1. DONNINA C. HALLEY, Petitioner, vs.PRINTWELL, INC., Respondent.

Stockholders of a corporation are liable for the debts of the corporation up

to the extent of their unpaid subscriptions. They cannot invoke the veil of
corporate identity as a shield from liability, because the veil may be lifted
to avoid defrauding corporate creditors.
Weaffirm with modification the decisionpromulgated on August 14,
2002,1whereby the Court of Appeals(CA) upheld thedecision of the Regional
Trial Court, Branch 71, in Pasig City (RTC),2ordering the defendants
(including the petitioner)to pay to Printwell, Inc. (Printwell) the principal
sum of P291,342.76 plus interest.
Antecedents
The petitioner wasan incorporator and original director of Business Media
Philippines, Inc. (BMPI), which, at its incorporation on November 12,
1987,3had an authorized capital stock of P3,000,000.00 divided into
300,000 shares each with a par value of P10.00,of which 75,000 were
initially subscribed, to wit:
Printwellengaged in commercial and industrial printing.BMPI commissioned
Printwell for the printing of the magazine Philippines, Inc. (together with
wrappers and subscription cards) that BMPI published and sold. For that
purpose, Printwell extended 30-day credit accommodations to BMPI.
In the period from October 11, 1988 until July 12, 1989, BMPI placedwith
Printwell several orders on credit, evidenced byinvoices and delivery
receipts totalingP316,342.76.Considering that BMPI
paidonlyP25,000.00,Printwell suedBMPIon January 26, 1990 for the
collection of the unpaid balance ofP291,342.76 in the RTC.4
On February 8, 1990,Printwell amended thecomplaint in order to implead
as defendants all the original stockholders and incorporators to recover on
theirunpaid subscriptions, as follows:5
The defendants filed a consolidated answer,6averring that they all had paid
their subscriptions in full; that BMPI had a separate personality from those
of its stockholders; thatRizalino C. Vieza had assigned his fully-paid up
sharesto a certain Gerardo R. Jacinto in 1989; andthat the directors and
stockholders of BMPI had resolved to dissolve BMPI during the annual
meetingheld on February 5, 1990.
To prove payment of their subscriptions, the
defendantstockholderssubmitted in evidenceBMPI official receipt (OR) no.
217, OR no. 218, OR no. 220,OR no. 221, OR no. 222, OR no. 223, andOR
no. 227,to wit:

In addition, the stockholderssubmitted other documentsin evidence,

namely:(a) an audit report dated March 30, 1989 prepared by Ilagan,
Cepillo & Associates (submitted to the SEC and the BIR);7(b) BMPIbalance
sheet8 and income statement9as of December 31, 1988; (c) BMPI income
tax return for the year 1988 (stamped "received" by the BIR);10(d) journal
vouchers;11(e) cash deposit slips;12 and(f)Bank of the Philippine Islands
(BPI) savings account passbookin the name of BMPI.13
Ruling of the RTC
On November 3, 1993, the RTC rendereda decision in favor of Printwell,
rejecting the allegation of payment in full of the subscriptions in view of an
irregularity in the issuance of the ORs and observingthat the defendants
had used BMPIs corporate personality to evade payment and create
injustice, viz:
The claim of individual defendants that they have fully paid their
subscriptions to defend[a]nt corporation, is not worthy of consideration,
because:
a) in the case of defendants-spouses Albert and Zenaida Yu, it will be noted
that the alleged payment made on May 13, 1988 amounting
to P135,000.00, is covered by Official Receipt No. 218 (Exh. "2"), whereas
the alleged payment made earlier on November 5, 1987, amounting
to P5,000.00, is covered by Official Receipt No. 222 (Exh. "3"). This is
cogent proof that said receipts were belatedly issued just to suit their
theory since in the ordinary course of business, a receipt
issued earlier must have serial numbers lower than those issued on a later
date. But in the case at bar, the receipt issued on November 5, 1987 has
serial numbers (222) higher than those issued on a later date (May 13,
1988).
b) The claim that since there was no call by the Board of Directors of
defendant corporation for the payment of unpaid subscriptions will not be
a valid excuse to free individual defendants from liability. Since the
individual defendants are members of the Board of Directors of
defendantcorporation, it was within their exclusive power to prevent the
fulfillment of the condition, by simply not making a call for the payment of
the unpaid subscriptions. Their inaction should not work to their benefit
and unjust enrichment at the expense of plaintiff.
Assuming arguendo that the individual defendants have paid their unpaid
subscriptions, still, it is very apparent that individual defendants merely
used the corporate fiction as a cloak or cover to create an injustice; hence,
the alleged separate personality of defendant corporation should be
disregarded (Tan Boon Bee & Co., Inc. vs. Judge Jarencio, G.R. No. 41337,
30 June 1988).14

Applying the trust fund doctrine, the RTC declared the defendant
stockholders liable to Printwell pro rata, thusly:
Defendant Business Media, Inc. is a registered corporation (Exhibits "A", "A1" to "A-9"), and, as appearing from the Articles of Incorporation, individual
defendants have the following unpaid subscriptions:
and it is an established doctrine that subscriptions to the capital stock of a
corporation constitute a fund to which creditors have a right to look for
satisfaction of their claims (Philippine National Bank vs. Bitulok Sawmill,
Inc., 23 SCRA 1366) and, in fact, a corporation has no legal capacity to
release a subscriber to its capital stock from the obligation to pay for his
shares, and any agreement to this effect is invalid (Velasco vs. Poizat, 37
Phil. 802).
The liability of the individual stockholders in the instant case shall be prorated as follows:
The RTC disposed as follows:
WHEREFORE, judgment is hereby rendered in favor of plaintiff and against
defendants, ordering defendants to pay to plaintiff the amount
of P291,342.76, as principal, with interest thereon at 20% per annum, from
date of default, until fully paid, plus P30,000.00 as attorneys fees, plus
costs of suit.
Defendants counterclaims are ordered dismissed for lack of merit.
SO ORDERED.16
Ruling of the CA
All the defendants, except BMPI, appealed.
Spouses Donnina and Simon Halley, andRizalinoVieza defined the
following errors committed by the RTC, as follows:
I.THE TRIAL COURT ERRED IN HOLDING APPELLANTS-STOCKHOLDERS
LIABLE FOR THE LIABILITIES OF THE DEFENDANT CORPORATION.
II.ASSUMING ARGUENDO THAT APPELLANTS MAY BE LIABLE TO THE EXTENT
OF THEIR UNPAID SUBSCRIPTION OF SHARES OF STOCK, IF ANY, THE TRIAL
COURT NONETHELESS ERRED IN NOT FINDING THAT APPELLANTSSTOCKHOLDERS HAVE, AT THE TIME THE SUIT WAS FILED, NO SUCH
UNPAID SUBSCRIPTIONS.
On their part, Spouses Albert and Zenaida Yu averred:

I.THE RTC ERRED IN REFUSING TO GIVE CREDENCE AND WEIGHT TO

DEFENDANTS-APPELLANTS SPOUSES ALBERT AND ZENAIDA YUS EXHIBITS
2 AND 3 DESPITE THE UNREBUTTED TESTIMONY THEREON BY APPELLANT
ALBERT YU AND THE ABSENCE OF PROOF CONTROVERTING THEM.
II.THE RTC ERRED IN HOLDING DEFENDANTS-APPELLANTS SPOUSES
ALBERT AND ZENAIDA YU PERSONALLY LIABLE FOR THE CONTRACTUAL
OBLIGATION OF BUSINESS MEDIA PHILS., INC. DESPITE FULL PAYMENT BY
SAID DEFENDANTS-APPELLANTS OF THEIR RESPECTIVE SUBSCRIPTIONS TO
THE CAPITAL STOCK OF BUSINESS MEDIA PHILS., INC.
Roberto V. Cabrera, Jr. argued:
I.IT IS GRAVE ERROR ON THE PART OF THE COURT A QUO TO APPLY THE
DOCTRINE OF PIERCING THE VEIL OF CORPORATE PERSONALITY IN
ABSENCE OF ANY SHOWING OF EXTRA-ORDINARY CIRCUMSTANCES THAT
WOULD JUSTIFY RESORT THERETO.
II.IT IS GRAVE ERROR ON THE PART OF THE COURT A QUO TO RULE THAT
INDIVIDUAL DEFENDANTS ARE LIABLE TO PAY THE PLAINTIFF-APPELLEES
CLAIM BASED ON THEIR RESPECTIVE SUBSCRIPTION. NOTWITHSTANDING
OVERWHELMING EVIDENCE SHOWING FULL SETTLEMENT OF SUBSCRIBED
CAPITAL BY THE INDIVIDUAL DEFENDANTS.
On August 14, 2002, the CA affirmed the RTC, holding that the defendants
resort to the corporate personality would createan injustice
becausePrintwell would thereby be at a loss against whom it would assert
the right to collect, viz:
Settled is the rule that when the veil of corporate fiction is used as a
means of perpetrating fraud or an illegal act or as a vehicle for the evasion
of an existing obligation, the circumvention of statutes, the achievements
or perfection of monopoly or generally the perpetration of knavery or
crime, the veil with which the law covers and isolates the corporation from
the members or stockholders who compose it will be lifted to allow for its
consideration merely as an aggregation of individuals (First Philippine
International Bank vs. Court of Appeals, 252 SCRA 259). Moreover, under
this doctrine, the corporate existence may be disregarded where the entity
is formed or used for non-legitimate purposes, such as to evade a just and
due obligations or to justify wrong (Claparols vs. CIR, 65 SCRA 613).
In the case at bench, it is undisputed that BMPI made several orders on
credit from appellee PRINTWELL involving the printing of business
magazines, wrappers and subscription cards, in the total amount of
P291,342.76 (Record pp. 3-5, Annex "A") which facts were never denied by
appellants stockholders that they owe appellee the amount of
P291,342.76. The said goods were delivered to and received by BMPI but it
failed to pay its overdue account to appellee as well as the interest
thereon, at the rate of 20% per annum until fully paid. It was also during

this time that appellants stockholders were in charge of the operation of

BMPI despite the fact that they were not able to pay their unpaid
subscriptions to BMPI yet greatly benefited from said transactions. In view
of the unpaid subscriptions, BMPI failed to pay appellee of its liability,
hence appellee in order to protect its right can collect from the appellants
stockholders regarding their unpaid subscriptions. To deny appellee from
recovering from appellants would place appellee in a limbo on where to
assert their right to collect from BMPI since the stockholders who are
appellants herein are availing the defense of corporate fiction to evade
payment of its obligations.17
Further, the CA concurred with the RTC on theapplicability of thetrust fund
doctrine, under which corporate debtors might look to the unpaid
subscriptions for the satisfaction of unpaid corporate debts, stating thus:
It is an established doctrine that subscription to the capital stock of a
corporation constitute a fund to which creditors have a right to look up to
for satisfaction of their claims, and that the assignee in insolvency can
maintain an action upon any unpaid stock subscription in order to realize
assets for the payment of its debts (PNB vs. Bitulok Sawmill, 23 SCRA
1366).
Premised on the above-doctrine, an inference could be made that the
funds, which consists of the payment of subscriptions of the stockholders,
is where the creditors can claim monetary considerations for the
satisfaction of their claims. If these funds which ought to be fully
subscribed by the stockholders were not paid or remain an unpaid
subscription of the corporation then the creditors have no other recourse to
collect from the corporation of its liability. Such occurrence was evident in
the case at bar wherein the appellants as stockholders failed to fully pay
their unpaid subscriptions, which left the creditors helpless in collecting
their claim due to insufficiency of funds of the corporation. Likewise, the
claim of appellants that they already paid the unpaid subscriptions could
not be given weight because said payment did not reflect in the Articles of
Incorporations of BMPI that the unpaid subscriptions were fully paid by the
appellants stockholders. For it is a rule that a stockholder may be sued
directly by creditors to the extent of their unpaid subscriptions to the
corporation (Keller vs. COB Marketing, 141 SCRA 86).
Moreover, a corporation has no power to release a subscription or its
capital stock, without valuable consideration for such releases, and as
against creditors, a reduction of the capital stock can take place only in the
manner and under the conditions prescribed by the statute or the charter
or the Articles of Incorporation. (PNB vs. Bitulok Sawmill, 23 SCRA 1366). 18
The CAdeclared thatthe inconsistency in the issuance of the ORs rendered
the claim of full payment of the subscriptions to the capital stock unworthy
of consideration; andheld that the veil of corporate fiction could be pierced

when it was used as a shield to perpetrate a fraud or to confuse legitimate

issues, to wit:
Finally, appellants SPS YU, argued that the fact of full payment for the
unpaid subscriptions was incontrovertibly established by competent
testimonial and documentary evidence, namely Exhibits "1", "2", "3" &
"4", which were never disputed by appellee, clearly shows that they should
not be held liable for payment of the said unpaid subscriptions of BMPI.
The reliance is misplaced.
We are hereby reproducing the contents of the above-mentioned exhibits,
to wit:
Based on the above exhibits, we are in accord with the lower courts
findings that the claim of the individual appellants that they fully paid their
subscription to the defendant BMPI is not worthy of consideration, because,
in the case of appellants SPS. YU, there is an inconsistency regarding the
issuance of the official receipt since the alleged payment made on May 13,
1988 amounting to P135,000.00 was covered by Official Receipt No. 218
(Record, p. 352), whereas the alleged payment made earlier on November
5, 1987 amounting to P5,000.00 is covered by Official Receipt No. 222
(Record, p. 353). Such issuance is a clear indication that said receipts were
belatedly issued just to suit their claim that they have fully paid the unpaid
subscriptions since in the ordinary course of business, a receipt is issued
earlier must have serial numbers lower than those issued on a later date.
But in the case at bar, the receipt issued on November 5, 1987 had a serial
number (222) higher than those issued on May 13, 1988 (218). And even
assuming arguendo that the individual appellants have paid their unpaid
subscriptions, still, it is very apparent that the veil of corporate fiction may
be pierced when made as a shield to perpetuate fraud and/or confuse
legitimate issues. (Jacinto vs. Court of Appeals, 198 SCRA 211). 19
Spouses Halley and Vieza moved for a reconsideration, but the CA denied
their motion for reconsideration.
Issues
Only Donnina Halley has come to the Court to seek a further
review, positing the following for our consideration and resolution,
to wit:
I.THE COURT OF APPEALS ERRED IN AFFIRMING IN TOTO THE
DECISION THAT DID NOTSTATE THE FACTS AND THE LAW UPON
WHICH THE JUDGMENT WAS BASED BUT MERELY COPIED THE
CONTENTS OF RESPONDENTS MEMORANDUM ADOPTING THE
SAME AS THE REASON FOR THE DECISION

II.THE COURT OF APPEALS ERRED IN AFFIRMING THE DECISION OF

THE REGIONAL TRIAL COURT WHICH ESSENTIALLY ALLOWED THE
PIERCING OF THE VEIL OF CORPORATE FICTION
III.THE HONORABLE COURT OF APPEALS ERRED IN APPLYING THE
TRUST FUND DOCTRINE WHEN THE GROUNDS THEREFOR HAVE
NOT BEEN SATISFIED.
On the first error, the petitioner contends that the RTC lifted verbatim from
the memorandum of Printwell; and submits that the RTCthereby
violatedthe requirement imposed in Section 14, Article VIII of the
Constitution20 as well as in Section 1,Rule 36 of the Rules of Court, 21to the
effect that a judgment or final order of a court should state clearly and
distinctly the facts and the law on which it is based. The petitioner claims
that the RTCs violation indicated that the RTC did not analyze the case
before rendering its decision, thus denying her the opportunity to analyze
the decision; andthat a suspicion of partiality arose from the fact that the
RTC decision was but a replica of Printwells memorandum.She cites
Francisco v. Permskul,22 in which the Court has stated that the reason
underlying the constitutional requirement, that every decision should
clearly and distinctly state the facts and the law on which it is based, is to
inform the reader of how the court has reached its decision and thereby
give the losing party an opportunity to study and analyze the decision and
enable such party to appropriately assign the errors committed therein on
appeal.
On the second and third errors, the petitioner maintains that the CA and
the RTC erroneously pierced the veil of corporate fiction despite the
absence of cogent proof showing that she, as stockholder of BMPI, had any
hand in transacting with Printwell; thatthe CA and the RTC failed to
appreciate the evidence that she had fully paid her subscriptions; and the
CA and the RTCwrongly relied on the articles of incorporation in
determining the current list of unpaid subscriptions despite the articles of
incorporationbeing at best reflectiveonly of the pre-incorporation status of
BMPI.
As her submissions indicate, the petitioner assails the decisions of the CA
on: (a) the propriety of disregarding the separate personalities of BMPI and
its stockholdersby piercing the thin veil that separated them; and (b) the
application of the trust fund doctrine.
Ruling
The petition for review fails.
I
The RTC did not violate
the Constitution and the Rules of Court

The contention of the petitioner, that the RTC merely copied the
memorandum of Printwell in writing its decision, and did not analyze the
records on its own, thereby manifesting a bias in favor of Printwell, is
unfounded.
It is noted that the petition for review merely generally alleges that starting
from its page 5, the decision of the RTC "copied verbatim the allegations of
herein Respondents in its Memorandum before the said court," as if "the
Memorandum was the draft of the Decision of the Regional Trial Court of
Pasig,"23but fails to specify either the portions allegedly lifted verbatim
from the memorandum, or why she regards the decision as copied. The
omission renders thepetition for review insufficient to support her
contention, considering that the mere similarityin language or thought
between Printwells memorandum and the trial courts decisiondid not
necessarily justify the conclusion that the RTC simply lifted verbatim or
copied from thememorandum.
It is to be observed in this connection that a trial or appellate judge may
occasionally viewa partys memorandum or brief as worthy of due
consideration either entirely or partly. When he does so, the judgemay
adopt and incorporatein his adjudicationthe memorandum or the parts of it
he deems suitable,and yet not be guilty of the accusation of lifting or
copying from the memorandum.24 This isbecause ofthe avowed objective of
the memorandum to contribute in the proper illumination and correct
determination of the controversy.Nor is there anything untoward in the
congruence of ideas and views about the legal issues between himself and
the party drafting the memorandum.The frequency of similarities in
argumentation, phraseology, expression, and citation of authorities
between the decisions of the courts and the memoranda of the parties,
which may be great or small, can be fairly attributable tothe adherence by
our courts of law and the legal profession to widely knownor universally
accepted precedents set in earlier judicial actions with identical factual
milieus or posing related judicial dilemmas.
We also do not agree with the petitioner that the RTCs manner of writing
the decisiondeprivedher ofthe opportunity to analyze its decisionas to be
able to assign errors on appeal. The contrary appears, considering that she
was able to impute and assignerrors to the RTCthat she extensively
discussed in her appeal in the CA, indicating her thorough analysis ofthe
decision of the RTC.
Our own readingof the trial courts decision persuasively shows that the
RTC did comply with the requirements regarding the content and the
manner of writing a decision prescribed in the Constitution and the Rules of
Court. The decision of the RTC contained clear and distinct findings of
facts, and stated the applicablelaw and jurisprudence, fully explaining why
the defendants were being held liable to the plaintiff. In short, the reader
was at once informed of the factual and legal reasons for the ultimate
result.

II
Corporate personality not to be used to foster injustice
Printwell impleaded the petitioner and the other stockholders of BMPI for
two reasons, namely: (a) to reach the unpaid subscriptions because it
appeared that such subscriptions were the remaining visible assets of
BMPI; and (b) to avoid multiplicity of suits.25
The petitionersubmits that she had no participation in the transaction
between BMPI and Printwell;that BMPI acted on its own; and that shehad
no hand in persuading BMPI to renege on its obligation to pay. Hence, she
should not be personally liable.
We rule against the petitioners submission.
Although a corporation has a personality separate and distinct from those
of its stockholders, directors, or officers,26such separate and distinct
personality is merely a fiction created by law for the sake of convenience
and to promote the ends of justice.27The corporate personality may be
disregarded, and the individuals composing the corporation will be treated
as individuals, if the corporate entity is being used as a cloak or cover for
fraud or illegality;as a justification for a wrong; as an alter ego, an adjunct,
or a business conduit for the sole benefit of the stockholders. 28 As a
general rule, a corporation is looked upon as a legal entity, unless and until
sufficient reason to the contrary appears. Thus,the courts always presume
good faith, andfor that reason accord prime importance to the separate
personality of the corporation, disregarding the corporate personality only
after the wrongdoing is first clearly and convincingly established. 29It thus
behooves the courts to be careful in assessing the milieu where the
piercing of the corporate veil shall be done.30
Although nowhere in Printwells amended complaint or in the testimonies
Printwell offered can it be read or inferred from that the petitioner was
instrumental in persuading BMPI to renege onits obligation to pay; or that
sheinduced Printwell to extend the credit accommodation by
misrepresenting the solvency of BMPI toPrintwell, her personal liability,
together with that of her co-defendants, remainedbecause the CA found
her and the other defendant stockholders to be in charge of the operations
of BMPI at the time the unpaid obligation was transacted and incurred, to
wit:
In the case at bench, it is undisputed that BMPI made several orders on
credit from appellee PRINTWELL involving the printing of business
magazines, wrappers and subscription cards, in the total amount
of P291,342.76 (Record pp. 3-5, Annex "A") which facts were never denied
by appellants stockholders that they owe(d) appellee the amount
of P291,342.76. The said goods were delivered to and received by BMPI but
it failed to pay its overdue account to appellee as well as the interest
thereon, at the rate of 20% per annum until fully paid. It was also during

this time that appellants stockholders were in charge of the operation of

BMPI despite the fact that they were not able to pay their unpaid
subscriptions to BMPI yet greatly benefited from said transactions. In view
of the unpaid subscriptions, BMPI failed to pay appellee of its liability,
hence appellee in order to protect its right can collect from the appellants
stockholders regarding their unpaid subscriptions. To deny appellee from
recovering from appellants would place appellee in a limbo on where to
assert their right to collect from BMPI since the stockholders who are
appellants herein are availing the defense of corporate fiction to evade
payment of its obligations.31
It follows, therefore, that whether or not the petitioner persuaded BMPI to
renege on its obligations to pay, and whether or not she induced Printwell
to transact with BMPI were not gooddefensesin the suit.1avvphi1
III. Unpaid creditor may satisfy its claim from
unpaid subscriptions;stockholders must
prove full payment oftheir subscriptions
Both the RTC and the CA applied the trust fund doctrineagainst the
defendant stockholders, including the petitioner.
The petitionerargues, however,that the trust fund doctrinewas
inapplicablebecause she had already fully paid her subscriptions to the
capital stock of BMPI. She thus insiststhat both lower courts erred in
disregarding the evidence on the complete payment of the subscription,
like receipts, income tax returns, and relevant financial statements.
The petitioners argumentis devoid of substance.
The trust fund doctrineenunciates a
xxx rule that the property of a corporation is a trust fund for the payment
of creditors, but such property can be called a trust fund only by way of
analogy or metaphor. As between the corporation itself and its creditors it
is a simple debtor, and as between its creditors and stockholders its assets
are in equity a fund for the payment of its debts.32
The trust fund doctrine, first enunciated in the American case of Wood v.
Dummer,33was adopted in our jurisdiction in Philippine Trust Co. v.
Rivera,34where thisCourt declared that:
It is established doctrine that subscriptions to the capital of a corporation
constitute a fund to which creditors have a right to look for satisfaction of
their claims and that the assignee in insolvency can maintain an action
upon any unpaid stock subscription in order to realize assets for the
payment of its debts. (Velasco vs. Poizat, 37 Phil., 802) xxx 35

We clarify that the trust fund doctrineis not limited to reaching the
stockholders unpaid subscriptions. The scope of the doctrine when the
corporation is insolvent encompasses not only the capital stock, but also
other property and assets generally regarded in equity as a trust fund for
the payment of corporate debts.36All assets and property belonging to the
corporation held in trust for the benefit of creditors thatwere distributed or
in the possession of the stockholders, regardless of full paymentof their
subscriptions, may be reached by the creditor in satisfaction of its claim.
Also, under the trust fund doctrine,a corporation has no legal capacity to
release an original subscriber to its capital stock from the obligation of
paying for his shares, in whole or in part,37 without a valuable
consideration,38or fraudulently, to the prejudice of creditors.39The creditor
is allowed to maintain an action upon any unpaid subscriptions and
thereby steps into the shoes of the corporation for the satisfaction of its
debt.40To make out a prima facie case in a suit against stockholders of an
insolvent corporation to compel them to contribute to the payment of its
debts by making good unpaid balances upon their subscriptions, it is only
necessary to establish that thestockholders have not in good faith paid the
par value of the stocks of the corporation.41
The petitionerposits that the finding of irregularity attending the issuance
of the receipts (ORs) issued to the other stockholders/subscribers should
not affect her becauseher receipt did not suffer similar irregularity.
Notwithstanding that the RTC and the CA did not find any irregularity in the
OR issued in her favor,we still cannot sustain the petitioners defense of
full payment of her subscription.
In civil cases, theparty who pleads payment has the burden of proving it,
that even where the plaintiff must allege nonpayment, the general rule is
that the burden rests on the defendant to prove payment, rather than on
the plaintiff to prove nonpayment. In other words, the debtor bears the
burden of showing with legal certainty that the obligation has been
discharged by payment.42
Apparently, the petitioner failed to discharge her burden.
A receipt is the written acknowledgment of the fact of payment in money
or other settlement between the seller and the buyer of goods, thedebtor
or thecreditor, or theperson rendering services, and theclient or
thecustomer.43Althougha receipt is the best evidence of the fact of
payment, it isnot conclusive, but merely presumptive;nor is it exclusive
evidence,considering thatparole evidence may also establishthe fact of
payment.44
The petitioners ORNo. 227,presentedto prove the payment of the balance
of her subscription, indicated that her supposed payment had beenmade
by means of a check. Thus, to discharge theburden to prove payment of

her subscription, she had to adduce evidence satisfactorily proving that her
payment by check wasregardedas payment under the law.
Paymentis defined as the delivery of money.45Yet, because a check is not
money and only substitutes for money, the delivery of a check does not
operate as payment and does not discharge the obligation under a
judgment.46The delivery of a bill of exchange only produces the fact of
payment when the bill has been encashed.47The following passage
fromBank of Philippine Islands v. Royeca 48is enlightening:
Settled is the rule that payment must be made in legal tender. A check is
not legal tender and, therefore, cannot constitute a valid tender of
payment. Since a negotiable instrument is only a substitute for money and
not money, the delivery of such an instrument does not, by itself, operate
as payment. Mere delivery of checks does not discharge the obligation
under a judgment. The obligation is not extinguished and remains
suspended until the payment by commercial document is actually realized.
To establish their defense, the respondents therefore had to present proof,
not only that they delivered the checks to the petitioner, but also that the
checks were encashed. The respondents failed to do so. Had the checks
been actually encashed, the respondents could have easily produced the
cancelled checks as evidence to prove the same. Instead, they merely
averred that they believed in good faith that the checks were encashed
because they were not notified of the dishonor of the checks and three
years had already lapsed since they issued the checks.
Because of this failure of the respondents to present sufficient proof of
payment, it was no longer necessary for the petitioner to prove nonpayment, particularly proof that the checks were dishonored. The burden
of evidence is shifted only if the party upon whom it is lodged was able to
adduce preponderant evidence to prove its claim.
Ostensibly, therefore, the petitioners mere submission of the receipt
issued in exchange of the check did not satisfactorily establish her
allegation of full payment of her subscription. Indeed, she could not even
inform the trial court about the identity of her drawee bank, 49and about
whether the check was cleared and its amount paid to BMPI. 50In fact, she
did not present the check itself.
Theincome tax return (ITR) and statement of assets and liabilities of BMPI,
albeit presented, had no bearing on the issue of payment of the
subscription because they did not by themselves prove payment.
ITRsestablish ataxpayers liability for taxes or a taxpayers claim for refund.
In the same manner, the deposit slips and entries in the passbook issued in
the name of BMPI were hardly relevant due to their not reflecting the
alleged payments.

