To enter into merger or consolidation with other
corporations as provided in this Code;
9. To make reasonable donations, including those for
the public welfare or for hospital, charitable, cultural,
scientific, civic, or similar purposes: Provided, That no
corporation, domestic or foreign, shall give donations
in aid of any political party or candidate or for purposes
of partisan political activity;
10. To establish pension, retirement, and other plans
for the benefit of its directors, trustees, officers and
employees; and
11. To exercise such other powers as may be
essential or necessary to carry out its purpose or
purposes as stated in its articles of incorporation.
(Emphasis supplied)
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Montelibano, et al. v. Bacolod-Murcia Milling Co., Inc.78 stated the test
to determine if a corporate act is in accordance with its purposes:
It is a question, therefore, in each case, of the logical relation of the
act to the corporate purpose expressed in the charter. If that act is
one which is lawful in itself, and not otherwise prohibited, is done for
the purpose of serving corporate ends, and is reasonably tributary to
the promotion of those ends, in a substantial, and not in a remote and
fanciful, sense, it may fairly be considered within charter powers. The
test to be applied is whether the act in question is in direct and
immediate furtherance of the corporation’s business, fairly incident to
the express powers and reasonably necessary to their exercise. If so,
the corporation has the power to do it; otherwise, not.79 (Emphasis
supplied)
As an educational institution, petitioner serves:
a. To establish, conduct and operate a college or
colleges, and/or university;
b. To acquire properties, real and/or personal, in
connection with the establishment and operation of
such college or colleges;
c. To do and perform the various and sundry acts and
things permitted by the laws of the Philippines unto
corporations like classes and kinds;
d. To engage in agricultural, industrial, and/or
commercial pursuits in line with educational program
of the corporation and to acquire all properties, real
and personal[,] necessary for the purposes[;]
e. To establish, operate, and/or acquire broadcasting
and television stations also in line with the educational
program of the corporation and for such other
purposes as the Board of Trustees may determine
from time to time;
f. To undertake housing projects of faculty members
and employees, and to acquire real estates for this
purpose;
g. To establish, conduct and operate and/or invest in
educational foundations; [As amended on December
15, 1965][;]
h. To establish, conduct and operate housing and
dental schools, medical facilities and other related
undertakings;
i. To invest in other corporations. [As amended on
December 9, 1998]. [Amended Articles of
Incorporation of the University of Mindanao, Inc. – the
Petitioner].80
Petitioner does not have the power to mortgage its properties in order
to secure loans of other persons. As an educational institution, it is
limited to developing human capital through formal instruction. It is
not a corporation engaged in the business of securing loans of others.
Hiring professors, instructors, and personnel; acquiring equipment
and real estate; establishing housing facilities for personnel and
students; hiring a concessionaire; and other activities that can be
directly connected to the operations and conduct of the education
business may constitute the necessary and incidental acts of an
educational institution.
Securing FISLAI’s loans by mortgaging petitioner’s properties does
not appear to have even the remotest connection to the operations
of petitioner as an educational institution. Securing loans is not an
adjunct of the educational institution’s conduct of business.81 It does
not appear that securing third-party loans was necessary to maintain
petitioner’s business of providing instruction to individuals.
This court upheld the validity of corporate acts when those acts were
shown to be clearly within the corporation’s powers or were
connected to the corporation’s purposes.
