Republic of the Philippines

SUPREME COURT
Manila

FIRST DIVISION

G.R. No. 108576 January 20, 1999

COMMISSIONER OF INTERNAL REVENUE, petitioner,

vs.
THE COURT OF APPEALS, COURT OF TAX APPEALS and A. SORIANO CORP., respondents.

MARTINEZ, J.:

Petitioner Commissioner of Internal Revenue (CIR) seeks the reversal of the decision of the Court of
Appeals (CA) 1 which affirmed the ruling of the Court of Tax Appeals (CTA) 2 that private respondent A.
Soriano Corporation's (hereinafter ANSCOR) redemption and exchange of the stocks of its foreign
stockholders cannot be considered as "essentially equivalent to a distribution of taxable dividends"
under, Section 83(b) of the 1939 Internal Revenue Act. 3

The undisputed facts are as follows:

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 P1,000,000.00 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. 4 In 1937, Don Andres subscribed to 4,963 shares
of the 5,000 shares originally issued. 5

On September 12, 1945, ANSCOR's 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. 6 This increased his subscription to 14,963 common
shares. 7 A month later, 8 Don Andres transferred 1,250 shares each to his two sons, Jose and Andres, Jr.,
as their initial investments in ANSCOR. 9 Both sons are foreigners. 10

By 1947, ANSCOR declared stock dividends. Other stock dividend declarations were made between 1949
and December 20, 1963. 11 On December 30, 1964 Don Andres died. As of that date, the records revealed
that he has a total shareholdings of 185,154 shares 12 — 50,495 of which are original issues and the
balance of 134.659 shares as stock dividend declarations. 13 Correspondingly, one-half of that
shareholdings or 92,577 14 shares were transferred to his wife, Doña Carmen Soriano, as her conjugal
share. The other half formed part of his estate. 15

A day after Don Andres died, ANSCOR increased its capital stock to P20M 16 and in 1966 further
increased it to P30M. 17 In the same year (December 1966), stock dividends worth 46,290 and 46,287
shares were respectively received by the Don Andres estate 18 and Doña Carmen from ANSCOR. Hence,
increasing their accumulated shareholdings to 138,867 and 138,864 19 common shares each. 20

On December 28, 1967, Doña Carmen requested a ruling from the United States Internal Revenue Service
(IRS), inquiring if an exchange of common with preferred shares may be considered as a tax avoidance
scheme 21 under Section 367 of the 1954 U.S. Revenue Act. 22 By January 2, 1968, ANSCOR reclassified its
existing 300,000 common shares into 150,000 common and 150,000 preferred shares. 23

In a letter-reply dated February 1968, the IRS opined that the exchange is only a recapitalization scheme
and not tax avoidance. 24 Consequently, 25 on March 31, 1968 Doña Carmen exchanged her whole
138,864 common shares for 138,860 of the newly reclassified preferred shares. The estate of Don Andres
in turn, exchanged 11,140 of its common shares, for the remaining 11,140 preferred shares, thus
reducing its (the estate) common shares to 127,727. 26

On June 30, 1968, pursuant to a Board Resolution, ANSCOR redeemed 28,000 common shares from the
Don Andres' estate. By November 1968, the Board further increased ANSCOR's capital stock to P75M
divided into 150,000 preferred shares and 600,000 common shares. 27 About a year later, ANSCOR again
redeemed 80,000 common shares from the Don Andres' estate, 28 further reducing the latter's common
shareholdings to 19,727. As stated in the Board Resolutions, ANSCOR's business purpose for both
redemptions of stocks is to partially retire said stocks as treasury shares in order to reduce the
company's foreign exchange remittances in case cash dividends are declared. 29

In 1973, after examining ANSCOR's books of account and records, Revenue examiners issued a report
proposing that ANSCOR be assessed for deficiency withholding tax-at-source, pursuant to Sections 53 and
54 of the 1939 Revenue Code, 30 for the year 1968 and the second quarter of 1969 based on the
transactions of exchange 31 and redemption of stocks. 31 The Bureau of Internal Revenue (BIR) made the
corresponding assessments despite the claim of ANSCOR that it availed of the tax amnesty under
Presidential Decree
(P.D.) 23 32 which were amended by P.D.'s 67 and 157. 33 However, petitioner ruled that the invoked
decrees do not cover Sections 53 and 54 in relation to Article 83(b) of the 1939 Revenue Act under which
ANSCOR was assessed. 34 ANSCOR's subsequent protest on the assessments was denied in 1983 by
petitioner. 35

Subsequently, ANSCOR filed a petition for review with the CTA assailing the tax assessments on the
redemptions and exchange of stocks. In its decision, the Tax Court reversed petitioner's ruling, after
finding sufficient evidence to overcome the prima facie correctness of the questioned assessments. 36 In a
petition for review the CA as mentioned, affirmed the ruling of the CTA. 37 Hence, this petition.

The bone of contention is the interpretation and application of Section 83(b) of the 1939 Revenue
Act 38 which provides:

Sec. 83. Distribution of dividends or assets by corporations. —

(b) Stock dividends — 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. (Emphasis supplied)

Specifically, the issue is whether ANSCOR's 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.

Petitioner contends that the exchange transaction a tantamount to "cancellation" under Section 83(b)
making the proceeds thereof taxable. It also argues that the Section applies to stock dividends which is
the bulk of stocks that ANSCOR redeemed. Further, petitioner claims that under the "net effect test," the
estate of Don Andres gained from the redemption. Accordingly, it was the duty of ANSCOR to withhold
the tax-at-source arising from the two transactions, pursuant to Section 53 and 54 of the 1939 Revenue
Act. 39

ANSCOR, however, avers that it has no duty to withhold any tax either from the Don Andres estate or
from Doña Carmen based on the two transactions, because the same were done for legitimate business
purposes which are (a) to reduce its foreign exchange remittances in the event the company would
declare cash dividends, 40 and to (b) subsequently "filipinized" ownership of ANSCOR, as allegedly,
envisioned by Don Andres. 41 It likewise invoked the amnesty provisions of P.D. 67.

We must emphasize that the application of Sec. 83(b) depends on the special factual circumstances of
each case.42 The findings of facts of a special court (CTA) exercising particular expertise on the subject of
tax, generally binds this Court, 43 considering that it is substantially similar to the findings of the CA
which is the final arbiter of questions of facts. 44 The issue in this case does not only deal with facts but
whether the law applies to a particular set of facts. Moreover, this Court is not necessarily bound by the
lower courts' conclusions of law drawn from such facts. 45

AMNESTY:

We will deal first with the issue of tax amnesty. Section 1 of P.D. 67 46 provides:

1. In all cases of voluntary disclosures of previously untaxed income and/or wealth such as
earnings, receipts, gifts, bequests or any other acquisitions from any source whatsoever
which are taxable under the National Internal Revenue Code, as amended, realized here or
abroad by any taxpayer, natural or judicial; the collection of all internal revenue taxes
including the increments or penalties or account of non-payment as well as all civil,
criminal or administrative liabilities arising from or incident to such disclosures under the
National Internal Revenue Code, the Revised Penal Code, the Anti-Graft and Corrupt
Practices Act, the Revised Administrative Code, the Civil Service laws and regulations, laws
and regulations on Immigration and Deportation, or any other applicable law or
proclamation, are hereby condoned and, in lieu thereof, a tax of ten (10%) per centum on
such previously untaxed income or wealth, is hereby imposed, subject to the following
conditions: (conditions omitted) [Emphasis supplied].

The decree condones "the collection of all internal revenue taxes including the increments or
penalties or account of non-payment as well as all civil, criminal or administrative liable arising
 from or incident to" (voluntary) disclosures under the NIRC of previously untaxed income and/or
wealth "realized here or abroad by any taxpayer, natural or juridical."

May the withholding agent, in such capacity, be deemed a taxpayer for it to avail of the amnesty? An
income taxpayer covers all persons who derive taxable income. 47 ANSCOR was assessed by petitioner for
deficiency withholding tax under Section 53 and 54 of the 1939 Code. As such, it is being held liable in its
capacity as a withholding agent and not its personality as a taxpayer.

In the operation of the withholding tax system, the withholding agent is the payor, a separate entity
acting no more than an agent of the government for the collection of the tax 48 in order to ensure its
payments; 49 the payer is the taxpayer — he is the person subject to tax impose by law; 50 and the payee
is the taxing authority. 51 In other words, the withholding agent is merely a tax collector, not a taxpayer.
Under the withholding system, however, the agent-payor becomes a payee by fiction of law. His (agent)
liability is direct and independent from the taxpayer, 52 because the income tax is still impose on and due
from the latter. The agent is not liable for the tax as no wealth flowed into him — he earned no income.
The Tax Code only makes the agent personally liable for the tax 53 arising from the breach of its legal duty
to withhold as distinguish from its duty to pay tax since:

the government's cause of action against the withholding is not for the collection of income
tax, but for the enforcement of the withholding provision of Section 53 of the Tax Code,
compliance with which is imposed on the withholding agent and not upon the taxpayer. 54

Not being a taxpayer, a withholding agent, like ANSCOR in this transaction is not protected by the
amnesty under the decree.

Codal provisions on withholding tax are mandatory and must be complied with by the withholding
agent. 55 The taxpayer should not answer for the non-performance by the withholding agent of its legal
duty to withhold unless there is collusion or bad faith. The former could not be deemed to have evaded
the tax had the withholding agent performed its duty. This could be the situation for which the amnesty
decree was intended. Thus, to curtail tax evasion and give tax evaders a chance to reform, 56 it was
deemed administratively feasible to grant tax amnesty in certain instances. In addition, a "tax amnesty,
much like a tax exemption, is never favored nor presumed in law and if granted by a statute, the term of
the amnesty like that of a tax exemption must be construed strictly against the taxpayer and liberally in
favor of the taxing authority.57 The rule on strictissimi juris equally applies. 58 So that, any doubt in the
application of an amnesty law/decree should be resolved in favor of the taxing authority.

Furthermore, ANSCOR's claim of amnesty cannot prosper. The implementing rules of P.D.
370 which expanded amnesty on previously untaxed income under P.D. 23 is very explicit,
to wit:

Sec. 4. Cases not covered by amnesty. — The following cases are not covered by the
amnesty subject of these regulations:

xxx xxx xxx

(2) Tax liabilities with or without assessments, on withholding tax at source provided
under Section 53 and 54 of the National Internal Revenue Code, as amended; 59
 ANSCOR was assessed under Sections 53 and 54 of the 1939 Tax Code. Thus, by specific provision
of law, it is not covered by the amnesty.

TAX ON STOCK DIVIDENDS

General Rule

Sec. 83(b) of the 1939 NIRC was taken from the Section 115(g)(1) of the U.S. Revenue Code of 1928. 60 It
laid down the general rule known as the proportionate test 61 wherein stock dividends once issued form
part of the capital and, thus, subject to income tax.62 Specifically, the general rule states that:

A stock dividend representing the transfer of surplus to capital account shall not be subject
to tax.

Having been derived from a foreign law, resort to the jurisprudence of its origin may shed light. Under
the US Revenue Code, this provision originally referred to "stock dividends" only, without any exception.
Stock dividends, strictly speaking, represent capital and do not constitute income to its
recipient. 63 So that the mere issuance thereof is not yet subject to income tax 64 as they are nothing but
an "enrichment through increase in value of capital
investment." 65 As capital, the stock dividends postpone the realization of profits because the "fund
represented by the new stock has been transferred from surplus to capital and no longer available for
actual distribution." 66 Income in tax law is "an amount of money coming to a person within a specified
time, whether as payment for services, interest, or profit from investment." 67 It means cash or its
equivalent. 68 It is gain derived and severed from capital, 69 from labor or from both combined 70 — so
that to tax a stock dividend would be to tax a capital increase rather than the income. 71 In a loose sense,
stock dividends issued by the corporation, are considered unrealized gain, and cannot be subjected to
income tax until that gain has been realized. Before the realization, stock dividends are nothing but a
representation of an interest in the corporate properties. 72 As capital, it is not yet subject to income tax.
It should be noted that capital and income are different. Capital is wealth or fund; whereas income is
profit or gain or the flow of wealth.73 The determining factor for the imposition of income tax is whether
any gain or profit was derived from a transaction. 74

The Exception

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. (Emphasis supplied).

In a response to the ruling of the American Supreme Court in the case of Eisner v. Macomber 75 (that pro
rata stock dividends are not taxable income), the exempting clause above quoted was added because
provision corporation found a loophole in the original provision. They resorted to devious means to
circumvent the law and evade the tax. 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 lust 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. 76Thus,

the provision had the obvious purpose of preventing a corporation from avoiding dividend
tax treatment by distributing earnings to its shareholders in two transactions — a pro
rata stock dividend followed by a pro rata redemption — that would have the same
economic consequences as a simple dividend. 77

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. 78 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. 79 Having realized gain from that
redemption, the income earner cannot escape income tax. 80

As qualified by the phrase "such time and in such manner," the exception was not intended to
characterize as taxable dividend every distribution of earnings arising from the redemption of stock
dividend. 81 So that, whether the amount distributed in the redemption should be treated as the
equivalent of a "taxable dividend" is a question of fact, 82 which is determinable on "the basis of the
particular facts of the transaction in question. 83 No decisive test can be used to determine the application
of the exemption under Section 83(b). The use of the words "such manner" and "essentially equivalent"
negative any idea that a weighted formula can resolve a crucial issue — Should the distribution be
treated as taxable dividend. 84 On this aspect, American courts developed certain recognized criteria,
which includes the following: 85

1) the presence or absence of real business purpose,

2) the amount of earnings and profits available for the declaration of a

regular dividends and the corporation's past record with respect to the
declaration of dividends,

3) the effect of the distribution, as compared with the declaration of regular

dividend,

4) the lapse of time between issuance and redemption, 86

5) the presence of a substantial surplus 87 and a generous supply of cash

which invites suspicion as does a meager policy in relation both to current
earnings and accumulated surplus, 88
 REDEMPTION AND CANCELLATION

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."
Of these, the most important is the third.

Redemption is repurchase, a reacquisition of stock by a corporation which issued the stock 89 in exchange
for property, whether or not the acquired stock is cancelled, retired or held in the treasury. 90Essentially,
the corporation gets back some of its stock, distributes cash or property to the shareholder in payment
for the stock, and continues in business as before. The redemption of stock dividends previously issued is
used as a veil for the constructive distribution of cash dividends. In the instant case, there is no dispute
that ANSCOR redeemed shares of stocks from a stockholder (Don Andres) twice (28,000 and 80,000
common shares). But where did the shares redeemed come from? If its source is the original capital
subscriptions upon establishment of the corporation or from initial capital investment in an existing
enterprise, its redemption to the concurrent value of acquisition may not invite the application of Sec.
83(b) under the 1939 Tax Code, as it is not income but a mere return of capital. On the contrary, if the
redeemed shares are from stock dividend declarations other than as initial capital investment, the
proceeds of the redemption is additional wealth, for it is not merely a return of capital but a gain thereon.

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. Besides, in the
absence of evidence to the contrary, the Tax Code presumes that every distribution of corporate
property, in whole or in part, is made out of corporate profits 92such as 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. 93 Once capital, it is always capital. 94 That doctrine
was intended for the protection of corporate creditors. 95

With respect to the third requisite, ANSCOR redeemed stock dividends issued just 2 to 3 years earlier.
The time alone that lapsed from the issuance to the redemption is not a sufficient indicator to determine
taxability. It is a must to consider the factual circumstances as to the manner of both the issuance and the
redemption. The "time" element is a factor to show a device to evade tax and the scheme of cancelling or
redeeming the same shares is a method usually adopted to accomplish the end sought. 96 Was this
transaction used as a "continuing plan," "device" or "artifice" to evade payment of tax? It is necessary to
determine the "net effect" of the transaction between the shareholder-income taxpayer and the acquiring
(redeeming) corporation. 97 The "net effect" test is not evidence or testimony to be considered; it is
rather an inference to be drawn or a conclusion to be reached. 98 It is also important to know whether the
issuance of stock dividends was dictated by legitimate business reasons, the presence of which might
negate a tax evasion plan. 99

The issuance of stock dividends and its subsequent redemption must be separate, distinct, and not
related, for the redemption to be considered a legitimate tax scheme. 100Redemption cannot be used as a
cloak to distribute corporate earnings. 101 Otherwise, the apparent intention to avoid tax becomes
doubtful as the intention to evade becomes manifest. It has been ruled that:
 [A]n operation with no business or corporate purpose — is a mere devise which put on the
form of a corporate reorganization as a disguise for concealing its real character, and the
sole object and accomplishment of which was the consummation of a preconceived plan,
not to reorganize a business or any part of a business, but to transfer a parcel of corporate
shares to a stockholder. 102

Depending on each case, the exempting provision of Sec. 83(b) of the 1939 Code may not be applicable if
the redeemed shares were issued with bona fide business purpose, 103which is judged after each and
every step of the transaction have been considered and the whole transaction does not amount to a tax
evasion scheme.

ANSCOR invoked two reasons to justify the redemptions — (1) the alleged "filipinization" program and
(2) the reduction of foreign exchange remittances in case cash dividends are declared. The Court is not
concerned with the wisdom of these purposes but on their relevance to the whole transaction which can
be inferred from the outcome thereof. Again, it is the "net effect rather than the motives and plans of the
taxpayer or his corporation" 104 that is the fundamental guide in administering Sec. 83(b). This tax
provision is aimed at the result. 105 It also applies even if at the time of the issuance of the stock dividend,
there was no intention to redeem it as a means of distributing profit or avoiding tax on dividends.106 The
existence of legitimate business purposes in support of the redemption of stock dividends is immaterial
in income taxation. It has no relevance in determining "dividend equivalence". 107 Such purposes may be
material only upon the issuance of the stock dividends. The test of taxability under the exempting clause,
when it provides "such time and manner" as would make the redemption "essentially equivalent to the
distribution of a taxable dividend", is whether the redemption resulted into a flow of wealth. If no wealth
is realized from the redemption, there may not be a dividend equivalence treatment. In the metaphor
of Eisner v. Macomber, income is not deemed "realize" until the fruit has fallen or been plucked from the
tree.

The three elements in the imposition of income tax are: (1) there must be gain or and profit, (2) that the
gain or profit is realized or received, actually or constructively, 108 and (3) it is not exempted by law or
treaty from income tax. Any business purpose as to why or how the income was earned by the taxpayer is
not a requirement. Income tax is assessed on income received from any property, activity or service that
produces the income because the Tax Code stands as an indifferent neutral party on the matter of where
income comes
from. 109

As stated above, the test of taxability under the exempting clause of Section 83(b) is, whether income was
realized through the redemption of stock dividends. The redemption converts into money the stock
dividends which become a realized profit or gain and consequently, the stockholder's separate
property. 110 Profits derived from the capital invested cannot escape income tax. As realized income, the
proceeds of the redeemed stock dividends can be reached by income taxation regardless of the existence
of any business purpose for the redemption. Otherwise, to rule that the said proceeds are exempt from
income tax when the redemption is supported by legitimate business reasons would defeat the very
purpose of imposing tax on income. Such argument would open the door for income earners not to pay
tax so long as the person from whom the income was derived has legitimate business reasons. In other
words, the payment of tax under the exempting clause of Section 83(b) would be made to depend not on
the income of the taxpayer, but on the business purposes of a third party (the corporation herein) from
whom the income was earned. This is absurd, illogical and impractical considering that the Bureau of
Internal Revenue (BIR) would be pestered with instances in determining the legitimacy of business
reasons that every income earner may interposed. It is not administratively feasible and cannot therefore
be allowed.

The ruling in the American cases cited and relied upon by ANSCOR that "the redeemed shares are the
equivalent of dividend only if the shares were not issued for genuine business purposes", 111 or the
"redeemed shares have been issued by a corporation bona fide" 112 bears no relevance in determining the
non-taxability of the proceeds of redemption ANSCOR, relying heavily and applying said cases, argued
that so long as the redemption is supported by valid corporate purposes the proceeds are not subject to
tax. 113 The adoption by the courts below 114 of such argument is misleading if not misplaced. A review of
the cited American cases shows that the presence or absence of "genuine business purposes" may be
material with respect to the issuance or declaration of stock dividends but not on its subsequent
redemption. The issuance and the redemption of stocks are two different transactions. Although the
existence of legitimate corporate purposes may justify a corporation's acquisition of its own shares under
Section 41 of the Corporation Code, 115 such purposes cannot excuse the stockholder from the effects of
taxation arising from the redemption. If the issuance of stock dividends is part of a tax evasion plan and
thus, without legitimate business reasons, the redemption becomes suspicious which exempting clause.
The substance of the whole transaction, not its form, usually controls the tax consequences. 116

The two purposes invoked by ANSCOR, under the facts of this case are no excuse for its tax liability. First,
the alleged "filipinization" plan cannot be considered legitimate as it was not implemented until the BIR
started making assessments on the proceeds of the redemption. Such corporate plan was not stated in
nor supported by any Board Resolution but a mere afterthought interposed by the counsel of ANSCOR.
Being a separate entity, the corporation can act only through its Board of Directors. 117 The Board
Resolutions authorizing the redemptions state only one purpose — reduction of foreign exchange
remittances in case cash dividends are declared. Not even this purpose can be given credence. Records
show that despite the existence of enormous corporate profits no cash dividend was ever declared by
ANSCOR from 1945 until the BIR started making assessments in the early 1970's. Although a corporation
under certain exceptions, has the prerogative when to issue dividends, yet when no cash dividends was
issued for about three decades, this circumstance negates the legitimacy of ANSCOR's alleged purposes.
Moreover, to issue stock dividends is to increase the shareholdings of ANSCOR's foreign stockholders
contrary to its "filipinization" plan. This would also increase rather than reduce their need for foreign
exchange remittances in case of cash dividend declaration, considering that ANSCOR is a family
corporation where the majority shares at the time of redemptions were held by Don Andres' foreign
heirs.

Secondly, assuming arguendo, that those business purposes are legitimate, the same cannot be a valid
excuse for the imposition of tax. Otherwise, the taxpayer's liability to pay income tax would be made to
depend upon a third person who did not earn the income being taxed. Furthermore, even if the said
purposes support the redemption and justify the issuance of stock dividends, the same has no bearing
whatsoever on the imposition of the tax herein assessed because the proceeds of the redemption are
deemed taxable dividends since it was shown that income was generated therefrom.

Thirdly, ANSCOR argued that to treat as "taxable dividend" the proceeds of the redeemed stock dividends
would be to impose on such stock an undisclosed lien and would be extremely unfair to intervening
purchase, i.e. those who buys the stock dividends after their issuance. 118 Such argument, however, bears
no relevance in this case as no intervening buyer is involved. And even if there is an intervening buyer, it
is necessary to look into the factual milieu of the case if income was realized from the transaction. Again,
we reiterate that the dividend equivalence test depends on such "time and manner" of the transaction
and its net effect. The undisclosed lien 119 may be unfair to a subsequent stock buyer who has no capital
interest in the company. But the unfairness may not be true to an original subscriber like Don Andres,
who holds stock dividends as gains from his investments. The subsequent buyer who buys stock
dividends is investing capital. It just so happen that what he bought is stock dividends. The effect of its
(stock dividends) redemption from that subsequent buyer is merely to return his capital subscription,
which is income if redeemed from the original subscriber.

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. As "taxable dividend" under Section 83(b), it
is part of the "entire income" subject to tax under Section 22 in relation to Section 21 120 of the 1939
Code. Moreover, under Section 29(a) of said Code, dividends are included in "gross income". As income, it
is subject to income tax which is required to be withheld at source. The 1997 Tax Code may have altered
the situation but it does not change this disposition.

EXCHANGE OF COMMON WITH PREFERRED SHARES 121

Exchange is an act of taking or giving one thing for another involving 122 reciprocal transfer 123 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. 124

Both the Tax Court and the Court of Appeals found that ANSCOR reclassified its shares into common and
preferred, and that parts of the common shares of the Don Andres estate and all of Doña Carmen's shares
were exchanged for the whole 150.000 preferred shares. Thereafter, both the Don Andres estate and
Doña Carmen remained as corporate subscribers except that their subscriptions now include preferred
shares. 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. 125

Reclassification of shares does not always bring any substantial alteration in the subscriber's
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. A common stock represents the residual
ownership interest in the corporation. It is a basic class of stock ordinarily and usually issued without
extraordinary rights or privileges and entitles the shareholder to a pro rata division of
profits. 126Preferred stocks are those which entitle the shareholder to some priority on dividends and
asset distribution. 127

Both shares are part of the corporation's capital stock. Both stockholders are no different from ordinary
investors who take on the same investment risks. Preferred and common shareholders participate in the
same venture, willing to share in the profits and losses of the enterprise. 128 Moreover, under the doctrine
of equality of shares — all stocks issued by the corporation are presumed equal with the same privileges
and liabilities, provided that the Articles of Incorporation is silent on such differences. 129

In this case, the exchange of shares, without more, produces no realized income to the subscriber. There
is only a modification of the subscriber's 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. 130

WHEREFORE, premises considered, the decision of the Court of Appeals is MODIFIED in that ANSCOR's
redemption of 82,752.5 stock dividends is herein considered as essentially equivalent to a distribution of
taxable dividends for which it is LIABLE for the withholding tax-at-source. The decision is AFFIRMED in
all other respects.

SO ORDERED.

Republic of the Philippines

SUPREME COURT
Manila

SECOND DIVISION

G.R. No. 183905 April 16, 2009

GOVERNMENT SERVICE, INSURANCE SYSTEM, Petitioner,

vs.
THE HON. COURT OF APPEALS, (8TH DIVISION), ANTHONY V. ROSETE, MANUEL M. LOPEZ, FELIPE
B. ALFONSO, JESUS F. FRANCISCO, CHRISTIAN S. MONSOD, ELPIDIO L. IBAÑEZ, and FRANCIS GILES
PUNO, Respondents.

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

G.R. No. 184275 April 16, 2009

SECURITIES AND EXCHANGE COMMISSION, COMMISSIONER JESUS ENRIQUE G. MARTINEZ IN HIS

CAPACITY AS OFFICER-IN-CHARGE OF THE SECURITIES AND EXCHANGE COMMISSION and HUBERT
G. GUEVARA IN HIS CAPACITY AS DIRECTOR OF THE COMPLIANCE AND ENFORCEMENT DEPT. OF
SECURITIES Petitioners,
vs.
ANTHONY V. ROSETE, MANUEL M. LOPEZ, FELIPE B. ALFONSO, JESUS F. FRANCISCO, CHRISTIAN S.
MONSOD, ELPIDIO L. IBAÑEZ, and FRANCIS GILES Respondents.

DECISION

TINGA, J.:

These are the undisputed facts.

The annual stockholders’ meeting (annual meeting) of the Manila Electric Company (Meralco) was
scheduled on 27 May 2008.1 In connection with the annual meeting, proxies2 were required to be
submitted on or before 17 May 2008, and the proxy validation was slated for five days later, or 22 May.3

In view of the resignation of Camilo Quiason,4 the position of corporate secretary of Meralco became
vacant.5 On 15 May 2008, the board of directors of Meralco designated Jose Vitug6 to act as corporate
secretary for the annual meeting.7 However, when the proxy validation began on 22 May, the proceedings
were presided over by respondent Anthony Rosete (Rosete), assistant corporate secretary and in-house
chief legal counsel of Meralco.8 Private respondents nonetheless argue that Rosete was the acting
corporate secretary of Meralco.9 Petitioner Government Service Insurance System (GSIS), a major
shareholder in Meralco, was distressed over the proxy validation proceedings, and the resulting
certification of proxies in favor of the Meralco management.10

On 23 May 2008, GSIS filed a complaint with the Regional Trial Court (RTC) of Pasay City, docketed as R-
PSY-08-05777-C4 seeking the declaration of certain proxies as invalid.11 Three days

later, on 26 May, GSIS filed a Notice with the RTC manifesting the dismissal of the complaint.12 On the
same day, GSIS filed an Urgent Petition13 with the Securities and Exchange Commission (SEC) seeking to
restrain Rosete from "recognizing, counting and tabulating, directly or indirectly, notionally or actually or
in whatever way, form, manner or means, or otherwise honoring the shares covered by" the proxies in
favor of respondents Manuel Lopez,14 Felipe Alfonso,15 Jesus Francisco,16 Oscar Lopez, Christian
Monsod,17 Elpidio Ibañez,18 Francisco Giles-Puno19 "or any officer representing MERALCO Management,"
and to annul and declare invalid said proxies.20 GSIS also prayed for the issuance of a Cease and Desist
Order (CDO) to restrain the use of said proxies during the annual meeting scheduled for the following
day.21 A CDO22 to that effect signed by SEC Commissioner Jesus Martinez was issued on 26 May 2008, the
same day the complaint was filed. During the annual meeting held on the following day, Rosete
announced that the meeting would push through, expressing the opinion that the CDO is null and void.23

On 28 May 2008, the SEC issued a Show Cause Order (SCO)24 against private respondents, ordering them
to appear before the Commission on 30 May 2008 and explain why they should not be cited in contempt.
On 29 May 2008, respondents filed a petition for certiorari with prohibition25 with the Court of Appeals,
praying that the CDO and the SCO be annulled. The petition was docketed as CA-G.R. SP No. 103692.

Many developments involving the Court of Appeals’ handling of CA-G.R. SP No. 103692 and the conduct of
several of its individual justices are recounted in our Resolution dated 9 September 2008 in A.M. No. 08-
8-11-CA (Re: Letter Of Presiding Justice Conrado M. Vasquez, Jr. On CA-G.R. SP No. 103692).26 On 23 July
2008, the Court of Appeals Eighth Division promulgated a decision in the case with the following
dispositive portion:

WHEREFORE, premises considered, the May 26, 2008 complaint filed by GSIS in the SEC is hereby
DISMISSED due to SEC’s lack of jurisdiction, due to forum shopping by respondent GSIS, and due to
splitting of causes of action by respondent GSIS. Consequently, the SEC’s undated cease and desist order
and the SEC’s May 28, 2008 show cause order are hereby DECLARED VOID AB INITIO and without legal
effect and their implementation are hereby permanently restrained.

The May 26, 2008 complaint filed by GSIS in the SEC is hereby barred from being considered, out of
equitable considerations, as an election contest in the RTC, because the prescriptive period of 15 days
from the May 27, 2008 Meralco election to file an election contest in the RTC had already run its course,
pursuant to Sec. 3, Rule 6 of the interim Rules of Procedure Governing Intra-Corporate Controversies
under R.A. No. 8799, due to deliberate act of GSIS in filing a complaint in the SEC instead of the RTC.

Let seventeen (17) copies of this decision be officially TRANSMITTED to the Office of the Chief Justice and
three (3) copies to the Office of the Court Administrator:

(1) for sanction by the Supreme Court against the "GSIS LAW OFFICE" for unauthorized practice of
law,

(2) for sanction and discipline by the Supreme Court of GSIS lawyers led by Atty. Estrella
Elamparo-Tayag, Atty. Marcial C. Pimentel, Atty. Enrique L. Tandan III, and other GSIS lawyers for
violation of Sec. 27 of Rule 138 of the Revised Rules of Court, pursuant to Santayana v. Alampay,
A.C. No. 5878, March 21, 2005 454 SCRA 1, and pursuant to Land Bank of the Philippines v.
Raymunda Martinez, G.R. No. 169008, August 14, 2007:

(a) for violating express provisions of law and defying public policy in deliberately
displacing the Office of the Government Corporate Counsel (OGCC) from its duty as the
exclusive lawyer of GSIS, a government owned and controlled corporation (GOCC), by
admittedly filing and defending cases as well as appearing as counsel for GSIS, without
authority to do so, the authority belonging exclusively to the OGCC;

(b) for violating the lawyer’s oath for failing in their duty to act as faithful officers of the
court by engaging in forum shopping;

(c) for violating express provisions of law most especially those on jurisdiction which are
mandatory; and

(d) for violating Sec. 3, Rule 2 of the 1997 Rules of Civil Procedure by deliberately splitting
causes of action in order to file multiple complaints: (i) in the RTC of Pasay City and (ii) in
the SEC, in order to ensure a favorable order.27

The promulgation of the said decision provoked a searing controversy, as detailed in our Resolution in
A.M. No. 08-8-11-CA. Nonetheless, the appellate court’s decision spawned three different actions
docketed with their own case numbers before this Court. One of them, G.R. No. 183933, was initiated by a
Motion for Extension of Time to File Petition for Review filed by the Office of the Solicitor General (OSG)
in behalf of the SEC, Commissioner Martinez in his capacity as officer-in-charge of the SEC, and Hubert
Guevarra in his capacity as Director of the Compliance and Enforcement Department of the
SEC.28 However, the OSG did not follow through with the filing of the petition for review adverted to;
thus, on 19 January 2009, the Court resolved to declare G.R. No. 183933 closed and terminated.29

The two remaining cases before us are docketed as G.R. No. 183905 and 184275. G.R. No. 183905
pertains to a petition for certiorari and prohibition filed by GSIS, against the Court of Appeals, and
respondents Rosete, Lopez, Alfonso, Francisco, Monsod, Ibañez and Puno, all of whom serve in different
corporate capacities with Meralco or First Philippines Holdings Corporation, a major stockholder of
Meralco and an affiliate of the Lopez Group of Companies. This petition seeks of the Court to declare the
23 July 2008 decision of the Court of Appeals null and void, affirm the SEC’s jurisdiction over the petition
filed before it by GSIS, and pronounce that the CDO and the SCO orders are valid. This petition was filed in
behalf of GSIS by the "GSIS Law Office;" it was signed by the Chief Legal Counsel and Assistant Legal
Counsel of GSIS, and three self-identified "Attorney[s]," presumably holding lawyer positions in GSIS.30

The OSG also filed the other petition, docketed as G.R. No. 184275. It identifies as its petitioners the SEC,
Commissioner Martinez in his capacity as OIC of the SEC, and Hubert Guevarra in his capacity as Director
of the Compliance and Enforcement Department of the SEC – the same petitioners in the aborted petition
for review initially docketed as G.R. No. 183933. Unlike what was adverted to in the motion for extension
filed by the same petitioners in G.R. No. 183933, the petition in G.R. No. 184275 is one for certiorari
under Rule 65 as indicated on page 3 thereof,31 and not a petition for review. Interestingly, save for the
first page which leaves the docket number blank, all 86 pages of this petition for certiorari carry a header
wrongly identifying the pleading as the non-existent petition for review under G.R. No. 183933. This
petition seeks the "reversal" of the assailed decision of the Court of Appeals, the recognition of the
jurisdiction of the SEC over the petition of GSIS, and the affirmation of the CDO and SCO.

II.

Private respondents seek the expunction of the petition filed by the SEC in G.R. No. 184275. We agree that
the petitioners therein, namely: the SEC, Commissioner Marquez and Guevarra, are not real parties-in-
interest to the dispute and thus bereft of capacity to file the petition. By way of simple illustration, to
argue otherwise is to say that the trial court judge, the National Labor Relations Commission, or any
quasi-judicial agency has the right to seek the review of an appellate court decision reversing any of their
rulings. That prospect, as any serious student of remedial law knows, is zero.

The Court, through the Resolution of the Third Division dated 2 September 2008, had resolved to treat
the petition in G.R. No. 184275 as a petition for review on certiorari, but withheld giving due course to
it.32 Under Section 1 of Rule 45, which governs appeals by certiorari, the right to file the appeal is
restricted to "a party," meaning that only the real parties-in-interest who litigated the petition for
certiorari before the Court of Appeals are entitled to appeal the same under Rule 45. The SEC and its two
officers may have been designated as respondents in the petition for certiorari filed with the Court of
Appeals, but under Section 5 of Rule 65 they are not entitled to be classified as real parties-in-interest.
Under the provision, the judge, court, quasi-judicial agency, tribunal, corporation, board, officer or person
to whom grave abuse of discretion is imputed (the SEC and its two officers in this case) are denominated
only as public respondents. The provision further states that "public respondents shall not appear in or
file an answer or comment to the petition or any pleading therein."33 Justice Regalado explains:

[R]ule 65 involves an original special civil action specifically directed against the person, court, agency or
party a quo which had committed not only a mistake of judgment but an error of jurisdiction, hence
should be made public respondents in that action brought to nullify their invalid acts. It shall, however be
the duty of the party litigant, whether in an appeal under Rule 45 or in a special civil action in Rule 65, to
defend in his behalf and the party whose adjudication is assailed, as he is the one interested in sustaining
the correctness of the disposition or the validity of the proceedings.

xxx The party interested in sustaining the proceedings in the lower court must be joined as a co-
respondent and he has the duty to defend in his own behalf and in behalf of the court which rendered the
questioned order. While there is nothing in the Rules that prohibit the presiding judge of the court
involved from filing his own answer and defending his questioned order, the Supreme Court has
reminded judges of the lower courts to refrain from doing so unless ordered by the Supreme
Court.34 The judicial norm or mode of conduct to be observed in trial and appellate courts is now
prescribed in the second paragraph of this section.

xxx

A person not a party to the proceedings in the trial court or in the Court of Appeals cannot
maintain an action for certiorari in the Supreme Court to have the judgment reviewed.35

Rule 65 does recognize that the SEC and its officers should have been designated as public respondents in
the petition for certiorari filed with the Court of Appeals. Yet their involvement in the instant petition is
not as original party-litigants, but as the quasi-judicial agency and officers exercising the adjudicative
functions over the dispute between the two contending factions within Meralco. From the onset, neither
the SEC nor Martinez or Guevarra has been considered as a real party-in-interest. Section 2, Rule 3 of the
1997 Rules of Civil Procedure provides that every action must be prosecuted or defended in the name of
the real party in interest, that is "the party who stands to be benefited or injured by the judgment in the
suit, or the party entitled to the avails of the suit." It would be facetious to assume that the SEC had any
real interest or stake in the intra-corporate dispute within Meralco.

We find our ruling in Hon. Santiago v. Court of Appeals36 quite apposite to the question at hand.
Petitioner therein, a trial court judge, had presided over an expropriation case. The litigants had arrived
at an amicable settlement, but the judge refused to approve the same, even declaring it invalid. The
matter was elevated to the Court of Appeals, which promptly reversed the trial court and approved the
amicable settlement. The judge took the extraordinary step of filing in his own behalf a petition for
review on certiorari with this Court, assailing the decision of the Court of Appeals which had reversed
him. In disallowing the judge’s petition, the Court explained:

While the issue in the Court of Appeals and that raised by petitioner now is whether the latter abused his
discretion in nullifying the deeds of sale and in proceeding with the expropriation proceeding, that
question is eclipsed by the concern of whether Judge Pedro T. Santiago may file this petition at all.

And the answer must be in the negative, Section 1 of Rule 45 allows a party to appeal by certiorari from a
judgment of the Court of Appeals by filing with this Court a petition for review on certiorari. But
petitioner judge was not a party either in the expropriation proceeding or in the certiorari proceeding in
the Court of Appeals. His being named as respondent in the Court of Appeals was merely to comply with
the rule that in original petitions for certiorari, the court or the judge, in his capacity as such, should be
named as party respondent because the question in such a proceeding is the jurisdiction of the court
itself (See Mayol v. Blanco, 61 Phil. 547 [19351, cited in Comments on the Rules of Court, Moran, Vol. II,
1979 ed., p. 471). "In special proceedings, the judge whose order is under attack is merely a nominal
party; wherefore, a judge in his official capacity, should not be made to appear as a party seeking reversal
of a decision that is unfavorable to the action taken by him. A decent regard for the judicial hierarchy bars
a judge from suing against the adverse opinion of a higher court,. . . ." (Alcasid v. Samson, 102 Phil. 785,
740 [1957])

ACCORDINGLY, this petition is DENIED for lack of legal capacity to sue by the petitioner.37

Justice Isagani Cruz added, in a Concurring Opinion in Santiago: "The judge is not an active combatant in
such proceeding and must leave it to the parties themselves to argue their respective positions and for
the appellate court to rule on the matter without his participation."38
Note that in Santiago, the Court recognized the good faith of the judge, who perceived the amicable
settlement "as a manifestly iniquitous and illegal contract."39 The SEC could have similarly felt in good
faith that the assailed Court of Appeals decision had unduly impaired its prerogatives or caused some
degree of hurt to it. Yet assuming that there are rights or prerogatives peculiar to the SEC itself that the
appellate court had countermanded, these can be vindicated in the petition for certiorari filed by GSIS,
whose legal capacity to challenge the Court of Appeals decision is without question. There simply is no
plausible reason for this Court to deviate from a time-honored rule that preserves the purity of our
judicial and quasi-judicial offices to accommodate the SEC’s distrust and resentment of the appellate
court’s decision. The expunction of the petition in G.R. No. 184275 is accordingly in order.

At this point, only one petition remains—the petition for certiorari filed by GSIS in G.R. No. 183905.
Casting off the uncritical and unimportant aspects, the two main issues for adjudication are as follows:
(1) whether the SEC has jurisdiction over the petition filed by GSIS against private respondents; and (2)
whether the CDO and SCO issued by the SEC are valid.

II.

It is our resolute inclination that this case, which raises interesting questions of law, be decided solely on
the merits, without regard to the personalities involved or the well-reported drama preceding the
petition. To that end, the Court has taken note of reports in the media that GSIS and the Lopez group have
taken positive steps to divest or significantly reduce their respective interests in Meralco.40 These are
developments that certainly ease the tension surrounding this case, not to mention reason enough for the
two groups to make an internal reassessment of their respective positions and interests in relation to this
case. Still, the key legal questions raised in the petition do not depend at all on the identity of any of the
parties, and would obtain the same denouement even if this case was lodged by unknowns as petitioners
against similarly obscure respondents.

With the objective to resolve the key questions of law raised in the petition, some of the issues raised
diminish as peripheral. For example, petitioners raise arguments tied to the behavior of individual
justices of the Court of Appeals, particularly former Justice Vicente Roxas, in relation to this case as it was
pending before the appellate court. The Court takes cognizance of our Resolution in A.M. No. 08-8-11-CA
dated 9 September 2008, which duly recited the various anomalous or unbecoming acts in relation to this
case performed by two of the justices who decided the case in behalf of the Court of Appeals—former
Justice Roxas (the ponente) and Justice Bienvenido L. Reyes (the Chairman of the 8th Division) – as well
as three other members of the Court of Appeals. At the same time, the consensus of the Court as it
deliberated on A.M. No. 08-8-11-CA was to reserve comment or conclusion on the assailed decision of the
Court of Appeals, in recognition of the reality that however stigmatized the actions and motivations of
Justice Roxas are, the decision is still the product of the Court of Appeals as a collegial judicial body, and
not of one or some rogue justices. The penalties levied by the Court on these appellate court justices, in
our estimation, redress the unwholesome acts which they had committed. At the same time, given the
jurisprudential importance of the questions of law raised in the petition, any result reached without
squarely addressing such questions would be unsatisfactory, perhaps derelict even.

III.

We now examine whether the SEC has jurisdiction over the petition filed by GSIS. To recall, SEC has
sought to enjoin the use and annul the validation, of the proxies issued in favor of several of the private
respondents, particularly in connection with the annual meeting.
 A.

Jurisdiction is conferred by no other source but law. Both sides have relied upon provisions of Rep. Act
No. 8799, otherwise known as the Securities Regulation Code (SRC), its implementing rules (Amended
Implementing Rules or AIRR-SRC), and other related rules to support their competing contentions that
either the SEC or the trial courts has exclusive original jurisdiction over the dispute.

GSIS primarily anchors its argument on two correlated provisions of the SRC. These are Section 53.1 and
Section 20.1, which we cite:

SEC. 53. Investigations, Injunctions and Prosecution of Offenses . - 53.1. The Commission may, in its
discretion, make such investigations as it deems necessary to determine whether any person has
violated or is about to violate any provision of this Code, any rule, regulation or order thereunder,
or any rule of an Exchange, registered securities association, clearing agency, other self-
regulatory organization, and may require or permit any person to file with it a statement in writing,
under oath or otherwise, as the Commission shall determine, as to all facts and circumstances concerning
the matter to be investigated. The Commission may publish information concerning any such
violations, and to investigate any fact, condition, practice or matter which it may deem necessary
or proper to aid in the enforcement of the provisions of this Code, in the prescribing of rules and
regulations thereunder, or in securing information to serve as a basis for recommending further
legislation concerning the matters to which this Code relates: xxx (emphasis supplied)

SEC. 20. Proxy Solicitations. – 20.1. Proxies must be issued and proxy solicitation must be made in
accordance with rules and regulations to be issued by the Commission;

The argument, stripped of extravagance, is that since proxy solicitations following Section 20.1 have to be
made in accordance with rules and regulations issued by the SEC, it is the SEC under Section 53.1 that has
the jurisdiction to investigate alleged violations of the rules on proxy solicitations. The GSIS petition
invoked AIRR-AIRR-SRC Rule 20, otherwise known as "The Proxy Rule," which enumerates the
requirements as to form of proxy and delivery of information to security holders. According to GSIS, the
information statement Meralco had filed with the SEC in connection with the annual meeting did not
contain any proxy form as required under AIRR-SRC Rule 20.

On the other hand, private respondents argue before us that under Section 5.2 of the SRC, the SEC’s
jurisdiction over all cases enumerated in Section 5 of Presidential Decree No. 902-A was transferred to
the courts of general jurisdiction or the appropriate regional trial court. The two particular classes of
cases in the enumeration under Section 5 of Presidential Decree No. 902-A which private respondents
especially refer to are as follows:

xxx

(2) Controversies arising out of intra-corporate, partnership, or association relations, between and
among stockholders, members, or associates; or association of which they are stockholders, members, or
associates, respectively;

3) Controversies in the election or appointment of directors, trustees, officers or managers of

corporations, partnerships, or associations;
 xxx

In addition, private respondents cite the Interim Rules on Intra-Corporate Controversies (Interim Rules)
promulgated by this Court in 2001, most pertinently, Section 2 of Rule 6 (on Election Contests), which
defines "election contests" as follows:

SEC. 2. Definition. – An election contest refers to any controversy or dispute involving title or claim to any
elective office in a stock or nonstock corporation, the validation of proxies, the manner and validity of
elections and the qualifications of candidates, including the proclamation of winners, to the office of
director, trustee or other officer directly elected by the stockholders in a close corporation or by
members of a nonstock corporation where the articles of incorporation or bylaws so provide. (emphasis
supplied)

The correct answer is not clear-cut, but there is one. In private respondents’ favor, the provisions of law
they cite pertain directly and exclusively to the statutory jurisdiction of trial courts acquired by virtue of
the transfer of jurisdiction following the passage of the SRC. In contrast, the SRC provisions relied upon
by GSIS do not immediately or directly establish that body’s jurisdiction over the petition, since it
necessitates the linkage of Section 20 to Section 53.1 of the SRC before the point can bear on us.

On the other hand, the distinction between "proxy solicitation" and "proxy validation" cannot be
dismissed offhand. The right of a stockholder to vote by proxy is generally established by the

Corporation Code,41 but it is the SRC which specifically regulates the form and use of proxies, more
particularly the procedure of proxy solicitation, primarily through Section 20.42 AIRR-SRC Rule 20 defines
the terms solicit and solicitation:

The terms solicit and solicitation include:

A. any request for a proxy whether or not accompanied by or included in a form of proxy

B. any request to execute or not to execute, or to revoke, a proxy; or

C. the furnishing of a form of proxy or other communication to security holders under

circumstance reasonably calculated to result in the procurement, withholding or revocation of a
proxy.

It is plain that proxy solicitation is a procedure that antecedes proxy validation. The former involves the
securing and submission of proxies, while the latter concerns the validation of such secured and
submitted proxies. GSIS raises the sensible point that there was no election yet at the time it filed its
petition with the SEC, hence no proper election contest or controversy yet over which the regular courts
may have jurisdiction. And the point ties its cause of action to alleged irregularities in the proxy
solicitation procedure, a process that precedes either the validation of proxies or the annual meeting
itself.

Under Section 20.1, the solicitation of proxies must be in accordance with rules and regulations issued by
the SEC, such as AIRR-SRC Rule 4. And by virtue of Section 53.1, the SEC has the discretion "to make such
investigations as it deems necessary to determine whether any person has violated" any rule issued by it,
such as AIRR-SRC Rule 4. The investigatory power of the SEC established by Section 53.1 is central to its
regulatory authority, most crucial to the public interest especially as it may pertain to corporations with
publicly traded shares. For that reason, we are not keen on pursuing private respondents’ insistence that
the GSIS complaint be viewed as rooted in an intra-corporate controversy solely within the jurisdiction of
the trial courts to decide. It is possible that an intra-corporate controversy may animate a disgruntled
shareholder to complain to the SEC a corporation’s violations of SEC rules and regulations, but that
motive alone should not be sufficient to deprive the SEC of its investigatory and regulatory powers,
especially so since such powers are exercisable on a motu proprio basis.

At the same time, Meralco raises the substantial point that nothing in the SRC empowers the SEC to annul
or invalidate improper proxies issued in contravention of Section 20. It cites that the penalties defined by
the SEC itself for violation of Section 20 or AIRR-SRC Rule 20 are limited to a reprimand/warning for the
first offense, and pecuniary fines for succeeding offenses.43 Indeed, if the SEC does not have the power to
invalidate proxies solicited in violation of its promulgated rules, serious questions may be raised whether
it has the power to adjudicate claims of violation in the first place, since the relief it may extend does not
directly redress the cause of action of the complainant seeking the exclusion of the proxies.

There is an interesting point, which neither party raises, and it concerns Section 6(g) of Presidential
Decree No. 902-A, which states:

SEC. 6. In order to effectively exercise such jurisdiction, the Commission shall possess the following
powers:

xxx

(g) To pass upon the validity of the issuance and use of proxies and voting trust agreements for absent
stockholders or members;

xxx

As promulgated then, the provision would confer on the SEC the power to adjudicate controversies
relating not only to proxy solicitation, but also to proxy validation. Should the proposition hold true up to
the present, the position of GSIS would have merit, especially since Section 6 of Presidential Decree No.
902-A was not expressly repealed or abrogated by the SRC.44

Yet a closer reading of the provision indicates that such power of the SEC then was incidental or ancillary
to the "exercise of such jurisdiction." Note that Section 6 is immediately preceded by Section 5, which
originally conferred on the SEC "original and exclusive jurisdiction to hear and decide cases" involving
"controversies in the election or appointments of directors, trustees, officers or managers of such
corporations, partnerships or associations." The cases referred to in Section 5 were transferred from the
jurisdiction of the SEC to the regular courts with the passage of the SRC, specifically Section 5.2. Thus, the
SEC’s power to pass upon the validity of proxies in relation to election controversies has effectively been
withdrawn, tied as it is to its abrogated jurisdictional powers.

Based on the foregoing, it is evident that the linchpin in deciding the question is whether or not the cause
of action of GSIS before the SEC is intimately tied to an election controversy, as defined under Section 5(c)
of Presidential Decree No. 902-A. To answer that, we need to properly ascertain the scope of the power of
trial courts to resolve controversies in corporate elections.
 B.

Shares of stock in corporations may be divided into voting shares and non-voting shares, which are
generally issued as "preferred" or "redeemable" shares.45 Voting rights are exercised during regular or
special meetings of stockholders; regular meetings to be held annually on a fixed date, while special
meetings may be held at any time necessary or as provided in the by-laws, upon due notice.46 The
Corporation Code provides for a whole range of matters which can be voted upon by stockholders,
including a limited set on which even non-voting stockholders are entitled to vote on.47 On any of these
matters which may be voted upon by stockholders, the proxy device is generally available.48

Under Section 5(c) of Presidential Decree No. 902-A, in relation to the SRC, the jurisdiction of the regular
trial courts with respect to election-related controversies is specifically confined to "controversies in the
election or appointment of directors, trustees, officers or managers of corporations, partnerships, or
associations." Evidently, the jurisdiction of the regular courts over so-called election contests or
controversies under Section 5(c) does not extend to every potential subject that may be voted on by
shareholders, but only to the election of directors or trustees, in which stockholders are authorized to
participate under Section 24 of the Corporation Code.49

This qualification allows for a useful distinction that gives due effect to the statutory right of the SEC to
regulate proxy solicitation, and the statutory jurisdiction of regular courts over election contests or
controversies. The power of the SEC to investigate violations of its rules on proxy solicitation is
unquestioned when proxies are obtained to vote on matters unrelated to the cases enumerated under
Section 5 of Presidential Decree No. 902-A. However, when proxies are solicited in relation to the election
of corporate directors, the resulting controversy, even if it ostensibly raised the violation of the SEC rules
on proxy solicitation, should be properly seen as an election controversy within the original and exclusive
jurisdiction of the trial courts by virtue of Section 5.2 of the SRC in relation to Section 5(c) of Presidential
Decree No. 902-A.

The conferment of original and exclusive jurisdiction on the regular courts over such controversies in the
election of corporate directors must be seen as intended to confine to one body the adjudication of all
related claims and controversy arising from the election of such directors. For that reason, the
aforequoted Section 2, Rule 6 of the Interim Rules broadly defines the term "election contest" as
encompassing all plausible incidents arising from the election of corporate directors, including: (1) any
controversy or dispute involving title or claim to any elective office in a stock or nonstock corporation,
(2) the validation of proxies, (3) the manner and validity of elections and (4) the qualifications of
candidates, including the proclamation of winners. If all matters anteceding the holding of such election
which affect its manner and conduct, such as the proxy solicitation process, are deemed within the
original and exclusive jurisdiction of the SEC, then the prospect of overlapping and competing
jurisdictions between that body and the regular courts becomes frighteningly real. From the language of
Section 5(c) of Presidential Decree No. 902-A, it is indubitable that controversies as to the qualification of
voting shares, or the validity of votes cast in favor of a candidate for election to the board of directors are
properly cognizable and adjudicable by the regular courts exercising original and exclusive jurisdiction
over election cases. Questions relating to the proper solicitation of proxies used in such election are
indisputably related to such issues, yet if the position of GSIS were to be upheld, they would be resolved
by the SEC and not the regular courts, even if they fall within "controversies in the election" of directors.

The Court recognizes that GSIS’s position flirts with the abhorrent evil of split jurisdiction,50 allowing as it
does both the SEC and the regular courts to assert jurisdiction over the same controversies surrounding
an election contest. Should the argument of GSIS be sustained, we would be perpetually confronted with
the spectacle of election controversies being heard and adjudicated by both the SEC and the regular
courts, made possible through a mere allegation that the anteceding proxy solicitation process was
errant, but the competing cases filed with one objective in mind – to affect the outcome of the election of
the board of directors. There is no definitive statutory provision that expressly mandates so untidy a
framework, and we are disinclined to construe the SRC in such a manner as to pave the way for the
splitting of jurisdiction.

Unlike either Section 20.1 or Section 53.1, which merely alludes to the rule-making or investigatory
power of the SEC, Section 5 of Pres. Decree No. 902-A sets forth a definitive rule on jurisdiction, expressly
granting as it does "original and exclusive jurisdiction" first to the SEC, and now to the regular courts. The
fact that the jurisdiction of the regular courts under Section 5(c) is confined to the voting on election of
officers, and not on all matters which may be voted upon by stockholders, elucidates that the power of
the SEC to regulate proxies remains extant and could very well be exercised when stockholders vote on
matters other than the election of directors.