It is notable, too, that the petitioner and her co-stockholders did not
support their allegation of complete payment of their respective
subscriptions with the stock and transfer book of BMPI. Indeed, books and
records of a corporation (including the stock and transfer book) are
admissible in evidence in favor of or against the corporation and its
members to prove the corporate acts, its financial status and other matters
(like the status of the stockholders), and are ordinarily the best evidence of
corporate acts and proceedings.51Specifically, a stock and transfer book is
necessary as a measure of precaution, expediency, and convenience
because it provides the only certain and accurate method of establishing
the various corporate acts and transactions and of showing the ownership
of stock and like matters.52That she tendered no explanation why the stock
and transfer book was not presented warrants the inference that the book
did not reflect the actual payment of her subscription.
Nor did the petitioner present any certificate of stock issued by BMPI to
her. Such a certificate covering her subscription might have been a reliable
evidence of full payment of the subscriptions, considering that under
Section 65 of the Corporation Code a certificate of stock issues only to a
subscriber who has fully paid his subscription. The lack of any explanation
for the absence of a stock certificate in her favor likewise warrants an
unfavorable inference on the issue of payment.
Lastly, the petitioner maintains that both lower courts erred in relying on
the articles of incorporationas proof of the liabilities of the stockholders
subscribing to BMPIs stocks, averring that the articles of incorporationdid
not reflect the latest subscription status of BMPI.
Although the articles of incorporation may possibly reflect only the preincorporation status of a corporation, the lower courts reliance on that
document to determine whether the original subscribersalready fully paid
their subscriptions or not was neither unwarranted nor erroneous. As
earlier explained, the burden of establishing the fact of full payment
belonged not to Printwell even if it was the plaintiff, but to the stockholders
like the petitioner who, as the defendants, averredfull payment of their
subscriptions as a defense. Their failure to substantiate their averment of
full payment, as well as their failure to counter the reliance on the recitals
found in the articles of incorporation simply meant their failure or inability
to satisfactorily prove their defense of full payment of the subscriptions.
To reiterate, the petitionerwas liablepursuant to the trust fund doctrine for
the corporate obligation of BMPI by virtue of her subscription being still
unpaid. Printwell, as BMPIs creditor,had a right to reachher unpaid
subscription in satisfaction of its claim.
IV
Liability of stockholders for corporate debts isup
to the extentof their unpaid subscription

The RTC declared the stockholders pro rata liable for the debt(based on the
proportion to their shares in the capital stock of BMPI); and held the
petitionerpersonally liable onlyin the amount of P149,955.65.
We do not agree. The RTC lacked the legal and factual support for its
prorating the liability. Hence, we need to modify the extent of the
petitioners personal liability to Printwell. The prevailing rule is that a
stockholder is personally liable for the financial obligations of the
corporation to the extent of his unpaid subscription.53In view ofthe
petitioners unpaid subscription being worth P262,500.00, shewas liable up
to that amount.
Interest is also imposable on the unpaid obligation. Absent any stipulation,
interest is fixed at 12% per annum from the date the amended complaint
was filed on February 8, 1990 until the obligation (i.e., to the extent of the
petitioners personal liability of P262,500.00) is fully paid.54
Lastly, we find no basis togrant attorneys fees, the award for which must
be supported by findings of fact and of law as provided under Article 2208
of the Civil Code55incorporated in the body of decision of the trial court.
The absence of the requisite findings from the RTC decision warrants the
deletion of the attorneys fees.
ACCORDINGLY, we deny the petition for review on certiorari;and affirm
with modification the decision promulgated on August 14, 2002by ordering
the petitionerto pay to Printwell, Inc. the sum of P262,500.00, plus interest
of 12% per annum to be computed from February 8, 1990 until full
payment.
The petitioner shall paycost of suit in this appeal.

2. ONG YONG, JUANITA TAN ONG, WILSON T. ONG, ANNA L. ONG,

WILLIAM

T.

ONG,

WILLIE

T.

ONG,

and

JULIE

ONG

ALONZO, petitioners, vs.DAVID S. TIU, CELY Y. TIU, MOLY YU GAW,

BELEN SEE YU, D. TERENCE Y. TIU, JOHN YU, LOURDES C. TIU,
INTRALAND

RESOURCES

DEVELOPMENT

CORP.,

MASAGANA

TELAMART, INC., REGISTER OF DEEDS OF PASAY CITY, and the

SECURITIES AND EXCHANGE COMMISSION, respondents.

Before us are the (1) motion for reconsideration, dated March 15, 2002, of

while the Tius were to subscribe to an additional 549,800 shares at

petitioner movants Ong Yong, Juanita Tan Ong, Wilson Ong, Anna Ong,

P100.00 each in addition to their already existing subscription of

William Ong, Willie Ong and Julia Ong Alonzo (the Ongs); (2) motion for

450,200 shares. Furthermore, they agreed that the Tius were

partial reconsideration, dated March 15, 2002, of petitioner movant Willie

entitled to nominate the Vice-President and the Treasurer plus five

Ong seeking a reversal of this Court's Decision, 1 dated February 1, 2002, in

directors while the Ongs were entitled to nominate the President,

G.R. Nos. 144476 and 144629 affirming with modification the decision 2 of

the Secretary and six directors (including the chairman) to the

the Court of Appeals, dated October 5, 1999, which in turn upheld, likewise

board of directors of FLADC. Moreover, the Ongs were given the

with modification, the decision of the SEC en banc, dated September 11,

right to manage and operate the mall.

1998; and (3) motion for issuance of writ of execution of petitioners David
S. Tiu, Cely Y. Tiu, Moly Yu Gow, Belen See Yu, D. Terence Y. Tiu, John Yu and
Lourdes C. Tiu (the Tius) of our February 1, 2002 Decision.

Accordingly, the Ongs paid P100 million in cash for their subscription to
1,000,000 shares of stock while the Tius committed to contribute to FLADC
a four-storey building and two parcels of land respectively valued at P20

A brief recapitulation of the facts shows that:

million (for 200,000 shares), P30 million (for 300,000 shares) and P49.8
million (for 49,800 shares) to cover their additional 549,800 stock

In 1994, the construction of the Masagana Citimall in Pasay City

was threatened with stoppage and incompletion when its owner,
the First Landlink Asia Development Corporation (FLADC), which
was owned by the Tius, encountered dire financial difficulties. It

subscription therein. The Ongs paid in another P70 million 3 to FLADC and
P20 million to the Tius over and above their P100 million investment, the
total sum of which (P190 million) was used to settle the P190 million
mortgage indebtedness of FLADC to PNB.

was heavily indebted to the Philippine National Bank (PNB) for

P190 million. To stave off foreclosure of the mortgage on the two

The business harmony between the Ongs and the Tius in FLADC, however,

lots where the mall was being built, the Tius invited Ong Yong,

was shortlived because the Tius, on February 23, 1996, rescinded the Pre-

Juanita Tan Ong, Wilson T. Ong, Anna L. Ong, William T. Ong and

Subscription Agreement. The Tius accused the Ongs of (1) refusing to

Julia Ong Alonzo (the Ongs), to invest in FLADC. Under the Pre-

credit to them the FLADC shares covering their real property contributions;

Subscription Agreement they entered into, the Ongs and the Tius

(2) preventing David S. Tiu and Cely Y. Tiu from assuming the positions of

agreed to maintain equal shareholdings in FLADC: the Ongs were

and performing their duties as Vice-President and Treasurer, respectively,

to subscribe to 1,000,000 shares at a par value of P100.00 each

and (3) refusing to give them the office spaces agreed upon.

According to the Tius, the agreement was for David S. Tiu and Cely S. Tiu to

payment thereof, the SEC would not approve the valuation of the Tius'

assume the positions and perform the duties of Vice-President and

property contribution (as opposed to cash contribution). This, in turn,

Treasurer, respectively, but the Ongs prevented them from doing so.

would make it impossible to secure a new Transfer Certificate of Title (TCT)

Furthermore, the Ongs refused to provide them the space for their

over the property in FLADC's name. In any event, it was easy for the Tius

executive offices as Vice-President and Treasurer. Finally, and most serious

to simply pay the said transfer taxes and, after the new TCT was issued in

of all, the Ongs refused to give them the shares corresponding to their

FLADC's name, they could then be given the corresponding shares of

property contributions of a four-story building, a 1,902.30 square-meter lot

stocks. On the 151 square-meter property, the Tius never executed a deed

and a 151 square-meter lot. Hence, they felt they were justified in setting

of assignment in favor of FLADC. The Tius initially claimed that they could

aside their Pre-Subscription Agreement with the Ongs who allegedly

not as yet surrender the TCT because it was "still being reconstituted" by

refused to comply with their undertakings.

the Lichaucos from whom the Tius bought it. The Ongs later on discovered
that FLADC had in reality owned the property all along, even before their

In their defense, the Ongs said that David S. Tiu and Cely Y. Tiu had in fact
assumed the positions of Vice-President and Treasurer of FLADC but that it
was they who refused to comply with the corporate duties assigned to
them. It was the contention of the Ongs that they wanted the Tius to sign

Pre-Subscription Agreement was executed in 1994. This meant that the

151 square-meter property was at that time already the corporate property
of FLADC for which the Tius were not entitled to the issuance of new shares
of stock.

the checks of the corporation and undertake their management duties but
that the Tius shied away from helping them manage the corporation. On

The

controversy

finally

came

to

head

when

this

case

was

the issue of office space, the Ongs pointed out that the Tius did in fact

commenced4 by the Tius on February 27, 1996 at the Securities and

already have existing executive offices in the mall since they owned it

Exchange Commission (SEC), seeking confirmation of their rescission of the

100% before the Ongs came in. What the Tius really wanted were new

Pre-Subscription Agreement. After hearing, the SEC, through then Hearing

offices which were anyway subsequently provided to them. On the most

Officer Rolando G. Andaya, Jr., issued a decision on May 19, 1997

important issue of their alleged failure to credit the Tius with the FLADC

confirming the rescission sought by the Tius, as follows:

shares commensurate to the Tius' property contributions, the Ongs

asserted that, although the Tius executed a deed of assignment for the
1,902.30 square-meter lot in favor of FLADC, they (the Tius) refused to pay
P 570,690 for capital gains tax and documentary stamp tax. Without the

WHEREFORE,

judgment

is

hereby

rendered

confirming

the

rescission of the Pre-Subscription Agreement, and consequently

ordering:

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

(g) The individual defendants, jointly and severally, to return to

individual defendants in FLADC;

FLADC interest payment in the amount of P8,866,669.00 and all

interest payments as well as any payments on principal received

(b) FLADC to pay the amount of P170,000,000.00 to the individual

defendants representing the return of their contribution for
1,000,000 shares of FLADC;

(c) The plaintiffs to submit with (sic) the Securities and Exchange
Commission amended articles of incorporation of FLADC to
conform with this decision;

(d) The defendants to surrender to the plaintiffs TCT Nos. 132493,

from the P70,000,000.00 inexistent loan, plus the legal rate of

interest thereon from the date of their receipt of such payment
until fully paid;

(h) The plaintiff David Tiu to pay individual defendants the sum of
P20,000,000.00 representing his loan from said defendants plus
legal interest from the date of receipt of such amount.

SO ORDERED.5

132494, 134066 (formerly 15587), 135325 and 134204 and any

other title or deed in the name of FLADC, failing in which said titles

On motion of both parties, the above decision was partially reconsidered

are declared void;

but only insofar as the Ongs' P70 million was declared not as a premium on
capital stock but an advance (loan) by the Ongs to FLADC and that the

(e) The Register of Deeds to issue new certificates of titles in favor

imposition of interest on it was correct.6

of the plaintiffs and to cancel the annotation of the PreSubscription Agreement dated 15 August 1994 on TCT No. 134066

Both parties appealed7 to the SEC en banc which rendered a decision on

(formerly 15587);

September 11, 1998, affirming the May 19, 1997 decision of the Hearing
Officer. The SEC en banc confirmed the rescission of the Pre-Subscription

(f) The individual defendants, individually and collectively, their

agents and representatives, to desist from exercising or performing
any and all acts pertaining to stockholder, director or officer of

Agreement but reverted to classifying the P70 million paid by the Ongs as
premium on capital and not as a loan or advance to FLADC, hence, not
entitled to earn interest.8

FLADC or in any manner intervene in the management and affairs

of FLADC;

On appeal, the Court of Appeals (CA) rendered a decision on October 5,

1999, thus:

WHEREFORE, the Order dated September 11, 1998 issued by the

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

Securities and Exchange Commission En Banc in SEC AC CASE

by Transfer Certificate of Title No. 15587 in the

NOS. 598 and 601 confirming the rescission of the Pre-Subscription

name

Agreement dated August 15, 1994 is hereby AFFIRMED, subject to

P30,000,000.00 for 300,000 shares in First Landlink

the following MODIFICATIONS:

Asia Development Corporation at a par value of

of

Masagana

Telamart,

Inc.

valued

at

P100.00 per share.

1. The Ong and Tiu Groups are ordered to liquidate First Landlink
Asia Development Corporation in accordance with the following

2) Whatever remains of the assets of the First Landlink Asia

cash and property contributions of the parties therein.

Development Corporation and the management thereof is (sic)

hereby ordered transferred to the Tiu Group.

(a) Ong Group P100,000,000.00 cash contribution for one

(1) million shares in First Landlink Asia Development

3) First Landlink Asia Development Corporation is hereby ordered

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

to pay the amount of P70,000,000.00 that was advanced to it by

the Ong Group upon the finality of this decision. Should the former

(b) Tiu Group:

1) P45,020,000.00 original cash contribution for

450,200 shares in First Landlink Asia Development
Corporation at a par value of P100.00 per share;

2) A four-storey building described in Transfer

Certificate of Title No. 15587 in the name of
Intraland Resources and Development Corporation
valued at P20,000,000.00 for 200,000 shares in

incur in delay in the payment thereof, it shall pay the legal interest
thereon pursuant to Article 2209 of the New Civil Code.

4)

The

Tius

are

hereby

ordered

to

pay

the

amount

of

P20,000,000.00 loaned them by the Ongs upon the finality of this

decision. Should the former incur in delay in the payment thereof,
it shall pay the legal interest thereon pursuant to Article 2209 of
the New Civil Code.

SO ORDERED.9

First Landlink Asia Development Corporation at a

par value of P100.00 per share;

An interesting sidelight of the CA decision was its description of the

rescission made by the Tius as the "height of ingratitude" and as "pulling a

fast one" on the Ongs. The CA moreover found the Tius guilty of

due to the refusal of the Tius to pay the required transfer taxes to secure

withholding FLADC funds from the Ongs and diverting corporate income to

the approval of the SEC for the property contribution and, thereafter, the

their own MATTERCO account.10 These were findings later on affirmed in

issuance of title in FLADC's name. They also argued that the liquidation of

our own February 1, 2002 Decision which is the subject of the instant

FLADC may not legally be ordered by the appellate court even for so called

motion for reconsideration.11

"practical considerations" or even to prevent "further squabbles and

numerous litigations," since the same are not valid grounds under the

But there was also a strange aspect of the CA decision. The CA concluded
that both the Ongs and the Tius were in pari delicto (which would not have
legally entitled them to rescission) but, "for practical considerations," that

Corporation Code. Moreover, the Ongs bewailed the failure of the CA to

grant interest on their P70 million and P20 million advances to FLADC and
David S. Tiu, respectively, and to award costs and damages.

is, their inability to work together, it was best to separate the two groups
by rescinding the Pre-Subscription Agreement, returning the original

In their petition docketed as G.R. No. 144629, Tiu et al. vs. Ong et al., the

investment of the Ongs and awarding practically everything else to the

Tius, on the other hand, contended that the rescission should have been

Tius.

limited to the restitution of the parties' respective investments and not the
liquidation of FLADC based on the erroneous perception by the court that:

Their motions for reconsideration having been denied, both parties filed
separate petitions for review before this Court.

In their petition docketed as G.R. No. 144476, Ong et al. vs. Tiu et al., the
Ongs argued that the Tius may not properly avail of rescission under Article
1191 of the Civil Code considering that the Pre-Subscription Agreement did
not provide for reciprocity of obligations; that the rights over the subject
matter of the rescission (capital assets and properties) had been acquired
by a third party (FLADC); that they did not commit a substantial and
fundamental breach of their agreement since they did not prevent the Tius
from assuming the positions of Vice-President and Treasurer of FLADC, and
that the failure to credit the 300,000 shares corresponding to the 1,902.30
square-meter property covered by TCT No. 134066 (formerly 15587) was

the Masagana Citimall was threatened with incompletion since FLADC was
in financial distress; that the Tius invited the Ongs to invest in FLADC to
settle its P190 million loan from PNB; that they violated the PreSubscription Agreement when it was the Lichaucos and not the Tius who
executed the deed of assignment over the 151 square-meter property
commensurate to 49,800 shares in FLADC thereby failing to pay the price
for the said shares; that they did not turn over to the Ongs the entire
amount of FLADC funds; that they were diverting rentals from lease
contracts due to FLADC to their own MATTERCO account; that the P70
million paid by the Ongs was an advance and not a premium on capital;
and that, by rescinding the Pre-Subscription Agreement, they wanted to

wrestle away the management of the mall and prevent the Ongs from

sound either and would only lead to further "squabbles and numerous

enjoying the profits of their P190 million investment in FLADC.

litigations" between the parties.

On February 1, 2002, this Court promulgated its Decision (the subject of

On March 15, 2002, the Tius filed before this Court a Motion for Issuance of

the instant motions), affirming the assailed decision of the Court of Appeals

a Writ of Execution on the grounds that: (a) the SEC order had become

but with the following modifications:

executory as early as September 11, 1998 pursuant to Sections 1 and 12,

Rule 43 of the Rules of Court; (b) any further delay would be injurious to

1. the P20 million loan extended by the Ongs to the Tius shall earn
interest at twelve percent (12%) per annum to be computed from
the time of judicial demand which is from April 23, 1996;

2. the P70 million advanced by the Ongs to the FLADC shall earn
interest at ten percent (10%) per annum to be computed from the
date of the FLADC Board Resolution which is June 19, 1996; and

the rights of the Tius since the case had been pending for more than six
years; and (c) the SEC no longer had quasi-judicial jurisdiction under RA
8799 (Securities Regulation Code). The Ongs filed their opposition,
contending that the Decision dated February 1, 2002 was not yet final and
executory; that no good reason existed to issue a warrant of execution;
and that, pursuant to Section 5.2 of RA 8799, the SEC retained jurisdiction
over pending cases involving intra-corporate disputes already submitted

3. the Tius shall be credited with 49,800 shares in FLADC for their

for final resolution upon the effectivity of the said law.

property contribution, specifically, the 151 sq. m. parcel of land.

Aside from their opposition to the Tius' Motion for Issuance of Writ of
This Court affirmed the fact that both the Ongs and the Tius violated their

Execution,

the

Ongs

filed

their

own

"Motion

for

Reconsideration;

respective obligations under the Pre-Subscription Agreement. The Ongs

Alternatively, Motion for Modification (of the February 1, 2002 Decision)" on

prevented the Tius from assuming the positions of Vice-President and

March 15, 2002, raising two main points: (a) that specific performance and

Treasurer of the corporation. On the other hand, the Decision established

not rescission was the proper remedy under the premises; and (b) that,

that the Tius failed to turn over FLADC funds to the Ongs and that the Tius

assuming rescission to be proper, the subject decision of this Court should

diverted rentals due to FLADC to their MATTERCO account. Consequently, it

be modified to entitle movants to their proportionate share in the mall.

held that rescission was not possible since both parties were in pari delicto.
However, this Court agreed with the Court of Appeals that the remedy of
specific performance, as espoused by the Ongs, was not practical and

On their first point (specific performance and not rescission was the proper
remedy), movants Ong argue that their alleged breach of the PreSubscription Agreement was, at most, casual which did not justify the

rescission of the contract. They stress that providing appropriate offices for

The Ongs also allege that, in view of the findings of the Court that both

David S. Tiu and Cely Y. Tiu as Vice-President and Treasurer, respectively,

parties were guilty of violating the Pre-Subscription Agreement, neither of

had no bearing on their obligations under the Pre-Subscription Agreement

them could resort to rescission under the principle of pari delicto. In

since the said obligation (to provide executive offices) pertained to FLADC

addition, since the cash and other contributions now sought to be returned

itself. Such obligation arose from the relations between the said officers

already belong to FLADC, an innocent third party, said remedy may no

and the corporation and not any of the individual parties such as the Ongs.

longer be availed of under the law.

Likewise, the alleged failure of the Ongs to credit shares of stock in favor of
the Tius for their property contributions also pertained to the corporation
and not to the Ongs. Just the same, it could not be done in view of the Tius'
refusal to pay the necessary transfer taxes which in turn resulted in the
inability to secure SEC approval for the property contributions and the
issuance of a new TCT in the name of FLADC.

On their second point (assuming rescission to be proper, the Ongs should

be given their proportionate share of the mall), movants Ong vehemently
take exception to the second item in the dispositive portion of the
questioned Decision insofar as it decreed that whatever remains of the
assets of FLADC and the management thereof (after liquidation) shall be
transferred to the Tius. They point out that the mall itself, which would

Besides, according to the Ongs, the principal objective of both parties in

have been foreclosed by PNB if not for their timely investment of P190

entering into the Pre-Subscription Agreement in 1994 was to raise the

million in 1994 and which is now worth about P1 billion mainly because of

P190 million desperately needed for the payment of FLADC's loan to PNB.

their efforts, should be included in any partition and distribution. They (the

Hence, in this light, the alleged failure to provide office space for the two

Ongs) should not merely be given interest on their capital investments. The

corporate officers was no more than an inconsequential infringement. For

said portion of our Decision, according to them, amounted to the unjust

rescission to be justified, the law requires that the breach of contract

enrichment of the Tius and ran contrary to our own pronouncement that

should be so "substantial or fundamental" as to defeat the primary

the act of the Tius in unilaterally rescinding the agreement was "the height

objective of the parties in making the agreement. At any rate, the Ongs

of ingratitude" and an attempt "to pull a fast one" as it would prevent the

claim that it was the Tius who were guilty of fundamental violations in

Ongs from enjoying the fruits of their P190 million investment in FLADC. It

failing to remit funds due to FLADC and diverting the same to their

also contravenes this Court's assurance in the questioned Decision that the

MATTERCO account.

Ongs and Tius "will have a bountiful return of their respective investments
derived from the profits of the corporation."

Willie Ong filed a separate "Motion for Partial Reconsideration" dated March

Telecommunications Commission,13 this Court, through then Chief Justice

8, 2002, pointing out that there was no violation of the Pre-Subscription

Felix V. Makasiar, said that its members may and do change their minds,

Agreement on the part of the Ongs; that, after more than seven years

after a re-study of the facts and the law, illuminated by a mutual exchange

since the mall began its operations, rescission had become not only

of views.14 After a thorough re-examination of the case, we find that our

impractical but would also adversely affect the rights of innocent parties;

Decision of February 1, 2002 overlooked certain aspects which, if not

and that it would be highly inequitable and unfair to simply return the

corrected, will cause extreme and irreparable damage and prejudice to the

P100 million investment of the Ongs and give the remaining assets now

Ongs, FLADC and its creditors.

amounting to about P1 billion to the Tius.

The procedural rule on pro-forma motions pointed out by the Tius should
The Tius, in their opposition to the Ongs' motion for reconsideration,

not be blindly applied to meritorious motions for reconsideration. As long

counter that the arguments therein are a mere re-hash of the contentions

as the same adequately raises a valid ground15 (i.e., the decision or final

in the Ongs' petition for review and previous motion for reconsideration of

order is contrary to law), this Court has to evaluate the merits of the

the Court of Appeals' decision. The Tius compare the arguments in said

arguments to prevent an unjust decision from attaining finality. In Security

pleadings to prove that the Ongs do not raise new issues, and, based on

Bank and Trust Company vs. Cuenca,16 we ruled that a motion for

well-settled jurisprudence,12 the Ongs' present motion is therefore pro-

reconsideration is not pro-forma for the reason alone that it reiterates the

forma and did not prevent the Decision of this Court from attaining finality.

arguments earlier passed upon and rejected by the appellate court. We

explained there that a movant may raise the same arguments, if only to

On January 29, 2003, the Special Second Division of this Court held oral
arguments on the respective positions of the parties. On February 27,
2003, Dr. Willie Ong and the rest of the movants Ong filed their respective
memoranda.

On

February

28,

2003,

the

Tius

submitted

their

memorandum.

We grant the Ongs' motions for reconsideration.

convince this Court that its ruling was erroneous. Moreover, the rule (that a
motion is pro-forma if it only repeats the arguments in the previous
pleadings) will not apply if said arguments were not squarely passed upon
and answered in the decision sought to be reconsidered. In the case at bar,
no ruling was made on some of the petitioner Ongs' arguments. For
instance, no clear ruling was made on why an order distributing corporate
assets and property to the stockholders would not violate the statutory

This is not the first time that this Court has reversed itself on a motion for

preconditions for corporate dissolution or decrease of authorized capital

reconsideration. In Philippine Consumers Foundation, Inc. vs. National

stock. Thus, it would serve the ends of justice to entertain the subject

motion for reconsideration since some important issues therein, although

A subscription contract necessarily involves the corporation as one of the

mere repetitions, were not considered or clearly resolved by this Court.

contracting parties since the subject matter of the transaction is property

owned by the corporation its shares of stock. Thus, the subscription

Going now to the merits, we resolve whether the Tius could legally rescind
the Pre-Subscription Agreement. We rule that they could not.

FLADC was originally incorporated with an authorized capital stock of

500,000 shares with the Tius owning 450,200 shares representing the paidup capital. When the Tius invited the Ongs to invest in FLADC as
stockholders, an increase of the authorized capital stock became
necessary to give each group equal (50-50) shareholdings as agreed upon
in the Pre-Subscription Agreement. The authorized capital stock was thus
increased from 500,000 shares to 2,000,000 shares with a par value of
P100 each, with the Ongs subscribing to 1,000,000 shares and the Tius to
549,800 more shares in addition to their 450,200 shares to complete
1,000,000 shares. Thus, the subject matter of the contract was the
1,000,000 unissued shares of FLADC stock allocated to the Ongs. Since
these were unissued shares, the parties' Pre-Subscription Agreement was
in fact a subscription contract as defined under Section 60, Title VII of the
Corporation Code:

Any contract for the acquisition of unissued stock in an existing

corporation or a corporation still to be formed shall be deemed a
subscription within the meaning of this Title, notwithstanding the
fact that theparties refer to it as a purchase or some other
contract (Italics supplied).

contract (denominated by the parties as a Pre-Subscription Agreement)

whereby the Ongs invested P100 million for 1,000,000 shares of stock was,
from the viewpoint of the law, one between the Ongs and FLADC, not
between the Ongs and the Tius. Otherwise stated, the Tius did not contract
in their personal capacities with the Ongs since they were not selling any
of their own shares to them. It was FLADC that did.

Considering therefore that the real contracting parties to the subscription

agreement were FLADC and the Ongs alone, a civil case for rescission on
the ground of breach of contract filed by the Tius in their personal
capacities will not prosper. Assuming it had valid reasons to do so, only
FLADC (and certainly not the Tius) had the legal personality to file suit
rescinding the subscription agreement with the Ongs inasmuch as it was
the real party in interest therein. Article 1311 of the Civil Code provides
that "contracts take effect only between the parties, their assigns and
heirs" Therefore, a party who has not taken part in the transaction
cannot sue or be sued for performance or for cancellation thereof, unless
he shows that he has a real interest affected thereby. 17

In their February 28, 2003 Memorandum, the Tius claim that there are two
contracts embodied in the Pre-Subscription Agreement: a shareholder's
agreement between the Tius and the Ongs defining and governing their
relationship and a subscription contract between the Tius, the Ongs and

FLADC regarding the subscription of the parties to the corporation. They

fiction since there is no proof that the corporation is being used "as a cloak

point out that these two component parts form one whole agreement and

or cover for fraud or illegality, or to work injustice." 18

that their terms and conditions are intrinsically related and dependent on
each other. Thus, the breach of the shareholders' agreement, which was
allegedly the consideration for the subscription contract, was also a breach
of the latter.