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In Pirovano, et al. v. De la Rama Steamship Co.,82 this court declared
valid the donation given to the children of a deceased person who
contributed to the growth of the corporation.83 This court found that
this donation was within the broad scope of powers and purposes of
the corporation to "aid in any other manner any person . . . in which
any interest is held by this corporation or in the affairs or prosperity
of which this corporation has a lawful interest."84
In Twin Towers Condominium Corporation v. Court of Appeals, et
al.,85 this court declared valid a rule by Twin Towers Condominium
denying delinquent members the right to use condominium
facilities.86 This court ruled that the condominium’s power to
promulgate rules on the use of facilities and to enforce provisions of
the Master Deed was clear in the Condominium Act, Master Deed,
and By-laws of the condominium.87 Moreover, the promulgation of
such rule was "reasonably necessary" to attain the purposes of the
condominium project.88
This court has, in effect, created a presumption that corporate acts
are valid if, on their face, the acts were within the corporation’s
powers or purposes. This presumption was explained as early as in
1915 in Coleman v. Hotel De France89 where this court ruled that
contracts entered into by corporations in the exercise of their
incidental powers are not ultra vires.90
Coleman involved a hotel’s cancellation of an employment contract it
executed with a gymnast. One of the hotel’s contentions was the
supposed ultra vires nature of the contract. It was executed outside
its express and implied powers under the articles of incorporation.91
In ruling in favor of the contract’s validity, this court considered the
incidental powers of the hotel to include the execution of employment
contracts with entertainers for the purpose of providing its guests
entertainment and increasing patronage.92
This court ruled that a contract executed by a corporation shall be
presumed valid if on its face its execution was not beyond the powers
of the corporation to do.93 Thus:
When a contract is not on its face necessarily beyond the scope of
the power of the corporation by which it was made, it will, in the
absence of proof to the contrary, be presumed to be valid.
Corporations are presumed to contract within their powers. The
doctrine of ultra vires, when invoked for or against a corporation,
should not be allowed to prevail where it would defeat the ends of
justice or work a legal wrong.94
However, this should not be interpreted to mean that such
presumption applies to all cases, even when the act in question is on
its face beyond the corporation’s power to do or when the evidence
contradicts the presumption.
Presumptions are "inference[s] as to the existence of a fact not
actually known, arising from its usual connection with another which
is known, or a conjecture based on past experience as to what course
human affairs ordinarily take."95 Presumptions embody values and
revealed behavioral expectations under a given set of circumstances.
Presumptions may be conclusive96 or disputable.97
Conclusive presumptions are presumptions that may not be
overturned by evidence, however strong the evidence is.98 They are
made conclusive not because there is an established uniformity in
behavior whenever identified circumstances arise. They are
conclusive because they are declared as such under the law or the
rules. Rule 131, Section 2 of the Rules of Court identifies two (2)
conclusive presumptions:
SEC. 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;
(b) The tenant is not permitted to deny the title of his
landlord at the time of the commencement of the
relation of landlord and tenant between them.
On the other hand, disputable presumptions are presumptions that
may be overcome by contrary evidence.99 They are disputable in
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recognition of the variability of human behavior. Presumptions are not
always true. They may be wrong under certain circumstances, and
courts are expected to apply them, keeping in mind the nuances of
every experience that may render the expectations wrong.
Thus, the application of disputable presumptions on a given
circumstance must be based on the existence of certain facts on
which they are meant to operate. "[P]resumptions are not allegations,
nor do they supply their absence[.]"100 Presumptions are conclusions.
They do not apply when there are no facts or allegations to support
them.
If the facts exist to set in motion the operation of a disputable
presumption, courts may accept the presumption. However, contrary
evidence may be presented to rebut the presumption.
Courts cannot disregard contrary evidence offered to rebut
disputable presumptions. Disputable presumptions apply only in the
absence of contrary evidence or explanations. This court explained
in Philippine Agila Satellite Inc. v. Usec. Trinidad-Lichauco:101
We do not doubt the existence of the presumptions of "good faith" or
"regular performance of official duty," yet these presumptions are
disputable and may be contradicted and overcome by other
evidence. Many civil actions are oriented towards overcoming any
number of these presumptions, and a cause of action can certainly
be geared towards such effect. The very purpose of trial is to allow a
party to present evidence to overcome the disputable presumptions
involved. Otherwise, if trial is deemed irrelevant or unnecessary,
owing to the perceived indisputability of the presumptions, the judicial
exercise would be relegated to a mere ascertainment of what
presumptions apply in a given case, nothing more. Consequently, the
entire Rules of Court is rendered as excess verbiage, save perhaps
for the provisions laying down the legal presumptions.
