1.

Republic Planters Bank vs Court of Appeals

In 1979, World Garment Manufacturing, through its
board authorized Shozo Yamaguchi (president) and
Fermin Canlas (treasurer) to obtain credit facilities
from Republic Planters Bank (RPB). For this, 9
promissory notes were executed. Each promissory
note was uniformly written in the following manner:
___________, after date, for value received, I/we,
jointly and severally promise to pay to the ORDER
of the REPUBLIC PLANTERS BANK, at its office in
Manila, Philippines, the sum of ___________
PESOS(.) Philippine Currency
Please credit proceeds of this note to:
________ Savings Account ______XX Current Account
No. 1372-00257-6 of WORLDWIDE GARMENT MFG.
CORP.
Sgd. Shozo Yamaguchi
Sgd. Fermin Canlas
The note became due and no payment was made.
RPB eventually sued Yamaguchi and Canlas.
Canlas, in his defense, averred that he should not
be held personally liable for such authorized
corporate acts that he performed inasmuch as he
signed the promissory notes in his capacity as
officer of the defunct Worldwide Garment
Manufacturing.
ISSUE: Whether or not Canlas should be held liable
for the promissory notes.
HELD: Yes. The solidary liability of private
respondent Fermin Canlas is made clearer and
certain, without reason for ambiguity, by the
presence of the phrase joint and several as
describing the unconditional promise to pay to the
order of Republic Planters Bank. Where an
instrument containing the words I promise to pay
is signed by two or more persons, they are deemed
to be jointly and severally liable thereon.
Canlas is solidarily liable on each of the promissory
notes bearing his signature for the following
reasons:
The promissory notes are negotiable instruments
and must be governed by the Negotiable
Instruments Law.
Under the Negotiable lnstruments Law, persons
who write their names on the face of promissory
notes are makers and are liable as such. By
signing the notes, the maker promises to pay to the
order of the payee or any holder according to the
tenor thereof.
2. CASTILLO vs. BALINGHASAY
G.R. No. 150976
October 18, 2004
FACTS: Petitioners and the respondents are
stockholders of MCPI, with the former holding Class
"B" shares and the latter owning Class "A" shares.
MCPI is a domestic corporation. It was organized
sometime in September 1977. At the time of its
incorporation, Act No. 1459, the old Corporation
Law was still in force and effect. On September 9,

1992, Article VII was again amended. It states that

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 officers. 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 before the RTC of
Paraaque City, Branch 258. In finding for the
respondents, the trial court ruled that corporations
had the power to classify their shares of stocks,
such
as
"voting
and
non-voting"
shares,
conformably with Section 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. Hence this petition.
ISSUE: Whether or not holders of Class "B" shares
of the MCPI may be deprived of the right to vote
and be voted for as directors in MCPI.
RULING: The law referred to in the amendment to
Article VII refers to the Corporation Code and no
other law. At the time of the incorporation of MCPI
in 1977, the right of a corporation to classify its
shares of stock was sanctioned by Section 5 of Act
No. 1459. The law repealing Act No. 1459, B.P. Blg.
68, retained the same grant of right of classification
of stock shares to corporations, but with a
significant change. Under Section 6 of B.P. Blg. 68,
the requirements and restrictions on voting rights
were explicitly provided for, such that "no share
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.
There is no merit in respondents position that
Section 6 of the Corporation Code cannot apply to
MCPI without running afoul of the non-impairment
clause of the Bill of Rights. Section 148 of the
Corporation Code expressly provides that it shall
apply to corporations in existence at the time of
the effectivity of the Code.
3. Wilson P. Gamboa v. Finance Secretary
Margarito Teves, et al., G.R. No. 176579, June
28, 2011
I.

THE FACTS

This is a petition to nullify the sale of shares of

stock of Philippine Telecommunications Investment
Corporation (PTIC) by the government of the
Republic of the Philippines, acting through the
Inter-Agency Privatization Council (IPC), to Metro
Pacific Assets Holdings, Inc. (MPAH), an affiliate of
First Pacific Company Limited (First Pacific), a Hong
Kong-based investment management and holding
company and a shareholder of the Philippine Long
Distance Telephone Company (PLDT).
The petitioner questioned the sale on the ground
that it also involved an indirect sale of 12 million
shares (or about 6.3 percent of the outstanding
common shares) of PLDT owned by PTIC to First
Pacific. With the this sale, First Pacifics common
shareholdings in PLDT increased from 30.7 percent
to 37 percent, thereby increasing the total common
shareholdings of foreigners in PLDT to about
81.47%. This, according to the petitioner, violates
Section 11, Article XII of the 1987 Philippine
Constitution which limits foreign ownership of the
capital of a public utility to not more than 40%,
thus:
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)
II.