The Tius also argue that, since the Ongs represent FLADC as its
management, breach by the Ongs is breach by FLADC. This must also fail
because such an argument disregards the separate juridical personality of
FLADC.

Aside from the fact that this is an entirely new angle never raised in any of
their previous pleadings until after the oral arguments on January 29, 2003,
we find this argument too strained for comfort. It is obviously intended to
remedy and cover up the Tius' lack of legal personality to rescind an
agreement in which they were personally not parties-in-interest. Assuming
arguendo that there were two "sub-agreements" embodied in the PreSubscription Agreement, this Court fails to see how the shareholders
agreement between the Ongs and Tius can, within the bounds of reason,
be interpreted as the consideration of the subscription contract between
FLADC and the Ongs. There was nothing in the Pre-Subscription Agreement
even remotely suggesting such alleged interdependence. Be that as it
may, however, the Tius are nevertheless not the proper parties to raise this
point because they were not parties to the subscription contract between
FLADC and the Ongs. Thus, they are not in a position to claim that the
shareholders agreement between them and the Ongs was what induced
FLADC and the Ongs to enter into the subscription contract. It is the Ongs
alone who can say that. Though FLADC was represented by the Tius in the
subscription contract, FLADC had a separate juridical personality from the
Tius. The case before us does not warrant piercing the veil of corporate

The Tius allege that they were prevented from participating in the
management of the corporation. There is evidence that the Ongs did
prevent the rightfully elected Treasurer, Cely Tiu, from exercising her
function as such. The records show that the President, Wilson Ong,
supervised the collection and receipt of rentals in the Masagana
Citimall;19 that he ordered the same to be deposited in the bank; 20 and that
he held on to the cash and properties of the corporation. 21 Section 25 of
the Corporation Code prohibits the President from acting concurrently as
Treasurer of the corporation. The rationale behind the provision is to ensure
the effective monitoring of each officer's separate functions.

However, although the Tius were adversely affected by the Ongs'

unwillingness to let them assume their positions, rescission due to breach
of

contract

is

definitely

the

wrong

remedy

for

their

personal

grievances. The Corporation Code, SEC rules and even the Rules of
Court

provide

for

appropriate

and

adequate

intra-corporate

remedies, other than rescission, in situations like this. Rescission is

certainly not one of them, specially if the party asking for it has no legal
personality to do so and the requirements of the law therefor have not

been met. A contrary doctrine will tread on extremely dangerous ground

earnings,25 and (3) dissolution and eventual liquidation of the corporation.

because it will allow just any stockholder, for just about any real or

Furthermore, the doctrine is articulated in Section 41 on the power of a

imagined offense, to demand rescission of his subscription and call for the

corporation to acquire its own shares 26 and in Section 122 on the

distribution of some part of the corporate assets to him without complying

prohibition against the distribution of corporate assets and property unless

with the requirements of the Corporation Code.

the stringent requirements therefor are complied with.27

Hence, the Tius, in their personal capacities, cannot seek the ultimate and

The distribution of corporate assets and property cannot be made to

extraordinary remedy of rescission of the subject agreement based on a

depend on the whims and caprices of the stockholders, officers or directors

less than substantial breach of subscription contract. Not only are they not

of the corporation, or even, for that matter, on the earnest desire of the

parties to the subscription contract between the Ongs and FLADC; they

court a quo "to prevent further squabbles and future litigations" unless the

also have other available and effective remedies under the law.

indispensable conditions and procedures for the protection of corporate

creditors are followed. Otherwise, the "corporate peace" laudably hoped

All this notwithstanding, granting but not conceding that the Tius possess
the legal standing to sue for rescission based on breach of contract, said
action will nevertheless still not prosper since rescission will violate the
Trust Fund Doctrine and the procedures for the valid distribution of assets

for by the court will remain nothing but a dream because this time, it will
be the creditors' turn to engage in "squabbles and litigations" should the
court order an unlawful distribution in blatant disregard of the Trust Fund
Doctrine.

and property under the Corporation Code.

In the instant case, the rescission of the Pre-Subscription Agreement will
The Trust Fund Doctrine, first enunciated by this Court in the 1923 case
of Philippine Trust Co. vs. Rivera,22provides that subscriptions to the capital
stock of a corporation constitute a fund to which the creditors have a right
to look for the satisfaction of their claims.

23

This doctrine is the underlying

principle in the procedure for the distribution of capital assets, embodied in

effectively result in the unauthorized distribution of the capital assets and

property of the corporation, thereby violating the Trust Fund Doctrine and
the Corporation Code, since rescission of a subscription agreement is not
one of the instances when distribution of capital assets and property of the
corporation is allowed.

the Corporation Code, which allows the distribution of corporate capital

only in three instances: (1) amendment of the Articles of Incorporation to

Contrary to the Tius' allegation, rescission will, in the final analysis, result

reduce the authorized capital stock, 24(2) purchase of redeemable shares by

in the premature liquidation of the corporation without the benefit of prior

the corporation, regardless of the existence of unrestricted retained

dissolution in accordance with Sections 117, 118, 119 and 120 of the

Corporation Code.28 The Tius maintain that rescinding the subscription

requirements for decrease of capital stock under Section 33 of the

contract is not synonymous to corporate liquidation because all rescission

Corporation Code. No majority vote of the board of directors was ever

will entail would be the simple restoration of the status quo ante and a

taken. Neither was there any stockholders meeting at which the approval

return to the two groups of their cash and property contributions. We wish

of stockholders owning at least two-thirds of the outstanding capital stock

it were that simple. Very noticeable is the fact that the Tius do not explain

was secured. There was no revised treasurer's affidavit and no proof that

why rescission in the instant case will not effectively result in liquidation.

said decrease will not prejudice the creditors' rights. On the contrary, all

The Tius merely refer in cavalier fashion to the end-result of rescission

their pleadings contained were alleged acts of violations by the Ongs to

(which incidentally is 100% favorable to them) but turn a blind eye to its

justify an order of rescission.

unfair, inequitable and disastrous effect on the corporation, its creditors

and the Ongs.

Furthermore, it is an improper judicial intrusion into the internal affairs of

the corporation to compel FLADC to file at the SEC a petition for the

In their Memorandum dated February 28, 2003, the Tius claim that

issuance of a certificate of decrease of stock. Decreasing a corporation's

rescission of the agreement will not result in an unauthorized liquidation of

authorized capital stock is an amendment of the Articles of Incorporation. It

the corporation because their case is actually a petition to decrease capital

is a decision that only the stockholders and the directors can make,

stock pursuant to Section 38 of the Corporation Code. Section 122 of the

considering that they are the contracting parties thereto. In this case, the

law provides that "(e)xcept by decrease of capital stock, no corporation

Tius are actually not just asking for a review of the legality and fairness of

shall distribute any of its assets or property except upon lawful dissolution

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

and after payment of all its debts and liabilities." The Tius claim that their

for FLADC. We decline to intervene and order corporate structural changes

case for rescission, being a petition to decrease capital stock, does not

not voluntarily agreed upon by its stockholders and directors.

violate the liquidation procedures under our laws. All that needs to be
done, according to them, is for this Court to order (1) FLADC to file with the
SEC a petition to issue a certificate of decrease of capital stock and (2) the
SEC to approve said decrease. This new argument has no merit.

The Tius' case for rescission cannot validly be deemed a petition to

decrease capital stock because such action never complied with the formal

Truth to tell, a judicial order to decrease capital stock without the assent of
FLADC's directors and stockholders is a violation of the "business judgment
rule" which states that:

xxx xxx xxx (C)ontracts intra vires entered into by the board of
directors are binding upon the corporation and courts will not
interfere

unless

such

contracts

are

so

unconscionable

and

oppressive as to amount to wanton destruction to the rights of the

Stripped to its barest essentials, the issue of rescission in this case is not

minority, as when plaintiffs aver that the defendants (members of

difficult to understand. If rescission is denied, will injustice be inflicted on

the board), have concluded a transaction among themselves as will

any of the parties? The answer is no because the financial interests of both

result in serious injury to the plaintiffs stockholders. 29

the Tius and the Ongs will remain intact and safe within FLADC. On the
other hand, if rescission is granted, will any of the parties suffer an

The reason behind the rule is aptly explained by Dean Cesar L. Villanueva,
an esteemed author in corporate law, thus:

Courts and other tribunals are wont to override the business

judgment of the board mainly because, courts are not in the
business of business, and the laissez faire rule or the free
enterprise system prevailing in our social and economic set-up
dictates that it is better for the State and its organs to leave
business to the businessmen; especially so, when courts are illequipped to make business decisions. More importantly, the social
contract in the corporate family to decide the course of the
corporate business has been vested in the board and not with
courts.30

Apparently, the Tius do not realize the illegal consequences of seeking

rescission and control of the corporation to the exclusion of the Ongs. Such
an act infringes on the law on reduction of capital stock. Ordering the
return and distribution of the Ongs' capital contribution without dissolving
the corporation or decreasing its authorized capital stock is not only
against the law but is also prejudicial to corporate creditors who enjoy
absolute priority of payment over and above any individual stockholder
thereof.

injustice? Definitely yes because the Ongs will find themselves out in the
streets with nothing but the money they had in 1994 while the Tius will not
only enjoy a windfall estimated to be anywhere from P450 million to P900
million31 but will also take over an extremely profitable business without
much effort at all.

Another very important point follows. The Court of Appeals and, later on,
our Decision dated February 1, 2002, stated that both groups were in pari
delicto, meaning, that both the Tius and the Ongs committed breaches of
the Pre-Subscription Agreement. This may be true to a certain extent but,
judging from the comparative gravity of the acts separately committed by
each group, we find that the Ongs' acts were relatively tame vis--vis those
committed by the Tius in not surrendering FLADC funds to the corporation
and diverting corporate income to their own MATTERCO account. The Ongs
were right in not issuing to the Tius the shares corresponding to the fourstory building and the 1,902.30 square-meter lot because no title for it
could be issued in FLADC's name, owing to the Tius' refusal to pay the
transfer taxes. And as far as the 151 square-meter lot was concerned, why
should FLADC issue additional shares to the Tius for property already
owned by the corporation and which, in the final analysis, was already
factored into the shareholdings of the Tius before the Ongs came in?

We are appalled by the attempt by the Tius, in the words of the Court of

rescission of the subject subscription agreement. The Ongs' shortcomings

Appeals, to "pull a fast one" on the Ongs because that was where the

were far from serious and certainly less than substantial; they were in fact

problem precisely started. It is clear that, when the finances of FLADC

remediable and correctable under the law. It would be totally against all

improved considerably after the equity infusion of the Ongs, the Tius

rules of justice, fairness and equity to deprive the Ongs of their interests on

started planning to take over the corporation again and exclude the Ongs

petty and tenuous grounds.

from it. It appears that the Tius' refusal to pay transfer taxes might not
have really been at all unintentional because, by failing to pay that
relatively small amount which they could easily afford, the Tius should
have expected that they were not going to be given the corresponding
shares. It was, from every angle, the perfect excuse for blackballing the
Ongs. In other words, the Tius created a problem then used that same
problem as their pretext for showing their partners the door. In the process,
they stood to be rewarded with a bonanza of anywhere between P450
million to P900 million in assets (from an investment of only P45 million
which was nearly foreclosed by PNB), to the extreme and irreparable
damage of the Ongs, FLADC and its creditors.

After all is said and done, no one can close his eyes to the fact that the
Masagana Citimall would not be what it has become today were it not for
the timely infusion of P190 million by the Ongs in 1994. There are no ifs or
buts about it.

Without the Ongs, the Tius would have lost everything they originally
invested in said mall. If only for this and the fact that this Resolution can
truly pave the way for both groups to enjoy the fruits of their investments
assuming good faith and honest intentions we cannot allow the

WHEREFORE, the motion for reconsideration, dated March 15, 2002, of

petitioners Ong Yong, Juanita Tan Ong, Wilson Ong, Anna Ong, William Ong,
Willie Ong and Julie Ong Alonzo and the motion for partial reconsideration,
dated March 15, 2002, of petitioner Willie Ong are hereby GRANTED. The
Petition for Confirmation of the Rescission of the Pre-Subscription
Agreement docketed as SEC Case No. 02-96-5269 is hereby DISMISSED for
lack of merit. The unilateral rescission by the Tius of the subject PreSubscription Agreement, dated August 15, 1994, is hereby declared as null
and void.

The motion for the issuance of a writ of execution, dated March 15, 2002,
of petitioners David S. Tiu, Cely Y. Tiu, Moly Yu Gow, Belen See Yu, D.
Terence Y. Tiu, John Yu and Lourdes C. Tiu is hereby DENIED for being moot.

Accordingly, the Decision of this Court, dated February 1, 2002, affirming

with modification the decision of the Court of Appeals, dated October 5,
1999, and the SEC en banc, dated September 11, 1998, is hereby
REVERSED.

3.

NATIONAL

TELECOMMUNICATIONS

2. the amount of P9.0 Million as permit fee

COMMISSION, petitioner, vs.HONORABLE COURT OF APPEALS and

under Section 40 (f) of the PSA for the

PHILIPPINE LONG DISTANCE TELEPHONE COMPANY, respondents.

approval of the protestant's increase of its

authorized capital stock from P2.7 Billion to

At bar is a Petition for Review on Certiorari under Rule 45 of the Revised

Rules of Court seeking to modify the October 30, 1996 Decision
January 27, 1997 Resolution

of the Court of Appeals

P4.5 Billion; and

and the

in CA-G.R. SP No.

3. the amounts of P12,261,600.00 and

34063.1wphi1.nt

P33,472,030.00

as

permit

fees

under

Section 40 (g) of the PSA in connection

The antecedent facts that matter can be culled as follows:

with the Commission's decisions in NTC

Cases Nos. 86-13 and 87-008 respectively,

Sometime in 1988, the National Telecommunications Commission (NTC)

approving

served on the Philippine Long Distance Telephone Company (PLDT) the

Cable
the

amount

supervision

and

of

P7,495,161.00

regulation

fee

as

1988, computed at P0.50 per P100.00 of

the Protestant's (PLDT) outstanding capital
stock as at December 31, 1987 which then
of

Serial

Preferred

Stock

amounting to P1,277,934,390.00 (Billion)

and

Common

Stock

of

P221,097,785

(Million) or a total of P1,499,032,175.00

(Billion).

equity

systems

and

X-5

Service

Improvement and Expansion Program.4

under

Section 40 (e) of the PSA for the said year,

consisted

Protestant's

participation in the Fiber Optic Interpacific

following assessment notices and demands for payment:

1.

the

In its two letter-protests

position

papers

respectively,

dated

the

dated February 23, 1988 and July 14, 1988, and

November

PLDT

8,

challenged

1990

and

March

the

aforesaid

12,

1991,

assessments,

theorizing inter alia that:

(a) The assessments were being made to raise revenues

and not as mere reimbursements for actual regulatory
expenses in violation of the doctrine in PLDT vs. PSC, 66
SCRA 341 [1975];

(b) The assessment under Section 40 (e) should only have

SO ORDERED.

been on the basis of the par values of private respondent's

On

outstanding capital stock;

October

22,

Reconsideration,
(c)

Petitioner

has

no

authority

to

compel

private

1993,

PLDT

interposed

which was denied by NTC in an Order

Motion

for

issued on May 3,

10

1994.

respondents payment of the assessed fees under Section

40 (f) for the increase of its authorized capital stock since
petitioner did not render any supervisory or regulatory
activity and incurred no expenses in relation thereto.

xxx xxx xxx

On May 12, 1994, PLDT appealed the aforesaid Decision to the Court of
Appeals, which came out with its questioned Decision of October 30, 1996,
modifying the disposition of NTC as follows:

WHEREFORE, the assailed decision and order of the

respondent Commission dated September 29, 1993 and

On September 29, 1993, the NTC rendered a Decision

in NTC Case No. 90-

223, denying the protest of PLDT and disposing thus:

May 03, 1994, respectively, in NTC Case No. 90-223 are

hereby

MODIFIED.

The

Commission

is

ordered

to

recompute its assessments and demands for payment from

FOR ALL THE FOREGOING, finding PLDT's protest to be

petitioner PLDT as follows.

without merit, the Commission has no alternative but to

uphold the law and DENIES the protest of PLDT. Unless

A. For annual supervision and regulation fees (SRF) under

otherwise restrained by a competent court of law, the

Section 40 (e) of the Public Service Act, as amended, they

Common Carrier Authorization Department (CCAD) is

should be computed at fifty centavos for each one hundred

hereby directed to update its assessments and collections

pesos or fraction thereof of the par value of the capital

on PLDT and all public telecommunications carriers for the

stock

payment of the fees in accordance with the provisions of

dividends, premiums or capital in excess of par.

subscribed

or

paid excluding

stock

Section 40 (e) (f) and (g) of the Revised NTC Schedule of

Fees and Charges.

B. For permit fees for the approval of petitioner's increase

of authorized capital stock under Section 40 (f) of the same

This decision takes effect immediately.

Act, they should be computed at fifty for each one hundred

pesos or fraction thereof, regardless of any regulatory

Succinct and clear is the ruling of this Court in the case of Philippine Long

service or expense incurred by respondent.

Distance Telephone Company vs.Public Service Commission, 66 SCRA 341,

that the basis for computation of the fee to be charged by NTC on PLDT, is

On November 20, 1996, NTC moved for partial reconsideration of the

abovementioned Decision, with respect to the basis of the assessment

" the capital stock subscribed or paid and not, alternatively, the property
and equipment."

under Section 40 (e), i.e., par value of the subscribed capital stock. It also
sought a partial reconsideration of the fee of fifty (P0.50) centavos for the

The law in point is clear and categorical. There is no room for construction.

issuance or increasing of the capital stock under Section 40 (f).

It simply calls for application. To repeat, the fee in question is based on the

11

capital stock subscribed or paid, nothing less nothing more.

With the denial of its motions for reconsideration by the Resolution of the
Court of Appeals dated January 27, 1997, petitioner found its way to this

It bears stressing that it is not the NTC that imposed such a fee. It is the

Court via the present Petition; posing as sole issue:

legislature itself. Since Congress has the power to exercise the State
inherent powers of Police Power, Eminent Domain and Taxation, the

WHETHER THE COURT OF APPEALS ERRED IN

HOLDING
SUPERVISION

THAT
AND

THE

COMPUTATION

REGULATION

FEES

OF

UNDER

SECTION 40 (F) OF THE PUBLIC SERVICE ACT

SHOULD BE BASED ON THE PAR VALUE OF THE
SUBSCRIBED CAPITAL STOCK.

Simply put, the submission of NTC is that the fee under Section 40 (e)
should be based on the market value of PLDT's outstanding capital stock
inclusive of stock dividends and premium, and not on the par value of
PLDT's capital stock excluding stock dividends and premium, as contended
by PLDT.

distinction between police power and the power to tax, which could be
significant if the exercising authority were mere political subdivisions (since
delegation by it to such political subdivisions of one power does not
necessarily include the other), would not be of any moment when, as in the
case under consideration, Congress itself exercises the power. All that is to
be done would be to apply and enforce the law when sufficiently definitive
and not constitutional infirm.

The term "capital" and other terms used to describe the capital structure of
a corporation are of universal acceptance, and their usages have long been
established in jurisprudence. Briefly, capital refers to the value of the
property or assets of a corporation. The capital subscribed is the total
amount of the capital that persons (subscribers or shareholders) have
agreed to take and pay for, which need not necessarily be, and can be

more than, the par value of the shares. In fine, it is the amount that the

From the pleadings on hand, it can be gleaned that the assessment for

corporation receives, inclusive of the premiums if any, in consideration of

supervision and regulation fee under Section 40(e) made by NTC for 1988,

the original issuance of the shares. In the case of stock dividends, it is the

computed at P0.50 per 100 of PLDT's outstanding capital stock as of

amount that the corporation transfers from its surplus profit account to its

December 31, 1987, amounted to P7,495,161.00. The same was based on

capital account. It is the same amount that can loosely be termed as the

the

"trust fund" of the corporation. The "Trust Fund" doctrine considers this

P221,097,785.00 of common stocks or a total of P1,499,032,175.00. The

subscribed capital as a trust fund for the payment of the debts of the

assessment was reported to include stock dividends, premium on issued

corporation, to which the creditors may look for satisfaction. Until the

common shares and premium on preferred shares converted into common

liquidation of the corporation, no part of the subscribed capital may be

stock.

returned or released to the stockholder (except in the redemption of

which PLDT received actual payments were not disclosed or extant in the

redeemable shares) without violating this principle. Thus, dividends must

records before the Court. The only other item available is the amount

never impair the subscribed capital; subscription commitments cannot be

assessed by petitioner from PLDT, which had been based on market value

condoned or remitted; nor can the corporation buy its own shares using the

of the outstanding capital stock on given dates.14

subscribed capital as the consideration therefor.

amount

13

of

P1,277,934,390.00

of

serial

preferred

stocks

and

The actual capital paid or the amount of capital stock paid and for

12

All things studiedly considered, and mindful of the aforesaid ruling of this
In the same way that the Court in PLDT vs. PSC has rejected the "value of

Court in the case of Philippine Long Distance Telephone Company

the property and equipment" as being the proper basis for the fee imposed

vs. Public Service Commission, it should be reiterated that the proper basis

by Section 40(e) of the Public Service Act, as amended by Republic Act No.

for the computation of subject fee under Section 40(e) of the Public Service

3792, so also must the Court disallow the idea of computing the fee on

Act, as amended by Republic Act No. 3792, is "the capital stock subscribed

"the par value of [PLDT's] capital stock subscribed or paid excluding stock

or paid and not, alternatively, the property and equipment.1wphi1.nt

dividends, premiums, or capital in excess of par." Neither, however, is the

assessment made by the National Telecommunications Commission on the
basis of the market value of the subscribed or paid-in capital stock
acceptable since it is itself a deviation from the explicit language of the
law.

WHEREFORE, the decision of the Court of Appeals, dated October 30, 1996,
and its Resolution, dated January 27, 1997, in CA G.R. SP No. 34063, as
well as the decision of the National Telecommunication Commission, dated
September 29, 1993, and Order, dated May 3, 1994, in NTC case No. 90223,

are

hereby

SET

ASIDE

and

the

National

Telecommunication

Commission is hereby ordered to make a re-computation of the fee to be

corporation, partnership or single proprietorship of the capital invested, or

imposed on Philippine Long Distance Telephone Company on the basis of

of the property and equipment, whichever is higher.

the latter's capital stock subscribed or paid and strictly in accordance with
Under Section 40 (e) of the PSA, the NTC sent SRF assessments to

the foregoing disquisition and conclusion.

petitioner Philippine Long Distance Telephone Company (PLDT) starting

4.

PHILIPPINE

LONG

DISTANCE

TELEPHONE

sometime in 1988. The SRF assessments were based on the market value

TELECOMMUNICATIONS

of the outstanding capital stock, including stock dividends, of PLDT. PLDT

his

NTC

protested the assessments contending that the SRF ought to be based on

Commissioner, and EDGARDO CABARRIOS, in his capacity as Chief,

the par value of its outstanding capital stock. Its protest was denied by the

CCAD, respondents.

NTC and likewise, its motion for reconsideration.

Before us is a Petition for Review on Certiorari 1 under Rule 45 of the Rules

PLDT appealed before the CA. The CA modified the disposition of the NTC

of Court. It assails the February 12, 2001 Decision 2 of the Court of Appeals

by holding that the SRF should be assessed at par value of the outstanding

(CA) in CA-G.R. SP No. 61033, which dismissed petitioners special civil

capital stock of PLDT, excluding stock dividends.

COMPANY, petitioner, vs.NATIONAL

COMMISSION,

JOSEPH

A.SANTIAGO,

in

capacity

as

action for certiorari and prohibition, and the March 21, 2002 Resolution 3 of
the CA denying petitioners motion for reconsideration. The petition raises
the sole issue on whether the appellate court erred in holding that the
assessments of the National Telecommunications Commission (NTC) were
contrary to our Decision in G.R. No. 127937 entitled NTC v. Honorable
Court of Appeals.

With the denial of the NTCs partial reconsideration of the CA Decision, the
issue of the basis for the assessment of the SRF was brought before this
Court under G.R. No. 127937 wherein we ruled that the SRF should be
based neither on the par value nor the market value of the outstanding
capital stock but on the value of the stocks subscribed or paid including
the premiums paid therefor, that is, the amount that the corporation

This case pertains to Section 40 (e) 5 of the Public Service Act6 (PSA), as

receives, inclusive of the premiums if any, in consideration of the original

amended on March 15, 1984, pursuant to Batas Pambansa Blg. 325, which

issuance of the shares. We added that in the case of stock dividends, it is

authorized the NTC to collect from public telecommunications companies

the amount that the corporation transfers from its surplus profit account to

Supervision and Regulation Fees (SRF) of PhP 0.50 for every PhP 100 or a

its capital account, that is, the amount the stock dividends represent is

fraction of the capital and stock subscribed or paid for of a stock

equivalent to the value paid for its original issuance.

PLDT wanted our July 28, 1999 Decision in G.R. No. 127937 clarified. It

assessments from 1988 which were questioned by PLDT in G.R. No. 127937

posited that the SRF should be based on the par value in consonance with

for being based on the market value of its outstanding capital stock.

our holding in Philippine Long Distance Telephone Company v. Public

Service Commission,7 and that the premiums on issued shares should not
be included in the valuation of the outstanding capital stock. Through our
November 15, 1999 Resolution in G.R. No. 127937, we elucidated that our
July 28, 1999 decision was not in conflict with our ruling in Philippine Long
Distance Telephone Company since we never enunciated in the said case
that the phrase "capital stock subscribed or paid" must be determined at
par value. We reiterated that the term "capital stock subscribed or paid" is
the amount that the corporation receives, inclusive of the premiums, if
any, in consideration of the original issuance of the shares.

PLDT wrote a letter protesting the assailed February 10, 2000 assessment
which was not acted upon by the NTC. Instead, the NTC sent a second
assailed assessment on September 5, 2000. Thus, in an attempt to clarify
and resolve this issue, PLDT filed a Motion for Clarification of Enforcement
of the Decision dated 28 July 1999 in G.R. No. 127937 which this Court
simply noted for the case had already become final and executory.

Thus, on October 2, 2000, PLDT instituted the special civil action for
certiorari and prohibition docketed as CA-G.R. SP No. 61033 10 before the
CA. To maintain the status quo and to defer the enforcement of the

Thereafter, to comply with our disposition in G.R. No. 127937, for the
reassessment of the SRF based on the value of the stocks subscribed or
paid including the premiums paid for the stocks, if any, the NTC sent the
assailed assessments of February 10, 20008 and September 5, 20009 to
PLDT which included the value of stock dividends issued by PLDT. The

assailed assessments and subsequent assessments, on October 3, 2000,

the CA issued a Temporary Restraining Order. On December 4, 2000, a writ
of preliminary injunction was granted.

Subsequently, on February 12, 2001, the CA rendered the assailed Decision

dismissing the petition. The dispositive portion reads:

assailed assessments were based on the schedule of capital stock

submitted by PLDT.

WHEREFORE, the petition is DISMISSED for lack of merit, and the

writ of preliminary injunction heretofore issued is DISSOLVED. 11

PLDT now contends that our disposition in G.R. No. 127937 excluded stock
dividends from the SRF coverage, while the NTC asserts the contrary. Also,

PLDTs motion for reconsideration was denied by the CAs Special Division

PLDT questions the assessments for violating our disposition in G.R. No.

of Five on March 21, 2002.

127937

since

these

assessments

were

identical

to

the

previous
Hence, the instant petition for review, raising the core issue:

THE COURT OF APPEALS ERRED IN HOLDING THAT THE DISPUTED

usages have long been established in jurisprudence. Briefly, capital

NTC ASSESSMENTS WERE NOT CONTRARY TO THE PURISIMA

refers to the value of the property or assets of a corporation.