If this reasoning of the Court of Appeals were ever adopted as a
jurisprudential rule, no public officer could ever be sued for acts
executed beyond their official functions or authority, or for tortious
conduct or behavior, since such acts would "enjoy the presumption
of good faith and in the regular performance of official duty." Indeed,
few civil actions of any nature would ever reach the trial stage, if a
case can be adjudicated by a mere determination from the complaint
or answer as to which legal presumptions are applicable. For
example, the presumption that a person is innocent of a wrong is a
disputable presumption on the same level as that of the regular
performance of official duty. A civil complaint for damages
necessarily alleges that the defendant committed a wrongful act or
omission that would serve as basis for the award of damages. With
the rationale of the Court of Appeals, such complaint can be
dismissed upon a motion to dismiss solely on the ground that the
presumption is that a person is innocent of a wrong.102 (Emphasis
supplied, citations omitted)
In this case, the presumption that the execution of mortgage
contracts was within petitioner’s corporate powers does not apply.
Securing third-party loans is not connected to petitioner’s purposes
as an educational institution.
III
Respondent argues that petitioner’s act of mortgaging its properties
to guarantee FISLAI’s loans was consistent with petitioner’s business
interests, since petitioner was presumably a FISLAI shareholder
whose officers and shareholders interlock with FISLAI. Respondent
points out that petitioner and its key officers held substantial shares
in MSLAI when DSLAI and FISLAI merged. Therefore, it was safe to
assume that when the mortgages were executed in 1982, petitioner
held substantial shares in FISLAI.103
Parties dealing with corporations cannot simply assume that their
transaction is within the corporate powers. The acts of a corporation
are still limited by its powers and purposes as provided in the law and
its articles of incorporation.
Acquiring shares in another corporation is not a means to create new
powers for the acquiring corporation. Being a shareholder of another
corporation does not automatically change the nature and purpose of
a corporation’s business. Appropriate amendments must be made
either to the law or the articles of incorporation before a corporation
can validly exercise powers outside those provided in law or the
articles of incorporation. In other words, without an amendment, what
is ultra vires before a corporation acquires shares in other
corporations is still ultra vires after such acquisition.
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Thus, regardless of the number of shares that petitioner had with
FISLAI, DSLAI, or MSLAI, securing loans of third persons is still
beyond petitioner’s power to do. It is still inconsistent with its
purposes under the law104 and its articles of incorporation.105
In attempting to show petitioner’s interest in securing FISLAI’s loans
by adverting to their interlocking directors and shareholders,
respondent disregards petitioner’s separate personality from its
officers, shareholders, and other juridical persons.
The separate personality of corporations means that they are
"vest[ed] [with] rights, powers, and attributes [of their own] as if they
were natural persons[.]"106 Their assets and liabilities are their own
and not their officers’, shareholders’, or another corporation’s. In the
same vein, the assets and liabilities of their officers and shareholders
are not the corporations’. Obligations incurred by corporations are not
obligations of their officers and shareholders. Obligations of officers
and shareholders are not obligations of corporations.107 In other
words, corporate interests are separate from the personal interests
of the natural persons that comprise corporations.
Corporations are given separate personalities to allow natural
persons to balance the risks of business as they accumulate capital.
They are, however, given limited competence as a means to protect
the public from fraudulent acts that may be committed using the
separate juridical personality given to corporations.
Petitioner’s key officers, as shareholders of FISLAI, may have an
interest in ensuring the viability of FISLAI by obtaining a loan from
respondent and securing it by whatever means. However, having
interlocking officers and stockholders with FISLAI does not mean that
petitioner, as an educational institution, is or must necessarily be
interested in the affairs of FISLAI.
Since petitioner is an entity distinct and separate not only from its own
officers and shareholders but also from FISLAI, its interests as an
educational institution may not be consistent with FISLAI’s.