That the proxy challenge raised by GSIS relates to the election of the directors of Meralco is undisputed.
The controversy was engendered by the looming annual meeting, during which the stockholders of
Meralco were to elect the directors of the corporation. GSIS very well knew of that fact. On 17 March
2008, the Meralco board of directors adopted a board resolution stating:

RESOLVED that the board of directors of the Manila Electric Company (MERALCO) delegate, as it hereby
delegates to the Nomination & Governance Committee the authority to approve and adopt appropriate
rules on: (1) nomination of candidates for election to the board of directors; (2) appreciation of
ballots during the election of members of the board of directors; and (3) validation of proxies for
regular or special meetings of the stockholders.51

In addition, the Information Statement/Proxy form filed by First Philippine Holdings Corporation with
the SEC pursuant to Section 20 of the SRC, states:

REASON FOR SOLICITATION OF VOTES

The Solicitor is soliciting proxies from stockholders of the Company for the purpose of electing the
directors named under the subject headed ‘Directors’ in this Statement as well as to vote the
matters in the agenda of the meeting as provided for in the Information Statement of the Company. All of
the nominees are current directors of the Company.52

Under the circumstances, we do not see it feasible for GSIS to posit that its challenge to the solicitation or
validation of proxies bore no relation at all to the scheduled election of the board of directors of Meralco
during the annual meeting. GSIS very well knew that the controversy falls within the contemplation of an
election controversy properly within the jurisdiction of the regular courts. Otherwise, it would have
never filed its original petition with the RTC of Pasay. GSIS may have withdrawn its petition with the RTC
on a new assessment made in good faith that the controversy falls within the jurisdiction of the SEC, yet
the reality is that the reassessment is precisely wrong as a matter of law.

IV.
The lack of jurisdiction of the SEC over the subject matter of GSIS’s petition necessarily invalidates the
CDO and SDO issued by that body. However, especially with respect to the CDO, there is need for this
Court to squarely rule on the question pertaining to its validity, if only for jurisprudential value and for
the guidance of the SEC.

To recount the facts surrounding the issuance of the CDO, GSIS filed its petition with the SEC on 26 May
2008. The CDO, six (6) pages in all with three (3) pages devoted to the tenability of granting the
injunctive relief, was issued on the very same day, 26 May 2008, without notice or hearing. The CDO bore
the signature of Commissioner Jesus Martinez, identified therein as "Officer-in-Charge," and nobody
else’s.

The provisions of the SRC relevant to the issuance of a CDO are as follows:

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:

xxx

(i) Issue cease and desist orders to prevent fraud or injury to the investing public;

xxx

[SEC.] 53.3. Whenever it shall appear to the Commission that any person has engaged or is about to
engage in any act or practice constituting a violation of any provision of this Code, any rule, regulation or
order thereunder, or any rule of an Exchange, registered securities association, clearing agency or other
self-regulatory organization, it may issue an order to such person to desist from committing such act or
practice: Provided, however, That the Commission shall not charge any person with violation of the rules
of an Exchange or other self regulatory organization unless it appears to the Commission that such
Exchange or other self-regulatory organization is unable or unwilling to take action against such person.
After finding that such person has engaged in any such act or practice and that there is a reasonable
likelihood of continuing, further or future violations by such person, the Commission may issue ex-parte a
cease and desist order for a maximum period of ten (10) days, enjoining the violation and compelling
compliance with such provision. The Commission may transmit such evidence as may be available
concerning any violation of any provision of this Code, or any rule, regulation or order thereunder, to the
Department of Justice, which may institute the appropriate criminal proceedings under this Code.

SEC. 64. Cease and Desist Order. – 64.1. The Commission, after proper investigation or verification, motu
proprio, or upon verified complaint by any aggrieved party, may issue a cease and desist order without
the necessity of a prior hearing if in its judgment the act or practice, unless restrained, will operate as a
fraud on investors or is otherwise likely to cause grave or irreparable injury or prejudice to the investing
public.

64.2. Until the Commission issues a cease and desist order, the fact that an investigation has been
initiated or that a complaint has been filed, including the contents of the complaint, shall be confidential.
Upon issuance of a cease and desist order, the Commission shall make public such order and a copy
thereof shall be immediately furnished to each person subject to the order.
64.3. Any person against whom a cease and desist order was issued may, within five (5) days from receipt
of the order, file a formal request for a lifting thereof. Said request shall be set for hearing by the
Commission not later than fifteen (15) days from its filing and the resolution thereof shall be made not
later than ten (10) days from the termination of the hearing. If the Commission fails to resolve the
request within the time herein prescribed, the cease and desist order shall automatically be lifted.

There are three distinct bases for the issuance by the SEC of the CDO. The first, allocated by Section 5(i),
is predicated on a necessity "to prevent fraud or injury to the investing public". No other requisite or
detail is tied to this CDO authorized under Section 5(i).

The second basis, found in Section 53.3, involves a determination by the SEC that "any person has
engaged or is about to engage in any act or practice constituting a violation of any provision of this Code,
any rule, regulation or order thereunder, or any rule of an Exchange, registered securities association,
clearing agency or other self-regulatory organization." The provision additionally requires a finding that
"there is a reasonable likelihood of continuing [or engaging in] further or future violations by such
person." The maximum duration of the CDO issued under Section 53.3 is ten (10) days.

The third basis for the issuance of a CDO is Section 64. This CDO is founded on a determination of an act
or practice, which unless restrained, "will operate as a fraud on investors or is otherwise likely to cause
grave or irreparable injury or prejudice to the investing public". Section 64.1 plainly provides three
segregate instances upon which the SEC may issue the CDO under this provision: (1) after proper
investigation or verification, (2) motu proprio, or (3) upon verified complaint by any aggrieved party.
While no lifetime is expressly specified for the CDO under Section 64, the respondent to the CDO may file
a formal request for the lifting thereof, which the SEC must hear within fifteen (15) days from filing and
decide within ten (10) days from the hearing.

It appears that the CDO under Section 5(i) is similar to the CDO under Section 64.1. Both require a
common finding of a need to prevent fraud or injury to the investing public. At the same time, no mention
is made whether the CDO defined under Section 5(i) may be issued ex-parte, while the CDO under Section
64.1 requires "grave and irreparable" injury, language absent in Section 5(i). Notwithstanding the
similarities between Section 5(i) and Section 64.1, it remains clear that the CDO issued under Section
53.3 is a distinct creation from that under Section 64.

The Court of Appeals cited the CDO as having been issued in violation of the constitutional provision on
due process, which requires both prior notice and prior hearing.53 Yet interestingly, the CDO as
contemplated in Section 53.3 or in Section 64, may be issued "ex-parte" (under Section 53.3) or "without
necessity of hearing" (under Section 64.1). Nothing in these provisions impose a requisite hearing before
the CDO may be issued thereunder. Nonetheless, there are identifiable requisite actions on the part of the
SEC that must be undertaken before the CDO may be issued either under Section 53.3 or Section 64. In
the case of Section 53.3, the SEC must make two findings: (1) that such person has engaged in any such
act or practice, and (2) that there is a reasonable likelihood of continuing, (or engaging in) further or
future violations by such person. In the case of Section 64, the SEC must adjudge that the act, unless
restrained, will operate as a fraud on investors or is otherwise likely to cause grave or irreparable injury
or prejudice to the investing public."

Noticeably, the CDO is not precisely clear whether it was issued on the basis of Section 5.1, Section 53.3
or Section 64 of the SRC. The CDO actually refers and cites all three provisions, yet it is apparent that a
singular CDO could not be founded on Section 5.1, Section 53.3 and Section 64 collectively. At the very
least, the CDO under Section 53.3 and under Section 64 have their respective requisites and terms.

GSIS was similarly cagey in its petition before the SEC, it demurring to state whether it was seeking the
CDO under Section 5.1, Section 53.3, or Section 64. Considering that injunctive relief generally avails upon
the showing of a clear legal right to such relief, the inability or unwillingness to lay bare the precise
statutory basis for the prayer for injunction is an obvious impediment to a successful

application. Nonetheless, the error of the SEC in granting the CDO without stating which kind of CDO it
was issuing is more unpardonable, as it is an act that contravenes due process of law.

We have particularly required, in administrative proceedings, that the body or tribunal "in all
controversial questions, render its decision in such a manner that the parties to the proceeding can know
the various issues involved, and the reason for the decision rendered."54 This requirement is vital, as its
fulfillment would afford the adverse party the opportunity to interpose a reasoned and intelligent appeal
that is responsive to the grounds cited against it. The CDO extended by the SEC fails to provide the
needed reasonable clarity of the rationale behind its issuance.

The subject CDO first refers to Section 64, citing its provisions, then stating: "[p]rescinding from the
aforequoted, there can be no doubt whatsoever that the Commission is in fact mandated to take up, if
expeditiously, any verified complaint praying for the provisional remedy of a cease and desist
order."55 The CDO then discusses the nature of the right of GSIS to obtain the CDO, as well as "the urgent
and paramount necessity to prevent serious damage because the stockholders’ meeting is scheduled on
May 28, 2008 x x x" Had the CDO stopped there, the unequivocal impression would have been that the
order is based on Section 64.

But the CDO goes on to cite Section 5.1, quoting paragraphs (i) and (n) in full, ratiocinating that under
these provisions, the SEC had "the power to issue cease and desist orders to prevent fraud or injury to the
public and such other measures necessary to carry out the Commission’s role as
regulator."56 Immediately thence, the CDO cites Section 53.3 as providing "that whenever it shall appear
to the Commission that nay person has engaged or is about to engage in any act or practice constituting a
violation of any provision, any rule, regulation or order thereunder, the Commission may issue ex-parte a
cease and desist order for a maximum period of ten (10) days, enjoining the violation and compelling
compliance therewith."57

The citation in the CDO of Section 5.1, Section 53.3 and Section 64 together may leave the impression that
it is grounded on all three provisions, and that may very well have been the intention of the SEC.
Assuming that is so, it is legally impermissible for the SEC to have utilized both Section 53.3 and Section
64 as basis for the CDO at the same time. The CDO under Section 53.3 is premised on distinctly different
requisites than the CDO under Section 64. Even more crucially, the lifetime of the CDO under Section 53.3
is confined to a definite span of ten (10) days, which is not the case with the CDO under Section 64. This
CDO under Section 64 may be the object of a formal request for lifting within five (5) days from its
issuance, a remedy not expressly afforded to the CDO under Section 53.3.

Any respondent to a CDO which cites both Section 53.3 and Section 64 would not have an intelligent or
adequate basis to respond to the same. Such respondent would not know whether the CDO would have a
determinate lifespan of ten (10) days, as in Section 53.3, or would necessitate a formal request for lifting
within five (5) days, as required under Section 64.1. This lack of clarity is to the obvious prejudice of the
respondent, and is in clear defiance of the constitutional right to due process of law. Indeed, the veritable
mélange that the assailed CDO is, with its jumbled mixture of premises and conclusions, the antithesis of
due process.

Had the CDO issued by the SEC expressed the length of its term, perhaps greater clarity would have been
offered on what Section of the SRC it is based. However, the CDO is precisely silent as to its lifetime,
thereby precluding much needed clarification. In view of the statutory differences among the three CDOs
under the SRC, it is essential that the SEC, in issuing such injunctive relief, identify the exact provision of
the SRC on which the CDO is founded. Only by doing so could the adversely affected party be able to
properly evaluate whatever his responses under the law.

To make matters worse for the SEC, the fact that the CDO was signed, much less apparently deliberated
upon, by only by one commissioner likewise renders the order fatally infirm.

The SEC is a collegial body composed of a Chairperson and four (4) Commissioners.58 In order to
constitute a quorum to conduct business, the presence of at least three (3) Commissioners is
required.59 In the leading case of GMCR v. Bell,60 we definitively explained the nature of a collegial body,
and how the act of one member of such body, even if the head, could not be considered as that of the
entire body itself. Thus:

We hereby declare that the NTC is a collegial body requiring a majority vote out of the three members of
the commission in order to validly decide a case or any incident therein. Corollarily, the vote alone of the
chairman of the commission, as in this case, the vote of Commissioner Kintanar, absent the required
concurring vote coming from the rest of the membership of the commission to at least arrive at a
majority decision, is not sufficient to legally render an NTC order, resolution or decision.

Simply put, Commissioner Kintanar is not the National Telecommunications Commission. He alone does
not speak for and in behalf of the NTC. The NTC acts through a three-man body, and the three members of
the commission each has one vote to cast in every deliberation concerning a case or any incident therein
that is subject to the jurisdiction of the NTC. When we consider the historical milieu in which the NTC
evolved into the quasi-judicial agency it is now under Executive Order No. 146 which organized the NTC
as a three-man commission and expose the illegality of all memorandum circulars negating the collegial
nature of the NTC under Executive Order No. 146, we are left with only one logical conclusion: the NTC is
a collegial body and was a collegial body even during the time when it was acting as a one-man regime.61

We can adopt a virtually word-for-word observation with respect to former Commissioner Martinez and
the SEC. Simply put, Commissioner Martinez is not the SEC. He alone does not speak for and in behalf of
the SEC. The SEC acts through a five-person body, and the five members of the commission each has one
vote to cast in every deliberation concerning a case or any incident therein that is subject to the
jurisdiction of the SEC.

GSIS attempts to defend former Commissioner Martinez’s action, but its argument is without merit. It
cites SEC Order No. 169, Series of 2008, whereby Martinez was designated as "Officer-in-Charge of the
Commission for the duration of the official travel of the Chairperson to Paris, France, to attend the 33rd
Annual Conference of the [IOSCO] from May 26-30, 2008."62 As officer-in-charge (OIC), Martinez was
"authorized to sign all documents and papers and perform all other acts and deeds as may be necessary
in the day-to-day operation of the Commission".1avvphi1
It is clear that Martinez was designated as OIC because of the official travel of only one member,
Chairperson Fe Barin. Martinez was not commissioned to act as the SEC itself. At most, he was to act in
place of Chairperson Barin in the exercise of her duties as Chairperson of the SEC. Under Section 4.3 of
the SRC, the Chairperson is the chief executive officer of the SEC, and thus empowered to "execute and
administer the policies, decisions, orders and resolutions approved by the Commission," as well as to
"have the

general executive direction and supervision of the work and operation of the Commission."63 It is in
relation to the exercise of these duties of the Chairperson, and not to the functions of the Commission,
that Martinez was "authorized to sign all documents and papers and perform all other acts and deeds as
may be necessary in the day-to-day operation of the Commission."

GSIS likewise cites, as authority for Martinez’s unilateral issuance of the CDO, Section 4.6 of the SRC,
which states that the SEC "may, for purposes of efficiency, delegate any of its functions to any department
or office of the Commission, an individual Commissioner or staff member of the Commission except its
review or appellate authority and its power to adopt, alter and supplement any rule or regulation."
Reliance on this provision is inappropriate. First, there is no convincing demonstration that the SEC had
delegated to Martinez the authority to issue the CDO. The SEC Order designating Martinez as OIC only
authorized him to exercise the functions of the absent Chairperson, and not of the Commission. If the
Order is read as enabling Martinez to issue the CDO in behalf of the Commission, it would be akin to
conceding that the SEC Chairperson, acting alone, can issue the CDO in behalf of the SEC itself. That again
contravenes our holding in GMCR v. Bell.

In addition, it is clear under Section 4.6 that the ability to delegate functions to a single commissioner
does not extend to the exercise of the review or appellate authority of the SEC. The issuance of the CDO is
an act of the SEC itself done in the exercise of its original jurisdiction to review actual cases or
controversies. If it has not been clear to the SEC before, it should be clear now that its power to issue a
CDO can not, under the SRC, be delegated to an individual commissioner.

V.

In the end, even assuming that the events narrated in our Resolution in A.M. No. 08-8-11-CA constitute
sufficient basis to nullify the assailed decision of the Court of Appeals, still it remains clear that the reliefs
GSIS seeks of this Court have no basis in law. Notwithstanding the black mark that stains the appellate
court’s decision, the first paragraph of its fallo, to the extent that it dismissed the complaint of GSIS with
the SEC for lack of jurisdiction and consequently nullified the CDO and SDO, defies unbiased scrutiny and
deserves affirmation.

A.

In its dispositive portion, the Court of Appeals likewise pronounced that the complaint filed by GSIS with
the SEC should be barred from being considered "as an election contest in the RTC", given that the fifteen
(15) day prescriptive period to file an election contest with the RTC, under Section 3, Rule 6 of the
Interim Rules, had already run its course.64 Yet no such relief was requested by private respondents in
their petition for certiorari filed with the Court of Appeals65 . Without disputing the legal predicates
surrounding this pronouncement, we note that its tenor, if not the text, unduly suggests an unwholesome
pre-emptive strike. Given our observations in A.M. No. 08-8-11-CA of the "undue interest" exhibited by
the author of the appellate court decision, such declaration is best deleted. Nonetheless, we do trust that
any court or tribunal that may be confronted with that premise adverted to by the Court of Appeals
would know how to properly treat the same.

B.

Finally, we turn to the sanction on the lawyers of GSIS imposed by the Court of Appeals.

Nonetheless, we find that as a matter of law the sanctions are unwarranted. The charter of GSIS66 is
unique among government owned or controlled corporations with original charter in that it allocates a
role for its internal legal counsel that is in conjunction with or complementary to the Office of the
Government Corporate Counsel (OGCC), which is the statutory legal counsel for GOCCs. Section 47 of GSIS
charter reads:

SEC. 47. Legal Counsel.—The Government Corporate Counsel shall be the legal adviser and consultant of
GSIS, but GSIS may assign to the Office of the Government Corporate Counsel (OGCC) cases for legal
action or trial, issues for legal opinions, preparation and review of contracts/agreements and others, as
GSIS may decide or determine from time to time: Provided, however, That the present legal services
group in GSIS shall serve as its in-house legal counsel.

The GSIS may, subject to approval by the proper court, deputize any personnel of the legal service group
to act as special sheriff in the enforcement of writs and processes issued by the court, quasi-judicial
agencies or administrative bodies in cases involving GSIS.67

The designation of the OGCC as the legal counsel for GOCCs is set forth by statute, initially by Rep. Act No.
3838, then reiterated by the Administrative Code of 1987.68 Given that the designation is statutory in
nature, there is no impediment for Congress to impose a different role for the OGCC with respect to
particular GOCCs it may charter. Congress appears to have done so with respect to GSIS, designating the
OGCC as a "legal adviser and consultant," rather than as counsel to GSIS. Further, the law clearly vests
unto GSIS the discretion, rather than the duty, to assign cases to the OGCC for legal action, while
designating the present legal services group of GSIS as "in-house legal counsel." This situates GSIS
differently from the Land Bank of the Philippines, whose own in-house lawyers have persistently argued
before this Court to no avail on their alleged right

to file petitions before us instead of the OGCC.69 Nothing in the Land Bank charter70 vested it with the
discretion to choose when to assign

cases to the OGCC, notwithstanding the establishment of its own Legal Department.71

Congress is not bound to retain the OGCC as the primary or exclusive legal counsel of GSIS even if it
performs such a role for other GOCCs. To bind Congress to perform in that manner would be akin to
elevating the OGCC’s statutory role to irrepealable status, and it is basic that Congress is barred from
passing irrepealable laws.72

C.

We close by acknowledging that the surrounding circumstances behind these petitions are unfortunate,
given the events as narrated in A.M. No. 08-8-11-CA. While due punishment has been meted on the errant
magistrates, the corporate world may very well be reminded that the members of the judiciary are not to
be viewed or treated as

mere pawns or puppets in the internecine fights businessmen and their associates wage against other
businessmen in the quest for corporate dominance. In the end, the petitions did afford this Court to
clarify consequential points of law, points rooted in principles which will endure long after the names of
the participants in these cases have been forgotten.

WHEREFORE, the petition in G.R. No. 184275 is EXPUNGED for lack of capacity of the petitioner to bring
forth the suit.

The petition in G.R. No. 183905 is DISMISSED for lack of merit except that the second and third
paragraphs of the fallo of the assailed decision dated 23 July 2008 of the Court of Appeals, including
subparagraphs (1), (2), 2(a), 2(b), 2(c) and 2(d) under the second paragraph, are hereby DELETED.

No pronouncements as to costs.

SO ORDERED.

Republic of the Philippines

SUPREME COURT
Manila

THIRD DIVISION

G.R. No. 93695 February 4, 1992

RAMON C. LEE and ANTONIO DM. LACDAO, petitioners,

vs.
THE HON. COURT OF APPEALS, SACOBA MANUFACTURING CORP., PABLO GONZALES, JR. and
THOMAS GONZALES, respondents.

Cayanga, Zuniga & Angel Law Offices for petitioners.

Timbol & Associates for private respondents.

GUTIERREZ, JR., J.:

What is the nature of the voting trust agreement executed between two parties in this case? Who owns
the stocks of the corporation under the terms of the voting trust agreement? How long can a voting trust
agreement remain valid and effective? Did a director of the corporation cease to be such upon the
creation of the voting trust agreement? These are the questions the answers to which are necessary in
resolving the principal issue in this petition forcertiorari — whether or not there was proper service of
summons on Alfa Integrated Textile Mills (ALFA, for short) through the petitioners as president and vice-
president, allegedly, of the subject corporation after the execution of a voting trust agreement between
ALFA and the Development Bank of the Philippines (DBP, for short).

From the records of the instant case, the following antecedent facts appear:

On November 15, 1985, a complaint for a sum of money was filed by the International Corporate Bank,
Inc. against the private respondents who, in turn, filed a third party complaint against ALFA and the
petitioners on March 17, 1986.

On September 17, 1987, the petitioners filed a motion to dismiss the third party complaint which the
Regional Trial Court of Makati, Branch 58 denied in an Order dated June 27, 1988.

On July 18, 1988, the petitioners filed their answer to the third party complaint.

Meanwhile, on July 12, 1988, the trial court issued an order requiring the issuance of an alias summons
upon ALFA through the DBP as a consequence of the petitioner's letter informing the court that the
summons for ALFA was erroneously served upon them considering that the management of ALFA had
been transferred to the DBP.

In a manifestation dated July 22, 1988, the DBP claimed that it was not authorized to receive summons on
behalf of ALFA since the DBP had not taken over the company which has a separate and distinct
corporate personality and existence.

On August 4, 1988, the trial court issued an order advising the private respondents to take the
appropriate steps to serve the summons to ALFA.

On August 16, 1988, the private respondents filed a Manifestation and Motion for the Declaration of
Proper Service of Summons which the trial court granted on August 17, 1988.

On September 12, 1988, the petitioners filed a motion for reconsideration submitting that Rule 14,
section 13 of the Revised Rules of Court is not applicable since they were no longer officers of ALFA and
that the private respondents should have availed of another mode of service under Rule 14, Section 16 of
the said Rules, i.e., through publication to effect proper service upon ALFA.

In their Comment to the Motion for Reconsideration dated September 27, 1988, the private respondents
argued that the voting trust agreement dated March 11, 1981 did not divest the petitioners of their
positions as president and executive vice-president of ALFA so that service of summons upon ALFA
through the petitioners as corporate officers was proper.

On January 2, 1989, the trial court upheld the validity of the service of summons on ALFA through the
petitioners, thus, denying the latter's motion for reconsideration and requiring ALFA to filed its answer
through the petitioners as its corporate officers.

On January 19, 1989, a second motion for reconsideration was filed by the petitioners reiterating their
stand that by virtue of the voting trust agreement they ceased to be officers and directors of ALFA, hence,
they could no longer receive summons or any court processes for or on behalf of ALFA. In support of their
second motion for reconsideration, the petitioners attached thereto a copy of the voting trust agreement
between all the stockholders of ALFA (the petitioners included), on the one hand, and the DBP, on the
other hand, whereby the management and control of ALFA became vested upon the DBP.

On April 25, 1989, the trial court reversed itself by setting aside its previous Order dated January 2, 1989
and declared that service upon the petitioners who were no longer corporate officers of ALFA cannot be
considered as proper service of summons on ALFA.

On May 15, 1989, the private respondents moved for a reconsideration of the above Order which was
affirmed by the court in its Order dated August 14, 1989 denying the private respondent's motion for
reconsideration.

On September 18, 1989, a petition for certiorari was belatedly submitted by the private respondent
before the public respondent which, nonetheless, resolved to give due course thereto on September 21,
1989.

On October 17, 1989, the trial court, not having been notified of the pending petition for certiorari with
public respondent issued an Order declaring as final the Order dated April 25, 1989. The private
respondents in the said Order were required to take positive steps in prosecuting the third party
complaint in order that the court would not be constrained to dismiss the same for failure to prosecute.
Subsequently, on October 25, 1989 the private respondents filed a motion for reconsideration on which
the trial court took no further action.

On March 19, 1990, after the petitioners filed their answer to the private respondents' petition
for certiorari, the public respondent rendered its decision, the dispositive portion of which reads:

WHEREFORE, in view of the foregoing, the orders of respondent judge dated April 25, 1989
and August 14, 1989 are hereby SET ASIDE and respondent corporation is ordered to file
its answer within the reglementary period. (CA Decision, p. 8; Rollo, p. 24)

On April 11, 1990, the petitioners moved for a reconsideration of the decision of the public respondent
which resolved to deny the same on May 10, 1990. Hence, the petitioners filed this certiorari petition
imputing grave abuse of discretion amounting to lack of jurisdiction on the part of the public respondent
in reversing the questioned Orders dated April 25, 1989 and August 14, 1989 of the court a quo, thus,
holding that there was proper service of summons on ALFA through the petitioners.

In the meantime, the public respondent inadvertently made an entry of judgment on July 16, 1990
erroneously applying the rule that the period during which a motion for reconsideration has been
pending must be deducted from the 15-day period to appeal. However, in its Resolution dated January 3,
1991, the public respondent set aside the aforestated entry of judgment after further considering that the
rule it relied on applies to appeals from decisions of the Regional Trial Courts to the Court of Appeals, not
to appeals from its decision to us pursuant to our ruling in the case of Refractories Corporation of the
Philippines v. Intermediate Appellate Court, 176 SCRA 539 [1989]. (CA Rollo, pp. 249-250)

In their memorandum, the petitioners present the following arguments, to wit:

(1) that the execution of the voting trust agreement by a stockholders whereby all his
shares to the corporation have been transferred to the trustee deprives the stockholders of
his position as director of the corporation; to rule otherwise, as the respondent Court of
 Appeals did, would be violative of section 23 of the Corporation Code ( Rollo, pp. 270-
3273); and

(2) that the petitioners were no longer acting or holding any of the positions provided
under Rule 14, Section 13 of the Rules of Court authorized to receive service of summons
for and in behalf of the private domestic corporation so that the service of summons on
ALFA effected through the petitioners is not valid and ineffective; to maintain the
respondent Court of Appeals' position that ALFA was properly served its summons through
the petitioners would be contrary to the general principle that a corporation can only be
bound by such acts which are within the scope of its officers' or agents' authority (Rollo, pp.
273-275)

In resolving the issue of the propriety of the service of summons in the instant case, we dwell first on the
nature of a voting trust agreement and the consequent effects upon its creation in the light of the
provisions of the Corporation Code.

A voting trust is defined in Ballentine's Law Dictionary as follows:

(a) trust created by an agreement between a group of the stockholders of a corporation and
the trustee or by a group of identical agreements between individual stockholders and a
common trustee, whereby it is provided that for a term of years, or for a period contingent
upon a certain event, or until the agreement is terminated, control over the stock owned by
such stockholders, either for certain purposes or for all purposes, is to be lodged in the
trustee, either with or without a reservation to the owners, or persons designated by them,
of the power to direct how such control shall be used. (98 ALR 2d. 379 sec. 1 [d]; 19 Am J
2d Corp. sec. 685).

Under Section 59 of the new Corporation Code which expressly recognizes voting trust agreements, a
more definitive meaning may be gathered. The said provision partly reads:

Sec. 59. Voting Trusts — One or more stockholders of a stock corporation may create a
voting trust for the purpose of conferring upon a trustee or trustees the right to vote and
other rights pertaining to the share for a period rights pertaining to the shares for a period
not exceeding five (5) years at any one time: Provided, that in the case of a voting trust
specifically required as a condition in a loan agreement, said voting trust may be for a
period exceeding (5) years but shall automatically expire upon full payment of the loan. A
voting trust agreement must be in writing and notarized, and shall specify the terms and
conditions thereof. A certified copy of such agreement shall be filed with the corporation
and with the Securities and Exchange Commission; otherwise, said agreement is ineffective
and unenforceable. The certificate or certificates of stock covered by the voting trust
agreement shall be cancelled and new ones shall be issued in the name of the trustee or
trustees stating that they are issued pursuant to said agreement. In the books of the
corporation, it shall be noted that the transfer in the name of the trustee or trustees is
made pursuant to said voting trust agreement.

By its very nature, a voting trust agreement results in the separation of the voting rights of a stockholder
from his other rights such as the right to receive dividends, the right to inspect the books of the
corporation, the right to sell certain interests in the assets of the corporation and other rights to which a
stockholder may be entitled until the liquidation of the corporation. However, in order to distinguish a
voting trust agreement from proxies and other voting pools and agreements, it must pass three criteria or
tests, namely: (1) that the voting rights of the stock are separated from the other attributes of ownership;
(2) that the voting rights granted are intended to be irrevocable for a definite period of time; and (3) that
the principal purpose of the grant of voting rights is to acquire voting control of the corporation. (5
Fletcher, Cyclopedia of the Law on Private Corporations, section 2075 [1976] p. 331 citingTankersly v.
Albright, 374 F. Supp. 538)

Under section 59 of the Corporation Code, supra, a voting trust agreement may confer upon a trustee not
only the stockholder's voting rights but also other rights pertaining to his shares as long as the voting
trust agreement is not entered "for the purpose of circumventing the law against monopolies and illegal
combinations in restraint of trade or used for purposes of fraud." (section 59, 5th paragraph of the
Corporation Code) Thus, the traditional concept of a voting trust agreement primarily intended to single
out a stockholder's right to vote from his other rights as such and made irrevocable for a limited duration
may in practice become a legal device whereby a transfer of the stockholder's shares is effected subject to
the specific provision of the voting trust agreement.

The execution of a voting trust agreement, therefore, may create a dichotomy between the equitable or
beneficial ownership of the corporate shares of a stockholders, on the one hand, and the legal title thereto
on the other hand.

The law simply provides that a voting trust agreement is an agreement in writing whereby one or more
stockholders of a corporation consent to transfer his or their shares to a trustee in order to vest in the
latter voting or other rights pertaining to said shares for a period not exceeding five years upon the
fulfillment of statutory conditions and such other terms and conditions specified in the agreement. The
five year-period may be extended in cases where the voting trust is executed pursuant to a loan
agreement whereby the period is made contingent upon full payment of the loan.

In the instant case, the point of controversy arises from the effects of the creation of the voting trust
agreement. The petitioners maintain that with the execution of the voting trust agreement between them
and the other stockholders of ALFA, as one party, and the DBP, as the other party, the former assigned
and transferred all their shares in ALFA to DBP, as trustee. They argue that by virtue to of the voting trust
agreement the petitioners can no longer be considered directors of ALFA. In support of their contention,
the petitioners invoke section 23 of the Corporation Code which provides, in part, that:

Every director must own at least one (1) share of the capital stock of the corporation of
which he is a director which share shall stand in his name on the books of the corporation.
Any director who ceases to be the owner of at least one (1) share of the capital stock of the
corporation of which he is a director shall thereby cease to be director . . . (Rollo, p. 270)

The private respondents, on the contrary, insist that the voting trust agreement between ALFA and the
DBP had all the more safeguarded the petitioners' continuance as officers and directors of ALFA
inasmuch as the general object of voting trust is to insure permanency of the tenure of the directors of a
corporation. They cited the commentaries by Prof. Aguedo Agbayani on the right and status of the
transferring stockholders, to wit:

The "transferring stockholder", also called the "depositing stockholder", is equitable owner
for the stocks represented by the voting trust certificates and the stock reversible on
 termination of the trust by surrender. It is said that the voting trust agreement does not
destroy the status of the transferring stockholders as such, and thus render them ineligible
as directors. But a more accurate statement seems to be that for some purposes the
depositing stockholder holding voting trust certificates in lieu of his stock and being the
beneficial owner thereof, remains and is treated as a stockholder. It seems to be deducible
from the case that he may sue as a stockholder if the suit is in equity or is of an equitable
nature, such as, a technical stockholders' suit in right of the corporation. [Commercial Laws
of the Philippines by Agbayani, Vol. 3 pp. 492-493, citing 5 Fletcher 326, 327] (Rollo, p. 291)

We find the petitioners' position meritorious.

Both under the old and the new Corporation Codes there is no dispute as to the most immediate effect of
a voting trust agreement on the status of a stockholder who is a party to its execution — from legal
titleholder or owner of the shares subject of the voting trust agreement, he becomes the equitable or
beneficial owner. (Salonga, Philippine Law on Private Corporations, 1958 ed., p. 268; Pineda and
Carlos, The Law on Private Corporations and Corporate Practice, 1969 ed., p. 175; Campos and Lopez-
Campos, The Corporation Code; Comments, Notes & Selected Cases, 1981, ed., p. 386;
Agbayani, Commentaries and Jurisprudence on the Commercial Laws of the Philippines,Vol. 3, 1988 ed., p.
536). The penultimate question, therefore, is whether the change in his status deprives the stockholder of
the right to qualify as a director under section 23 of the present Corporation Code which deletes the
phrase "in his own right." Section 30 of the old Code states that:

Every director must own in his own right at least one share of the capital stock of the stock
corporation of which he is a director, which stock shall stand in his name on the books of
the corporation. A director who ceases to be the owner of at least one share of the capital
stock of a stock corporation of which is a director shall thereby cease to be a director . . .
(Emphasis supplied)

Under the old Corporation Code, the eligibility of a director, strictly speaking, cannot be adversely
affected by the simple act of such director being a party to a voting trust agreement inasmuch as he
remains owner (although beneficial or equitable only) of the shares subject of the voting trust agreement
pursuant to which a transfer of the stockholder's shares in favor of the trustee is required (section 36 of
the old Corporation Code). No disqualification arises by virtue of the phrase "in his own right" provided
under the old Corporation Code.

With the omission of the phrase "in his own right" the election of trustees and other persons who in fact
are not beneficial owners of the shares registered in their names on the books of the corporation
becomes formally legalized (see Campos and Lopez-Campos, supra, p. 296) Hence, this is a clear
indication that in order to be eligible as a director, what is material is the legal title to, not beneficial
ownership of, the stock as appearing on the books of the corporation (2 Fletcher, Cyclopedia of the Law of
Private Corporations, section 300, p. 92 [1969] citingPeople v. Lihme, 269 Ill. 351, 109 N.E. 1051).

The facts of this case show that the petitioners, by virtue of the voting trust agreement executed in 1981
disposed of all their shares through assignment and delivery in favor of the DBP, as trustee. Consequently,
the petitioners ceased to own at least one share standing in their names on the books of ALFA as required
under Section 23 of the new Corporation Code. They also ceased to have anything to do with the
management of the enterprise. The petitioners ceased to be directors. Hence, the transfer of the
petitioners' shares to the DBP created vacancies in their respective positions as directors of ALFA. The
transfer of shares from the stockholder of ALFA to the DBP is the essence of the subject voting trust
agreement as evident from the following stipulations:

1. The TRUSTORS hereby assign and deliver to the TRUSTEE the certificate of the shares of
the stocks owned by them respectively and shall do all things necessary for the transfer of
their respective shares to the TRUSTEE on the books of ALFA.

2. The TRUSTEE shall issue to each of the TRUSTORS a trust certificate for the number of
shares transferred, which shall be transferrable in the same manner and with the same
effect as certificates of stock subject to the provisions of this agreement;

3. The TRUSTEE shall vote upon the shares of stock at all meetings of ALFA, annual or
special, upon any resolution, matter or business that may be submitted to any such
meeting, and shall possess in that respect the same powers as owners of the equitable as well
as the legal title to the stock;

4. The TRUSTEE may cause to be transferred to any person one share of stock for the
purpose of qualifying such person as director of ALFA, and cause a certificate of stock
evidencing the share so transferred to be issued in the name of such person;

xxx xxx xxx

9. Any stockholder not entering into this agreement may transfer his shares to the same
trustees without the need of revising this agreement, and this agreement shall have the
same force and effect upon that said stockholder. (CA Rollo, pp. 137-138; Emphasis
supplied)

Considering that the voting trust agreement between ALFA and the DBP transferred legal ownership of
the stock covered by the agreement to the DBP as trustee, the latter became the stockholder of record
with respect to the said shares of stocks. In the absence of a showing that the DBP had caused to be
transferred in their names one share of stock for the purpose of qualifying as directors of ALFA, the
petitioners can no longer be deemed to have retained their status as officers of ALFA which was the case
before the execution of the subject voting trust agreement. There appears to be no dispute from the
records that DBP has taken over full control and management of the firm.

Moreover, in the Certification dated January 24, 1989 issued by the DBP through one Elsa A. Guevarra,
Vice-President of its Special Accounts Department II, Remedial Management Group, the petitioners were
no longer included in the list of officers of ALFA "as of April 1982." (CA Rollo, pp. 140-142)

Inasmuch as the private respondents in this case failed to substantiate their claim that the subject voting
trust agreement did not deprive the petitioners of their position as directors of ALFA, the public
respondent committed a reversible error when it ruled that:

. . . while the individual respondents (petitioners Lee and Lacdao) may have ceased to be
president and vice-president, respectively, of the corporation at the time of service of
summons on them on August 21, 1987, they were at least up to that time, still directors . . .
The aforequoted statement is quite inaccurate in the light of the express terms of Stipulation No. 4 of the
subject voting trust agreement. Both parties, ALFA and the DBP, were aware at the time of the execution
of the agreement that by virtue of the transfer of shares of ALFA to the DBP, all the directors of ALFA
were stripped of their positions as such.

There can be no reliance on the inference that the five-year period of the voting trust agreement in
question had lapsed in 1986 so that the legal title to the stocks covered by the said voting trust
agreement ipso facto reverted to the petitioners as beneficial owners pursuant to the 6th paragraph of
section 59 of the new Corporation Code which reads:

Unless expressly renewed, all rights granted in a voting trust agreement shall automatically
expire at the end of the agreed period, and the voting trust certificate as well as the
certificates of stock in the name of the trustee or trustees shall thereby be deemed
cancelled and new certificates of stock shall be reissued in the name of the transferors.

On the contrary, it is manifestly clear from the terms of the voting trust agreement between ALFA and the
DBP that the duration of the agreement is contingent upon the fulfillment of certain obligations of ALFA
with the DBP. This is shown by the following portions of the agreement.

WHEREAS, the TRUSTEE is one of the creditors of ALFA, and its credit is secured by a first
mortgage on the manufacturing plant of said company;

WHEREAS, ALFA is also indebted to other creditors for various financial accomodations
and because of the burden of these obligations is encountering very serious difficulties in
continuing with its operations.

WHEREAS, in consideration of additional accommodations from the TRUSTEE, ALFA had

offered and the TRUSTEE has accepted participation in the management and control of the
company and to assure the aforesaid participation by the TRUSTEE, the TRUSTORS have
agreed to execute a voting trust covering their shareholding in ALFA in favor of the
TRUSTEE;

AND WHEREAS, DBP is willing to accept the trust for the purpose aforementioned.

NOW, THEREFORE, it is hereby agreed as follows:

xxx xxx xxx

6. This Agreement shall last for a period of Five (5) years, and is renewable for as long as
the obligations of ALFA with DBP, or any portion thereof, remains outstanding; (CA Rollo,
pp. 137-138)

Had the five-year period of the voting trust agreement expired in 1986, the DBP would not have
transferred all its rights, titles and interests in ALFA "effective June 30, 1986" to the national government
through the Asset Privatization Trust (APT) as attested to in a Certification dated January 24, 1989 of the
Vice President of the DBP's Special Accounts Department II. In the same certification, it is stated that the
DBP, from 1987 until 1989, had handled APT's account which included ALFA's assets pursuant to a
management agreement by and between the DBP and APT (CA Rollo, p. 142) Hence, there is evidence on
record that at the time of the service of summons on ALFA through the petitioners on August 21, 1987,
the voting trust agreement in question was not yet terminated so that the legal title to the stocks of ALFA,
then, still belonged to the DBP.

In view of the foregoing, the ultimate issue of whether or not there was proper service of summons on
ALFA through the petitioners is readily answered in the negative.

Under section 13, Rule 14 of the Revised Rules of Court, it is provided that:

Sec. 13. Service upon private domestic corporation or partnership. — If the defendant is a
corporation organized under the laws of the Philippines or a partnership duly registered,
service may be made on the president, manager, secretary, cashier, agent or any of its
directors.

It is a basic principle in Corporation Law that a corporation has a personality separate and distinct from
the officers or members who compose it. (See Sulo ng Bayan Inc. v. Araneta, Inc., 72 SCRA 347 [1976];
Osias Academy v. Department of Labor and Employment, et al., G.R. Nos. 83257-58, December 21, 1990).
Thus, the above rule on service of processes of a corporation enumerates the representatives of a
corporation who can validly receive court processes on its behalf. Not every stockholder or officer can
bind the corporation considering the existence of a corporate entity separate from those who compose it.

The rationale of the aforecited rule is that service must be made on a representative so integrated with
the corporation sued as to make it a priori supposable that he will realize his responsibilities and know
what he should do with any legal papers served on him. (Far Corporation v. Francisco, 146 SCRA 197
[1986] citing Villa Rey Transit, Inc. v. Far East Motor Corp. 81 SCRA 303 [1978]).

The petitioners in this case do not fall under any of the enumerated officers. The service of summons
upon ALFA, through the petitioners, therefore, is not valid. To rule otherwise, as correctly argued by the
petitioners, will contravene the general principle that a corporation can only be bound by such acts which
are within the scope of the officer's or agent's authority. (see Vicente v. Geraldez, 52 SCRA 210 [1973]).

WHEREFORE, premises considered, the petition is hereby GRANTED. The appealed decision dated March
19, 1990 and the Court of Appeals' resolution of May 10, 1990 are SET ASIDE and the Orders dated April
25, 1989 and October 17, 1989 issued by the Regional Trial Court of Makati, Branch 58 are REINSTATED.

SO ORDERED.

Republic of the Philippines

SUPREME COURT
Manila

FIRST DIVISION

G.R. No. 77860 November 22, 1988

BOMAN ENVIRONMENTAL DEVELOPMENT CORPORATION, petitioners,

vs.
HON. COURT OF APPEALS and NILCAR Y. FAJILAN, respondents.
Lim, Duran & Associates for petitioner.

Renato J. Dilag for private respondent.

GRIÑO-AQUINO, J.:

The only issue in this case is whether or not a suit brought by a withdrawing stockholder against the
corporation to enforce payment of the balance due on the consideration (evidenced by a corporate
promissory note) for the surrender of his shares of stock and interests in the corporation, involves an
intra-corporate dispute. The resolution of that issue will determine whether the Securities and Exchange
Commission (SEC) or a regular court has jurisdiction over the action.

On May 7, 1984, respondent Nilcar Y. Fajilan offered in writing to resign as President and Member of the
Board of Directors of petitioner, Boman Environmental Development Corporation (BEDECO), and to sell
to the company all his shares, rights, and interests therein for P 300,000 plus the transfer to him of the
company's Isuzu pick-up truck which he had been using. The letter-offer (Exh. A-1) reads as follows:

07 May 1984

THE BOARD OF DIRECTORS,

BOMAN ENVIRONMENTAL DEVELOPMENT
CORPORATION
2nd Floor, AGS Building,
466 EDSA, Makati,
Metro Manila

Gentlemen:

With deepest regrets, I am tendering my resignation as member of the Board of Directors

and President of the Company effective as soon as my shares and interests thereto are sold
and fully paid.

It is really painful to leave the Company which we painstakingly labored and nortured for
years to attain its success today, however, family interests and other considerations dictate
me otherwise.

Thank you for your interest of buying my shares and other interests on the Company. It is
really my intention to divest myself of these investments and sell them all for PESOS:
THREE HUNDRED THOUSAND (P 300,000) payable in cash in addition to the Isuzu pick up
I am presently using for and in behalf of the Company.

Thank you.

NILCAR Y. FAJILAN
Director/President (p. 239, Rollo.)
At a meeting of the Board of Directors of BEDECO on June 14, 1984, Fajilan's resignation as president was
accepted and new officers were elected. Fajilan's offer to sell his shares back to the corporation was
approved, the Board promising to pay for them on a staggered basis from July 15, 1984 to December 15,
1984 (Annex B).<äre||anº•1àw> The resolution of the Board was communicated to Fajilan in the
following letter-agreement dated June 25, 1984 to which he affixed his conformity (Annex C):

June
25,
1984

Mr. Nilcar Y. Fajilan

No. 159 Aramismis Street
Project 7, Quezon City

Dear Mr. Fajilan:

Please be informed that after due deliberation the Board of Directors has accepted your
offer to sellyour share and interest in the company at the price of P300,000.00, inclusive of
your unpaid salary from February 1984 to May 31, 1984, loan principal, interest on loan,
profit sharing and share on book value of the corporation as at May 31, 1984. Payment of
the P300,000.00 shall be as follows:

July 15, P
1984 100,000.00
September P
15, 1984 75,000.00
October P
15, 1984 62,500.00
December P
15, 1984 62,500.00
P
300,000.00.

To assure you of payment of the above amount on respective due dates, the company will
execute the necessary promissory note.

In addition to the above, the Ford Courier Pick-up will belong to you subject to your
assumption of the outstanding obligation thereof with Fil-Invest. It is understood that upon
your full payment of the pick-up, arrangement will be made and negotiated with Fil-Invest
regarding the transfer of the ownership of the vehicle to your name.

If the above meets your requirements, kindly signify your conformity/approval by signing below.

Very truly yours,

(SGD) JAMES C.
 PERALTA
Corporate Secretary

CONFORME:

(SGD) NILCAR Y. FAJILAN

Noted:

(SGD) ALFREDO S. PANGILINAN (SGD) MAXIMO R. REBALDO (SGD) BENEDICTO M.

EMPAYNADO

SUBSCRIBED AND SWORN TO before me, this 3rd day of July, 1984, Alfredo S. Pangilinan
exhibiting to me his Residence Certificate No. 1696224 issued at Makati, Metro Manila on
January 24, 1984, in his capacity as President of Boman Environmental Development
Corporation with Corporate Residence Certificate No. 207911 issued at Makati, Metro
Manila on March 26, 1984.

(SGD) ERNESTO B.
DURAN
NOTARY PUBLIC
Until December 31,
1984
PTR No. 8582861
Issued
on January 24, 1984
at
Makati, Metro
Manila

Doc. No. 392

Page No. 80
Book No. X
Series of 1984. (p. 245, Rollo.)

A promissory note dated July 3, 1984, was signed by BEDECO'S new president, Alfredo Pangilinan, in the
presence of two directors, committing BEDECO to pay him P300,000 over a six-month period from July
15, 1984 to December 15, 1984. The promissory note (Exh. D) provided as follows:

PROMISSORY NOTE

Makati
,
Metro
Manila
July 3,
1984
 FOR VALUE RECEIVED, BOMAN ENVIRONMENTAL DEVELOPMENT CORPORATION, a
domestic corporation duly registered with the Securities and Exchange Commission, with
office at Rm. 608, Metro Bank Bldg., Ayala Blvd., Makati, Metro Manila, promise to pay
NILCAR Y. FAJILAN of 17 Aramismis St., Project 7, Quezon City, the sum of PESOS: THREE
HUNDRED THOUSAND (P300,000.00), Philippine Currency payable as follows:

P100,000.00 — July 15,

1984
75,000.00 — Sept.
15,
1984
62,500.00 — October
15,
1984
62,500.00 — Dec. 15,
1984
P300,000.00

BOMAN ENVIRONMENTAL
DEVELOPMENT CORPORATION
By:
(SGD) ALFREDO S. PANGILINAN
President

Signed in the presence of:

(SGD) MAXIMO R. REBALDO

(SGD) BENEDICTO M. EMPAYNADO

(Annex D, p. 247, Rollo.)

However, BEDECO paid only P50,000 on July 15, 1984 and another P50,000 on August 31, 1984 and
defaulted in paying the balance of P200,000.

On April 30, 1985, Fajilan filed a complaint in the Regional Trial Court of Makati for collection of that
balance from BEDECO.

In an order dated September 9, 1985, the trial court, through Judge Ansberto Paredes, dismissed the
complaint for lack of jurisdiction. It ruled that the controversy arose out of intracorporate relations,
hence, the Securities and Exchange Commission has original and exclusive jurisdiction to hear and decide
it.

His motion for reconsideration of that order having been denied, Fajilan filed a "Petition for Certiorari,
and mandamus with Preliminary Attachment" in the Intermediate Appellate Court.
In a decision dated March 2, 1987, the Court of Appeals set aside Judge Paredes' order of dismissal and
directed him to take cognizance of the case. BEDECO's motion for reconsideration was denied in a
resolution dated March 24, 1987 of the Court of Appeals.

In its decision, the Appellate Court characterized the case as a suit for collection of a sum of money as
Fajilan "was merely suing on the balance of the promissory note" (p. 4, Decision; p. 196, Rollo) which
BEDECO failed and refused to pay in full. More particularly, the Court of Appeals held:

While it is true that the circumstances which led to the execution of the promissory note by
the Board of Directors of respondent corporation was an intra- corporate matter, there
arose no controversy as to the sale of petitioner's interests and rights as well as his shares
as Member of the Board of Directors and President of respondent corporation. The intra-
corporate matter of the resignation of petitioner as Member of the Board of Directors and
President of respondent corporation has long been settled without issue.

The Board of Directors of respondent corporation has likewise long settled the sale by
petitioner of all his shares, rights and interests in favor of the corporation. No controversy
arose out of this transaction. The jurisdiction of the Securities and Exchange Commission
therefore need not be invoked on this matter. (p. 196, Rollo.)

The petition is impressed with merit.

Section 5(b) of P.D. No. 902-A, as amended, grants the SEC original and exclusive jurisdiction to hear and
decide cases involving—

b) Controversies arising out of intra-corporate or partnership relations, between and among

stockholders members, or associates; between any or all of them and the corporation,
partnership or association of which they are stockholders, members or associates,
respectively; ... (Emphasis supplied.)

This case involves an intra-corporate controversy because the parties are a stockholder and the
corporation. As correctly observed by the trial court, the perfection of the agreement to sell Fajilan's
participation and interests in BEDECO and the execution of the promissory note for payment of the price
of the sale did not remove the dispute from the coverage of Section 5(b) of P.D. No. 902, as amended, for
both the said agreement (Annex C) and the promissory note (Annex D) arose from intra-corporate
relations. Indeed, all the signatories of both documents were stockholders of the corporation at the time
of signing the same. It was an intra-corporate transaction, hence, this suit is an intra-corporate
controversy.

Fajilan's offer to resign as president and director "effective as soon as my shares and interests thereto
(sic) are sold and fully paid" (Annex A-1, p. 239, Rollo) implied that he would remain a stockholder until
his shares and interests were fully paid for, for one cannot be a director or president of a corporation
unless he is also a stockholder thereof. The fact that he was replaced as president of the corporation did
not necessaryily mean that he ceased to be a stockholder considering how the corporation failed to
complete payment of the consideration for the purchase of his shares of stock and interests in the
goodwill of the business. There has been no actual transfer of his shares to the corporation. In the books
of the corporation he is still a stockholder.
Fajilan's suit against the corporation to enforce the latter's promissory note or compel the corporation to
pay for his shareholdings is cognizable by the SEC alone which shall determine whether such payment
will not constitute a distribution of corporate assets to a stockholder in preference over creditors of the
corporation. The SEC has exclusive supervision, control and regulatory jurisdiction to investigate
whether the corporation has unrestricted retained earnings to cover the payment for the shares, and
whether the purchase is for a legitimate corporate purpose as provided in Sections 41 and 122 of the
Corporation Code, which reads as follows:

SEC. 41. Power to acquire own shares.—A stock corporation shall have the power to
purchase or acquire its own shares for a legitimate corporate purpose or purposes,
including but not limited to the following cases: Provided, That the corporation has
unrestricted retained earnings in its books to cover the shares to be purchased or acquired;

1. To eliminate fractional shares arising out of stock dividends;

2. To collect or compromise an indebtedness to the corporation, arising out of unpaid

subscription, in a delinquency sale, and to purchase delinquent shares sold during said
sale; and

3. To pay dissenting or withdrawing stockholders entitled to payment for their shares

under the provisions of this Code,

Sec. 12. Corporate liquidation. ...

xxx xxx xxx

Except by decrease of capital stock and as otherwise allowed by this Code, no corporation
shall distribute any of its assets or property except upon lawful dissolution and after
payment of all its debts and liabilities, (77a, 89a, 16a).

These provisions of the Corporation Code should be deemed written into the agreement between the
corporation and the stockholders even if there is no express reference to them in the promissory note.
The principle is well settled that an existing law enters into and forms part of a valid contract without
need for the parties' expressly making reference to it (Lakas ng Manggagawang Makabayan vs. Abiera, 36
SCRA 437).

The requirement of unrestricted retained earnings to cover the shares is based on the trust fund doctrine
which means that the capital stock, property and other assets of a corporation are regarded as equity in
trust for the payment of corporate creditors. The reason is that creditors of a corporation are preferred
over the stockholders in the distribution of corporate assets. There can be no distribution of assets
among the stockholders without first paying corporate creditors. Hence, any disposition of corporate
funds to the prejudice of creditors is null and void. "Creditors of a corporation have the right to assume
that so long as there are outstanding debts and liabilities, the board of directors will not use the assets of
the corporation to purchase its own stock ..."(Steinberg vs. Velasco, 52 Phil. 953.)

WHEREFORE, the petition for certiorari is granted. The decision of the Court of Appeals is reversed and
set aside. The order of the trial court dismissing the complaint for lack of jurisdiction is hereby reinstated.
No costs.
SO ORDERED.

Republic of the Philippines

SUPREME COURT
Manila

FIRST DIVISION

G.R. No. 90580 April 8, 1991

RUBEN SAW, DIONISIO SAW, LINA S. CHUA, LUCILA S. RUSTE AND EVELYN SAW, petitioners,
vs.
HON. COURT OF APPEALS, HON. BERNARDO P. PARDO, Presiding Judge of Branch 43, (Regional
Trial Court of Manila), FREEMAN MANAGEMENT AND DEVELOPMENT CORPORATION, EQUITABLE
BANKING CORPORATION, FREEMAN INCORPORATED, SAW CHIAO LIAN, THE REGISTER OF DEEDS
OF CALOOCAN CITY, and DEPUTY SHERIFF ROSALIO G. SIGUA, respondents.

Benito O. Ching, Jr. for petitioners.

William R. Vetor for Equitable Banking Corp.
Pineda, Uy & Janolo for Freeman, Inc. and Saw Chiao.