THE ISSUE

Does the term capital in Section 11, Article XII of

the Constitution refer to the total common shares
only, or to the total outstanding capital stock
(combined total of common and non-voting
preferred shares) of PLDT, a public utility?
III. THE RULING
[The Court partly granted the petition and held that
the term capital in Section 11, Article XII of the
Constitution refers only to shares of stock entitled
to vote in the election of directors of a public utility,
i.e., to the total common shares in PLDT.]
Considering that common shares have voting rights
which translate to control, as opposed to preferred
shares which usually have no voting rights, the
term capital in Section 11, Article XII of the
Constitution refers only to common shares.
However, if the preferred shares also have the right
to vote in the election of directors, then the term
capital
shall
include
such
preferred
shares because the right to participate in the
control or management of the corporation is
exercised through the right to vote in the election
of directors. In short, the term capital in Section
11, Article XII of the Constitution refers only to
shares of stock that can vote in the election of
directors.
To construe broadly the term capital as the total
outstanding capital stock, including both common
and non-voting preferred
shares,
grossly
contravenes the intent and letter of the
Constitution that the State shall develop a selfreliant
and
independent
national
economy effectively controlled by Filipinos. A
broad definition unjustifiably disregards who owns
the all-important voting stock, which necessarily
equates to control of the public utility.
Holders of PLDT preferred shares are explicitly
denied of the right to vote in the election of
directors. PLDTs Articles of Incorporation expressly
state that the holders of Serial Preferred Stock
shall not be entitled to vote at any meeting of the
stockholders for the election of directors or for any
other purpose or otherwise participate in any
action taken by the corporation or its stockholders,

or to receive notice of any meeting of

stockholders. On the other hand, holders of
common shares are granted the exclusive right to
vote in the election of directors. PLDTs Articles of
Incorporation state that each holder of Common
Capital Stock shall have one vote in respect of each
share of such stock held by him on all matters
voted upon by the stockholders, and the holders of
Common Capital Stock shall have the exclusive
right to vote for the election of directors and for all
other purposes.
It must be stressed, and respondents do not
dispute, that foreigners hold a majority of the
common shares of PLDT. In fact, based on PLDTs
2010 General Information Sheet (GIS), which is a
document required to be submitted annually to the
Securities and Exchange Commission, foreigners
hold 120,046,690 common shares of PLDT whereas
Filipinos hold only 66,750,622 common shares. In
other words, foreigners hold 64.27% of the total
number of PLDTs common shares, while Filipinos
hold only 35.73%. Since holding a majority of the
common shares equates to control, it is clear that
foreigners exercise control over PLDT. Such amount
of control unmistakably exceeds the allowable 40
percent limit on foreign ownership of public utilities
expressly mandated in Section 11, Article XII of the
Constitution.
As shown in PLDTs 2010 GIS, as submitted to the
SEC, the par value of PLDT common shares is P5.00
per share, whereas the par value of preferred
shares is P10.00 per share. In other words,
preferred shares have twice the par value of
common shares but cannot elect directors and
have only 1/70 of the dividends of common shares.
Moreover, 99.44% of the preferred shares are
owned by Filipinos while foreigners own only a
minuscule 0.56% of the preferred shares. Worse,
preferred shares constitute 77.85% of the
authorized capital stock of PLDT while common
shares constitute only 22.15%. This undeniably
shows that beneficial interest in PLDT is not with
the non-voting preferred shares but with the
common
shares,
blatantly
violating
the
constitutional requirement of 60 percent Filipino
control and Filipino beneficial ownership in a public
utility.
In short, Filipinos hold less than 60 percent of the
voting stock, and earn less than 60 percent of the
dividends, of PLDT. This directly contravenes the
express command in Section 11, Article XII of the
Constitution that [n]o franchise, certificate, or any
other form of authorization for the operation of a
public utility shall be granted except to x x x
corporations x x x organized under the laws of the
Philippines, at least sixty per centum of whose
capital is owned by such citizens x x x.
To repeat, (1) foreigners own 64.27% of the
common shares of PLDT, which class of shares
exercises the sole right to vote in the election of
directors, and thus exercise control over PLDT; (2)