Petitioner and FISLAI have different constituencies. Petitioner’s
constituents comprise persons who have committed to developing
skills and acquiring knowledge in their chosen fields by availing the
formal instruction provided by petitioner. On the other hand, FISLAI
is a thrift bank, which constituencies comprise investors.
While petitioner and FISLAI exist ultimately to benefit their
stockholders, their constituencies affect the means by which they can
maintain their existence. Their interests are congruent with sustaining
their constituents’ needs because their existence depends on that.
Petitioner can exist only if it continues to provide for the kind and
quality of instruction that is needed by its constituents. Its operations
and existence are placed at risk when resources are used on
activities that are not geared toward the attainment of its purpose.
Petitioner has no business in securing FISLAI, DSLAI, or MSLAI’s
loans. This activity is not compatible with its business of providing
quality instruction to its constituents.
Indeed, there are instances when we disregard the separate
corporate personalities of the corporation and its stockholders,
directors, or officers. This is called piercing of the corporate veil.
Corporate veil is pierced when the separate personality of the
corporation is being used to perpetrate fraud, illegalities, and
injustices.108 In Lanuza, Jr. v. BF Corporation:109
Piercing the corporate veil is warranted when "[the separate
personality of a corporation] is used as a means to perpetrate fraud
or an illegal act, or as a vehicle for the evasion of an existing
obligation, the circumvention of statutes, or to confuse legitimate
issues." It is also warranted in alter ego cases "where a corporation
is merely a farce since it is a mere alter ego or business conduit of a
person, or where the corporation is so organized and controlled and
its affairs are so conducted as to make it merely an instrumentality,
agency, conduit or adjunct of another corporation."110
These instances have not been shown in this case. There is no
evidence pointing to the possibility that petitioner used its separate
personality to defraud third persons or commit illegal acts. Neither is
there evidence to show that petitioner was merely a farce of a
corporation. What has been shown instead was that petitioner, too,
had been victimized by fraudulent and unauthorized acts of its own
officers and directors.
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In this case, instead of guarding against fraud, we perpetuate fraud if
we accept respondent’s contentions.
IV
Petitioner argues that it did not authorize Saturnino Petalcorin to
mortgage its properties on its behalf. There was no board resolution
to that effect. Thus, the mortgages executed by Saturnino Petalcorin
were unenforceable.111
The mortgage contracts executed in favor of respondent do not bind
petitioner. They were executed without authority from petitioner.
Petitioner must exercise its powers and conduct its business through
its Board of Trustees. Section 23 of the Corporation Code provides:
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 to be elected from among the holders of
stocks, or where there is no stock, from among the members of the
corporation, who shall hold office for one (1) year and until their
successors are elected and qualified.
Being a juridical person, petitioner cannot conduct its business, make
decisions, or act in any manner without action from its Board of
Trustees. The Board of Trustees must act as a body in order to
exercise corporate powers. Individual trustees are not clothed with
corporate powers just by being a trustee. Hence, the individual
trustee cannot bind the corporation by himself or herself.
The corporation may, however, delegate through a board resolution
its corporate powers or functions to a representative, subject to
limitations under the law and the corporation’s articles of
incorporation.112
The relationship between a corporation and its representatives is
governed by the general principles of agency.113 Article 1317 of the
Civil Code provides that there must be authority from the principal
before anyone can act in his or her name:
ART. 1317. No one may contract in the name of another without
being authorized by the latter, or unless he has by law a right to
represent him.
Hence, without delegation by the board of directors or trustees, acts
of a person—including those of the corporation’s directors, trustees,
shareholders, or officers—executed on behalf of the corporation are
generally not binding on the corporation.114
Contracts entered into in another’s name without authority or valid
legal representation are generally unenforceable. The Civil Code
provides:
ART. 1317. . . .
A contract entered into in the name of another by one who has no
authority or legal representation, or who has acted beyond his
powers, shall be unenforceable, unless it is ratified, expressly or
impliedly, by the person on whose behalf it has been executed,
before it is revoked by the other contracting party.
....