CRUZ, J.:

A collection suit with preliminary attachment was filed by Equitable Banking Corporation against
Freeman, Inc. and Saw Chiao Lian, its President and General Manager. The petitioners moved to
intervene, alleging that (1) the loan transactions between Saw Chiao Lian and Equitable Banking Corp.
were not approved by the stockholders representing at least 2/3 of corporate capital; (2) Saw Chiao Lian
had no authority to contract such loans; and (3) there was collusion between the officials of Freeman, Inc.
and Equitable Banking Corp. in securing the loans. The motion to intervene was denied, and the
petitioners appealed to the Court of Appeals.

Meanwhile, Equitable and Saw Chiao Lian entered into a compromise agreement which they submitted to
and was approved by the lower court. But because it was not complied with, Equitable secured a writ of
execution, and two lots owned by Freeman, Inc. were levied upon and sold at public auction to Freeman
Management and Development Corp.

The Court of Appeals1 sustained the denial of the petitioners' motion for intervention, holding that "the
compromise agreement between Freeman, Inc., through its President, and Equitable Banking Corp. will
not necessarily prejudice petitioners whose rights to corporate assets are at most inchoate, prior to the
dissolution of Freeman, Inc. . . . And intervention under Sec. 2, Rule 12 of the Revised Rules of Court is
proper only when one's right is actual, material, direct and immediate and not simply contingent or
expectant."

It also ruled against the petitioners' argument that because they had already filed a notice of appeal, the
trial judge had lost jurisdiction over the case and could no longer issue the writ of execution.
The petitioners are now before this Court, contending that:

1. The Honorable Court of Appeals erred in holding that the petitioners cannot intervene in Civil
Case No. 88-44404 because their rights as stockholders of Freeman are merely inchoate and not
actual, material, direct and immediate prior to the dissolution of the corporation;

2. The Honorable Court of Appeals erred in holding that the appeal of the petitioners in said Civil
Case No. 88-44404 was confined only to the order denying their motion to intervene and did not
divest the trial court of its jurisdiction over the whole case.

The petitioners base their right to intervene for the protection of their interests as stockholders
on Everett v. Asia Banking Corp.2 where it was held:

The well-known rule that shareholders cannot ordinarily sue in equity to redress wrongs done to
the corporation, but that the action must be brought by the Board of Directors, . . . has its
exceptions. (If the corporation [were] under the complete control of the principal defendants, . . . it
is obvious that a demand upon the Board of Directors to institute action and prosecute the same
effectively would have been useless, and the law does not require litigants to perform useless acts.

Equitable demurs, contending that the collection suit against Freeman, Inc, and Saw Chiao Lian is
essentially in personam and, as an action against defendants in their personal capacities, will not
prejudice the petitioners as stockholders of the corporation. The Everett case is not applicable because it
involved an action filed by the minority stockholders where the board of directors refused to bring an
action in behalf of the corporation. In the case at bar, it was Freeman, Inc. that was being sued by the
creditor bank.

Equitable also argues that the subject matter of the intervention falls properly within the original and
exclusive jurisdiction of the Securities and Exchange Commission under P.D. No. 902-A. In fact, at the time
the motion for intervention was filed, there was pending between Freeman, Inc. and the petitioners SEC
Case No. 03577 entitled "Dissolution, Accounting, Cancellation of Certificate of Registration with
Restraining Order or Preliminary Injunction and Appointment of Receiver." It also avers in its Comment
that the intervention of the petitioners could have only caused delay and prejudice to the principal
parties.

On the second assignment of error, Equitable maintains that the petitioners' appeal could only apply to
the denial of their motion for intervention and not to the main case because their personality as party
litigants had not been recognized by the trial court.

After examining the issues and arguments of the parties, the Court finds that the respondent court
committed no reversible error in sustaining the denial by the trial court of the petitioners' motion for
intervention.

In the case of Magsaysay-Labrador v. Court of Appeals,3 we ruled as follows:

Viewed in the light of Section 2, Rule 12 of the Revised Rules of Court, this Court affirms the
respondent court's holding that petitioners herein have no legal interest in the subject matter in
litigation so as to entitle them to intervene in the proceedings below. In the case of Batama
Farmers' Cooperative Marketing Association, Inc. v. Rosal, we held: "As clearly stated in Section 2
 of Rule 12 of the Rules of Court, to be permitted to intervene in a pending action, the party must
have a legal interest in the matter in litigation, or in the success of either of the parties or an
interest against both, or he must be so situated as to be adversely affected by a distribution or
other disposition of the property in the custody of the court or an officer thereof."

To allow intervention, [a] it must be shown that the movant has legal interest in the matter in
litigation, or otherwise qualified; and [b] consideration must be given as to whether the
adjudication of the rights of the original parties may be delayed or prejudiced, or whether the
intervenor's rights may be protected in a separate proceeding or not. Both requirements must
concur as the first is not more important than the second.

The interest which entitles a person to intervene in a suit between other parties must be in the
matter in litigation and of such direct and immediate character that the intervenor will either gain
or lose by the direct legal operation and effect of the judgment. Otherwise, if persons not parties of
the action could be allowed to intervene, proceedings will become unnecessarily complicated,
expensive and interminable. And this is not the policy of the law.

The words "an interest in the subject" mean a direct interest in the cause of action as pleaded, and
which would put the intervenor in a legal position to litigate a fact alleged in the complaint,
without the establishment of which plaintiff could not recover.

Here, the interest, if it exists at all, of petitioners-movants is indirect, contingent, remote,

conjectural, consequential and collateral. At the very least, their interest is purely inchoate, or in
sheer expectancy of a right in the management of the corporation and to share in the profits
thereof and in the properties and assets thereof on dissolution, after payment of the corporate
debts and obligations.

While a share of stock represents a proportionate or aliquot interest in the property of the
corporation, it does not vest the owner thereof with any legal right or title to any of the property,
his interest in the corporate property being equitable or beneficial in nature. Shareholders are in
no legal sense the owners of corporate property, which is owned by the corporation as a distinct
legal person.

On the second assignment of error, the respondent court correctly noted that the notice of appeal was
filed by the petitioners on October 24, 1988, upon the denial of their motion to intervene, and the writ of
execution was issued by the lower court on January 30, 1989. The petitioners' appeal could not have
concerned the "whole" case (referring to the decision) because the petitioners "did not appeal the
decision as indeed they cannot because they are not parties to the case despite their being stockholders
of respondent Freeman, Inc." They could only appeal the denial of their motion for intervention as they
were never recognized by the trial court as party litigants in the main case.

Intervention is "an act or proceeding by which a third person is permitted to become a party to an action
or proceeding between other persons, and which results merely in the addition of a new party or parties
to an original action, for the purpose of hearing and determining at the same time all conflicting claims
which may be made to the subject matter in litigation.4

It is not an independent proceeding, but an ancillary and supplemental one which, in the nature of things,
unless otherwise provided for by the statute or Rules of Court, must be in subordination to the main
proceeding.5 It may be laid down as a general rule that an intervenor is limited to the field of litigation
open to the original parties.6

In the case at bar, there is no more principal action to be resolved as a writ of execution had already been
issued by the lower court and the claim of Equitable had already been satisfied. The decision of the lower
court had already become final and in fact had already been enforced. There is therefore no more
principal proceeding in which the petitioners may intervene.

As we held in the case of Barangay Matictic v. Elbinias:7

An intervention has been regarded, as merely "collateral or accessory or ancillary to the principal
action and not an independent proceedings; and interlocutory proceeding dependent on and
subsidiary to, the case between the original parties." (Fransisco, Rules of Court, Vol. 1, p. 721).
With the final dismissal of the original action, the complaint in intervention can no longer be acted
upon. In the case of Clareza v. Resales, 2 SCRA 455, 457-458, it was stated that:

That right of the intervenor should merely be in aid of the right of the original party, like
the plaintiffs in this case. As this right of the plaintiffs had ceased to exist, there is nothing
to aid or fight for. So the right of intervention has ceased to exist.

Consequently, it will be illogical and of no useful purpose to grant or even consider further herein
petitioner's prayer for the issuance of a writ of mandamus to compel the lower court to allow and
admit the petitioner's complaint in intervention. The dismissal of the expropriation case has no
less the inherent effect of also dismissing the motion for intervention which is but the unavoidable
consequence.

The Court observes that even with the denial of the petitioners' motion to intervene, nothing is really lost
to them.1âwphi1The denial did not necessarily prejudice them as their rights are being litigated in the
case now before the Securities and Exchange Commission and may be fully asserted and protected in that
separate proceeding.

WHEREFORE, the petition is DENIED, with costs against the petitioners. It is so ordered.

Republic of the Philippines

SUPREME COURT
Manila

THIRD DIVISION

G.R. No. 157479 November 24, 2010

PHILIP TURNER and ELNORA TURNER, Petitioners,

vs.
LORENZO SHIPPING CORPORATION, Respondent.

DECISION

BERSAMIN, J.:
This case concerns the right of dissenting stockholders to demand payment of the value of their
shareholdings.

In the stockholders’ suit to recover the value of their shareholdings from the corporation, the Regional
Trial Court (RTC) upheld the dissenting stockholders, herein petitioners, and ordered the corporation,
herein respondent, to pay. Execution was partially carried out against the respondent. On the
respondent’s petition for certiorari, however, the Court of Appeals (CA) corrected the RTC and dismissed
the petitioners’ suit on the ground that their cause of action for collection had not yet accrued due to the
lack of unrestricted retained earnings in the books of the respondent.

Thus, the petitioners are now before the Court to challenge the CA’s decision promulgated on March 4,
2003 in C.A.-G.R. SP No. 74156 entitled Lorenzo Shipping Corporation v. Hon. Artemio S. Tipon, in his
capacity as Presiding Judge of Branch 46 of the Regional Trial Court of Manila, et al.1

Antecedents

The petitioners held 1,010,000 shares of stock of the respondent, a domestic corporation engaged
primarily in cargo shipping activities. In June 1999, the respondent decided to amend its articles of
incorporation to remove the stockholders’ pre-emptive rights to newly issued shares of stock. Feeling
that the corporate move would be prejudicial to their interest as stockholders, the petitioners voted
against the amendment and demanded payment of their shares at the rate of ₱2.276/share based on the
book value of the shares, or a total of ₱2,298,760.00.

The respondent found the fair value of the shares demanded by the petitioners unacceptable. It insisted
that the market value on the date before the action to remove the pre-emptive right was taken should be
the value, or ₱0.41/share (or a total of ₱414,100.00), considering that its shares were listed in the
Philippine Stock Exchange, and that the payment could be made only if the respondent had unrestricted
retained earnings in its books to cover the value of the shares, which was not the case.

The disagreement on the valuation of the shares led the parties to constitute an appraisal committee
pursuant to Section 82 of the Corporation Code, each of them nominating a representative, who together
then nominated the third member who would be chairman of the appraisal committee. Thus, the
appraisal committee came to be made up of Reynaldo Yatco, the petitioners’ nominee; Atty. Antonio
Acyatan, the respondent’s nominee; and Leo Anoche of the Asian Appraisal Company, Inc., the third
member/chairman.

On October 27, 2000, the appraisal committee reported its valuation of ₱2.54/share, for an aggregate
value of ₱2,565,400.00 for the petitioners.2

Subsequently, the petitioners demanded payment based on the valuation of the appraisal committee, plus
2%/month penalty from the date of their original demand for payment, as well as the reimbursement of
the amounts advanced as professional fees to the appraisers.3

In its letter to the petitioners dated January 2, 2001,4 the respondent refused the petitioners’ demand,
explaining that pursuant to the Corporation Code, the dissenting stockholders exercising their appraisal
rights could be paid only when the corporation had unrestricted retained earnings to cover the fair value
of the shares, but that it had no retained earnings at the time of the petitioners’ demand, as borne out by
its Financial Statements for Fiscal Year 1999 showing a deficit of ₱72,973,114.00 as of December 31,
1999.

Upon the respondent’s refusal to pay, the petitioners sued the respondent for collection and damages in
the RTC in Makati City on January 22, 2001. The case, docketed as Civil Case No. 01-086, was initially
assigned to Branch 132.5

On June 26, 2002, the petitioners filed their motion for partial summary judgment, claiming that:

7) xxx the defendant has an accumulated unrestricted retained earnings of ELEVEN MILLION
NINE HUNDRED SEVENTY FIVE THOUSAND FOUR HUNDRED NINETY (P11,975,490.00) PESOS,
Philippine Currency, evidenced by its Financial Statement as of the Quarter Ending March 31,
2002; xxx

8) xxx the fair value of the shares of the petitioners as fixed by the Appraisal Committee is final,
that the same cannot be disputed xxx

9) xxx there is no genuine issue to material fact and therefore, the plaintiffs are entitled, as a
matter of right, to a summary judgment. xxx 6

The respondent opposed the motion for partial summary judgment, stating that the determination of the
unrestricted retained earnings should be made at the end of the fiscal year of the respondent, and that
the petitioners did not have a cause of action against the respondent.

During the pendency of the motion for partial summary judgment, however, the Presiding Judge of
Branch 133 transmitted the records to the Clerk of Court for re-raffling to any of the RTC’s special
commercial courts in Makati City due to the case being an intra-corporate dispute. Hence, Civil Case No.
01-086 was re-raffled to Branch 142.

Nevertheless, because the principal office of the respondent was in Manila, Civil Case No. 01-086 was
ultimately transferred to Branch 46 of the RTC in Manila, presided by Judge Artemio Tipon,7 pursuant to
the Interim Rules of Procedure on Intra-Corporate Controversies (Interim Rules) requiring intra-
corporate cases to be brought in the RTC exercising jurisdiction over the place where the principal office
of the corporation was found.

After the conference in Civil Case No. 01-086 set on October 23, 2002, which the petitioners’ counsel did
not attend, Judge Tipon issued an order,8 granting the petitioners’ motion for partial summary judgment,
stating:

As to the motion for partial summary judgment, there is no question that the 3-man committee mandated
to appraise the shareholdings of plaintiff submitted its recommendation on October 27, 2000 fixing the
fair value of the shares of stocks of the plaintiff at P2.54 per share. Under Section 82 of the Corporation
Code:

"The findings of the majority of the appraisers shall be final, and the award shall be paid by the
corporation within thirty (30) days after the award is made."

"The only restriction imposed by the Corporation Code is–"

"That no payment shall be made to any dissenting stockholder unless the corporation has unrestricted
retained earning in its books to cover such payment."

The evidence submitted by plaintiffs shows that in its quarterly financial statement it submitted to the
Securities and Exchange Commission, the defendant has retained earnings of P11,975,490 as of March 21,
2002. This is not disputed by the defendant. Its only argument against paying is that there must be
unrestricted retained earning at the time the demand for payment is made.

This certainly is a very narrow concept of the appraisal right of a stockholder. The law does not say that
the unrestricted retained earnings must exist at the time of the demand. Even if there are no retained
earnings at the time the demand is made if there are retained earnings later, the fair value of such stocks
must be paid. The only restriction is that there must be sufficient funds to cover the creditors after the
dissenting stockholder is paid. No such allegations have been made by the defendant.9

On November 12, 2002, the respondent filed a motion for reconsideration.

On the scheduled hearing of the motion for reconsideration on November 22, 2002, the petitioners filed a
motion for immediate execution and a motion to strike out motion for reconsideration. In the latter
motion, they pointed out that the motion for reconsideration was prohibited by Section 8 of the Interim
Rules. Thus, also on November 22, 2002, Judge Tipon denied the motion for reconsideration and granted
the petitioners’ motion for immediate execution.10

Subsequently, on November 28, 2002, the RTC issued a writ of execution.11

Aggrieved, the respondent commenced a special civil action for certiorari in the CA to challenge the two
aforecited orders of Judge Tipon, claiming that:

A.

JUDGE TIPON GRAVELY ABUSED HIS DISCRETION IN GRANTING SUMMARY JUDGMENT TO THE
SPOUSES TURNER, BECAUSE AT THE TIME THE "COMPLAINT" WAS FILED, LSC HAD NO
RETAINED EARNINGS, AND THUS WAS COMPLYING WITH THE LAW, AND NOT VIOLATING ANY
RIGHTS OF THE SPOUSES TURNER, WHEN IT REFUSED TO PAY THEM THE VALUE OF THEIR LSC
SHARES. ANY RETAINED EARNINGS MADE A YEAR AFTER THE "COMPLAINT" WAS FILED ARE
IRRELEVANT TO THE SPOUSES TURNER’S RIGHT TO RECOVER UNDER THE "COMPLAINT",
BECAUSE THE WELL-SETTLED RULE, REPEATEDLY BROUGHT TO JUDGE TIPON’S ATTENTION, IS
"IF NO RIGHT EXISTED AT THE TIME (T)HE ACTION WAS COMMENCED THE SUIT CANNOT BE
MAINTAINED, ALTHOUGH SUCH RIGHT OF ACTION MAY HAVE ACCRUED THEREAFTER.

B.

JUDGE TIPON IGNORED CONTROLLING CASE LAW, AND THUS GRAVELY ABUSED HIS
DISCRETION, WHEN HE GRANTED AND ISSUED THE QUESTIONED "WRIT OF EXECUTION"
DIRECTING THE EXECUTION OF HIS PARTIAL SUMMARY JUDGMENT IN FAVOR OF THE SPOUSES
TURNER, BECAUSE THAT JUDGMENT IS NOT A FINAL JUDGMENT UNDER SECTION 1 OF RULE 39
OF THE RULES OF COURT AND THEREFORE CANNOT BE SUBJECT OF EXECUTION UNDER THE
SUPREME COURT’S CATEGORICAL HOLDING IN PROVINCE OF PANGASINAN VS. COURT OF
APPEALS.
Upon the respondent’s application, the CA issued a temporary restraining order (TRO), enjoining the
petitioners, and their agents and representatives from enforcing the writ of execution. By then, however,
the writ of execution had been partially enforced.

The TRO lapsed without the CA issuing a writ of preliminary injunction to prevent the execution.
Thereupon, the sheriff resumed the enforcement of the writ of execution.

The CA promulgated its assailed decision on March 4, 2003,12 pertinently holding:

However, it is clear from the foregoing that the Turners’ appraisal right is subject to the legal condition
that no payment shall be made to any dissenting stockholder unless the corporation has unrestricted
retained earnings in its books to cover such payment. Thus, the Supreme Court held that:

The requirement of unrestricted retained earnings to cover the shares is based on the trust fund doctrine
which means that the capital stock, property and other assets of a corporation are regarded as equity in
trust for the payment of corporate creditors. The reason is that creditors of a corporation are preferred
over the stockholders in the distribution of corporate assets. There can be no distribution of assets
among the stockholders without first paying corporate creditors. Hence, any disposition of corporate
funds to the prejudice of creditors is null and void. Creditors of a corporation have the right to assume
that so long as there are outstanding debts and liabilities, the board of directors will not use the assets of
the corporation to purchase its own stock.

In the instant case, it was established that there were no unrestricted retained earnings when the
Turners filed their Complaint. In a letter dated 20 August 2000, petitioner informed the Turners that
payment of their shares could only be made if it had unrestricted earnings in its books to cover the same.
Petitioner reiterated this in a letter dated 2 January 2001 which further informed the Turners that its
Financial Statement for fiscal year 1999 shows that its retained earnings ending December 31, 1999 was
at a deficit in the amount of ₱72,973,114.00, a matter which has not been disputed by private
respondents. Hence, in accordance with the second paragraph of sec. 82, BP 68 supra, the Turners’ right
to payment had not yet accrued when they filed their Complaint on January 22, 2001, albeit their
appraisal right already existed.

In Philippine American General Insurance Co. Inc. vs. Sweet Lines, Inc., the Supreme Court declared that:

Now, before an action can properly be commenced all the essential elements of the cause of action must
be in existence, that is, the cause of action must be complete. All valid conditions precedent to the
institution of the particular action, whether prescribed by statute, fixed by agreement of the parties or
implied by law must be performed or complied with before commencing the action, unless the conduct of
the adverse party has been such as to prevent or waive performance or excuse non-performance of the
condition.

It bears restating that a right of action is the right to presently enforce a cause of action, while a cause of
action consists of the operative facts which give rise to such right of action. The right of action does not
arise until the performance of all conditions precedent to the action and may be taken away by the
running of the statute of limitations, through estoppel, or by other circumstances which do not affect the
cause of action. Performance or fulfillment of all conditions precedent upon which a right of action
depends must be sufficiently alleged, considering that the burden of proof to show that a party has a right
of action is upon the person initiating the suit.
The Turners’ right of action arose only when petitioner had already retained earnings in the amount of
₱11,975,490.00 on March 21, 2002; such right of action was inexistent on January 22, 2001 when they
filed the Complaint.

In the doctrinal case of Surigao Mine Exploration Co. Inc., vs. Harris, the Supreme Court ruled:

Subject to certain qualifications, and except as otherwise provided by law, an action commenced before
the cause of action has accrued is prematurely brought and should be dismissed. The fact that the cause
of action accrues after the action is commenced and while it is pending is of no moment. It is a rule of law
to which there is, perhaps, no exception, either at law or in equity, that to recover at all there must be
some cause of action at the commencement of the suit. There are reasons of public policy why there
should be no needless haste in bringing up litigation, and why people who are in no default and against
whom there is as yet no cause of action should not be summoned before the public tribunals to answer
complaints which are groundless. An action prematurely brought is a groundless suit. Unless the plaintiff
has a valid and subsisting cause of action at the time his action iscommenced, the defect cannot be cured
or remedied by the acquisition or accrual of one while the action is pending, and a supplemental
complaint or an amendment setting up such after-accrued cause of action is not permissible.

The afore-quoted ruling was reiterated in Young vs Court of Appeals and Lao vs. Court of Appeals.

The Turners’ apprehension that their claim for payment may prescribe if they wait for the petitioner to
have unrestricted retained earnings is misplaced. It is the legal possibility of bringing the action that
determines the starting point for the computation of the period of prescription. Stated otherwise, the
prescriptive period is to be reckoned from the accrual of their right of action.

Accordingly, We hold that public respondent exceeded its jurisdiction when it entertained the herein
Complaint and issued the assailed Orders. Excess of jurisdiction is the state of being beyond or outside
the limits of jurisdiction, and as distinguished from the entire absence of jurisdiction, means that the act
although within the general power of the judge, is not authorized and therefore void, with respect to the
particular case, because the conditions which authorize the exercise of his general power in that
particular case are wanting, and hence, the judicial power is not in fact lawfully invoked.

We find no necessity to discuss the second ground raised in this petition.

WHEREFORE, upon the premises, the petition is GRANTED. The assailed Orders and the corresponding
Writs of Garnishment are NULLIFIED. Civil Case No. 02-104692 is hereby ordered DISMISSED without
prejudice to refiling by the private respondents of the action for enforcement of their right to payment as
withdrawing stockholders.

SO ORDERED.

The petitioners now come to the Court for a review on certiorari of the CA’s decision, submitting that:

I.

THE COURT OF APPEALS COMMITTED SERIOUS ERRORS OF LAW WHEN IT GRANTED THE PETITION
FOR CERTIORARI WHEN THE REGIONAL TRIAL COURT OF MANILA DID NOT ACT BEYOND ITS
JURISDICTION AMOUNTING TO LACK OF JURISDICTION IN GRANTING THE MOTION FOR PARTIAL
SUMMARY JUDGMENT AND IN GRANTING THE MOTION FOR IMMEDIATE EXECUTION OF JUDGMENT;

II.

THE COURT OF APPEALS COMMITTED SERIOUS ERRORS OF LAW WHEN IT ORDERED THE DISMISSAL
OF THE CASE, WHEN THE PETITION FOR CERTIORARI MERELY SOUGHT THE ANNULMENT OF THE
ORDER GRANTING THE MOTION FOR PARTIAL SUMMARY JUDGMENT AND OF THE ORDER GRANTING
THE MOTION FOR IMMEDIATE EXECUTION OF THE JUDGMENT;

III.

THE HONORABLE COURT OF APPEALS HAS DECIDED QUESTIONS OF SUBSTANCE NOT THEREFORE
DETERMINED BY THIS HONORABLE COURT AND/OR DECIDED IT IN A WAY NOT IN ACCORD WITH
LAW OR WITH JURISPRUDENCE.

Ruling

The petition fails.

The CA correctly concluded that the RTC had exceeded its jurisdiction in entertaining the petitioners’
complaint in Civil Case No. 01-086, and in rendering the summary judgment and issuing writ of
execution.

A.

Stockholder’s Right of Appraisal, In General

A stockholder who dissents from certain corporate actions has the right to demand payment of the fair
value of his or her shares. This right, known as the right of appraisal, is expressly recognized in Section 81
of the Corporation Code, to wit:

Section 81. Instances of appraisal right. - Any stockholder of a corporation shall have the right to dissent
and demand payment of the fair value of his shares in the following instances:

1. In case any amendment to the articles of incorporation has the effect of changing or restricting
the rights of any stockholder or class of shares, or of authorizing preferences in any respect
superior to those of outstanding shares of any class, or of extending or shortening the term of
corporate existence;

2. In case of sale, lease, exchange, transfer, mortgage, pledge or other disposition of all or
substantially all of the corporate property and assets as provided in the Code; and

3. In case of merger or consolidation. (n)

Clearly, the right of appraisal may be exercised when there is a fundamental change in the charter or
articles of incorporation substantially prejudicing the rights of the stockholders. It does not vest unless
objectionable corporate action is taken.13 It serves the purpose of enabling the dissenting stockholder to
have his interests purchased and to retire from the corporation.141avvphil

Under the common law, there were originally conflicting views on whether a corporation had the power
to acquire or purchase its own stocks. In England, it was held invalid for a corporation to purchase its
issued stocks because such purchase was an indirect method of reducing capital (which was statutorily
restricted), aside from being inconsistent with the privilege of limited liability to creditors.15 Only a few
American jurisdictions adopted by decision or statute the strict English rule forbidding a corporation
from purchasing its own shares. In some American states where the English rule used to be adopted,
statutes granting authority to purchase out of surplus funds were enacted, while in others, shares might
be purchased even out of capital provided the rights of creditors were not prejudiced.16 The reason
underlying the limitation of share purchases sprang from the necessity of imposing safeguards against
the depletion by a corporation of its assets and against the impairment of its capital needed for the
protection of creditors.17

Now, however, a corporation can purchase its own shares, provided payment is made out of surplus
profits and the acquisition is for a legitimate corporate purpose.18 In the Philippines, this new rule is
embodied in Section 41 of the Corporation Code, to wit:

Section 41. Power to acquire own shares. - A stock corporation shall have the power to purchase or
acquire its own shares for a legitimate corporate purpose or purposes, including but not limited to the
following cases: Provided, That the corporation has unrestricted retained earnings in its books to cover
the shares to be purchased or acquired:

1. To eliminate fractional shares arising out of stock dividends;

2. To collect or compromise an indebtedness to the corporation, arising out of unpaid

subscription, in a delinquency sale, and to purchase delinquent shares sold during said sale; and

3. To pay dissenting or withdrawing stockholders entitled to payment for their shares under the
provisions of this Code. (n)

The Corporation Code defines how the right of appraisal is exercised, as well as the implications of the
right of appraisal, as follows:

1. The appraisal right is exercised by any stockholder who has voted against the proposed corporate
action by making a written demand on the corporation within 30 days after the date on which the vote
was taken for the payment of the fair value of his shares. The failure to make the demand within the
period is deemed a waiver of the appraisal right.19

2. If the withdrawing stockholder and the corporation cannot agree on the fair value of the shares within
a period of 60 days from the date the stockholders approved the corporate action, the fair value shall be
determined and appraised by three disinterested persons, one of whom shall be named by the
stockholder, another by the corporation, and the third by the two thus chosen. The findings and award of
the majority of the appraisers shall be final, and the corporation shall pay their award within 30 days
after the award is made. Upon payment by the corporation of the agreed or awarded price, the
stockholder shall forthwith transfer his or her shares to the corporation.20
3. All rights accruing to the withdrawing stockholder’s shares, including voting and dividend rights, shall
be suspended from the time of demand for the payment of the fair value of the shares until either the
abandonment of the corporate action involved or the purchase of the shares by the corporation, except
the right of such stockholder to receive payment of the fair value of the shares.21

4. Within 10 days after demanding payment for his or her shares, a dissenting stockholder shall submit to
the corporation the certificates of stock representing his shares for notation thereon that such shares are
dissenting shares. A failure to do so shall, at the option of the corporation, terminate his rights under this
Title X of the Corporation Code. If shares represented by the certificates bearing such notation are
transferred, and the certificates are consequently canceled, the rights of the transferor as a dissenting
stockholder under this Title shall cease and the transferee shall have all the rights of a regular
stockholder; and all dividend distributions that would have accrued on such shares shall be paid to the
transferee.22

5. If the proposed corporate action is implemented or effected, the corporation shall pay to such
stockholder, upon the surrender of the certificates of stock representing his shares, the fair value thereof
as of the day prior to the date on which the vote was taken, excluding any appreciation or depreciation in
anticipation of such corporate action.23

Notwithstanding the foregoing, no payment shall be made to any dissenting stockholder unless the
corporation has unrestricted retained earnings in its books to cover the payment. In case the corporation
has no available unrestricted retained earnings in its books, Section 83 of the Corporation Code provides
that if the dissenting stockholder is not paid the value of his shares within 30 days after the award, his
voting and dividend rights shall immediately be restored.

The trust fund doctrine backstops the requirement of unrestricted retained earnings to fund the payment
of the shares of stocks of the withdrawing stockholders. Under the doctrine, the capital stock, property,
and other assets of a corporation are regarded as equity in trust for the payment of corporate creditors,
who are preferred in the distribution of corporate assets.24 The creditors of a corporation have the right
to assume that the board of directors will not use the assets of the corporation to purchase its own stock
for as long as the corporation has outstanding debts and liabilities.25 There can be no distribution of
assets among the stockholders without first paying corporate debts. Thus, any disposition of corporate
funds and assets to the prejudice of creditors is null and void.26

B.

Petitioners’ cause of action was premature

That the respondent had indisputably no unrestricted retained earnings in its books at the time the
petitioners commenced Civil Case No. 01-086 on January 22, 2001 proved that the respondent’s legal
obligation to pay the value of the petitioners’ shares did not yet arise. Thus, the CA did not err in holding
that the petitioners had no cause of action, and in ruling that the RTC did not validly render the partial
summary judgment.

A cause of action is the act or omission by which a party violates a right of another.27 The essential
elements of a cause of action are: (a) the existence of a legal right in favor of the plaintiff; (b) a correlative
legal duty of the defendant to respect such right; and (c) an act or omission by such defendant in violation
of the right of the plaintiff with a resulting injury or damage to the plaintiff for which the latter may
maintain an action for the recovery of relief from the defendant.28 Although the first two elements may
exist, a cause of action arises only upon the occurrence of the last element, giving the plaintiff the right to
maintain an action in court for recovery of damages or other appropriate relief.29

Section 1, Rule 2, of the Rules of Court requires that every ordinary civil action must be based on a cause
of action. Accordingly, Civil Case No. 01-086 was dismissible from the beginning for being without any
cause of action.

The RTC concluded that the respondent’s obligation to pay had accrued by its having the unrestricted
retained earnings after the making of the demand by the petitioners. It based its conclusion on the fact
that the Corporation Code did not provide that the unrestricted retained earnings must already exist at
the time of the demand.

The RTC’s construal of the Corporation Code was unsustainable, because it did not take into account the
petitioners’ lack of a cause of action against the respondent. In order to give rise to any obligation to pay
on the part of the respondent, the petitioners should first make a valid demand that the respondent
refused to pay despite having unrestricted retained earnings. Otherwise, the respondent could not be
said to be guilty of any actionable omission that could sustain their action to collect.

Neither did the subsequent existence of unrestricted retained earnings after the filing of the complaint
cure the lack of cause of action in Civil Case No. 01-086. The petitioners’ right of action could only spring
from an existing cause of action. Thus, a complaint whose cause of action has not yet accrued cannot be
cured by an amended or supplemental pleading alleging the existence or accrual of a cause of action
during the pendency of the action.30For, only when there is an invasion of primary rights, not before, does
the adjective or remedial law become operative.31 Verily, a premature invocation of the court’s
intervention renders the complaint without a cause of action and dismissible on such ground.32 In short,
Civil Case No. 01-086, being a groundless suit, should be dismissed.

Even the fact that the respondent already had unrestricted retained earnings more than sufficient to
cover the petitioners’ claims on June 26, 2002 (when they filed their motion for partial summary
judgment) did not rectify the absence of the cause of action at the time of the commencement of Civil Case
No. 01-086. The motion for partial summary judgment, being a mere application for relief other than by a
pleading,33 was not the same as the complaint in Civil Case No. 01-086. Thereby, the petitioners did not
meet the requirement of the Rules of Court that a cause of action must exist at the commencement of an
action, which is "commenced by the filing of the original complaint in court."34

The petitioners claim that the respondent’s petition for certiorari sought only the annulment of the
assailed orders of the RTC (i.e., granting the motion for partial summary judgment and the motion for
immediate execution); hence, the CA had no right to direct the dismissal of Civil Case No. 01-086.

The claim of the petitioners cannot stand.

Although the respondent’s petition for certiorari targeted only the RTC’s orders granting the motion for
partial summary judgment and the motion for immediate execution, the CA’s directive for the dismissal of
Civil Case No. 01-086 was not an abuse of discretion, least of all grave, because such dismissal was the
only proper thing to be done under the circumstances. According to Surigao Mine Exploration Co., Inc. v.
Harris:35
Subject to certain qualification, and except as otherwise provided by law, an action commenced before
the cause of action has accrued is prematurely brought and should be dismissed. The fact that the
cause of action accrues after the action is commenced and while the case is pending is of no moment. It is
a rule of law to which there is, perhaps no exception, either in law or in equity, that to recover at all there
must be some cause of action at the commencement of the suit. There are reasons of public policy why
there should be no needless haste in bringing up litigation, and why people who are in no default and
against whom there is as yet no cause of action should not be summoned before the public tribunals to
answer complaints which are groundless. An action prematurely brought is a groundless suit. Unless the
plaintiff has a valid and subsisting cause of action at the time his action is commenced, the defect
cannot be cured or remedied by the acquisition or accrual of one while the action is pending, and a
supplemental complaint or an amendment setting up such after-accrued cause of action is not
permissible.

Lastly, the petitioners argue that the respondent’s recourse of a special action for certiorari was the
wrong remedy, in view of the fact that the granting of the motion for partial summary judgment
constituted only an error of law correctible by appeal, not of jurisdiction.

The argument of the petitioners is baseless. The RTC was guilty of an error of jurisdiction, for it exceeded
its jurisdiction by taking cognizance of the complaint that was not based on an existing cause of action.

WHEREFORE, the petition for review on certiorari is denied for lack of merit.

We affirm the decision promulgated on March 4, 2003 in C.A.-G.R. SP No. 74156 entitled Lorenzo
Shipping Corporation v. Hon. Artemio S. Tipon, in his capacity as Presiding Judge of Branch 46 of the
Regional Trial Court of Manila, et al.

Costs of suit to be paid by the petitioners.

SO ORDERED.

Republic of the Philippines

SUPREME COURT
Manila

EN BANC

G.R. No. L-45911 April 11, 1979

JOHN GOKONGWEI, JR., petitioner,

vs.
SECURITIES AND EXCHANGE COMMISSION, ANDRES M. SORIANO, JOSE M. SORIANO, ENRIQUE
ZOBEL, ANTONIO ROXAS, EMETERIO BUNAO, WALTHRODE B. CONDE, MIGUEL ORTIGAS, ANTONIO
PRIETO, SAN MIGUEL CORPORATION, EMIGDIO TANJUATCO, SR., and EDUARDO R.
VISAYA, respondents.

De Santos, Balgos & Perez for petitioner.

Angara, Abello, Concepcion, Regala, Cruz Law Offices for respondents Sorianos
Siguion Reyna, Montecillo & Ongsiako for respondent San Miguel Corporation.

R. T Capulong for respondent Eduardo R. Visaya.

ANTONIO, J.:

The instant petition for certiorari, mandamus and injunction, with prayer for issuance of writ of
preliminary injunction, arose out of two cases filed by petitioner with the Securities and Exchange
Commission, as follows:

SEC CASE NO 1375

On October 22, 1976, petitioner, as stockholder of respondent San Miguel Corporation, filed with the
Securities and Exchange Commission (SEC) a petition for "declaration of nullity of amended by-laws,
cancellation of certificate of filing of amended by- laws, injunction and damages with prayer for a
preliminary injunction" against the majority of the members of the Board of Directors and San Miguel
Corporation as an unwilling petitioner. The petition, entitled "John Gokongwei Jr. vs. Andres Soriano, Jr.,
Jose M. Soriano, Enrique Zobel, Antonio Roxas, Emeterio Bunao, Walthrode B. Conde, Miguel Ortigas,
Antonio Prieto and San Miguel Corporation", was docketed as SEC Case No. 1375.

As a first cause of action, petitioner alleged that on September 18, 1976, individual respondents amended
by bylaws of the corporation, basing their authority to do so on a resolution of the stockholders adopted
on March 13, 1961, when the outstanding capital stock of respondent corporation was only
P70,139.740.00, divided into 5,513,974 common shares at P10.00 per share and 150,000 preferred
shares at P100.00 per share. At the time of the amendment, the outstanding and paid up shares totalled
30,127,047 with a total par value of P301,270,430.00. It was contended that according to section 22 of
the Corporation Law and Article VIII of the by-laws of the corporation, the power to amend, modify,
repeal or adopt new by-laws may be delegated to the Board of Directors only by the affirmative vote of
stockholders representing not less than 2/3 of the subscribed and paid up capital stock of the
corporation, which 2/3 should have been computed on the basis of the capitalization at the time of the
amendment. Since the amendment was based on the 1961 authorization, petitioner contended that the
Board acted without authority and in usurpation of the power of the stockholders.

As a second cause of action, it was alleged that the authority granted in 1961 had already been exercised
in 1962 and 1963, after which the authority of the Board ceased to exist.

As a third cause of action, petitioner averred that the membership of the Board of Directors had changed
since the authority was given in 1961, there being six (6) new directors.

As a fourth cause of action, it was claimed that prior to the questioned amendment, petitioner had all the
qualifications to be a director of respondent corporation, being a Substantial stockholder thereof; that as
a stockholder, petitioner had acquired rights inherent in stock ownership, such as the rights to vote and
to be voted upon in the election of directors; and that in amending the by-laws, respondents purposely
provided for petitioner's disqualification and deprived him of his vested right as afore-mentioned hence
the amended by-laws are null and void. 1
As additional causes of action, it was alleged that corporations have no inherent power to disqualify a
stockholder from being elected as a director and, therefore, the questioned act is ultra vires and void; that
Andres M. Soriano, Jr. and/or Jose M. Soriano, while representing other corporations, entered into
contracts (specifically a management contract) with respondent corporation, which was allowed because
the questioned amendment gave the Board itself the prerogative of determining whether they or other
persons are engaged in competitive or antagonistic business; that the portion of the amended bylaws
which states that in determining whether or not a person is engaged in competitive business, the Board
may consider such factors as business and family relationship, is unreasonable and oppressive and,
therefore, void; and that the portion of the amended by-laws which requires that "all nominations for
election of directors ... shall be submitted in writing to the Board of Directors at least five (5) working
days before the date of the Annual Meeting" is likewise unreasonable and oppressive.

It was, therefore, prayed that the amended by-laws be declared null and void and the certificate of filing
thereof be cancelled, and that individual respondents be made to pay damages, in specified amounts, to
petitioner.

On October 28, 1976, in connection with the same case, petitioner filed with the Securities and Exchange
Commission an "Urgent Motion for Production and Inspection of Documents", alleging that the Secretary
of respondent corporation refused to allow him to inspect its records despite request made by petitioner
for production of certain documents enumerated in the request, and that respondent corporation had
been attempting to suppress information from its stockholders despite a negative reply by the SEC to its
query regarding their authority to do so. Among the documents requested to be copied were (a) minutes
of the stockholder's meeting field on March 13, 1961, (b) copy of the management contract between San
Miguel Corporation and A. Soriano Corporation (ANSCOR); (c) latest balance sheet of San Miguel
International, Inc.; (d) authority of the stockholders to invest the funds of respondent corporation in San
Miguel International, Inc.; and (e) lists of salaries, allowances, bonuses, and other compensation, if any,
received by Andres M. Soriano, Jr. and/or its successor-in-interest.

The "Urgent Motion for Production and Inspection of Documents" was opposed by respondents, alleging,
among others that the motion has no legal basis; that the demand is not based on good faith; that the
motion is premature since the materiality or relevance of the evidence sought cannot be determined until
the issues are joined, that it fails to show good cause and constitutes continued harrasment, and that
some of the information sought are not part of the records of the corporation and, therefore, privileged.

During the pendency of the motion for production, respondents San Miguel Corporation, Enrique Conde,
Miguel Ortigas and Antonio Prieto filed their answer to the petition, denying the substantial allegations
therein and stating, by way of affirmative defenses that "the action taken by the Board of Directors on
September 18, 1976 resulting in the ... amendments is valid and legal because the power to "amend,
modify, repeal or adopt new By-laws" delegated to said Board on March 13, 1961 and long prior thereto
has never been revoked of SMC"; that contrary to petitioner's claim, "the vote requirement for a valid
delegation of the power to amend, repeal or adopt new by-laws is determined in relation to the total
subscribed capital stock at the time the delegation of said power is made, not when the Board opts to
exercise said delegated power"; that petitioner has not availed of his intra-corporate remedy for the
nullification of the amendment, which is to secure its repeal by vote of the stockholders representing a
majority of the subscribed capital stock at any regular or special meeting, as provided in Article VIII,
section I of the by-laws and section 22 of the Corporation law, hence the, petition is premature; that
petitioner is estopped from questioning the amendments on the ground of lack of authority of the Board.
since he failed, to object to other amendments made on the basis of the same 1961 authorization: that the
power of the corporation to amend its by-laws is broad, subject only to the condition that the by-laws
adopted should not be respondent corporation inconsistent with any existing law; that respondent
corporation should not be precluded from adopting protective measures to minimize or eliminate
situations where its directors might be tempted to put their personal interests over t I hat of the
corporation; that the questioned amended by-laws is a matter of internal policy and the judgment of the
board should not be interfered with: That the by-laws, as amended, are valid and binding and are
intended to prevent the possibility of violation of criminal and civil laws prohibiting combinations in
restraint of trade; and that the petition states no cause of action. It was, therefore, prayed that the
petition be dismissed and that petitioner be ordered to pay damages and attorney's fees to respondents.
The application for writ of preliminary injunction was likewise on various grounds.

Respondents Andres M. Soriano, Jr. and Jose M. Soriano filed their opposition to the petition, denying the
material averments thereof and stating, as part of their affirmative defenses, that in August 1972, the
Universal Robina Corporation (Robina), a corporation engaged in business competitive to that of
respondent corporation, began acquiring shares therein. until September 1976 when its total holding
amounted to 622,987 shares: that in October 1972, the Consolidated Foods Corporation (CFC) likewise
began acquiring shares in respondent (corporation. until its total holdings amounted to P543,959.00 in
September 1976; that on January 12, 1976, petitioner, who is president and controlling shareholder of
Robina and CFC (both closed corporations) purchased 5,000 shares of stock of respondent corporation,
and thereafter, in behalf of himself, CFC and Robina, "conducted malevolent and malicious publicity
campaign against SMC" to generate support from the stockholder "in his effort to secure for himself and
in representation of Robina and CFC interests, a seat in the Board of Directors of SMC", that in the
stockholders' meeting of March 18, 1976, petitioner was rejected by the stockholders in his bid to secure
a seat in the Board of Directors on the basic issue that petitioner was engaged in a competitive business
and his securing a seat would have subjected respondent corporation to grave disadvantages; that
"petitioner nevertheless vowed to secure a seat in the Board of Directors at the next annual meeting; that
thereafter the Board of Directors amended the by-laws as afore-stated.

As counterclaims, actual damages, moral damages, exemplary damages, expenses of litigation and
attorney's fees were presented against petitioner.

Subsequently, a Joint Omnibus Motion for the striking out of the motion for production and inspection of
documents was filed by all the respondents. This was duly opposed by petitioner. At this juncture,
respondents Emigdio Tanjuatco, Sr. and Eduardo R. Visaya were allowed to intervene as oppositors and
they accordingly filed their oppositions-intervention to the petition.

On December 29, 1976, the Securities and Exchange Commission resolved the motion for production and
inspection of documents by issuing Order No. 26, Series of 1977, stating, in part as follows:

Considering the evidence submitted before the Commission by the petitioner and
respondents in the above-entitled case, it is hereby ordered:

1. That respondents produce and permit the inspection, copying and photographing, by or
on behalf of the petitioner-movant, John Gokongwei, Jr., of the minutes of the stockholders'
meeting of the respondent San Miguel Corporation held on March 13, 1961, which are in
the possession, custody and control of the said corporation, it appearing that the same is
material and relevant to the issues involved in the main case. Accordingly, the respondents
should allow petitioner-movant entry in the principal office of the respondent Corporation,
 San Miguel Corporation on January 14, 1977, at 9:30 o'clock in the morning for purposes of
enforcing the rights herein granted; it being understood that the inspection, copying and
photographing of the said documents shall be undertaken under the direct and strict
supervision of this Commission. Provided, however, that other documents and/or papers
not heretofore included are not covered by this Order and any inspection thereof shall
require the prior permission of this Commission;

2. As to the Balance Sheet of San Miguel International, Inc. as well as the list of salaries,
allowances, bonuses, compensation and/or remuneration received by respondent Jose M.
Soriano, Jr. and Andres Soriano from San Miguel International, Inc. and/or its successors-
in- interest, the Petition to produce and inspect the same is hereby DENIED, as petitioner-
movant is not a stockholder of San Miguel International, Inc. and has, therefore, no inherent
right to inspect said documents;

3. In view of the Manifestation of petitioner-movant dated November 29, 1976,

withdrawing his request to copy and inspect the management contract between San Miguel
Corporation and A. Soriano Corporation and the renewal and amendments thereof for the
reason that he had already obtained the same, the Commission takes note thereof; and

4. Finally, the Commission holds in abeyance the resolution on the matter of production
and inspection of the authority of the stockholders of San Miguel Corporation to invest the
funds of respondent corporation in San Miguel International, Inc., until after the hearing on
the merits of the principal issues in the above-entitled case.

This Order is immediately executory upon its approval. 2

Dissatisfied with the foregoing Order, petitioner moved for its reconsideration.

Meanwhile, on December 10, 1976, while the petition was yet to be heard, respondent corporation issued
a notice of special stockholders' meeting for the purpose of "ratification and confirmation of the
amendment to the By-laws", setting such meeting for February 10, 1977. This prompted petitioner to ask
respondent Commission for a summary judgment insofar as the first cause of action is concerned, for the
alleged reason that by calling a special stockholders' meeting for the aforesaid purpose, private
respondents admitted the invalidity of the amendments of September 18, 1976. The motion for summary
judgment was opposed by private respondents. Pending action on the motion, petitioner filed an "Urgent
Motion for the Issuance of a Temporary Restraining Order", praying that pending the determination of
petitioner's application for the issuance of a preliminary injunction and/or petitioner's motion for
summary judgment, a temporary restraining order be issued, restraining respondents from holding the
special stockholder's meeting as scheduled. This motion was duly opposed by respondents.

On February 10, 1977, respondent Commission issued an order denying the motion for issuance of
temporary restraining order. After receipt of the order of denial, respondents conducted the special
stockholders' meeting wherein the amendments to the by-laws were ratified. On February 14, 1977,
petitioner filed a consolidated motion for contempt and for nullification of the special stockholders'
meeting.

A motion for reconsideration of the order denying petitioner's motion for summary judgment was filed
by petitioner before respondent Commission on March 10, 1977. Petitioner alleges that up to the time of
the filing of the instant petition, the said motion had not yet been scheduled for hearing. Likewise, the
motion for reconsideration of the order granting in part and denying in part petitioner's motion for
production of record had not yet been resolved.

In view of the fact that the annul stockholders' meeting of respondent corporation had been scheduled
for May 10, 1977, petitioner filed with respondent Commission a Manifestation stating that he intended
to run for the position of director of respondent corporation. Thereafter, respondents filed a
Manifestation with respondent Commission, submitting a Resolution of the Board of Directors of
respondent corporation disqualifying and precluding petitioner from being a candidate for director
unless he could submit evidence on May 3, 1977 that he does not come within the disqualifications
specified in the amendment to the by-laws, subject matter of SEC Case No. 1375. By reason thereof,
petitioner filed a manifestation and motion to resolve pending incidents in the case and to issue a writ of
injunction, alleging that private respondents were seeking to nullify and render ineffectual the exercise of
jurisdiction by the respondent Commission, to petitioner's irreparable damage and prejudice, Allegedly
despite a subsequent Manifestation to prod respondent Commission to act, petitioner was not heard
prior to the date of the stockholders' meeting.

Petitioner alleges that there appears a deliberate and concerted inability on the part of the SEC to act
hence petitioner came to this Court.

SEC. CASE NO. 1423

Petitioner likewise alleges that, having discovered that respondent corporation has been investing
corporate funds in other corporations and businesses outside of the primary purpose clause of the
corporation, in violation of section 17 1/2 of the Corporation Law, he filed with respondent Commission,
on January 20, 1977, a petition seeking to have private respondents Andres M. Soriano, Jr. and Jose M.
Soriano, as well as the respondent corporation declared guilty of such violation, and ordered to account
for such investments and to answer for damages.

On February 4, 1977, motions to dismiss were filed by private respondents, to which a consolidated
motion to strike and to declare individual respondents in default and an opposition ad abundantiorem
cautelam were filed by petitioner. Despite the fact that said motions were filed as early as February 4,
1977, the commission acted thereon only on April 25, 1977, when it denied respondents' motion to
dismiss and gave them two (2) days within which to file their answer, and set the case for hearing on
April 29 and May 3, 1977.

Respondents issued notices of the annual stockholders' meeting, including in the Agenda thereof, the
following:

6. Re-affirmation of the authorization to the Board of Directors by the stockholders at the

meeting on March 20, 1972 to invest corporate funds in other companies or businesses or
for purposes other than the main purpose for which the Corporation has been organized,
and ratification of the investments thereafter made pursuant thereto.

By reason of the foregoing, on April 28, 1977, petitioner filed with the SEC an urgent motion for the
issuance of a writ of preliminary injunction to restrain private respondents from taking up Item 6 of the
Agenda at the annual stockholders' meeting, requesting that the same be set for hearing on May 3, 1977,
the date set for the second hearing of the case on the merits. Respondent Commission, however, cancelled
the dates of hearing originally scheduled and reset the same to May 16 and 17, 1977, or after the
scheduled annual stockholders' meeting. For the purpose of urging the Commission to act, petitioner filed
an urgent manifestation on May 3, 1977, but this notwithstanding, no action has been taken up to the
date of the filing of the instant petition.

With respect to the afore-mentioned SEC cases, it is petitioner's contention before this Court that
respondent Commission gravely abused its discretion when it failed to act with deliberate dispatch on the
motions of petitioner seeking to prevent illegal and/or arbitrary impositions or limitations upon his
rights as stockholder of respondent corporation, and that respondent are acting oppressively against
petitioner, in gross derogation of petitioner's rights to property and due process. He prayed that this
Court direct respondent SEC to act on collateral incidents pending before it.

On May 6, 1977, this Court issued a temporary restraining order restraining private respondents from
disqualifying or preventing petitioner from running or from being voted as director of respondent
corporation and from submitting for ratification or confirmation or from causing the ratification or
confirmation of Item 6 of the Agenda of the annual stockholders' meeting on May 10, 1977, or from
Making effective the amended by-laws of respondent corporation, until further orders from this Court or
until the Securities and Ex-change Commission acts on the matters complained of in the instant petition.

On May 14, 1977, petitioner filed a Supplemental Petition, alleging that after a restraining order had been
issued by this Court, or on May 9, 1977, the respondent Commission served upon petitioner copies of the
following orders:

(1) Order No. 449, Series of 1977 (SEC Case No. 1375); denying petitioner's motion for reconsideration,
with its supplement, of the order of the Commission denying in part petitioner's motion for production of
documents, petitioner's motion for reconsideration of the order denying the issuance of a temporary
restraining order denying the issuance of a temporary restraining order, and petitioner's consolidated
motion to declare respondents in contempt and to nullify the stockholders' meeting;

(2) Order No. 450, Series of 1977 (SEC Case No. 1375), allowing petitioner to run as a director of
respondent corporation but stating that he should not sit as such if elected, until such time that the
Commission has decided the validity of the bylaws in dispute, and denying deferment of Item 6 of the
Agenda for the annual stockholders' meeting; and

(3) Order No. 451, Series of 1977 (SEC Case No. 1375), denying petitioner's motion for reconsideration of
the order of respondent Commission denying petitioner's motion for summary judgment;

It is petitioner's assertions, anent the foregoing orders, (1) that respondent Commission acted with
indecent haste and without circumspection in issuing the aforesaid orders to petitioner's irreparable
damage and injury; (2) that it acted without jurisdiction and in violation of petitioner's right to due
process when it decided en banc an issue not raised before it and still pending before one of its
Commissioners, and without hearing petitioner thereon despite petitioner's request to have the same
calendared for hearing , and (3) that the respondents acted oppressively against the petitioner in
violation of his rights as a stockholder, warranting immediate judicial intervention.

It is prayed in the supplemental petition that the SEC orders complained of be declared null and void and
that respondent Commission be ordered to allow petitioner to undertake discovery proceedings relative
to San Miguel International. Inc. and thereafter to decide SEC Cases No. 1375 and 1423 on the merits.
On May 17, 1977, respondent SEC, Andres M. Soriano, Jr. and Jose M. Soriano filed their comment, alleging
that the petition is without merit for the following reasons:

(1) that the petitioner the interest he represents are engaged in business competitive and antagonistic to
that of respondent San Miguel Corporation, it appearing that the owns and controls a greater portion of
his SMC stock thru the Universal Robina Corporation and the Consolidated Foods Corporation, which
corporations are engaged in business directly and substantially competing with the allied businesses of
respondent SMC and of corporations in which SMC has substantial investments. Further, when CFC and
Robina had accumulated investments. Further, when CFC and Robina had accumulated shares in SMC, the
Board of Directors of SMC realized the clear and present danger that competitors or antagonistic parties
may be elected directors and thereby have easy and direct access to SMC's business and trade secrets and
plans;

(2) that the amended by law were adopted to preserve and protect respondent SMC from the clear and
present danger that business competitors, if allowed to become directors, will illegally and unfairly utilize
their direct access to its business secrets and plans for their own private gain to the irreparable prejudice
of respondent SMC, and, ultimately, its stockholders. Further, it is asserted that membership of a
competitor in the Board of Directors is a blatant disregard of no less that the Constitution and pertinent
laws against combinations in restraint of trade;

(3) that by laws are valid and binding since a corporation has the inherent right and duty to preserve and
protect itself by excluding competitors and antogonistic parties, under the law of self-preservation, and it
should be allowed a wide latitude in the selection of means to preserve itself;

(4) that the delay in the resolution and disposition of SEC Cases Nos. 1375 and 1423 was due to
petitioner's own acts or omissions, since he failed to have the petition to suspend, pendente lite the
amended by-laws calendared for hearing. It was emphasized that it was only on April 29, 1977 that
petitioner calendared the aforesaid petition for suspension (preliminary injunction) for hearing on May
3, 1977. The instant petition being dated May 4, 1977, it is apparent that respondent Commission was not
given a chance to act "with deliberate dispatch", and

(5) that, even assuming that the petition was meritorious was, it has become moot and academic because
respondent Commission has acted on the pending incidents, complained of. It was, therefore, prayed that
the petition be dismissed.