Filipinos own only 35.73% of PLDTs common

shares, constituting a minority of the voting stock,
and thus do not exercise control over PLDT; (3)
preferred shares, 99.44% owned by Filipinos, have
no voting rights; (4) preferred shares earn only 1/70
of the dividends that common shares earn; (5)
preferred shares have twice the par value of
common shares; and (6) preferred shares
constitute 77.85% of the authorized capital stock of
PLDT and common shares only 22.15%. This kind of
ownership and control of a public utility is a
mockery of the Constitution.
[Thus,
the Respondent
Chairperson
of
the
Securities
and
Exchange
Commission
was DIRECTED by the Court to apply the foregoing
definition of the term capital in determining the
extent of allowable foreign ownership in respondent
Philippine Long Distance Telephone Company, and
if there is a violation of Section 11, Article XII of the
Constitution, to impose the appropriate sanctions
under the law.]
4. COMMISSIONER OF INTERNAL REVENUE
vs. THE COURT OF APPEALS
Facts: Sometime in the 1930s, Don Andres Soriano,
a citizen and resident of the United States, formed
the corporation A. Soriano Y Cia, predecessor of
ANSCOR with a 1,000,000.00 capitalization divided
into 10,000 common shares at a par value of
P100/share. ANSCOR is wholly owned and
controlled by the family of Don Andres, who are all
non-resident aliens. In 1937, Don Andres
subscribed to 4,963 shares of the 5,000 shares
originally issued.
On September 12, 1945, ANSCORs authorized
capital stock was increased to P2,500,000.00
divided into 25,000 common shares with the same
par value. Of the additional 15,000 shares, only
10,000 was issued which were all subscribed by
Don Andres, after the other stockholders waived in
favor of the former their pre-emptive rights to
subscribe to the new issues. This increased his
subscription to 14,963 common shares. A month
later, Don Andres transferred 1,250 shares each to
his two sons, Jose and Andres Jr., as their initial
investments in ANSCOR. Both sons are foreigners.
By
1947,
ANSCOR
declared stock dividends.
Other stock dividend declarations were made
between 1949 and December 20, 1963. On
December 30, 1964 Don Andres died. As of that
date, the records revealed that he has a total
shareholdings of 185,154 shares. 50,495 of which
are original issues and the balance of 134,659
shares
as stock dividend
declarations.
Correspondingly, one-half of that shareholdings or
92,577 shares were transferred to his wife,
Doa Carmen Soriano, as her conjugal share. The
offer half formed part of his estate.
A day after Don Andres died, ANSCOR increased its
capital stock to P20M and in 1966 further increased
it to P30M. In the same year (December
1966), stock dividends worth 46,290 and 46,287
shares were respectively received by the Don

Andres estate and Doa Carmen from ANSCOR.

Hence, increasing their accumulated shareholdings
to 138,867 and 138,864 common shares each.
On December 28, 1967, Doa Carmen requested a
ruling from the United States Internal Revenue
Service
(IRS),
inquiring
if
an
exchange
of commonwith
preferred
shares
may
be
considered as a tax avoidance scheme. By January
2, 1968, ANSCOR reclassified its existing
300,000 common shares into 150,000 common and
150,000 preferred shares.
In a letter-reply dated February 1968, the IRS
opined that the exchange is only a recapitalization
scheme and not tax avoidance. Consequently, on
March 31, 1968 Doa Carmen exchanged her whole
138,864 commonshares for 138,860 of the
preferred shares. The estate of Don Andres in turn
exchanged 11,140 of its common shares for the
remaining 11,140 preferred shares.
In 1973, after examining ANSCORs books of
account and record Revenue examiners issued a
report proposing that ANSCOR be assessed for
deficiency withholding tax-at-source, for the year
1968 and the 2nd quarterof 1969 based on the
transaction of exchange and redemption of stocks.
BIR
made
the
corresponding assessments.
ANSCORs
subsequent
protest
on
the assessments was denied in 1983 by petitioner.
ANSCOR filed a petition for review with the CTA, the
Tax Court reversed petitioners ruling. CA affirmed
the ruling of the CTA. Hence this position.
Issue: WON ANSCORs redemption of stocks from its
stockholder as well as the exchange of common
with preferred shares can be considered as
essentially equivalent to the distribution of taxable
dividend, making the proceeds thereof taxable
under the provisions of the above-quoted law.
UNA: A stock dividend representing the transfer of
surplus to capital account shall not be subject to
tax.
However,
if
a
corporation cancels
or redeems stock issued as a dividend at such time
and in such manner as to make the distribution and
cancellation or redemption, in whole or in
part, essentially equivalent to the distribution of
a taxable dividend, the amount so distributed in
redemption or cancellation of the stock shall be
considered as taxable income to the extent it
represents
a
distribution
of
earnings
or
profits accumulated after March first, nineteen
hundred and thirteen.
In a response to the ruling of the American
Supreme Court in the case of Eisner v. Macomber,
corporate earnings would be distributed under the
guise of its initial capitalization by declaring the
stock dividends previously issued and later redeem
said dividends by paying cash to the stockholder.
This process of issuance-redemption amounts to a
distribution of taxable cash dividends which was
just delayed so as to escape the tax. It becomes a
convenient technical strategy to avoid the effects
of taxation.