ART. 1403. The following contracts are unenforceable, unless they
are ratified:
(1) Those entered into in the name of another person by one who has
been given no authority or legal representation, or who has acted
beyond his powers[.]
The unenforceable status of contracts entered into by an
unauthorized person on behalf of another is based on the basic
principle that contracts must be consented to by both parties.115
There is no contract without meeting of the minds as to the subject
matter and cause of the obligations created under the contract.116
Consent of a person cannot be presumed from representations of
another, especially if obligations will be incurred as a result. Thus,
authority is required to make actions made on his or her behalf
binding on a person. Contracts entered into by persons without
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authority from the corporation shall generally be considered ultra
vires and unenforceable117 against the corporation.
Two trial courts118 found that the Secretary’s Certificate and the board
resolution were either non-existent or fictitious. The trial courts based
their findings on the testimony of the Corporate Secretary, Aurora de
Leon herself. She signed the Secretary’s Certificate and the excerpt
of the minutes of the alleged board meeting purporting to authorize
Saturnino Petalcorin to mortgage petitioner’s properties. There was
no board meeting to that effect. Guillermo B. Torres ordered the
issuance of the Secretary’s Certificate. Aurora de Leon’s testimony
was corroborated by Saturnino Petalcorin.
Even the Court of Appeals, which reversed the trial courts’ decisions,
recognized that "BSP failed to prove that the UM Board of Trustees
actually passed a Board Resolution authorizing Petalcorin to
mortgage the subject real properties[.]"119
Well-entrenched is the rule that this court, not being a trier of facts, is
bound by the findings of fact of the trial courts and the Court of
Appeals when such findings are supported by evidence on record.120
Hence, not having the proper board resolution to authorize Saturnino
Petalcorin to execute the mortgage contracts for petitioner, the
contracts he executed are unenforceable against petitioner. They
cannot bind petitioner.
However, personal liabilities may be incurred by directors who
assented to such unauthorized act121 and by the person who
contracted in excess of the limits of his or her authority without the
corporation’s knowledge.122
V time of the execution of the contract entered into by the
Unauthorized acts that are merely beyond the powers of the
corporation under its articles of incorporation are not void ab initio.
In Pirovano, et al., this court explained that corporate acts may be
ultra vires but not void.123 Corporate acts may be capable of
ratification:124
[A] distinction should be made between corporate acts or contracts
which are illegal and those which are merely ultra vires. The former
contemplates the doing of an act which is contrary to law, morals, or
public order, or contravene some rules of public policy or public duty,
and are, like similar transactions between individuals, void. They
cannot serve as basis of a court action, nor acquire validity by
performance, ratification, or estoppel. Mere ultra vires acts, on the
other hand, or those which are not illegal and void ab initio, but are
not merely within the scope of the articles of incorporation, are merely
voidable and may become binding and enforceable when ratified by
the stockholders.125
Thus, even though a person did not give another person authority to
act on his or her behalf, the action may be enforced against him or
her if it is shown that he or she ratified it or allowed the other person
to act as if he or she had full authority to do so. The Civil Code
provides:
ART. 1910. The principal must comply with all the obligations which
the agent may have contracted within the scope of his authority.
As for any obligation wherein the agent has exceeded his power, the
principal is not bound except when he ratifies it expressly or tacitly.