On May 21, 1977, respondent Emigdio G, Tanjuatco, Sr. filed his comment, alleging that the petition has
become moot and academic for the reason, among others that the acts of private respondent sought to be
enjoined have reference to the annual meeting of the stockholders of respondent San Miguel Corporation,
which was held on may 10, 1977; that in said meeting, in compliance with the order of respondent
Commission, petitioner was allowed to run and be voted for as director; and that in the same meeting,
Item 6 of the Agenda was discussed, voted upon, ratified and confirmed. Further it was averred that the
questions and issues raised by petitioner are pending in the Securities and Exchange Commission which
has acquired jurisdiction over the case, and no hearing on the merits has been had; hence the elevation of
these issues before the Supreme Court is premature.

Petitioner filed a reply to the aforesaid comments, stating that the petition presents justiciable questions
for the determination of this Court because (1) the respondent Commission acted without
circumspection, unfairly and oppresively against petitioner, warranting the intervention of this Court; (2)
a derivative suit, such as the instant case, is not rendered academic by the act of a majority of
stockholders, such that the discussion, ratification and confirmation of Item 6 of the Agenda of the annual
stockholders' meeting of May 10, 1977 did not render the case moot; that the amendment to the bylaws
which specifically bars petitioner from being a director is void since it deprives him of his vested rights.

Respondent Commission, thru the Solicitor General, filed a separate comment, alleging that after
receiving a copy of the restraining order issued by this Court and noting that the restraining order did not
foreclose action by it, the Commission en banc issued Orders Nos. 449, 450 and 451 in SEC Case No. 1375.

In answer to the allegation in the supplemental petition, it states that Order No. 450 which denied
deferment of Item 6 of the Agenda of the annual stockholders' meeting of respondent corporation, took
into consideration an urgent manifestation filed with the Commission by petitioner on May 3, 1977 which
prayed, among others, that the discussion of Item 6 of the Agenda be deferred. The reason given for
denial of deferment was that "such action is within the authority of the corporation as well as falling
within the sphere of stockholders' right to know, deliberate upon and/or to express their wishes
regarding disposition of corporate funds considering that their investments are the ones directly
affected." It was alleged that the main petition has, therefore, become moot and academic.

On September 29,1977, petitioner filed a second supplemental petition with prayer for preliminary
injunction, alleging that the actuations of respondent SEC tended to deprive him of his right to due
process, and "that all possible questions on the facts now pending before the respondent Commission are
now before this Honorable Court which has the authority and the competence to act on them as it may
see fit." (Reno, pp. 927-928.)

Petitioner, in his memorandum, submits the following issues for resolution;

(1) whether or not the provisions of the amended by-laws of respondent corporation, disqualifying a
competitor from nomination or election to the Board of Directors are valid and reasonable;

(2) whether or not respondent SEC gravely abused its discretion in denying petitioner's request for an
examination of the records of San Miguel International, Inc., a fully owned subsidiary of San Miguel
Corporation; and

(3) whether or not respondent SEC committed grave abuse of discretion in allowing discussion of Item 6
of the Agenda of the Annual Stockholders' Meeting on May 10, 1977, and the ratification of the
investment in a foreign corporation of the corporate funds, allegedly in violation of section 17-1/2 of the
Corporation Law.

Whether or not amended by-laws are valid is purely a legal question which public interest requires to be
resolved —

It is the position of the petitioner that "it is not necessary to remand the case to respondent SEC for an
appropriate ruling on the intrinsic validity of the amended by-laws in compliance with the principle of
exhaustion of administrative remedies", considering that: first: "whether or not the provisions of the
amended by-laws are intrinsically valid ... is purely a legal question. There is no factual dispute as to what
the provisions are and evidence is not necessary to determine whether such amended by-laws are valid
as framed and approved ... "; second: "it is for the interest and guidance of the public that an immediate
and final ruling on the question be made ... "; third: "petitioner was denied due process by SEC" when
"Commissioner de Guzman had openly shown prejudice against petitioner ... ", and "Commissioner Sulit ...
approved the amended by-laws ex-parte and obviously found the same intrinsically valid; and finally: "to
remand the case to SEC would only entail delay rather than serve the ends of justice."

Respondents Andres M. Soriano, Jr. and Jose M. Soriano similarly pray that this Court resolve the legal
issues raised by the parties in keeping with the "cherished rules of procedure" that "a court should
always strive to settle the entire controversy in a single proceeding leaving no root or branch to bear the
seeds of future ligiation", citing Gayong v. Gayos. 3 To the same effect is the prayer of San Miguel
Corporation that this Court resolve on the merits the validity of its amended by laws and the rights and
obligations of the parties thereunder, otherwise "the time spent and effort exerted by the parties
concerned and, more importantly, by this Honorable Court, would have been for naught because the main
question will come back to this Honorable Court for final resolution." Respondent Eduardo R. Visaya
submits a similar appeal.

It is only the Solicitor General who contends that the case should be remanded to the SEC for hearing and
decision of the issues involved, invoking the latter's primary jurisdiction to hear and decide case
involving intra-corporate controversies.

It is an accepted rule of procedure that the Supreme Court should always strive to settle the entire
controversy in a single proceeding, leaving nor root or branch to bear the seeds of future
litigation. 4 Thus, in Francisco v. City of Davao, 5 this Court resolved to decide the case on the merits
instead of remanding it to the trial court for further proceedings since the ends of justice would not be
subserved by the remand of the case. In Republic v. Security Credit and Acceptance Corporation, et
al., 6 this Court, finding that the main issue is one of law, resolved to decide the case on the merits
"because public interest demands an early disposition of the case", and in Republic v. Central Surety and
Insurance Company, 7 this Court denied remand of the third-party complaint to the trial court for further
proceedings, citing precedent where this Court, in similar situations resolved to decide the cases on the
merits, instead of remanding them to the trial court where (a) the ends of justice would not be subserved
by the remand of the case; or (b) where public interest demand an early disposition of the case; or (c)
where the trial court had already received all the evidence presented by both parties and the Supreme
Court is now in a position, based upon said evidence, to decide the case on its merits. 8 It is settled that
the doctrine of primary jurisdiction has no application where only a question of law is
involved. 8a Because uniformity may be secured through review by a single Supreme Court, questions of
law may appropriately be determined in the first instance by courts. 8b In the case at bar, there are facts
which cannot be denied, viz.: that the amended by-laws were adopted by the Board of Directors of the
San Miguel Corporation in the exercise of the power delegated by the stockholders ostensibly pursuant to
section 22 of the Corporation Law; that in a special meeting on February 10, 1977 held specially for that
purpose, the amended by-laws were ratified by more than 80% of the stockholders of record; that the
foreign investment in the Hongkong Brewery and Distellery, a beer manufacturing company in
Hongkong, was made by the San Miguel Corporation in 1948; and that in the stockholders' annual
meeting held in 1972 and 1977, all foreign investments and operations of San Miguel Corporation were
ratified by the stockholders.

II
Whether or not the amended by-laws of SMC of disqualifying a competitor from nomination or election to
the Board of Directors of SMC are valid and reasonable —

The validity or reasonableness of a by-law of a corporation in purely a question of law. 9 Whether the by-
law is in conflict with the law of the land, or with the charter of the corporation, or is in a legal sense
unreasonable and therefore unlawful is a question of law. 10 This rule is subject, however, to the
limitation that where the reasonableness of a by-law is a mere matter of judgment, and one upon which
reasonable minds must necessarily differ, a court would not be warranted in substituting its judgment
instead of the judgment of those who are authorized to make by-laws and who have exercised their
authority. 11

Petitioner claims that the amended by-laws are invalid and unreasonable because they were tailored to
suppress the minority and prevent them from having representation in the Board", at the same time
depriving petitioner of his "vested right" to be voted for and to vote for a person of his choice as director.

Upon the other hand, respondents Andres M. Soriano, Jr., Jose M. Soriano and San Miguel Corporation
content that ex. conclusion of a competitor from the Board is legitimate corporate purpose, considering
that being a competitor, petitioner cannot devote an unselfish and undivided Loyalty to the corporation;
that it is essentially a preventive measure to assure stockholders of San Miguel Corporation of reasonable
protective from the unrestrained self-interest of those charged with the promotion of the corporate
enterprise; that access to confidential information by a competitor may result either in the promotion of
the interest of the competitor at the expense of the San Miguel Corporation, or the promotion of both the
interests of petitioner and respondent San Miguel Corporation, which may, therefore, result in a
combination or agreement in violation of Article 186 of the Revised Penal Code by destroying free
competition to the detriment of the consuming public. It is further argued that there is not vested right of
any stockholder under Philippine Law to be voted as director of a corporation. It is alleged that
petitioner, as of May 6, 1978, has exercised, personally or thru two corporations owned or controlled by
him, control over the following shareholdings in San Miguel Corporation, vis.: (a) John Gokongwei, Jr. —
6,325 shares; (b) Universal Robina Corporation — 738,647 shares; (c) CFC Corporation — 658,313
shares, or a total of 1,403,285 shares. Since the outstanding capital stock of San Miguel Corporation, as of
the present date, is represented by 33,139,749 shares with a par value of P10.00, the total shares owned
or controlled by petitioner represents 4.2344% of the total outstanding capital stock of San Miguel
Corporation. It is also contended that petitioner is the president and substantial stockholder of Universal
Robina Corporation and CFC Corporation, both of which are allegedly controlled by petitioner and
members of his family. It is also claimed that both the Universal Robina Corporation and the CFC
Corporation are engaged in businesses directly and substantially competing with the alleged businesses
of San Miguel Corporation, and of corporations in which SMC has substantial investments.

ALLEGED AREAS OF COMPETITION BETWEEN PETITIONER'S CORPORATIONS AND SAN MIGUEL

CORPORATION

According to respondent San Miguel Corporation, the areas of, competition are enumerated in its Board
the areas of competition are enumerated in its Board Resolution dated April 28, 1978, thus:

Product Line Estimated Market Share Total

1977 SMC Robina-CFC
 Table Eggs 0.6% 10.0% 10.6%
Layer Pullets 33.0% 24.0% 57.0%
Dressed Chicken 35.0% 14.0% 49.0%
Poultry & Hog Feeds 40.0% 12.0% 52.0%
Ice Cream 70.0% 13.0% 83.0%
Instant Coffee 45.0% 40.0% 85.0%
Woven Fabrics 17.5% 9.1% 26.6%

Thus, according to respondent SMC, in 1976, the areas of competition affecting SMC involved product
sales of over P400 million or more than 20% of the P2 billion total product sales of SMC. Significantly, the
combined market shares of SMC and CFC-Robina in layer pullets dressed chicken, poultry and hog feeds
ice cream, instant coffee and woven fabrics would result in a position of such dominance as to affect the
prevailing market factors.

It is further asserted that in 1977, the CFC-Robina group was in direct competition on product lines
which, for SMC, represented sales amounting to more than ?478 million. In addition, CFC-Robina was
directly competing in the sale of coffee with Filipro, a subsidiary of SMC, which product line represented
sales for SMC amounting to more than P275 million. The CFC-Robina group (Robitex, excluding Litton
Mills recently acquired by petitioner) is purportedly also in direct competition with Ramie Textile, Inc.,
subsidiary of SMC, in product sales amounting to more than P95 million. The areas of competition
between SMC and CFC-Robina in 1977 represented, therefore, for SMC, product sales of more than P849
million.

According to private respondents, at the Annual Stockholders' Meeting of March 18, 1976, 9,894
stockholders, in person or by proxy, owning 23,436,754 shares in SMC, or more than 90% of the total
outstanding shares of SMC, rejected petitioner's candidacy for the Board of Directors because they
"realized the grave dangers to the corporation in the event a competitor gets a board seat in SMC." On
September 18, 1978, the Board of Directors of SMC, by "virtue of powers delegated to it by the
stockholders," approved the amendment to ' he by-laws in question. At the meeting of February 10, 1977,
these amendments were confirmed and ratified by 5,716 shareholders owning 24,283,945 shares, or
more than 80% of the total outstanding shares. Only 12 shareholders, representing 7,005 shares,
opposed the confirmation and ratification. At the Annual Stockholders' Meeting of May 10, 1977, 11,349
shareholders, owning 27,257.014 shares, or more than 90% of the outstanding shares, rejected
petitioner's candidacy, while 946 stockholders, representing 1,648,801 shares voted for him. On the May
9, 1978 Annual Stockholders' Meeting, 12,480 shareholders, owning more than 30 million shares, or
more than 90% of the total outstanding shares. voted against petitioner.

AUTHORITY OF CORPORATION TO PRESCRIBE QUALIFICATIONS OF DIRECTORS EXPRESSLY CONFERRED

BY LAW

Private respondents contend that the disputed amended by laws were adopted by the Board of Directors
of San Miguel Corporation a-, a measure of self-defense to protect the corporation from the clear and
present danger that the election of a business competitor to the Board may cause upon the corporation
and the other stockholders inseparable prejudice. Submitted for resolution, therefore, is the issue —
whether or not respondent San Miguel Corporation could, as a measure of self- protection, disqualify a
competitor from nomination and election to its Board of Directors.
It is recognized by an authorities that 'every corporation has the inherent power to adopt by-laws 'for its
internal government, and to regulate the conduct and prescribe the rights and duties of its members
towards itself and among themselves in reference to the management of its affairs. 12 At common law, the
rule was "that the power to make and adopt by-laws was inherent in every corporation as one of its
necessary and inseparable legal incidents. And it is settled throughout the United States that in the
absence of positive legislative provisions limiting it, every private corporation has this inherent power as
one of its necessary and inseparable legal incidents, independent of any specific enabling provision in its
charter or in general law, such power of self-government being essential to enable the corporation to
accomplish the purposes of its creation. 13

In this jurisdiction, under section 21 of the Corporation Law, a corporation may prescribe in its by-laws
"the qualifications, duties and compensation of directors, officers and employees ... " This must
necessarily refer to a qualification in addition to that specified by section 30 of the Corporation Law,
which provides that "every director must own in his right at least one share of the capital stock of the
stock corporation of which he is a director ... " In Government v. El Hogar, 14 the Court sustained the
validity of a provision in the corporate by-law requiring that persons elected to the Board of Directors
must be holders of shares of the paid up value of P5,000.00, which shall be held as security for their
action, on the ground that section 21 of the Corporation Law expressly gives the power to the corporation
to provide in its by-laws for the qualifications of directors and is "highly prudent and in conformity with
good practice. "

NO VESTED RIGHT OF STOCKHOLDER TO BE ELECTED DIRECTOR

Any person "who buys stock in a corporation does so with the knowledge that its affairs are dominated by
a majorityof the stockholders and that he impliedly contracts that the will of the majority shall govern in
all matters within the limits of the act of incorporation and lawfully enacted by-laws and not forbidden by
law." 15 To this extent, therefore, the stockholder may be considered to have "parted with his personal
right or privilege to regulate the disposition of his property which he has invested in the capital stock of
the corporation, and surrendered it to the will of the majority of his fellow incorporators. ... It cannot
therefore be justly said that the contract, express or implied, between the corporation and the
stockholders is infringed ... by any act of the former which is authorized by a majority ... ." 16

Pursuant to section 18 of the Corporation Law, any corporation may amend its articles of incorporation by a
vote or written assent of the stockholders representing at least two-thirds of the subscribed capital stock of
the corporation If the amendment changes, diminishes or restricts the rights of the existing shareholders
then the disenting minority has only one right, viz.: "to object thereto in writing and demand payment for
his share." Under section 22 of the same law, the owners of the majority of the subscribed capital stock
may amend or repeal any by-law or adopt new by-laws. It cannot be said, therefore, that petitioner has a
vested right to be elected director, in the face of the fact that the law at the time such right as stockholder
was acquired contained the prescription that the corporate charter and the by-law shall be subject to
amendment, alteration and modification. 17

It being settled that the corporation has the power to provide for the qualifications of its directors, the
next question that must be considered is whether the disqualification of a competitor from being elected
to the Board of Directors is a reasonable exercise of corporate authority.

A DIRECTOR STANDS IN A FIDUCIARY RELATION TO THE CORPORATION AND ITS SHAREHOLDERS

Although in the strict and technical sense, directors of a private corporation are not regarded as trustees,
there cannot be any doubt that their character is that of a fiduciary insofar as the corporation and the
stockholders as a body are concerned. As agents entrusted with the management of the corporation for
the collective benefit of the stockholders, "they occupy a fiduciary relation, and in this sense the relation
is one of trust." 18 "The ordinary trust relationship of directors of a corporation and stockholders",
according to Ashaman v. Miller, 19 "is not a matter of statutory or technical law. It springs from the fact
that directors have the control and guidance of corporate affairs and property and hence of the property
interests of the stockholders. Equity recognizes that stockholders are the proprietors of the corporate
interests and are ultimately the only beneficiaries thereof * * *.

Justice Douglas, in Pepper v. Litton, 20 emphatically restated the standard of fiduciary obligation of the
directors of corporations, thus:

A director is a fiduciary. ... Their powers are powers in trust. ... He who is in such fiduciary
position cannot serve himself first and his cestuis second. ... He cannot manipulate the
affairs of his corporation to their detriment and in disregard of the standards of common
decency. He cannot by the intervention of a corporate entity violate the ancient precept
against serving two masters ... He cannot utilize his inside information and strategic
position for his own preferment. He cannot violate rules of fair play by doing indirectly
through the corporation what he could not do so directly. He cannot violate rules of fair
play by doing indirectly though the corporation what he could not do so directly. He cannot
use his power for his personal advantage and to the detriment of the stockholders and
creditors no matter how absolute in terms that power may be and no matter how
meticulous he is to satisfy technical requirements. For that power is at all times subject to
the equitable limitation that it may not be exercised for the aggrandizement, preference or
advantage of the fiduciary to the exclusion or detriment of the cestuis.

And in Cross v. West Virginia Cent, & P. R. R. Co., 21 it was said:

... A person cannot serve two hostile and adverse master, without detriment to one of them.
A judge cannot be impartial if personally interested in the cause. No more can a director.
Human nature is too weak -for this. Take whatever statute provision you please giving
power to stockholders to choose directors, and in none will you find any express
prohibition against a discretion to select directors having the company's interest at heart,
and it would simply be going far to deny by mere implication the existence of such a
salutary power

... If the by-law is to be held reasonable in disqualifying a stockholder in a competing company from being
a director, the same reasoning would apply to disqualify the wife and immediate member of the family of
such stockholder, on account of the supposed interest of the wife in her husband's affairs, and his
suppose influence over her. It is perhaps true that such stockholders ought not to be condemned as
selfish and dangerous to the best interest of the corporation until tried and tested. So it is also true that
we cannot condemn as selfish and dangerous and unreasonable the action of the board in passing the by-
law. The strife over the matter of control in this corporation as in many others is perhaps carried on not
altogether in the spirit of brotherly love and affection. The only test that we can apply is as to whether or
not the action of the Board is authorized and sanctioned by law. ... . 22

These principles have been applied by this Court in previous cases.23

AN AMENDMENT TO THE CORPORATION BY-LAW WHICH RENDERS A STOCKHOLDER INELIGIBLE TO BE
DIRECTOR, IF HE BE ALSO DIRECTOR IN A CORPORATION WHOSE BUSINESS IS IN COMPETITION WITH
THAT OF THE OTHER CORPORATION, HAS BEEN SUSTAINED AS VALID

It is a settled state law in the United States, according to Fletcher, that corporations have the power to
make by-laws declaring a person employed in the service of a rival company to be ineligible for the
corporation's Board of Directors. ... (A)n amendment which renders ineligible, or if elected, subjects to
removal, a director if he be also a director in a corporation whose business is in competition with or is
antagonistic to the other corporation is valid." 24This is based upon the principle that where the director
is so employed in the service of a rival company, he cannot serve both, but must betray one or the other.
Such an amendment "advances the benefit of the corporation and is good." An exception exists in New
Jersey, where the Supreme Court held that the Corporation Law in New Jersey prescribed the only
qualification, and therefore the corporation was not empowered to add additional qualifications. 25 This
is the exact opposite of the situation in the Philippines because as stated heretofore, section 21 of the
Corporation Law expressly provides that a corporation may make by-laws for the qualifications of
directors. Thus, it has been held that an officer of a corporation cannot engage in a business in direct
competition with that of the corporation where he is a director by utilizing information he has received
as such officer, under "the established law that a director or officer of a corporation may not enter into a
competing enterprise which cripples or injures the business of the corporation of which he is an officer or
director. 26

It is also well established that corporate officers "are not permitted to use their position of trust and
confidence to further their private interests." 27 In a case where directors of a corporation cancelled a
contract of the corporation for exclusive sale of a foreign firm's products, and after establishing a rival
business, the directors entered into a new contract themselves with the foreign firm for exclusive sale of
its products, the court held that equity would regard the new contract as an offshoot of the old contract
and, therefore, for the benefit of the corporation, as a "faultless fiduciary may not reap the fruits of his
misconduct to the exclusion of his principal. 28

The doctrine of "corporate opportunity" 29 is precisely a recognition by the courts that the fiduciary
standards could not be upheld where the fiduciary was acting for two entities with competing interests.
This doctrine rests fundamentally on the unfairness, in particular circumstances, of an officer or director
taking advantage of an opportunity for his own personal profit when the interest of the corporation justly
calls for protection. 30

It is not denied that a member of the Board of Directors of the San Miguel Corporation has access to
sensitive and highly confidential information, such as: (a) marketing strategies and pricing structure; (b)
budget for expansion and diversification; (c) research and development; and (d) sources of funding,
availability of personnel, proposals of mergers or tie-ups with other firms.

It is obviously to prevent the creation of an opportunity for an officer or director of San Miguel
Corporation, who is also the officer or owner of a competing corporation, from taking advantage of the
information which he acquires as director to promote his individual or corporate interests to the
prejudice of San Miguel Corporation and its stockholders, that the questioned amendment of the by-laws
was made. Certainly, where two corporations are competitive in a substantial sense, it would seem
improbable, if not impossible, for the director, if he were to discharge effectively his duty, to satisfy his
loyalty to both corporations and place the performance of his corporation duties above his personal
concerns.
Thus, in McKee & Co. v. First National Bank of San Diego, supra the court sustained as valid and reasonable
an amendment to the by-laws of a bank, requiring that its directors should not be directors, officers,
employees, agents, nominees or attorneys of any other banking corporation, affiliate or subsidiary
thereof. Chief Judge Parker, in McKee, explained the reasons of the court, thus:

... A bank director has access to a great deal of information concerning the business and
plans of a bank which would likely be injurious to the bank if known to another bank, and it
was reasonable and prudent to enlarge this minimum disqualification to include any
director, officer, employee, agent, nominee, or attorney of any other bank in California.
The Ashkins case, supra, specifically recognizes protection against rivals and others who
might acquire information which might be used against the interests of the corporation as a
legitimate object of by-law protection. With respect to attorneys or persons associated with
a firm which is attorney for another bank, in addition to the direct conflict or potential
conflict of interest, there is also the danger of inadvertent leakage of confidential
information through casual office discussions or accessibility of files. Defendant's directors
determined that its welfare was best protected if this opportunity for conflicting loyalties
and potential misuse and leakage of confidential information was foreclosed.

In McKee the Court further listed qualificational by-laws upheld by the courts, as follows:

(1) A director shall not be directly or indirectly interested as a stockholder in any other
firm, company, or association which competes with the subject corporation.

(2) A director shall not be the immediate member of the family of any stockholder in any
other firm, company, or association which competes with the subject corporation,

(3) A director shall not be an officer, agent, employee, attorney, or trustee in any other firm,
company, or association which compete with the subject corporation.

(4) A director shall be of good moral character as an essential qualification to holding

office.

(5) No person who is an attorney against the corporation in a law suit is eligible for service
on the board. (At p. 7.)

These are not based on theorical abstractions but on human experience — that a person cannot serve
two hostile masters without detriment to one of them.

The offer and assurance of petitioner that to avoid any possibility of his taking unfair advantage of his
position as director of San Miguel Corporation, he would absent himself from meetings at which
confidential matters would be discussed, would not detract from the validity and reasonableness of the
by-laws here involved. Apart from the impractical results that would ensue from such arrangement, it
would be inconsistent with petitioner's primary motive in running for board membership — which is to
protect his investments in San Miguel Corporation. More important, such a proposed norm of conduct
would be against all accepted principles underlying a director's duty of fidelity to the corporation, for the
policy of the law is to encourage and enforce responsible corporate management. As explained by
Oleck: 31 "The law win not tolerate the passive attitude of directors ... without active and conscientious
participation in the managerial functions of the company. As directors, it is their duty to control and
supervise the day to day business activities of the company or to promulgate definite policies and rules of
guidance with a vigilant eye toward seeing to it that these policies are carried out. It is only then that
directors may be said to have fulfilled their duty of fealty to the corporation."

Sound principles of corporate management counsel against sharing sensitive information with a director
whose fiduciary duty of loyalty may well require that he disclose this information to a competitive arrival.
These dangers are enhanced considerably where the common director such as the petitioner is a
controlling stockholder of two of the competing corporations. It would seem manifest that in such
situations, the director has an economic incentive to appropriate for the benefit of his own corporation
the corporate plans and policies of the corporation where he sits as director.

Indeed, access by a competitor to confidential information regarding marketing strategies and pricing
policies of San Miguel Corporation would subject the latter to a competitive disadvantage and unjustly
enrich the competitor, for advance knowledge by the competitor of the strategies for the development of
existing or new markets of existing or new products could enable said competitor to utilize such
knowledge to his advantage. 32

There is another important consideration in determining whether or not the amended by-laws are
reasonable. The Constitution and the law prohibit combinations in restraint of trade or unfair
competition. Thus, section 2 of Article XIV of the Constitution provides: "The State shall regulate or
prohibit private monopolies when the public interest so requires. No combinations in restraint of trade
or unfair competition shall be snowed."

Article 186 of the Revised Penal Code also provides:

Art. 186. Monopolies and combinations in restraint of trade. —The penalty of prision
correccional in its minimum period or a fine ranging from two hundred to six thousand
pesos, or both, shall be imposed upon:

1. Any person who shall enter into any contract or agreement or shall take part in any
conspiracy or combination in the form of a trust or otherwise, in restraint of trade or
commerce or to prevent by artificial means free competition in the market.

2. Any person who shag monopolize any merchandise or object of trade or commerce, or
shall combine with any other person or persons to monopolize said merchandise or object
in order to alter the price thereof by spreading false rumors or making use of any other
artifice to restrain free competition in the market.

3. Any person who, being a manufacturer, producer, or processor of any merchandise or

object of commerce or an importer of any merchandise or object of commerce from any
foreign country, either as principal or agent, wholesale or retailer, shall combine, conspire
or agree in any manner with any person likewise engaged in the manufacture, production,
processing, assembling or importation of such merchandise or object of commerce or with
any other persons not so similarly engaged for the purpose of making transactions
prejudicial to lawful commerce, or of increasing the market price in any part of the
Philippines, or any such merchandise or object of commerce manufactured, produced,
processed, assembled in or imported into the Philippines, or of any article in the
 manufacture of which such manufactured, produced, processed, or imported merchandise
or object of commerce is used.

There are other legislation in this jurisdiction, which prohibit monopolies and combinations in restraint
of trade. 33

Basically, these anti-trust laws or laws against monopolies or combinations in restraint of trade are
aimed at raising levels of competition by improving the consumers' effectiveness as the final arbiter in
free markets. These laws are designed to preserve free and unfettered competition as the rule of trade. "It
rests on the premise that the unrestrained interaction of competitive forces will yield the best allocation
of our economic resources, the lowest prices and the highest quality ... ." 34 they operate to forestall
concentration of economic power. 35 The law against monopolies and combinations in restraint of trade is
aimed at contracts and combinations that, by reason of the inherent nature of the contemplated acts,
prejudice the public interest by unduly restraining competition or unduly obstructing the course of
trade. 36

The terms "monopoly", "combination in restraint of trade" and "unfair competition" appear to have a well
defined meaning in other jurisdictions. A "monopoly" embraces any combination the tendency of which is
to prevent competition in the broad and general sense, or to control prices to the detriment of the
public. 37 In short, it is the concentration of business in the hands of a few. The material consideration in
determining its existence is not that prices are raised and competition actually excluded, but
that power exists to raise prices or exclude competition when desired. 38 Further, it must be considered
that the Idea of monopoly is now understood to include a condition produced by the mere act of
individuals. Its dominant thought is the notion of exclusiveness or unity, or the suppression of
competition by the qualification of interest or management, or it may be thru agreement and concert of
action. It is, in brief, unified tactics with regard to prices. 39

From the foregoing definitions, it is apparent that the contentions of petitioner are not in accord with
reality. The election of petitioner to the Board of respondent Corporation can bring about an illegal
situation. This is because an express agreement is not necessary for the existence of a combination or
conspiracy in restraint of trade. 40 It is enough that a concert of action is contemplated and that the
defendants conformed to the arrangements, 41 and what is to be considered is what the parties actually
did and not the words they used. For instance, the Clayton Act prohibits a person from serving at the
same time as a director in any two or more corporations, if such corporations are, by virtue of their
business and location of operation, competitors so that the elimination of competition between them
would constitute violation of any provision of the anti-trust laws. 42 There is here a statutory recognition
of the anti-competitive dangers which may arise when an individual simultaneously acts as a director of
two or more competing corporations. A common director of two or more competing corporations would
have access to confidential sales, pricing and marketing information and would be in a position to
coordinate policies or to aid one corporation at the expense of another, thereby stifling competition. This
situation has been aptly explained by Travers, thus:

The argument for prohibiting competing corporations from sharing even one director is
that the interlock permits the coordination of policies between nominally independent firms
to an extent that competition between them may be completely eliminated. Indeed, if a
director, for example, is to be faithful to both corporations, some accommodation must
result. Suppose X is a director of both Corporation A and Corporation B. X could hardly vote
for a policy by A that would injure B without violating his duty of loyalty to B at the same
 time he could hardly abstain from voting without depriving A of his best judgment. If the
firms really do compete — in the sense of vying for economic advantage at the expense of
the other — there can hardly be any reason for an interlock between competitors other than
the suppression of competition. 43 (Emphasis supplied.)

According to the Report of the House Judiciary Committee of the U. S. Congress on section 9 of the Clayton
Act, it was established that: "By means of the interlocking directorates one man or group of men have
been able to dominate and control a great number of corporations ... to the detriment of the small ones
dependent upon them and to the injury of the public. 44

Shared information on cost accounting may lead to price fixing. Certainly, shared information on
production, orders, shipments, capacity and inventories may lead to control of production for the
purpose of controlling prices.

Obviously, if a competitor has access to the pricing policy and cost conditions of the products of San
Miguel Corporation, the essence of competition in a free market for the purpose of serving the lowest
priced goods to the consuming public would be frustrated, The competitor could so manipulate the prices
of his products or vary its marketing strategies by region or by brand in order to get the most out of the
consumers. Where the two competing firms control a substantial segment of the market this could lead to
collusion and combination in restraint of trade. Reason and experience point to the inevitable conclusion
that the inherent tendency of interlocking directorates between companies that are related to each other
as competitors is to blunt the edge of rivalry between the corporations, to seek out ways of compromising
opposing interests, and thus eliminate competition. As respondent SMC aptly observes, knowledge by
CFC-Robina of SMC's costs in various industries and regions in the country win enable the former to
practice price discrimination. CFC-Robina can segment the entire consuming population by geographical
areas or income groups and change varying prices in order to maximize profits from every market
segment. CFC-Robina could determine the most profitable volume at which it could produce for every
product line in which it competes with SMC. Access to SMC pricing policy by CFC-Robina would in effect
destroy free competition and deprive the consuming public of opportunity to buy goods of the highest
possible quality at the lowest prices.

Finally, considering that both Robina and SMC are, to a certain extent, engaged in agriculture, then the
election of petitioner to the Board of SMC may constitute a violation of the prohibition contained in
section 13(5) of the Corporation Law. Said section provides in part that "any stockholder of more than
one corporation organized for the purpose of engaging in agriculture may hold his stock in such
corporations solely for investment and not for the purpose of bringing about or attempting to bring about
a combination to exercise control of incorporations ... ."

Neither are We persuaded by the claim that the by-law was Intended to prevent the candidacy of
petitioner for election to the Board. If the by-law were to be applied in the case of one stockholder but
waived in the case of another, then it could be reasonably claimed that the by-law was being applied in a
discriminatory manner. However, the by law, by its terms, applies to all stockholders. The equal
protection clause of the Constitution requires only that the by-law operate equally upon all persons of a
class. Besides, before petitioner can be declared ineligible to run for director, there must be hearing and
evidence must be submitted to bring his case within the ambit of the disqualification. Sound principles of
public policy and management, therefore, support the view that a by-law which disqualifies a competition
from election to the Board of Directors of another corporation is valid and reasonable.
In the absence of any legal prohibition or overriding public policy, wide latitude may be accorded to the
corporation in adopting measures to protect legitimate corporation interests. Thus, "where the
reasonableness of a by-law is a mere matter of judgment, and upon which reasonable minds must
necessarily differ, a court would not be warranted in substituting its judgment instead of the judgment of
those who are authorized to make by-laws and who have expressed their authority. 45

Although it is asserted that the amended by-laws confer on the present Board powers to perpetua
themselves in power such fears appear to be misplaced. This power, but is very nature, is subject to
certain well established limitations. One of these is inherent in the very convert and definition of the
terms "competition" and "competitor". "Competition" implies a struggle for advantage between two or
more forces, each possessing, in substantially similar if not Identical degree, certain characteristics
essential to the business sought. It means an independent endeavor of two or more persons to obtain the
business patronage of a third by offering more advantageous terms as an inducement to secure
trade. 46 The test must be whether the business does in fact compete, not whether it is capable of an
indirect and highly unsubstantial duplication of an isolated or non-characteristics activity. 47 It is,
therefore, obvious that not every person or entity engaged in business of the same kind is a competitor.
Such factors as quantum and place of business, Identity of products and area of competition should be
taken into consideration. It is, therefore, necessary to show that petitioner's business covers a substantial
portion of the same markets for similar products to the extent of not less than 10% of respondent
corporation's market for competing products. While We here sustain the validity of the amended by-laws,
it does not follow as a necessary consequence that petitioner is ipso facto disqualified. Consonant with
the requirement of due process, there must be due hearing at which the petitioner must be given the
fullest opportunity to show that he is not covered by the disqualification. As trustees of the corporation
and of the stockholders, it is the responsibility of directors to act with fairness to the
stockholders.48Pursuant to this obligation and to remove any suspicion that this power may be utilized by
the incumbent members of the Board to perpetuate themselves in power, any decision of the Board to
disqualify a candidate for the Board of Directors should be reviewed by the Securities behind Exchange
Commission en banc and its decision shall be final unless reversed by this Court on certiorari. 49 Indeed, it
is a settled principle that where the action of a Board of Directors is an abuse of discretion, or forbidden
by statute, or is against public policy, or is ultra vires, or is a fraud upon minority stockholders or
creditors, or will result in waste, dissipation or misapplication of the corporation assets, a court of equity
has the power to grant appropriate relief. 50

III

Whether or not respondent SEC gravely abused its discretion in denying petitioner's request for an
examination of the records of San Miguel International Inc., a fully owned subsidiary of San Miguel
Corporation —

Respondent San Miguel Corporation stated in its memorandum that petitioner's claim that he was denied
inspection rights as stockholder of SMC "was made in the teeth of undisputed facts that, over a specific
period, petitioner had been furnished numerous documents and information," to wit: (1) a complete list
of stockholders and their stockholdings; (2) a complete list of proxies given by the stockholders for use at
the annual stockholders' meeting of May 18, 1975; (3) a copy of the minutes of the stockholders' meeting
of March 18,1976; (4) a breakdown of SMC's P186.6 million investment in associated companies and
other companies as of December 31, 1975; (5) a listing of the salaries, allowances, bonuses and other
compensation or remunerations received by the directors and corporate officers of SMC; (6) a copy of the
US $100 million Euro-Dollar Loan Agreement of SMC; and (7) copies of the minutes of all meetings of the
Board of Directors from January 1975 to May 1976, with deletions of sensitive data, which deletions were
not objected to by petitioner.

Further, it was averred that upon request, petitioner was informed in writing on September 18, 1976; (1)
that SMC's foreign investments are handled by San Miguel International, Inc., incorporated in Bermuda
and wholly owned by SMC; this was SMC's first venture abroad, having started in 1948 with an initial
outlay of ?500,000.00, augmented by a loan of Hongkong $6 million from a foreign bank under the
personal guaranty of SMC's former President, the late Col. Andres Soriano; (2) that as of December 31,
1975, the estimated value of SMI would amount to almost P400 million (3) that the total cash dividends
received by SMC from SMI since 1953 has amount to US $ 9.4 million; and (4) that from 1972-1975, SMI
did not declare cash or stock dividends, all earnings having been used in line with a program for the
setting up of breweries by SMI

These averments are supported by the affidavit of the Corporate Secretary, enclosing photocopies of the
afore-mentioned documents. 51

Pursuant to the second paragraph of section 51 of the Corporation Law, "(t)he record of all business
transactions of the corporation and minutes of any meeting shall be open to the inspection of any
director, member or stockholder of the corporation at reasonable hours."

The stockholder's right of inspection of the corporation's books and records is based upon their
ownership of the assets and property of the corporation. It is, therefore, an incident of ownership of the
corporate property, whether this ownership or interest be termed an equitable ownership, a beneficial
ownership, or a ownership. 52 This right is predicated upon the necessity of self-protection. It is generally
held by majority of the courts that where the right is granted by statute to the stockholder, it is given to
him as such and must be exercised by him with respect to his interest as a stockholder and for some
purpose germane thereto or in the interest of the corporation. 53 In other words, the inspection has to be
germane to the petitioner's interest as a stockholder, and has to be proper and lawful in character and
not inimical to the interest of the corporation. 54 In Grey v. Insular Lumber, 55 this Court held that "the
right to examine the books of the corporation must be exercised in good faith, for specific and honest
purpose, and not to gratify curiosity, or for specific and honest purpose, and not to gratify curiosity, or for
speculative or vexatious purposes. The weight of judicial opinion appears to be, that on application for
mandamus to enforce the right, it is proper for the court to inquire into and consider the stockholder's
good faith and his purpose and motives in seeking inspection. 56 Thus, it was held that "the right given by
statute is not absolute and may be refused when the information is not sought in good faith or is used to
the detriment of the corporation." 57 But the "impropriety of purpose such as will defeat enforcement
must be set up the corporation defensively if the Court is to take cognizance of it as a qualification. In
other words, the specific provisions take from the stockholder the burden of showing propriety of
purpose and place upon the corporation the burden of showing impropriety of purpose or motive. 58 It
appears to be the general rule that stockholders are entitled to full information as to the management of
the corporation and the manner of expenditure of its funds, and to inspection to obtain such information,
especially where it appears that the company is being mismanaged or that it is being managed for the
personal benefit of officers or directors or certain of the stockholders to the exclusion of others." 59

While the right of a stockholder to examine the books and records of a corporation for a lawful purpose is
a matter of law, the right of such stockholder to examine the books and records of a wholly-owned
subsidiary of the corporation in which he is a stockholder is a different thing.
Some state courts recognize the right under certain conditions, while others do not. Thus, it has been held
that where a corporation owns approximately no property except the shares of stock of subsidiary
corporations which are merely agents or instrumentalities of the holding company, the legal fiction of
distinct corporate entities may be disregarded and the books, papers and documents of all the
corporations may be required to be produced for examination, 60 and that a writ of mandamus, may be
granted, as the records of the subsidiary were, to all incontents and purposes, the records of the parent
even though subsidiary was not named as a party. 61 mandamus was likewise held proper to inspect both
the subsidiary's and the parent corporation's books upon proof of sufficient control or dominion by the
parent showing the relation of principal or agent or something similar thereto. 62

On the other hand, mandamus at the suit of a stockholder was refused where the subsidiary corporation
is a separate and distinct corporation domiciled and with its books and records in another jurisdiction,
and is not legally subject to the control of the parent company, although it owned a vast majority of the
stock of the subsidiary. 63Likewise, inspection of the books of an allied corporation by stockholder of the
parent company which owns all the stock of the subsidiary has been refused on the ground that the
stockholder was not within the class of "persons having an interest." 64

In the Nash case, 65 The Supreme Court of New York held that the contractual right of former
stockholders to inspect books and records of the corporation included the right to inspect corporation's
subsidiaries' books and records which were in corporation's possession and control in its office in New
York."

In the Bailey case, 66 stockholders of a corporation were held entitled to inspect the records of a
controlled subsidiary corporation which used the same offices and had Identical officers and directors.

In his "Urgent Motion for Production and Inspection of Documents" before respondent SEC, petitioner
contended that respondent corporation "had been attempting to suppress information for the
stockholders" and that petitioner, "as stockholder of respondent corporation, is entitled to copies of some
documents which for some reason or another, respondent corporation is very reluctant in revealing to
the petitioner notwithstanding the fact that no harm would be caused thereby to the
corporation." 67 There is no question that stockholders are entitled to inspect the books and records of a
corporation in order to investigate the conduct of the management, determine the financial condition of
the corporation, and generally take an account of the stewardship of the officers and directors. 68

In the case at bar, considering that the foreign subsidiary is wholly owned by respondent San Miguel
Corporation and, therefore, under its control, it would be more in accord with equity, good faith and fair
dealing to construe the statutory right of petitioner as stockholder to inspect the books and records of the
corporation as extending to books and records of such wholly subsidiary which are in respondent
corporation's possession and control.

IV

Whether or not respondent SEC gravely abused its discretion in allowing the stockholders of respondent
corporation to ratify the investment of corporate funds in a foreign corporation

Petitioner reiterates his contention in SEC Case No. 1423 that respondent corporation invested corporate
funds in SMI without prior authority of the stockholders, thus violating section 17-1/2 of the Corporation
Law, and alleges that respondent SEC should have investigated the charge, being a statutory offense,
instead of allowing ratification of the investment by the stockholders.

Respondent SEC's position is that submission of the investment to the stockholders for ratification is a
sound corporate practice and should not be thwarted but encouraged.

Section 17-1/2 of the Corporation Law allows a corporation to "invest its funds in any other corporation
or business or for any purpose other than the main purpose for which it was organized" provided that its
Board of Directors has been so authorized by the affirmative vote of stockholders holding shares entitling
them to exercise at least two-thirds of the voting power. If the investment is made in pursuance of the
corporate purpose, it does not need the approval of the stockholders. It is only when the purchase of
shares is done solely for investment and not to accomplish the purpose of its incorporation that the vote
of approval of the stockholders holding shares entitling them to exercise at least two-thirds of the voting
power is necessary. 69

As stated by respondent corporation, the purchase of beer manufacturing facilities by SMC was an
investment in the same business stated as its main purpose in its Articles of Incorporation, which is to
manufacture and market beer. It appears that the original investment was made in 1947-1948, when
SMC, then San Miguel Brewery, Inc., purchased a beer brewery in Hongkong (Hongkong Brewery &
Distillery, Ltd.) for the manufacture and marketing of San Miguel beer thereat. Restructuring of the
investment was made in 1970-1971 thru the organization of SMI in Bermuda as a tax free reorganization.

Under these circumstances, the ruling in De la Rama v. Manao Sugar Central Co., Inc., supra, appears
relevant. In said case, one of the issues was the legality of an investment made by Manao Sugar Central
Co., Inc., without prior resolution approved by the affirmative vote of 2/3 of the stockholders' voting
power, in the Philippine Fiber Processing Co., Inc., a company engaged in the manufacture of sugar bags.
The lower court said that "there is more logic in the stand that if the investment is made in a corporation
whose business is important to the investing corporation and would aid it in its purpose, to require
authority of the stockholders would be to unduly curtail the power of the Board of Directors." This Court
affirmed the ruling of the court a quo on the matter and, quoting Prof. Sulpicio S. Guevara, said:

"j. Power to acquire or dispose of shares or securities. — A private corporation, in order to

accomplish is purpose as stated in its articles of incorporation, and subject to the
limitations imposed by the Corporation Law, has the power to acquire, hold, mortgage,
pledge or dispose of shares, bonds, securities, and other evidence of indebtedness of any
domestic or foreign corporation. Such an act, if done in pursuance of the corporate purpose,
does not need the approval of stockholders; but when the purchase of shares of another
corporation is done solely for investment and not to accomplish the purpose of its
incorporation, the vote of approval of the stockholders is necessary. In any case, the purchase
of such shares or securities must be subject to the limitations established by the
Corporations law; namely, (a) that no agricultural or mining corporation shall be restricted
to own not more than 15% of the voting stock of nay agricultural or mining corporation;
and (c) that such holdings shall be solely for investment and not for the purpose of bringing
about a monopoly in any line of commerce of combination in restraint of trade." The
Philippine Corporation Law by Sulpicio S. Guevara, 1967 Ed., p. 89) (Emphasis supplied.)

40. Power to invest corporate funds. — A private corporation has the power to invest its
corporate funds "in any other corporation or business, or for any purpose other than the
 main purpose for which it was organized, provide that 'its board of directors has been so
authorized in a resolution by the affirmative vote of stockholders holding shares in the
corporation entitling them to exercise at least two-thirds of the voting power on such a
propose at a stockholders' meeting called for that purpose,' and provided further, that no
agricultural or mining corporation shall in anywise be interested in any other agricultural
or mining corporation. When the investment is necessary to accomplish its purpose or
purposes as stated in its articles of incorporation the approval of the stockholders is not
necessary."" (Id., p. 108) (Emphasis ours.) (pp. 258-259).

Assuming arguendo that the Board of Directors of SMC had no authority to make the assailed investment,
there is no question that a corporation, like an individual, may ratify and thereby render binding upon it
the originally unauthorized acts of its officers or other agents. 70 This is true because the questioned
investment is neither contrary to law, morals, public order or public policy. It is a corporate transaction
or contract which is within the corporate powers, but which is defective from a supported failure to
observe in its execution the. requirement of the law that the investment must be authorized by the
affirmative vote of the stockholders holding two-thirds of the voting power. This requirement is for the
benefit of the stockholders. The stockholders for whose benefit the requirement was enacted may,
therefore, ratify the investment and its ratification by said stockholders obliterates any defect which it
may have had at the outset. "Mere ultra vires acts", said this Court in Pirovano, 71 "or those which are not
illegal and void ab initio, but are not merely within the scope of the articles of incorporation, are merely
voidable and may become binding and enforceable when ratified by the stockholders.

Besides, the investment was for the purchase of beer manufacturing and marketing facilities which is
apparently relevant to the corporate purpose. The mere fact that respondent corporation submitted the
assailed investment to the stockholders for ratification at the annual meeting of May 10, 1977 cannot be
construed as an admission that respondent corporation had committed an ultra vires act, considering the
common practice of corporations of periodically submitting for the gratification of their stockholders the
acts of their directors, officers and managers.

WHEREFORE, judgment is hereby rendered as follows:

The Court voted unanimously to grant the petition insofar as it prays that petitioner be allowed to
examine the books and records of San Miguel International, Inc., as specified by him.

On the matter of the validity of the amended by-laws of respondent San Miguel Corporation, six (6)
Justices, namely, Justices Barredo, Makasiar, Antonio, Santos, Abad Santos and De Castro, voted to sustain
the validity per se of the amended by-laws in question and to dismiss the petition without prejudice to
the question of the actual disqualification of petitioner John Gokongwei, Jr. to run and if elected to sit as
director of respondent San Miguel Corporation being decided, after a new and proper hearing by the
Board of Directors of said corporation, whose decision shall be appealable to the respondent Securities
and Exchange Commission deliberating and acting en banc and ultimately to this Court. Unless
disqualified in the manner herein provided, the prohibition in the afore-mentioned amended by-laws
shall not apply to petitioner.

The afore-mentioned six (6) Justices, together with Justice Fernando, voted to declare the issue on the
validity of the foreign investment of respondent corporation as moot.
Chief Justice Fred Ruiz Castro reserved his vote on the validity of the amended by-laws, pending hearing
by this Court on the applicability of section 13(5) of the Corporation Law to petitioner.

Justice Fernando reserved his vote on the validity of subject amendment to the by-laws but otherwise
concurs in the result.

Four (4) Justices, namely, Justices Teehankee, Concepcion, Jr., Fernandez and Guerrero filed a separate
opinion, wherein they voted against the validity of the questioned amended bylaws and that this question
should properly be resolved first by the SEC as the agency of primary jurisdiction. They concur in the
result that petitioner may be allowed to run for and sit as director of respondent SMC in the scheduled
May 6, 1979 election and subsequent elections until disqualified after proper hearing by the respondent's
Board of Directors and petitioner's disqualification shall have been sustained by respondent SEC en
banc and ultimately by final judgment of this Court.

In resume, subject to the qualifications aforestated judgment is hereby rendered GRANTING the petition
by allowing petitioner to examine the books and records of San Miguel International, Inc. as specified in
the petition. The petition, insofar as it assails the validity of the amended by- laws and the ratification of
the foreign investment of respondent corporation, for lack of necessary votes, is hereby DISMISSED. No
costs.

Republic of the Philippines

SUPREME COURT
Manila

FIRST DIVISION

G.R. No. L-33320 May 30, 1983

RAMON A. GONZALES, petitioner,

vs.
THE PHILIPPINE NATIONAL BANK, respondent.

Ramon A. Gonzales in his own behalf.

Juan Diaz for respondent.

VASQUEZ, J.:

Petitioner Ramon A. Gonzales instituted in the erstwhile Court of First Instance of Manila a special civil
action for mandamus against the herein respondent praying that the latter be ordered to allow him to
look into the books and records of the respondent bank in order to satisfy himself as to the truth of the
published reports that the respondent has guaranteed the obligation of Southern Negros Development
Corporation in the purchase of a US$ 23 million sugar-mill to be financed by Japanese suppliers and
financiers; that the respondent is financing the construction of the P 21 million Cebu-Mactan Bridge to be
constructed by V.C. Ponce, Inc., and the construction of Passi Sugar Mill at Iloilo by the Honiron
Philippines, Inc., as well as to inquire into the validity of Id transactions. The petitioner has alleged hat his
written request for such examination was denied by the respondent. The trial court having dismissed the
petition for mandamus, the instant appeal to review the said dismissal was filed.

The facts that gave rise to the subject controversy have been set forth by the trial court in the decision
herein sought to be reviewed, as follows:

Briefly stated, the following facts gathered from the stipulation of the parties served as the
backdrop of this proceeding.

Previous to the present action, the petitioner instituted several cases in this Court
questioning different transactions entered into by the Bark with other parties. First among
them is Civil Case No. 69345 filed on April 27, 1967, by petitioner as a taxpayer versus Sec.
Antonio Raquiza of Public Works and Communications, the Commissioner of Public
Highways, the Bank, Continental Ore Phil., Inc., Continental Ore, Huber Corporation, Allis
Chalmers and General Motors Corporation In the course of the hearing of said case on
August 3, 1967, the personality of herein petitioner to sue the bank and question the letters
of credit it has extended for the importation by the Republic of the Philippines of public
works equipment intended for the massive development program of the President was
raised. In view thereof, he expressed and made known his intention to acquire one share of
stock from Congressman Justiniano Montano which, on the following day, August 30, 1967,
was transferred in his name in the books of the Bank.

Subsequent to his aforementioned acquisition of one share of stock of the Bank, petitioner,
in his dual capacity as a taxpayer and stockholder, filed the following cases involving the
bank or the members of its Board of Directors to wit:

l. On October l8,1967, Civil Case No. 71044 versus the Board of Directors of the Bank; the
National Investment and Development Corp., Marubeni Iida Co., Ltd., and Agro-Inc. Dev. Co.
or Saravia;

2. On May 11, 1968, Civil Case No. 72936 versus Roberto Benedicto and other Directors of
the Bank, Passi (Iloilo) Sugar Central, Inc., Calinog-Lambunao Sugar Mill Integrated
Farming, Inc., Talog sugar Milling Co., Inc., Safary Central, Inc., and Batangas Sugar Central
Inc.;

3. On May 8, 1969, Civil Case No. 76427 versus Alfredo Montelibano and the Directors of
both the PNB and DBP;

On January 11, 1969, however, petitioner addressed a letter to the President of the Bank
(Annex A, Pet.), requesting submission to look into the records of its transactions covering
the purchase of a sugar central by the Southern Negros Development Corp. to be financed
by Japanese suppliers and financiers; its financing of the Cebu-Mactan Bridge to be
constructed by V.C. Ponce, Inc. and the construction of the Passi Sugar Mills in Iloilo. On
January 23, 1969, the Asst. Vice-President and Legal Counsel of the Bank answered
petitioner's letter denying his request for being not germane to his interest as a one-share
stockholder and for the cloud of doubt as to his real intention and purpose in acquiring said
share. (Annex B, Pet.) In view of the Bank's refusal the petitioner instituted this action.'
(Rollo, pp. 16-18.)
The petitioner has adopted the above finding of facts made by the trial court in its brief which he
characterized as having been "correctly stated." (Petitioner-Appellant"s Brief, pp. 57.)

The court a quo denied the prayer of the petitioner that he be allowed to examine and inspect the books
and records of the respondent bank regarding the transactions mentioned on the grounds that the right
of a stockholder to inspect the record of the business transactions of a corporation granted under Section
51 of the former Corporation Law (Act No. 1459, as amended) is not absolute, but is limited to purposes
reasonably related to the interest of the stockholder, must be asked for in good faith for a specific and
honest purpose and not gratify curiosity or for speculative or vicious purposes; that such examination
would violate the confidentiality of the records of the respondent bank as provided in Section 16 of its
charter, Republic Act No. 1300, as amended; and that the petitioner has not exhausted his administrative
remedies.

Assailing the conclusions of the lower court, the petitioner has assigned the single error to the lower
court of having ruled that his alleged improper motive in asking for an examination of the books and
records of the respondent bank disqualifies him to exercise the right of a stockholder to such inspection
under Section 51 of Act No. 1459, as amended. Said provision reads in part as follows:

Sec. 51. ... The record of all business transactions of the corporation and the minutes of any
meeting shall be open to the inspection of any director, member or stockholder of the
corporation at reasonable hours.

Petitioner maintains that the above-quoted provision does not justify the qualification made by the lower
court that the inspection of corporate records may be denied on the ground that it is intended for an
improper motive or purpose, the law having granted such right to a stockholder in clear and
unconditional terms. He further argues that, assuming that a proper motive or purpose for the desired
examination is necessary for its exercise, there is nothing improper in his purpose for asking for the
examination and inspection herein involved.