DECISION.12

The capital subscribed is the total amount of the capital

that persons (subscribers or shareholders) have agreed to

The petition is bereft of merit.

PLDT argues that in our Decision in G.R. No. 127937 we have excluded
from the coverage of the SRF the capital stocks issued as stock dividends.
Petitioner argues that G.R. No. 127937 clearly delineates between capital
subscribed and stock dividends to the effect that the latter are not included
in the concept of capital stock subscribed because subscribers or
shareholders do not pay for their subscriptions as no amount is received by
the corporation in consideration of such issuances since these are effected
as mere book entries, that is, the transfer from the retained earnings
account to the capital or stock account. To bolster its position, PLDT
repeatedly used the phrase "actual payments" received by a corporation
as a consideration for issuances of shares which do not apply to stock
dividends.

take and pay for, which need not necessarily by, and can be
more than, the par value of the shares. In fine, it is the amount
that the corporation receives, inclusive of the premiums if
any, in consideration of the original issuance of the
shares. In the case of stock dividends, it is the amount that
the corporation transfers from its surplus profit account to
its capital account. It is the same amount that can be loosely
termed as the "trust fund" of the corporation. The "Trust Fund"
doctrine considers this subscribed capital as a trust fund for the
payment of the debts of the corporation, to which the creditors
may look for satisfaction. Until the liquidation of the corporation,
no part of the subscribed capital may be returned or released to
the stockholder (except in the redemption of redeemable shares)
without violating this principle. Thus, dividends must never impair

We are not persuaded.

the subscribed capital; subscription commitments cannot be

condoned or remitted; nor can the corporation buy its own shares

Crucial in point is our disquisition in G.R. No. 127937 entitled National

Telecommunications Commission v. Honorable Court of Appeals, which we

using

the

subscribed

capital

as

the

considerations

therefor.13 (Emphasis supplied.)

quote:
Two concepts can be gleaned from the above. First, what constitutes
The term "capital" and other terms used to describe the capital
structure of a corporation are of universal acceptance and their

capital stock that is subject to the SRF. Second, such capital stock is

equated to the "trust fund" of a corporation held in trust as security for

Thus, it cannot be said that no consideration is involved in the issuance of

satisfaction to creditors in case of corporate liquidation.

stock dividends. In fact, the declaration of stock dividends is akin to a

forced purchase of stocks. By declaring stock dividends, a corporation

The first asks if stock dividends are part of the outstanding capital stocks
of a corporation insofar as it is subject to the SRF. They are. The first issue
we have to tackle is, are all the stock dividends that are part of the
outstanding capital stock of PLDT subject to the SRF? Yes, they are.

PLDTs contention, that stock dividends are not similarly situated as the
subscribed capital stock because the subscribers or shareholders do not
pay for their issuances as no amount was received by the corporation in
consideration of such issuances since these are effected as a mere book
entry, is erroneous.

Dividends, regardless of the form these are declared, that is, cash,
property or stocks, are valued at the amount of the declared dividend
taken from the unrestricted retained earnings of a corporation. Thus, the
value of the declaration in the case of a stock dividend is the actual value
of the original issuance of said stocks. In G.R. No. 127937 we said that "in
the case of stock dividends, it is the amount that the corporation transfers
from its surplus profit account to its capital account" or "it is the amount
that the corporation receives in consideration of the original issuance of
the shares." It is "the distribution of current or accumulated earnings to the
shareholders of a corporation pro rata based on the number of shares
owned."14 Such distribution in whatever form is valued at the declared
amount or monetary equivalent.

ploughs back a portion or its entire unrestricted retained earnings either to

its working capital or for capital asset acquisition or investments. It is
simplistic to say that the corporation did not receive any actual payment
for these. When the dividend is distributed, it ceases to be a property of
the corporation as the entire or portion of its unrestricted retained earnings
is distributed pro rata to corporate shareholders.

When stock dividends are distributed, the amount declared ceases to

belong to the corporation but is distributed among the shareholders.
Consequently, the unrestricted retained earnings of the corporation are
diminished by the amount of the declared dividend while the stockholders
equity is increased. Furthermore, the actual payment is the cash value
from the unrestricted retained earnings that each shareholder foregoes for
additional stocks/shares which he would otherwise receive as required by
the Corporation Code to be given to the stockholders subject to the
availability

and

conditioned

on

certain

level

of

retained

earnings.15 Elsewise put, where the unrestricted retained earnings of a

corporation are more than 100% of the paid-in capital stock, the corporate
Board

of

Directors

is

mandated

to

declare

dividends

which

the

shareholders will receive in cash unless otherwise declared as property or

stock dividends, which in the latter case the stockholders are forced to
forego cash in lieu of property or stocks.

In essence, therefore, the stockholders by receiving stock dividends are

stock, yet it assessed it to PLDT. However, a closer look at the assailed

forced to exchange the monetary value of their dividend for capital stock,

assessments of February 13, 2000 and September 5, 2000 would show that

and the monetary value they forego is considered the actual payment for

the NTC based its assessment on the schedule of capital stock submitted

the original issuance of the stocks given as dividends. Therefore, stock

by PLDT. PLDT did not dispute this; it only disputed the level of assessment

dividends acquired by shareholders for the monetary value they forego are

which was the same as before.

under the coverage of the SRF and the basis for the latter is such monetary
value as declared by the board of directors.

Now, where should the NTC base its assessment? It is incumbent upon
PLDT to furnish the NTC the actual payment made on the subscription of its

On the second issue, do the assailed NTC assessments violate the ruling in

capital stock in order for the NTC to assess the proper SRF. Logically, the

G.R. No. 127937? PLDT contends that these did since the assessments are

NTC would base its SRF assessment of PLDT from PLDT data.

identical to the previous assessments from 1988 which were questioned by

PLDT in the seminal G.R. No. 127937 for being based on the market value
of its outstanding capital stock.

PLDT should not bewail that the assailed assessments are substantially the
same assessments it protested in G.R. No. 127937. After all, it had not
shown the actual figures of the amount of premiums and subscriptions it

A cursory review of the assessments made by the NTC prior to our July 28,

had received for the original issuances of its capital stock. While indeed it

1999 Decision in G.R. No. 127937 and the assailed assessments of

submitted a table of the comparative assessments made by the NTC to this

February 10, 2000 and September 5, 2000 does show that the

Court, PLDT has not furnished the NTC nor this Court the correct figures of

assessments are substantially identical. In our July 28, 1999 Decision in

the actual payments made for its capital stock.

G.R. No. 127937, we noted, and similarly true in the petition before us,
that, "The actual capital paid or the amount of capital stock paid and for
which PLDT received actual payments were not disclosed or extant in the
records before the Court."16

We are not unaware that in accounting practice, the journal entries for
transactions are recorded in historical value or cost. Thus, the purchase of
properties or assets is recorded at acquisition cost. The same is true with
liabilities and equity transactions where the actual loan and the amount

Hence, as before, we cannot factually determine whether the assailed

paid for the subscription are recorded at the actual payment, including the

assessments substantially followed our Decision in G.R. No. 127937. It is

premiums paid for the subscription of capital stock.

apparent that the assessments are identical and that the NTC in the earlier
case asserted that the SRF be based on the market value of the capital

Moreover, it is common practice that the values of the accounts recorded

Anent stock dividends, the value transferred from the unrestricted retained

at historical value or cost are not increased or decreased due to market

earnings of PLDT to the capital stock account pursuant to the issuance of

forces. In the case of properties, the appreciation in values is generally not

stock dividends is the proper basis for the assessment of the SRF, which

recorded as income nor the increase in the corresponding asset because

the NTC correctly assessed.

the increase or decrease is not yet realized until the property is actually
sold. The same is true with the capital account. The market value may be
much higher than the actual payment of the par value and premium of
capital stock. Still, the books of account will not reflect such increase; and

WHEREFORE, we DENY the petition for lack of merit, and AFFIRM the
February 12, 2001 Decision and March 21, 2002 Resolution in CA-G.R. SP
No. 61033. Costs against petitioner.

vice-versa, any decrease of the value of stocks is likewise not reflected in

the books of account. Thus, given the general practice that book entries of
the premiums and subscriptions for capital stock are the actual value for

5. CECILIA CASTILLO, OSCAR DEL ROSARIO, ARTURO S. FLORES,

the original issuance of stocks, then the NTC was correct to follow the

XERXES NAVARRO, MARIA ANTONIA TEMPLO and MEDICAL CENTER

schedule of capital stocks submitted by PLDT.

PARAAQUE,
vs.ANGELES

Moreover, the "Trust Fund" doctrine, the second concept this Court
elucidated in G.R. No. 127937 and quoted above, bolsters the correctness
of the assessments made by the NTC. As a fund in trust for creditors in
case of liquidation, the actual value of the subscriptions and the value of
stock dividends distributed may not be decreased or increased by the

ROSARIO,

INC., petitioners,
BALINGHASAY,

ROMEO

RENATO

FUNTILA,

BERNABE,

TERESITA

ALODIA

GAYANILO,

DEL

RUSTICO

JIMENEZ, ARACELI** JO, ESMERALDA MEDINA, CECILIA MONTALBAN,

VIRGILIO

OBLEPIAS,

CARMENCITA

PARRENO,

CESAR

REYES,

REYNALDO SAVET, SERAPIO TACCAD, VICENTE VALDEZ, SALVACION

VILLAMORA, and HUMBERTO VILLAREAL, respondents.

fluctuating market value of the stocks. Thus, absent any showing by PLDT
of the actual payment it received for the original issuance of its capital
stock, the assessments made by the NTC, based on the schedule of
outstanding capital stock of PLDT recorded at historical value payments
made, is deemed correct.

For review on certiorari is the Partial Judgment1 dated November 26,

2001 in Civil Case No. 01-0140, of the Regional Trial Court (RTC) of
Paraaque City, Branch 258. The trial court declared the February 9, 2001,
election of the board of directors of the Medical Center Paraaque, Inc.
(MCPI) valid. The Partial Judgment dismissed petitioners first cause of
action, specifically, to annul said election for depriving petitioners their
voting rights and to be voted on as members of the board.
The facts, as culled from records, are as follows:

Petitioners and the respondents are stockholders of MCPI, with the

former holding Class "B" shares and the latter owning Class "A"
shares.
MCPI is a domestic corporation with offices at Dr. A. Santos Avenue, Sucat,
Paraaque City. It was organized sometime in September 1977. At the time
of its incorporation, Act No. 1459, the old Corporation Law was still in force
and effect. Article VII of MCPIs original Articles of Incorporation, as
approved by the Securities and Exchange Commission (SEC) on October
26, 1977, reads as follows:
SEVENTH. That the authorized capital stock of the corporation is
TWO MILLION (P2,000,000.00) PESOS, Philippine Currency, divided
into TWO THOUSAND (2,000) SHARES at a par value of P100 each
share, whereby the ONE THOUSAND SHARES issued to, and
subscribed by, the incorporating stockholders shall be classified as
Class A shares while the other ONE THOUSAND unissued shares
shall be considered as Class B shares. Only holders of Class A
shares can have the right to vote and the right to be elected as
directors or as corporate officers.2 (Stress supplied)
On July 31, 1981, Article VII of the Articles of Incorporation of MCPI was
amended, to read thus:
SEVENTH. That the authorized capital stock of the corporation is
FIVE MILLION (P5,000,000.00) PESOS, divided as follows:
CLASS
"A"
"B"

NO. OF SHARES
1,000
4,000

PAR VALUE
P1,000.00
P1,000.00

Only holders of Class A shares have the right to vote and the right
to be elected as directors or as corporate officers.3 (Emphasis
supplied)
The foregoing amendment was approved by the SEC on June 7, 1983.
While the amendment granted the right to vote and to be elected as
directors or corporate officers only to holders of Class "A" shares, holders
of Class "B" stocks were granted the same rights and privileges as holders
of Class "A" stocks with respect to the payment of dividends.
On September 9, 1992, Article VII was again amended to provide as
follows:
SEVENTH: That the authorized capital stock of the corporation is
THIRTY TWO MILLION PESOS (P32,000,000.00) divided as follows:

Except when otherwise provided by law, only holders of Class "A"

shares have the right to vote and the right to be elected as
directors or as corporate officers4 (Stress and underscoring
supplied).
The SEC approved the foregoing amendment on September 22, 1993.
On February 9, 2001, the shareholders of MCPI held their annual
stockholders meeting and election for directors. During the course of the
proceedings, respondent Rustico Jimenez, citing Article VII, as amended,
and notwithstanding MCPIs history, declared over the objections of herein
petitioners, that no Class "B" shareholder was qualified to run or be voted
upon as a director. In the past, MCPI had seen holders of Class "B" shares
voted for and serve as members of the corporate board and some Class
"B" share owners were in fact nominated for election as board members.
Nonetheless, Jimenez went on to announce that the candidates holding
Class "A" shares were the winners of all seats in the corporate board. The
petitioners protested, claiming that Article VII was null and void for
depriving them, as Class "B" shareholders, of their right to vote and to be
voted upon, in violation of the Corporation Code (Batas Pambansa Blg. 68),
as amended.
On March 22, 2001, after their protest was given short shrift, herein
petitioners filed a Complaint for Injunction, Accounting and Damages,
docketed as Civil Case No. CV-01-0140 before the RTC of Paraaque City,
Branch 258. Said complaint was founded on two (2) principal causes of
action, namely:
a. Annulment of the declaration of directors of the MCPI made
during the February 9, 2001 Annual Stockholders Meeting, and for
the conduct of an election whereat all stockholders, irrespective of
the classification of the shares they hold, should be afforded their
right to vote and be voted for; and
b. Stockholders derivative suit challenging the validity of a
contract entered into by the Board of Directors of MCPI for the
operation of the ultrasound unit.5
Subsequently, the complaint was amended to implead MCPI as partyplaintiff for purposes only of the second cause of action.
Before the trial court, the herein petitioners alleged that they were
deprived of their right to vote and to be voted on as directors at the annual
stockholders meeting held on February 9, 2001, because respondents had
erroneously relied on Article VII of the Articles of Incorporation of MCPI,
despite Article VII being contrary to the Corporation Code, thus null and
void. Additionally, respondents were in estoppel, because in the past,
petitioners were allowed to vote and to be elected as members of the

board. They further claimed that the privilege granted to the Class "A"
shareholders was more in the nature of a right granted to founders shares.
In their Answer, the respondents averred that the provisions of Article VII
clearly and categorically state that only holders of Class "A" shares have
the exclusive right to vote and be elected as directors and officers of the
corporation. They denied that the exclusivity was intended only as a
privilege granted to founders shares, as no such proviso is found in the
Articles of Incorporation. The respondents further claimed that the
exclusivity of the right granted to Class "A" holders cannot be defeated or
impaired by any subsequent legislative enactment, e.g.the New
Corporation Code, as the Articles of Incorporation is an intra-corporate
contract between the corporation and its members; between the
corporation and its stockholders; and among the stockholders. They submit
that to allow Class "B" shareholders to vote and be elected as directors
would constitute a violation of MCPIs franchise or charter as granted by
the State.
At the pre-trial, the trial court ruled that a partial judgment could be
rendered on the first cause of action and required the parties to submit
their respective position papers or memoranda.
On November 26, 2001, the RTC rendered the Partial Judgment, the
dispositive portion of which reads:
WHEREFORE, viewed in the light of the foregoing, the election held
on February 9, 2001 is VALID as the holders of CLASS "B" shares
are not entitled to vote and be voted for and this case based on
the First Cause of Action is DISMISSED.
SO ORDERED.6
In finding for the respondents, the trial court ruled that corporations had
the power to classify their shares of stocks, such as "voting and nonvoting" shares, conformably with Section 67 of the Corporation Code of the
Philippines. It pointed out that Article VII of both the original and amended
Articles of Incorporation clearly provided that only Class "A" shareholders
could vote and be voted for to the exclusion of Class "B" shareholders, the
exception being in instances provided by law, such as those enumerated in
Section 6, paragraph 6 of the Corporation Code. The RTC found merit in the
respondents theory that the Articles of Incorporation, which defines the
rights and limitations of all its shareholders, is a contract between MCPI
and its shareholders. It is thus the law between the parties and should be
strictly enforced as to them. It brushed aside the petitioners claim that the
Class "A" shareholders were in estoppel, as the election of Class "B"
shareholders to the corporate board may be deemed as a mere act of
benevolence on the part of the officers. Finally, the court brushed aside the
"founders shares" theory of the petitioners for lack of factual basis.

Hence, this petition submitting the sole legal issue of whether or not the
Court a quo, in rendering the Partial Judgment dated November 26, 2001,
has decided a question of substance in a way not in accord with law and
jurisprudence considering that:
1. Under the Corporation Code, the exclusive voting right and right
to be voted granted by the Articles of Incorporation of the MCPI to
Class A shareholders is null and void, or already extinguished;
2. Hence, the declaration of directors made during the February 9,
2001 Annual Stockholders Meeting on the basis of the purported
exclusive voting rights is null and void for having been done
without the benefit of an election and in violation of the rights of
plaintiffs and Class B shareholders; and
3. Perforce, another election should be conducted to elect the
directors of the MCPI, this time affording the holders of Class B
shares full voting right and the right to be voted.8
The issue for our resolution is whether or not holders of Class "B" shares of
the MCPI may be deprived of the right to vote and be voted for as directors
in MCPI.
Before us, petitioners assert that Article VII of the Articles of Incorporation
of MCPI, which denied them voting rights, is null and void for being
contrary to Section 6 of the Corporation Code. They point out that Section
6 prohibits the deprivation of voting rights except as to preferred and
redeemable shares only. Hence, under the present law on corporations, all
shareholders, regardless of classification, other than holders of preferred or
redeemable shares, are entitled to vote and to be elected as corporate
directors or officers. Since the Class "B" shareholders are not classified as
holders of either preferred or redeemable shares, then it necessarily
follows that they are entitled to vote and to be voted for as directors or
officers.
The respondents, in turn, maintain that the grant of exclusive voting rights
to Class "A" shares is clearly provided in the Articles of Incorporation and is
in accord with Section 59 of the Corporation Law (Act No. 1459), which was
the prevailing law when MCPI was incorporated in 1977. They likewise
submit that as the Articles of Incorporation of MCPI is in the nature of a
contract between the corporation and its shareholders and Section 6 of the
Corporation Code could not retroactively apply to it without violating the
non-impairment clause10 of the Constitution.
We find merit in the petition.
When Article VII of the Articles of Incorporation of MCPI was amended in
1992, the phrase "except when otherwise provided by law" was inserted in

the provision governing the grant of voting powers to Class "A"

shareholders. This particular amendment is relevant for it speaks of a law
providing for exceptions to the exclusive grant of voting rights to Class "A"
stockholders. Which law was the amendment referring to? The
determination of which law to apply is necessary. There are two laws being
cited and relied upon by the parties in this case. In this instance, the law in
force at the time of the 1992 amendment was the Corporation Code (B.P.
Blg. 68), not the Corporation Law (Act No. 1459), which had been repealed
by then.
We find and so hold that the law referred to in the amendment to Article VII
refers to the Corporation Code and no other law. At the time of the
incorporation of MCPI in 1977, the right of a corporation to classify its
shares of stock was sanctioned by Section 5 of Act No. 1459. The law
repealing Act No. 1459, B.P. Blg. 68, retained the same grant of right of
classification of stock shares to corporations, but with a significant change.
Under Section 6 of B.P. Blg. 68, the requirements and restrictions on voting
rights were explicitly provided for, such that "no share may be deprived of
voting rights except those classified and issued as "preferred" or
"redeemable" shares, unless otherwise provided in this Code" and that
"there shall always be a class or series of shares which have complete
voting rights." Section 6 of the Corporation Code being deemed written
into Article VII of the Articles of Incorporation of MCPI, it necessarily follows
that unless Class "B" shares of MCPI stocks are clearly categorized to be
"preferred" or "redeemable" shares, the holders of said Class "B" shares
may not be deprived of their voting rights. Note that there is nothing in the
Articles of Incorporation nor an iota of evidence on record to show that
Class "B" shares were categorized as either "preferred" or "redeemable"
shares. The only possible conclusion is that Class "B" shares fall under
neither category and thus, under the law, are allowed to exercise voting
rights.

Code expressly prohibits the deprivation of voting rights, except as to

"preferred" and "redeemable" shares, then Article VII of the Articles of
Incorporation cannot be construed as granting exclusive voting rights to
Class "A" shareholders, to the prejudice of Class "B" shareholders, without
running afoul of the letter and spirit of the Corporation Code.
The respondents then take the tack that the phrase "except when
otherwise provided by law" found in the amended Articles is only a
handwritten insertion and could have been inserted by anybody and that
no board resolution was ever passed authorizing or approving said
amendment.
Said contention is not for this Court to pass upon, involving as it does a
factual question, which is not proper in this petition. In an
appeal via certiorari, only questions of law may be reviewed.13 Besides,
respondents did not adduce persuasive evidence, but only bare
allegations, to support their suspicion. The presumption that in the
amendment process, the ordinary course of business has been
followed14 and that official duty has been regularly performed 15 on the part
of the SEC, applies in this case.
WHEREFORE, the petition is GRANTED. The Partial Judgment dated
November 26, 2001 of the Regional Trial Court of Paraaque City, Branch
258, in Civil Case No. 01-0140 is REVERSED AND SET ASIDE. No
pronouncement as to costs.
6.

Neither do we find merit in respondents position that Section 6 of the

Corporation Code cannot apply to MCPI without running afoul of the nonimpairment clause of the Bill of Rights. Section 14812 of the Corporation
Code expressly provides that it shall apply to corporations in existence at
the time of the effectivity of the Code. Hence, the non-impairment clause is
inapplicable in this instance. When Article VII of the Articles of
Incorporation of MCPI were amended in 1992, the board of directors and
stockholders must have been aware of Section 6 of the Corporation Code
and intended that Article VII be construed in harmony with the Code, which
was then already in force and effect. Since Section 6 of the Corporation

OF

WILSON

P.

GAMBOA,* Petitioners, vs.FINANCE

SECRETARYMARGARITO B. TEVES, FINANCE UNDERSECRETARYJOHN

P.

One of the rights of a stockholder is the right to participate in the control

and management of the corporation that is exercised through his vote. The
right to vote is a right inherent in and incidental to the ownership of
corporate stock, and as such is a property right. The stockholder cannot be
deprived of the right to vote his stock nor may the right be essentially
impaired, either by the legislature or by the corporation, without his
consent, through amending the charter, or the by-laws.11

HEIRS

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.

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 ),3and ( 4) the
Securities and Exchange Commission (SEC)4 (collectively, movants ).
The Office of the Solicitor General (OSG) initially filed a motion for
reconsideration on behalfofthe SEC,5 assailing the 28 June 2011 Decision.
However, it subsequently filed a Consolidated Comment on behalf of the
State,6declaring expressly that it agrees with the Court's definition of the
term "capital" in Section 11, Article XII of the Constitution. During the Oral
Arguments on 26 June 2012, the OSG reiterated its position consistent with
the Court's 28 June 2011 Decision.
We deny the motions for reconsideration.
I.
Far-reaching implications of the legal issue justify
treatment of petition for declaratory relief as one for mandamus.
As we emphatically stated in the 28 June 2011 Decision, the interpretation
of the term "capital" in Section 11, Article XII of the Constitution has farreaching 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 Pangilinans narrow view, the serious economic consequences
resulting in the interpretation of the term "capital" in Section 11, Article XII
of the Constitution undoubtedly demand an immediate adjudication of this
issue. Simply put, the far-reaching implications of this issue justify
the treatment of the petition as one for mandamus.7
In Luzon Stevedoring Corp. v. Anti-Dummy Board,8 the Court deemed it
wise and expedient to resolve the case although the petition for
declaratory relief could be outrightly dismissed for being procedurally
defective. There, appellant admittedly had already committed a breach of
the Public Service Act in relation to the Anti-Dummy Law since it had been
employing non- American aliens long before the decision in a prior similar

case. However, the main issue in Luzon Stevedoring was of transcendental

importance, involving the exercise or enjoyment of rights, franchises,
privileges, properties and businesses which only Filipinos and qualified
corporations could exercise or enjoy under the Constitution and the
statutes. Moreover, the same issue could be raised by appellant in an
appropriate action. Thus, in Luzon Stevedoring the Court deemed it
necessary to finally dispose of the case for the guidance of all concerned,
despite the apparent procedural flaw in the petition.
The circumstances surrounding the present case, such as the supposed
procedural defect of the petition and the pivotal legal issue involved,
resemble those in Luzon Stevedoring. Consequently, in the interest of
substantial justice and faithful adherence to the Constitution, we opted to
resolve this case for the guidance of the public and all concerned parties.
II.
No change of any long-standing rule;
thus, no redefinition of the term "capital."
Movants contend that the term "capital" in Section 11, Article XII of the
Constitution has long been settled and defined to refer to the total
outstanding shares of stock, whether voting or non-voting. In fact, movants
claim that the SEC, which is the administrative agency tasked to enforce
the 60-40 ownership requirement in favor of Filipino citizens in the
Constitution and various statutes, has consistently adopted this particular
definition in its numerous opinions. Movants point out that with the 28 June
2011 Decision, the Court in effect introduced a "new" definition or
"midstream redefinition"9 of the term "capital" in Section 11, Article XII of
the Constitution.
This is egregious error.
For more than 75 years since the 1935 Constitution, the Court
has not interpreted or defined the term "capital" found in various
economic provisions of the 1935, 1973 and 1987 Constitutions. There has
never been a judicial precedent interpreting the term "capital" in the 1935,
1973 and 1987 Constitutions, until now. Hence, it is patently wrong and
utterly baseless to claim that the Court in defining the term "capital" in its
28 June 2011 Decision modified, reversed, or set aside the purported longstanding 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 nonvoting 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 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."

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 beunconstitutional 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:

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, MLRCs investment in 60% of BFDCs outstanding
capital stock entitled to vote shall be deemed as of Philippine
nationality, thereby qualifying BFDC to own private land.

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 stockswap transaction in question may not be constitutionally upheld.
While it may be ordinary corporate practice to classify corporate shares
into common voting shares and preferred non-voting shares, any
arrangement which attempts to defeat the constitutional purpose should
be eschewed. Thus, the resultant equity arrangement which would
place ownership of 60%11 of the common (voting) shares in the
Japanese group, while retaining 60% of the total percentage of
common and preferred shares in Filipino hands would amount to
circumvention of the principle of control by Philippine
stockholders that is implicit in the 60% Philippine nationality
requirement in the Constitution. (Emphasis supplied)
In short, Minister Mendoza categorically rejected the theory that the
term "capital" in Section 9, Article XIV of the 1973 Constitution includes
"both preferred and common stocks" treated as the same class of shares
regardless of differences in voting rights and privileges. Minister Mendoza
stressed that the 60-40 ownership requirement in favor of Filipino citizens

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 Courts
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 exceptits review or
appellate authority and its power to adopt, alter and supplement any
rule or regulation.