ART. 1911. Even when the agent has exceeded his authority, the
principal is solidarily liable with the agent if the former allowed the
latter to act as though he had full powers. (Emphasis supplied)
Ratification is a voluntary and deliberate confirmation or adoption of
a previous unauthorized act.126 It converts the unauthorized act of an
agent into an act of the principal.127 It cures the lack of consent at the
representative, making the contract valid and enforceable.128 It is, in
essence, consent belatedly given through express or implied acts
that are deemed a confirmation or waiver of the right to impugn the
unauthorized act.129 Ratification has the effect of placing the principal
in a position as if he or she signed the original contract. In Board of
Liquidators v. Heirs of M. Kalaw, et al.:130
Authorities, great in number, are one in the idea that "ratification by a
corporation of an unauthorized act or contract by its officers or others
relates back to the time of the act or contract ratified, and is equivalent
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to original authority;" and that "[t]he corporation and the other party
to the transaction are in precisely the same position as if the act or
contract had been authorized at the time." The language of one case
is expressive: "The adoption or ratification of a contract by a
corporation is nothing more nor less than the making of an original
contract. The theory of corporate ratification is predicated on the right
of a corporation to contract, and any ratification or adoption is
equivalent to a grant of prior authority."131 (Citations omitted)
Implied ratification may take the form of silence, acquiescence, acts
consistent with approval of the act, or acceptance or retention of
benefits.132 However, silence, acquiescence, retention of benefits,
and acts that may be interpreted as approval of the act do not by
themselves constitute implied ratification. For an act to constitute an
implied ratification, there must be no acceptable explanation for the
act other than that there is an intention to adopt the act as his or her
own.133 "[It] cannot be inferred from acts that a principal has a right to
do independently of the unauthorized act of the agent."134
No act by petitioner can be interpreted as anything close to
ratification. It was not shown that it issued a resolution ratifying the
execution of the mortgage contracts. It was not shown that it received
proceeds of the loans secured by the mortgage contracts. There was
also no showing that it received any consideration for the execution
of the mortgage contracts. It even appears that petitioner was
unaware of the mortgage contracts until respondent notified it of its
desire to foreclose the mortgaged properties.
Ratification must be knowingly and voluntarily done.135 Petitioner’s
lack of knowledge about the mortgage executed in its name
precludes an interpretation that there was any ratification on its part.
Respondent further argues that petitioner is presumed to have
knowledge of its transactions with respondent because its officers,
the Spouses Guillermo and Dolores Torres, participated in obtaining
the loan.136
Indeed, a corporation, being a person created by mere fiction of law,
can act only through natural persons such as its directors, officers,
agents, and representatives. Hence, the general rule is that
knowledge of an officer is considered knowledge of the corporation.
However, even though the Spouses Guillermo and Dolores Torres
were officers of both the thrift banks and petitioner, their knowledge
of the mortgage contracts cannot be considered as knowledge of the
corporation.
The rule that knowledge of an officer is considered knowledge of the
corporation applies only when the officer is acting within the authority
given to him or her by the corporation. In Francisco v. Government
Service Insurance System:137
Knowledge of facts acquired or possessed by an officer or agent of a
corporation in the course of his employment, and in relation to
matters within the scope of his authority, is notice to the corporation,
whether he communicates such knowledge or not.138
The public should be able to rely on and be protected from the
representations of a corporate representative acting within the scope
of his or her authority. This is why an authorized officer’s knowledge
is considered knowledge of corporation. However, just as the public
should be able to rely on and be protected from corporate
representations, corporations should also be able to expect that they
will not be bound by unauthorized actions made on their account.
Thus, knowledge should be actually communicated to the corporation
through its authorized representatives. A corporation cannot be
expected to act or not act on a knowledge that had not been
communicated to it through an authorized representative. There can
be no implied ratification without actual communication. Knowledge
of the existence of contract must be brought to the corporation’s
representative who has authority to ratify it. Further, "the
circumstances must be shown from which such knowledge may be
presumed."139
The Spouses Guillermo and Dolores Torres’ knowledge cannot be
interpreted as knowledge of petitioner. Their knowledge was not
obtained as petitioner’s representatives. It was not shown that they
were acting for and within the authority given by petitioner when they
acquired knowledge of the loan transactions and the mortgages. The
knowledge was obtained in the interest of and as representatives of
the thrift banks.