Petitioner may no longer insist on his interpretation of Section 51 of Act No. 1459, as amended, regarding
the right of a stockholder to inspect and examine the books and records of a corporation. The former
Corporation Law (Act No. 1459, as amended) has been replaced by Batas Pambansa Blg. 68, otherwise
known as the "Corporation Code of the Philippines."

The right of inspection granted to a stockholder under Section 51 of Act No. 1459 has been retained, but
with some modifications. The second and third paragraphs of Section 74 of Batas Pambansa Blg. 68
provide the following:

The records of all business transactions of the corporation and the minutes of any meeting
shag be open to inspection by any director, trustee, stockholder or member of the
corporation at reasonable hours on business days and he may demand, in writing, for a
copy of excerpts from said records or minutes, at his expense.

Any officer or agent of the corporation who shall refuse to allow any director, trustee,
stockholder or member of the corporation to examine and copy excerpts from its records
or minutes, in accordance with the provisions of this Code, shall be liable to such director,
trustee, stockholder or member for damages, and in addition, shall be guilty of an offense
which shall be punishable under Section 144 of this Code: Provided, That if such refusal is
 made pursuant to a resolution or order of the board of directors or trustees, the liability
under this section for such action shall be imposed upon the directors or trustees who
voted for such refusal; and Provided, further, That it shall be a defense to any action under
this section that the person demanding to examine and copy excerpts from the
corporation's records and minutes has improperly used any information secured through
any prior examination of the records or minutes of such corporation or of any other
corporation, or was not acting in good faith or for a legitimate purpose in making his
demand.

As may be noted from the above-quoted provisions, among the changes introduced in the new Code with
respect to the right of inspection granted to a stockholder are the following the records must be kept at
the principal office of the corporation; the inspection must be made on business days; the stockholder
may demand a copy of the excerpts of the records or minutes; and the refusal to allow such inspection
shall subject the erring officer or agent of the corporation to civil and criminal liabilities. However, while
seemingly enlarging the right of inspection, the new Code has prescribed limitations to the same. It is
now expressly required as a condition for such examination that the one requesting it must not have been
guilty of using improperly any information through a prior examination, and that the person asking for
such examination must be "acting in good faith and for a legitimate purpose in making his demand."

The unqualified provision on the right of inspection previously contained in Section 51, Act No. 1459, as
amended, no longer holds true under the provisions of the present law. The argument of the petitioner
that the right granted to him under Section 51 of the former Corporation Law should not be dependent
on the propriety of his motive or purpose in asking for the inspection of the books of the respondent bank
loses whatever validity it might have had before the amendment of the law. If there is any doubt in the
correctness of the ruling of the trial court that the right of inspection granted under Section 51 of the old
Corporation Law must be dependent on a showing of proper motive on the part of the stockholder
demanding the same, it is now dissipated by the clear language of the pertinent provision contained in
Section 74 of Batas Pambansa Blg. 68.

Although the petitioner has claimed that he has justifiable motives in seeking the inspection of the books
of the respondent bank, he has not set forth the reasons and the purposes for which he desires such
inspection, except to satisfy himself as to the truth of published reports regarding certain transactions
entered into by the respondent bank and to inquire into their validity. The circumstances under which he
acquired one share of stock in the respondent bank purposely to exercise the right of inspection do not
argue in favor of his good faith and proper motivation. Admittedly he sought to be a stockholder in order
to pry into transactions entered into by the respondent bank even before he became a stockholder. His
obvious purpose was to arm himself with materials which he can use against the respondent bank for
acts done by the latter when the petitioner was a total stranger to the same. He could have been impelled
by a laudable sense of civic consciousness, but it could not be said that his purpose is germane to his
interest as a stockholder.

We also find merit in the contention of the respondent bank that the inspection sought to be exercised by
the petitioner would be violative of the provisions of its charter. (Republic Act No. 1300, as amended.)
Sections 15, 16 and 30 of the said charter provide respectively as follows:

Sec. 15. Inspection by Department of Supervision and Examination of the Central Bank. —
The National Bank shall be subject to inspection by the Department of Supervision and
Examination of the Central Bank'
 Sec. 16. Confidential information. —The Superintendent of Banks and the Auditor General,
or other officers designated by law to inspect or investigate the condition of the National
Bank, shall not reveal to any person other than the President of the Philippines, the
Secretary of Finance, and the Board of Directors the details of the inspection or
investigation, nor shall they give any information relative to the funds in its custody, its
current accounts or deposits belonging to private individuals, corporations, or any other
entity, except by order of a Court of competent jurisdiction,'

Sec. 30. Penalties for violation of the provisions of this Act.— Any director, officer, employee,
or agent of the Bank, who violates or permits the violation of any of the provisions of this
Act, or any person aiding or abetting the violations of any of the provisions of this Act, shall
be punished by a fine not to exceed ten thousand pesos or by imprisonment of not more
than five years, or both such fine and imprisonment.

The Philippine National Bank is not an ordinary corporation. Having a charter of its own, it is not
governed, as a rule, by the Corporation Code of the Philippines. Section 4 of the said Code provides:

SEC. 4. Corporations created by special laws or charters. — Corporations created by special

laws or charters shall be governed primarily by the provisions of the special law or charter
creating them or applicable to them. supplemented by the provisions of this Code, insofar
as they are applicable.

The provision of Section 74 of Batas Pambansa Blg. 68 of the new Corporation Code with respect to the
right of a stockholder to demand an inspection or examination of the books of the corporation may not be
reconciled with the abovequoted provisions of the charter of the respondent bank. It is not correct to
claim, therefore, that the right of inspection under Section 74 of the new Corporation Code may apply in a
supplementary capacity to the charter of the respondent bank.

WHEREFORE, the petition is hereby DISMISSED, without costs.

Republic of the Philippines

SUPREME COURT
Manila

EN BANC

G.R. No. 88809 July 10, 1991

REPUBLIC OF THE PHILIPPINES, (PRESIDENTIAL COMMISSION ON GOOD

GOVERNMENT), petitioner,
vs.
THE HONORABLE SANDIGANBAYAN (FIRST DIVISION) AND EDUARDO COJUANGCO,
JR., respondents.

G.R. No. 88858 July 10, 1991

REPUBLIC OF THE PHILIPPINES, (PRESIDENTIAL COMMISSION ON GOOD
GOVERNMENT), petitioner,
vs.
THE HONORABLE SANDIGANBAYAN (FIRST DIVISION) AND EDUARDO COJUANGCO,
JR., respondents.

Estelito P. Mendoza for private respondent.

RESOLUTION

BIDIN, J.:

These petitions for certiorari assail the resolution of respondent Sandiganbayan dated May 9, 1989,
allowing respondent Eduardo Cojuangco, Jr., to inspect the corporate records of United Coconut Planters
Bank, the dispositive portion of which reads:

IN VIEW OF THE FOREGOING, the respondent UCPB and its corporate secretary shall respond to
petitioner Eduardo Cojuangco's request for examination and copying of corporate records in a
manner consistent with its duties to all its other registered stockholders as described in the
Corporation Code and under specific laws governing banking institutions such as said respondent
UCPB. (Rollo, pp. 3640, G.R. No. 88858)

and its resolution dated May 18, 1989, likewise allowing respondent Cojuangco to examine the corporate
records of San Miguel Corporation. It reads:

IN VIEW OF THE FOREGOING, the petition filed by Petitioner Eduardo Cojuangco, Jr., to examine
the records of the San Miguel Corporation is granted within the confines of Sec. 74 of the
Corporation Code. (Rollo, pp. 36-40; G.R. No. 88809)

The facts that gave rise to the instant petitions are as follows:

In G.R. No. 88809:

On December 26, 1988, private respondent-stockholder requested the San Miguel Corporation (SMC) and
its corporate secretary the production, inspection, examination/verification and/or photocopying of the
SMC corporate records to inform him of the decisions, policies, acts and performance of the management
of the SMC under the PCGG-Board.

Since the shares of private respondent in the SMC have been sequestered by the PCGG, the former (SMC)
sought advice from the latter on the effect of such sequestration. Subsequently, private respondent was
informed by the SMC that all requests for the examination, inspection and photocopying of its corporate
records should be coursed through the PCGG.

In G.R. No. 88858:

The facts set forth in G.R. No. 88809 are substantially similar in G.R. No. 88858 except that in the latter
case, private respondent as stockholder of record seeks authority to inspect and examine the corporate
records of United Coconut Planters Bank.

The request of private respondent for the inspection/examination of SMC's corporate records was denied
by the PCGG (Rollo, p. 44, G.R. No. 88809). As regards the corporate records of URPB, private respondent
was likewise advised to course his request through the PCGG (Rollo, pp. 45-46, GR No. 88858).

Thereafter, private respondent filed two separate petitions for prohibition and mandamus before the
Sandiganbayan seeking to enforce his stockholder's right to inspect the corporate records of SMC and the
UCPB. Subsequently, respondent Sandiganbayan rendered the assailed resolutions aforequoted.

Hence, the instant petitions for certiorari with prayer for the issuance of temporary restraining orders.
On June 13, 1989 and July 20, 1989, the Court issued a temporary restraining order in G.R. Nos. 88809
and 88858, respectively.

Petitioner argues, among others, that:

1) respondent Sandiganbayan has no jurisdiction over the petition filed by respondent Eduardo
Cojuangco, Jr.;

2) the PCGG may validly refuse private respondent's right to inspection; and

3) the petition filed by private respondent before the Sandiganbayan is barred by the doctrine of state
immunity from suit.

We find the petition devoid of merit.

Nothing is more settled than this Court's pronouncement in PCGG v. Peña (159 SCRA 556 [1988]), where
We held that:

. . . Under Section 2 of the President's Executive Order No. 14 issued on May 7, 1986, all cases of
the Commission regarding "the Funds, Moneys, Assets, and Properties Illegally Acquired or
Misappropriated by Former President Ferdinand Marcos, Mrs. Imelda Romualdez Marcos, their
Close Relatives, Subordinates, Business Associates, Dummies, Agents, or Nominees," civil or
criminal, are lodged within the "exclusive and original jurisdiction of the Sandiganbayan" and all
incidents arising from, incidental to, or related to, such cases necessarily fall likewise under the
Sandiganbayan's exclusive and original jurisdiction, subject to review on certiorari exclusively by
the Supreme Court.

xxx xxx xxx

. . . Executive Order No. 14, which defines the jurisdiction over cases involving the ill-gotten wealth
of former President Marcos, his wife, Imelda, members of their immediate family, close relatives,
subordinates, close and/or business associates, dummies, agents and nominees, specifically
provides in section 2 that "the Presidential Commission on Good Government shall file all such
cases, whether civil or criminal, with the Sandiganbayan which shall have exclusive and original
jurisdiction thereof. "Necessarily, those who wish to question or challenge the Commission's acts or
 orders in such cases must seek recourse in the same court, the Sandiganbayan, which is vested with
exclusive and original jurisdiction. . . . (Emphasis supplied)

The above ruling was reiterated in Soriano v. Yuson (164 SCRA 226 [1988]) and accompanying cases.

All matters of sequestration being within the exclusive and original jurisdiction of the Sandiganbayan, it
follows that the propriety of petitioner's action in denying Cojuangco's right of inspection, ostensibly
based on the order of sequestration, may be challenged before the respondent court.

Neither may the doctrine of state immunity be properly invoked by petitioner in the case at bar. For one
thing, the petition filed by respondent Cojuangco, Jr., before the Sandiganbayan demanded no affirmative
performance by the State in its political capacity which would otherwise call for the application of
immunity from suit. (See Republic v. Sandiganbayan, 184 SCRA 382 [1990] and cases cited therein).

As regards the might of inspection, it is the submission of petitioner that the request of respondent
Cojuangco, Jr., for the examination of the corporate records of SMC and UCPB may be validly refused
pending judicial determination of respondent's sequestered shares, i.e., whether the same are ill-gotten
or not (Rollo, p. 14, GR No. 88809; citing EO Nos. 1 & 2). It is further argued that respondent's purpose in
examining the corporate records of SMC and the UCPB is merely to satisfy his curiosity regarding the
performance of said corporations (Rollo, p. 16, GR No. 88809; Rollo, p. 17, GR No. 88858).

Does sequestration automatically deprive a stockholder of his right of inspection?

We rule in the negative.

The right of a stockholder to inspect and/or examine the records of a corporation is explicitly provided in
Section 74 of the Corporation Code, the pertinent portion of which reads:

Sec. 74. Books to be kept; stock transfer agent.

xxx xxx xxx

The records of all business transactions of the corporation and the minutes of any meeting shall be
open to the inspection of any director, trustee, stockholder or member of the corporation at
reasonable hours on business days and he may demand, in writing, for a copy of excerpts from
said records or minutes, at his expense.

Petitioners argue, however, that the Corporation Code has to give way to, as having been amended by,
Executive Orders Nos. 1, 2, 14 and related issuances as well as the pronouncement laid down by this
Court in Bataan Shipyard and Engineering Corporation v. Presidential Commission on Good Government
(150 SCRA 181 [1987]) on the effects of sequestration (Rollo, p. 12, GR No. 88809; Rollo, p. 13, GR No.
88858). There is mischief in this argument. We have examined the extent of Executive Orders Nos. 1, 2
and 14 on sequestration as well as the BASECO case relied upon by petitioner. Nevertheless, the Court
finds nothing therein to indicate that the Corporation Code has been deemed amended, much less an
implied modification of a stockholder's right to inspection as guaranteed by Sec. 74 thereof. Moreover,
what is clear in the case of BASECO, supra, is the following:
 One thing is certain, and should be stated at the outset: the PCGG cannot exercise acts of dominion
over property sequestered, frozen or provisionally taken over. As already earlier stressed with no
little insistence, the act of sequestration; freezing or provisional takeover of property does not
import or bring about a divestment of title over said property; does not make the PCGG the owner
thereof. In relation to the property sequestered, frozen or provisionally taken over, the PCGG is a
conservator, not an owner. . . .

The PCGG does not become, ipso facto, the owner of the shares just because the same have been
sequestered; nor does it become the stockholder of record by virtue of such sequestration.

Just recently, We ruled that the PCGG cannot vote the sequestered shares of respondent Cojuangco, Jr., in
San Miguel Corporation (Cojuangco, Jr., et al., v. Roxas, et al., GR No. 91925, April 16, 1991; Cojuangco, Jr.,
et al., v. Azcuna, et al., GR No. 93005, April 16, 1991). If the PCGG cannot vote the sequestered shares of
private respondent, with much more reason it cannot restrain or prevent private respondent, as
stockholder from inspecting the corporate records of the SMC and the UCPB at reasonable hours on
business days. The law grants respondent/stockholder such authority.

Petitioner, in seeking to bar private respondent from exercising his statutory right of inspection, lays
emphasis on the argument that respondent's express purpose is to "supervise" PCGG's management, if
not to gratify his curiosity regarding the performance of the SMC and the UCPB.

Again, the argument is devoid of merit. Records indicate that private respondent is the ostensible owner
of a substantial number of shares and is a stockholder of record in SMC and UCPB. * Being a stockholder
beyond doubt, there is therefore no reason why private respondent may not exercise his statutory right
of inspection in accordance with Sec. 74 of the Corporation Code, the only express limitation being that
the right of inspection should be exercised at reasonable hours on business days; 2) the person
demanding to examine and copy excerpts from the corporation's records and minutes has not improperly
used any information secured through any previous examination of the records of such corporation; and
3) the demand is made in good faith or for a legitimate purpose. The latter two limitations, however, must
be set up as a defense by the corporation if it is to merit judicial cognizance. As such, and in the absence of
evidence, the PCGG cannot unilaterally deny a stockholder from exercising his statutory right of
inspection based on an unsupported and naked assertion that private respondent's motive is improper or
merely for curiosity or on the ground that the stockholder is not in friendly terms with the corporation's
officers.1âwphi1

Explaining the rationale behind a stockholder's right to inspection, this Court in the case of Gokongwei,
Jr., v. Securities and Exchange Commission (89 SCRA 336 [1979]) held that:

The stockholder's right of inspection of the corporation's books and records is based upon their
ownership of the assets and property of the corporation. It is, therefore, an incident of ownership
of the corporate property, whether this ownership or interest be termed an equitable ownership,
a beneficial ownership, or a quasi-ownership. This right is predicated upon the necessity of self-
protection. It is generally held by majority of the courts that where the right is granted by statute
to the stockholder, it is given to him as such and must be exercised by him with respect to his
interest as a stockholder and for some purpose germane thereto or in the interest of the
corporation. In other words, the inspection has to be germane to the petitioner's interest as a
stockholder, and has to be proper and lawful in character and not inimical to the interest of the
 corporation. (citing Fletcher Cyc, Private Corporations, Vol. 5, 1976 Rev. Ed., Secs. 2213, 2218 &
2222)

While it may be true that the right of inspection granted by Sec. 74 of the Corporation Code is not
absolute, as when the stockholder is not acting in good faith and for a legitimate purpose (Gonzales v.
PNB, 122 SCRA 489 [1983]); or when the demand is purely speculative or merely to satisfy curiosity
(Grey v. Insular Lumber Co., 40 O.G., No. 31st Supp. 1 [1939]; See also State ex rel. Thiele v. Cities Service
Co. (115 A. 773 [1922]), the same may not be said in the case of private respondent. This is because:

. . . the "impropriety of purpose such as will defeat enforcement must be set up (by) the
corporation defensively if the Court is to take cognizance of it as a qualification. In other words,
the specific provisions take from the stockholder the burden of showing impropriety of purpose or
motive. (Gokongwei, Jr., v. Securities and Exhange Commission, supra; citing State v. Monida &
Yellowstone Stage Co., 110 Minn. 193, 124 NW 791; State v. Cities Service Co., 114 A 463.)

In the case at bar, petitioner failed to discharge the burden of proof to show that private respondent's
action in seeking examination of the corporate records was moved by unlawful or ill-motivated designs
which could appropriately call for a judicial protection against the exercise of such right. Save for its
unsubstantiated allegations, petitioner could offer no proof, nay, not even a scintilla of evidence that
respondent Cojuangco, Jr., was motivated by bad faith; that the demand was for an illegitimate purpose or
that the demand was impelled by speculation or idle curiosity. Surely, respondent's substantial
shareholdings in the SMC and UCPB cannot be an object of mere curiosity.

IN VIEW OF THE FOREGOING, the Court Resolved to DISMISS the instant petition for lack of merit. The
temporary restraining orders issued are hereby LIFTED and SET ASIDE. This Resolution is immediately
executory.

SO ORDERED.

Republic of the Philippines

SUPREME COURT
Manila

EN BANC

G.R. No. 83831 January 9, 1992

VICTOR AFRICA, petitioner,

vs.
PRESIDENTIAL COMMISSION ON GOOD GOVERNMENT, JOSE LAURETA, MELQUIADES GUTIERREZ,
EDUARDO M. VILLANUEVA, EDUARDO DE LOS ANGELES and ROMAN MABANTA, JR., respondents.

G.R. No. 85594 January 9, 1992

PRESIDENTIAL COMMISSION ON GOOD GOVERNMENT and PCGG-Nominees/Designees:

MELQUIADES GUTIERREZ, EDUARDO M. VILLANUEVA, RAMON DESUASIDO, ALMARIO P. VELASCO,
RANULFO P. PAYOS and JOSE P. ROXAS, petitioners.
vs.
THE HONORABLE SANDIGANBAYAN (THIRD DIVISION), JOSE L. AFRICA, MANUEL H. NIETO, JR.,
RAFAEL VALDEZ and VICTOR AFRICA, respondents.

G.R. No. 85597 January 9, 1992

REPUBLIC OF THE PHILIPPINES (PRESIDENTIAL COMMISSION ON GOOD

GOVERNMENT), petitioner,
vs.
THE HONORABLE SANDIGANBAYAN (THIRD DIVISION), JOSE L. AFRICA, MANUEL H. NIETO and
RAFAEL VALDEZ, respondents.

G.R. No. 85621 January 9, 1992

EDUARDO M. VILLANUEVA, petitioner,

vs.
THE HONORABLE SANDIGANBAYAN (THIRD DIVISION), JOSE L. AFRICA, MANUEL NIETO, RAFAEL C.
VALDEZ and PRESIDENTIAL COMMISSION ON GOOD GOVERNMENT,* respondents.

Victor Africa for petitioner in G.R. No. 83831

Jose L. Africa and Manuel H. Nieto for respondents in G.R. No. 85594 and 85597.

Arthur D. Lim Law Office for petitioner in G.R. No. 85621.

Romulo, Mabanta, Buenaventura, Sayoc & De los Angeles for respondents Mabanta & de los Angeles in
83831 & 85594.

REGALADO, J.:

These four cases separately filed before this Court were consolidated pursuant to our resolution of
November 22, 1988 1 since they involve issues arising from, incidental or related to the sequestration of
Eastern Telecommunications Philippines, Inc. (ETPI) by the Presidential Commission on Good
Government (PCGG) on March 14, 1986 and the consequent filing by the PCGG on July 22, 1987 of an
action for reconveyance, reversion, accounting and restitution of the alleged ill-gotten ETPI shares and
damages, docketed as Civil Case No. 0009 in the Sandiganbayan.

Shortly after the PCGG sequestered ETPI on March 14, 1986, the sequestration order was partially lifted
in May, 1986 when 40% of the shares of stock (Class "B") owned by Cable and Wireless, Ltd. were freed
from the effects of sequestration. The remaining 60% of the shares (Class "A"), however, remained under
sequestration. Thereafter, on July 22, 1987, the PCGG filed with the Sandiganbayan the aforesaid Civil
Case No. 0009.

Subsequently, during the annual stockholders meeting convened on January 29, 1988 pursuant to a PCGG
Resolution dated January 28, 1988 which called for the resumption of the stockholders meeting originally
scheduled on January 4, 1988, Eduardo M. Villanueva, as PCGG nominee, Roman Mabanta, Jr. and Eduardo
de los Angeles as nominees of the foreign investors, Cable and Wireless Ltd., and Jose L. Africa (who was
absent) were elected as members of the board of directors.

An organizational meeting was later held where Eduardo Villanueva was elected as president and general
manager, while Ramon Desuasido, Almario Velasco and Ranulfo Payos were elected as acting corporate
secretary, acting treasurer, and acting assistant corporate secretary, respectively.

The nomination and election of PCGG nominees/designees to the ETPI Board of Directors, as well as the
election of its new officers, triggered a chain of contentious proceedings before the Sandiganbayan and
this Court between the members of the ETPI Board and its stockholders, on the one hand, and the PCGG's
nominees/designees elected ETPI Board, on the other hand, in the cases hereinunder discussed.

G.R. No. 83831

Victor Africa, who claims to be an employee of ETPI holding the positions of vice-president, general
counsel (on official leave without pay), corporate secretary and special assistant to the chairman (and
president), filed directly with this Court on June 30, 1988 a petition for injunction docketed as G.R. No.
83831, seeking to enjoin the PCGG and its nominees/designees to the board of directors and the newly-
installed officers of ETPI from implementing their alleged illegal, invalid and immoral act of ousting him
from his offices and positions at the ETPI pending the determination of whether they have validly, legally
and morally assumed their supposed positions and offices as "directors" and/or "officers" of ETPI.

He contends that the reasons advanced by the PCGG-sponsored board of directors for ousting him from
his offices (redundancy, need to conserve company funds and loss of confidence) are flimsy, whimsical
and arbitrary, evidencing not only the PCGG-sponsored board's discriminatory and oppressive attitude
towards him but, more importantly, its clear intent to harass him into refraining from questioning before
several tribunals all the invalid, illegal and immoral acts of said PCGG-sponsored board which have
caused and are still causing ETPI damages because they constitute dissipation of assets.

Further claiming that the acts of respondents will work injustice, unfairness and inequity to him as they
will invalidly, illegally and immorally deprive him of his principal means of livelihood to the detriment of
his spouse and three children, petitioner sought the issuance of a writ of preliminary injunction or a
temporary restraining order to enjoin the PCGG from ousting him from his positions and offices effective
June 30, 1988.

On July 8, 1988, petitioner informed the Court that while a verbal agreement to maintain the status
quo was reached between petitioner's lawyers, Attys. Juan de Ocampo and Antonio Africa, and Messrs.
Orlando Romero and Serafin Rivera of the PCGG, respondent Eduardo M. Villanueva circulated on July 5,
1988 an inter-office memorandum easing out the legitimate members of the board from their rooms in
the executive offices for the benefit of the newly-installed members of the questioned PCGG board; and
that Ildefonso Reynoso, vice-president for administration, issued a memorandum to the Nival Security
and Protective Agency informing them that they were being relieved of their duty to provide security
services at the 7th Floor of Telecoms Plaza where the executive offices are located, which services would
then be handled by the FCA Security Agency. 2

On July 15, 1988, petitioner was allegedly forcibly taken out of his office on the basis of a PCGG order
which petitioner claimed was addressed not to then PCGG Commissioner Laureta but to three other PCGG
officials, namely, Esteban B. Conejos, Jr., Serafin P. Rivera and Orlando Z. Romero. As a consequence,
petitioner Africa sought to have then Commissioner Laureta declared in contempt of court for having
committed "improper conduct tending directly or indirectly, to impede, obstruct or degrade the
administration of justice." 3 He likewise sought the issuance of a writ of preliminary mandatory
injunction ordering respondents to open his office and allow him access to and use of the same.

G.R. Nos. 85597 and 85621

Jose L. Africa, Manuel Nieto and Rafael Valdez, allegedly the registered stockholders of ETPI, instituted on
September 6, 1988 before the Sandiganbayan Civil Case No. 0048, 4 a complaint for injunction and
damages with prayer for a temporary restraining order seeking to enjoin Eduardo M. Villanueva from
acting as "Director, President and/or General Manager" of ETPI and from exercising the powers and
functions of said positions, as well as to stop the PCGG from directly or indirectly interfering with the
management of ETPI. They contend that the assumption of Villanueva to said positions was effected
without due process of law through the PCGG using and voting the sequestered shares without legal
justification.

Eduardo M. Villanueva filed a motion to dismiss/opposition to the issuance of a restraining order on the
grounds of lack of jurisdiction, because the complaint partakes of the nature of a suit against the State
without its consent; that plaintiffs are not the real parties in interest in the action, which is actually a quo
warranto proceeding; that the complaint is premature for failure to exhaust administrative remedies; and
that the issues raised have already been passed upon by the Supreme Court in G.R. No. 82188, a recourse
against the Securities and Exchange Commission (SEC), entitled "PCGG, et al. vs. SEC, et al." 5

The PCGG, on the other hand, opposed the issuance of a writ of preliminary injunction, contending that
the issues raised in Civil Case No. 0048 have already been passed upon by the Supreme Court in its
aforesaid decision in G.R. No. 82188 promulgated on June 30, 1988. 6

In the proceedings on September 13, 1988, the PCGG, through Solicitor Ramolete, moved to defer the
hearing until after the motion to dismiss of Villanueva and the objection raised by PCGG shall have been
resolved. However, the Sandiganbayan resolved to hear the evidence on the application for preliminary
injunction with the understanding that the incident shall not be resolved earlier than the resolution of the
motion to dismiss and the issue raised by Solicitor Ramolete. 7

At the scheduled hearing on October 12, 1988, Villanueva objected to further proceedings without his
motion to dismiss being first resolved, contending that since the action is for injunction and damages, the
reception of evidence on the application for preliminary injunction was tantamount to a hearing on the
merits. In open court, he was overruled and his motion to have the proceedings suspended pending
resolution of his motion to dismiss was denied.

From the denial of PCGG's motion to defer hearing and Villanueva's motion to suspend proceedings in
Civil Case No. 0048, the PCGG filed on November 12, 1988 a petition for prohibition with prayer for a writ
of preliminary injunction and/or restraining order with this Court, docketed as G.R. No. 85597, while
Villanueva filed on November 16, 1988 a separate petition for prohibition with preliminary injunction
and/or restraining order docketed as G.R. No. 85621. Both petitions assail the orders issued by the
Sandiganbayan, dated September 13, 1988 and October 12, 1988, as having been issued with grave abuse
of discretion amounting to lack of jurisdiction.
On November 15, 1988, the Court issued a temporary restraining order 8 in G.R. No. 85597 directing the
Sandiganbayan to cease and desist from proceeding with its hearing in Civil Case No. 0048 scheduled on
November 18, 1988 at 2:00 p.m. In the resolution of November 22, 1988, the case was ordered
consolidated with the other ETPI cases (G.R. Nos. 83831, 85594 and 85621).

G.R. No. 85594

The same plaintiffs in Civil Case No. 0048, now in their capacity as erstwhile members of the Board of
Directors of ETPI, instituted before the Sandiganbayan on September 23, 1988 Civil Case No. 0050,
another action for injunction and damages with prayer for a writ of preliminary injunction and/or
temporary restraining order.

In their complaint, plaintiffs questioned the acts and orders of the PCGG leading to the election of therein
defendants Melquiades Gutierrez, Mark Javier, Ranulfo P. Payos, Jose P. Roxas and Almario Velasco, and
Cable and Wireless representatives Roman Mabanta, Jr. and Eduardo de los Angeles to the ETPI Board of
Directors. Claiming to be the duly elected members of the ETPI Board of Directors during the January 4,
1988 special stockholders meeting, plaintiffs prayed that defendants be removed from their ETPI
positions, and that an injunction be issued perpetually restraining the PCGG from electing, designating
and supporting the defendants in their ETPI roles. 9

The PCGG 10 and its nominees/designees to the ETPI Board, 11 Roman Mabanta, Jr. and Eduardo de los
Angeles, 12 separately filed their respective motions to dismiss and opposed the issuance of writ of
preliminary injunction/restraining order invoking substantially the same grounds proffered in Civil Case
No. 0048, as follows: (1) the court lacks jurisdiction because plaintiffs may not sue the State without its
consent; (2) the filing of the complaint is improper because the cause(s) of action alleged and the reliefs
sought therein constitute an action for quo warranto, hence plaintiffs are not the proper and real parties
in interest to oust or unseat defendants; and (3) the filing of the complaint is barred by lis pendens, as
plaintiffs should have contested PCGG's acts in Civil Case No. 0009 (Republic vs. Jose L. Africa, et al.).
Roman Mabanta, Jr. and Eduardo de los Angeles further maintained that respondent court has no
jurisdiction over the nature and subject matter of the complaint insofar as they are concerned, they being
Class B Directors; and that the complaint is barred by the decision of the Supreme Court in G.R. No.
82188.

On October 21, 1988, or while the motions to dismiss remained pending and prior to the hearing set on
November 3, 1988 for the issuance of a writ of preliminary injunction/temporary restraining order, the
Clerk of Court of the Sandiganbayan issued, upon request of the counsel for Jose L. Africa, et al. dated
October 18, 1988, a subpoena duces tecum and ad testificandum ordering the PCGG or its representatives
to appear and testify before the Sandiganbayan during the hearing on November 3, 1988 at 2:00 p.m. and
to produce the stock and transfer book and all stubs of the outstanding stock certificates of ETPI.

Three days thereafter, or on October 24, 1988, another subpoena duces tecum was issued upon an
amended request for subpoena by the same counsel, ordering Assistant Solicitor General Ramon
Desuasido or his representative to appear before the Sandiganbayan at the 2:00 p.m. hearing on
November 3, 1988 and to produce the "minutes of all meetings of the Board of Directors and
Stockholders of ETPI held from January 29, 1988 to date."
The PCGG and its nominee/designee, Ramon Desuasido, moved to quash both subpoenae, but the motion
was denied by the Sandiganbayan in an order 13 dated November 3, 1988. The hearing was reset to
November 15, 1988 at 2:00 o'clock in the afternoon.

On November 15, 1988, an urgent petition for certiorari, docketed as G.R. No. 85594, was filed by the
PCGG and its nominees/designees before this Court, assailing as having been issued with grave abuse of
discretion the incidental orders dated October 24, 1988 and November 3, 1988 on the principal
contention that the Sandiganbayan has no jurisdiction over the main action for damages since Civil Case
No. 0050 is in truth a suit against the State without its consent. The PCGG also prayed for the issuance of a
temporary restraining order to enjoin the respondents from enforcing and/or executing the subpoenas
dated October 21, 1988 and October 24, 1988. On the same date, or on November 15, 1988, the Court
issued a temporary restraining order. 14

The Sandiganbayan, in the meantime, proceeded with the main case and, thereafter, on December 13,
1988 promulgated a resolution 15 denying the motions to dismiss separately filed by the PCGG and the
individual defendants.

On February 23, 1989, the Sandiganbayan denied the motion for reconsideration filed by the
representatives of Cable and Wireless, Ltd. 16 The PCGG and its nominees opted not to file a motion for
reconsideration apparently in the belief that the same would be merely repetitive, if not futile.

From the denial of the motion to dismiss, the PCGG and its nominees/designees filed on March 27, 1989
an Urgent Supplemental Petition in G.R. No. 85594 17 assailing the denial by the Sandiganbayan of their
motions to dismiss on the grounds that the core subject matter and issue are res judicata by virtue of the
decision in G.R. No. 82188; that the respondent court lacks jurisdiction over the case; that private
respondents have no legal capacity to sue and institute a separate action; and that they are not the real
parties in interest.

Recapping, therefore, from the foregoing narration it appears that the injunction suits filed and docketed
as Civil Cases Nos. 0048 and 0050 in the Sandiganbayan and the petition for injunction filed directly with
this Court as G.R. No. 83831 are substantially identical in the reliefs sought therein, that is, to nullify the
acts and orders of the PCGG which led to the nomination and election of the new members of the board of
directors and officers of the ETPI and to enjoin said directors and officers from exercising the powers and
functions of said positions.

Civil Cases Nos. 0048 and 0050 were elevated to this Court on some incidental matters relating to the
propriety of hearing the cases on the merits without the motions to dismiss filed therein having been first
resolved; and in Civil Case No. 0050, on the additional issue of the legality of the subpoena duces
tecum and ad testificandum issued by the Sandiganbayan ordering the PCGG or its representatives to
testify and produce the stock and transfer book, all stubs of the outstanding stock certificates of ETPI and
the minutes of all meetings of the board of directors and stockholders held from January 29, 1988.

The issue in Civil Case No. 0050 as to the propriety of hearing the main action for injunction before
resolving the motions to dismiss has been mooted when the Sandiganbayan denied said motions to
dismiss on December 13, 1988. We are, however, constrained to go deeper into the issue since the denial
of said motions was the subject matter of a supplemental petition in G.R. No. 85594.
With respect to G.R. Nos. 85597 and 85621, we find that the deferment of the resolution of the motions to
dismiss Civil Case No. 0048 was tainted with grave abuse of discretion. It is well-settled that while the
court has the discretion to defer the hearing and determination of a motion to dismiss if the ground
therefor is not indubitable, 18such deferment is in excess of jurisdiction if the ground for the motion to
dismiss is lack of jurisdiction or lack of cause of action, since the allegations of the complaint are deemed
admitted and the motion to dismiss can be resolved without waiting for trial on the merits.19 Clearly, on
the face of the complaint, the issue of lack of jurisdiction invoked in the motion to dismiss can be resolved
without waiting for trial on the merits as will be shown hereunder. Thus, petitioner Villanueva is correct
in his assertion that his motion to dismiss must first be resolved before trial on the merits may be had.

Be that as it may, this finding merely constitutes a technical victory for said petitioner as it will be
rendered moot and academic by the following ruling on the merits of the grounds raised in his motion to
dismiss.

In G.R. No. 85621, petitioner Villanueva imputes grave abuse of discretion to the Sandiganbayan in
proceeding with the hearing of Civil Case No. 0048. To his mind, the injunction suit filed by Africa, Nieto
and Valdez is in effect a suit against the State and, since there is no waiver of immunity by the State,
respondent court cannot acquire jurisdiction over the same.

Along the same vein, the PCGG elevated to this Court in G.R. No. 85594 the denial of its motion to dismiss
Civil Case No. 0050 contending that the Sandiganbayan has no jurisdiction to entertain an independent
suit against the Republic of the Philippines (PCGG) not only because it is only the Republic, without
consenting to be sued or countersued, that is allowed to file civil or criminal cases with said court
pursuant to Executive Order No. 14, but also because the cause of action, if any, or the subject matter or
nature of the complaint for injunction are not within the limited or special jurisdiction of the
Sandiganbayan as defined by Section 4, Presidential Decree No. 1606, as amended by Presidential Decree
No. 1891, even as such jurisdiction has been enlarged by Executive Order No. 14.

The law and jurisprudence on the jurisdiction of the Sandiganbayan over cases for the recovery of "ill-
gotten wealth" are now settled. In PCGG vs. Hon. Emmanuel G. Peña, etc., et al., 20 this Court held:

. . . Under Section 2 of the President's Executive Order No. 14 issued on May 7, 1986, all
cases of the Commission regarding "the Funds, Moneys, Assets, and Properties Illegally
Acquired or Misappropriated by Former President Ferdinand Marcos, Mrs. Imelda
Romualdez Marcos, their Close Relatives, Subordinates, Business Associates, Dummies,
Agents, or Nominees" whether civil or criminal, are lodged within the "exclusive and
original jurisdiction of the Sandiganbayan" and all incidents arising from, incidental to, or
related to, such cases necessarily fall likewise under the Sandiganbayan's exclusive and
original jurisdiction, subject to review on certiorari exclusively by the Supreme Court.

The aforequoted ruling was reiterated in PCGG vs. Hon. Aquino, Jr., etc., et al. and Marcelo Fiberglass
Corporation vs. PCGG, 21 which were jointly decided by the Court on June 30, 1988.

In six (6) subsequent cases 22 likewise jointly decided on August 10, 1988, the Court pointed out that:

. . . (the) exclusive jurisdiction conferred on the Sandiganbayan would evidently extend not
only to the principal causes of action, i.e., the recovery of alleged ill-gotten wealth, but also
to "all incidents arising from, incidental to, or related to, such cases," such as the dispute
 over the sale of shares, the propriety of the issuance of ancillary writs or provisional
remedies relative thereto, the sequestration thereof, which may not be made the subject of
separate actions or proceedings in another forum.

A careful examination of the records of these cases reveals that the complaints instituted by Jose L. Africa,
et al. in Civil Cases Nos. 0048 and 0050 before the Sandiganbayan are in the nature of special and original
civil actions for injunction 23 directed against the defendants therein and specially seeking to restrain
them from representing and acting as officers and members of the Board of Directors of ETPI and to
prevent the PCGG from exercising acts of ownership and/or management over ETPI.

Moreover, in claiming as illegal the acts or orders of the PCGG issued in pursuance of the exercise of its
powers and functions under Executive Orders Nos. 1, 2 and 14, which resulted in the installation of
defendants to the Board of Directors of ETPI and to their corporate offices, plaintiffs Jose L. Africa, et al.
merely sought to preserve the status quo, that is, the last actual, peaceable, uncontested status which
preceded the pending controversy. The status quoto the plaintiffs was the fact of their election to the
Board of Directors of ETPI during the special stockholders meeting on January 4, 1988 allegedly pursuant
to a valid call, notice and assembly in accordance with law.

The issue of jurisdiction of the Sandiganbayan over original special civil actions involving the powers and
functions of the PCGG has been raised in and resolved by this Court. In the consolidated cases of PCGG
vs. Hon. Aquino, Jr., etc., et al. and Marcelo Fiberglass Corporation vs. PCGG, supra, therein private
respondent Marcelo Fiberglass Corporation contested the jurisdiction of the Sandiganbayan over special
civil actions claiming that Section 2 of Executive Order No. 14 vested the Sandiganbayan with Jurisdiction
over civil and criminal cases filed by the PCGG but not over special civil actions filed by private parties;
that Section 2 did not limit the filing of special civil actions by private persons exclusively with the
Sandiganbayan; and that Presidential Decree No. 1606 which created the Sandiganbayan did not vest
such court with jurisdiction over special civil actions such as those involved therein and as enumerated in
Section 4 of Presidential Decree No. 1606.

The Court rejected such contention, declaring that the attempt to remove special civil actions from the
Sandiganbayan's exclusive jurisdiction is of no avail if they similarly involve the powers and functions of
the PCGG. The Court reiterated the pronouncement in PCGG vs. Peña, etc., et al., supra, that the
Sandiganbayan has exclusive and original jurisdiction in civil or criminal cases involving ill-gotten wealth
under Executive Order No. 14, as well as incidents arising from, incidental or related to such cases,
subject to review on certiorari exclusively by the Supreme Court.

Since the injunctive suits filed by Jose L. Africa, et al. before the Sandiganbayan stemmed from incidents
arising from, incidental and related to the partial sequestration of ETPI, the directive enunciated in
the Peña case that "those who wish to question or challenge the Commission's acts or orders in such
cases must seek recourse in the same court, the Sandiganbayan, which is vested with exclusive and
original jurisdiction," applies to the instant case.

Neither would the principle of immunity of the State from suit invoked by the PCGG divest the
Sandiganbayan of its jurisdiction over the complaints for injunction in both Civil Cases Nos. 0048 and
0050. While there were claims for damages alleged in the complaints in both cases, the same are,
however, directed against the individual defendants in their personal capacities for having allegedly
acted without legal authority and in a manner adverse to the interests of ETPI. 24
Incorporating a monetary claim in the complaint will not convert the special civil action for injunction
into a mere claim for damages which would otherwise call for the application of the rule on non-suability
of the State. 25 The complaints for injunction do not seek money judgments from nor do they demand any
affirmative performance by the State in its political capacity which would call for immunity from suit. The
doctrine of state immunity from suit applies only in actions resulting in adverse consequences on the
public treasury, whether in the disbursement of funds or loss of property. 26

Plaintiffs in both cases sought the intervention of the Sandiganbayan to obtain redress for what they
perceived to be an arbitrary and illegal deprivation of their proprietary rights in the ETPI by the
individual defendants resulting from the latter being installed as directors or officers of ETPI by virtue of
the questioned acts or orders of the PCGG. Plaintiffs do not seek to impose pecuniary liabilities against
the PCGG as a government entity. Verily, the PCGG cannot hide behind the aforestated doctrine of
immunity of the State from suit to bar plaintiffs from going to the courts to seek affirmative reliefs in
these actions.

Seeking further to divest the Sandiganbayan of its jurisdiction over the actions for injunction in Civil
Cases Nos. 0048 and 0050, the PCGG argues that the said actions are barred by res judicata because of the
prior judgment in PCGG, et al. vs. SEC, et al. and its companion case, PCGG vs. Sandiganbayan, et pl., supra.
It is the contention of the PCGG that the subject matter and issues in both Civil Cases Nos. 0048 and 0050
are the very same subject matter and issues raised by Africa, et al. in SEC Case No. 3297 and in their
motion for injunction in Civil Case No. 0009, both of which were elevated by the PCGG to this Court in G.R.
No. 82186.

The doctrine of res judicata or bar by prior judgment does not apply in the instant cases. The two issues
raised in G.R. No. 82188 related principally to the issue of jurisdiction, namely: (1) whether or not the
Securities and Exchange Commission gravely abused its discretion and acted in excess of jurisdiction in
SEC Case No. 3297 when it restrained the PCGG from holding the special stockholders meeting of the
ETPI on March 4, 1988; and (2) whether or not the Sandiganbayan gravely abused its discretion and
acted in excess of jurisdiction when it restrained the PCGG, its nominated directors and/or corporate
officers, employees, nominees, agents and/or representatives at ETPI from calling and/or holding a
stockholders meeting and voting the sequestered shares thereat for the purpose of amending the articles
of incorporation or by-laws of ETPI, or otherwise effecting substantial changes in policy, programs or
practices of said corporation.

In brief, what was obviously raised and resolved by the Court was the scope and extent of the authority of
the Sandiganbayan to issue injunctive writs on matters involving the exercise and performance of the
powers and functions of the PCGG as conservator in accordance with the ruling in BASECO vs. PCGG, et
al. 27 to prevent the disposal and dissipation of the assets of sequestered companies or businesses.

Although the challenge against the temporary restraining order issued by the Securities and Exchange
Commission in SEC Case No. 3297 became moot and academic by virtue of the expiration of its 20-day
effectivity period, the Court nevertheless ruled that the issuance of the same was tainted with grave
abuse of discretion considering that the SEC Hearing Panel should have then realized that there existed
an element in the case which effectively removed it from the jurisdiction of the SEC, to wit, the presence
of the PCGG which, as another quasi-judicial body, is a co-equal entity over whose actions the SEC has no
power of control.
The Court, on the other hand, upheld the temporary restraining order issued by the Sandiganbayan
insofar as it restrained the stockholders meeting specifically called for the purpose of ratifying the
proposed amendment to delete from ETPI's articles of incorporation and by-laws the "right of first
refusal" clause. Recognizing that the exercise of the "right of first refusal" is an act of strict ownership, the
Court ruled that while there may be instances when only through an act of strict ownership can the PCGG
be able to prevent the dissipation of assets of a sequestered corporation or business, the situation then
presented was nevertheless not one of such instances.

Significantly, however, the Court found the general injunction imposed by the Sandiganbayan on the
PCGG to desist and refrain from calling a stockholders meeting for the purpose of electing a new board of
directors or effecting substantial changes in the policy, program or practice of the corporation to be too
broad as to thereby taint said order with grave abuse of discretion.

On PCGG's insistence on the rule of bar by prior judgment, it is readily apparent that one fundamental
requisite for the application of that doctrine of res judicata is absent in the instant case, that is, the prior
judgment or order must be a judgment on the merits of the case. For a prior judgment to constitute a bar
to a subsequent case, (1) it must be a final judgment or order, (2) the court rendering the same must have
jurisdiction over the subject matter and over the parties, (3) it must be a judgment or order on the merits,
and (4) there must be between the two cases identity of parties, subject matter, and causes of
action. 28

There is no dispute that, substantially, the acts or orders of the PCGG which led to the election of the
members of the board of directors and officers of ETPI, as well as all acts done thereafter by the said
board, are the incidents which gave rise to the causes of action involved in the injunction suit in SEC Case
No. 3297 and the motion for injunction in Civil Case No. 0009, both of which gave rise to G.R. No. 82188.

There is, accordingly, identity of the incidents upon which the causes of action in Civil Cases Nos. 0048
and 0050 are based and those of the two cases which gave rise to G.R. No. 82188.

However, there is nothing, in the pronouncements of the Court in G.R. No. 82188 which finally resolved
the merits of the factual issues raised therein by the opposing parties which included, among others, the
alleged illegal manner by which the meeting to elect the new board of directors was called and held on
January 29, 1988; the qualification, experience and probity of those elected to the board contrary to the
caveat in BASECO vs. PCGG, et al., supra, on the substitution of directors of the board of sequestered
corporations; and the alleged mismanagement of the operations of ETPI by those elected to the board and
the corporate offices by the PCGG.

A cursory reading of the decision would show that the Court merely ruled on the parameters of the
jurisdiction of the Sandiganbayan to issue injunctive writs in cases involving the PCGG and PCGG-related
matters. In fact, the Court stressed in G.R. No. 82188 that "the various motions filed by private
respondents in this case involving matters which would require us to look into the facts of the case are
better ventilated before the Sandiganbayan." Nothing final or definite was laid down by this Court in that
case with respect to the legality or illegality of the questioned acts or orders of the PCGG leading to the
election of its nominees/designees to the ETPI board of directors and corporate offices.

The denial, therefore, of the motion to dismiss in Civil Case No. 0050 was not sullied by grave abuse of
discretion. With this pronouncement, the denial of the motion to dismiss Civil Case No. 0048 would
likewise be proper and necessarily called for.
The issue raised in the original petition in G.R. No. 85594 relating to the validity of the issuance by the
Sandiganbayan of the subpoena duces tecum and ad testificandum ordering the PCGG or its representative
to testify and produce the stock and transfer book, all stubs of the outstanding stock certificates of ETPI
and the minutes of all meetings of the board of directors and stockholders of ETPI held from January 29,
1988 to date was laid to rest by our joint resolution in two cases, both entitled Republic
vs. Sandiganbayan and Eduardo Cojuangco, Jr., 29 which applies squarely in the instant petitions.

In upholding therein the right of a stockholder of a sequestered company to inspect and/or examine the
records of a corporation pursuant to Section 74 of the Corporation Code, the Court found nothing in
Executive Orders Nos. 1, 2 and 14, as well as in BASECO, to indicate an implied amendment of the
Corporation Code, much less an implied modification of a stockholder's right of inspection as guaranteed
by Section 74 thereof. The only express limitation on the right of inspection, according to the Court, is
that (1) the right of inspection should be exercised at reasonable hours on business days; (2) the person
demanding the right to examine and copy excerpts from the corporate records and minutes has not
improperly used any information secured through any previous examination of the records of such
corporation; and (3) the demand is made in good faith or for a legitimate purpose.

The issues raised in G.R. No. 83831, an original petition filed by Victor Africa with this Court, including
the motion for contempt filed by Eduardo M. Villanueva against Jose L. Africa, Manuel Nieto and Victor
Africa for having made unwarranted comments to the news media on matters involved in the pending
petitions, are factual in nature and are best ventilated before the Sandiganbayan — the proper forum
where both parties can substantiate their respective claims. This Court is not a trier of facts.

Considering that Civil Cases Nos. 0048 and 0050 arose from the partial sequestration of ETPI and the
incidents raised before this Court in G.R. Nos. 85594, 85597 and 85621 are related to said partial
sequestration of ETPI, all the factual matters alleged in these cases are best threshed out in the main case,
Civil Case No. 0009, as incidents therein, to save time and efforts in the presentation of evidence and in
order to avoid multiplicity of suits.

IN VIEW OF THE FOREGOING, the petitions in G.R. Nos. 85594, 85597 and 85621 are hereby DISMISSED
for lack of merit, and G.R. No. 83831 is REFERRED to the Sandiganbayan for appropriate proceedings. The
Sandiganbayan is hereby ordered to consolidate G.R. No. 83831 and Civil Cases Nos. 0048 and 0050 with
Civil Case No. 0009. The temporary restraining orders separately issued in G.R. No. 85594 and G.R. No.
85597 on November 15, 1988 are hereby LIFTED and SET ASIDE.

SO ORDERED.

Republic of the Philippines

SUPREME COURT
Manila

THIRD DIVISION

G.R. No. 178511 December 4, 2008

MA. BELEN FLORDELIZA C. ANG-ABAYA, FRANCIS JASON A. ANG, HANNAH ZORAYDA A. ANG, and
VICENTE G. GENATO, petitioners,
vs.
EDUARDO G. ANG, respondent.

DECISION

YNARES-SANTIAGO, J.:

This Petition for Review on Certiorari1 under Rule 45 of the Rules of Court assails the March 6, 2007
Decision2 of the Court of Appeals in CA-G.R. SP No. 94708, which nullified and set aside the July 26, 2005
and March 29, 2006 Resolutions3 of the Secretary of Justice in I.S. No. MAL-2004-1167 directing the
withdrawal of the information filed against petitioners for violation of Section 74 of the Corporation
Code. Also assailed is the June 19, 2007 Resolution4 denying the Motion for Reconsideration.

Vibelle Manufacturing Corporation (VMC) and Genato Investments, Inc. (Genato) (collectively referred to
as "the corporations") are family-owned corporations, where petitioners Ma. Belen Flordeliza C. Ang-
Abaya (Flordeliza), Francis Jason A. Ang (Jason), Vincent G. Genato (Vincent), Hanna Zorayda A. Ang
(Hanna) and private respondent Eduardo G. Ang (Eduardo) are shareholders, officers and members of
the board of directors.

Prior to the instant controversy, VMC, Genato, and Oriana Manufacturing Corporation (Oriana) filed Civil
Case No. 4257-MC, which is a case for damages with prayer for issuance of a temporary restraining order
(TRO) and/or writ of preliminary injunction against herein respondent Eduardo, together with Michael
Edward Chi Ang (Michael), and some other persons for allegedly conniving to fraudulently wrest
control/management of the corporations.5 Eduardo allegedly borrowed substantial amounts of money
from the said corporations without any intention to repay; that he repeatedly demanded for increases in
his monthly allowance and for more cash advances contrary to existing corporate policies; that he
harassed petitioner Flordeliza to transfer and/or sell certain corporate and personal properties in order
to pay off his personal obligations; that he attempted to forcibly evict petitioner Jason from his office and
claim it as his own; that he interfered with and disrupted the daily business operations of the
corporations; that Michael was placed on preventive suspension due to prolonged absence without leave
and commission of acts of disloyalty such as carrying out orders of Eduardo which were detrimental to
their business, using privileged information and confidential documents/data obtained in his capacity as
Vice President of the corporations, and admitting to have sabotaged their distribution system and
operations.

During the pendency of Civil Case No. 4257-MC, particularly in July, 2004, Eduardo sought permission to
inspect the corporate books of VMC and Genato on account of petitioners’ alleged failure and/or refusal
to update him on the financial and business activities of these family corporations.6 Petitioners denied
the request claiming that Eduardo would use the information obtained from said inspection for purposes
inimical to the corporations’ interests, considering that: "a) he is harassing and/or bullying the
Corporation[s] into writing off P165,071,586.55 worth of personal advances which he had unlawfully
obtained in the past; b) he is unjustly demanding that he be given the office currently occupied by Mr.
Francis Jason Ang, the Vice-President for Finance and Corporate Secretary; c) he is usurping the rights
belonging exclusively to the Corporation; and d) he is coercing and/or trying to inveigle the Directors
and/or Officers of the Corporation to give in to his baseless demands involving specific corporate
assets."7
Because of petitioners’ refusal to grant his request to inspect the corporate books of VMC and Genato,
Eduardo filed an Affidavit-Complaint8 against petitioners Flordeliza and Jason, charging them with
violation (two counts) of Section 74, in relation to Section 144, of the Corporation Code of the
Philippines.9 Ma. Belinda G. Sandejas (Belinda), Vincent, and Hanna were subsequently impleaded for
likewise denying respondent’s request to inspect the corporate books.

Petitioners filed a Joint Counter-Affidavit praying for the dismissal of the complaint for lack of factual and
legal basis, or for the suspension of the same while Civil Case No. 4257-MC is still pending
resolution.10 They denied violating Section 74 of the Corporation Code and reiterated the allegations
contained in their complaint in Civil Case No. 4257-MC. Petitioners blamed Eduardo’s lavish lifestyle,
which is funded by personal loans and cash advances from the family corporations. They alleged that
Eduardo consistently pressured petitioner Flordeliza, his daughter, to improperly transfer ownership of
the corporations’ V.A.G. Building to him;11 to disregard the company policy prohibiting advances by
shareholders; to unduly increase his corporate monthly allowance; and to sell her Wack-Wack Golf
proprietary share and use the proceeds thereof to pay his personal financial obligations. When the
proposed transfer of the V.A.G. Building did not materialize, petitioners claim that Eduardo instituted an
action to compel the donation of said property to him.12 Furthermore, they claim that Eduardo attempted
to forcibly evict petitioner Jason from his office at VMC so he can occupy the same; that Eduardo and his
cohorts constantly created trouble by intervening in the daily operations of the corporations without the
knowledge or consent of the board of directors.