Thus, to plug the loophole the exempting clause

was added. It provides that the redemption or
cancellation of stock dividends, depending on the
time and manner it was made is essentially
equivalent to a distribution of taxable dividends,
making the proceeds thereof taxable income to the
extent it represents profits. The exception was
designed to prevent the issuance and cancellation
or redemption of stock dividends, which is
fundamentally not taxable, from being made use of
as a device for the actual distribution of cash
dividends, which is taxable.
Although redemption and cancellation are generally
considered capital transactions, as such, they are
not subject to tax. However, it does not necessarily
mean that a shareholder may not realize a taxable
gain from such transactions. Simply put, depending
on the circumstances, the proceeds of redemption
of stock dividends are essentially distribution of
cash dividends, which when paid becomes the
absolute property of the stockholder. Thereafter,
the latter becomes the exclusive owner thereof and
can exercise the freedom of choice. Having realized
gain from that redemption, the income earner
cannot escape income tax.
For the exempting clause of Section 83(b) to apply,
it is indispensable that: (a) there is redemption or
cancellation; (b) the transaction involves stock
dividends and (c) the time and manner of the
transaction makes it essentially equivalent to a
distribution of taxable dividends.
It is not the stock dividends but the proceeds of its
redemption that may be deemed as taxable
dividends. Here, it is undisputed that at the time of
the last redemption, the original common shares
owned by the estate were only 25,247.5.[91] This
means that from the total of 108,000 shares
redeemed from the estate, the balance of 82,752.5
(108,000 less 25,247.5) must have come
from stock dividends. The capital cannot be
distributed in the form of redemption of stock
dividends without violating the trust fund doctrine
wherein the capital stock, property and other
assets of the corporation are regarded as equity in
trust for the payment of the corporate
creditors.Once capital, it is always capital.
After
considering
the
manner
and
the
circumstances by which the issuance and
redemption of stock dividends were made, there is
no other conclusion but that the proceeds thereof
are essentially considered equivalent to a
distribution of taxable dividends.
KALAWA: Exchange is an act of taking or giving
one thing for another involving reciprocal transfer
and is generally considered as a taxable
transaction. The exchange of common stocks with
preferred stocks, or preferred for common or a
combination of either for both, may not produce a
recognized gain or loss, so long as the provisions of
Section 83(b) is not applicable. This is true in a
trade between two (2) persons as well as a trade
between a stockholder and a corporation. In
general, this trade must be parts of merger,
transfer to controlled corporation, corporate

acquisitions or corporate reorganizations. No

taxable gain or loss may be recognized on
exchange of property, stock or securities related to
reorganizations.
There was no change in their proportional interest
after the exchange. There was no cash flow. Both
stocks had the same par value. Under the facts
herein, any difference in their market value would
be immaterial at the time of exchange because no
income is yet realized it was a mere corporate
paper transaction. It would have been different, if
the exchange transaction resulted into a flow of
wealth, in which case income tax may be imposed.
Reclassification of shares does not always bring any
substantial
alteration
in
the
subscribers
proportional interest. But the exchange is different
there would be a shifting of the balance of stock
features, like priority in dividend declarations or
absence of voting rights. Yet neither the
reclassification nor exchange per se, yields realize
income for tax purposes.
In this case, the exchange of shares, without more,
produces no realized income to the subscriber.
There is only a modification of the subscribers
rights and privileges - which is not a flow of wealth
for tax purposes. The issue of taxable dividend may
arise only once a subscriber disposes of his entire
interest and not when there is still maintenance of
proprietary interest.
5.Cocofed vs
177857-58