VI
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Respondent argues that Saturnino Petalcorin was clothed with the
authority to transact on behalf of petitioner, based on the board
resolution dated March 30, 1982 and Aurora de Leon’s notarized
Secretary’s Certificate.140 According to respondent, petitioner is
bound by the mortgage contracts executed by Saturnino
Petalcorin.141
This court has recognized presumed or apparent authority or capacity
to bind corporate representatives in instances when the corporation,
through its silence or other acts of recognition, allowed others to
believe that persons, through their usual exercise of corporate
powers, were conferred with authority to deal on the corporation’s
behalf.142
The doctrine of apparent authority does not go into the question of
the corporation’s competence or power to do a particular act. It
involves the question of whether the officer has the power or is
clothed with the appearance of having the power to act for the
corporation. A finding that there is apparent authority is not the same
as a finding that the corporate act in question is within the
corporation’s limited powers.
The rule on apparent authority is based on the principle of estoppel.
The Civil Code provides:
ART. 1431. Through estoppel an admission or representation is
rendered conclusive upon the person making it, and cannot be
denied or disproved as against the person relying thereon.
....
ART. 1869. Agency may be express, or implied from the acts of the
principal, from his silence or lack of action, or his failure to repudiate
the agency, knowing that another person is acting on his behalf
without authority.
Agency may be oral, unless the law requires a specific form.
A corporation is estopped by its silence and acts of recognition
because we recognize that there is information asymmetry between
third persons who have little to no information as to what happens
during corporate meetings, and the corporate officers, directors, and
representatives who are insiders to corporate affairs.143
In People’s Aircargo and Warehousing Co. Inc. v. Court of
Appeals,144 this court held that the contract entered into by the
corporation’s officer without a board resolution was binding upon the
corporation because it previously allowed the officer to contract on its
behalf despite the lack of board resolution.145
In Francisco, this court ruled that Francisco’s proposal for redemption
of property was accepted by and binding upon the Government
Service Insurance System. This court did not appreciate the
Government Service Insurance System’s defense that since it was
the Board Secretary and not the General Manager who sent
Francisco the acceptance telegram, it could not be made binding
upon the Government Service Insurance System. It did not authorize
the Board Secretary to sign for the General Manager. This court
appreciated the Government Service Insurance System’s failure to
disown the telegram sent by the Board Secretary and its silence while
it accepted all payments made by Francisco for the redemption of
property.146
There can be no apparent authority and the corporation cannot be
estopped from denying the binding affect of an act when there is no
evidence pointing to similar acts and other circumstances that can be
interpreted as the corporation holding out a representative as having
authority to contract on its behalf. In Advance Paper Corporation v.
Arma Traders Corporation,147 this court had the occasion to say:
The doctrine of apparent authority does not apply if the principal did
not commit any acts or conduct which a third party knew and relied
upon in good faith as a result of the exercise of reasonable prudence.
Moreover, the agent’s acts or conduct must have produced a change
of position to the third party’s detriment.148 (Citation omitted)
Saturnino Petalcorin’s authority to transact on behalf of petitioner
cannot be presumed based on a Secretary’s Certificate and excerpt
from the minutes of the alleged board meeting that were found to
have been simulated. These documents cannot be considered as the
corporate acts that held out Saturnino Petalcorin as petitioner’s
authorized representative for mortgage transactions. They were not
supported by an actual board meeting.149
Page | 161
VII
Respondent argues that it may rely on the Secretary’s Certificate
issued by Aurora de Leon because it was notarized.
The Secretary’s Certificate was void whether or not it was notarized.
Notarization creates a presumption of regularity and authenticity on
the document. This presumption may be rebutted by "strong,
complete and conclusive proof"150 to the contrary. While notarial
acknowledgment "attaches full faith and credit to the document
concerned[,]"151 it does not give the document its validity or binding
effect. When there is evidence showing that the document is invalid,
the presumption of regularity or authenticity is not applicable.
In Basilio v. Court of Appeals,152 this court was convinced that the
purported signatory on a deed of sale was not as represented,
despite testimony from the notary public that the signatory appeared
before him and signed the instrument.153 Apart from finding that there
was forgery,154 this court noted:
The notary public, Atty. Ruben Silvestre, testified that he was the one
who notarized the document and that Dionisio Z. Basilio appeared
personally before him and signed the instrument himself. However,
he admitted that he did not know Dionisio Z. Basilio personally to
ascertain if the person who signed the document was actually
Dionisio Z. Basilio himself, or another person who stood in his place.