The Commission may review upon its own initiative or upon the petition of
any interested party any action of any department or office, individual
Commissioner, or staff member of the Commission.
SEC. 5. Powers and Functions of the Commission.- 5.1. The Commission
shall act with transparency and shall have the powers and functions
provided by this Code, Presidential Decree No. 902-A, the Corporation
Code, the Investment Houses Law, the Financing Company Act and other
existing laws. Pursuant thereto the Commission shall have, among others,
the following powers and functions:
xxxx
(g) Prepare, approve, amend or repeal rules, regulations and
orders, and issue opinions and provide guidance on and supervise
compliance with such rules, regulations and orders;
x x x x (Emphasis supplied)
Thus, the act of the individual Commissioners or legal officers of the SEC in
issuing opinions that have the effect of SEC rules or regulations is ultra
vires. Under Sections 4.6 and 5.1(g) of the Code, only the SEC en banc can
"issue opinions" that have the force and effect of rules or regulations.
Section 4.6 of the Code bars the SEC en banc from delegating to any
individual Commissioner or staff the power to adopt rules or regulations. In
short, any opinion of individual Commissioners or SEC legal
officers does not constitute a rule or regulation of the SEC.
The SEC admits during the Oral Arguments that only the SEC en banc, and
not any of its individual commissioners or legal staff, is empowered to
issue opinions which have the same binding effect as SEC rules and
regulations, thus:
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
corporations 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 6040 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:

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 andPhilippine 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:

Mere legal title is insufficient to meet the 60 percent Filipinoowned

"capital" required in the Constitution. Full beneficial ownership of 60
percent of the outstanding capital stock, coupled with 60 percent
of the voting rights, is required. The legal and beneficial ownership of
60 percent of the outstanding capital stock must rest in the hands of
Filipino nationals in accordance with the constitutional mandate.
Otherwise, the corporation is "considered as non-Philippine national[s]."
(Emphasis supplied)

(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.

Both the Voting Control Test and the Beneficial Ownership Test must be
applied to determine whether a corporation is a "Philippine national."

(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 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.

The Courts 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.

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

III.
Filipinization of Public Utilities
The Preamble of the 1987 Constitution, as the prologue of the supreme law
of the land, embodies the ideals that the Constitution intends to
achieve.22 The Preamble reads:
We, the sovereign Filipino people, imploring the aid of Almighty God, in
order to build a just and humane society, and establish a Government that
shall embody our ideals and aspirations, promote the common
good, conserve and develop our patrimony, and secure to ourselves
and our posterity, the blessings of independence and democracy under the

rule of law and a regime of truth, justice, freedom, love, equality, and
peace, do ordain and promulgate this Constitution. (Emphasis supplied)
Consistent with these ideals, Section 19, Article II of the 1987 Constitution
declares as State policy the development of a national economy
"effectively controlled" by Filipinos:
Section 19. The State shall develop a self-reliant and independent national
economy effectively controlled by Filipinos.
Fortifying the State policy of a Filipino-controlled economy, the Constitution
decrees:
Section 10. The Congress shall, upon recommendation of the economic and
planning agency, when the national interest dictates, reserve to citizens of
the Philippines or to corporations or associations at least sixty per
centum of whose capital is owned by such citizens, or such higher
percentage as Congress may prescribe, certain areas of investments. The
Congress shall enact measures that will encourage the formation and
operation of enterprises whose capital is wholly owned by Filipinos.
In the grant of rights, privileges, and concessions covering the national
economy and patrimony, the State shall give preference to qualified
Filipinos.
The State shall regulate and exercise authority over foreign investments
within its national jurisdiction and in accordance with its national goals and
priorities.23
Under Section 10, Article XII of the 1987 Constitution, Congress may
"reserve to citizens of the Philippines or to corporations or associations at
least sixty per centum of whose capital is owned by such citizens, or such
higher percentage as Congress may prescribe, certain areas of
investments." Thus, in numerous laws Congress has reserved certain areas
of investments to Filipino citizens or to corporations at least sixty percent
of the "capital" of which is owned by Filipino citizens. Some of these laws
are: (1) Regulation of Award of Government Contracts or R.A. No. 5183; (2)
Philippine Inventors Incentives Act or R.A. No. 3850; (3) Magna Carta for
Micro, Small and Medium Enterprises or R.A. No. 6977; (4) Philippine
Overseas Shipping Development Act or R.A. No. 7471; (5) Domestic
Shipping Development Act of 2004 or R.A. No. 9295; (6) Philippine
Technology Transfer Act of 2009 or R.A. No. 10055; and (7) Ship Mortgage
Decree or P.D. No. 1521.
With respect to public utilities, the 1987 Constitution specifically ordains:
Section 11. No franchise, certificate, or any other form of
authorization for the operation of a public utility shall be granted

except to citizens of the Philippines or to corporations or

associations organized under the laws of the Philippines, at least
sixty per centum of whose capital is owned by such citizens; nor
shall such franchise, certificate, or authorization be exclusive in character
or for a longer period than fifty years. Neither shall any such franchise or
right be granted except under the condition that it shall be subject to
amendment, alteration, or repeal by the Congress when the common good
so requires. The State shall encourage equity participation in public utilities
by the general public. The participation of foreign investors in the
governing body of any public utility enterprise shall be limited to their
proportionate share in its capital, and all the executive and managing
officers of such corporation or association must be citizens of the
Philippines. (Emphasis supplied)
This provision, which mandates the Filipinization of public utilities, requires
that any form of authorization for the operation of public utilities shall be
granted only to "citizens of the Philippines or to corporations or
associations organized under the laws of the Philippines at least sixty per
centum of whose capital is owned by such citizens." "The provision is
[an express] recognition of the sensitive and vital position of
public utilities both in the national economy and for national
security."24
The 1987 Constitution reserves the ownership and operation of public
utilities exclusively to (1) Filipino citizens, or (2) corporations or
associations at least 60 percent of whose "capital" is owned by Filipino
citizens. Hence, in the case of individuals, only Filipino citizens can validly
own and operate a public utility. In the case of corporations or associations,
at least 60 percent of their "capital" must be owned by Filipino citizens. In
other words, under Section 11, Article XII of the 1987 Constitution,
to own and operate a public utility a corporations 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."27Thus, a "non-Philippine national" cannot own and operate
a reserved economic activity like a public utility. This means, of course,
that only a "Philippine national" can own and operate a public utility.
In turn, the definition of a "Philippine national" under Article 15 of the
Omnibus Investments Code of 1987 was a reiteration of the meaning of
such term as provided in Article 14 of the Omnibus Investments Code of
1981,28 to wit:
Article 14. "Philippine national" shall mean a citizen of the Philippines; or a
domestic partnership or association wholly owned by citizens of the
Philippines; or a corporation organized under the laws of the
Philippines of which at least sixty per cent (60%) of the capital
stock outstanding and entitled to vote is owned and held by
citizens of the Philippines; or a trustee of funds for pension or other
employee retirement or separation benefits, where the trustee is a
Philippine national and at least sixty per cent (60%) of the fund will accrue
to the benefit of Philippine nationals: Provided, That where a corporation
and its non-Filipino stockholders own stock in a registered enterprise, at
least sixty per cent (60%) of the capital stock outstanding and entitled to
vote of both corporations must be owned and held by the citizens of the
Philippines and at least sixty per cent (60%) of the members of the Board
of Directors of both corporations must be citizens of the Philippines in order
that the corporation shall be considered a Philippine national. (Boldfacing,
italicization and underscoring supplied)
Under Article 69(3) of the Omnibus Investments Code of 1981, "no
corporation x x x which is not a Philippine national x x x shall do business
x x x in the Philippines x x x without first securing a written certificate from
the Board of Investments to the effect that such business or economic
activity x x x would not conflict with the Constitution or laws of the
Philippines."29 Thus, a "non-Philippine national" cannot own and operate a
reserved economic activity like a public utility. Again, this means that only
a "Philippine national" can own and operate a public utility.
Prior to the Omnibus Investments Code of 1981, Republic Act No. 518630 or
the Investment Incentives Act, which took effect on 16 September 1967,
contained a similar definition of a "Philippine national," to wit:
(f) "Philippine National" shall mean a citizen of the Philippines; or a
partnership or association wholly owned by citizens of the Philippines; or a
corporation organized under the laws of the Philippines of which
at least sixty per cent of the capital stock outstanding and
entitled to vote is owned and held by citizens of the Philippines; or
a trustee of funds for pension or other employee retirement or separation
benefits, where the trustee is a Philippine National and at least sixty per

cent of the fund will accrue to the benefit of Philippine Nationals: Provided,
That where a corporation and its non-Filipino stockholders own stock in a
registered enterprise, at least sixty per cent of the capital stock
outstanding and entitled to vote of both corporations must be owned and
held by the citizens of the Philippines and at least sixty per cent of the
members of the Board of Directors of both corporations must be citizens of
the Philippines in order that the corporation shall be considered a
Philippine National. (Boldfacing, italicization and underscoring supplied)
Under Section 3 of Republic Act No. 5455 or the Foreign Business
Regulations Act, which took effect on 30 September 1968, if the
investment in a domestic enterprise by non-Philippine nationals exceeds
30% of its outstanding capital stock, such enterprise must obtain prior
approval from the Board of Investments before accepting such investment.
Such approval shall not be granted if the investment "would conflict with
existing constitutional provisions and laws regulating the degree of
required ownership by Philippine nationals in the enterprise."31 A "nonPhilippine 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 adomestic corporation "at least sixty
percent (60%) of the capital stock outstanding and entitled to
vote"is owned by Filipino citizens. A domestic corporation is a "Philippine
national" only if at least 60% of its voting stock is owned by Filipino
citizens. This definition of a "Philippine national" is crucial in the present
case because the FIA reiterates and clarifies Section 11, Article XII of the
1987 Constitution, which limits the ownership and operation of public
utilities to Filipino citizens or to corporations or associations at least 60%
Filipino-owned.
The FIA is the basic law governing foreign investments in the Philippines,
irrespective of the nature of business and area of investment. The FIA
spells out the procedures by which non-Philippine nationals can invest in
the Philippines. Among the key features of this law is the concept of a
negative list or the Foreign Investments Negative List. 32 Section 8 of the
law states:
SEC. 8. List of Investment Areas Reserved to Philippine
Nationals [Foreign Investment Negative List]. - The Foreign Investment
Negative List shall have two 2 component lists: A and B:
a. List A shall enumerate the areas of activities reserved to
Philippine nationals by mandate of the Constitution and specific
laws.
b. List B shall contain the areas of activities and enterprises regulated
pursuant to law:

1. which are defense-related activities, requiring prior clearance and

authorization from the Department of National Defense [DND] to engage in
such activity, such as the manufacture, repair, storage and/or distribution
of firearms, ammunition, lethal weapons, military ordinance, explosives,
pyrotechnics and similar materials; unless such manufacturing or repair
activity is specifically authorized, with a substantial export component, to a
non-Philippine national by the Secretary of National Defense; or
2. which have implications on public health and morals, such as the
manufacture and distribution of dangerous drugs; all forms of gambling;
nightclubs, bars, beer houses, dance halls, sauna and steam bathhouses
and massage clinics. (Boldfacing, underscoring and italicization supplied)
Section 8 of the FIA enumerates the investment areas "reserved to
Philippine nationals." Foreign Investment Negative List A consists of
"areas of activities reserved to Philippine nationals by mandate of
the Constitution and specific laws," where foreign equity
participation in any enterprise shall be limited to the maximum
percentage expressly prescribed by the Constitution and other
specific laws. In short, to own and operate a public utility in the
Philippines one must be a "Philippine national" as defined in the
FIA. The FIA is abundant notice to foreign investors to what extent
they can invest in public utilities in the Philippines.
To repeat, among the areas of investment covered by the Foreign
Investment Negative List A is the ownership and operation of public
utilities, which the Constitution expressly reserves to Filipino citizens and to
corporations at least 60% owned by Filipino citizens. In other words,
Negative List A of the FIA reserves the ownership and operation of
public utilities only to "Philippine nationals," defined in Section
3(a) of the FIA as "(1) a citizen of the Philippines; x x x or (3) a
corporation organized under the laws of the Philippines of which
at least sixty percent (60%) of the capital stock outstanding and
entitled to vote is owned and held by citizens of the Philippines; or
(4) a corporation organized abroad and registered as doing business in the
Philippines under the Corporation Code of which one hundred percent
(100%) of the capital stock outstanding and entitled to vote is wholly
owned by Filipinos or a trustee of funds for pension or other employee
retirement or separation benefits, where the trustee is a Philippine national
and at least sixty percent (60%) of the fund will accrue to the benefit of
Philippine nationals."
Clearly, from the effectivity of the Investment Incentives Act of 1967 to the
adoption of the Omnibus Investments Code of 1981, to the enactment of
the Omnibus Investments Code of 1987, and to the passage of the present
Foreign Investments Act of 1991, or for more than four decades, the
statutory definition of the term "Philippine national" has been
uniform and consistent: it means a Filipino citizen, or a domestic
corporation at least 60% of the voting stock is owned by Filipinos.
Likewise, these same statutes have uniformly and consistently

required that only "Philippine nationals" could own and operate

public utilities in the Philippines. The following exchange during the
Oral Arguments is revealing:
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:
The SEC legal officers occasional but blatant disregard of the definition of
the term "Philippine national" in the FIA signifies their lack of integrity and
competence in resolving issues on the 60-40 ownership requirement in
favor of Filipino citizens in Section 11, Article XII of the Constitution.
The PSE President argues that the term "Philippine national" defined in the
FIA should be limited and interpreted to refer to corporations seeking to
avail of tax and fiscal incentives under investment incentives laws and
cannot be equated with the term "capital" in Section 11, Article XII of the
1987 Constitution. Pangilinan similarly contends that the FIA and its
predecessor statutes do not apply to "companies which have not registered
and obtained special incentives under the schemes established by those
laws."

Both are desperately grasping at straws. The FIA does not grant tax or
fiscal incentives to any enterprise. Tax and fiscal incentives to investments
are granted separately under the Omnibus Investments Code of 1987, not
under the FIA. In fact, the FIA expressly repealed Articles 44 to 56 of Book II
of the Omnibus Investments Code of 1987, which articles previously
regulated foreign investments in nationalized or partially nationalized
industries.
The FIA is the applicable law regulating foreign investments in nationalized
or partially nationalized industries. There is nothing in the FIA, or even in
the Omnibus Investments Code of 1987 or its predecessor statutes, that
states, expressly or impliedly, that the FIA or its predecessor statutes do
not apply to enterprises not availing of tax and fiscal incentives under the
Code. The FIA and its predecessor statutes apply to investments in all
domestic enterprises, whether or not such enterprises enjoy tax and fiscal
incentives under the Omnibus Investments Code of 1987 or its predecessor
statutes. The reason is quite obvious mere non-availment of tax
and fiscal incentives by a non-Philippine national cannot exempt it
from Section 11, Article XII of the Constitution regulating foreign
investments in public utilities. In fact, the Board of
Investments Primer on Investment Policies in the
Philippines,34 which is given out to foreign investors, provides:
PART III. FOREIGN INVESTMENTS WITHOUT INCENTIVES
Investors who do not seek incentives and/or whose chosen activities do not
qualify for incentives, (i.e., the activity is not listed in the IPP, and they are
not exporting at least 70% of their production) may go ahead and make
the investments without seeking incentives. They only have to be
guided by the Foreign Investments Negative List (FINL).
The FINL clearly defines investment areas requiring at least 60% Filipino
ownership. All other areas outside of this list are fully open to foreign
investors. (Emphasis supplied)
V.
Right to elect directors, coupled with beneficial ownership,
translates to effective control.
The 28 June 2011 Decision declares that the 60 percent Filipino ownership
required by the Constitution to engage in certain economic activities
applies not only to voting control of the corporation, but also to the
beneficial ownership of the corporation. To repeat, we held:
Mere legal title is insufficient to meet the 60 percent Filipino-owned
"capital" required in the Constitution. Full beneficial ownership of 60
percent of the outstanding capital stock, coupled with 60 percent
of the voting rights, is required. The legal and beneficial ownership of
60 percent of the outstanding capital stock must rest in the hands of

Filipino nationals in accordance with the constitutional mandate.

Otherwise, the corporation is "considered as non-Philippine national[s]."
(Emphasis supplied)
This is consistent with Section 3 of the FIA which provides that where 100%
of the capital stock is held by "a trustee of funds for pension or other
employee retirement or separation benefits," the trustee is a Philippine
national if "at least sixty percent (60%) of the fund will accrue to the
benefit of Philippine nationals." Likewise, Section 1(b) of the Implementing
Rules of the FIA provides that "for stocks to be deemed owned and held by
Philippine citizens or Philippine nationals, mere legal title is not enough to
meet the required Filipino equity. Full beneficial ownership of the
stocks, coupled with appropriate voting rights, is essential."
Since the constitutional requirement of at least 60 percent Filipino
ownership applies not only to voting control of the corporation but also to
the beneficial ownership of the corporation, it is therefore imperative that
such requirement apply uniformly and across the board to all classes of
shares, regardless of nomenclature and category, comprising the capital of
a corporation. Under the Corporation Code, capital stock35 consists of all
classes of shares issued to stockholders, that is, common shares as well as
preferred shares, which may have different rights, privileges or restrictions
as stated in the articles of incorporation.36
The Corporation Code allows denial of the right to vote to preferred and
redeemable shares, but disallows denial of the right to vote in specific
corporate matters. Thus, common shares have the right to vote in the
election of directors, while preferred shares may be denied such right.
Nonetheless, preferred shares, even if denied the right to vote in the
election of directors, are entitled to vote on the following corporate
matters: (1) amendment of articles of incorporation; (2) increase and
decrease of capital stock; (3) incurring, creating or increasing bonded
indebtedness; (4) sale, lease, mortgage or other disposition of substantially
all corporate assets; (5) investment of funds in another business or
corporation or for a purpose other than the primary purpose for which the
corporation was organized; (6) adoption, amendment and repeal of bylaws; (7) merger and consolidation; and (8) dissolution of corporation. 37
Since a specific class of shares may have rights and privileges or
restrictions different from the rest of the shares in a corporation, the 60-40
ownership requirement in favor of Filipino citizens in Section 11, Article XII
of the Constitution must apply not only to shares with voting rights but also
to shares without voting rights. Preferred shares, denied the right to vote in
the election of directors, are anyway still entitled to vote on the eight
specific corporate matters mentioned above. Thus, if a corporation,
engaged in a partially nationalized industry, issues a mixture of
common and preferred non-voting shares, at least 60 percent of
the common shares and at least 60 percent of the preferred nonvoting 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 Pangilinans 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 Opinion 38 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:
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 Courts 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 Courts declaration that the Constitution reserved
exclusively to Philippine nationals the ownership and operation of public
utilities consistent with the States 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 selfreliant and independent national economyeffectively 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 (P 1.00) per
share. Under the broad definition of the term "capital," such corporation
would be considered compliant with the 40 percent constitutional limit on
foreign equity of public utilities since the overwhelming majority, or more
than 99.999 percent, of the total outstanding capital stock is Filipino
owned. This is obviously absurd.
In the example given, only the foreigners holding the common shares have
voting rights in the election of directors, even if they hold only 100 shares.
The foreigners, with a minuscule equity of less than 0.001 percent,
exercise control over the public utility. On the other hand, the Filipinos,
holding more than 99.999 percent of the equity, cannot vote in the election
of directors and hence, have no control over the public utility. This starkly
circumvents the intent of the framers of the Constitution, as well as the
clear language of the Constitution, to place the control of public utilities in
the hands of Filipinos. x x x
Further, even if foreigners who own more than forty percent of the voting
shares elect an all-Filipino board of directors, this situation does not
guarantee Filipino control and does not in any way cure the violation of the
Constitution. The independence of the Filipino board members so elected
by such foreign shareholders is highly doubtful. As the OSG pointed out,
quoting Justice George Sutherlands words in Humphreys 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 latters will." Allowing foreign shareholders to
elect a controlling majority of the board, even if all the directors are
Filipinos, grossly circumvents the letter and intent of the Constitution and
defeats the very purpose of our nationalization laws.

VII.
Last sentence of Section 11, Article XII of the Constitution
The last sentence of Section 11, Article XII of the 1987 Constitution reads:
The participation of foreign investors in the governing body of any public
utility enterprise shall be limited to their proportionate share in its capital,
and all the executive and managing officers of such corporation or
association must be citizens of the Philippines.
During the Oral Arguments, the OSG emphasized that there was never a
question on the intent of the framers of the Constitution to limit foreign
ownership, and assure majority Filipino ownership and control of public
utilities. The OSG argued, "while the delegates disagreed as to the
percentage threshold to adopt, x x x the records show they clearly
understood that Filipino control of the public utility corporation can only be
and is obtained only through the election of a majority of the members of
the board."
Indeed, the only point of contention during the deliberations of the
Constitutional Commission on 23 August 1986 was the extent of majority
Filipino control of public utilities. This is evident from the following
exchange:
THE PRESIDENT. Commissioner Jamir is recognized.
MR. JAMIR. Madam President, my proposed amendment on lines 20 and 21
is to delete the phrase "two thirds of whose voting stock or controlling
interest," and instead substitute the words "SIXTY PERCENT OF WHOSE
CAPITAL" so that the sentence will read: "No franchise, certificate, or any
other form of authorization for the operation of a public utility shall be
granted except to citizens of the Philippines or to corporations or
associations organized under the laws of the Philippines at least SIXTY
PERCENT OF WHOSE CAPITAL is owned by such citizens."
xxxx
THE PRESIDENT: Will Commissioner Jamir first explain?
MR. JAMIR. Yes, in this Article on National Economy and Patrimony, there
were two previous sections in which we fixed the Filipino equity to 60
percent as against 40 percent for foreigners. It is only in this Section 15
with respect to public utilities that the committee proposal was increased
to two-thirds. I think it would be better to harmonize this provision by
providing that even in the case of public utilities, the minimum equity for
Filipino citizens should be 60 percent.
MR. ROMULO. Madam President.

THE PRESIDENT. Commissioner Romulo is recognized.

MR. ROMULO. My reason for supporting the amendment is based on the
discussions I have had with representatives of the Filipino majority owners
of the international record carriers, and the subsequent memoranda they
submitted to me. x x x
Their second point is that under the Corporation Code, the management
and control of a corporation is vested in the board of directors, not in the
officers but in the board of directors. The officers are only agents of the
board. And they believe that with 60 percent of the equity, the Filipino
majority stockholders undeniably control the board. Only on important
corporate acts can the 40-percent foreign equity exercise a veto, x x x.
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.

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
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 PLDTs 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 Courts jurisdiction, but well within the SECs 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.

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,

IX.
PLDT is not an indispensable party;
SEC is impleaded in this case.
In his petition, Gamboa prays, among others:

xxxx
5. For the Honorable Court to issue a declaratory relief that ownership of
common or voting shares is the sole basis in determining foreign equity in
a public utility and that any other government rulings, opinions, and
regulations inconsistent with this declaratory relief be declared
unconstitutional and a violation of the intent and spirit of the 1987
Constitution;
6. For the Honorable Court to declare null and void all sales of common
stocks to foreigners in excess of 40 percent of the total subscribed
common shareholdings; and
7. For the Honorable Court to direct the Securities and Exchange
Commission and Philippine Stock Exchange to require PLDT to make a
public disclosure of all of its foreign shareholdings and their actual
and real beneficial owners.
Other relief(s) just and equitable are likewise prayed for. (Emphasis
supplied)
As can be gleaned from his prayer, Gamboa clearly asks this Court to
compel the SEC to perform its statutory duty to investigate whether "the
required percentage of ownership of the capital stock to be owned by
citizens of the Philippines has been complied with [by PLDT] as required by
x x x the Constitution."51 Such plea clearly negates SECs 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 SECs 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. InSalvador, 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 partyin-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 BOCs 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 Courts decision and defer to the Courts 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 Courts jurisdiction. It is clear, therefore, that there exists no
legal impediment against the proper and immediate
implementation of the Courts directive to the SEC.
PLDT is an indispensable party only insofar as the other issues, particularly
the factual questions, are concerned. In other words, PLDT must be
impleaded in order to fully resolve the issues on (1) whether the sale of
111,415 PTIC shares to First Pacific violates the constitutional limit on
foreign ownership of PLDT; (2) whether the sale of common shares to
foreigners exceeded the 40 percent limit on foreign equity in PLDT; and (3)
whether the total percentage of the PLDT common shares with voting
rights complies with the 60-40 ownership requirement in favor of Filipino
citizens under the Constitution for the ownership and operation of PLDT.
These issues indisputably call for an examination of the parties respective
evidence, and thus are clearly within the jurisdiction of the SEC. In short,
PLDT must be impleaded, and must necessarily be heard, in the
proceedings before the SEC where the factual issues will be thoroughly
threshed out and resolved.
Notably, the foregoing issues were left untouched by the Court.
The Court did not rule on the factual issues raised by Gamboa, except the
single and purely legal issue on the definition of the term "capital" in
Section 11, Article XII of the Constitution. The Court confined the resolution
of the instant case to this threshold legal issue in deference to the factfinding 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
Courts 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 Courts
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 PLDTs property or denial of
PLDTs right to due process, contrary to Pangilinan and Nazarenos
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 P 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. Villegass argument that foreign investments in
telecommunication companies like PLDT are badly needed to save our
ailing economy contradicts his own theory that the solution is for
government to take over these companies. Dr. Villegas is barking up the
wrong tree since State ownership of public utilities and foreign investments
in such industries are diametrically opposed concepts, which cannot
possibly be reconciled.
In any event, the experience of our neighboring countries cannot be used
as argument to decide the present case differently for two reasons. First,
the governments of our neighboring countries have, as claimed by Dr.
Villegas, taken over ownership and control of their strategic public utilities
like the telecommunications industry. Second, our Constitution has specific
provisions limiting foreign ownership in public utilities which the Court is
sworn to uphold regardless of the experience of our neighboring countries.
In our jurisdiction, the Constitution expressly reserves the ownership and
operation of public utilities to Filipino citizens, or corporations or
associations at least 60 percent of whose capital belongs to Filipinos.
Following Dr. Villegass 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 PLDTs
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 FIAs 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 toshares 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.

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 toeffective 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.
7. NARRA NICKEL MINING AND DEVELOPMENT CORP., TESORO
MINING

AND

DEVELOPMENT,

INC.,

and

McARTHUR

MINING,

INC., Petitioners,
vs.REDMONT CONSOLIDATED MINES CORP., Respondent.

Filipinos have only to remind themselves of how this country was exploited
under the Parity Amendment, which gave Americans the same rights as
Filipinos in the exploitation of natural resources, and in the ownership and
control of public utilities, in the Philippines. To do this the 1935
Constitution, which contained the same 60 percent Filipino ownership and
control requirement as the present 1987 Constitution, had to be amended
to give Americans parity rights with Filipinos. There was bitter opposition to
the Parity Amendment62 and many Filipinos eagerly awaited its expiration.

Before the Court is the Motion for Reconsideration of its April 21, 2014
Decision, which denied the Petition for Review on Certiorari under Rule 45
jointly interposed by petitioners Narra Nickel and Mining Development
Corp. (Narra), Tesoro Mining and Development, Inc. (Tesoro), and McArthur
Mining Inc. (McArthur), and affirmed the October 1, 2010 Decision and

February 15, 2011 Resolution of the Court of Appeals (CA) in CA-G.R. SP

No. 109703.

provision, the violation is capable of repetition yet evading review, and the
present case involves a matter of public concern.

Very simply, the challenged Decision sustained the appellate court's ruling
that petitioners, being foreign corporations, are not entitled to Mineral
Production Sharing Agreements (MPSAs). In reaching its conclusion, this
Court upheld with approval the appellate court's finding that there was
doubt as to petitioners' nationality since a 100% Canadian-owned firm,
MBMI Resources, Inc. (MBMI), effectively owns 60% of the common stocks
of the petitioners by owning equity interest of petitioners' other majority
corporate shareholders.

Indeed, as the Court clarified in its Decision, the conversion of the MPSA
application to one for FTAAs and the issuance by the OP of an FTAA in
petitioners favor are irrelevant. The OP itself has already cancelled and
revoked the FTAA thusissued to petitioners. Petitioners curiously have
omitted this critical factin their motion for reconsideration. Furthermore,
the supposed sale by MBMI of its shares in the petition ercorporations and
in their holding companies is not only a question of fact that this Court is
without authority toverify, it also does not negate any violation of the
Constitutional provisions previously committed before any such sale.