Republic
Jan

Case Digest GR
24
2012

Facts:
In 1971, RA 6260 created the Coconut Investment
Company (CIC) to administer the Coconut
Investment Fund, a fund to be sourced from levy on
the sale of copra. The copra seller was, or ought to
be, issued COCOFUND receipts. The fund was
placed at the disposition of COCOFED, the national
association of coconut producers having the largest
membership.
When martial law started in 1972, several
presidential decrees were issued to improve the
coconut industry through the collection and use of
the coconut levy fund:
PD 276 established the Coconut Consumers
Stabilization Fund (CCSF) and declared the
proceeds of the CCSF levy as trust fund, to be
utilized to subsidize the sale of coconut-based
products, thus stabilizing the price of edible oil.
PD 582 created the Coconut Industry Development
Fund (CIDF) to finance the operation of a hybrid
coconut seed farm.
In 1973, PD 232 created the Philippine Coconut
Authority (PCA) to accelerate the growth and
development of the coconut and palm oil industry.
Then came P.D. No. 755 in July 1975, providing
under its Section 1 the policy to provide readily
available credit facilities to the coconut farmers at
preferential rates. Towards achieving this, Section 2
of PD 755 authorized PCA to utilize the CCSF and
the CIDF collections to acquire a commercial bank
and deposit the CCSF levy collections in said bank,
interest free, the deposit withdrawable only when

the bank has attained a certain level of sufficiency

in its equity capital. It also decreed that all levies
PCA is authorized to collect shall not be considered
as special and/or fiduciary funds or form part of the
general funds of the government.
Both P.D. Nos. 961 and 1468 also provide that the
CCSF shall not be construed by any law as a special
and/or trust fund, the stated intention being
that actual ownership of the said fund shall pertain
to coconut farmers in their private capacities.
Shortly before the issuance of PD 755 however,
PCA had already bought from Peping Cojuangco
72.2% of the outstanding capital stock of FUB /
UCPB. In that contract, it was also stipulated that
Danding Cojuanco shall receive equity in FUB
amounting to 10%, or 7.22 % of the 72.2%, as
consideration for PCAs buy-out of what Danding
Conjuanco claim as his exclusive and personal
option to buy the FUB shares.
The PCA appropriated, out of its own fund, an
amount for the purchase of the said 72.2% equity.
It later reimbursed itself from the coconut levy
fund.
While the 64.98% (72.2 % 7.22%) portion of the
option shares ostensibly pertained to the farmers,
the corresponding stock certificates supposedly
representing the farmers equity were in the name
of and delivered to PCA. There were, however,
shares forming part of the 64.98% portion, which
ended up in the hands of non-farmers. The
remaining 27.8% of the FUB capital stock were not
covered by any of the agreements.
Through the years, a part of the coconut levy funds
went directly or indirectly to various projects and/or
was converted into different assets or investments.
Of particular relevance to this was their use to
acquire the FUB / UCPB, and the acquisition by
UCPB, through the CIIF and holding companies, of a
large block of San Miguel Corporation (SMC) shares.
Issue 1: W/N the mandate provided under PD 755,
961 and 1468 that the CCSF shall not be construed
by any law as a special and/or trust fund is valid
No. The coconut levy funds can only be used for
the special purpose and the balance thereof should
revert back to the general fund.
Article VI, Section 29 (3) of the Constitution
provides that all money collected on any tax levied
for a special purpose shall be treated as a special
fund and paid out for such purpose only, and if the
purpose for which a special fund was created has
been fulfilled or abandoned, the balance, if any,
shall be transferred to the general funds of the
Government. Here, the CCSF were sourced from
forced exactions with the end-goal of developing
the entire coconut industry. Therefore, the
subsequent reclassification of the CCSF as a private
fund to be owned by private individuals in their
private capacities under P.D. Nos. 755, 961 and
1468 is unconstitutional.
Not only is it unconstitutional, but the mandate is
contrary to the purpose or policy for which the coco
levy fund was created.

Issue 2:
W/N the coco levy fund may be owned by the
coconut farmers in their private capacities
No. The coconut levy funds are in the nature of
taxes and can only be used for public purpose.
They cannot be used to purchase shares of stocks
to be given for free to private individuals. Even if
the money is allocated for a special purpose and
raised by special means, it is still public in
character.
Accordingly, the presidential issuances which
authorized the PCA to distribute, for free, the
shares of stock of the bank it acquired to the
coconut farmers under such rules and regulations
the PCA may promulgate is unconstitutional.
It is unconstitutional because first, it have unduly
delegated legislative power to the PCA, and
second, it allowed the use of the CCSF to benefit
directly private interest by the outright and
unconditional grant of absolute ownership of the
FUB/UCPB shares paid for by PCA entirely with the
CCSF to the undefined coconut farmers, which
negated or circumvented the national policy or
public purpose declared by P.D. No. 755.
Hence, the so-called Farmers shares do not belong
to the coconut farmers in their private capacities,
but to the Government. The coconut levy funds are
special public funds and any property purchased by
means of the coconut levy funds should likewise be
treated as public funds or public property, subject
to burdens and restrictions attached by law to such
property.