He could not even recall whether the document had been executed
in his office or not.
Thus, considering the testimonies of various witnesses and a
comparison of the signature in question with admittedly genuine
signatures, the Court is convinced that Dionisio Z. Basilio did not
execute the questioned deed of sale. Although the questioned deed
of sale was a public document having in its favor the presumption of
regularity, such presumption was adequately refuted by competent
witnesses showing its forgery and the Court’s own visual analysis of
the document.155 (Emphasis supplied, citations omitted)
In Suntay v. Court of Appeals,156 this court held that a notarized deed
of sale was void because it was a mere sham.157 It was not intended
to have any effect between the parties.158 This court said:
[I]t is not the intention nor the function of the notary public to validate
and make binding an instrument never, in the first place, intended to
have any binding legal effect upon the parties thereto.159
Since the notarized Secretary’s Certificate was found to have been
issued without a supporting board resolution, it produced no effect. It
is not binding upon petitioner. It should not have been relied on by
respondent especially given its status as a bank.
VIII
The banking institution is "impressed with public interest"160 such that
the public’s faith is "of paramount importance."161 Thus, banks are
required to exercise the highest degree of diligence in their
transactions.162 In China Banking Corporation v. Lagon,163 this court
found that the bank was not a mortgagee in good faith for its failure
to question the due execution of a Special Power of Attorney that was
presented to it in relation to a mortgage contract.164 This court said:
Though petitioner is not expected to conduct an exhaustive
investigation on the history of the mortgagor’s title, it cannot be
excused from the duty of exercising the due diligence required of a
banking institution. Banks are expected to exercise more care and
prudence than private individuals in their dealings, even those that
involve registered lands, for their business is affected with public
interest.165 (Citations omitted)
For its failure to exercise the degree of diligence required of banks,
respondent cannot claim good faith in the execution of the mortgage
contracts with Saturnino Petalcorin. Respondent’s witness, Daciano
Paguio, Jr., testified that there was no board resolution authorizing
Saturnino Petalcorin to act on behalf of petitioner.166 Respondent did
not inquire further as to Saturnino Petalcorin’s authority.
Banks cannot rely on assumptions. This will be contrary to the high
standard of diligence required of them.
Page | 162
VI

According to respondent, the annotations of respondent’s mortgage

interests on the certificates of titles of petitioner’s properties operated
as constructive notice to petitioner of the existence of such
interests.167 Hence, petitioners are now estopped from claiming that
they did not know about the mortgage.

Annotations of adverse claims on certificates of title to properties

operate as constructive notice only to third parties—not to the court
or the registered owner.1âwphi1 In Sajonas v. Court of Appeals:168

[A]nnotation of an adverse claim is a measure designed to protect the

interest of a person over a piece of real property where the
registration of such interest or right is not otherwise provided for by
the Land Registration Act or Act 496 (now [Presidential Decree No.]
1529 or the Property Registration Decree), and serves a warning to
third parties dealing with said property that someone is claiming an
interest on the same or a better right than that of the registered owner
thereof.169 (Emphasis supplied)

Annotations are merely claims of interest or claims of the legal nature

and incidents of relationship between the person whose name
appears on the document and the person who caused the annotation.
It does not say anything about the validity of the claim or convert a
defective claim or document into a valid one. 170 These claims may
be proved or disproved during trial.

Thus, annotations are not conclusive upon courts or upon owners

who may not have reason to doubt the security of their claim as their
properties' title holders.

WHEREFORE, the Petition is GRANTED. The Court of Appeals'

Decision dated December 17, 2009 is REVERSED and SET ASIDE.
The Regional Trial Courts' Decisions of November 23, 2001 and
December 7, 2001 are REINSTATED.

SO ORDERED.

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