In a strongly worded Motion for Reconsideration dated June 5, 2014,

petitioners-movants argued, in the main, that the Court's Decision was not
in accord with law and logic. In its September 2, 2014 Comment, on the
other hand, respondent Redmont Consolidated Mines Corp. (Redmont)
countered that petitioners motion for reconsideration is nothing but a
rehash of their arguments and should, thus, be denied outright for being
pro-forma. Petitioners have interposed on September 30, 2014 their Reply
to the respondents Comment.
After considering the parties positions, as articulated in their respective
submissions, We resolve to deny the motion for reconsideration.
I.
The case has not been rendered moot and academic
Petitioners have first off criticized the Court for resolving in its Decision a
substantive issue, which,as argued, has supposedly been rendered moot
by the fact that petitioners applications for MPSAs had already been
converted to an application for a Financial Technical Assistance Agreement
(FTAA), as petitioners have in fact been granted an FTAA. Further, the
nationality issue, so petitioners presently claim, had been rendered
moribund by the fact that MBMI had already divested itself and sold all its
shareholdings in the petitioners, as well as in their corporate stockholders,
to a Filipino corporationDMCI Mining Corporation (DMCI).
As a counterpoint, respondent Redmontavers that the present case has not
been rendered moot by the supposed issuance of an FTAA in petitioners
favor as this FTAA was subsequently revoked by the Office of the President
(OP) and is currently a subject of a petition pending in the Courts First
Division. Redmont likewise contends that the supposed sale of MBMIs
interest in the petitioners and in their "holding companies" is a question of
fact that is outside the Courts province to verify in a Rule 45 certiorari
proceedings. In any case, assuming that the controversy has been
rendered moot, Redmont claims that its resolution on the merits is still
justified by the fact that petitioners have violated a constitutional

We can assume for the nonce that the controversy had indeed been
rendered moot by these two events. Asthis Court has time and again
declared, the "moot and academic" principle is not a magical formula that
automatically dissuades courts in resolving a case. 1 The Court may still
take cognizance of an otherwise moot and academic case, if it finds that
(a) there is a grave violation of the Constitution;(b) the situation is of
exceptional character and paramount public interest is involved; (c) the
constitutional issue raised requires formulation of controlling principles to
guide the bench, the bar, and the public; and (d) the case is capable of
repetition yet evading review.2 The Courts April 21, 2014 Decision
explained in some detail that all four (4) of the foregoing circumstances are
present in the case. If only to stress a point, we will do so again. First,
allowing the issuance of MPSAs to applicants that are owned and controlled
by a 100% foreign-owned corporation, albeit through an intricate web of
corporate layering involving alleged Filipino corporations, is tantamount to
permitting a blatant violation of Section 2, Article XII of the Constitution.
The Court simply cannot allow this breach and inhibit itself from resolving
the controversy on the facile pretext that the case had already been
rendered academic.
Second, the elaborate corporate layering resorted to by petitioners so as to
make it appear that there is compliance with the minimum Filipino
ownership in the Constitution is deftly exceptional in character. More
importantly, the case is of paramount public interest, as the corporate
layering employed by petitioners was evidently designed to circumvent the
constitutional caveat allowing only Filipino citizens and corporations 60%owned by Filipino citizens to explore, develop, and use the countrys
natural resources.
Third, the facts of the case, involving as they do a web of corporate
layering intended to go around the Filipino ownership requirement in the
Constitution and pertinent laws, requirethe establishment of a definite
principle that will ensure that the Constitutional provision reserving to
Filipino citizens or "corporations at least sixty per centum of whose capital
is owned by such citizens" be effectively enforced and complied with. The
case, therefore, is an opportunity to establish a controlling principle that
will "guide the bench, the bar, and the public."

Lastly, the petitioners actions during the lifetime and existence of the
instant case that gave rise to the present controversy are capable of
repetition yet evading review because, as shown by petitioners actions,
foreign corporations can easily utilize dummy Filipino corporations through
various schemes and stratagems to skirt the constitutional prohibition
against foreign mining in Philippine soil.
II.
The application of the Grandfather Ruleis justified by the circumstances of
the case to determine the nationality of petitioners.
To petitioners, the Courts application of the Grandfather Rule to determine
their nationality is erroneous and allegedly without basis in the
Constitution, the Foreign Investments Act of 1991 (FIA), the Philippine
Mining Act of 1995,3 and the Rules issued by the Securities and Exchange
Commission (SEC). These laws and rules supposedly espouse the
application of the Control Test in verifying the Philippine nationality of
corporate entities for purposes of determining compliance withSec. 2, Art.
XII of the Constitution that only "corporations or associations at least sixty
per centum of whose capital is owned by such [Filipino] citizens" may enjoy
certain rights and privileges, like the exploration and development of
natural resources.
The application of the Grandfather Rule in the present case does not
eschew the Control Test.
Clearly, petitioners have misread, and failed to appreciate the clear import
of, the Courts April 21, 2014 Decision. Nowhere in that disposition did the
Court foreclose the application of the Control Test in determining which
corporations may be considered as Philippine nationals. Instead, to borrow
Justice Leonens term, the Court used the Grandfather Rule as a
"supplement" to the Control Test so that the intent underlying the averted
Sec. 2, Art. XII of the Constitution be given effect. The following excerpts of
the April 21, 2014 Decision cannot be clearer:
In ending, the "control test" is still the prevailing mode of determining
whether or not a corporation is a Filipino corporation, within the ambit of
Sec. 2, Art. XII of the 1987 Constitution, entitled to undertake the
exploration, development and utilization of the natural resources of the
Philippines. When in the mind of the Court, there is doubt, based on the
attendant facts and circumstances of the case, in the 60-40 Filipino equity
ownership in the corporation, then it may apply the "grandfather rule."
(emphasis supplied)
With that, the use of the Grandfather Rule as a "supplement" to the Control
Test is not proscribed by the Constitution or the Philippine Mining Act of
1995.

The Grandfather Rule implements the intent of the Filipinization provisions

of the Constitution.
To reiterate, Sec. 2, Art. XII of the Constitution reserves the exploration,
development, and utilization of natural resources to Filipino citizens and
"corporations or associations at least sixty per centum of whose capital is
owned by such citizens." Similarly, Section 3(aq) of the Philippine Mining
Act of 1995 considers a "corporation x x x registered in accordance with
law at least sixty per cent of the capital of which is owned by citizens of
the Philippines" as a person qualified to undertake a mining operation.
Consistent with this objective, the Grandfather Rulewas originally
conceived to look into the citizenshipof the individuals who ultimately own
and control the shares of stock of a corporation for purposes of
determining compliance with the constitutional requirement of Filipino
ownership. It cannot, therefore, be denied that the framers of the
Constitution have not foreclosed the Grandfather Rule as a tool in verifying
the nationality of corporations for purposes of ascertaining their right to
participate in nationalized or partly nationalized activities. The following
excerpts from the Record of the 1986 Constitutional Commission suggest
as much:
As further defined by Dean Cesar Villanueva, the Grandfather Rule is "the
method by which the percentage of Filipino equity in a corporation
engaged in nationalized and/or partly nationalized areas of activities,
provided for under the Constitution and other nationalization laws, is
computed, in cases where corporate shareholders are present, by
attributing the nationality of the second or even subsequent tier of
ownership to determine the nationality of the corporate
shareholder."4 Thus, to arrive at the actual Filipino ownership and control in
a corporation, both the direct and indirect shareholdings in the corporation
are determined.
This concept of stock attribution inherent in the Grandfather Rule to
determine the ultimate ownership in a corporation is observed by the
Bureau of Internal Revenue (BIR) in applying Section 127 (B)5 of the
National Internal Revenue Code on taxes imposed on closely held
corporations, in relation to Section 96 of the Corporation Code6 on close
corporations. Thus, in BIR Ruling No. 148-10, Commissioner Kim Henares
held:
In the case of a multi-tiered corporation, the stock attribution rule must be
allowed to run continuously along the chain of ownership until it finally
reaches the individual stockholders. This is in consonance with the
"grandfather rule" adopted in the Philippines under Section 96 of the
Corporation Code(Batas Pambansa Blg. 68) which provides that
notwithstanding the fact that all the issued stock of a corporation are held
by not more than twenty persons, among others, a corporation is
nonetheless not to be deemed a close corporation when at least two thirds
of its voting stock or voting rights is owned or controlled by another
corporation which is not a close corporation.7

In SEC-OGC Opinion No. 10-31 dated December 9, 2010 (SEC Opinion 1031), the SEC applied the Grandfather Rule even if the corporation engaged
in mining operation passes the 60-40 requirement of the Control Test, viz:
You allege that the structure of MMLs ownership in PHILSAGA is as follows:
(1) MML owns 40% equity in MEDC, while the 60% is ostensibly owned by
Philippine individual citizens who are actually MMLs controlled nominees;
(2) MEDC, in turn, owns 60% equity in MOHC, while MML owns the
remaining 40%; (3) Lastly, MOHC owns 60% of PHILSAGA, while MML owns
the remaining 40%. You provide the following figure to illustrate this
structure:

Accordingly, under the structure you represented, the joint mining venture
is 87.04 % foreign owned, while it is only 12.96% owned by Philippine
citizens. Thus, the constitutional requirement of 60% ownership by
Philippine citizens isviolated. (emphasis supplied)
Similarly, in the eponymous Redmont Consolidated Mines Corporation v.
McArthur Mining Inc., et al.,8 the SEC en bancapplied the Grandfather Rule
despite the fact that the subject corporations ostensibly have satisfied the
60-40 Filipino equity requirement. The SEC en bancheld that to attain the
Constitutional objective of reserving to Filipinos the utilization of natural
resources, one should not stop where the percentage of the capital stock is
60%.Thus:

xxxx
We note that the Constitution and the statute use the concept "Philippine
citizens." Article III, Section 1 of the Constitution provides who are
Philippine citizens: x x x This enumeration is exhaustive. In other words,
there can be no other Philippine citizens other than those falling within the
enumeration provided by the Constitution. Obviously, only natural persons
are susceptible of citizenship. Thus, for purposes of the Constitutional and
statutory restrictions on foreign participation in the exploitation of mineral
resources, a corporation investing in a mining joint venture can never be
considered as a Philippine citizen.
The Supreme Court En Banc confirms this [in] Pedro R. Palting, vs. San
Jose Petroleum [Inc.]. The Court held that a corporation investing in
another corporation engaged ina nationalized activity cannot be
considered as a citizen for purposes of the Constitutional provision
restricting foreign exploitation of natural resources:
xxxx
Accordingly, we opine that we must look into the citizenship of the
individual stockholders, i.e. natural persons, of that investor-corporation in
order to determine if the Constitutional and statutory restrictions are
complied with. If the shares of stock of the immediate investor corporation
is in turn held and controlled by another corporation, then we must look
into the citizenship of the individual stockholders of the latter corporation.
In other words, if there are layers of intervening corporations investing in a
mining joint venture, we must delve into the citizenship of the individual
stockholders of each corporation. This is the strict application of the
grandfather rule, which the Commission has been consistently applying
prior to the 1990s. Indeed, the framers of the Constitution intended for the
"grandfather rule" to apply in case a 60%-40% Filipino-Foreign equity
corporation invests in another corporation engaging in an activity where
the Constitution restricts foreign participation.
xxxx

[D]oubt, we believe, exists in the instant case because the foreign investor,
MBMI, provided practically all the funds of the remaining appelleecorporations. The records disclose that: (1) Olympic Mines and
Development Corporation ("OMDC"), a domestic corporation, and MBMI
subscribed to 6,663 and 3,331 shares, respectively, out of the authorized
capital stock of Madridejos; however, OMDC paid nothing for this
subscription while MBMI paid P2,803,900.00 out of its total subscription
cost of P3,331,000.00; (2) Palawan Alpha South Resource Development
Corp. ("Palawan Alpha"), also a domestic corporation, and MBMI subscribed
to 6,596 and 3,996 shares, respectively, out of the authorized capital stock
of PatriciaLouise; however, Palawan Alpha paid nothing for this subscription
while MBMI paid P2,796,000.00 out of its total subscription cost
of P3,996,000.00; (3) OMDC and MBMI subscribed to 6,663 and 3,331
shares, respectively, out of the authorized capital stock of Sara Marie;
however, OMDC paid nothing for this subscription while MBMI
paid P2,794,000.00 out of its total subscription cost of P3,331,000.00; and
(4) Falcon Ridge Resources Management Corp. ("Falcon Ridge"), another
domestic corporation, and MBMI subscribed to 5,997 and 3,998 shares,
respectively, out of the authorized capital stock of San Juanico; however,
Falcon Ridge paid nothing for this subscription while MBMI
paid P2,500,000.00 out of its total subscription cost of P3,998,000.00.
Thus, pursuant to the afore-quoted DOJ Opinion, the Grandfather Rule must
be used.
xxxx
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 practicedvia 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.

The method employed in the Grandfather Rule of attributing the

shareholdings of a given corporate shareholder to the second or even the
subsequent tier of ownership hews with the rule that the "beneficial
ownership" of corporations engaged in nationalized activities must reside
in the hands of Filipino citizens. Thus, even if the 60-40 Filipino equity
requirement appears to have been satisfied, the Department of Justice
(DOJ), in its Opinion No. 144, S. of 1977, stated that an agreement that
may distort the actual economic or beneficial ownership of a mining
corporation may be struck down as violative of the constitutional
requirement, viz:
In this connection, you raise the following specific questions:
1. Can a Philippine corporation with 30% equity owned by foreigners enter
into a mining service contract with a foreign company granting the latter a
share of not morethan 40% from the proceeds of the operations?
xxxx
By law, a mining lease may be granted only to a Filipino citizen, or to a
corporation or partnership registered with the [SEC] at least 60% of the
capital of which is owned by Filipino citizens and possessing x x x.The sixty
percent Philippine equity requirement in mineral resource exploitation x x
xis intended to insure, among other purposes, the conservation of
indigenous natural resources, for Filipino posterityx x x. I think it is implicit
in this provision, even if it refers merely to ownership of stock in the
corporation holding the mining concession, that beneficial ownership of the
right to dispose, exploit, utilize, and develop natural resources shall pertain
to Filipino citizens, and that the nationality requirementis not satisfied
unless Filipinos are the principal beneficiaries in the exploitation of the
countrys natural resources. This criterion of beneficial ownership is tacitly
adopted in Section 44 of P.D. No. 463, above-quoted, which limits the
service fee in service contracts to 40% of the proceeds of the operation,
thereby implying that the 60-40 benefit-sharing ration is derived from the
60-40 equity requirement in the Constitution.
xxxx
It is obvious that while payments to a service contractor may be justified
as a service fee, and therefore, properly deductible from gross proceeds,
the service contract could be employed as a means of going about or
circumventing the constitutional limit on foreign equity participation and
the obvious constitutional policy to insure that Filipinos retain beneficial
ownership of our mineral resources. Thus, every service contract scheme
has to be evaluated in its entirety, on a case to case basis, to determine
reasonableness of the total "service fee" x x x like the options available
tothe contractor to become equity participant in the Philippine entity
holding the concession, or to acquire rights in the processing and
marketing stages. x x x (emphasis supplied)

The "beneficial ownership" requirement was subsequently used in tandem

with the "situs of control" todetermine the nationality of a corporation in
DOJ Opinion No. 84, S.of 1988, through the Grandfather Rule, despite the
fact that both the investee and investor corporations purportedly satisfy
the 60-40 Filipino equity requirement:9
This refers to your request for opinion on whether or not there may be an
investment in real estate by a domestic corporation (the investing
corporation) seventy percent (70%) of the capital stock of which is owned
by another domestic corporation withat least 60%-40% Filipino-Foreign
Equity, while the remaining thirty percent (30%) of the capital stock is
owned by a foreign corporation.
xxxx
This Department has had the occasion to rule in several opinions that it is
implicit in the constitutional provisions, even if it refers merely to
ownership of stock in the corporation holding the land or natural resource
concession, that the nationality requirement is not satisfied unless it meets
the criterion of beneficial ownership, i.e. Filipinos are the principal
beneficiaries in the exploration of natural resources(Op. No. 144, s. 1977;
Op. No. 130, s. 1985), and that in applying the same "the primordial
consideration is situs of control, whether in a stock or nonstock
corporation"(Op. No. 178, s. 1974). As stated in the Register of Deeds vs.
Ung Sui Si Temple (97 Phil. 58), obviously toinsure that corporations and
associations allowed to acquire agricultural land or to exploit natural
resources "shall be controlled by Filipinos." Accordingly, any arrangement
which attempts to defeat the constitutional purpose should be eschewed
(Op. No 130, s. 1985).
We are informed that in the registration of corporations with the [SEC],
compliance with the sixty per centum requirement is being monitored by
SEC under the "Grandfather Rule" a method by which the percentage of
Filipino equity in corporations engaged in nationalized and/or partly
nationalized areas of activities provided for under the Constitution and
other national laws is accurately computed, and the diminution if said
equity prevented (SEC Memo, S. 1976). The "Grandfather Rule" is applied
specifically in cases where the corporation has corporate stockholders with
alien stockholdings, otherwise, if the rule is not applied, the presence of
such corporate stockholders could diminish the effective control of
Filipinos.
Applying the "Grandfather Rule" in the instant case, the result is as follows:
x x x the total foreign equity in the investing corporation is 58% while the
Filipino equity is only 42%, in the investing corporation, subject of your
query, is disqualified from investing in real estate, which is a nationalized
activity, as it does not meet the 60%-40% Filipino-Foreign equity
requirement under the Constitution.

This pairing of the concepts "beneficial ownership" and the "situs of

control" in determining what constitutes"capital" has been adopted by this
Court in Heirs of Gamboa v. Teves.10 In its October 9, 2012 Resolution, the
Court clarified, thus:
This is consistent with Section 3 of the FIA which provides that where 100%
of the capital stock is heldby "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." (emphasis supplied)

per the Term Sheet. Evidently, the parties intend to convert the
unsustainable portion of respondents debt into common stocks, which
have voting rights. If we indulge petitioners on their proposal, the Omnibus
Creditors which are foreign corporations, shall have control over 77.7% of
Bayantel, a public utility company. This is precisely the scenario proscribed
by the Filipinization provision of the Constitution.Therefore, the Court of
Appeals acted correctly in sustaining the 40% debt-to-equity ceiling on
conversion. (emphasis supplied) As shown by the quoted legislative
enactments, administrative rulings, opinions, and this Courts decisions,
the Grandfather Rule not only finds basis, but more importantly, it
implements the Filipino equity requirement, in the Constitution.
Application of the Grandfather
Rule with the Control Test.

In emphasizing the twin requirements of "beneficial ownership" and

"control" in determining compliance with the required Filipino equity in
Gamboa, the en bancCourt explicitly cited with approval the SEC en bancs
application in Redmont Consolidated Mines, Corp. v. McArthur Mining, Inc.,
et al. of the Grandfather Rule, to wit:
Significantly, the SEC en banc, which is the collegial body statutorily
empowered to issue rules and opinions on behalf of SEC, has adopted the
Grandfather Rulein 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.
x x x (emphasis supplied)
Applying Gamboa, the Court, in Express Investments III Private Ltd. v.
Bayantel Communications, Inc.,11 denied the foreign creditors proposal to
convert part of Bayantels debts to common shares of the company at a
rate of 77.7%. Supposedly, the conversion of the debts to common shares
by the foreign creditors would be done, both directly and indirectly, in
order to meet the control test principle under the FIA.Under the proposed
structure, the foreign creditors would own 40% of the outstanding capital
stock of the telecommunications company on a direct basis, while the
remaining 40% of shares would be registered to a holding company that
shall retain, on a direct basis, the other 60% equity reserved for Filipino
citizens. Nonetheless, the Court found the proposal non-compliant with the
Constitutional requirement of Filipino ownership as the proposed structure
would give more than 60% of the ownership of the common shares of
Bayantel to the foreign corporations, viz:
In its Rehabilitation Plan, among the material financial commitments made
by respondent Bayantelis that its shareholders shall relinquish the agreedupon amount of common stock[s] as payment to Unsecured Creditors as

Admittedly, an ongoing quandary obtains as to the role of the Grandfather

Rule in determining compliance with the minimum Filipino equity
requirement vis--vis the Control Test. This confusion springs from the
erroneous assumption that the use of one method forecloses the use of the
other.
As exemplified by the above rulings, opinions, decisions and this Courts
April 21, 2014 Decision, the Control Test can be, as it has been, applied
jointly withthe Grandfather Rule to determine the observance of foreign
ownership restriction in nationalized economic activities. The Control Test
and the Grandfather Rule are not, as it were, incompatible ownershipdeterminant methods that canonly be applied alternative to each other.
Rather, these methodscan, if appropriate, be used cumulatively in the
determination of the ownership and control of corporations engaged in
fully or partly nationalized activities, as the mining operation involved in
this case or the operation of public utilities as in Gamboa or Bayantel.
The Grandfather Rule, standing alone, should not be used to determine the
Filipino ownership and control in a corporation, as it could result in an
otherwise foreign corporation rendered qualified to perform nationalized or
partly nationalized activities. Hence, it is only when the Control Test is first
complied with that the Grandfather Rule may be applied. Put in another
manner, if the subject corporations Filipino equity falls below the threshold
60%, the corporation is immediately considered foreign-owned, in which
case, the needto resort to the Grandfather Rule disappears.
On the other hand, a corporation that complies with the 60-40 Filipino to
foreign equity requirement can be considered a Filipino corporation if there
is no doubtas to who has the "beneficial ownership" and "control" of the
corporation. In that instance, there is no need fora dissection or further
inquiry on the ownership of the corporate shareholders in both the
investing and investee corporation or the application of the Grandfather
Rule.12 As a corollary rule, even if the 60-40 Filipino to foreign equity ratio is

apparently met by the subject or investee corporation, a resort to the

Grandfather Rule is necessary if doubt existsas to the locusof the
"beneficial ownership" and "control." In this case, a further investigation as
to the nationality of the personalities with the beneficial ownership and
control of the corporate shareholders in both the investing and investee
corporations is necessary.

xxxx

As explained in the April 21,2012 Decision, the "doubt" that demands the
application of the Grandfather Rule in addition to or in tandem with the
Control Test is not confined to, or more bluntly, does not refer to the fact
that the apparent Filipino ownership of the corporations equity falls below
the 60% threshold. Rather, "doubt" refers to various indicia that the
"beneficial ownership" and "control" of the corporation do not in fact reside
in Filipino shareholders but in foreign stakeholders. As provided in DOJ
Opinion No. 165, Series of 1984, which applied the pertinent provisions of
the Anti-DummyLaw in relation to the minimum Filipino equity requirement
in the Constitution, "significant indicators of the dummy status" have been
recognized in view of reports "that some Filipino investors or businessmen
are being utilized or [are] allowing themselves to be used as dummies by
foreign investors" specifically in joint ventures for national resource
exploitation. These indicators are:

However, we are aware that some unscrupulous individuals employ

schemes to circumvent the constitutional and statutory restrictions on
foreign equity. In the present case, the fact that the shares of the Japanese
nationals have a greater par value but only have similar rights to those
held by Philippine citizens having much lower par value, is highly
suspicious. This is because a reasonable investor would expect to have
greater control and economic rights than other investors who invested less
capital than him. Thus, it is reasonable to suspectthat there may be secret
arrangements between the corporation and the stockholders wherein the
Japanese nationals who subscribed to the shares with greater par value
actually have greater control and economic rights contrary to the equality
of shares based on the articles of incorporation.

1. That the foreign investors provide practically all the funds for the
joint investment undertaken by these Filipino businessmen and
their foreign partner;
2. That the foreign investors undertake to provide practically all the
technological support for the joint venture;
3. That the foreign investors, while being minority stockholders,
manage the company and prepare all economic viability studies.
Thus, In the Matter of the Petition for Revocation of the Certificate of
Registration of Linear Works Realty Development Corporation,13 the SEC
held that when foreigners contribute more capital to an enterprise, doubt
exists as to the actual control and ownership of the subject corporation
even if the 60% Filipino equity threshold is met. Hence, the SEC in that one
ordered a further investigation, viz:
x x x The [SEC Enforcement and Prosecution Department (EPD)]
maintained that the basis for determining the level of foreign participation
is the number of shares subscribed, regardless of the par value. Applying
such an interpretation, the EPD rules that the foreign equity participation in
Linear works Realty Development Corporation amounts to 26.41% of the
corporations capital stock since the amount of shares subscribed by
foreign nationals is 1,795 only out of the 6,795 shares. Thus, the subject
corporation is compliant with the 40% limit on foreign equity participation.
Accordingly, the EPD dismissed the complaint, and did not pursue any
investigation against the subject corporation.

x x x [I]n this respect we find no error in the assailed order made by the
EPD. The EPD did not err when it did not take into account the par value of
shares in determining compliance with the constitutional and statutory
restrictionson foreign equity.

With this in mind, we find it proper for the EPD to investigate the subject
corporation. The EPD is advised to avail of the Commissions subpoena
powers in order to gather sufficient evidence, and file the necessary
complaint.
As will be discussed, even if atfirst glance the petitioners comply with the
60-40 Filipino to foreign equity ratio, doubt exists in the present case that
gives rise to a reasonable suspicion that the Filipino shareholders do not
actually have the requisite number of control and beneficial ownership in
petitioners Narra, Tesoro, and McArthur. Hence, a further investigation and
dissection of the extent of the ownership of the corporate shareholders
through the Grandfather Rule is justified.
Parenthetically, it is advanced that the application of the Grandfather Rule
is impractical as tracing the shareholdings to the point when natural
persons hold rights to the stocks may very well lead to an investigation ad
infinitum. Suffice it to say in this regard that, while the Grandfather Rule
was originally intended to trace the shareholdings to the point where
natural persons hold the shares, the SEC had already set up a limit as to
the number of corporate layers the attribution of the nationality of the
corporate shareholders may be applied.
In a 1977 internal memorandum, the SEC suggested applying the
Grandfather Rule on two (2) levels of corporate relations for publicly-held
corporations or where the shares are traded in the stock exchanges, and to
three (3) levels for closely held corporations or the shares of which are not
traded in the stock exchanges.14 These limits comply with the requirement
in Palting v. San Jose Petroleum, Inc.15 that the application of the
Grandfather Rule cannot go beyond the level of what is reasonable.

A doubt exists as to the extent of control and beneficial ownership of MBMI

over the petitioners and their investing corporate stockholders.
In the Decision subject of this recourse, the Court applied the Grandfather
Rule to determine the matter of true ownership and control over the
petitioners as doubt exists as to the actual extent of the participation of
MBMI in the equity of the petitioners and their investing corporations.
We considered the following membership and control structures and like
nuances:
Tesoro
Supposedly Filipino corporation Sara Marie Mining, Inc. (Sara Marie) holds
59.97% of the 10,000 commonshares of petitioner Tesoro while the
Canadian-owned company, MBMI, holds 39.98% of its shares.

Petitioner McArthur follows the corporate layering structure of Tesoro, as

59.97% of its 10, 000 common shares is owned by supposedly Filipino
Madridejos Mining Corporation (Madridejos), while 39.98% belonged to the
Canadian MBMI.
In turn, 66.63% of Madridejos shares were held by Olympic while 33.31%
of its shares belonged to MBMI. Yet again, Olympic did not contribute to the
paid-up capital of Madridejos and it was MBMI that provided 99.79% of the
paid-up capital of Madridejos.
Again, the fact that MBMI had practically provided all the funds in
Madridejos and McArthur creates serious doubt as to the true extent of its
control and ownership of MBMI over both Madridejos and McArthur. The
application of the Grandfather Rule is clearly called for, and as will be
shown below, MBMI, along with the other foreign shareholders, breached
the maximum limit of 40% ownership in petitioner McArthur, rendering the
petitioner disqualified to an MPSA:

In turn, the Filipino corporation Olympic Mines & Development Corp.