6. KUKAN INTERNATIONAL CORPORATION VS.

HON. AMOR REYES
G.R. NO. 182729, SEPTEMBER 29, 2010
FACTS:
Private respondent Romeo M. Morales doing
business
under
the
name
RM
Morales
Trophies and Plaques was awarded a P5 million
contract for the supply and installation of signages
in a building constructed in Makati sometime in
March 1998. The contract price was later reduced
to P3,388,502 because some items were deleted
from the contract. Morales complied with his
contractual obligations but he was paid only the
amount of P1,976,371.07 leaving a balance of
P1,412,130.93. He filed a case against Kukan, Inc.,
for sum of money with the RTC of Manila docketed
as Civil Case No. 99-93173. Kukan Inc., stopped
participating in the proceedings in November 2000,
hence, it was
declared in default and Morales
presented his evidence ex-parte against petitioner.
On November 28, 2002, the RTC rendered a
decision in favor of Morales and against Kunkan,
Inc. ordering the latter to pay the sum of
P1,201,724.00 with legal interest of 12% per
annum until fully paid; P50,000.00 as moral
damages,P20,000.00 as attorney's fees and
P7,960.06
as
litigation
expenses.
The
counterclaimfiled by Kunkan, Inc. was dismissed.

The decision became final and executory During

the execution, the sheriff levied the personal
properties found at the office of Kukan, Inc..
Claiming it owned the properties levied, Kukan
International Corporation (KIC) fied an Affidavit of
Third Party Claim. Morales filed an Omnibus Motion
praying to apply the principle of piercing the veil of
corporate entity. He alleged that Kankun, Inc. and
KIC are one and the same corporation His Motion
was denied. On Motion of Morales the presiding
Judge of Branch 17 of RTC Manila inhibited himself
from hearing the case. It was raffled to Branch 21
which granted the Motion filed by Morales on March
12, 2007 and decreed that Kukan, Inc. and Kukan
International Inc., as one and the same corporation;
that the levy made on the properties of KIC is valid;
and ordering Kunkan International Corp. and
Michael Chan as jointly and severally liable to pay
the award pursuant to the Decision dated
November 28, 2002. KIC filed a Motion for
Reconsideration which was denied.KIC brought the
case to the Court of Appeals which rendered the
Decision n January 23, 2008 denying KIC's petition.
The CA also denied its Motion for Reconsideration
in the Resolution dated June 7, 2007.
Hence, this case.
ISSUE/S: One of the issues raised is whether or
not
the trial
court and the appellate court
correctly applied the principle of piercing the veil of
corporate entity.
HELD: The Supreme Court ruled that the doctrine
of piercing the veil of corporate entity finds no
application in this case.
According to the Supreme Court, the principle of
piercing the veil of corporate entity and the
resulting treatment of two related corporation as
one and the same juridical person applies only to
established liability and not to confer jurisdiction. In
this case, the Supreme Court ruled that KIC was not
made a party defendant in Civil Case No. 99-93173.
It entered a special but not a voluntary appearance
in the trial court to assert that it was a separate
entity and has a separate legal personality from
Kunkan, Inc. KIC was not impleaded nor served with
summons. Hence, it could only assert its claim
through the affidavits, comments and motions filed
by special apperance before the RTC that it is a
separate juridical entity.
The Supreme stated that the doctrine of piercing
the veil of corporate entity comes to play during
the trial of the case after the court has already
acquired jurisdiction over the corporation.
To justify the piercing of the veil of corporate
fiction, it must be shown by clear and convincing
proof
that
the
separate and
distinct
personality of the corporation was purposely
employed to evade a legitimate and binding
comittment and perpetuate a fraud or like a
wrongdoings.
In those instances when the Court pierced the veil
of corporate fiction of two corporations, there was a
confluence of the following factors:

1.
A first corporation is dissolved;
2.
The assets of the first corporation is
transferred to a second corporation to avoid a
financial
liability of the first corporation; and
3.
Both corporations are owned and
controlled by the same persons such that the
second
corporation should be considered as a continuation
and successor of the first corporation.
In this case, the second and third factors are
conspicuously absent.
There is, therefore, no
compelling justification for disregarding the fiction
of corporate entity separating Kukan, Inc. from KIC.
In applying the principle, both the RTC and the CA
miserably failed to identify the presence of the
abovementioned factors.
The High Court stated that neither should the level
of paid-up capital of Kukan, Inc. upon its
incorporation be viewed as a badge of fraud, for it
is in compliance with Sec. 13 of the Corporation
Code, which only requires a minimum paid-up
capital of PhP 5,000.
The suggestion that KIC is but a continuation and
successor of Kukan, Inc., owned and controlled as
they are by the same stockholders, stands without
factual basis. The fact that Michael Chan, a.k.a.
Chan Kai Kit, owns 40% of the outstanding capital
stock of both corporations standing alone,
is
insufficient to establish identity. There must
be
at
least
a
substantial
identity
of
stockholders for both corporations in order to
consider this factor to be constitutive of corporate
identity.
7. TOPIC: Concession Theory and Corporate
Franchises
CASE NAME: JRS BUSINESS CORP VS IMPERIAL
INSURANCE INC
NAME: Carmela Abergos
FACTS:
Imperial Insurance Inc., filed against JRS Business
Corp, an establishment duly franchised by the
Congress of the Philippines to conduct a messenger
and delivery express service, a complaint for sum
of money. The parties entered into a Compromise
Agreement where defendants promised to pay their
obligation in the amount of P 61,172.32 within 60
days and should they fail to pay, Imperial Insurance
shall be entitled to move for the execution of the
decision.
JRS failed to pay its judgment debt. Imperial
Insurance Inc. then filed a motion for the issuance
of a Writ of Execution. A Writ of Execution was
issued and Notices of Sale were sent out for the
auction of the personal properties of J.R.S. Business
Corporation.
Notice of Sale of the "whole capital stocks of the
defendants JRS Business Corporation, the business

name, right of operation, the whole assets,

furnitures and equipments, the total liabilities, and
Net Worth, books of accounts, etc., of the petitioner
corporation was, handed down.
JRS filed an "Urgent Petition for Postponement of
Auction Sale and for Release of Levy on the
Business Name and Right to Operate of Defendant
JRS Business Corporation" stating that the
judgment was for money only. Thus, Imperial
Insurance may not use the business name of JRS
Business Corp and its right to operate under the
franchise is not transferable and could not be
subject to levy and sale. CFI of Manila denied the
petition for postponement.
Auction sale was conducted and all the properties
of JRS Business Corporation, the business name,
right of operation, the whole assets, furnitures and
equipments, the total liabilities and net worth,
books of accounts and etc. were bought by
respondent Imperial Insurance, Inc., for P10,000.00,
which was the highest bid offered. After the sale,
respondent Insurance Company took possession of
the proper ties and started running the affairs and
operating the business of the JRS Business
Corporation.
ISSUE:
Won the business name or trade name, franchise
(right to operate) and capital stocks of the
petitioner could be the subject of levy, execution
and sale.
SC RULING:
No. The right to operate a messenger and express
delivery service, by virtue of a legislative
enactment, is admittedly a secondary franchise
(R.A. No. 3260, entitled "An Act granting the JRS
Business Corporation a franchise to conduct a
messenger and express service)" and, as such,
under our corporation law, is subject to levy and
sale on execution together and including all the
property necessary for the enjoyment thereof. The
law, however, indicates the procedure under which
the same (secondary franchise and the properties
necessary for its enjoyment) may be sold under
execution. Said franchise can be sold under
execution, when such sale is especially decreed
and ordered in the judgment and it becomes
effective only when the sale is confirmed by the
Court after due notice (Sec. 56, Corp. Law). The
compromise agreement and the judgment based
thereon, do not contain any special decree or order
making the franchise answerable for the judgment
debt. The same thing may be stated with respect to
petitioner's trade name or business name and its
capital stock. Incidentally, the trade name or
business name corresponds to the initials of the
President of the petitioner corporation and there
can be no serious dispute regarding the fact that a
trade name or business name and capital stock are
necessarily included in the enjoyment of the
franchise. Like that of a franchise, the law
mandates, that property necessary for the