Meanwhile, in Civil Case No. 4257-MC, the trial court rendered a Decision granting the permanent
injunction applied for by the corporations.13 However, the Court of Appeals subsequently rendered a
Decision14 declaring that Eduardo, his son Michael, and the other persons impleaded in Civil Case No.
4257-MC, were imprudently declared in default by the trial court. The appellate court thus annulled the
permanent injunction issued by the trial court and remanded the case for further proceedings. VMC,
Genato, and Oriana corporations filed a Petition for Review on Certiorari before this Court, but the same
was denied for failure to sufficiently show any reversible error in the Decision of the Court of
Appeals.15 The three corporations filed a Motion for Reconsideration, but the same was denied with
finality on June 25, 2008.

Meanwhile, on February 3, 2005, the City Prosecutor’s Office of Malabon City issued a
Resolution16 recommending that petitioners be charged with two counts of violation of Section 74 of the
Corporation Code, but dismissed the complaint against Belinda for lack of evidence.17 Petitioners filed a
Petition for Review18 before the Department of Justice (DOJ), which reversed the recommendation of the
City Prosecutor of Malabon City.19 The dispositive portion of the DOJ Resolution dated July 26, 2005,
reads:

Wherefore, premises considered, the assailed resolution is REVERSED and SET ASIDE. The City
Prosecutor of Malabon City is hereby directed to cause the withdrawal of the corresponding
information filed against respondents [herein petitioners] for violation of Section 74 of the
Corporation Code of the Philippines and to report the action taken thereon within ten (10) days
from the receipt hereof.

SO ORDERED.20

The DOJ denied Eduardo’s Motion for Reconsideration21 in a Resolution22 dated March 29, 2006. On
appeal, the Court of Appeals rendered the assailed Decision, the dispositive portion of which states:
 WHEREFORE, the instant petition is partially GRANTED. The assailed Resolutions of public
respondent dated July 26, 2005 and March 29, 2006 are hereby NULLIFIED and SET ASIDE.
However, due to the present existence of a prejudicial question, the criminal case docketed I.S. No.
MAL-2004-1167 is hereby SUSPENDED until Civil Case No. 4257-MC is decided on the merits with
finality. 23

The appellate court ruled that the Secretary of Justice committed grave abuse of discretion amounting to
lack or excess of jurisdiction in reversing the Resolutions of the Malabon City Prosecutor and in finding
that Eduardo did not act in good faith when he demanded for the examination of VMC and Genato’s
corporate books. It further held that Eduardo can demand said examination as a stockholder of both
corporations; that Eduardo raised legitimate questions that necessitated inspection of the corporate
books and records; and that petitioners’ refusal to allow inspection created probable cause to believe that
they have committed a violation of Section 74 of the Corporation Code.

On June 19, 2007, the Court of Appeals denied the Motions for Reconsideration filed by petitioners and
the Secretary of Justice.24 Hence, this petition raising the following issues:

WHETHER OR NOT THE HONORABLE COURT OF APPEALS WAS CORRECT IN ITS FINDING THAT
THE HONORABLE JUSTICE SECRETARY’S REVERSAL OF THE MALABON CITY
PROSECUTOR’S RESOLUTION FINDING PROBABLE CAUSE AGAINST HEREIN PETITIONERS WAS
DONE CONTRARY TO THE APPLICABLE LAW AND JURISPRUDENCE TANTAMOUNT TO GRAVE
ABUSE OF DISCRETION.

WHETHER OR NOT THE HONORABLE JUSTICE SECRETARY COMMITTED GRAVE ABUSE OF

DISCRETION AMOUNTING TO LACK OR EXCESS OF JURISDICTION IN REVERSING THE
RESOLUTION OF THE MALABON CITY PROSECUTOR FINDING PROBABLE CAUSE AGAINST
PETITIONERS AFTER PRELIMINARY INVESTIGATION FOR VIOLATION OF SECTION 74 OF THE
CORPORATION CODE OF THE PHILIPPINES.

WHETHER OR NOT THE HONORABLE JUSTICE SECRETARY COMMITTED GRAVE ABUSE OF

DISCRETION AMOUNTING TO LACK OR EXCESS OF JURISDICTION IN FINDING THAT
PETITIONERS ACTED IN GOOD FAITH WHEN THEY DENIED PRIVATE RESPONDENT’S DEMAND
FOR INSPECTION OF CORPORATE BOOKS.25

We grant the petition.

Probable cause, for purposes of filing a criminal information, has been defined as such facts as are
sufficient to engender a well-founded belief that a crime has been committed and that respondent is
probably guilty thereof. It is such a state of facts in the mind of the prosecutor as would lead a person of
ordinary caution and prudence to believe or entertain an honest or strong suspicion that a thing is so.
The term does not mean "actual or positive cause;" nor does it import absolute certainty. It is merely
based on opinion and reasonable belief. Thus, a finding of probable cause does not require an inquiry into
whether there is sufficient evidence to procure a conviction. It is enough that it is believed that the act or
omission complained of constitutes the offense charged. Precisely, there is a trial for the reception of
prosecution’s evidence in support of the charge."26

The determination of the existence of probable cause lies within the discretion of the prosecuting officers
after conducting a preliminary investigation upon complaint of an offended party. Their decisions are
reviewable by the Secretary of Justice who may direct the filing of the corresponding information or to
move for the dismissal of the case.27

In reversing the Resolutions of the Secretary of Justice directing the withdrawal of the information filed
against petitioners for lack of probable cause, the Court of Appeals held that it was beyond the Secretary
of Justice’s authority to determine the motives of Eduardo in seeking an inspection of the corporations’
books and papers.

In order that probable cause to file a criminal case may be arrived at, or in order to engender the well-
founded belief that a crime has been committed, the elements of the crime charged should be
present.28 This is based on the principle that every crime is defined by its elements, without which there
should be – at the most – no criminal offense.

In Gokongwei, Jr. v. Securities and Exchange Commission,29 this Court explained the rationale behind a
stockholder's right to inspect corporate books, to wit:

The stockholder's right of inspection of the corporation's books and records is based upon their
ownership of the assets and property of the corporation. It is, therefore, an incident of ownership
of the corporate property, whether this ownership or interest be termed an equitable ownership,
a beneficial ownership, or a quasi-ownership. This right is predicated upon the necessity of self-
protection. It is generally held by majority of the courts that where the right is granted by statute
to the stockholder, it is given to him as such and must be exercised by him with respect to his
interest as a stockholder and for some purpose germane thereto or in the interest of the
corporation. In other words, the inspection has to be germane to the petitioner's interest as
a stockholder, and has to be proper and lawful in character and not inimical to the interest
of the corporation.30

In Republic v. Sandiganbayan,31 the Court declared that the right to inspect and/or examine the records of
a corporation under Section 74 of the Corporation Code is circumscribed by the express limitation
contained in the succeeding proviso, which states that:

[I]t shall be a defense to any action under this section that the person demanding to examine and
copy excerpts from the corporation's records and minutes has improperly used any
information securedthrough any prior examination of the records or minutes of such
corporation or of any other corporation, orwas not acting in good faith or for a legitimate
purpose in making his demand. (Emphasis supplied)

Thus, contrary to Eduardo’s insistence, the stockholder’s right to inspect corporate books is not without
limitations. While the right of inspection was enlarged under the Corporation Code as opposed to the old
Corporation Law (Act No. 1459, as amended),

It is now expressly required as a condition for such examination that the one requesting it must
not have been guilty of using improperly any information secured through a prior examination, or
that the person asking for such examination must be acting in good faith and for a legitimate
purpose in making his demand.32(Emphasis supplied)
In order therefore for the penal provision under Section 144 of the Corporation Code to apply in a case of
violation of a stockholder or member’s right to inspect the corporate books/records as provided for
under Section 74 of the Corporation Code, the following elements must be present:

First. A director, trustee, stockholder or member has made a prior demand in writing for a copy of
excerpts from the corporation’s records or minutes;

Second. Any officer or agent of the concerned corporation shall refuse to allow the said director, trustee,
stockholder or member of the corporation to examine and copy said excerpts;

Third. If such refusal is made pursuant to a resolution or order of the board of directors or trustees, the
liability under this section for such action shall be imposed upon the directors or trustees who voted for
such refusal; and,

Fourth. Where the officer or agent of the corporation sets up the defense that the person demanding to
examine and copy excerpts from the corporation’s records and minutes has improperly used any
information secured through any prior examination of the records or minutes of such corporation or of
any other corporation, or was not acting in good faith or for a legitimate purpose in making his demand,
the contrary must be shown or proved.

Thus, in a criminal complaint for violation of Section 74 of the Corporation Code, the defense of improper
use or motive is in the nature of a justifying circumstance that would exonerate those who raise and are
able to prove the same. Accordingly, where the corporation denies inspection on the ground of improper
motive or purpose, the burden of proof is taken from the shareholder and placed on the
corporation.33 This being the case, it would be improper for the prosecutor, during preliminary
investigation, to refuse or fail to address the defense of improper use or motive, given its express
statutory recognition. In the past we have declared that if justifying circumstances are claimed as a
defense, they should have at least been raised during preliminary investigation;34 which settles the view
that the consideration and determination of justifying circumstances as a defense is a relevant subject of
preliminary investigation.

A preliminary investigation is in effect a realistic judicial appraisal of the merits of the case; sufficient
proof of the guilt of the criminal respondent must be adduced so that when the case is tried, the trial
court may not be bound, as a matter of law, to order an acquittal.35 Although a preliminary investigation
is not a trial and is not intended to usurp the function of the trial court, it is not a casual affair; the officer
conducting the same investigates or inquires into the facts concerning the commission of the crime with
the end in view of determining whether or not an information may be prepared against the
accused.36 After all, the purpose of preliminary investigation is not only to determine whether there is
sufficient ground to engender a well-founded belief that a crime has been committed and the respondent
therein is probably guilty thereof and should be held for trial; it is just as well for the purpose of securing
the innocent against hasty, malicious and oppressive prosecution, and to protect him from an open and
public accusation of a crime, from the trouble, expense and anxiety of a public trial.37 More importantly,
in the appraisal of the case presented to him for resolution, the duty of a prosecutor is more to do justice
and less to prosecute.38

If the prosecutor is convinced during preliminary investigation of the validity of the respondent’s claim of
a justifying circumstance, then he must dismiss the complaint; if not, then he must file the requisite
information. This is his discretion, the exercise of which we grant sufficient latitude. 39
In the instant case, the Court finds that the Court of Appeals erred in declaring that the Secretary of
Justice exceeded his authority when he conducted an inquiry on the petitioners’ defense of improper use
and motive on Eduardo’s part. As a necessary element in the offense of refusal to honor a
stockholder/member’s right to inspect the corporate books/records, it was incumbent upon the
Secretary of Justice to determine that all the elements which constitute said offense are present, in line
with our ruling in Duterte v. Sandiganbayan.

A preliminary investigation is the crucial sieve in the criminal justice system which spells for an
individual the difference between months if not years of agonizing trial and possibly jail term, on the one
hand, and peace of mind and liberty, on the other. Thus, we have characterized the right to a preliminary
investigation as not a mere formal or technical right but a substantive one, forming part of due process in
criminal justice.40 Due process, in the instant case, requires that an inquiry into the motive behind
Eduardo’s attempt at inspection should have been made even during the preliminary investigation stage,
just as soon as petitioners set up the defense of improper use and motive.

Petitioners argue that Eduardo’s demand for an inspection of the corporations’ books is based on the
latter’s attempt in bad faith at having his more than P165 million advances from the corporations written
off; that Eduardo is unjustly demanding that he be given the office of Jason, or the Vice Presidency for
Finance and Corporate Secretary; that Eduardo is usurping rights belonging exclusively to the
corporations; and Eduardo’s attempts at coercing the corporations, their directors and officers into giving
in to his baseless demands involving specific corporate assets. Specifically, petitioners accuse Eduardo of
the following:

1. He is a spendthrift, using the family corporations’ resources to sustain his extravagant lifestyle.
During his incumbency as officer of VMC and Genato (from 1984 to 2000), he was able to obtain
massive amounts by way of cash advances from these corporations, amounting to more than P165
million;

2. He is exercising undue pressure upon petitioners in order to acquire ownership, through the
forced execution of a deed of donation, over the VAG Building in San Juan, which building belongs
to Genato;

3. He is putting pressure on the corporations, through their directors and officers, for the latter to
disregard their respective policies which prohibit the grant of cash advances to stockholders.

4. At one time, he coerced Flordeliza for the latter to sell her Wack-Wack Golf Proprietary Share;

5. In May 2003, without the requisite authority, he called a "stockholders’ meeting" to demand an
increase in his P140,000.00 monthly allowance from the corporation to P250,000.00; demand a
cash advance of US$10,000; and to demand that the corporations shoulder the medical and
educational expenses of his family as well as those of the other stockholders;

6. In November 2003, he demanded that he be given an office within the corporations’ premises.
In December 2003, he stormed the corporations’ common office, ordered the employees to vacate
the premises, summoned the directors to a meeting, and there he berated them for not acting on
his requests. In January 2004, he returned to the office, demanding the transfer of the Accounting
Department and for Jason to vacate his office by the end of the month. He likewise left a letter
which contained his demands. At the end of January 2004, he returned, ordered the employees to
 leave the premises and demanded that Jason surrender his office and vacate his desk. He did this
no less than four (4) times. As a result, the respective boards of directors of the corporations
resolved to ban him from the corporate premises;

7. He has been interfering in the everyday operations of VMC and Genato, usurping the duties,
rights and authority of the directors and officers thereof. He attempted to lease out a warehouse
within the VMC premises without the knowledge and consent of its directors and officers; during
the wake of the former President of VMC and Genato, he issued instructions for the employees to
close down operations for the whole duration of the wake, against the corporate officers’
instructions to attend the wake by batch, so as not to hamper business operations; he has caused
chaos and confusion in VMC and Genato as a result;41

8. He is out to sabotage the family corporations.42

These serious allegations are supported by official and other documents, such as board resolutions,
treasurer’s affidavits and written communication from the respondent Eduardo himself, who appears to
have withheld his objections to these charges. His silence virtually amounts to an acquiescence.43 Taken
together, all these serve to justify petitioners’ allegation that Eduardo was not acting in good faith and for
a legitimate purpose in making his demand for inspection of the corporate books. Otherwise stated, there
is lack of probable cause to support the allegation that petitioners violated Section 74 of the Corporation
Code in refusing respondent’s request for examination of the corporation books.

WHEREFORE, the Petition for Review on Certiorari is GRANTED. The March 6, 2007 Decision and June
19, 2007 Resolution of the Court of Appeals in CA-G.R. SP No. 94708 are REVERSED and SET ASIDE. The
July 26, 2005 and March 29, 2006 Resolutions of the Secretary of Justice directing the withdrawal of the
information filed against petitioners for violation of Section 74 of the Corporation Code are
accordingly REINSTATED and AFFIRMED.

SO ORDERED.

FIRST DIVISION

G.R. No. 160924, August 05, 2015

TERELAY INVESTMENT AND DEVELOPMENT CORPORATION, Petitioner, v. CECILIA TERESITA J.

YULO, Respondent.

DECISION

BERSAMIN, J.:

In its desire to block the inspection of its corporate books by a stockholder holding a very insignificant
shareholding, the petitioner now seeks to set aside the judgment promulgated on September 12,
2003,1whereby the Court of Appeals (CA) affirmed the decision rendered on March 22, 2002 by the
Regional Trial Court, Branch 142, in Makati City (RTC) allowing the inspection, and ordering it to pay
attorney's fees of P50,000.00 to the stockholder.2cralawrednad
With the CA having denied the petitioner's motion for reconsideration and motion for oral argument
through the resolution promulgated on November 28, 2003,3 such denial is also the subject of this appeal.

Antecedents

The CA recited the following antecedents:cralawlawlibrary

Asserting her right as a stockholder, Cecilia Teresita Yulo wrote a letter, dated September 14, 1999,
addressed to Terelay Investment and Development Corporation (TERELAY) requesting that she be
allowed to examine its books and records on September 17, 1999 at 1:30 o'clock in the afternoon at the
latter's office on the 25th floor, Citibank Tower, Makati City. In its reply-letter, dated September 15, 1999,
TERELAY denied the request for inspection and instead demanded that she show proof that she was a
bona fide stockholder.

On September 16, 1999, Cecilia Yulo again sent another letter clarifying that her request for examination
of the corporate records was for the purpose of inquiring into the financial condition of TERELAY and the
conduct of its affairs by the principal officers. The following day, Cecilia Yulo received a faxed letter from
TERELAY's counsel advising her not to continue with the inspection in order to avoid trouble.

On October 11, 1999, Cecilia Yulo filed with the Securities and Exchange Commission (SEC), a Petition for
Issuance of a Writ of Mandamus with prayer for Damages against TERELAY, docketed as SEC Case No. 10-
99-6433. In her petition, she prayed that judgment be rendered ordering TERELAY to allow her to inspect
its corporate records, books of account and other financial records; to pay her actual damages
representing attorney's fees and litigation expenses of not less than One Hundred Thousand Pesos
(P100,000.00); to pay her exemplary damages; and to pay the costs of the suit On May 16, 2000, in the
preliminary conference held before the SEC Hearing Officer, the parties agreed on the
following:cralawlawlibrary
1. Petitioner Cecilia Teresita Yulo is registered as a stockholder in the corporation's stock and transfer
book subject to the qualification in the Answer, and

2. Petitioner had informed the respondent, through demand letter, of her desire to inspect the records of
the corporation, but the same was denied by the respondent.
Thereafter, the parties stipulated that the ISSUES to be resolved are the following:cralawlawlibrary
1. Whether or not petitioner has the right to inspect and examine TERELAY's corporate records, books of
account and other financial records pursuant to Section 74 of the Corporation Code of the Philippines;

2. Whether or not petitioner as stockholder and director of TERELAY has been unduly deprived of her
right to inspect and examine TERELAY's corporate records, books of accounts and other financial records
in clear contravention of law, which warrants her claim for damages;

3. Whether or not Atty. Reynaldo G. Geronimo and/or the principal officers, Ma. Antonia Yulo Loyzaga
and Teresa J. Yulo of respondent corporation are indispensable parties and hence, should be impleaded
as respondents;

4. As a prejudicial question, whether or not petitioner is a stockholder of respondent corporation and

such being the issue, whether this issue should be threshed out in the probate of the will of the late Luis
A. Yulo and settlement of estate now pending with the Regional Trial Court of Manila;

5. Assuming petitioner is a stockholder, whether or not petitioner's mere desire to inquire into the
financial condition of respondent corporation and conduct of the affairs of the corporation is a just and
sufficient ground for inspection of the corporate records.4
Following the enactment of Republic Act No. 8799 (The Securities Regulation Code), the case was
transferred from the Securities and Exchange Commission to the RTC.

On March 22, 2002, the RTC rendered its judgment,5 ruling thusly:cralawlawlibrary
Accordingly, petitioner's application for inspection of corporate records is granted pursuant to Rule 7 of
the Interim Rules in relation to Section 74 and 75 of the Corporation Code. Defendant, through its officers,
is ordered to allow inspection of corporate books and records at reasonable hours on business days
and/or furnish petitioner copies thereof all at her expense. In this connection, plaintiff is ordered to
deposit to the Court the amount of P1,000.00 to cover the estimated cost of the manpower necessary to
produce the books and records and the cost of copying.

Respondent is further ordered to pay petitioner attorney's fees in the amount of P50,000.00

SO ORDERED.6
On September 12, 2003, the CA affirmed the RTC.7cralawrednad

The petitioner sought reconsideration, and moved for the holding of oral arguments thereon, but the CA
denied the motion on November 28, 2003.8cralawrednad

Issues

In this appeal, the petitioner insists that the CA committed serious error: (a) in holding that the
respondent was a stockholder entitled to inspect its books and records, and allowing her to inspect its
corporate records despite her shareholding being a measly .001% interest; (b) in declaring that the RTC
had the jurisdiction to determine whether or not she was a stockholder; (c) in ruling that it did not
adduce sufficient proof showing that she was in bad faith or had an ulterior motive in demanding
inspection of the records; (d) in finding that her purpose for the inspection, which was to inquire into its
financial condition and into the conduct of its affairs by its principal officers, was a valid ground to
examine the corporate records; (e) in holding that her petition for mandamus was not premature; (f) in
not resolving whether or not its principal officers should be impleaded as indispensable parties; and (g)
in not setting aside the award of attorney's fees in the amount of P50,000.00.9cralawrednad

In her comment,10 the respondent counters that the law does not require substantial shareholding before
she can exercise her right of inspection as a stockholder; that the issue of the nullity of the donation in
her favor of the shareholding was irrelevant because it was the subscription to the shares that granted
the statutory and common rights to stockholders; that the RTC, sitting as a corporate court, was the
proper court to declare that she was a stockholder; that she has just and sufficient grounds to inspect its
corporate records; that its officers are not indispensable parties; that her petition for mandamus was not
premature; and that the CA correctly upheld the RTC's order to pay attorney's fees to her.

Ruling of the Court

We deny the petition for review on certiorari.

To start with, it is fundamental that a petition for review on certiorari should raise only questions of
law.11 In that regard, the findings of fact of the trial court, as affirmed by the appellate court, are final and
conclusive, and cannot be reviewed on appeal by the Court as long as such findings are supported by the
records, or are based on substantial evidence. In other words, it is not the function of the Court to analyze
or weigh all over again the evidence or the factual premises supportive of the lower courts'
determinations.

Even when the Court has to review the factual premises, it has consistently held that the findings of the
appellate and the trial courts are accorded great weight, if not binding effect, unless the most compelling
and cogent reasons exist to revisit such findings.12 Among the compelling and cogent reasons are the
following,13 namely: (a) when the findings are grounded entirely on speculation, surmises, or conjectures;
(b) when the inference made is manifestly mistaken, absurd, or impossible; (c) when there is grave abuse
of discretion; (d) when the judgment is based on a misapprehension of facts; (e) when the findings of
facts are conflicting; (f) when the CA, in making its findings, went beyond the issues of the case, or its
findings are contrary to the admissions of both the appellant and the appellee; (g) when the CA's findings
are contrary to those by the trial court; (h) when the findings are conclusions without citation of specific
evidence on which they are based; (i) when the facts set forth in the petition as well as in the petitioner's
main and reply briefs are not disputed by the respondent; (j) when the findings of fact are premised on
the supposed absence of evidence and contradicted by the evidence on record; or (k) when the CA
manifestly overlooked certain relevant facts not disputed by the parties, which, if properly considered,
would justify a different conclusion.

However, the Court has determined from its review in this appeal that the CA correctly disposed of the
legal and factual matters and issues presented by the parties. This appeal is not, therefore, under any of
the aforecited exceptions.

The Court now adopts with approval the cogent observations of the CA on the matters and issues raised
by the petitioner, as follows:cralawlawlibrary
Regarding the issue of jurisdiction, TERELAY avers that it is not within the jurisdiction of the trial court to
determine whether or not petitioner-appellee is its stockholder. It contends that a petition for the
probate of the will of Cecilia's father, the late Luis A. Yulo, and the settlement of his estate was filed with
the Regional Trial Court of Manila. The inventory of the estate includes the five (5) shares which Cecilia is
claiming. Being a court of limited jurisdiction, the court a quo could not decide whether or not Luis A.
Yulo donated five (5) shares to Cecilia during his lifetime. The position of TERELAY is untenable. As
correctly pointed out by Cecilia Yulo, the main issue in this case is the question of whether or not she is a
stockholder and therefore, has the right to inspect the corporate books and records. We agree with the
ruling of the trial court that the determination of this issue is within the competence of the Regional Trial
Court, acting as a special court for intra-corporate controversies, and not in the proceeding for the
settlement of the estate of the late Luis Yulo.

On the matter of exhaustion of administrative remedies, TERELAY asserts that the petition for mandamus
filed by Cecilia Yulo was premature because she failed to exhaust all available remedies before filing the
instant petition. The Court disagrees. A writ of mandamus is a remedy provided by law where despite the
stockholder's request for record inspection, the corporation still refuses to allow the stockholder the
right to inspect. In the instant case, Cecilia Yulo, through counsel, sent a letter request, dated September
14, 1999, for inspection of corporate records, books of accounts and other financial records, but the same
was denied by TERELAY through counsel, in its reply-letter, dated September 15, 1999. Appellee Yulo
sent another letter, dated September 16, 1999, reiterating the same request but the same was again
denied by TERELAY in a reply-letter dated September 17, 1999. Clearly then, appellee Yulo's right is not
pre-mature and may be enforced by a writ of mandamus.
On the contention that there was no stipulation that Cecilia Yulo was registered as a stockholder,
TERELAY asserts that the trial court was misled into believing that there was a stipulation or admission
that Cecilia Yulo is a registered stockholder in its stock and transfer book. According to TERELAY, the
admission or stipulation was that she was registered in the Articles of Incorporation is separate and
distinct from being so in the stock and transfer book. TERELAY's argument cannot be sustained. A careful
review of the records would show that in the Preliminary Conference Order, dated May 16, 2000, of the
SEC Hearing Officer, both parties represented by their respective counsels, agreed on the fact that
petitioner-appellee was "registered as a stockholder in respondent-appellant's stock and transfer book
subject to the qualifications in the Answer." The records failed to disclose any objection by TERELAY.
Neither did TERELAY raise this matter in the SEC hearing held on August 7, 2000 as one of the issues to
be determined and resolved.

TERELAY further points out that her name as incorporator, stockholder and director in the Articles of
Incorporation and Amendments were unsigned; that she did not pay for the five (5) shares appearing in
the Amended Articles of Incorporation and General Information Sheet of TERELAY; that she did not
subscribe to the shares; that she has neither been in possession of nor seen the certificate of stock
covering the five (5) shares of stock; that the donation of the five (5) shares claimed by her was null and
void for failure to comply with the requisites of a donation under Art. 748 of the Civil Code; and that there
was no acceptance of the donation by her as donee. TERELAY further contends that Cecilia Yulo's
purpose in inspecting the books was to inquire into its financial condition and the conduct of its affairs by
the principal officers which are not sufficient and valid reasons. Therefore, the presumption of good faith
cannot be accorded her.

TERELAY's position has no merit. The records disclose that the corporate documents submitted, which
include the Articles of Incorporation and the Amended Articles of Incorporation, as well as the General
Information Sheets and the Quarterly Reports all bear the signatures of the proper parties and their
authorized custodians. The signature of appellee under the name Cecilia J. Yulo appears in the Articles of
Incorporation of TERELAY. Likewise, her signatures under the name Cecilia Y. Blancaflor appear in the
Amended Articles of Incorporation where she signed as Director and Corporate Secretary of TERELAY.
The General Information Sheets from December 31, 1977 up to February 20, 2002 all exhibited that she
was recognized as director and corporate secretary, and that she had subscribed to five (5) shares of
stock. The quarterly reports do not show otherwise.

Verily, petitioner-appellee has presented enough evidence that she is a stockholder of TERELAY. The
corporate documents presented support her claim that she is a registered stockholder in TERELAY's
stock and transfer book thus giving her the right, under Section 74 par. 2 and Section 75 of the Philippine
Corporation Law, to inspect TERELAY's books, records, and financial statements. Section 74, par. 2 and
Section 75 of our Corporation Code reads as follows: x x x

Accordingly, Cecilia Yulo as the right to be fully informed of TERELAY's corporate condition and the
manner its affairs are being managed. It is well-settled that the ownership of shares of stock gives
stockholders the right under the law to be protected from possible mismanagement by its officers. This
right is predicated upon selfpreservation. In any case, TERELAY did not adduce sufficient proof that
Cecilia Yulo was in bad faith or had an ulterior motive in demanding her right under the law.

In view of the foregoing, the Court finds it unnecessary to discuss the other issues raised by TERELAY as
they are incapable of defeating the established fact that Cecilia Yulo is a registered stockholder of
respondent-applicant.

Finally, the Court agrees with the ruling of the court a quo that the petitioner is entitled to the reasonable
amount of P50,000.00 representing attorney's fees for having been compelled to litigate in order to
exercise her right of inspection.14
Secondly, the petitioner's submission that the respondent's "insignificant holding" of only .001% of the
petitioner's stockholding did not justify the granting of her application for inspection of the corporate
books and records is unwarranted.

The Corporation Code has granted to all stockholders the right to inspect the corporate books and
records, and in so doing has not required any specific amount of interest for the exercise of the right to
inspect.15 Ubi lex non distinguit nee nos distinguere debemos. When the law has made no distinction, we
ought not to recognize any distinction.

Neither could the petitioner arbitrarily deny the respondent's right to inspect the corporate books and
records on the basis that her inspection would be used for a doubtful or dubious reason. Under Section
74, third paragraph, of the Corporation Code, the only time when the demand to examine and copy the
corporation's records and minutes could be refused is when the corporation puts up as a defense to any
action that "the person demanding" had "improperly used any information secured through any prior
examination of the records or minutes of such corporation or of any other corporation, or was not acting in
good faith or for a legitimate purpose in making his demand."

The right of the shareholder to inspect the books and records of the petitioner should not be made
subject to the condition of a showing of any particular dispute or of proving any mismanagement or other
occasion rendering an examination proper, but if the right is to be denied, the burden of proof is upon the
corporation to show that the purpose of the shareholder is improper, by way of defense. According to a
recognized commentator:16
By early English decisions it was formerly held that there must be something more than bare suspicion of
mismanagement or fraud. There must be some particular controversy or question in which the party
applying was interested, and inspection would be granted only so far as necessary for that particular
occasion. By the general rule in the United States, however, shareholders have a right to inspect the books
and papers of the corporation without first showing any particular dispute or proving any
mismanagement or other occasion rendering an examination proper. The privilege, however, is not
absolute and the corporation may show in defense that the applicant is acting from wrongful motives.

In Guthrie v. Harkness, there was involved the right of a shareholder in a national bank to inspect its
books for the purpose of ascertaining whether the business affairs of the bank had been conducted
according to law, and whether, as suspected, the bank was guilty of irregularities. The court said: "The
decisive weight of American authority recognizes the right of the shareholder, for proper purposes and
under reasonable regulations as to place and time, to inspect the books of the corporation of which he is a
member . . . In issuing the writ of mandamus the court will exercise a sound discretion and grant the right
under proper safeguards to protect the interest of all concerned. The writ should not be granted for
speculative purposes or to gratify idle curiosity or to aid a blackmailer, but it may not be denied to the
stockholder who seeks the information for legitimate purposes."

Among the purposes held to justify a demand for inspection are the following: (1) To ascertain the
financial condition of the company or the propriety of dividends; (2) the value of the shares of stock for
sale or investment; (3) whether there has been mismanagement; (4) in anticipation of shareholders'
meetings to obtain a mailing list of shareholders to solicit proxies or influence voting; (5) to obtain
information in aid of litigation with the corporation or its officers as to corporate transactions. Among the
improper purposes which may justify denial of the right of inspection are: (1) Obtaining of information as
to business secrets or to aid a competitor; (2) to secure business "prospects" or investment or advertising
lists; (3) to find technical defects in corporate transactions in order to bring "strike suits" for purposes of
blackmail or extortion.

In general, however, officers and directors have no legal authority to close the office doors against
shareholders for whom they are only agents, and withhold from them the right to inspect the books
which furnishes the most effective method of gaining information which the law has provided, on mere
doubt or suspicion as to the motives of the shareholder. While there is some conflict of authority, when
an inspection by a shareholder is contested, the burden is usually held to be upon the corporation to
establish a probability that the applicant is attempting to gain inspection for a purpose not connected
with his interests as a shareholder, or that his purpose is otherwise improper. The burden is not upon the
petitioner to show the propriety of his examination or that the refusal by the officers or directors was
wrongful, except under statutory provisions.
WHEREFORE, the Court AFFIRMS the judgment promulgated on September 12, 2003; and ORDERSthe
petitioner to pay the costs of suit.

SO ORDERED.chanrobles virtuallawlibrary

Republic of the Philippines

SUPREME COURT
Manila

FIRST DIVISION

G.R. No. 123553 July 13, 1998

(CA-G.R. No. 33291) July 13, 1998

NORA A. BITONG, petitioner,

vs.

COURT OF APPEALS (FIFTH DIVISION), EUGENIA D. APOSTOL, JOSE A. APOSTOL, MR. & MS.
PUBLISHING CO., LETTY J. MAGSANOC, AND ADORACION G. NUYDA, respondents.

(CA-G.R. No. 33873) July 13, 1998

NORA A. BITONG, petitioner,

vs.

COURT OF APPEALS (FIFTH DIVISION) and EDGARDO B. ESPIRITU, respondents.

BELLOSILLO, J.:

These twin cases originated from a derivative suit 1 filed by petitioner Nora A. Bitong before
the Securities and Exchange Commission (SEC hereafter) allegedly for the benefit of private
respondent Mr. & Ms. Publishing Co., Inc. (Mr. & Ms. hereafter), among others, to hold respondent
spouses Eugenia D. Apostol and Jose A. Apostol 2 liable for fraud, misrepresentation, disloyalty,
evident bad faith, conflict of interest and mismanagement in directing the affairs of Mr. & Ms. to
the damage and prejudice of Mr. & Ms. and its stockholders, including petitioner.

Alleging before the SEC that she had been the Treasurer and a Member of the Board of Directors of
Mr. & Ms. from the time it was incorporated on 29 October 1976 to 11 April 1989, and was the
registered owner of 1,000 shares of stock out of the 4,088 total outstanding shares, petitioner
complained of irregularities committed from 1983 to 1987 by Eugenia D. Apostol, President and
Chairperson of the Board of Directors. Petitioner claimed that except for the sale of the
name Philippine Inquirer to Philippine Daily Inquirer (PDI hereafter) all other transactions and
agreements entered into by Mr. & Ms. with PDI were not supported by any bond and/or
stockholders' resolution. And, upon instructions of Eugenia D. Apostol, Mr. & Ms. made several
cash advances to PDI on various occasions amounting to P3.276 million. On some of these
borrowings PDI paid no interest whatsoever. Despite the fact that the advances made by Mr. & Ms.
to PDI were booked as advances to an affiliate, there existed no board or stockholders' resolution,
contract nor any other document which could legally authorize the creation of and support to an
affiliate.

Petitioner further alleged that respondents Eugenia and Jose Apostol were stockholders, directors
and officers in both Mr. & Ms. and PDI. In fact on 2 May 1986 respondents Eugenia D. Apostol,
Leticia J. Magsanoc and Adoracion G. Nuyda subscribed to PDI shares of stock at P50,000.00 each
or a total of P150,000.00. The stock subscriptions were paid for by Mr. & Ms. and initially treated,
as receivables from officers and employees. But, no payments were ever received from
respondents, Magsanoc and Nuyda.

The petition principally sought to (a) enjoin respondents Eugenia D. Apostol and Jose A. Apostol
from further acting as president-director and director, respectively, of Mr. & Ms. and disbursing
any money or funds except for the payment of salaries and similar expenses in the ordinary
course of business, and from disposing of their Mr. & Ms. shares; (b) enjoin respondents Apostol
spouses, Magsanoc and Nuyda from disposing of the PDI shares of stock registered in their names;
(c) compel respondents Eugenia and Jose Apostol to account for and reconvey all profits and
benefits accruing to them as a result of their improper and fraudulent acts; (d) compel
respondents Magsanoc and Nuyda to account for and reconvey to Mr. & Ms. all shares of stock paid
from cash advances from it and all accessions or fruits thereof; (e) hold respondents Eugenia and
Jose Apostol liable for damages suffered by Mr. & Ms. and the other stockholders, including
petitioner, by reason of their improper and fraudulent acts; (f) appoint a management committee
for Mr. & Ms. during the pendency of the suit to prevent further dissipation and loss of its assets
and funds as well as paralyzation of business operations; and, (g) direct the management
committee for Mr. & Ms. to file the necessary action to enforce its rights against PDI and other
third parties.
Private respondents Apostol spouses, Magsanoc, Nuyda, and Mr. & Ms., on the other hand, refuted
the allegations of petitioner by starting with a narration of the beginnings of Mr. & Ms. They
recounted that on 9 March 1976 Ex Libris Publishing Co., Inc. (Ex Libris hereafter) was
incorporated for the purpose of publishing a weekly magazine. Its original principal stockholders
were spouses Senator Juan Ponce Enrile (then Minister of National Defense) and Cristina Ponce
Enrile through Jaka Investments Corporation (JAKA hereafter), and respondents Eugenia and Jose
Apostol. When Ex Libris suffered financial difficulties, JAKA and the Apostols, together with new
investors Luis Villafuerte and Ramon Siy, restructured Ex Libris by organizing a new corporation
known as Mr. & Ms.

The original stockholders of Mr. & Ms., i.e., JAKA, Luis Villafuerte, Ramon Siy, the Apostols and Ex
Libriscontinued to be virtually the same up to 1989. Thereafter it was agreed among them that,
they being close friends, Mr. & Ms. would be operated as a partnership or a close corporation;
respondent Eugenia D. Apostol would manage the affairs of Mr. & Ms.; and, no shares of stock
would be sold to third parties without first offering the shares to the other stockholders so that
transfers would be limited to and only among the original stockholders.

Private respondents also asserted that respondent Eugenia D. Apostol had been informing her
business partners of her actions as manager, and obtaining their advice and consent.
Consequently the other stockholders consented, either expressly or impliedly, to her
management. They offered no objections. As a result, the business prospered. Thus, as shown in a
statement prepared by the accounting firm Punongbayan and Araullo, there were increases from
1976 to 1988 in the total assets of Mr. & Ms. from P457,569.00 to P10,143,046.00; in the total
stockholders' equity from P203,378.00 to P2,324,954.00; and, in the net sales, from P301,489.00
to P16,325,610.00. Likewise, cash dividends were distributed and received by the stockholders.

Private respondents further contended that petitioner, being merely a holder-in-trust of JAKA
shares, only represented and continued to represent JAKA in the board. In the beginning,
petitioner cooperated with and assisted the management until mid-1986 when relations between
her and her principals on one hand, and respondent Eugenia D. Apostol on the other, became
strained due to political differences. Hence from mid-1986 to mid-1988 petitioner refused to
speak with respondent Eugenia D. Apostol, and in 1988 the former became openly critical of the
management of the latter. Nevertheless, respondent Eugenia D. Apostol always made available to
petitioner and her representatives all the books of the corporation.

Private respondents averred that all the PDI shares owned by respondents Eugenia and Jose
Apostol were acquired through their own private funds and that the loan of P750,000.00 by PDI
from Mr. & Ms. had been fully paid with 20% interest per annum. And, it was PDI, not Mr. & Ms.,
which loaned off P250,000.00 each to respondents Magsanoc and Nuyda. Private respondents
further argued that petitioner was not the true party to this case, the real party being JAKA which
continued to be the true stockholder of Mr. & Ms.; hence, petitioner did not have the personality to
initiate and prosecute the derivative suit which, consequently, must be dismissed.

On 6 December 1990, the SEC Hearing Panel 3 issued a writ of preliminary injunction enjoining
private respondents from disbursing any money except for the payment of salaries and other
similar expenses in the regular course of business. The Hearing Panel also enjoined respondent
Apostol spouses, Nuyda and Magsanoc from disposing of their PDI shares, and further ruled —
 . . . respondents' contention that petitioner is not entitled to the provisional reliefs
prayed for because she is not the real party in interest . . . is bereft of any merit. No
less than respondents' Amended Answer, specifically paragraph V, No. 8 on
Affirmative Allegations/Defenses states that "The petitioner being herself a minor
stockholder and holder-in-trust of JAKA shares represented and continues to
represent JAKA in the Board." This statement refers to petitioner sitting in the board
of directors of Mr. & Ms. in two capacities, one as a minor stockholder and the other
as the holder in trust of the shares of JAKA in Mr. & Ms. Such reference alluded to by
the respondents indicates an admission on respondents' part of the petitioner's legal
personality to file a derivative suit for the benefit of the respondent Mr. & Ms.
Publishing Co., Inc.

The Hearing Panel however denied petitioner's prayer for the constitution of a
management committee.

On 25 March 1991 private respondents filed a Motion to Amend Pleadings to Conform to

Evidence alleging that the issue of whether petitioner is the real party-in-interest had been tried
by express or implied consent of the parties through the admission of documentary exhibits
presented by private respondents proving that the real party-in-interest was JAKA, not petitioner
Bitong. As such, No. 8, par. V (Affirmative Allegations/Defenses), Answer to the Amended Petition,
was stipulated due to inadvertence and excusable mistake and should be amended. On 10 October
1991 the Hearing Panel denied the motion for amendment.

Petitioner testified at the trial that she became the registered and beneficial owner of 997 shares
of stock of Mr. & Ms. out of the 4,088 total outstanding shares after she acquired them from JAKA
through a deed of sale executed on 25 July 1983 and recorded in the Stock and Transfer Book of
Mr. & Ms. under Certificate of Shares of Stock No. 008. She pointed out that Senator Enrile decided
that JAKA should completely divest itself of its holdings in Mr. & Ms. and this resulted in the sale to
her of JAKA's interest and holdings in that publishing firm.

Private respondents refuted the statement of petitioner that she was a stockholder of Mr. & Ms.
since 25 July 1983 as respondent Eugenia D. Apostol signed Certificate of Stock No. 008 only on 17
March 1989, and not on 25 July 1983. Respondent Eugenia D. Apostol explained that she stopped
using her long signature (Eugenia D. Apostol) in 1987 and changed it to E.D. Apostol, the signature
which appeared on the face of Certificate of Stock No. 008 bearing the date 25 July 1983. And,
since the Stock and Transfer Book which petitioner presented in evidence was not registered with
the SEC, the entries therein including Certificate of Stock No. 008 were fraudulent. Respondent
Eugenia D. Apostol claimed that she had not seen the Stock and Transfer Book at anytime until 21
March 1989 when it was delivered by petitioner herself to the office of Mr. & Ms., and that
petitioner repeatedly referred to Senator Enrile as "my principal" during the Mr. & Ms. board
meeting of 22 September 1988, seven (7) times no less.

On 3 August 1993, after trial on the merits, the SEC Hearing Panel dismissed the derivative suit
filed by petitioner and dissolved the writ of preliminary injunction barring private respondents
from disposing of their PDI shares and any of Mr. & Ms. assets. The Hearing Panel ruled that there
was no serious mismanagement of Mr. & Ms. which would warrant drastic corrective measures. It
gave credence to the assertion of respondent Eugenia D. Apostol that Mr. & Ms. was operated like
a close corporation where important matters were discussed and approved through informal
consultations at breakfast conferences. The Hearing Panel also concluded that while the evidence
presented tended to show that the real party-in-interest indeed was JAKA and/or Senator Enrile,
it viewed the real issue to be the alleged mismanagement, fraud and conflict of interest on the
part of respondent Eugenia D. Apostol, and allowed petitioner to prosecute the derivative suit if
only to resolve the real issues. Hence, for this purpose, the Hearing Panel considered petitioner to
be the real party-in-interest.

On 19 August 1993 respondent Apostol spouses sold the PDI shares registered in the name of
their holding company, JAED Management Corporation, to Edgardo B. Espiritu. On 25 August 1993
petitioner Bitong appealed to the SEC En Banc.

On 24 January 1994 the SEC En Banc 4 reversed the decision of the Hearing Panel and, among
others, ordered private respondents to account for, return and deliver to Mr. & Ms. any and all
funds and assets that they disbursed from the coffers of the corporation including shares of stock,
profits, dividends and/or fruits that they might have received as a result of their investment in
PDI, including those arising from the P150,000.00 advanced to respondents Eugenia D. Apostol,
Leticia J. Magsanoc and Adoracion G. Nuyda; account for and return any profits and fruits of all
amounts irregularly or unlawfully advanced to PDI and other third persons; and, cease and desist
from managing the affairs of Mr. & Ms. for reasons of fraud, mismanagement, disloyalty and
conflict of interest.

The SEC En Banc also declared the 19 August 1993 sale of the PDI shares of JAED Management
Corporation to Edgardo B. Espiritu to be tainted with fraud, hence, null and void, and considered
Mr. & Ms. as the true and lawful owner of all the PDI shares acquired by respondents Eugenia D.
Apostol, Magsanoc and Nuyda. It also declared all subsequent transferees of such shares as
trustees for the benefit of Mr. & Ms. and ordered them to forthwith deliver said shares to Mr. & Ms.

Consequently, respondent Apostol spouses, Magsanoc, Nuyda, and Mr. & Ms. filed a petition for
review before respondent Court of Appeals, docketed as CA-GR No. SP 33291, while respondent
Edgardo B. Espiritu filed a petition for certiorari and prohibition also before respondent Court of
Appeals, docketed as CA-GR No. SP 33873. On 8 December 1994 the two (2) petitions were
consolidated.

On 31 August 1995 respondent appellate court rendered a decision reversing the SEC En Banc and
held that from the evidence on record petitioner was not the owner of any share of stock in Mr. &
Ms. and therefore not the real party-in-interest to prosecute the complaint she had instituted
against private respondents. Accordingly, petitioner alone and by herself as an agent could not
file a derivative suit in behalf of her principal. For not being the real party-in-interest, petitioner's
complaint did not state a cause of action, a defense which was never waived; hence, her petition
should have been dismissed. Respondent appellate court ruled that the assailed orders of the SEC
were issued in excess of jurisdiction, or want of it, and thus were null and void. 5 On 18 January
1996, petitioner's motion for reconsideration was denied for lack of merit.

Before this Court, petitioner submits that in paragraph 1 under the caption "I. The Parties" of
her Amended Petition before the SEC, she stated that she was a stockholder and director of Mr. &
Ms. In par. 1 under the caption "II. The Facts" she declared that she "is the registered owner of
1,000 shares of stock of Mr. & Ms. out of the latter's 4,088 total outstanding shares" and that she
was a member of the Board of Directors of Mr. & Ms. and treasurer from its inception until 11
April 1989. Petitioner contends that private respondents did not deny the above allegations in
their answer and therefore they are conclusively bound by this judicial admission. Consequently,
private respondents' admission that petitioner has 1,000 shares of stock registered in her name
in the books of Mr. & Ms. forecloses any question on her status and right to bring a derivative suit
on behalf of Mr. & Ms.

Not necessarily. A party whose pleading is admitted as an admission against interest is entitled to
overcome by evidence the apparent inconsistency, and it is competent for the party against whom
the pleading is offered to show that the statements were inadvertently made or were made under
a mistake of fact. In addition, a party against whom a single clause or paragraph of a pleading is
offered may have the right to introduce other paragraphs which tend to destroy the admission in
the paragraph offered by the adversary. 6

The Amended Petition before the SEC alleges —

I. THE PARTIES

1. Petitioner is a stockholder and director of Mr. & Ms. . . . .

II. THE FACTS

1. Petitioner is the registered owner of 1,000 shares of stock of Mr. & Ms. out of the
latter's 4,088 total outstanding shares. Petitioner, at all times material to this
petition, is a member of the Board of Directors of Mr. & Ms. and from the inception of
Mr. & Ms. until 11 April 1989 was its treasurer . . .

On the other hand, the Amended Answer to the Amended Petition states —

I. PARTIES

1. Respondents admit the allegations contained in Caption I, pars. 1 to 4 of the

Petition referring to the personality, addresses and capacity of the parties to the
petition except . . . but qualify said admission insofar as they are limited, qualified
and/or expanded by allegations in the Affirmative Allegations/Defenses . . .

II. THE FACTS

1. Respondents admit paragraph 1 of the Petition, but qualify said admission as to

the beneficial ownership of the shares of stock registered in the name of the
petitioner, the truth being as stated in the Affirmative Allegations/Defenses of this
Answer . . .

V. AFFIRMATIVE ALLEGATIONS/DEFENSES

Respondents respectfully allege by way of Affirmative Allegations/Defenses, that . . . .

3. Fortunately, respondent Apostol was able to convince Mr. Luis Villafuerte to take
interest in the business and he, together with the original investors, restructured the
 Ex Libris Publishing Company by organizing a new corporation known as Mr. & Ms.
Publishing Co., Inc. . . . Mr. Luis Villafuerte contributed his own P100,000.00. JAKA
and respondent Jose Z. Apostol, original investors of Ex Libris contributed
P100,000.00 each; Ex Libris Publishing Company was paid 800 shares for the name
of Mr. & Ms. magazine and goodwill. Thus, the original stockholders of respondent
Mr. & Ms. were:

Cert./No./Date Name of Stockholder No. of Shares %

001-9-15-76 JAKA Investments Corp. 1,000 21%

002-9-15-76 Luis Villafuerte 1,000 21%

003-9-15-76 Ramon L. Siy 1,000 21%

004-9-15-76 Jose Z. Apostol 1,000 21%

005-9-15-76 Ex Libris Publishing Co. 800 16%

—— ——

4,800 96%

4. The above-named original stockholders of respondent Mr. & Ms. continue to be

virtually the same stockholders up to this date . . . .

8. The petitioner being herself a minor stockholder and holder-in-trust of JAKA

shares, represented and continues to represent JAKA in the Board . . . .

21. Petitioner Nora A. Bitong is not the true party to this case, the true party being
JAKA Investments Corporation which continues to be the true stockholder of
respondent Mr. & Ms. Publishing Co., Inc., consequently, she does not have the
personality to initiate and prosecute this derivative suit, and should therefore be
dismissed . . . .

The answer of private respondents shows that there was no judicial admission that petitioner was
a stockholder of Mr. & Ms. to entitle her to file a derivative suit on behalf of the corporation.
Where the statements of the private respondents were qualified with phrases such as, "insofar as
they are limited, qualified and/or expanded by," "the truth being as stated in the Affirmative
Allegations/Defenses of this Answer" they cannot be considered definite and certain enough,
cannot be construed as judicial admissions. 7

More so, the affirmative defenses of private respondents directly refute the representation of
petitioner that she is a true and genuine stockholder of Mr. & Ms. by stating unequivocally that
petitioner is not the true party to the case but JAKA which continues to be the true stockholder of
Mr. & Ms. In fact, one of the reliefs which private respondents prayed for was the dismissal of the
petition on the ground that petitioner did not have the legal interest to initiate and prosecute the
same.
When taken in its totality, the Amended Answer to the Amended Petition, or even the Answer to
the Amended Petition alone, clearly raises an issue as to the legal personality of petitioner to file
the complaint. Every alleged admission is taken as an entirety of the fact which makes for the one
side with the qualifications which limit, modify or destroy its effect on the other side. The reason
for this is, where part of a statement of a party is used against him as an admission, the court
should weigh any other portion connected with the statement, which tends to neutralize or
explain the portion which is against interest.

In other words, while the admission is admissible in evidence, its probative value is to be
determined from the whole statement and others intimately related or connected therewith as an
integrated unit. Although acts or facts admitted do not require proof and cannot be contradicted,
however, evidence aliunde can be presented to show that the admission was made through
palpable mistake. 8 The rule is always in favor of liberality in construction of pleadings so that the
real matter in dispute may be submitted to the judgment of the court. 9

Petitioner also argues that since private respondents failed to appeal the 6 December 1990 Order
and the 3 August 1993 Decision of the SEC Hearing Panel declaring that she was the real party-in-
interest and had legal personality to sue, they are now estopped from questioning her personality.

Not quite. The 6 December 1990 Order is clearly an interlocutory order which cannot be
considered as having finally resolved on the merits the issue of legal capacity of petitioner. The
SEC Hearing Panel discussed the issue of legal capacity solely for the purpose of ruling on the
application for writ of preliminary injunction as an incident to the main issues raised in the
complaint. Being a mere interlocutory order, it is not appealable.

For, an interlocutory order refers to something between the commencement and end of the suit
which decides some point or matter but it is not the final decision of the whole
controversy. 10 Thus, even though the 6 December 1990 Order was adverse to private
respondents, they had the legal right and option not to elevate the same to the SEC En Banc but
rather to await the decision which resolves all the issues raised by the parties and to appeal
therefrom by assigning all errors that might have been committed by the Hearing Panel.

On the other hand, the 3 August 1993 Decision of the Hearing Panel dismissing the derivative suit
for failure to prove the charges of mismanagement, fraud, disloyalty and conflict of interest and
dissolving the writ of preliminary injunction, was favorable to private respondents. Hence, they
were not expected to appeal therefrom.

In fact, in the 3 August 1993 Decision, the Hearing Panel categorically stated that the evidence
presented showed that the real party-in-interest was not petitioner Bitong but JAKA and/or
Senator Enrile. Petitioner was merely allowed to prosecute her complaint so as not to sidetrack
"the real issue to be resolved (which) was the allegation of mismanagement, fraud and conflict of
interest allegedly committed by respondent Eugenia D. Apostol." It was only for this reason that
petitioner was considered to be capacitated and competent to file the petition.

Accordingly, with the dismissal of the complaint of petitioner against private respondents, there
was no compelling reason for the latter to appeal to the SEC En Banc. It was in fact petitioner's
turn as the aggrieved party to exercise her right to appeal from the decision. It is worthy to note
that even during the appeal of petitioner before the SEC En Banc private respondents maintained
their vigorous objection to the appeal and reiterated petitioner's lack of legal capacity to sue
before the SEC.

Petitioner then contends that she was a holder of the proper certificates of shares of stock and
that the transfer was recorded in the Stock and Transfer Book of Mr. & Ms. She invokes Sec. 63
of The Corporation Code which provides that no transfer shall be valid except as between the
parties until the transfer is recorded in the books of the corporation, and upon its recording the
corporation is bound by it and is estopped to deny the fact of transfer of said shares. Petitioner
alleges that even in the absence of a stock certificate, a stockholder solely on the strength of the
recording in the stock and transfer book can exercise all the rights as stockholder, including the
right to file a derivative suit in the name of the corporation. And, she need not present a separate
deed of sale or transfer in her favor to prove ownership of stock.

Sec. 63 of The Corporation Code expressly provides —

Sec. 63. Certificate of stock and transfer of shares. — The capital stock of stock
corporations shall be divided into shares for which certificates signed by the
president or vice president, countersigned by the secretary or assistant secretary,
and sealed with the seal of the corporation shall be issued in accordance with the by-
laws. Shares of stock so issued are personal property and may be transferred by
delivery of the certificate or certificates indorsed by the owner or his attorney-in-
fact or other person legally authorized to make the transfer. No transfer however
shall be valid except as between the parties until the transfer is recorded in the
books of the corporation showing the names of the parties to the transaction, the
date of the transfer, the number of the certificate or certificates and the number of
shares transferred . . . .

This provision above quoted envisions a formal certificate of stock which can be issued only upon
compliance with certain requisites. First, the certificates must be signed by the president or vice-
president, countersigned by the secretary or assistant secretary, and sealed with the seal of the
corporation. A mere typewritten statement advising a stockholder of the extent of his ownership
in a corporation without qualification and/or authentication cannot be considered as a formal
certificate of stock. 11 Second, delivery of the certificate is an essential element of its issuance.
Hence, there is no issuance of a stock certificate where it is never detached from the stock books
although blanks therein are properly filled up if the person whose name is inserted therein has no
control over the books of the company. 12 Third, the par value, as to par value shares, or the full
subscription as to no par value shares, must first be fully paid. Fourth, the original certificate must
be surrendered where the person requesting the issuance of a certificate is a transferee from a
stockholder.