(Olympic) holds 66.63% of Sara Maries shares while the same Canadian
company MBMI holds 33.31% of Sara Maries shares. Nonetheless, it is
admitted that Olympic did not pay a single peso for its shares. On the
contrary, MBMI paid for 99% of the paid-up capital of Sara Marie.
The fact that MBMI had practically provided all the funds in Sara
Marie and Tesoro creates serious doubt as to the true extent of its
(MBMI) control and ownership over both Sara Marie and
Tesoro since, as observed by the SEC, "a reasonable investor would
expect to have greater control and economic rights than other investors
who invested less capital than him." The application of the Grandfather
Rule is clearly called for, and as shown below, the Filipinos control and
economic benefits in petitioner Tesoro (through Sara Marie) fallbelow the
threshold 60%, viz:
Filipino participation in petitioner Tesoro: 40.01%
Foreign participation in petitioner Tesoro: 59.99%
With only 40.01% Filipino ownership in petitioner Tesoro, as compared to
59.99% foreign ownership of its shares, it is clear that petitioner Tesoro
does not comply with the minimum Filipino equity requirement imposed in
Sec. 2, Art. XII of the Constitution. Hence, the appellate courts observation
that Tesoro is a foreign corporation not entitled to an MPSA is apt.
McArthur

Filipino participation in petitioner McArthur: 40.01%

Foreign participation in petitioner McArthur: 59.99%
As with petitioner Tesoro, with only 40.01% Filipino ownership in petitioner
McArthur, as compared to 59.99% foreign ownership of its shares, it is
clear that petitioner McArthur does not comply with the minimum Filipino
equity requirement imposed in Sec. 2, Art. XII of the Constitution. Thus, the
appellate court did not err in holding that petitioner McArthur is a foreign
corporation not entitled to an MPSA.
Narra
As for petitioner Narra, 59.97% of its shares belonged to Patricia Louise
Mining & Development Corporation (PLMDC), while Canadian MBMI held
39.98% of its shares.
PLMDCs shares, in turn, were held by Palawan Alpha South Resources
Development Corporation (PASRDC), which subscribed to 65.96% of
PLMDCs shares, and the Canadian MBMI, which subscribed to 33.96% of
PLMDCs shares.
Yet again, PASRDC did not pay for any of its subscribed shares, while MBMI
contributed 99.75% of PLMDCs paid-up capital. This fact creates serious
doubt as to the true extent of MBMIs control and ownership over both
PLMDC and Narra since "a reasonable investor would expect to have
greater control and economic rights than other investors who invested less
capital than him." Thus, the application of the Grandfather Rule is justified.
And as will be shown, it is clear that the Filipino ownership in petitioner

Narra falls below the limit prescribed in both the Constitution and the
Philippine Mining Act of 1995.
Filipino participation in petitioner Narra: 39.64%
Foreign participation in petitioner Narra: 60.36%
With 60.36% foreign ownership in petitioner Narra, as compared to only
39.64% Filipino ownership of its shares, it is clear that petitioner Narra
does not comply with the minimum Filipino equity requirement imposed in
Section 2, Article XII of the Constitution. Hence, the appellate court did not
err in holding that petitioner McArthur is a foreign corporation not entitled
to an MPSA.
It must be noted that the foregoing determination and computation of
petitioners Filipino equity composition was based on their common
shareholdings, not preferred or redeemable shares. Section 6 of the
Corporation Code of the Philippines explicitly provides that "no share may
be deprived of voting rights except those classified as preferred or
redeemable shares." Further, as Justice Leonen puts it, there is "no
indication that any of the shares x x x do not have voting rights, [thus] it
must be assumed that all such shares have voting rights."22 It cannot
therefore be gain said that the foregoing computation hewed with the
pronouncements of Gamboa, as implemented by SEC Memorandum
Circular No. 8, Series of 2013, (SEC Memo No. 8)23 Section 2 of which
states:
Section 2. All covered corporations shall, at all times, observe the
constitutional or statutory requirement.1wphi1 For purposes of
determining compliance therewith, the required percentage of Filipino
ownership shall be applied to BOTH (a) the total outstanding shares of
stock entitled to vote in the election of directors; AND (b) the total number
of outstanding shares of stock, whether or not entitled to vote in the
election of directors.

Petitioners also scoffed at this Courts decision to uphold the jurisdiction of

the Panel of Arbitrators (POA) of the Department of Environment and
Natural Resources (DENR) since the POAs determination of petitioners
nationalities is supposedly beyond its limited jurisdiction, as defined in
Gonzales v. Climax Mining Ltd.24 and Philex Mining Corp. v. Zaldivia.25
The April 21, 2014 Decision did not dilute, much less overturn, this Courts
pronouncements in either Gonzales or Philex Mining that POAs jurisdiction
"is limited only to mining disputes which raise questions of fact," and not
judicial questions cognizable by regular courts of justice. However, to
properly recognize and give effect to the jurisdiction vested in the POA by
Section 77 of the Philippine Mining Act of 1995, 26 and in parallel with this
Courts ruling in Celestial Nickel Mining Exploration Corporation v.
Macroasia Corp.,27 the Court has recognized in its Decision that in resolving
disputes "involving rights to mining areas" and "involving mineral
agreements or permits," the POA has jurisdiction to make a preliminary
finding of the required nationality of the corporate applicant in order to
determine its right to a mining area or a mineral agreement.
There is certainly nothing novel or aberrant in this approach. In ejectment
and unlawful detainer cases, where the subject of inquiry is possession de
facto, the jurisdiction of the municipal trial courts to make a preliminary
adjudication regarding ownership of the real property involved is allowed,
but only for purposes of ruling on the determinative issue of material
possession.
The present case arose from petitioners' MPSA applications, in which they
asserted their respective rights to the mining areas each applied for. Since
respondent Redmont, itself an applicant for exploration permits over the
same mining areas, filed petitions for the denial of petitioners' applications,
it should be clear that there exists a controversy between the parties and it
is POA's jurisdiction to resolve the said dispute. POA's ruling on Redmont's
assertion that petitioners are foreign corporations not entitled to MPSA is
but a necessary incident of its disposition of the mining dispute presented
before it, which is whether the petitioners are entitled to MPSAs.

In fact, there is no indication that herein petitioners issued any other class
of shares besides the 10,000 common shares. Neither is it suggested that
the common shares were further divided into voting or non-voting common
shares. Hence, for purposes of this case, items a) and b) in SEC Memo No.
8 both refer to the 10,000 common shares of each of the petitioners, and
there is no need to separately apply the 60-40 ratio to any segment or part
of the said common shares.

Indeed, as the POA has jurisdiction to entertain "disputes involving rights

to mining areas," it necessarily follows that the POA likewise wields the
authority to pass upon the nationality issue involving petitioners, since the
resolution of this issue is essential and indispensable in the resolution of
the main issue, i.e., the determination of the petitioners' right to the
mining areas through MPSAs.

III.

WHEREFORE, We DENY the motion for reconsideration WITH FINALITY. No

further pleadings shall be entertained. Let entry of judgment be made in
due course.

In mining disputes, the POA has jurisdiction to pass upon the nationality of
applications for MPSAs

8.

REPUBLIC

BANK, petitioner,

totaling to the full amount of the loan, which is P120,000.00, petitioner lent

vs.HON. ENRIQUE A. AGANA, SR., as Presiding Judge, Court of First

such amount partially in the form of money and partially in the form of

Instance of Rizal, Branch XXVIII, Pasay City, ROBES-FRANCISCO

stock certificates numbered 3204 and 3205, each for 400 shares with a par

REALTY

value of P10.00 per share, or for P4,000.00 each, for a total of P8,000.00.

&

DEVELOPMENT

PLANTERS

CORPORATION

and

ADALIA

F.

ROBES, respondents.

Said stock certificates were in the name of private respondent Adalia F.

Robes and Carlos F. Robes, who subsequently, however, endorsed his

This is a petition for certiorari seeking the annulment of the Decision 1 of

shares in favor of Adalia F. Robes.

the then Court of First Instance of Rizal for having been rendered in grave
2

abuse of discretion. Private respondents Robes-Francisco Realty and

Said certificates of stock bear the following terms and conditions:

Development Corporation (hereafter, "the Corporation") and Adalia F.

Robes filed in the court a quo, an action for specific performance to compel
petitioner to redeem 800 preferred shares of stock with a face value of
P8,000.00 and to pay 1% quarterly interest thereon as quarterly dividend
owing them under the terms and conditions of the certificates of stock.

The court a quo rendered judgment in favor of private respondents; hence,

The Preferred Stock shall have the following rights,

preferences, qualifications and limitations, to wit:

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

Centum (1%), cumulative and participating.

xxx xxx xxx

this instant petition.

2. That such preferred shares may be redeemed, by the
Herein parties debate only legal issues, no issues of fact having been
raised by them in the court a quo. For ready reference, however, the

system of drawing lots, at any time after two (2) years from
the date of issue at the option of the Corporation. . . .

following narration of pertinent transactions and events is in order:

On January 31, 1979, private respondents proceeded against petitioner and
On September 18, 1961, private respondent Corporation secured a loan
from petitioner in the amount of P120,000.00. As part of the proceeds of
the loan, preferred shares of stocks were issued to private respondent
Corporation, through its officers then, private respondent Adalia F. Robes
and one Carlos F. Robes. In other words, instead of giving the legal tender

filed a Complaint anchored on private respondents' alleged rights to collect

dividends under the preferred shares in question and to have petitioner
redeem the same under the terms and conditions of the stock certificates.
Private respondents attached to their complaint, a letter-demand dated
January 5, 1979 which, significantly, was not formally offered in evidence.

Petitioner filed a Motion to Dismiss 3 private respondents' Complaint on the

participating, clearly and unequivocably [sic] indicates that

following grounds: (1) that the trial court had no jurisdiction over the

the same are "interest bearing stocks" which are stocks

subject-matter of the action; (2) that the action was unenforceable under

issued by a corporation under an agreement to pay a

substantive law; and (3) that the action was barred by the statute of

certain rate of interest thereon (5 Thompson, Sec. 3439).

limitations and/or laches.

As such, plaintiffs become entitled to the payment thereof

as a matter of right without necessity of a prior declaration

Petitioner's Motion to Dismiss was denied by the trial court in an Order

of dividend.

dated March 16, 1979. Petitioner then filed its Answer on May 2,
4

1979.

Thereafter, the trial court gave the parties ten (10) days from July

On the question of the redemption by the defendant of said

30, 1979 to submit their respective memoranda after the submission of

preferred shares of stock, the very wordings of the terms

which the case would be deemed submitted for resolution. 6

and conditions in said stock certificates clearly allows the

same.
On September 7, 1979, the trial court rendered the herein assailed decision
in favor of private respondents. In ordering petitioner to pay private

To allow the herein defendant not to redeem said preferred

respondents the face value of the stock certificates as redemption price,

shares of stock and/or pay the interest due thereon despite

plus 1% quarterly interest thereon until full payment, the trial court ruled:

the clear import of said provisions by the mere invocation

of alleged Central Bank Circulars prohibiting the same is

There being no issue of fact raised by either of the parties

who filed their respective memoranda delineating their

tantamount to an impairment of the obligation of contracts

enshrined in no less than the fundamental law itself.

respective contentions, a judgment on the pleadings,

conformably with an earlier order of the Court, appears to

Moreover, the herein defendant is considered in estoppel

be in order.

from taking shelter behind a General Banking Act provision

to the effect that it cannot buy its own shares of stocks

From a further perusal of the pleadings, it appears that the

provision of the stock certificates in question to the effect
that the plaintiffs shall have the right to receive a quarterly
dividend

of

One Per

Centum (1%),

cumulative

and

considering that the very terms and conditions in said

stock certificates allowing their redemption are its own
handiwork.

As to the claim by the defendant that plaintiffs' cause of

REDEEMING ITS PREFERRED SHARES AND FROM PAYING

action is barred by prescription, suffice it to state that the

DIVIDENDS THEREON . . . .

running

of

the

prescriptive

period

was

considered
D. THE TRIAL COURT ERRED IN NOT HOLDING THAT THE

interrupted by the written extrajudicial demands made by

COMPLAINT DOES NOT STATE A CAUSE OF ACTION.

the plaintiffs from the defendant. 7

E. THE TRIAL COURT ERRED IN NOT HOLDING THAT THE

Aggrieved by the decision of the trial court, petitioner elevated the case

CLAIM OF RESPONDENT ADALIA F. ROBES IS BARRED BY

before us essentially on pure questions of law. Petitioner's statement of the

PRESCRIPTION OR LACHES.

issues that it submits for us to adjudicate upon, is as follows:

A. RESPONDENT JUDGE COMMITTED A GRAVE ABUSE OF

DISCRETION
JURISDICTION

AMOUNTING
IN

TO

ORDERING

LACK

OR

EXCESS

PETITIONER

TO

OF
PAY

RESPONDENT ADALIA F. ROBES THE AMOUNT OF P8213.69

The petition is meritorious.

Before passing upon the merits of this petition, it may be pertinent to

provide an overview on the nature of preferred shares and the redemption
thereof, considering that these issues lie at the heart of the dispute.

AS INTERESTS FROM 1961 TO 1979 ON HER PREFERRED

SHARES.

A preferred share of stock, on one hand, is one which entitles the holder
thereof to certain preferences over the holders of common stock. The

B. RESPONDENT JUDGE COMMITTED A GRAVE ABUSE OF

DISCRETION
JURISDICTION

AMOUNTING
IN

TO

ORDERING

LACK

OR

PETITIONER

EXCESS
TO

OF

REDEEM

RESPONDENT ADALIA F. ROBES' PREFERRED SHARES FOR

P8,000.00.

corporation. 9 Preferred shares take a multiplicity of forms. The most

common forms may be classified into two: (1) preferred shares as to
assets; and (2) preferred shares as to dividends. The former is a share
which gives the holder thereof preference in the distribution of the assets

C. RESPONDENT JUDGE COMMITTED A GRAVE ABUSE OF

DISCRETION

AMOUNTING

TO

LACK

OR

EXCESS

OF

JURISDICTION IN DISREGARDING THE ORDER OF THE

CENTRAL

preferences are designed to induce persons to subscribe for shares of a

BANK

TO

PETITIONER

TO

DESIST

FROM

of the corporation in case of liquidation;

10

the latter is a share the holder

of which is entitled to receive dividends on said share to the extent agreed

upon before any dividends at all are paid to the holders of common
stock.

11

There is no guaranty, however, that the share will receive any

dividends. Under the old Corporation Law in force at the time the contract

Redeemable shares, on the other hand, are shares usually preferred, which

between the petitioner and the private respondents was entered into, it

by their terms are redeemable at a fixed date, or at the option of either

was provided that "no corporation shall make or declare any dividend

issuing corporation, or the stockholder, or both at a certain redemption

except from the surplus profits arising from its business, or distribute its

price.17 A redemption by the corporation of its stock is, in a sense, a

capital stock or property other than actual profits among its members or

repurchase of it for cancellation.

stockholders until after the payment of its debts and the termination of its

shares even if there are no unrestricted retained earnings on the books of

existence by limitation or lawful dissolution."

Similarly, the present

the corporation. This is a new provision which in effect qualifies the general

Corporation Code13 provides that the board of directors of a stock

rule that the corporation cannot purchase its own shares except out of

corporation may declare dividends only out of unrestricted retained

current retained earnings.

earnings.

The Code, in Section 43, adopting the change made in

redeemed regardless of the existence of unrestricted retained earnings,

accounting terminology, substituted the phrase "unrestricted retained

this is subject to the condition that the corporation has, after such

earnings," which may be a more precise term, in place of "surplus profits

redemption, assets in its books to cover debts and liabilities inclusive of

arising from its business" in the former law. Thus, the declaration of

capital stock. Redemption, therefore, may not be made where the

dividends

corporation is insolvent or if such redemption will cause insolvency or

14

is

dependent

upon

the

12

availability

of

surplus

profit

or

unrestricted retained earnings, as the case may be. Preferences granted to

19

18

The present Code allows redemption of

However, while redeemable shares may be

inability of the corporation to meet its debts as they mature.

20

preferred stockholders, moreover, do not give them a lien upon the

property of the corporation nor make them creditors of the corporation, the
right of the former being always subordinate to the latter. Dividends are
thus payable only when there are profits earned by the corporation and as
a general rule, even if there are existing profits, the board of directors has
the discretion to determine whether or not dividends are to be
declared.

15

Shareholders, both common and preferred, are considered risk

takers who invest capital in the business and who can look only to what is
left after corporate debts and liabilities are fully paid.

We come now to the merits of the case. The petitioner argues that it
cannot be compelled to redeem the preferred shares issued to the private
respondent. We agree. Respondent judge, in ruling that petitioner must
redeem the shares in question, stated that:

On the question of the redemption by the defendant of said

preferred shares of stock, the very wordings of the terms
and conditions in said stock certificates clearly allows the

16

same.

21

What respondent judge failed to recognize was that while the stock

quo, and to prevent the financial ruin of a banking institution that would

certificate does allow redemption, the option to do so was clearly

have resulted in adverse repercussions, not only to its depositors and

vested in the petitioner bank. The redemption therefore is clearly

creditors, but also to the banking industry as a whole. The directive, in

the type known as "optional". Thus, except as otherwise provided

limiting the exercise of a right granted by law to a corporate entity, may

in the stock certificate, the redemption rests entirely with the

thus be considered as an exercise of police power. The respondent judge

corporation and the stockholder is without right to either compel or

insists that the directive constitutes an impairment of the obligation of

refuse the redemption of its stock.

Furthermore, the terms and

contracts. It has, however, been settled that the Constitutional guaranty of

conditions set forth therein use the word "may". It is a settled

non-impairment of obligations of contract is limited by the exercise of the

doctrine in statutory construction that the word "may" denotes

police power of the state, the reason being that public welfare is superior

discretion, and cannot be construed as having a mandatory effect.

to private rights.

22

25

We fail to see how respondent judge can ignore what, in his words,
are the "very wordings of the terms and conditions in said stock
certificates" and construe what is clearly a mere option to be his
legal basis for compelling the petitioner to redeem the shares in

The respondent judge also stated that since the stock certificate granted
the private respondents the right to receive a quarterly dividend of
One Per Centum (1%) cumulative and participating, it "clearly and
unequivocably (sic) indicates that the same are "interest bearing stocks" or

question.

stocks issued by a corporation under an agreement to pay a certain rate of

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

interest thereon. As such, plaintiffs (private respondents herein) become

petitioner, the Central Bank made a finding that said petitioner has been

entitled to the payment thereof as a matter of right without necessity of a

suffering from chronic reserve deficiency,

prior declaration of dividend."

23

and that such finding resulted

26

There is no legal basis for this observation.

in a directive, issued on January 31, 1973 by then Gov. G.S. Licaros of the

Both Sec. 16 of the Corporation Law and Sec. 43 of the present Corporation

Central Bank, to the President and Acting Chairman of the Board of the

Code prohibit the issuance of any stock dividend without the approval of

petitioner bank prohibiting the latter from redeeming any preferred share,

stockholders, representing not less than two-thirds (2/3) of the outstanding

on the ground that said redemption would reduce the assets of the Bank to

capital stock at a regular or special meeting duly called for the purpose.

the prejudice of its depositors and creditors.

Redemption of preferred

These provisions underscore the fact that payment of dividends to a

shares was prohibited for a just and valid reason. The directive issued by

stockholder is not a matter of right but a matter of consensus.

the Central Bank Governor was obviously meant to preserve the status

Furthermore, "interest bearing stocks", on which the corporation agrees

24

absolutely to pay interest before dividends

are paid to common

stockholders, is legal only when construed as requiring payment of interest

as dividends from net earnings or surplus only.

27

warranting a presumption that the party entitled to assert it either has

abandoned it or declined to assert it.28

Clearly, the respondent

judge, in compelling the petitioner to redeem the shares in question and to

pay the corresponding dividends, committed grave abuse of discretion
amounting to lack or excess of jurisdiction in ignoring both the terms and
conditions specified in the stock certificate, as well as the clear mandate of
the law.

Considering that the terms and conditions set forth in the stock certificate
clearly indicate that redemption of the preferred shares may be made at
any time after the lapse of two years from the date of issue, private
respondents should have taken it upon themselves, after the lapse of the
said period, to inquire from the petitioner the reason why the said shares
have not been redeemed. As it is, not only two years had lapsed, as agreed

Anent the issue of prescription, this Court so holds that the claim of private

upon,

but an additional sixteen years

passed before the private

respondent is already barred by prescription as well as laches. Art. 1144 of

respondents saw it fit to demand their right. The petitioner, at the time it

the New Civil Code provides that a right of action that is founded upon a

issued said preferred shares to the private respondents in 1961, could not

written contract prescribes in ten (10) years. The letter-demand made by

have known that it would be suffering from chronic reserve deficiency

the private respondents to the petitioner was made only on January 5,

twelve years later. Had the private respondents been vigilant in asserting

1979, or almost eighteen years after receipt of the written contract in the

their rights, the redemption could have been effected at a time when the

form of the stock certificate. As noted earlier, this letter-demand,

petitioner bank was not suffering from any financial crisis.

significantly, was not formally offered in evidence, nor were any other
evidence of demand presented. Therefore, we conclude that the only time
the private respondents saw it fit to assert their rights, if any, to the
preferred shares of stock, was after the lapse of almost eighteen years. The
same clearly indicates that the right of the private respondents to any

WHEREFORE, the instant petition, being impressed with merit, is hereby

GRANTED. The challenged decision of respondent judge is set aside and
the complaint against the petitioner is dismissed.

Costs against the private respondents.

relief under the law has already prescribed. Moreover, the claim of the
private respondents is also barred by laches. Laches has been defined as

9. ENRIQUE RAZON, petitioner, vs.INTERMEDIATE APPELLATE COURT

the failure or neglect, for an unreasonable length of time, to do that which

and VICENTE B. CHUIDIAN, in his capacity as Administrator of the

by exercising due diligence could or should have been done earlier; it is

Estate of the Deceased JUAN T. CHUIDIAN, respondents.

negligence or omission to assert a right within a reasonable time,

The main issue in these consolidated petitions centers on the ownership of

defendants from disposing of the said shares of stock, for a

1,500 shares of stock in E. Razon, Inc. covered by Stock Certificate No. 003

writ of preliminary attachment v. properties of defendants

issued on April 23, 1966 and registered under the name of Juan T. Chuidian

having possession of shares of stock and for receivership of

in the books of the corporation. The then Court of First Instance of Manila,

the properties of defendant corporation . . .

now Regional Trial Court of Manila, declared that Enrique Razon, the
petitioner in G.R. No. 74306 is the owner of the said shares of stock. The
then Intermediate Appellate Court, now Court of Appeals, however,
reversed the trial court's decision and ruled that Juan T. Chuidian, the
deceased father of petitioner Vicente B. Chuidian in G.R. No. 74315 is the
owner of the shares of stock. Both parties filed separate motions for
reconsideration. Enrique Razon wanted the appellate court's decision
reversed and the trial court's decision affirmed while Vicente Chuidian
asked that all cash and stock dividends and all the pre-emptive rights
accruing to the 1,500 shares of stock be ordered delivered to him. The
appellate court denied both motions. Hence, these petitions.

xxx xxx xxx

In their answer filed on June 18, 1973, defendants alleged

that all the shares of stock in the name of stockholders of
record of the corporation were fully paid for by defendant,
Razon; that said shares are subject to the agreement
between defendants and incorporators; that the shares of
stock were actually owned and remained in the possession
of Razon. Appellees also alleged . . . that neither the late
Juan T. Chuidian nor the appellant had paid any amount
whatsoever for the 1,500 shares of stock in question . . .

The relevant Antecedent facts are as follows:

xxx xxx xxx

In his complaint filed on June 29, 1971, and amended on

November 16, 1971, Vicente B. Chuidian prayed that
defendants Enrique B. Razon, E. Razon, Inc., Geronimo
Velasco, Francisco de Borja, Jose Francisco, Alfredo B. de

The evidence of the plaintiff shown that he is the

administrator of the intestate estate of Juan Telesforo
Chuidian in Special Proceedings No. 71054, Court of First
Instance of Manila.

Leon, Jr., Gabriel Llamas and Luis M. de Razon be ordered

to

deliver

certificates

of

stocks

representing

the

Sometime in 1962, Enrique Razon organized the E. Razon,

shareholdings of the deceased Juan T. Chuidian in the E.

Inc. for the purpose of bidding for the arrastre services in

Razon, Inc. with a prayer for an order to restrain the

South Harbor, Manila. The incorporators consisted of

Enrique Razon, Enrique Valles, Luisa M. de Razon, Jose

Defendants allege that after organizing the E. Razon, Inc.,

Tuason, Jr., Victor Lim, Jose F. Castro and Salvador Perez de

Enrique Razon distributed shares of stock previously placed

Tagle.

in the names of the withdrawing nominal incorporators to

some friends including Juan T. Chuidian

On April 23, 1966, stock certificate No. 003 for 1,500

shares of stock of defendant corporation was issued in the

Stock Certificate No. 003 covering 1,500 shares of stock

name of Juan T. Chuidian.

upon instruction of the late Chuidian on April 23, 1986 was

personally delivered by Chuidian on July 1, 1966 to the

On the basis of the 1,500 shares of stock, the late Juan T.

Chuidian and after him, the plaintiff-appellant, were
elected as directors of E. Razon, Inc. Both of them actually
served and were paid compensation as directors of E.
Razon, Inc.

From the time the certificate of stock was issued on April

1966 up to April 1971, Enrique Razon had not questioned
the ownership by Juan T. Chuidian of the shares of stock in
question and had not brought any action to have the
certificate of stock over the said shares cancelled.

The certificate of stock was in the possession of defendant

Razon who refused to deliver said shares to the plaintiff,
until the same was surrendered by defendant Razon and
deposited in a safety box in Philippine Bank of Commerce.

Corporate Secretary of Attorney Silverio B. de Leon who

was himself an associate of the Chuidian Law Office (Exhs.
C & 11). Since then, Enrique Razon was in possession of
said stock certificate even during the lifetime of the late
Chuidian, from the time the late Chuidian delivered the
said stock certificate to defendant Razon until the time
(sic) of defendant Razon. By agreement of the parties (sic)
delivered it for deposit with the bank under the joint
custody of the parties as confirmed by the trial court in its
order of August 7, 1971.

Thus, the 1,500 shares of stook under Stock Certificate No.

003 were delivered by the late Chuidian to Enrique
because it was the latter who paid for all the subscription
on the shares of stock in the defendant corporation and the
understanding was that he (defendant Razon) was the
owner of the said shares of stock and was to have
possession thereof until such time as he was paid therefor

by the other nominal incorporators/stockholders (TSN., pp.

person, or against a person of unsound mind, upon a claim

4, 8, 10, 24-25, 25-26, 28-31, 31-32, 60, 66-68, July 22,

or demand against the estate of such deceased person or

1980, Exhs. "C", "11", "13" "14"). (Ro11o 74306, pp. 66-

against such person of unsound mind, cannot testify as to

68)

any matter of fact accruing before the death of such

deceased person or before such person became of

In G.R. No. 74306, petitioner Enrique Razon assails the appellate court's

unsound mind." (Emphasis supplied)

decision on its alleged misapplication of the dead man's statute rule under
Section 20(a) Rule 130 of the Rules of Court. According to him, the "dead

xxx xxx xxx

man's statute" rule is not applicable to the instant case. Moreover, the
private respondent, as plaintiff in the case did not object to his oral
testimony regarding the oral agreement between him and the deceased
Juan T. Chuidian that the ownership of the shares of stock was actually
vested in the petitioner unless the deceased opted to pay the same; and
that the petitioner was subjected to a rigid cross examination regarding
such testimony.

The purpose of the rule has been explained by this Court in this wise:

The reason for the rule is that if persons having a claim

against the estate of the deceased or his properties were
allowed to testify as to the supposed statements made by
him (deceased person), many would be tempted to falsely
impute statements to deceased persons as the latter can

Section 20(a) Rule 130 of the Rules of Court (Section 23 of the Revised

no longer deny or refute them, thus unjustly subjecting

their properties or rights to false or unscrupulous claims or

Rules on Evidence) States:

demands. The purpose of the law is to "guard against the

Sec.

20.

Disqualification

by

reason

of

interest

or

temptation to give false testimony in regard to the

relationship The following persons cannot testify as to

transaction in question on the part of the surviving party."

matters in which they are interested directly or indirectly,

(Tongco v. Vianzon, 50 Phil. 698; Go Chi Gun, et al. v. Co

as herein enumerated.