enjoyment of said franchise, can only be sold to

satisfy a judgment debt if the decision especially so
provides. As we have stated heretofore, no such
directive appears in the decision. Moreover, a trade
name or business name cannot be sold separately
from the franchise, and the capital stock of the
petitioner corporation or any other corporation, for
the matter, represents the interest and is the
property of stockholders in the corporation, who
can only be deprived thereof in the manner
provided by law
11.
NATIONAL
TELECOMMUNICATIONS
COMMISSION vs. HONORABLE COURT OF
APPEALS
FACTS:
Sometime
in
1988,
the
National
Telecommunications Commission (NTC) served on
the
Philippine
Long
Distance
Telephone
Company (PLDT) assessment notices and demands
for payment stating among others: 3. the amounts
of P12,261,600.00 and P33,472,030.00 as permit
fees under Section 40 (g) of the PSA. In its two
letter-protests dated the PLDT challenged the
aforesaid assessments, theorizing
that the
assessments
were
being
made to
raise
revenues and not as mere reimbursements for
actual regulatory expenses, the assessment under
Section 40 (e) should only have been on the basis
of
the par
values of
private
respondents
outstanding capital stock and petitioner has no
authority to compel private 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.
NTC rendered a Decision denying the protest of
PLDT.
PLDT
interposed
a Motion
for
Reconsideration, which was denied. PLDT appealed
the aforesaid Decision to the Court of Appeals,
which modified the same and ordered NTC to
recompute its assessments and demands for
payment from petitioner PLDT as follows:
A. For annual supervision and regulation fees (SRF)
under Section 40 (e) of the Public Service Act, as
amended, they should be computed at fifty
centavos for each one hundred pesos or fraction
thereof of the par value of the capital stock
subscribed or paid excluding stock dividends,
premiums or capital in excess of par.
B. For permit fees for the approval of petitioners
increase of authorized capital stock under Section
40 (f) of the same Act, they should be computed at
fifty for each one hundred pesos or fraction
thereof, regardless of any regulatory service or
expense incurred by respondent.
NTC moved for partial reconsideration of the
abovementioned Decision, with respect to the basis
of the assessment 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 issuance or increasing of the
capital stock under Section 40 (f).

ISSUE: WON COURT OF APPEALS ERRED IN

HOLDING
THAT
THE
COMPUTATION
OF
SUPERVISION AND REGULATION FEES UNDER
SECTION 40 (F) OF THE PUBLIC SERVICE ACT
SHOULD BE BASED ON THE PAR VALUE OF THE
SUBSCRIBED CAPITAL STOCK.
HELD: It bears stressing that it is not the NTC that
imposed such a fee. It is the legislature itself. 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 corporation receives, inclusive of
the premiums if any, in consideration of the original
issuance of the shares. In the case of stock
dividends, it is the amount that the corporation
transfers from its surplus profit account to its
capital account. It is the same amount that can
loosely be termed as the trust fund of the
corporation.
The Trust Fund doctrine considers this subscribed
capital as a trust fund for the payment of the debts
of the corporation, to which the creditors may look
for satisfaction. Until the liquidation of the
corporation, no part of the subscribed capital may
be returned or released to the stockholder (except
in the redemption of redeemable shares) without
violating this principle. Thus, dividends must never
impair
the
subscribed
capital;
subscription
commitments cannot be condoned or remitted; nor
can the corporation buy its own shares using the
subscribed capital as the consideration therefor.
The Court must disallow the idea of computing the
fee on the par value of [PLDTs] capital stock
subscribed or paid excluding stock 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.
From the pleadings on hand, it can be gleaned that
the assessment for supervision and regulation fee
under Section 40(e) made by NTC for 1988,
computed at P0.50 per 100 of PLDTs outstanding
capital stock as of December 31, 1987, amounted
to P7,495,161.00. The same was based on the
amount of P1,277,934,390.00 of serial preferred
stocks and P221,097,785.00 of common stocks or a
total of P1,499,032,175.00. The assessment was
reported to include stock dividends, premium on
issued common shares and premium on preferred
shares converted into common stock. 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. The only other item available is the amount
assessed by petitioner from PLDT, which had been
based on market value of the outstanding capital
stock on given dates.
All things studiedly considered, and mindful of the
aforesaid ruling of this Court in the case of
Philippine Long Distance Telephone Company vs.
Public Service Commission, it should be reiterated
that the proper basis for the computation of subject
fee under Section 40(e) of the Public Service Act, as
amended by Republic Act No. 3792, is the capital

stock subscribed or paid and not, alternatively, the

property and equipment.
The National Telecommunication Commission is
hereby ordered to make a re-computation of the
fee to be imposed on Philippine Long Distance
Telephone Company on the basis of the latters
capital stock subscribed or paid and strictly in
accordance with the foregoing disquisition and
conclusion. To repeat, the fee in question is based
on the capital stock subscribed or paid, nothing
less nothing more.