The certificate of stock itself once issued is a continuing affirmation or representation that the
stock described therein is valid and genuine and is at least prima facie evidence that it was legally
issued in the absence of evidence to the contrary. However, this presumption may be
rebutted. 13 Similarly, books and records of a corporation which include even the stock and
transfer book are generally admissible in evidence in favor of or against the corporation and its
members to prove the corporate acts, its financial status and other matters including one's status
as a stockholder. They are ordinarily the best evidence of corporate acts and proceedings.
However, the books and records of a corporation are not conclusive even against the corporation
but areprima facie evidence only. Parol evidence may be admitted to supply omissions in the
records, explain ambiguities, or show what transpired where no records were kept, or in some
cases where such records were contradicted. 14 The effect of entries in the books of the
corporation which purport to be regular records of the proceedings of its board of directors or
stockholders can be destroyed by testimony of a more conclusive character than mere suspicion
that there was an irregularity in the manner in which the books were kept. 15

The foregoing considerations are founded on the basic principle that stock issued without
authority and in violation of law is void and confers no rights on the person to whom it is issued
and subjects him to no liabilities. 16 Where there is an inherent lack of power in the corporation to
issue the stock, neither the corporation nor the person to whom the stock is issued is estopped to
question its validity since an estopped cannot operate to create stock which under the law cannot
have existence. 17

As found by the Hearing Panel and affirmed by respondent Court of Appeals, there is
overwhelming evidence that despite what appears on the certificate of stock and stock and
transfer book, petitioner was not a bona fide stockholder of Mr. & Ms. before March 1989 or at the
time the complained acts were committed to qualify her to institute a stockholder's derivative
suit against private respondents. Aside from petitioner's own admissions, several corporate
documents disclose that the true party-in-interest is not petitioner but JAKA.

Thus, while petitioner asserts in her petition that Certificate of Stock No. 008 dated 25 July 1983
was issued in her name, private respondents argue that this certificate was signed by respondent
Eugenia D. Apostol as President only in 1989 and was fraudulently antedated by petitioner who
had possession of the Certificate Book and the Stock and Transfer Book. Private respondents
stress that petitioner's counsel entered into a stipulation on record before the Hearing Panel that
the certificate was indeed signed by respondent Apostol only in 1989 and not in 1983.

In her reply, petitioner admits that while respondent Eugenia D. Apostol signed the Certificate of
Stock No. 008 in petitioner's name only in 1989, it was issued by the corporate secretary in 1983
and that the other certificates covering shares in Mr. & Ms. had not yet been signed by respondent
Eugenia D. Apostol at the time of the filing of the complaint with the SEC although they were
issued years before.

Based on the foregoing admission of petitioner, there is no truth to the statement written in
Certificate of Stock No. 008 that the same was issued and signed on 25 July 1983 by its duly
authorized officers specifically the President and Corporate Secretary because the actual date of
signing thereof was 17 March 1989. Verily, a formal certificate of stock could not be considered
issued in contemplation of law unless signed by the president or vice-president and
countersigned by the secretary or assistant secretary.

In this case, contrary to petitioner's submission, the Certificate of Stock No. 008 was only legally
issued on 17 March 1989 when it was actually signed by the President of the corporation, and not
before that date. While a certificate of stock is not necessary to make one a stockholder, e.g.,
where he is an incorporator and listed as stockholder in the articles of incorporation although no
certificate of stock has yet been issued, it is supposed to serve as paper representative of the stock
itself and of the owner's interest therein. Hence, when Certificate of Stock No. 008 was admittedly
signed and issued only on 17 March 1989 and not on 25 July 1983, even as it indicates that
petitioner owns 997 shares of stock of Mr. & Ms., the certificate has no evidentiary value for the
purpose of proving that petitioner was a stockholder since 1983 up to 1989.

And even the factual antecedents of the alleged ownership by petitioner in 1983 of shares of stock
of Mr. & Ms. are indistinctive if not enshrouded in inconsistencies. In her testimony before the
Hearing Panel, petitioner said that early in 1983, to relieve Mr. & Ms. from political pressure,
Senator Enrile decided to divest the family holdings in Mr. & Ms. as he was then part of the
government and Mr. & Ms. was evolving to be an opposition newspaper. The JAKA shares
numbering 1,000 covered by Certificate of Stock No. 001 were thus transferred to respondent
Eugenia D. Apostol in trust or in blank. 18

Petitioner now claims that a few days after JAKA's shares were transferred to respondent Eugenia
D. Apostol, Senator Enrile sold to petitioner 997 shares of JAKA. For this purpose, a deed of sale
was executed and antedated to 10 May 1983. 19 This submission of petitioner is however
contradicted by the records which show that a deed of sale was executed by JAKA transferring
1,000 shares of Mr. & Ms. to respondent Apostol on 10 May 1983 and not to petitioner. 20

Then Senator Enrile testified that in May or June 1983 he was asked at a media interview if his
family owned shares of stock in Mr. & Ms. Although he and his family were stockholders at that
time he denied it so as not to embarrass the magazine. He called up petitioner and instructed her
to work out the documentation of the transfer of shares from JAKA to respondent Apostol to be
covered by a declaration of trust. His instruction was to transfer the shares of JAKA in Mr. & Ms.
and Ex Libris to respondent Apostol as a nominal holder. He then finally decided to transfer the
shareholdings to petitioner. 21

When asked if there was any document or any written evidence of that divestment in favor of
petitioner, Senator Enrile answered that there was an endorsement of the shares of stock. He said
that there was no other document evidencing the assignment to petitioner because the stocks
were personal property that could be transferred even orally. 22 Contrary to Senator Enrile's
testimony, however, petitioner maintains that Senator Enrile executed a deed of sale in her favor.

A careful perusal of the records shows that neither the alleged endorsement of Certificate of Stock
No. 001 in the name of JAKA nor the alleged deed of sale executed by Senator Enrile directly in
favor of petitioner could have legally transferred or assigned on 25 July 1983 the shares of stock
in favor of petitioner because as of 10 May 1983 Certificate of Stock No. 001 in the name of JAKA
was already cancelled and a new one, Certificate of Stock No. 007, issued in favor of respondent
Apostol by virtue of a Declaration of Trust and Deed of Sale. 23

It should be emphasized that on 10 May 1983 JAKA executed, a deed of sale over 1,000 Mr. & Ms.
shares in favor of respondent Eugenio D. Apostol. On the same day, respondent Apostol signed a
declaration of trust stating that she was the registered owner of 1,000 Mr. & Ms. shares covered by
Certificate of Stock No. 007.

The declaration of trust further showed that although respondent Apostol was the registered
owner, she held the shares of stock and dividends which might be paid in connection therewith
solely in trust for the benefit of JAKA, her principal. It was also stated therein that being a trustee,
respondent Apostol agreed, on written request of the principal, to assign and transfer the shares
of stock and any and all such distributions or dividends unto the principal or such other person as
the principal would nominate or appoint.

Petitioner was well aware of this trust, being the person in charge of this documentation and
being one of the witnesses to the execution of this
document. 24 Hence, the mere alleged endorsement of Certificate of Stock No. 001 by Senator
Enrile or by a duly authorized officer of JAKA to effect the transfer of shares of JAKA to petitioner
could not have been legally feasible because Certificate of Stock No. 001 was already canceled by
virtue of the deed of sale to respondent Apostol.

And, there is nothing in the records which shows that JAKA had revoked the trust it reposed on
respondent Eugenia D. Apostol. Neither was there any evidence that the principal had requested
her to assign and transfer the shares of stock to petitioner. If it was true that the shares of stock
covered by Certificate of Stock No. 007 had been transferred to petitioner, the person who could
legally endorse the certificate was private respondent Eugenia D. Apostol, she being the
registered owner and trustee of the shares of stock covered by Certificate of Stock No. 007. It is a
settled rule that the trustee should endorse the stock certificate to validate the cancellation of her
share and to have the transfer recorded in the books of the corporation. 25

In fine, the records are unclear on how petitioner allegedly acquired the shares of stock of JAKA.
Petitioner being the chief executive officer of JAKA and the sole person in charge of all business
and financial transactions and affairs of JAKA 26 was supposed to be in the best position to show
convincing evidence on the alleged transfer of shares to her, if indeed there was a transfer.
Considering that petitioner's status is being questioned and several factual circumstances have
been presented by private respondents disproving petitioner's claim, it was incumbent upon her
to submit rebuttal evidence on the manner by which she allegedly became a stockholder. Her
failure to do so taken in the light of several substantial inconsistencies in her evidence is fatal to
her case.

The rule is that the endorsement of the certificate of stock by the owner or his attorney-in-fact or
any other person legally authorized to make the transfer shall be sufficient to effect the transfer of
shares only if the same is coupled with delivery. The delivery of the stock certificate duly
endorsed by the owner is the operative act of transfer of shares from the lawful owner to the new
transferee.

Thus, for a valid transfer of stocks, the requirements are as follows: (a) There must be delivery of
the stock certificate; (b) The certificate must be endorsed by the owner or his attorney-in-fact or
other persons legally authorized to make the transfer; and, (c) to be valid against third parties,
the transfer must be recorded in the books of the corporation. 27 At most, in the instant case,
petitioner has satisfied only the third requirement. Compliance with the first two requisites has
not been clearly and sufficiently shown.

Considering that the requirements provided under Sec. 63 of The Corporation Code should be
mandatorily complied with, the rule on presumption of regularity cannot apply. The regularity
and validity of the transfer must be proved. As it is, even the credibility of the stock and transfer
book and the entries thereon relied upon by petitioner to show compliance with the third
requisite to prove that she was a stockholder since 1983 is highly doubtful.
The records show that the original stock and transfer book and the stock certificate book of Mr. &
Ms. were in the possession of petitioner before their custody was transferred to the Corporate
Secretary, Atty. Augusto San Pedro. 28 On 25 May 1988, Assistant Corporate Secretary Renato Jose
Unson wrote Mr. & Ms. about the lost stock and transfer book which was also noted by the
corporation's external auditors, Punongbayan and Araullo, in their audit. Atty. Unson even
informed respondent Eugenia D. Apostol as President of Mr. & Ms. that steps would be undertaken
to prepare and register a new Stock and Transfer Book with the SEC. Incidentally, perhaps
strangely, upon verification with the SEC, it was discovered that the general file of the corporation
with the SEC was missing. Hence, it was even possible that the original Stock and Transfer Book
might not have been registered at all.

On 20 October 1988 respondent Eugenia D. Apostol wrote Atty. Augusto San Pedro noting the
changes he had made in the Stock and Transfer Book without prior notice to the corporate
officers. 29 In the 27 October 1988 directors' meeting, respondent Eugenia D. Apostol asked about
the documentation to support the changes in the Stock and Transfer Book with regard to the JAKA
shares. Petitioner answered that Atty. San Pedro made the changes upon her instructions
conformably with established practice. 30

This simply shows that as of 1988 there still existed certain issues affecting the ownership of the
JAKA shares, thus raising doubts whether the alleged transactions recorded in the Stock and
Transfer Book were proper, regular and authorized. Then, as if to magnify and compound the
uncertainties in the ownership of the shares of stock in question, when the corporate secretary
resigned, the Stock and Transfer Book was delivered not to the corporate office where the book
should be kept but to petitioner. 31

That JAKA retained its ownership of its Mr. & Ms. shares was clearly shown by its receipt of the
dividends issued in December 1986. 32 This only means, very obviously, that Mr. & Ms. shares in
question still belonged to JAKA and not to petitioner. For, dividends are distributed to
stockholders pursuant to their right to share in corporate profits. When a dividend is declared, it
belongs to the person who is the substantial and beneficial owner of the stock at the time
regardless of when the distribution profit was earned. 33

Finally, this Court takes notice of the glaring and open admissions of petitioner made, not just
seven (7) but nine (9) times, during the 22 September 1988 meeting of the board of directors that
the Enriles were her principals or shareholders, as shown by the minutes thereof which she duly
signed 34 —

5. Mrs. E. Apostol explained to the Directors that through her efforts, the asset base
of the Company has improved and profits were realized. It is for this reason that the
Company has declared a 100% cash dividend in 1986. She said that it is up for the
Board to decide based on this performance whether she should continue to act as
Board Chairman or not. In this regard, Ms. N.A. Bitong expressed her recollection of
how Ex-Libris/Mr. & Ms. were organized and her participation for and on behalf
of her principals, as follows: She recalled that her principalswere invited by Mrs. E.
Apostol to invest in Ex-Libris and eventually Mr. & Ms. The relationship between her
principals and Mrs. E. Apostol made it possible for the latter to have access to several
information concerning certain political events and issues. In many instances, her
principals supplied first hand and newsworthy information that made Mr. & Ms. a
 popular
paper . . . .

6. According to Ms. Bitong, her principals were instrumental in helping Mr. & Ms.
survive during those years that it was cash strapped . . . . Ms. N.A. Bitong pointed out
that the practice of using the former Minister's influence and stature in the
government is one thing which her principalsthemselves are strongly against . . . .

7. . . . . At this point, Ms. N. Bitong again expressed her recollection of the subject
matter as follows: (a) Mrs. E. Apostol, she remembers, brought up the concept of a
cooperative-ran newspaper company in one of her breakfast session with her
principals sometime during the end of 1985. Her principals when asked for an
opinion, said that they recognized the concept as something very noble and visible . .
. . Then Ms. Bitong asked a very specific question — "When you conceptualized Ex-
Libris and Mr. & Ms., did you not think of my shareholders the Ponce Enriles as
liabilities? How come you associated yourself with them then and not now? What is
the difference?" Mrs. Apostol did not answer the question.

The admissions of a party against his interest inscribed upon the record books of a corporation
are competent and persuasive evidence against him. 35 These admissions render nugatory any
argument that petitioner is a bona fide stockholder of Mr. & Ms. at any time before 1988 or at the
time the acts complained of were committed. There is no doubt that petitioner was an employee
of JAKA as its managing officer, as testified to by Senator Enrile himself. 36 However, in the
absence of a special authority from the board of directors of JAKA to institute a derivative suit for
and in its behalf, petitioner is disqualified by law to sue in her own name. The power to sue and be
sued in any court by a corporation even as a stockholder is lodged in the board of directors that
exercises its corporate powers and not in the president or officer thereof. 37

It is well settled in this jurisdiction that where corporate directors are guilty of a breach of trust,
not of mere error of judgment or abuse of discretion, and intracorporate remedy is futile or
useless, a stockholder may institute a suit in behalf of himself and other stockholders and for the
benefit of the corporation, to bring about a redress of the wrong inflicted directly upon the
corporation and indirectly upon the stockholders. 38The stockholder's right to institute a
derivative suit is not based on any express provision of The Corporation Code but is impliedly
recognized when the law makes corporate directors or officers liable for damages suffered by the
corporation and its stockholders for violation of their fiduciary duties.

Hence, a stockholder may sue for mismanagement, waste or dissipation of corporate assets
because of a special injury to him for which he is otherwise without redress. 39 In effect, the suit is
an action for specific performance of an obligation owed by the corporation to the stockholders to
assist its rights of action when the corporation has been put in default by the wrongful refusal of
the directors or management to make suitable measures for its protection. 40

The basis of a stockholder's suit is always one in equity. However, it cannot prosper without first
complying with the legal requisites for its institution. The most important of these is the bona
fide ownership by a stockholder of a stock in his own right at the time of the transaction
complained of which invests him with standing to institute a derivative action for the benefit of
the corporation. 41
WHEREFORE, the petition is DENIED. The 31 August 1995 Decision of the Court of Appeals
dismissing the complaint of petitioner Nora A. Bitong in CA-G.R. No. SP 33291, and granting the
petition for certiorari and prohibition filed by respondent Edgardo U. Espiritu as well as annulling
the 5 November 1993, 24 January 1993 and 18 February 1994 Orders of the SEC En Banc in CA-
G.R. No. SP 33873, is AFFIRMED. Costs against petitioner.

SO ORDERED.

Republic of the Philippines

SUPREME COURT
Manila

SECOND DIVISION

G.R. No. 180416 June 2, 2014

ADERITO Z. YUJUICO and BONIFACIO C. SUMBILLA, Petitioners,

vs.
CEZAR T. QUIAMBAO and ERIC C. PILAPIL, Respondents.

DECISION

PEREZ, J.:

This case is a Petition for Review on Certiorari1 from the Orders2 dated 4 June 2007 and 5 November
2007 of the Regional Trial Court (RTC), Branch 154, of Pasig City in S.C.A. No. 3047.

The facts:

Background

Strategic Alliance Development Corporation (STRADEC) is a domestic corporation operating as a

business development and investment company.

On 1 March 2004, during the annual stockholder's meeting of STRADEC, petitioner Aderito Z. Yujuico
(Yujuico) was elected as president and chairman of the company.3 Yujuico replaced respondent Cezar T.
Quiambao (Quiambao), who had been the president and chairman of STRADEC since 1994.4

With Yujuico at the helm, STRADEC appointed petitioner Bonifacio C. Sumbilla (Sumbilla) as treasurer
and one Joselito John G. Blando (Blando) as corporate secretary.5 Blando replaced respondent Eric C.
Pilapil (Pilapil), the previous corporate secretary of STRADEC.6

The Criminal Complaint

On 12 August 2005, petitioners filed a criminal complaint7 against respondents and one Giovanni T.
Casanova (Casanova) before the Office of the City Prosecutor (OCP) of Pasig City. The complaint was
docketed in the OCP as LS. No. PSG 05-08-07465.
The complaint accuses respondents and Casanova of violating Section 74 in relation to Section 144 of
Batas Pambansa Blg. 68 or the Corporation Code. The petitioners premise such accusation on the
following factual allegations:8

1. During the stockholders' meeting on 1 March 2004, Yujuico-as newly elected president and
chairman of STRADEC-demanded Quiambao for the turnover of the corporate records of the
company, particularly the accounting files, ledgers, journals and other records of the corporation's
business. Quiambao refused.

2. As it turns out, the corporate records of STRADEC were in the possession of Casanova-the
accountant of STRADEC. Casanova was keeping custody of the said records on behalf of Quiambao,
who allegedly needed the same as part of his defense in a pending case in court.

3. After the 1 March 2004 stockholders' meeting, Quiambao and Casanova caused the removal of
the corporate records of STRADEC from the company's offices in Pasig City.

4. Upon his appointment as corporate secretary on 21 June 2004, Blando likewise demanded
Pilapil for the turnover of the stock and transfer book of STRADEC. Pilapil refused.

5. Instead, on 25 June 2004, Pilapil proposed to Blando to have the stock and transfer book
deposited in a safety deposit box with Equitable PCI Bank, Kamias Road, Quezon City. Blando
acceded to the proposal and the stock and transfer book was deposited in a safety deposit box
with the bank identified. It was agreed that the safety deposit box may only be opened in the
presence of both Quiambao and Blando.

6. On 30 June 2004, however, Quiambao and Pilapil withdrew the stock and transfer book from
the safety deposit box and brought it to the offices of the Stradcom Corporation (STRADCOM) in
Quezon City. Quiambao thereafter asked Blando to proceed to the STRADCOM offices. Upon
arriving thereat, Quiambao pressured Blando to make certain entries in the stock and transfer
books. After making such entries, Blando again demanded that he be given possession of the stock
and transfer book. Quiambao refused.

7. On 1 July 2004, Blando received an order dated 30 June 2004 issued by the RTC, Branch 71, of
Pasig City in Civil Case No. 70027, which directed him to cancel the entries he made in the stock
and transfer book. Hence, on even date, Blando wrote letters to Quiambao and Pilapil once again
demanding for the turnover of the stock and transfer book. Pilapil replied thru a letter dated 2 July
2004 where he appeared to agree to Blando's demand.

8. However, upon meeting with Pilapil and Quiambao, the latter still refused to turnover the stock
and transfer book to Blando. Instead, Blando was once again constrained to agree to a proposal by
Pilapil to have the stock and transfer book deposited with the RTC, Branch 155, of Pasig City. The
said court, however, refused to accept such deposit on the ground that it had no place for
safekeeping.

9. Since Quiambao and Pilapil still refused to turnover the stock and transfer book, Blando again
acceded to have the book deposited in a safety deposit box, this time, with the Export and Industry
Bank in San Miguel A venue, Pasig City.
Petitioners theorize that the refusal by the respondents and Casanova to turnover STRADEC's corporate
records and stock and transfer book violates their right, as stockholders, directors and officers of the
corporation, to inspect such records and book under Section 7 4 of the Corporation Code. For such
violation, petitioners conclude, respondents may be held criminally liable pursuant to Section 144 of the
Corporation Code.

Preliminary investigation thereafter ensued.

Resolution of the OCP and the Informations

After receiving the counter-affidavits of the respondents and Casanova, as well as the other documentary
submissions9 by the parties, the OCP issued a Resolution10 dated 6 January 2006 in I.S. No. PSG 05-08-
07465. In the said resolution, the OCP absolved Casanova but found probable cause to hail respondents to
court on two (2) offenses: (1) for removing the stock and transfer book of STRADEC from its principal
office, and (2) for refusing access to, and examination of, the corporate records and the stock and transfer
book of STRADEC at its principal office.

Pursuant to the resolution, two (2) informations11 were filed against the respondents before the
Metropolitan Trial Court (MeTC) of Pasig City. The informations were docketed as Criminal Case No.
89723 and Criminal Case No. 89724 and were raffled to Branch 69.

Criminal Case No. 89723 is for the offense of removing the stock and transfer book of STRADEC from its
principal office. The information reads:12

On and/or about the period between March 1 and June 25, 2004, inclusive, in Pasig City and within the
jurisdiction of this Honorable Court, the above accused, being then members of the Board of Directors
and/or officers, as the case maybe, of Strategic Alliance Development Corporation (STRADEC, for short),
conspiring and confederating together and mutually helping and aiding one another, did then and there
willfully, unlawfully and feloniously, remove the stock and transfer book of the said STRADEC at its
principal office at the 24th Floor, One Magnificent Mile-CITRA City Bldg., San Miguel A venue, Ortigas
Center, Pasig City, where they should all be kept, in violation of the aforesaid law, and to the prejudice of
the said complainants.

Criminal Case No. 89724, on the other hand, covers the offense of refusing access to, and examination of,
the corporate records and the stock and transfer book of STRADEC at its principal office. The information
reads:13

On and/or about the period between March 1 and June 25, 2004, inclusive, in Pasig City, and within the
jurisdiction of this Honorable Court, the above accused, being then members of the Board of Directors
and/or officers, as the case maybe, of Strategic Alliance Development Corporation (STRADEC, for short),
conspiring and confederating together and mutually helping and aiding one another, did then and there
willfully, unlawfully and feloniously, refuse to allow complainants Bonifacio C. Sumbilla and Aderito Z.
Yujuico, being then stockholders and/or directors of STRADEC, access to, and examination of, the
corporate records, including the stock and transfer book, of STRADEC at its principal office at the 24th
Floor, One Magnificent Mile-CITRA Bldg., San Miguel Avenue, Ortigas Center, Pasig City, where they
should all be kept, in violation of the aforesaid law, and to the prejudice of the said complainants.

Urgent Omnibus Motion and the Dismissal of Criminal Case No. 89723
On 18 January 2006, respondents filed before the MeTC an Urgent Omnibus Motion for Judicial
Determination of Probable Cause and To Defer Issuance of Warrants of Arrest (Urgent Omnibus
Motion).14

On 8 May 2006, the MeTC issued an order15 partially granting the Urgent Omnibus Motion. The MeTC
dismissed Criminal Case No. 89723 but ordered the issuance of a warrant of arrest against respondents
in Criminal Case No. 89724.

In dismissing Criminal Case No. 89723, the MeTC held that Section 74, in relation to Section 144, of the
Corporation Code only penalizes the act of "refus[ing] to allow any director, trustee, stockholder or
member of the corporation to examine and copy excerpts from the records or minutes of the
corporation"16 and that act is already the subject matter of Criminal Case No. 89724. Hence, the MeTC
opined, Criminal Case No. 89723-which seeks to try respondents for merely removing the stock and
transfer book of STRADEC from its principal office-actually charges no offense and, therefore, cannot be
sustained.17

Anent directing the issuance of a warrant of arrest in Criminal Case No. 89724, the MeTC found probable
cause to do so; given the failure of the respondents to present any evidence during the preliminary
investigation showing that they do not have possession of the corporate records of STRADEC or that they
allowed petitioners to inspect the corporate records and the stock and transfer book of STRADEC.18

Unsatisfied, the respondents filed a motion for partial Reconsideration19 of the 8 May 2006 order of the
MeTC insofar as the disposition in Criminal Case No. 89724 is concerned. The MeTC, however, denied
such motion on 16 August 2006.20

Certiorari Petition and the Dismissal of Criminal Case No. 89724 After their motion for partial
reconsideration was denied, respondents filed a certiorari petition,21 with prayer for the issuance of a
temporary restraining order (TRO), before the RTC of Pasig City on 27 September 2006. The petition was
docketed as S.C.A. No. 3047.

On 16 November 2006, the RTC issued a TRO enjoining the MeTC from conducting further proceedings in
Criminal Case No. 89724 for twenty (20) days.22

On 4 June 2007, the R TC issued an Order23 granting respondents' certiorari petition and directing the
dismissal of Criminal Case No. 89724. According to the RTC, the MeTC committed grave abuse of
discretion in issuing a warrant of arrest against respondents in Criminal Case No. 89724.

The RTC found that the finding of probable cause against the respondents in Criminal Case No. 89724
was not supported by the evidence presented during the preliminary investigation but was, in fact,
contradicted by them:24

1. The R TC noted that, aside from the complaint itself, no evidence was ever submitted by
petitioners to prove that they demanded and was refused access to the corporate records of
STRADEC between 1 March to 25 June 2004. What petitioners merely submitted is their letter
dated 6 September 2004 demanding from respondents access to the corporate records of
STRADEC.
 2. The allegations of petitioners in their complaint, as well as 6 September 2004 letter above-
mentioned, however, are contradicted by the sworn statement dated 1 July 2004 of
Blando25 wherein he attested that as early as 25 June 2004, Pilapil already turned over to him
"two binders containing the minutes, board resolutions, articles of incorporation, copies of
contracts, correspondences and other papers of the corporation, except the stock certificate book
and the stock and transfer book."

3. The RTC also took exception to the reason provided by the MeTC in supporting its finding of
probable cause against the respondents. The R TC held that it was not incumbent upon the
respondents to provide evidence proving their innocence. Hence, the failure of the respondents to
submit evidence showing that they do not have possession of the corporate records of STRADEC
or that they have allowed inspection of the same cannot be taken against them much less support
a finding of probable cause against them.

The RTC further pointed out that, at most, the evidence on record only supports probable cause that the
respondents were withholding the stock and transfer book of STRADEC. The RTC, however, opined that
refusing to allow inspection of the stock and transfer book, as opposed to refusing examination of other
corporate records, is not punishable as an offense under the Corporation Code.26 Hence, the directive of
the RTC dismissing Criminal Case No. 89724.

The petitioners moved for reconsideration,27 but the R TC remained steadfast.28

Hence, this petition by petitioners.

The Instant Petition

In their petition, petitioners claim that Criminal Case No. 89724 may still be sustained against the
respondents insofar as the charge of refusing to allow access to the stock and transfer book of STRADEC
is concerned. They argue that the R TC made a legal blunder when it held that the refusal to allow
inspection of the stock and transfer book of a corporation is not a punishable offense under the
Corporation Code. Petitioners contend that such a refusal still amounts to a violation of Section 74 of the
Corporation Code, for which Section 144 of the same code prescribes a penalty.

OUR RULING

The RTC indeed made an inaccurate pronouncement when it held that the act of refusing to allow
inspection of the stock and transfer book of a corporation is not a punishable offense under the
Corporation Code. Such refusal, when done in violation of Section 74(4) of the Corporation Code,
properly falls within the purview of Section 144 of the same code and thus may be penalized as an
offense.

The foregoing gaffe nonetheless, We still sustain the dismissal of Criminal Case No. 89724 as against the
respondents.

A criminal action based on the violation of a stockholder's right to examine or inspect the corporate
records and the stock and transfer book of a corporation under the second and fourth paragraphs of
Section 74 of the Corporation Code-such as Criminal Case No. 89724--can only be maintained against
corporate officers or any other persons acting on behalf of such corporation. The submissions of the
petitioners during the preliminary investigation, however, clearly suggest that respondents are neither in
relation to STRADEC.

Hence, we deny the petition.

The act of ref using to allow inspection of the

stock and transfer book of a corporation,
when done in violation of Section 74(4) of
the Corporation Code, is punishable as an
offense under Section 144 of the same code.

We first address the inaccurate pronouncement of the RTC.

Section 74 is the provision of the Corporation Code that deals with the books a corporation is required to
keep. It reads:

Section 74. Books to be kept; stock transfer agent. - Every corporation shall keep and carefully preserve
at its principal office a record of all business transactions and minutes of all meetings of stockholders or
members, or of the board of directors or trustees, in which shall be set forth in detail the time and place
of holding the meeting, how authorized, the notice given, whether the meeting was regular or special, if
special its object, those present and absent, and every act done or ordered done at the meeting. Upon the
demand of any director, trustee, stockholder or member, the time when any director, trustee, stockholder
or member entered or left the meeting must be noted in the minutes; and on a similar demand, the yeas
and nays must be taken on any motion or proposition, and a record thereof carefully made. The protest of
any director, trustee, stockholder or member on any action or proposed action must be recorded in full
on his demand.

The records of all business transactions of the corporation and the minutes of any meetings shall be open
to inspection by any director, trustee, stockholder or member of the corporation at reasonable hours on
business days and he may demand, in writing, for a copy of excerpts from said records or minutes, at his
expense.

Any officer or agent of the corporation who shall refuse to allow any director, trustees, stockholder or
member of the corporation to examine and copy excerpts from its records or minutes, in accordance with
the provisions of this Code, shall be liable to such director, trustee, stockholder or member for damages,
and in addition, shall be guilty of an offense which shall be punishable under Section 144 of this Code:
Provided, That if such refusal is made pursuant to a resolution or order of the board of directors or
trustees, the liability under this section for such action shall be imposed upon the directors or trustees
who voted for such refusal: and Provided, further, That it shall be a defense to any action under this
section that the person demanding to examine and copy excerpts from the corporation's records and
minutes has improperly used any information secured through any prior examination of the records or
minutes of such corporation or of any other corporation, or was not acting in good faith or for a
legitimate purpose in making his demand.

Stock corporations must also keep a book to be known as the "stock and transfer book'', in which must be
kept a record of all stocks in the names of the stockholders alphabetically arranged; the installments paid
and unpaid on all stock for which subscription has been made, and the date of payment of any
installment; a statement of every alienation, sale or transfer of stock made, the date thereof, and by and to
whom made; and such other entries as the by-laws may prescribe. The stock and transfer book shall be
kept in the principal office of the corporation or in the office of its stock transfer agent and shall be open
for inspection by any director or stockholder of the corporation at reasonable hours on business days.

No stock transfer agent or one engaged principally in the business of registering transfers of stocks in
behalf of a stock corporation shall be allowed to operate in the Philippines unless he secures a license
from the Securities and Exchange Commission and pays a fee as may be fixed by the Commission, which
shall be renewable annually: Provided, That a stock corporation is not precluded from performing or
making transfer of its own stocks, in which case all the rules and regulations imposed on stock transfer
agents, except the payment of a license fee herein provided, shall be applicable. (5 la and 32a; P.B. No.
268.) (Emphasis supplied)

Section 144 of the Corporation Code, on the other hand, is the general penal provision of the Corporation
Code. It reads:

Section 144. Violations of the Code. - Violations of any of the provisions of this Code or its amendments
not otherwise specifically penalized therein shall be punished by a fine of not less than one thousand
(₱1,000.00) pesos but not more than ten thousand (₱10,000.00) pesos or by imprisonment for not less
than thirty (30) days but not more than five (5) years, or both, in the discretion of the court. If the
violation is committed by a corporation, the same may, after notice and hearing, be dissolved in
appropriate proceedings before the Securities and Exchange Commission: Provided, That such
dissolution shall not preclude the institution of appropriate action against the director, trustee or officer
of the corporation responsible for said violation: Provided, further, That nothing in this section shall be
construed to repeal the other causes for dissolution of a corporation provided in this Code. (190 112 a)
(Emphasis supplied)

In the assailed Orders, the RTC expressed its opinion that the act of refusing to allow inspection of the
stock and transfer book, even though it may be a violation of Section 74(4), is not punishable as an
offense under the Corporation Code.29 In justifying this conclusion, the RTC seemingly relied on the fact
that, under Section 7 4 of the Corporation Code, the application of Section 144 is expressly mentioned
only in relation to the act of "refus[ing] to allow any director, trustees, stockholder or member of the
corporation to examine and copy excerpts from [the corporation's] records or minutes" that excludes its
stock and transfer book.

We do not agree.

While Section 74 of the Corporation Code expressly mentions the application of Section 144 only in
relation to the act of "refus[ing] to allow any director, trustees, stockholder or member of the corporation
to examine and copy excerpts from [the corporation's] records or minutes," the same does not mean that
the latter section no longer applies to any other possible violations of the former section.

It must be emphasized that Section 144 already purports to penalize "[v]iolations" of "any provision" of
the Corporation Code "not otherwise specifically penalized therein." Hence, we find inconsequential the
fact that that Section 74 expressly mentions the application of Section 144 only to a specific act, but not
with respect to the other possible violations of the former section.

Indeed, we find no cogent reason why Section 144 of the Corporation Code cannot be made to apply to
violations of the right of a stockholder to inspect the stock and transfer book of a corporation under
Section 74(4) given the already unequivocal intent of the legislature to penalize violations of a parallel
right, i.e., the right of a stockholder or member to examine the other records and minutes of a corporation
under Section 74(2). Certainly, all the rights guaranteed to corporators under Section 7 4 of the
Corporation Code are mandatory for the corporation to respect. All such rights are just the same
underpinned by the same policy consideration of keeping public confidence in the corporate vehicle thru
an assurance of transparency in the corporation's operations.

Verily, we find inaccurate the pronouncement of the RTC that the act of refusing to allow inspection of the
stock and transfer book is not a punishable offense under the Corporation Code. Such refusal, when done
in violation of Section 74(4) of the Corporation Code, properly falls within the purview of Section 144 of
the same code and thus may be penalized as an offense.

A criminal action based on the violation of a

stockholder's right to examine or inspect the
corporate records and the stock and transfer
book of a corporation under the second and
fourth paragraphs of Section 74 of the
Corporation Code can only be maintained
against corporate officers or any other persons
acting on behalf of such corporation.

The foregoing notwithstanding, and independently of the reasons provided therefor by the RTC, we
sustain the dismissal of Criminal Case No. 89724.

Criminal Case No. 89724 accuses respondents of denying petitioners' right to examine or inspect the
corporate records and the stock and transfer book of STRADEC. It is thus a criminal action that is based
on the violation of the second and fourth paragraphs of Section 7 4 of the Corporation Code.

A perusal of the second and fourth paragraphs of Section 74, as well as the first paragraph of the same
section, reveal that they are provisions that obligates a corporation: they prescribe what books or
records a corporation is required to keep; where the corporation shall keep them;

and what are the other obligations of the corporation to its stockholders or members in relation to such
books and records.1âwphi1 Hence, by parity of reasoning, the second and fourth paragraphs of Section
74, including the first paragraph of the same section, can only be violated by a corporation.

It is clear then that a criminal action based on the violation of the second or fourth paragraphs of Section
74 can only be maintained against corporate officers or such other persons that are acting on behalf of
the corporation. Violations of the second and fourth paragraphs of Section 74 contemplates a situation
wherein a corporation, acting thru one of its officers or agents, denies the right of any of its stockholders
to inspect the records, minutes and the stock and transfer book of such corporation.

The problem with the petitioners' complaint and the evidence that they submitted during preliminary
investigation is that they do not establish that respondents were acting on behalf of STRADEC. Quite the
contrary, the scenario painted by the complaint is that the respondents are merely outgoing officers of
STRADEC who, for some reason, withheld and refused to turn-over the company records of STRADEC;
that it is the petitioners who are actually acting on behalf of STRADEC; and that STRADEC is actually
merely trying to recover custody of the withheld records.
In other words, petitioners are not actually invoking their right to inspect the records and the stock and
transfer book of STRADEC under the second and fourth paragraphs of Section 74. What they seek to
enforce is the proprietary right of STRADEC to be in possession of such records and book. Such right,
though certainly legally enforceable by other means, cannot be enforced by a criminal prosecution based
on a violation of the second and fourth paragraphs of Section 74. That is simply not the situation
contemplated by the second and fourth paragraphs of Section 74 of the Corporation Code.

For this reason, we affirm the dismissal of Criminal Case No. 89724 for lack of probable cause.

WHEREFORE, premises considered, the petlt10n is hereby DENIED. The Orders dated 4 June 2007 and 5
November 2007 of the Regional Trial Court, Branch 154, of Pasig City in S.C.A. No. 3047, insofar as said
orders effectively dismissed Criminal Case No. 89724 pending before Metropolitan Trial Court, Branch
69, of Pasig City, are hereby AFFIRMED.

SO ORDERED.

THIRD DIVISION

August 24, 2016

G.R. No. 216146

ALFREDO L. CHUA, TOMAS L. CHUA and MERCEDES P. DIAZ, Petitioners,

vs.
PEOPLE OF THE PHILIPPINES, Respondent.

DECISION

REYES, J.:

Before the Court is a petition for review on certiorari1 challenging the Resolutions dated September 23,
20142 and January 6, 20153 of the Court of Appeals (CA) in CA-G.R. CR No. 36764. The assailed
resolutions affirmed the Decision4 dated March 27, 2014 of the Regional Trial Court (RTC) of Quezon City,
Branch 90, in Criminal Case No. 107079 and Judgment5 dated November 23, 2012 of the Metropolitan
Trial Court (MeTC) of Quezon City, Branch 43, which sentenced herein petitioners Alfredo L. Chua
(Alfredo), Tomas L. Chua (Tomas) and Mercedes P. Diaz (Mercedes) (collectively referred to as the
petitioners) to suffer the penalty of thirty (30) days of imprisonment for violation of Section 74, 6 in
relation to Section 144, 7 of the Corporation Code.

Antecedent Facts

The Office of the Solicitor General (OSG) aptly summed up the antecedents leading to the filing of the
Complaint-Affidavit8 of Joselyn Chua (Joselyn) against the petitioners:

[Joselyn] was a stockholder of Chua Tee Corporation of Manila. x x x [Alfredo] was the president and
chairman of the board, while [Tomas] was the corporate secretary and also a member of the board of the
same corporation. x x x [Mercedes] was the accountant/bookkeeper tasked with the physical custody of
the corporate records.
On or about August 24, 2000, Joselyn invoked her right as a stockholder pursuant to Section 74 of the
Corporation Code to inspect the records of the books of the business transactions of the corporation, the
minutes of the meetings of the board of directors and stockholders, as well as the financial statement[ s]
of the corporation. She hired a lawyer to send demand letters to each of the petitioners for her right to
inspect to be heeded. However, she was denied of such right to inspect.

Joselyn likewise hired the services of Mr. Abednego Velayo (Mr. Velayo) from the accounting firm of
Guzman Bocaling and Company to assist her in examining the books of the corporation. Armed with a
letter request[,] together with the list of schedules of audit materials, Mr. Velayo and his group visited the
corporation's premises for the supposed examination of the accounts. However, the books of accounts
were not formally presented to them and there was no list of schedules[,] which would allow them to
pursue their inspection. Mr. Velayo testified that they failed to complete their objective of inspecting the
books of accounts and examine the recorded documents.9 (Citations omitted)

In the Complaint-Affidavit filed before the Quezon City Prosecutors' Office, Joselyn alleged that despite
written demands, the petitioners conspired in refusing without valid cause the exercise of her right to
inspect Chua Tee Corporation of Manila's (CTCM) business transactions records, financial statements and
minutes of the meetings of both the board of directors and stockholders. 10

In their Counter Affidavits, 11 the petitioners denied liability. They argued that the custody of the records
sought to be inspected by Joselyn did not pertain to them. Besides, the physical records were merely kept
inside the cabinets in the corporate office. Further, they did not prevent Joselyn from inspecting the
records. What happened was that Mercedes was severely occupied with winding up the affairs of CTCM
after it ceased operations. Joselyn and her lawyers then failed to set up an appointment with Mercedes.
Joselyn, through counsel, then sent demand letters to inspect the records. Not long after, Joselyn filed two
cases, one of which was civil and the other, criminal, against the petitioners.

On July 4, 2001, an Information12 indicting the petitioners for alleged violation of Section 7 4, in relation
to Section 144, of the Corporation Code was filed before the MeTC of Quezon City. The case was docketed
as Criminal Case No. 107079, raffled to Branch 43.

The Proceedings before the MeTC and the RTC

On January 30, 2002, the petitioners filed before the MeTC a Motion to Quash 13 the Information filed
against them. They argued that CTCM had ceased to exist as a corporate entity since May 26, 1999.
Consequently, when the acts complained of by Joselyn were allegedly committed in August of 2000, the
petitioners cannot be considered anymore as responsible officers of CTCM. Thus, assuming for
argument's sake that the petitioners actually refused to let Joselyn inspect corporate records, no criminal
liability can attach to an omission to perform a duty, which no longer existed. The Me TC, however,
denied the petitioners' Motion to Quash.

Arraignment, pre-trial and trial then ensued. The prosecution offered the testimonies of Joselyn and
Abednego Velayo (Velayo ). On the other hand, the petitioners neither presented witnesses, nor filed any
documentary evidence. 14

On November 23, 2012, the MeTC rendered its Judgment15 convicting the petitioners as charged,
sentencing them to suffer the penalty of 30 days of imprisonment, and directing them to pay the costs of
suit. The MeTC cited Ang-Abaya, et al. v. Ang16to stress that in the instant case, the prosecution had amply
established the presence of the elements of the offense under Section 74 of the Corporation Code, to wit:
(a) a stockholder's prior demand in writing for the inspection of corporate records; (b) refusal by
corporate officers to allow the inspection; and (c) proofs adduced by the corporate officers of the
stockholder's prior improper or malicious use of the records in the event that the same is raised as a
defense for the refusal to allow the inspection. 17 Further invoking Gokongwei, Jr. v. Securities and
Exchange Commission, 18 the Me TC explained that a stockholder's right to inspect corporate records is
based upon the necessity of self-protection. 19 Thus, the exercise of the right at reasonable hours during
business days should be allowed.

In the Order20 dated March 26, 2013, the MeTC denied the petitioners' Motion for Reconsideration. 21

The petitioners filed an appeal, which the RTC denied in the Decision22 rendered on March 27, 2014. The
RTC agreed with the MeTC's ruling and stated that the petitioners should have presented their evidence
to contradict or rebut the evidence presented by the prosecution that has overcome their constitutional
right to be presumed innocent, before the lower court.23 In its Order24 dated July 4, 2014, the RTC denied
the petitioners' motion for reconsideration. 25

The Proceedings before the CA

The petitioners filed before the CA a petition for review under Rule 42 of the Rules of Court. On
September 23, 2014, the CA outrightly dismissed the petition on technical grounds, i.e., failure to submit
(a) true copies or duplicate originals of the MeTC's Judgment dated November 23, 2012 and Order dated
March 26, 2013, and (b) a Special Power of Attorney (SPA) authorizing Alfredo to file the petition and
sign the verification and certification of non-forum shopping in behalf of Tomas and Mercedes.26

On October 15, 2014, the petitioners filed a Motion for Reconsideration,27 to which they appended their
belated compliance with the formal requirements pointed out by the CA. Pending resolution of the
motion, Rosario Sui Lian Chua (Rosario), mother of the now deceased Joselyn, filed an Affidavit of
Desistance28 dated December 11, 2014, which in part stated that:

3. After taking stock of the situation of the [petitioners] in the above-captioned case, and considering
moreover that [Alfredo and Tomas] are both uncles of [Joselyn], and are brothers of my now also-
deceased husband, I and the rest of my family, have decided to condone any and all possible criminal
wrongdoings attributable to [the petitioners], and to absolve the latter of both civil and criminal liabilities
in connection with the above-captioned case;

4. In any event, we have reason to believe that the filing of the instant criminal case was merely the result
of serious misunderstanding anent the management and operation of [CTCM], which had long ceased to
exist as a corporate entity even prior to the alleged commission of the crime in question, rather than by
reason of any criminal intent or actuation on the part of the [petitioners].29

On January 6, 2015, the CA issued the second assailed Resolution30 denying the petitioners' motion for
reconsideration.1âwphi1

Issue
Unfazed, the petitioners filed before this Court the instant petition for review on certiorari raising the
sole issue of the propriety of their conviction for alleged violation of Section 74, in relation to Section 144,
of the Corporation Code. 31

The petitioners reiterate their stance that since CTCM had ceased business operations prior to Joselyn's
filing of her complaint before the MeTC, there was no longer any duty pertaining to corporate officers to
allow a stockholder to inspect the records.32 The petitioners also aver that the prosecution failed to prove
by competent evidence that they had actually prevented Joselyn from exercising her right of inspection.
They point out that when Joselyn was cross-examined, she admitted that the petitioners had allowed her
to see the records. However, since she had designated her accountant to conduct the inspection, she was
not able to physically view the records. Hence, she had no personal knowledge as to whether or not the
inspection of the specific records she requested was allowed or denied. 33 Further, Velayo himself stated
during the trial that the letters demanding for inspection of the records were addressed to CTCM and not
to the petitioners. Velayo also declared that he had no personal dealings with the petitioners.34 Besides,
Rosario's Affidavit of Desistance proves the frivolous nature of Joselyn's complaint and the unjustness of
the petitioners' conviction by the courts a quo.35

In its Comment, 36 the OSG points out that under Section 122 of the Corporation Code, a corporate
entity, "whose charter expires by its own limitation" shall continue as "a body corporate for three (3) years
after the time when it would have been so dissolved, for the purpose of prosecuting and defending suits by or
against it and enabling it to settle and close its affairs." It follows then that CTCM continued as a body
corporate until May of 2002. 37 Moreover, the board of directors is not rendered functus officio by reason
of the corporation's dissolution.38 Liabilities incurred by officers shall not be removed or impaired by the
subsequent dissolution of the corporation.39 It follows therefore that a stockholder's right to inspect
corporate records subsists during the period of liquidation. 40

The OSG also emphasizes Velayo's testimony that upon his visit to CTCM's corporate office, the books of
accounts were not formally presented and no schedule was offered as to when the requested inspection
can be conducted. 41

Ruling of the Court

The Court affirms the conviction but directs the payment of fine, in lieu of the penalty of imprisonment
imposed by the courts a quo.

Procedural Matters

The CA's outright dismissal of the

petition for review filed before it

The CA outrightly dismissed on technical grounds the petition for review filed before it under Rule 42 of
the Rules of Court. Thereafter, the petitioners filed their belated compliance to correct the procedural
flaws referred to by the CA. They explained that their failure to immediately submit the requisite SPA
authorizing Alfredo to sign the verification and certification against non-forum shopping, and act in
behalf of Tomas and Mercedes was due to the fact that the latter two were out of the country when the
petition was filed. Anent the petitioners' non-submission of true copies or duplicate originals of the Me
TC judgment and order, they admitted their negligence, and prayed for the court's indulgence. 42
Fuji Television Network, Inc. v. Espiritu43summarizes the rules on verification and certification against
forum shopping, viz.:

1) A distinction must be made between non[-]compliance with the requirement on or submission of

defective verification, and non[-] compliance with the requirement on or submission of defective
certification against forum shopping.

2) As to verification, non[-]compliance therewith or a defect therein does not necessarily render the
pleading fatally defective. The court may order its submission or correction or act on the pleading if the
attending circumstances are such that strict compliance with the Rule may be dispensed with in order
that the ends of justice may be served thereby.

3) Verification is deemed substantially complied with when one who has ample knowledge to swear to
the truth of the allegations in the complaint or petition signs the verification, and when matters alleged in
the petition have been made in good faith or are true and correct.

4) As to certification against forum shopping, non-compliance therewith or a defect therein, unlike in

verification, is generally not curable by its subsequent submission or correction thereof, unless there is a
need to relax the Rule on the ground of "substantial compliance" or presence of "special circumstances or
compelling reasons."

5) The certification against forum shopping must be signed by all the plaintiffs or petitioners in a case;
otherwise, those who did not sign will be dropped as parties to the case. Under reasonable or justifiable
circumstances, however, as when all the plaintiffs or petitioners share a common interest and invoke a
common cause of action or defense, the signature of only one of them in the certification against forum
shopping substantially complies with the Rule.

x x x x44 (Italics and underscoring deleted)

In the case at bar, the petitioners complied with the procedural requirements belatedly, defectively, or
substantially. They explained the reasons for their lapses and begged for the court's understanding. It
likewise bears noting that the petitioners share common interests and causes of action as regards the
petition for review filed before the CA.

Tible & Tible Company, Inc., et al. v. Royal Savings and Loan Association, et al. 45 is emphatic that:

Courts are not slaves or robots of technical rules, shorn of judicial discretion. In rendering justice, courts
have always been, as they ought to be, conscientiously guided by the norm that on balance, technicalities
take a backseat against substantive rights, and not the other way around. 46 (Italics in the original)

Prescinding therefrom, the Court finds that the CA had committed reversible error in outrightly
dismissing the petition filed before it.1âwphi1 The Court does not perceive intentional disregard of
procedures on the part of the petitioners. The circumstances, thus, call for a relaxation of the rules in the
interest of substantial justice.

The effect of an Affidavit of

Desistance executed after an action
has already been instituted in court
"By itself, an affidavit of desistance or pardon is not a ground for the dismissal of an action, once the
action has been instituted in court."47

In the case at bench, Rosario's affidavit, which was executed during the pendency of the petition for
review before the CA, did not abate the proceedings. This properly springs from the rule that in a criminal
action already filed in court, the private complainant loses the right or absolute privilege to decide
whether the charge should proceed.

On Substantive Matters

Despite the expiration of CTCM's

corporate term in 1999, duties as
corporate officers still pertained to
the petitioners when Joselyn 's
complaint was filed in 2000.

Yu, et al. v. Yukayguan, et al. 48 instructs that:

[T]he corporation continues to be a body corporate for three (3) years after its dissolution for purposes
of prosecuting and defending suits by and against it and for enabling it to settle and close its affairs,
culminating in the disposition and distribution of its ,remaining assets. x x x The termination of the life of
a juridical entity does not by itself cause the extinction or diminution of the rights and liabilities of such
entity x x x nor those of its owners and creditors. x x x.49

Further, as correctly pointed out by the OSG, Sections 122 and 145 of the Corporation Code explicitly
provide for the continuation of the body corporate for three years after dissolution. The rights and
remedies against, or liabilities of, the officers shall not be removed or impaired by reason of the
dissolution of the corporation. Corollarily then, a stockholder's right to inspect corporate records subsists
during the period of liquidation. Hence, Joselyn, as a stockholder, had the right to demand for the
inspection of records. Lodged upon the corporation is the corresponding duty to allow the said
inspection.

It is beyond the ambit of a

petition filed under Rule 45 of the
Rules of Court to recalibrate the
evidence considered in the
proceedings below. However, the
Court notes circumstances justifying
the modification of the assailed
resolutions.

The Court notes that in the course of the trial, the petitioners presented neither testimonial nor
documentary evidence to prove their innocence. 50 The MeTC rendered a judgment of conviction, which
the RTC and the CA affirmed in toto.

It is settled that "a re-examination of factual findings is outside the province of a petition for review
on certiorari,"51especially in the instant petition where the MeTC, RTC and CA concurred in convicting the
petitioners of the charges against them.
Be that as it may, the Court takes exception and notes the following circumstances: (a) during cross-
examination, Joselyn admitted that permission was granted for her to see the documents, but she was
unable to actually view them as she was represented by her accountant; (b) Joselyn lacked personal
knowledge as to whether or not the petitioners in fact allowed or denied the checking of the records she
had requested; (c) Velayo stated that the letter requesting for the examination of CTCM's records was
addressed to the Accounting Department, and he and his colleagues did not have personal dealings with
the petitioners. 52

From the foregoing, it is apparent that a complete examination of CTCM's records did not occur resulting
to an effective deprivation of Joselyn's right as a stockholder. However, from Joselyn and Velayo's
testimonies, it can be inferred that permission to view the records was granted, albeit not fully effected.
The petitioners, on their part, explained in the Counter-Affidavit filed before the Quezon City Prosecution
Office that they never prevented Joselyn from exercising her right of inspection, but when the latter made
her request, Mercedes was too occupied in winding up the affairs of CTCM. 53

While a cloud of doubt is cast upon the existence of criminal intent on the part of the petitioners, it is
jurisprudentially settled that proof of malice or deliberate intent (mens rea) is not essential in offenses
punishable by special laws, which are mala prohibita.54

In the case at bar, the petitioners were charged with violations of Section 74, in relation to Section 144, of
the Corporation Code, a special law. Accordingly, since Joselyn was deprived of the exercise of an effective
right of inspection, offenses had in fact been committed, regardless of the petitioners' intent. The
Corporation Code provides for penalties relative to the commission of offenses, which cannot be
trivialized, lest the public purpose for which they are crafted be defeated and put to naught.

No exceptional grounds exist justifying the reversal of the conviction previously rendered by the MeTC,
RTC and CA. However, in lieu of the penalty of 30 days of imprisonment, the Court finds it more just to
impose upon each of the petitioners a fine of Ten Thousand Pesos (₱10,000.00) considering the reasons
below. First. Malicious intent was seemingly wanting. Permission to check the records was granted,
albeit not effected. Second. Joselyn had predeceased Alfredo and Tomas, her uncles, who are in their
twilight years. Third. Joselyn's mother, Rosario, had executed an Affidavit of Desistance stating that the
filing of the complaint before was "merely the result of [a] serious misunderstanding anent the
management and operation of [CTCM], which had long ceased to exist as a corporate entity even prior to the
alleged commission of the crime in question, rather than by reason of any criminal intent or actuation on the
part of the [petitioners]. "55

WHEREFORE, IN VIEW OF THE FOREGOING, the conviction of Alfredo L. Chua, Tomas L. Chua and
Mercedes P. Diaz for violations of Section 74, in relation to Section 144, of the Corporation Code
is AFFIRMED, but MODIFIEDto the extent that in lieu of the penalty of thirty (30) days of imprisonment,
a FINE of TEN THOUSAND PESOS(₱10,000.00) each is imposed upon the petitioners.

SO ORDERED.

THIRD DIVISION

June 7, 2017

G.R. No. 211108

ALEJANDRO D.C. ROQUE, Petitioner
vs.
PEOPLE OF THE PHILIPPINES, Respondent

DECISION

TIJAM, J.:

Before Us is a Petition for Review on Certiorari under Rule 45 filed by petitioner Alejandro Roque
(Roque).