Cho, et al., 622 [1955])

(a) Parties or assignors of parties to a case, or persons in

The rule, however, delimits the prohibition it contemplates in that it is

whose behalf a case is prosecuted,against an executor or

applicable to a case against the administrator or its representative of an

administrator or

other

representative

of

deceased

estate upon a claim against the estate of the deceased person. (See

It is also settled that the court cannot disregard evidence

Tongco v. Vianzon, 50 Phil. 698 [1927])

which would ordinarily be incompetent under the rules but

has been rendered admissible by the failure of a party to

In the instant case, the testimony excluded by the appellate court is that of

object thereto. Thus:

the defendant (petitioner herein) to the affect that the late Juan Chuidian,
(the father of private respondent Vicente Chuidian, the administrator of the

. . . The acceptance of an incompetent witness to testify in

estate of Juan Chuidian) and the defendant agreed in the lifetime of Juan

a civil suit, as well as the allowance of improper questions

Chuidian that the 1,500 shares of stock in E. Razon, Inc. are actually owned

that may be put to him while on the stand is a matter

by the defendant unless the deceased Juan Chuidian opted to pay the

resting in the discretion of the litigant. He may assert his

same which never happened. The case was filed by the administrator of

right by timely objection or he may waive it, expressly or

the estate of the late Juan Chuidian to recover shares of stock in E. Razon,

by silence. In any case the option rests with him.

Inc. allegedly owned by the late Juan T. Chuidian.

Once admitted, the testimony is in the case for what it is

worth and the judge has no power to disregard it for the

It is clear, therefore, that the testimony of the petitioner is not within the
prohibition of the rule. The case was not filed against the administrator of
the estate, nor was it filed upon claims against the estate.

Furthermore, the records show that the private respondent never objected
to the testimony of the petitioner as regards the true nature of his
transaction with the late elder Chuidian. The petitioner's testimony was

sole reason that it could have been excluded, if it had been

objected

to,

nor

to

strike

it

out

on

its

own

motion (Emphasis supplied). (Marella v. Reyes, 12 Phil. 1.)

The issue as to whether or not the petitioner's testimony is admissible

having been settled, we now proceed to discuss the fundamental issue on
the ownership of the 1,500 shares of stock in E. Razon, Inc.

subject to cross-examination by the private respondent's counsel. Hence,

granting that the petitioner's testimony is within the prohibition of Section

E. Razon, Inc. was organized in 1962 by petitioner Enrique Razon for the

20(a), Rule 130 of the Rules of Court, the private respondent is deemed to

purpose of participating in the bidding for the arrastre services in South

have waived the rule. We ruled in the case of Cruz v. Court of Appeals (192

Harbor, Manila. The incorporators were Enrique Razon, Enrique Valles,

SCRA 209 [1990]):

Luisa M. de Razon, Jose Tuazon, Jr., Victor L. Lim, Jose F. Castro and
Salvador Perez de Tagle. The business, however, did not start operations
until 1966. According to the petitioner, some of the incorporators withdrew

from the said corporation. The petitioner then distributed the stocks

otherwise

known

as

the

Corporation

Code

of

the

previously placed in the names of the withdrawing nominal incorporators

Philippines, shares of stock may be transferred by delivery

to some friends, among them the late Juan T. Chuidian to whom he gave

to the transferee of the certificate properly indorsed. Title

1,500 shares of stock. The shares of stock were registered in the name of

may be vested in the transferee by the delivery of the duly

Chuidian only as nominal stockholder and with the agreement that the said

indorsed certificate of stock (18 C.J.S. 928, cited in Rivera

shares of stock were owned and held by the petitioner but Chuidian was

v. Florendo, 144 SCRA 643). However, no transfer shall be

given the option to buy the same. In view of this arrangement, Chuidian in

valid, except as between the parties until the transfer is

1966 delivered to the petitioner the stock certificate covering the 1,500

properly recorded in the books of the corporation (Sec. 63,

shares of stock of E. Razon, Inc. Since then, the Petitioner had in his

Corporation Code of the Philippines; Section 35 of the

possession the certificate of stock until the time, he delivered it for deposit

Corporation Law)

with the Philippine Bank of Commerce under the parties' joint custody
pursuant to their agreement as embodied in the trial court's order.

In the instant case, there is no dispute that the questioned 1,500 shares of
stock of E. Razon, Inc. are in the name of the late Juan Chuidian in the

The petitioner maintains that his aforesaid oral testimony as regards the

books of the corporation. Moreover, the records show that during his

true nature of his agreement with the late Juan Chuidian on the 1,500

lifetime Chuidian was ellected member of the Board of Directors of the

shares of stock of E. Razon, Inc. is sufficient to prove his ownership over

corporation which clearly shows that he was a stockholder of the

the said 1,500 shares of stock.

corporation. (See Section 30, Corporation Code) From the point of view of
the corporation, therefore, Chuidian was the owner of the 1,500 shares of

The petitioner's contention is not correct.

In the case of Embassy Farms, Inc. v. Court of Appeals (188 SCRA 492
[1990]) we ruled:

stock. In such a case, the petitioner who claims ownership over the
questioned shares of stock must show that the same were transferred to
him by proving that all the requirements for the effective transfer of shares
of stock in accordance with the corporation's by laws, if any, were followed

. . . For an effective, transfer of shares of stock the mode

(See Nava v. Peers Marketing Corporation, 74 SCRA 65 [1976]) or in

and manner of transfer as prescribed by law must be

accordance with the provisions of law.

followed (Navea v. Peers Marketing Corp., 74 SCRA 65).

As provided under Section 3 of Batas Pambansa Bilang, 68

The petitioner failed in both instances. The petitioner did not present any

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

by-laws which could show that the 1,500 shares of stock were effectively

factual findings that the shares of stock were given to Juan T. Chuidian for

transferred to him. In the absence of the corporation's by-laws or rules

value. Juan T. Chuidian was the legal counsel who handled the legal affairs

governing effective transfer of shares of stock, the provisions of the

of the corporation. We give credence to the testimony of the private

Corporation Law are made applicable to the instant case.

respondent that the shares of stock were given to Juan T. Chuidian in

payment of his legal services to the corporation. Petitioner Razon failed to

The law is clear that in order for a transfer of stock certificate to be

overcome this testimony.

effective, the certificate must be properlyindorsed and that title to such

certificate of stock is vested in the transferee by the delivery of the duly

In G.R. No. 74315, petitioner Vicente B. Chuidian insists that the appellate

indorsedcertificate of stock. (Section 35, Corporation Code) Since the

court's decision declaring his deceased father Juan T. Chuidian as owner of

certificate of stock covering the questioned 1,500 shares of stock

the 1,500 shares of stock of E. Razon, Inc. should have included all cash

registered in the name of the late Juan Chuidian was never indorsed to the

and stock dividends and all the pre-emptive rights accruing to the said

petitioner, the inevitable conclusion is that the questioned shares of stock

1,500 shares of stock.

belong to Chuidian. The petitioner's asseveration that he did not require an

indorsement of the certificate of stock in view of his intimate friendship
with the late Juan Chuidian can not overcome the failure to follow the
procedure required by law or the proper conduct of business even among

The petition is impressed with merit.

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

friends. To reiterate, indorsement of the certificate of stock is a mandatory

requirement of law for an effective transfer of a certificate of stock.

The rights of stockholders are generally enumerated as follows:

xxx xxx xxx

. . . [F]irst, to have a certificate or other evidence of his

status as stockholder issued to him; second, to vote at
meetings

of

the

corporation;

third,

to

receive

his

proportionate share of the profits of the corporation; and

lastly, to participate proportionately in the distribution of

the corporate assets upon the dissolution or winding up.

The key facts are undisputed.

(Purdy's Beach on Private Corporations, sec. 554) (Pascual

v. Del Saz Orozco, 19 Phil. 82, 87)

Clemente applied to purchase one share of stock of Calatagan, indicating

in his application for membership his mailing address at "Phimco

WHEREFORE, judgment is rendered as follows:

Industries, Inc. P.O. Box 240, MCC," complete residential address, office
and residence telephone numbers, as well as the company (Phimco) with

a) In G.R. No. 74306, the petition is DISMISSED. The questioned decision

and resolution of the then Intermediate Appellate Court, now the Court of

which he was connected, Calatagan issued to him Certificate of Stock No.

A-01295 on 2 May 1990 after paying P120,000.00 for the share.2

Appeals, are AFFIRMED. Costs against the petitioner.

Calatagan charges monthly dues on its members to meet expenses for
b) In G.R. No. 74315, the petition is GRANTED. The questioned Resolution
insofar as it denied the petitioner's motion to clarify the dispositive portion
of the decision of the then Intermediate Appellate Court, now Court of
Appeals is REVERSED and SET ASIDE. The decision of the appellate court is
MODIFIED in that all cash and stock dividends as, well as all pre-emptive

general operations, as well as costs for upkeep and improvement of the

grounds and facilities. The provision on monthly dues is incorporated in
Calatagans Articles of Incorporation and By-Laws. It is also reproduced at
the back of each certificate of stock. 3As reproduced in the dorsal side of
Certificate of Stock No. A-01295, the provision reads:

rights that have accrued and attached to the 1,500 shares in E. Razon, Inc.,
since 1966 are declared to belong to the estate of Juan T. Chuidian.

5. The owners of shares of stock shall be subject to the payment of

monthly dues in an amount as may be prescribed in the by-laws or by the

10. CALATAGAN GOLF CLUB, INC. Petitioner, vs. SIXTO CLEMENTE,

JR., Respondent.

Seeking the reversal of the Decision 1 dated 1 June 2004 of the Court of
Appeals in CA-G.R. SP No. 62331 and the reinstatement of the Decision
dated 15 November 2000 of the Securities and Exchange Commission
(SEC) in SEC Case No. 04-98-5954, petitioner Calatagan Golf Club, Inc.
(Calatagan) filed this Rule 45 petition against respondent Sixto Clemente,
Jr. (Clemente).

Board of Directors which shall in no case be less that [sic] P50.00 to meet
the expenses for the general operations of the club, and the maintenance
and improvement of its premises and facilities, in addition to such fees as
may be charged for the actual use of the facilities x x x

When Clemente became a member the monthly charge stood at P400.00.

He paid P3,000.00 for his monthly dues on 21 March 1991 and
another P5,400.00 on 9 December 1991. Then he ceased paying the dues.
At that point, his balance amounted to P400.00.4

Ten (10) months later, Calatagan made the initial step to collect

time

of

the

sale,

Clementes

accrued

monthly

dues

amounted

Clementes back accounts by sending a demand letter dated 21

toP5,200.00.9 A notice of foreclosure of Clementes share was published in

September 1992. It was followed by a second letter dated 22 October

the 26 May 1993 issue of the Business World. 10

1992. Both letters were sent to Clementes mailing address as indicated in

his membership application but were sent back to sender with the postal
note that the address had been closed. 5

Clemente learned of the sale of his share only in November of 1997. 11 He

filed a claim with the Securities and Exchange Commission (SEC) seeking
the restoration of his shareholding in Calatagan with damages.

Calatagan declared Clemente delinquent for having failed to pay his

monthly dues for more than sixty (60) days, specifically P5,600.00 as of 31
October 1992. Calatagan also included Clementes name in the list of
delinquent members posted on the clubs bulletin board. On 1 December
1992, Calatagans board of directors adopted a resolution authorizing the
foreclosure of shares of delinquent members, including Clementes; and
the public auction of these shares.

On 15 November 2000, the SEC rendered a decision dismissing Clementes

complaint. Citing Section 69 of the Corporation Code which provides that
the sale of shares at an auction sale can only be questioned within six (6)
months from the date of sale, the SEC concluded that Clementes claim,
filed four (4) years after the sale, had already prescribed. The SEC further
held that Calatagan had complied with all the requirements for a valid sale
of the subject share, Clemente having failed to inform Calatagan that the

On 7 December 1992, Calatagan sent a third and final letter to Clemente,

address he had earlier supplied was no longer his address. Clemente, the

this time signed by its Corporate Secretary, Atty. Benjamin Tanedo, Jr. The

SEC ruled, had acted in bad faith in assuming as he claimed that his non-

letter contains a warning that unless Clemente settles his outstanding

payment of monthly dues would merely render his share "inactive."

dues, his share would be included among the delinquent shares to be sold
at public auction on 15 January 1993. Again, this letter was sent to
Clementes mailing address that had already been closed. 6

Clemente filed a petition for review with the Court of Appeals. On 1 June
2004, the Court of Appeals promulgated a decision reversing the SEC. The
appellate court restored Clementes one share with a directive to

On 5 January 1993, a notice of auction sale was posted on the Clubs

Calatagan to issue in his a new share, and awarded to Clemente a total

bulletin board, as well as on the clubs premises. The auction sale took

of P400,000.00 in damages, less the unpaid monthly dues of P5,200.00.

place as scheduled on 15 January 1993, and Clementes share sold

forP64,000.7 According to the Certificate of Sale issued by Calatagan after
the sale, Clementes share was purchased by a Nestor A. Virata. 8 At the

In rejecting the SECs finding that the action had prescribed, the Court of
Appeals cited the SECs own ruling in SEC Case No. 4160, Caram v. Valley

Golf Country Club, Inc., that Section 69 of the Corporation Code specifically

Section 69 of the Code provides that an action to recover delinquent stock

refers to unpaid subscriptions to capital stock, and not to any other debt of

sold must be commenced by the filing of a complaint within six (6) months

stockholders. With the insinuation that Section 69 does not apply to unpaid

from the date of sale. As correctly pointed out by the Court of Appeals,

membership dues in non-stock corporations, the appellate court employed

Section 69 is part of Title VIII of the Code entitled "Stocks and

Article 1140 of the Civil Code as the proper rule of prescription. The

Stockholders" and refers specifically to unpaid subscriptions to capital

provision sets the prescription period of actions to recover movables at

stock, the sale of which is governed by the immediately preceding Section

eight (8) years.

68.

The Court of Appeals also pointed out that since that Calatagans first two

The Court of Appeals debunked both Calatagans and the SECs reliance on

demand letters had been returned to it as sender with the notation about

Section 69 by citing another SEC ruling in the case of Caram v. Valley Golf.

the closure of the mailing address, it very well knew that its third and final

In connection with Section 69, Calatagan raises a peripheral point made in

demand letter also sent to the same mailing address would not be received

the SECs Caram ruling. In Caram, the SEC, using as take-off Section 6 of

by Clemente. It noted the by-law requirement that within ten (10) days

the Corporation Code which refers to "such rights, privileges or restrictions

after the Board has ordered the sale at auction of a members share of

as may be stated in the articles of incorporation," pointed out that the

stock for indebtedness, the Corporate Secretary shall notify the owner

Articles of Incorporation of Valley Golf does not "impose any lien, liability or

thereof and advise the Membership Committee of such fact. Finally, the

restriction on the Golf Share [of Caram]," but only its (Valley Golfs) By-

Court of Appeals ratiocinated that "a person who is in danger of the

Laws does. Here, Calatagan stresses that its own Articles of Incorporation

imminent loss of his property has the right to be notified and be given the

does provide that the monthly dues assessed on owners of shares of the

chance to prevent the loss."12

corporation, along with all other obligations of the shareholders to the club,
"shall constitute a first lien on the shares and in the event of delinquency

Hence, the present appeal.

Calatagan maintains that the action of Clemente had prescribed pursuant

to Section 69 of the Corporation Code, and that the requisite notices under
both the law and the by-laws had been rendered to Clemente.

such shares may be ordered sold by the Board of Directors in the manner
provided in the By-Laws to satisfy said dues or other obligations of the
shareholders."13 With its illative but incomprehensible logic, Calatagan
concludes that the prescriptive period under Section 69 should also apply
to the sale of Clementes share as the lien that Calatagan perceives to be a

restriction is stated in the articles of incorporation and not only in the by-

Code which provides that an action to recover movables shall prescribe in

laws.

eight (8) years. Calatagans action is for the recovery of a share of stock,
plus damages.

We remain unconvinced.
Calatagans advertence to the fact that the constitution of a lien on the
There are fundamental differences that defy equivalence or even analogy
between the sale of delinquent stock under Section 68 and the sale that
occurred in this case. At the root of the sale of delinquent stock is the nonpayment of the subscription price for the share of stock itself. The
stockholder or subscriber has yet to fully pay for the value of the share or
shares subscribed. In this case, Clemente had already fully paid for the
share in Calatagan and no longer had any outstanding obligation to
deprive him of full title to his share. Perhaps the analogy could have been
made if Clemente had not yet fully paid for his share and the non-stock
corporation, pursuant to an article or by-law provision designed to address
that situation, decided to sell such share as a consequence. But that is not

members share by virtue of the explicit provisions in its Articles of

Incorporation and By-Laws is relevant but ultimately of no help to its cause.
Calatagans Articles of Incorporation states that the "dues, together with all
other obligations of members to the club, shall constitute a first lien on the
shares, second only to any lien in favor of the national or local government,
and in the event of delinquency such shares may be ordered sold by the
Board of Directors in the manner provided in the By-Laws to satisfy said
dues or other obligations of the stockholders." 14 In turn, there are several
provisions in the By-laws that govern the payment of dues, the lapse into
delinquency of the member, and the constitution and execution on the lien.
We quote these provisions:

the case here, and there is no purpose for us to apply Section 69 to the
case at bar.

ARTICLE XII MEMBERS ACCOUNT

Calatagan argues in the alternative that Clementes suit is barred by Article

SEC. 31. (a) Billing Members, Posting of Delinquent Members The

1146 of the Civil Code which establishes four (4) years as the prescriptive

Treasurer shall bill al members monthly. As soon as possible after the end

period for actions based upon injury to the rights of the plaintiff on the

of every month, a statement showing the account of bill of a member for

hypothesis that the suit is purely for damages. As a second alternative still,

said month will be prepared and sent to him. If the bill of any member

Calatagan posits that Clementes action is governed by Article 1149 of the

remains unpaid by the 20th of the month following that in which the bill

Civil Code which sets five (5) years as the period of prescription for all

was incurred, the Treasurer shall notify him that if his bill is not paid in full

other actions whose prescriptive periods are not fixed in the Civil Code or

by the end of the succeeding month his name will be posted as delinquent

in any other law. Neither article is applicable but Article 1140 of the Civil

the following day at the Clubhouse bulletin board. While posted, a

member, the immediate members of his family, and his guests, may not

(c) On the date and hour fixed, the Membership Committee shall

avail of the facilities of the Club.

proceed with the auction by viva voce bidding and award the sale
of the share of stock to the highest bidder.

(b) Members on the delinquent list for more than 60 days shall be
reported to the Board and their shares or the shares of the juridical

(d) The purchase price shall be paid by the winning bidder to the

entities they represent shall thereafter be ordered sold by the

Club within twenty-four (24) hours after the bidding. The winning

Board at auction to satisfy the claims of the Club as provided for in

bidder or the representative in the case of a juridical entity shall

Section 32 hereon. A member may pay his overdue account at any

become a Regular Member upon payment of the purchase price

time before the auction sale.

and issuance of a new stock certificate in his name or in the name

of the juridical entity he represents. The proceeds of the sale shall

Sec. 32. Lien on Shares; Sale of Share at Auction- The club shall have a first
lien on every share of stock to secure debts of the members to the Club.

be paid by the Club to the selling stockholder after deducting his

obligations to the Club.

This lien shall be annotated on the certificates of stock and may be

enforced by the Club in the following manner:

(e) If no bids be received or if the winning bidder fails to pay the

amount of this bid within twenty-four (24) hours after the bidding,

(a) Within ten (10) days after the Board has ordered the sale at
auction of a members share of stock for indebtedness under
Section 31(b) hereof, the Secretary shall notify the owner thereof,

the auction procedures may be repeated from time to time at the

discretion of the Membership Committee until the share of stock be
sold.

and shall advise the Membership Committee of such fact.

(f) If the proceeds from the sale of the share of stock are not
(b) The Membership Committee shall then notify all applicants on
the Waiting List and all registered stockholders of the availability of
a share of stock for sale at auction at a specified date, time and
place, and shall post a notice to that effect in the Club bulletin
board for at least ten (10) days prior to the auction sale.

sufficient to pay in full the indebtedness of the member, the

member shall continue to be obligated to the Club for the unpaid
balance. If the member whose share of stock is sold fails or refuse
to surrender the stock certificate for cancellation, cancellation shall
be effected in the books of the Club based on a record of the
proceedings. Such cancellation shall render the unsurrendered

stock certificate null and void and notice to this effect shall be duly

the amount of delinquency is not paid, the share will be included among

published.

the delinquent shares to be sold at public auction. This letter was signed
by Atty. Benjamin Tanedo, Jr., Calatagan Golfs Corporate Secretary. It was

It is plain that Calatagan had endeavored to install a clear and

comprehensive procedure to govern the payment of monthly dues, the
declaration of a member as delinquent, and the constitution of a lien on

again sent to Clementes mailing address Phimco Industries Inc.,

P.O. Box 240, MCC Makati. As expected, it was returned because the
post office box had been closed.

the shares and its eventual public sale to answer for the members debts.
Under Section 91 of the Corporation Code, membership in a non-stock

Under the By-Laws, the Corporate Secretary is tasked to "give or cause to

corporation "shall be terminated in the manner and for the causes

be given, all notices required by law or by these By-Laws. .. and keep a

provided in the articles of incorporation or the by-laws." The By-law

record of the addresses of all stockholders. As quoted above, Sec. 32 (a) of

provisions are elaborate in explaining the manner and the causes for the

the By-Laws further provides that "within ten (10) days after the Board has

termination of membership in Calatagan, through the execution on the lien

ordered the sale at auction of a members share of stock for indebtedness

of the share. The Court is satisfied that the By-Laws, as written, affords due

under Section 31 (b) hereof, the Secretary shall notify the owner thereof

protection to the member by assuring that the member should be notified

and shall advise the Membership Committee of such fact.," The records do

by the Secretary of the looming execution sale that would terminate

not disclose what report the Corporate Secretary transmitted to the

membership in the club. In addition, the By-Laws guarantees that after the

Membership Committee to comply with Section 32(a). Obviously, the

execution sale, the proceeds of the sale would be returned to the former

reason for this mandatory requirement is to give the Membership

member after deducting the outstanding obligations. If followed to the

Committee the opportunity to find out, before the share is sold, if proper

letter, the termination of membership under this procedure outlined in the

notice has been made to the shareholder member.

By-Laws would accord with substantial justice.

We presume that the Corporate Secretary, as a lawyer is knowledgeable on
Yet, did Calatagan actually comply with the by-law provisions when it sold

the law and on the standards of good faith and fairness that the law

Clementes share? The appellate courts finding on this point warrants our

requires. As custodian of corporate records, he should also have known

approving citation, thus:

that the first two letters sent to Clemente were returned because the P.O.
Box had been closed. Thus, we are surprised given his knowledge of the

In accordance with this provision, Calatagan sent the third and final
demand letter to Clemente on December 7, 1992. The letter states that if

law and of corporate records that he would send the third and final letter

 Clementes last chance before his share is sold and his membership lost

very well knew that Clementes postal box to which it sent its previous

to the same P.O. Box that had been closed.

letters had already been closed, yet it persisted in sending that final letter
to the same postal box. What for? Just for the exercise, it appears, as it had

Calatagan argues that it "exercised due diligence before the foreclosure

sale" and "sent several notices to Clementes specified mailing address."

known

very

well

that

the

letter

would

never

actually

reach

Clemente.1avvphi1

We do not agree; we cannot label as due diligence Calatagans act of

sending the December 7, 1992 letter to Clementes mailing address

It is noteworthy that Clemente in his membership application had provided

knowing fully well that the P.O. Box had been closed. Due diligence or good

his residential address along with his residence and office telephone

faith imposes upon the Corporate Secretary the chief repository of all

numbers. Nothing in Section 32 of Calatagans By-Laws requires that the

corporate records the obligation to check Clementes other address

final notice prior to the sale be made solely through the members mailing

which, under the By-Laws, have to be kept on file and are in fact on file.

address. Clemente cites

One obvious purpose of giving the Corporate Secretary the duty to keep

Commercial Banking Corporation v. Court of Appeals15 that "[a] simple

the addresses of members on file is specifically for matters of this kind,

telephone call and an ounce of good faith x x x could have prevented this

when the member cannot be reached through his or her mailing address.

present controversy." That memorable observation is quite apt in this case.

our aphorism-like pronouncement in Rizal

Significantly, the Corporate Secretary does not have to do the actual

verification of other addressees on record; a mere clerk can do the very
simple task of checking the files as in fact clerks actually undertake these
tasks. In fact, one telephone call to Clementes phone numbers on file
would have alerted him of his impending loss.

Calatagans bad faith and failure to observe its own By-Laws had resulted
not merely in the loss of Clementes privilege to play golf at its golf course
and avail of its amenities, but also in significant pecuniary damage to him.
For that loss, the only blame that could be thrown Clementes way was his
failure to notify Calatagan of the closure of the P.O. Box. That lapse, if we

Ultimately, the petition must fail because Calatagan had failed to duly

uphold Calatagan would cost Clemente a lot. But, in the first place, does he

observe both the spirit and letter of its own by-laws. The by-law provisions

deserve answerability for failing to notify the club of the closure of the

was clearly conceived to afford due notice to the delinquent member of the

postal box? Indeed, knowing as he did that Calatagan was in possession of

impending sale, and not just to provide an intricate faade that would

his home address as well as residence and office telephone numbers, he

facilitate Calatagans sale of the share. But then, the bad faith on

had every reason to assume that the club would not be at a loss should it

Calatagans part is palpable. As found by the Court of Appeals, Calatagan

need to contact him. In addition, according to Clemente, he was not even

aware of the closure of the postal box, the maintenance of which was not

The Court of Appeals also awarded Clemente P200,000.00 as moral

his responsibility but his employer Phimcos.

damages, P100,000.00

as

exemplary

damages,

and P100,000.00

as

attorneys fees. We agree that the award of such damages is warranted.

The utter bad faith exhibited by Calatagan brings into operation Articles
19, 20 and 21 of the Civil Code, 16 under the Chapter on Human Relations.

The Court of Appeals cited Calatagan for violation of Article 32 of the Civil

These provisions, which the Court of Appeals did apply, enunciate a

Code, which allows recovery of damages from any private individual "who

general obligation under law for every person to act fairly and in good faith

directly or indirectly obstructs, defeats, violates or in any manner impedes

towards one another. A non-stock corporation like Calatagan is not exempt

or impairs" the right "against deprivation of property without due process

from that obligation in its treatment of its members. The obligation of a

of laws." The plain letter of the provision squarely entitles Clemente to

corporation to treat every person honestly and in good faith extends even

damages from Calatagan. Even without Article 32 itself, Calatagan will still

to its shareholders or members, even if the latter find themselves

be bound to pay moral and exemplary damages to Clemente. The latter

contractually bound to perform certain obligations to the corporation. A

was able to duly prove that he had sustained mental anguish, serious

certificate of stock cannot be a charter of dehumanization.

anxiety and wounded feelings by reason of Calatagans acts, thereby

entitling him to moral damages under Article 2217 of the Civil Code.

We turn to the matter of damages. The award of actual damages is of

Moreover, it is evident that Calatagans bad faith as exhibited in the

course warranted since Clemente has sustained pecuniary injury by reason

of Calatagans wrongful violation of its own By-Laws. It would not be

course of its corporate actions warrants correction for the public good,

feasible to deliver Clementes original Certificate of Stock because it had

thereby justifying exemplary damages under Article 2229 of the Civil Code.

already been cancelled and a new one issued in its place in the name of
the purchases at the auction who was not impleaded in this case. However,
the Court of Appeals instead directed that Calatagan to issue to Clemente
a new certificate of stock. That sufficiently redresses the actual damages
sustained by Clemente. After all, the certificate of stock is simply the
evidence of the share.

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

is AFFIRMED. Costs against petitioner.