Roque assails the Decision 1 dated August 31, 2012 and the Resolution 2 dated January 22, 2014 of the
Court of Appeals 3 (CA), which set aside and annulled the Order 4 dated November 12, 2008 of the
Regional Trial Court (RTC) 5 , Third Judicial Region, Branch 11, Malolos City, Bulacan in Criminal Case No.
1011-M- 2005. Said Order granted the motion for leave of court to file demurrer to evidence filed by
Rosalyn Singson (Singson), herein petitioner's co-accused.

On November 17, 1993, Barangay Mulawin Tricycle Operators and Drivers Association, Inc. (BMTODA)
became a corporation duly registered with the Securities and Exchange Commission (SEC).

Sometime in August 2003, Oscar Ongjoco (Ongjoco), a member of BMTODA, learned that BMTODA's
funds were missing. In a letter, Ongjoco requested copies of the Association's documents pursuant to his
right to examine records under Section 74 of the Corporation Code of the Philippines (Corporation Code).
However, Singson, the Secretary of BMTODA, denied his request.

Ongjoco also learned that the incumbent officers were holding office for three years already, in violation
of the one-year period provided for in BMTODA's by-laws. He then requested from Roque, the President
of BMTODA, a copy of the list of its members with the corresponding franchise numbers of their
respective tricycle fees and the franchise fees paid by each member, but Roque denied Ongjoco's request.

Ongjoco filed an Affidavit-Complaint against Roque and Singson for violation of Section 7 4 in relation to
Section 144 of the Corporation Code because of their refusal to furnish him copies of records pertaining
to BMTODA.

The Office of the City Prosecutor of San Jose Del Monte, Bulacan found probable cause to indict Roque and
Singson. Hence, an Information was filed against them, which reads:

That sometime in December 2004, in San Jose Del Monte City, [P]rovince of Bulacan, Ph,ilippines, and
within the jurisdiction of this Honorable· Court, the said accused, Alejandro D.C. Roque and Rosalyn G.
Singson, being the President and Secretary, respectively, of Barangay Mulawin Tricycle Operators and
Drivers Association, Inc. (BMTODA), conspiring, confederating, and mutually helping each other, did then
and there willfully, unlawfully, and feloniously fail and neglect to keep in their official record of all
business transactions, minutes of all meetings or stockholders or members·, or of the board of directors
or trustees and refused to allow stockholders, members, directors or trustees to examine and copy
excerpt from the records or minutes of the association after demand in writing. 6
After the prosecution rested its case, Roque and Singson filed a Motion for Leave of Court to File
Demurrer to Evidence with Motion to Dismiss by way of Demurrer to Evidence.1âwphi1 The prosecution
failed to file any comment thereon.

In an Order 7 dated November 12, 2008, the RTC granted the motion and gave due course to Roque and
Singson's demurrer to evidence. The RTC ruled that said association failed to prove its existence as a
corporation.

Hence, a violation under the Corporation Code cannot be made applicable against its officers.
The fallo thereof reads:

Accordingly, this demurrer is GIVEN DUE COURSE and the instant case is hereby DISMISSED.

SO ORDERED. 8

On appeal, the CA reversed and set aside the Order dated November 12, 2008 of the RTC. The CA ruled
that BMTODA is a duly registered corporation. The CA stated that a Petition to Lift Order of Revocation
and the SEC Order Lifting the Revocation were presented in evidence; and that logic dictates that such
documentary evidence presupposes a duly registered and existing entity. The dispositive portion thereof
reads:

WHEREFORE, premises considered, the instant Petition for Certiorari is hereby GRANTED.

Accordingly, the court a quo's Order dated 12 November 2008 is hereby ANNULLED and SET ASIDE.

This case is hereby remanded to the court a quo for the presentation of defense evidence. SO ORDERED. 9

Hence, Roque, thru his counsel, filed the present Petition.

Petitioner contends that there is want of evidence to prove that BMTODA is a corporation duly
established and organized under the Corporation Code; thus, he cannot be prosecuted under the penal
provisions of the said code.

The appeal lacks merit.

Section 7410 of the Corporation Code provides for the liability for damages of any officer or agent of the
corporation for refusing to allow any director, trustee, stockholder or member of the corporation to
examine and copy excerpts from its records or minutes. Section 144 of the same Code further provides
for other applicable penalties in case of violation of any provision of the Corporation Code.

Hence, to prove any violation under the aforementioned provisions, it is necessary that: (1) a director,
trustee, stockholder or member has made a prior demand in writing for a copy of excerpts from the
corporations records or minutes; (2) any officer or agent of the concerned corporation shall refuse to
allow the said director, trustee, stockholder or member of the corporation to examine and copy said
excerpts; (3) if such refusal is made pursuant to a resolution or order of the board of directors or
trustees, the liability under this section for such action spall be imposed upon the directors or trustees
who voted for such refusal;· and (4) where the officer or agent of the corporation sets up the defense that
the person demanding to examine and copy excerpts from the corporation's records and minutes has
improperly used any information secured through any prior examination of the records or minutes of
such corporation or of any other corporation, or was not acting in good faith or for a legitimate purpose
in making his demand, the contrary must be shown or proved. 11

Clearly, Ongjoco, as a member of BMTODA, had a right to examine documents and records pertaining to
said association. To recall, Ongjoco made a prior demand in writing for copy of pertinent records of
BMTODA from Roque and Singson. Ongjoco sent his letters dated December 13, 2003 12 and August 29,
2004 13 to Roque and Singson, respectively. However, both of them refused to furnish Ongjoco copies of
such pertinent records.

Roque argues that when the letters were received by him and Singson, BMTODA's registration
was·.already revoked. Hence, BMTODA ceased to exist as a corporation.

We are not persuaded.

While it appears that the registration of BMTODA as a corporation with the SEC was revoked on
September 30, 2003, the letter-request of Ongjoco to Singson, which was dated while BMTODA's
registration was revoked, was actually received by Singson after the revocation was lifted. In a Letter
dated October 11, 2004, the General Counsel of the SEC made it clear that the SEC lifted the revocation of
BMTODA's registration on August 30, 2004. As the CA correctly observed, the letter-request was received
by Singson on September 23, 2004 when BMTODA had regained its active status. 14

In any case, the revocation of a corporation's Certificate of Registration does not automatically warrant
the extinction of the corporation itself such that its rights and liabilities are likewise altogether
extinguished. In the case of Clemente v. Court of Appeals 15 , the Court explained that the termination of
the life of a juridical entity does not, by itself, cause the extinction or diminution of the rights and
liabilities of such entity nor those of its owners and creditors.

Thus, the revocation of BMTODA's registration does not automatically strip off Ongjoco of his right to
examine pertinent documents and records relating to such association.

Also, since Roque .admitted the revocation of BMTODA's Registration 16 , he cannot come 'forward and
disclaim BMTODA's registration with the SEC as a corporation. It is logical to presume that a registration
precedes the revocation thereof; as any registration cannot be revoked without its valid existence.

Moreover, Roque also tries to exculpate himself from liability by claiming Singson's denial of the request
of Ongjoco as Singson's personal act.

We do not agree.

A reading of this present Petition reveals that Roque admitted 17 his denial of Ongjoco's request, i.e., to
furnish him a copy of BMTODA's list of its members with the corresponding franchise body numbers of
their respective tricycles and franchise fees paid by each member. Also, what was requested from Singson
pertains to an entirely different document. Thus, Singson' s denial is immateriai, and does not detract
from Roque' s denial of Ongjoco's request to access the above-mentioned document. For his individual
and separate act, Roque should be held accountable. Hence, Roque's denial is unquestionably considered
as a violation under the Corporation Code.
WHEREFORE, the instant petition is DENIED. The Decision dated August 31, 2012 and Resolution dated
January 22, 2014 of the Court of Appeals are AFFIRMED in toto.

SO ORDERED.

Republic of the Philippines

SUPREME COURT
Manila

THIRD DIVISION

G.R. No. 165887 June 6, 2011

MAJORITY STOCKHOLDERS OF RUBY INDUSTRIAL CORPORATION, Petitioners,

vs.
MIGUEL LIM, in his personal capacity as Stockholder of Ruby Industrial Corporation and
representing the MINORITY STOCKHOLDERS OF RUBY INDUSTRIAL CORPORATION and the
MANAGEMENT COMMITTEE OF RUBY INDUSTRIAL CORPORATION, Respondents.

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

G.R. No. 165929

CHINA BANKING CORPORATION, Petitioner,

vs.
MIGUEL LIM, in his personal capacity as a stockholder of Ruby Industrial Corporation and
representing the MINORITY STOCKHOLDERS OF RUBY INDUSTRIAL CORPORATION, Respondent.

DECISION

VILLARAMA, JR., J.:

This case is brought to us on appeal for the fourth time, involving the same parties and interests litigating
on issues arising from rehabilitation proceedings initiated by Ruby Industrial Corporation wayback in
1983.

Following is the factual backdrop of the present controversy, as culled from the records and facts set
forth in the ponencia of Chief Justice Reynato S. Puno in Ruby Industrial Corporation v. Court of Appeals.1

The Antecedents

Ruby Industrial Corporation (RUBY) is a domestic corporation engaged in glass manufacturing. Reeling
from severe liquidity problems beginning in 1980, RUBY filed on December 13, 1983 a petition for
suspension of payments with the Securities and Exchange Commission (SEC) docketed as SEC Case No.
2556. On December 20, 1983, the SEC issued an order declaring RUBY under suspension of payments and
enjoining the disposition of its properties pending hearing of the petition, except insofar as necessary in
its ordinary operations, and making payments outside of the necessary or legitimate expenses of its
business.
On August 10, 1984, the SEC Hearing Panel created the management committee (MANCOM) for RUBY,
composed of representatives from Allied Leasing and Finance Corporation (ALFC), Philippine Bank of
Communications (PBCOM), China Banking Corporation (China Bank), Pilipinas Shell Petroleum
Corporation (Pilipinas Shell), and RUBY represented by Mr. Yu Kim Giang. The MANCOM was tasked to
perform the following functions: (1) undertake the management of RUBY; (2) take custody and control
over all existing assets and liabilities of RUBY; (3) evaluate RUBY’s existing assets and liabilities, earnings
and operations; (4) determine the best way to salvage and protect the interest of its investors and
creditors; and (5) study, review and evaluate the proposed rehabilitation plan for RUBY.

Subsequently, two (2) rehabilitation plans were submitted to the SEC: the BENHAR/RUBY Rehabilitation
Plan of the majority stockholders led by Yu Kim Giang, and the Alternative Plan of the minority
stockholders represented by Miguel Lim (Lim).

Under the BENHAR/RUBY Plan, Benhar International, Inc. (BENHAR) -- a domestic corporation engaged
in the importation and sale of vehicle spare parts which is wholly owned by the Yu family and headed by
Henry Yu, who is also a director and majority stockholder of RUBY -- shall lend its ₱60 million credit line
in China Bank to RUBY, payable within ten (10) years. Moreover, BENHAR shall purchase the credits of
RUBY’s creditors and mortgage RUBY’s properties to obtain credit facilities for RUBY. Upon approval of
the rehabilitation plan, BENHAR shall control and manage RUBY’s operations. For its service, BENHAR
shall receive a management fee equivalent to 7.5% of RUBY’s net sales.

The BENHAR/RUBY Plan was opposed by 40% of the stockholders, including Lim, a minority shareholder
of RUBY. ALFC, the biggest unsecured creditor of RUBY and chairman of the management committee, also
objected to the plan as it would transfer RUBY’s assets beyond the reach and to the prejudice of its
unsecured creditors.

On the other hand, the Alternative Plan of RUBY’s minority stockholders proposed to: (1) pay all RUBY’s
creditors without securing any bank loan; (2) run and operate RUBY without charging management fees;
(3) buy-out the majority shares or sell their shares to the majority stockholders; (4) rehabilitate RUBY’s
two plants; and (5) secure a loan at 25% interest, as against the 28% interest charged in the loan under
the BENHAR/RUBY Plan.

Both plans were endorsed by the SEC to the MANCOM for evaluation.

On October 28, 1988, the SEC Hearing Panel approved the BENHAR/RUBY Plan. The minority
stockholders thru Lim appealed to the SEC En Banc which, in its November 15, 1988 Order, enjoined the
implementation of the BENHAR/RUBY Plan. On December 20, 1988 after the expiration of the temporary
restraining order (TRO), the SEC En Banc granted the writ of preliminary injunction against the
enforcement of the BENHAR/RUBY Plan. BENHAR, Henry Yu, RUBY and Yu Kim Giang questioned the
issuance of the writ in their petition filed in the Court of Appeals (CA), docketed as CA-G.R. SP No. 16798.
The CA denied their appeal.2 Upon elevation to this Court (G.R. No. L-88311), we issued a minute
resolution dated February 28, 1990 denying the petition and upholding the injunction against the
implementation of the BENHAR/RUBY Plan.

Meanwhile, BENHAR paid off Far East Bank & Trust Company (FEBTC), one of RUBY’s secured creditors.
By May 30, 1988, FEBTC had already executed a deed of assignment of credit and mortgage rights in
favor of BENHAR. BENHAR likewise paid the other secured creditors who, in turn, assigned their rights in
favor of BENHAR. These acts were done by BENHAR despite the SEC’s TRO and injunction and even
before the SEC Hearing Panel approved the BENHAR/RUBY Plan on October 28, 1988.

ALFC and Miguel Lim moved to nullify the deeds of assignment executed in favor of BENHAR and cite the
parties thereto in contempt for willful violation of the December 20, 1983 SEC order enjoining RUBY from
disposing its properties and making payments pending the hearing of its petition for suspension of
payments. They also charged that in paying off FEBTC’s credits, FEBTC was given undue preference over
the other creditors of RUBY. Acting on the motions, the SEC Hearing Panel nullified the deeds of
assignment executed by RUBY’s creditors in favor of BENHAR and declared the parties thereto guilty of
indirect contempt. BENHAR and RUBY appealed to the SEC En Banc which denied their appeal. BENHAR
and RUBY joined by Henry Yu and Yu Kim Giang appealed to the CA (CA-G.R. SP No. 18310). By
Decision3 dated August 29, 1990, the CA affirmed the SEC ruling nullifying the deeds of assignment. The
CA also declared its decision final and executory as to RUBY and Yu Kim Giang for their failure to file their
pleadings within the reglementary period. By Resolution dated August 26, 1991 in G.R. No. 96675, 4 this
Court affirmed the CA’s decision.

Earlier, on May 29, 1990, after the SEC En Banc enjoined the implementation of BENHAR/RUBY Plan,
RUBY filed with the SEC En Banc an ex parte petition to create a new management committee and to
approve its revised rehabilitation plan (Revised BENHAR/RUBY Plan). Under the revised plan, BENHAR
shall receive ₱34.068 million of the ₱60.437 Million credit facility to be extended to RUBY, as
reimbursement for BENHAR’s payment to some of RUBY’s creditors. The SEC En Banc directed RUBY to
submit its revised rehabilitation plan to its creditors for comment and approval while the petition for the
creation of a new management committee was remanded for further proceedings to the SEC Hearing
Panel. The Alternative Plan of RUBY’s minority stockholders was also forwarded to the hearing panel for
evaluation.

On April 26, 1991, over ninety percent (90%) of RUBY’s creditors objected to the Revised BENHAR/RUBY
Plan and the creation of a new management committee. Instead, they endorsed the minority
stockholders’ Alternative Plan. At the hearing of the petition for the creation of a new management
committee, three (3) members of the original management committee (Lim, ALFC and Pilipinas Shell)
opposed the Revised BENHAR/RUBY Plan on grounds that: (1) it would legitimize the entry of BENHAR, a
total stranger, to RUBY as BENHAR would become the biggest creditor of RUBY; (2) it would put RUBY’s
assets beyond the reach of the unsecured creditors and the minority stockholders; and (3) it was not
approved by RUBY’s stockholders in a meeting called for the purpose.

Notwithstanding the objections of 90% of RUBY’s creditors and three members of the MANCOM, the SEC
Hearing Panel approved on September 18, 1991 the Revised BENHAR/RUBY Plan and dissolved the
existing management committee. It also created a new management committee and appointed BENHAR
as one of its members. In addition to the powers originally conferred to the management committee
under Presidential Decree (P.D.) No. 902-A, the new management committee was tasked to oversee the
implementation by the Board of Directors of the revised rehabilitation plan for RUBY.

The original management committee (MANCOM), Lim and ALFC appealed to the SEC En Banc which
affirmed the approval of the Revised BENHAR/RUBY Plan and the creation of a new management
committee on July 30, 1993. To ensure that the management of RUBY will not be controlled by any group,
the SEC appointed SEC lawyers Ruben C. Ladia and Teresita R. Siao as additional members of the new
management committee. Further, it declared that BENHAR’s membership in the new management
committee is subject to the condition that BENHAR will extend its credit facilities to RUBY without using
the latter’s assets as security or collateral.

Lim, ALFC and MANCOM moved for reconsideration while RUBY and BENHAR asked the SEC to
reconsider the portion of its Order prohibiting BENHAR from utilizing RUBY’s assets as collateral. On
October 15, 1993, the SEC denied the motion of Lim, ALFC and the original management committee but
granted RUBY and BENHAR’s motion and allowed BENHAR to use RUBY’s assets as collateral for loans,
subject to the approval of the majority of all the members of the new management committee. Lim, ALFC
and MANCOM appealed to the CA (CA-G.R. SP Nos. 32404, 32469 & 32483) which by Decision5 dated
March 31, 1995 set aside the SEC’s approval of the Revised BENHAR/RUBY Plan and remanded the case
to the SEC for further proceedings. The CA ruled that the revised plan circumvented its earlier decision
(CA-G.R. SP No. 18310) nullifying the deeds of assignment executed by RUBY’s creditors in favor of
BENHAR. Since under the revised plan, BENHAR was to receive ₱34.068 Million of the ₱60.437 Million
credit facility to be extended to RUBY, as settlement for its advance payment to RUBY’s seven (7) secured
creditors, such payments made by BENHAR under the void Deeds of Assignment, in effect were
recognized as payable to BENHAR under the revised plan. The motion for reconsideration filed by
BENHAR and RUBY was likewise denied by the CA.6

Undaunted, RUBY and BENHAR filed a petition for review in this Court (G.R. Nos. 124185-87 entitled
Ruby Industrial Corporation v. Court of Appeals) alleging that the CA gravely abused its discretion in
substituting its judgment for that of the SEC, and in allowing Lim, ALFC and MANCOM to file separate
petitions prepared by lawyers representing themselves as belonging to different firms. By
Decision7 dated January 20, 1998, we sustained the CA’s ruling that the Revised BENHAR/RUBY Plan
contained provisions which circumvented its final decision in CA-G.R. SP No. 18310, nullifying the deeds
of assignment of credits and mortgages executed by RUBY’s creditors in favor of BENHAR, as well as this
Court’s Resolution in G.R. No. 96675, affirming the said CA’s decision. We thus held:

…Specifically, the Revised BENHAR/RUBY Plan considered as valid the advance payments made by
BENHAR in favor of some of RUBY’s creditors. The nullity of BENHAR’s unauthorized dealings with
RUBY’s creditors is settled. The deeds of assignment between BENHAR and RUBY’s creditors had been
categorically declared void by the SEC Hearing Panel in two (2) orders issued on January 12, 1989 and
March 15, 1989. x x x

xxxx

These orders were upheld by the SEC en banc and the Court of Appeals. In CA-G.R. SP No. 18310, the
Court of Appeals ruled as follows:

"x x x xxx xxx

"1) x x x when the Deed of Assignment was executed on May 30, 1988 by and between Ruby
Industrial Corp., Benhar International, Inc., and FEBTC, the Rehabilitation Plan proposed by
petitioner Ruby Industrial Corp. for Benhar International, Inc. to assume all petitioner’s obligation
has not been approved by the SEC. The Rehabilitation Plan was not approved until October 28,
1988. There was a willful and blatant violation of the SEC order dated December 20, 1983 on the
part of petitioner Ruby Industrial Corp., represented by Yu Kim Giang, by Benhar International,
Inc., represented by Henry Yu and by FEBTC….
 "2) The magnitude and coverage of the transactions involved were such that Yu Kim Giang and the
other signatories cannot feign ignorance or pretend lack of knowledge thereto in view of the fact
that they were all signatories to the transaction and privy to all the negotiations leading to the
questioned transactions. In executing the Deeds of Assignment, the petitioners totally disregarded
the mandate contained in the SEC order not to dispose the properties of Ruby Industrial Corp. in
any manner whatsoever pending the approval of the Rehabilitation Plan and rendered illusory the
SEC efforts to rehabilitate the petitioner corporation to the best interests of all the creditors.

"3) The assignments were made without prior approval of the Management Committee created by
the SEC in an Order dated August 10, 1984. Under Sec. 6, par. d, sub. par. (2) of P.D. 902-A as
amended by P.D. 1799, the Management Committee, rehabilitation receiver, board or body shall
have the power to take custody and control over all existing assets of such entities under
management notwithstanding any provision of law, articles of incorporation or by-law to the
contrary. The SEC therefore has the power and authority, through a Management Committee
composed of petitioner’s creditors or through itself directly, to declare all assignment of assets of
the petitioner Corporation declared under suspension of payments, null and void, and to conserve
the same in order to effect a fair, equitable and meaningful rehabilitation of the insolvent
corporation."

"4) x x x. The acts for which petitioners were held in indirect contempt by the SEC arose from the
failure or willful refusal by petitioners to obey the lawful order of the SEC not to dispose of any of
its properties in any manner whatsoever without authority or approval of the SEC. The execution
of the Deeds of Assignment tend to defeat or obstruct the administration of justice. Such acts are
offenses against the SEC because they are calculated to embarrass, hinder and obstruct the
tribunal in the administration of justice or lessen its authority.

"x x x

Even the SEC en banc, in its July 30, 1993 Order affirming the approval of the Revised BENHAR/RUBY
Plan, has acknowledged the invalidity of the subject deeds of assignment. However, to justify it’s approval
of the plan and the appointment of BENHAR to the new management committee, it gave the lame excuse
that BENHAR became RUBY’s creditor for having paid RUBY’s debts. x x x

xxxx

For its part, the Court of Appeals noted that the approved Revised BENHAR/RUBY Plan gave undue
preference to BENHAR. The records, indeed, show that BENHAR’s offer to lend its credit facility in favor
of RUBY is conditioned upon the payment of the amount it advanced to RUBY’s creditors, x x x

xxxx

In fact, BENHAR shall receive P34.068 Million out of the P60.437 Million credit facility to be extended to
RUBY for the latter’s rehabilitation.

Rehabilitation contemplates a continuance of corporate life and activities in an effort to restore and
reinstate the corporation to its former position of successful operation and solvency. When a distressed
company is placed under rehabilitation, the appointment of a management committee follows to avoid
collusion between the previous management and creditors it might favor, to the prejudice of the other
creditors. All assets of a corporation under rehabilitation receivership are held in trust for the equal
benefit of all creditors to preclude one from obtaining an advantage or preference over another by the
expediency of attachment, execution or otherwise. As between the creditors, the key phrase is equality in
equity. Once the corporation threatened by bankruptcy is taken over by a receiver, all the creditors ought
to stand on equal footing. Not any one of them should be paid ahead of the others. This is precisely the
reason for suspending all pending claims against the corporation under receivership.8(Additional
emphasis supplied.)

Aside from the undue preference that would have been given to BENHAR under the Revised
BENHAR/RUBY Plan, we also found RUBY’s dealing with BENHAR highly irregular and its proposed
financing scheme more costly and ultimately prejudicial to RUBY. Thus:

Parenthetically, BENHAR is a domestic corporation engaged in importing and selling vehicle spare parts
with an authorized capital stock of thirty million pesos. Yet, it offered to lend its credit facility in the
amount of sixty to eighty million pesos to RUBY. It is to be noted that BENHAR is not a lending or
financing corporation and lending its credit facilities, worth more than double its authorized
capitalization, is not one of the powers granted to it under its Articles of Incorporation. Significantly,
Henry Yu, a director and a majority stockholder of RUBY is, at the same time, a stockholder of BENHAR, a
corporation owned and controlled by his family. These circumstances render the deals between BENHAR
and RUBY highly irregular.

xxxx

Moreover, when RUBY initiated its petition for suspension of payments with the SEC, BENHAR was not
listed as one of RUBY’s creditors. BENHAR is a total stranger to RUBY. If at all, BENHAR only served as a
conduit of RUBY. As aptly stated in the challenged Court of Appeals decision:

"Benhar’s role in the Revised Benhar/Ruby Plan, as envisioned by the majority stockholders, is to
contract the loan for Ruby and, serving the role of a financier, relend the same to Ruby. Benhar is merely
extending its credit line facility with China Bank, under which the bank agrees to advance funds to the
company should the need arise. This is unlikely a loan in which the entire amount is made available to the
borrower so that it can be used and programmed for the benefit of the company’s financial and
operational needs. Thus, it is actually China Bank which will be the source of the funds to be relent to
Ruby. Benhar will not shell out a single centavo of its own funds. It is the assets of Ruby which will be
mortgaged in favor of Benhar. Benhar’s participation will only make the rehabilitation plan more costly
and, because of the mortgage of its (Ruby’s) assets to a new creditor, will create a situation which is
worse than the present. x x x"

We need not say more.9 (Additional emphasis supplied.)

After the finality of the above decision, the SEC set the case for further proceedings.10 On March 14, 2000,
Bank of the Philippine Islands (BPI), one of RUBY’s secured creditors, filed a Motion to Vacate Suspension
Order11 on grounds that there is no existing management committee and that no decision has been
rendered in the case for more than 16 years already, which is beyond the period mandated by Sec. 3-8 of
the Rules of Procedure on Corporate Recovery. RUBY filed its opposition,12 asserting that the MANCOM
never relinquished its status as the duly appointed management committee as it resisted the orders of
the second and third management committees subsequently created, which have been nullified by the CA
and later this Court. As to the applicability of the cited rule under the Rules on Corporate Recovery, RUBY
pointed out that this case was filed long before the effectivity of said rules. It also pointed out that the
undue delay in the approval of the rehabilitation plan being due to the numerous appeals taken by the
minority stockholders and MANCOM to the CA and this Court, from the SEC approval of the
BENHAR/RUBY Plan. Since there have already been steps taken to finally settle RUBY’s obligations with
its creditors, it was contended that the application of the mandatory period under the cited provision
would cause prejudice and injustice to RUBY.

It appears that even earlier during the pendency of the appeals in the CA, BENHAR and RUBY have
performed other acts in pursuance of the BENHAR/RUBY Plan approved by the SEC.

On September 1, 1996, Lim received a Notice of Stockholders’ Meeting scheduled on September 3, 1996
signed by a certain Mr. Edgardo M. Magtalas, the "Designated Secretary" of RUBY and stating the matters
to be taken up in said meeting, which include the extension of RUBY’s corporate term for another twenty-
five (25) years and election of Directors.13 At the scheduled stockholders’ meeting of September 3, 1996,
Lim together with other minority stockholders, appeared in order to put on record their objections on the
validity of holding thereof and the matters to be taken therein. Specifically, they questioned the
percentage of stockholders present in the meeting which the majority claimed stood at 74.75% of the
outstanding capital stock of RUBY.

The aforesaid stockholders meeting was the subject of the Motion to Cite For Contempt14 and Supplement
to Motion to Cite For Contempt15 filed by Lim before the CA where their petitions for review (CA-G.R. Nos.
32404, 32469 and 32483) were then pending. Lim argued that the majority stockholders claimed to have
increased their shares to 74.75% by subscribing to the unissued shares of the authorized capital stock
(ACS). Lim pointed out that such move of the majority was in implementation of the BENHAR/RUBY Plan
which calls for capital infusion of ₱11.814 Million representing the unissued and unsubscribed portion of
the present ACS of ₱23.7 Million, and the Revised BENHAR/RUBY Plan which proposed an additional
subscription of ₱30 Million. Since the implementation of both majority plans have been enjoined by the
SEC and CA, the calling of the special stockholders meeting by the majority stockholders clearly violated
the said injunction orders. This circumstance certainly affects the determination of quorum, the voting
requirements for corporate term extension, as well as the election of Directors pursuant to the July 30,
1993 Order and October 15, 1993 Resolution of the SEC enjoining not only the implementation of the
revised plan but also the doing of any act that may render the appeal from the approval of the said plan
moot and academic.

The aforementioned capital infusion was taken up by RUBY’s board of directors in a special
meeting16 held on October 2, 1991 following the issuance by the SEC of its Order dated September 18,
199117 approving the Revised BENHAR/RUBY Plan and creating a new management committee to
oversee its implementation. During the said meeting, the board asserted its authority and resolved to
take over the management of RUBY’s funds, properties and records and to demand an accounting from
the MANCOM which was ordered dissolved by the SEC. The board thus resolved that:

The corporation be authorized to issue out of the unissued portion of the authorized capital stocks of the
corporation in the form of common stocks 11.8134.00 [Million] after comparing this with the audited
financial statement prepared by SGV as of December 31, 1982, to be subscribed and paid in full by the
present stockholders in proportion to their present stockholding in the corporation on staggered basis
starting October 28, December 27 then February 28 and April 28 as the last installment date at 25% for
each period. It was also moved and seconded that should any of the stockholders fail to exercise their
rights to buy the number of shares they are qualified to buy by making the first installment payment of
25% on or before October 13, 1991, then the other stockholders may buy the same and that only when
none of the present stockholders are interested in the shares may there be a resort to selling them by
public auction.18

As reflected in the Minutes of the special board meeting, a representative of the absent directors (Tan
Chai, Tomas Lim, Miguel Lim and Yok Lim) came to submit their letter addressed to the Chairman
suggesting that said meeting be deferred until the September 18, 1991 SEC Order becomes final and
executory. The directors present nevertheless proceeded with the meeting upon their belief that neither
appeal nor motion for reconsideration can stay the SEC order.19

The resolution to extend RUBY’s corporate term, which was to expire on January 2, 1997, was approved
during the September 3, 1996 stockholders meeting, as recommended by the board of directors
composed of Henry Yu (Chairman), James Yu, David Yukimteng, Harry L. Yu, Yu Kim Giang, Mary L. Yu
and Vivian L. Yu. The board certified that said resolution was approved by stockholders representing
two-thirds (2/3) of RUBY’s outstanding capital stock.20 Per Certification21 dated August 31, 1995 issued
by Yu Kim Giang as Executive Vice-President of RUBY, the majority stockholders own 74.75% of RUBY’s
outstanding capital stock as of October 27, 1991. The Amended Articles of Incorporation was filed with
the SEC on September 24, 1996.22

On March 17, 2000, Lim filed a Motion23 informing the SEC of acts being performed by BENHAR and
RUBY through directors who were illegally elected, despite the pendency of the appeal before this Court
questioning the SEC approval of the BENHAR/RUBY Plan and creation of a new management committee,
and after this Court had denied their motion for reconsideration of the January 20, 1998 decision in G.R.
Nos. 124185-87. Lim reiterated that before the matter of extension of corporate life can be passed upon
by the stockholders, it is necessary to determine the percentage ownership of the outstanding shares of
the corporation. The majority stockholders claimed that they have increased their shareholdings from
59.828% to 74.75% as a result of the illegal and invalid stockholders’ meeting on September 3, 1996. The
additional subscription of shares cannot be done as it implements the BENHAR/RUBY Plan against which
an existing injunction is still effective based on the SEC Order dated January 6, 1989, and which was
struck down under the final decision of this Court in G.R. Nos. 124185-87. Hence, the implementation of
the new percentage stockholdings of the majority stockholders and the calling of stockholders’ meeting
and the subsequent resolution approving the extension of corporate life of RUBY for another twenty-five
(25) years, were all done in violation of the decisions of the CA and this Court, and without compliance
with the legal requirements under the Corporation Code. There being no valid extension of corporate
term, RUBY’s corporate life had legally ceased. Consequently, Lim moved that the SEC: (1) declare as null
and void the infusion of additional capital made by the majority stockholders and restore the capital
structure of RUBY to its original structure prior to the time injunction was issued; and (2) declare as null
and void the resolution of the majority stockholders extending the corporate life of RUBY for another
twenty-five (25) years.

The MANCOM concurred with Lim and made a similar manifestation/comment24 regarding the irregular
and invalid capital infusion and extension of RUBY’s corporate term approved by stockholders
representing only 60% of RUBY’s outstanding capital stock. It further stated that the foregoing acts were
perpetrated by the majority stockholders without even consulting the MANCOM, which technically
stepped into the shoes of RUBY’s board of directors. Since RUBY was still under a state of suspension of
payment at the time the special stockholders’ meeting was called, all corporate acts should have been
made in consultation and close coordination with the MANCOM.
Lim likewise filed an Opposition25 to BPI’s Motion to Vacate Suspension Order, asserting that the
management committee originally created by the SEC continues to control the corporate affairs and
properties of RUBY. He also contended that the SEC Rules of Procedure on Corporate Recovery cannot
apply in this case which was filed long before the effectivity of said rules.

On the other hand, RUBY filed its Opposition26 to the Motion filed by Lim denying the allegation of Lim
that RUBY’s corporate existence had ceased. RUBY claimed that due notice were given to all stockholders
of the October 2, 1991 special meeting in which the infusion of additional capital was discussed. It further
contended that the CA decision setting aside the SEC orders approving the Revised BENHAR/RUBY Plan,
which was subsequently affirmed by this Court on January 20, 1998, did not nullify the resolution of
RUBY’s board of directors to issue the previously unissued shares. The amendment of its articles of
incorporation on the extension of RUBY’s corporate term was duly submitted with and approved by the
SEC as per the Certification dated September 24, 1996.

The MANCOM also filed its Opposition27 to BPI’s Motion to Vacate Suspension Order, stating that it has
continuously performed its primary function of preserving the assets of RUBY and undertaken the
management of RUBY’s day-to-day affairs. It expressed belief that between chaotic foreclosure
proceedings and collection suits that would be triggered by the vacation of the suspension order and an
orderly settlement of creditors’ claims before the SEC, the latter path is the more prudent and logical
course of action. On April 28, 2000, it submitted to the court copies of the minutes of meetings held from
January 18, 1999 to December 1, 1999 in pursuance of its mandate to preserve the assets and administer
the business affairs of RUBY.28

On August 23, 2000, China Bank filed a Manifestation29 echoing the contentions of BPI that as there is no
existing management committee and no rehabilitation plan approved even after the 240-day period,
warrants the application of Sec. 4-9 of the SEC Rules of Procedure on Corporate Recovery such that the
petition is "deemed ipso facto denied and dismissed." China Bank lamented that the length of time that
has lapsed, as well as the parties’ actuations, completely betrays a genuine attempt to rehabilitate RUBY’s
moribund operations – all to the dismay, damage and prejudice of RUBY’s creditors. It stressed that the
proceedings cannot be prolonged nor used as a ploy to defer indefinitely the payment of long overdue
obligations of RUBY to its creditors. With the case having been ipso facto dismissed, there is no need of
further action from the parties or an order from the SEC. Consequently, RUBY’s creditors may now take
whatever legal action they may deem appropriate to protect their rights including, but not limited to
extrajudicial foreclosure.

On September 11, 2000, the SEC granted Lim’s request for the issuance of subpoena duces tecum/ad
testificandum to Ms. Jocelyn Sta. Ana of BPI for the latter to testify and bring all documents and records
pertaining to RUBY.30Earlier, Lim moved for a hearing to verify the information that China Bank and BPI
had separately executed deeds of assignment in favor of Greener Investment Corporation, a company
owned by Yu Kim Giang, one of RUBY’s majority stockholders.31 Said hearing, however, did not push
through in view of RUBY’s proposal for a compromise agreement.32 Lim submitted his comments on the
Proposed Compromise Agreement, but there was no response from RUBY and the majority
stockholders.33 The minority stockholders likewise served a copy of the revised Compromise Agreement
to the majority stockholders.34 Lim moved that the case be assigned to a new Panel of Hearing Officers
and the majority stockholders be made to declare in a hearing whether they accept the counterproposals
of the minority in their draft Amicable Settlement in order that the case can proceed immediately to
liquidation.35
On January 25, 2001, the MANCOM filed with the SEC its Resolution unanimously adopted on January 19,
2001 affirming that: (1) MANCOM was never informed nor advised of the supposed capital infusion by
the majority stockholders in October 1991 and it never actually received any such additional subscription
nor signed any document attesting to or authorizing the said increase of RUBY’s capital stock or the
extension of its corporate life; (2) MANCOM continuously recognizes the 60%-40% ratio of shareholding
profile between the majority and minority stockholders, with the majority having 59.828% while the
minority holds 40.172% shareholding; (3) as there was no valid increase in the shareholding of the
majority and consequently no valid extension of corporate term, the liquidation of RUBY is thus in order;
(4) to date, the majority stockholders or Yu Kim Giang have not complied with the December 22, 1989
SEC order for them to turn over the cash including bank deposits, all other financial records and
documents of RUBY including transfer certificates of title over its real properties, and render an
accounting of all the money received by RUBY; and (5) pursuant to this Court’s ruling in G.R. No. 96675
dated August 26, 1991, the previous deeds of assignment made in favor of BENHAR by Florence Damon,
Philippine Bank of Communications, Philippine Commercial International Bank, Philippine Trust
Company, PCI Leasing and Finance, Inc. and FEBTC, having been earlier declared void by the SEC Hearing
Panel, and the CA decision in CA-G.R. SP No. 18310 affirmed by this Court – have no legal effect and are
deemed void.36

On the other hand, Lim filed a Supplement (to Manifestation and Motion dated January 18,
2001)37 reiterating his pending motion filed on March 15, 2000 for the SEC to implement this Court’s
January 20, 1998 Decision in G.R. Nos. 124185-87 which states in part that "[t]he SEC therefore has the
power and authority, directly to declare all assignment of assets of the petitioner Corporation declared
under suspension of payments, null and void, and to conserve the same in order to effect a fair, equitable
and meaningful rehabilitation of the insolvent corporation." Lim contended that the SEC retains
jurisdiction over pending suspension of payment/rehabilitation cases filed as of June 30, 2000 until these
are finally disposed, pursuant to Sec. 5.2 of the Securities Regulation Code (Republic Act [R.A.] No. 8799).
Considering that the Management Committee is intact, the majority stockholders cannot act in an illegal
manner with regard to RUBY’s assets. He thus concluded that the continued disobedience of the majority
stockholders to the orders and decisions of the SEC and CA, as affirmed by this Court, have certainly
rendered any additional assignments, such as the Deeds of Assignment executed by BPI and China Bank
with BENHAR, Henry Yu or conduits of the majority stockholders, null and void.

The MANCOM manifested that it is adopting in toto the Manifestation and Motion dated January 18, 2001
filed by Lim. It also moved for the SEC to conduct further proceedings as directed by this Court.
Considering that there is no chance at all for the proposed rehabilitation of RUBY in light of strict
implementation by government authorities of environmental laws particularly on pollution control, and
MANCOM’s assent to effect a liquidation, the MANCOM asserted that a hearing should focus on the
eventual liquidation of RUBY. It added that a dismissal under the circumstances would be tantamount to
a perceived shirking by the SEC of its mandate to afford all creditors ample opportunity to recover on
their respective financial exposure with RUBY.38

On May 15, 2001, the MANCOM submitted copies of minutes of meetings held from April 13, 2000 to
December 29, 2000.39

On September 20, 2001, the SEC issued an Order directing the Management Committee to submit a
detailed report – not mere minutes of meetings -- on the status of the rehabilitation process and financial
condition of RUBY, which should contain a statement on the feasibility of the rehabilitation plan.40 The
MANCOM complied with the said order on February 15, 2002.41 The majority stockholders and RUBY
moved to dismiss the petition and strike from the records the Compliance/Report. MANCOM filed its
omnibus opposition to the said motions. There was further exchange of pleadings by the parties on the
matter of whether the SEC should already dismiss the petition of RUBY as prayed for by the majority
stockholders and RUBY, or proceed with supervised liquidation of RUBY as proposed by the MANCOM
and minority stockholders.

The SEC’s Ruling

On September 18, 2002, the SEC issued its Order42 denying the petition for suspension of payments, as
follows:

WHEREFORE, in view of the foregoing, the Commission hereby resolves to terminate the proceedings and
DENY the instant petition.

Accordingly, pursuant to Sec. 5-5 of the SEC’s Rules of Procedure on Corporate Recovery, which provides:

"Discharge of the Management Committee -- The Management Committee shall be discharged and
dissolved under the following circumstances:

a. Whenever the Commission, on motion or motu prop[r]io, has determined that the necessity for
the Management Committee no longer exists;

b. Upon the appointment of a liquidator under these Rules;

c. By agreement of the parties;

d. Upon termination of the proceedings.

Upon its discharge and dissolution, the Management Committee shall submit its final report and render
an accounting of its management within such reasonable time as the Commission may allow."

the Management Committee is hereby DISSOLVED. It is likewise ordered to:

(1) Make an inventory of the assets, funds and properties of the petitioner;

(2) Turn-over the aforementioned assets, funds and properties to the proper party(ies);

(3) Render an accounting of its management; and

(4) Submit its Final Report to the Commission.

The MANCOM is ordered to comply with the foregoing within a non-extendible period of thirty (30) days
from receipt of this Order. Relative to any compensation owing to the MANCOM, it is left to the
determination of the parties concerned.

No pronouncement as to costs.

SO ORDERED.43
The SEC declared that since its order declaring RUBY under a state of suspension of payments was issued
on December 20, 1983, the 180-day period provided in Sec. 4-9 of the Rules of Procedure on Corporate
Recovery had long lapsed. Being a remedial rule, said provision can be applied retroactively in this case.
The SEC also overruled the objections raised by the minority stockholders regarding the questionable
issuance of shares of stock by the majority stockholders and extension of RUBY’s corporate term, citing
the presumption of regularity in the act of a government entity which obtains upon the SEC’s approval of
RUBY’s amendment of articles of incorporation. It pointed out that Lim raised the issue only in the year
2000. Moreover, the SEC found that notwithstanding his allegations of fraud, Lim never proved the
illegality of the additional infusion of the capitalization by RUBY so as to warrant a finding that there was
indeed an unlawful act.44

Lim, in his personal capacity and in representation of the minority stockholders of RUBY, filed a petition
for review with prayer for a temporary restraining order and/or writ of preliminary injunction before the
CA (CA-G.R. SP No. 73195) assailing the SEC order dismissing the petition and dissolving the MANCOM.

Ruling of the CA

On May 26, 2004, the CA rendered its Decision,45 the dispositive portion of which states:

WHEREFORE, the Questioned Order dated 18 September 2002 issued by the Securities and Exchange
Commission in SEC Case No. 2556 entitled "In the Matter of the Petition for Suspension of Payments,
Ruby Industrial Corporation, Petitioner," is hereby SET ASIDE, and consequently:

(1) the infusion of additional capital made by the majority stockholders be declared null and void
and restoring the capital structure of Ruby to its original structure prior to the time the injunction
was issued, that is, majority stockholders – 59.828% and the minority stockholders – 40.172% of
the authorized capital stock of Ruby Industrial Corporation.

(2) the resolution of the majority stockholders, who represents only 59.828% of the outstanding
capital stock of Ruby, extending the corporate life of Ruby for another twenty-five (25) years
which was made during the supposed stockholders’ meeting held on 03 September 1996 be
declared null and void;

(3) implementing the invalidation of any and all illegal assignments of credit/purchase of credits
and the cancellation of mortgages connected therewith made by the creditors of Ruby Industrial
Corporation during the effectivity of the suspension of payments order including that of China
Bank and BPI and to deliver to MANCOM or the Liquidator all the original of the Deeds of
Assignments and the registered titles thereto and any other documents related thereto; and order
their unwinding and requiring the majority stockholders to account for all illegal assignments
(amounts, dates, interests, etc. and present the original documents supporting the same); and

(4) ordering the Securities and Exchange Commission to supervise the liquidation of Ruby
Industrial Corporation after the foregoing steps shall have been undertaken.

SO ORDERED.46
According to the CA, the SEC erred in not finding that the October 2, 1991 meeting held by RUBY’s board
of directors was illegal because the MANCOM was neither involved nor consulted in the resolution
approving the issuance of additional shares of RUBY.

The CA further noted that the October 2, 1991 board meeting was conducted on the basis of the
September 18, 1991 order of the SEC Hearing Panel approving the Revised BENHAR/RUBY Plan, which
plan was set aside under this Court’s January 20, 1998 Decision in G.R. Nos. 124185-87. The CA pointed
out that records confirmed the proposed infusion of additional capital for RUBY’s rehabilitation,
approved during said meeting, as implementing the Revised BENHAR/RUBY Plan. Necessarily then, such
capital infusion is covered by the final injunction against the implementation of the revised plan. It must
be recalled that this Court affirmed the CA’s ruling that the revised plan not only recognized the void
deeds of assignments entered into with some of RUBY’s creditors in violation of the CA’s decision in CA-
G.R. SP No. 18310, but also maintained a financing scheme which will just make the rehabilitation plan
more costly and create a worse situation for RUBY.

On the supposed delay of the minority stockholders in raising the issue of the validity of the infusion of
additional capital effected by the board of directors, the CA held that laches is inapplicable in this case. It
noted that Lim sought relief while the case is still pending before the SEC. If ever there was delay, the
same is not fatal to the cause of the minority stockholders.

The CA likewise faulted the SEC in relying on the presumption of regularity on the matter of the extension
of RUBY’s corporate term through the filing of amended articles of incorporation. In doing so, the CA
totally disregarded the evidence which rebutted said presumption, as demonstrated by Lim: (1) it was
the board of directors and not the stockholders which conducted the meeting without the approval of the
MANCOM; (2) there was no written waivers of the minority stockholders’ pre-emptive rights and thus it
was irregular to merely notify them of the board of directors’ meeting and ask them to exercise their
option; (3) there was an existing permanent injunction against any additional capital infusion on the
BENHAR/RUBY Plan, while the CA and this Court both rejected the Revised BENHAR/RUBY Plan; (4)
there was no General Information Sheet reports made to the SEC on the alleged capital infusion, as per
certification by the SEC; (5) the Certification stating the present percentage of majority shareholding,
dated December 21, 1993 and signed by Yu Kim Giang -- which was not sworn to before a Notary Public --
was supposedly filed in 1996 with the SEC but it does not bear a stamped date of receipt, and was only
attached in a 2000 motion long after the October 1991 board meeting; (6) said Certification was
contradicted by the SEC list of all stockholders of RUBY, in which the majority remained at 59.828% and
the minority shareholding at 40.172% as of October 27, 1991; (7) certain receipts for the amount of ₱1.7
million was presented by the majority stockholders only in the year 2000, long after Lim questioned the
inclusion of extension of corporate term in the Notice of Meeting when Lim filed before the CA a motion
to cite for contempt (CA-G.R. Nos. 32404, 32469 and 32483); and (8) this Court’s decisions in the cases
elevated to it had recognized the 40% stockholding of the minority. Upon the foregoing grounds, the CA
said that the SEC should have invalidated the resolution extending the corporate term of RUBY for
another twenty-five (25) years.

With the expiration of the RUBY’s corporate term, the CA ruled that it was error for the SEC in not
commencing liquidation proceedings. As to the dismissal of RUBY’s petition for suspension of payments,
the CA held that the SEC erred when it retroactively applied Sec. 4-9 of the Rules of Procedure on
Corporate Recovery. Such retroactive application of procedural rules admits of exceptions, as when it
would impair vested rights or cause injustice. In this case, the CA emphasized that the two decisions of
this Court still have to be implemented by the SEC, but to date the SEC has failed to unwound the illegal
assignments and order the assignees to surrender the Deeds of Assignment to the MANCOM.

On the issue of violation of the rule against forum shopping, the CA held that this is not applicable
because the parties in CA-G.R. SP No. 73169 (filed by MANCOM) and CA-G.R. SP No. 73195 (filed by Lim)
are not the same and they do not have the same interest. This issue was in fact already resolved in G.R.
Nos. 124185-87 wherein this Court, citing Ramos, Sr. v. Court of Appeals47 declared that private
respondents Lim, the unsecured creditors (ALFC) and MANCOM cannot be considered to have engaged in
forum shopping in filing separate petitions with the CA as each have distinct rights to protect.

The CA also found that the belated submission of the special power of attorney executed by the other
minority stockholders representing 40.172% of RUBY’s ownership has no bearing to the continuation of
the petition filed with the appellate court. Moreover, since the petition is in the nature of a derivative suit,
Lim clearly can file the same not only in representation of the minority stockholders but also in behalf of
the corporation itself which is the real party in interest. Thus, notwithstanding that Lim’s ownership in
RUBY comprises only 1.4% of the outstanding capital stock, as claimed by the majority stockholders, his
petition may not be dismissed on this ground.

The Consolidated Petitions

From the Decision of the CA, China Bank and the Majority Stockholder joined by RUBY, filed separate
petitions before this Court.

In G.R. No. 165887, petitioners Majority Stockholders and RUBY raised the following grounds for the
reversal of the assailed decision and the reinstatement of the SEC’s September 18, 2002 Order:

First Reason

THE COURT OF APPEALS ERRED – AND WHEN IT DID, IT ACTED CONTRARY TO LAW AND
PRECEDENTS – WHEN IT GAVE DUE COURSE TO, AND, THEREAFTER, SUSTAINED, A FORMALLY
AND SUBSTANTIALLY DEFECTIVE PETITION FOR REVIEW.

Second Reason

THE COURT OF APPEALS ERRED – AND WHEN IT DID, IT ACTED IN A MANNER AT WAR WITH
ORDERLY PROCEDURE AND APPLICABLE JURISPRUDENCE – WHEN IT REVERSED THE ORDER
OF DISMISSAL OF THE SECURITIES AND EXCHANGE COMMISSION AND SUBSTITUTED ITS
JUDGMENT FOR THAT OF THE LATTER IN THE DETERMINATION OF ISSUES WELL WITHIN THE
EXPERTISE OF THE COMMISSION.

Third Reason

THE COURT OF APPEALS ERRED – AND WHEN IT DID, IT ACTED IN GRAVE ABUSE OF ITS
DISCRETION AND, IN FACT, IN EXCESS OR LACK OF JURISDICTION -- WHEN IT SUSTAINED
COLLATERAL ATTACKS OF FINAL ADJUDICATIONS OF THE SECURITIES AND EXCHANGE
COMMISSION.48
On the other hand, petitioner China Bank in G.R. No. 165929 puts forth the argument that the principle of
stare decisis cannot be given effect in this case considering the prevailing factual circumstances, as to do
so would result in manifest injustice. It contends that the reason for the declaration of nullity of the Deed
of Assignment pronounced more than a decade ago, has become legally inefficacious by its obsolescence.
The creditors of RUBY have the right to recover their credit. But when the CA ordered the nullification of
China Bank’s Deed of Assignment in favor of Greener Investment Corporation, it practically dashed its
last hope for ever recovering its credit.

China Bank is of the view that the CA overstretched the import of this Court’s January 20, 1998 decision
in G.R. Nos. 124185-87 when the SEC was ordered to "conduct further proceedings," as to include the
unwinding of the alleged illegal assignment of credits. The rehabilitation of RUBY, if it still may be capable
of, is not made dependent on the unwinding by the SEC of the illegal assignments, as the same concerns
only the issue of who shall now become the creditors of RUBY, and does not alter the fact that RUBY has
hefty loan obligations and it has not enough cash flow to pay for the same.

Deploring the principal parties’ penchant for prolonged litigation resulting considerably in irreversible
losses to RUBY, China Bank maintains that from the report submitted by the MANCOM to the SEC, it can
be clearly seen that no attempt at rehabilitation whatsoever had been pursued. Given the current
situation, China Bank prays that the CA Decision be reversed and its Deed of Assignment in favor of
Greener Investment Corporation be recognized and given full legal effect.

In fine, main issues to be resolved are: (1) whether private respondents MANCOM and Lim engaged in
forum shopping when they filed separate petitions before the CA assailing the September 18, 2002 SEC
Order; (2) whether the defects in the certification of non-forum shopping submitted by Lim warrant the
dismissal of his petition before the CA; (3) whether the CA was correct in reversing the SEC’s order
dismissing the petition for suspension of payment.

Our Ruling

The petitions have no merit.

On the charge of forum shopping, we have already ruled on the matter in G.R. Nos. 124185-87. Thus:

We hold that private respondents are not guilty of forum-shopping. In Ramos, Sr. v. Court of Appeals, we
ruled:

"The private respondents can be considered to have engaged in forum shopping if all of them, acting as
one group, filed identical special civil actions in the Court of Appeals and in this Court. There must be
identity of parties or interests represented, rights asserted and relief sought in different tribunals. In the
case at bar, two groups of private respondents appear to have acted independently of each other when
they sought relief from the appellate court. Both groups sought relief from the same tribunal.

"It would not matter even if there are several divisions in the Court of Appeals. The adverse party can
always ask for the consolidation of the two cases. x x x"

In the case at bar, private respondents represent different groups with different interests – the minority
stockholders’ group, represented by private respondent Lim; the unsecured creditors group, Allied
Leasing & Finance Corporation; and the old management group. Each group has distinct rights to protect.
In line with our ruling in Ramos, the cases filed by private respondents should be consolidated. In fact,
BENHAR and RUBY did just that – in their urgent motions filed on December 1, 1993 and December 6,
1993, respectively, they prayed for the consolidation of the cases before the Court of Appeals.49

In the present case, no consolidation of CA-G.R. SP Nos. 73169 (filed by MANCOM) which was earlier
assigned to the Thirteenth Division and CA-G.R. SP No. 73195 (filed by Lim) decided by the Second
Division, took place. In their Comment filed before CA-G.R. SP No. 73169, the Majority Stockholders and
RUBY (private respondents therein) prayed for the dismissal of said case arguing that MANCOM, of which
Lim is a member, circumvented the proscription against forum shopping. The CA’s Thirteenth Division,
however, disagreed with private respondents and granted the motion to withdraw petition filed by
MANCOM which manifested that the Second Division in CA-G.R. SP No. 73195 by Decision dated May 26,
2004 had granted the reliefs similar to those prayed for in their petition, said decision being binding on
MANCOM which was also impleaded in said case (CA-G.R. SP No. 73195). The Thirteenth Division also
cited our pronouncement in G.R. Nos. 124185-87 to the effect that there was no violation on the rule on
forum shopping because MANCOM and Lim or the minority shareholders of RUBY represent different
interests.50

As to the alleged defects in the certificate of non-forum shopping submitted by Lim, we find no error
committed by the CA in holding that the belated submission of a special power of attorney executed in
Lim’s favor by the minority stockholders has no bearing to the continuation of the case as supported by
ample jurisprudence. To appreciate the liberal stance adopted by the CA, one must take into account the
previous history of the petitions for review before the CA involving the SEC September 18, 2002 Order. It
was actually the third time that Lim and/or MANCOM have challenged certain acts perpetrated by the
majority stockholders which are prejudicial to RUBY, such as the execution of deeds of assignment during
the effectivity of the suspension order in pursuit of two rehabilitation plans submitted by them together
with BENHAR. The assignment of RUBY’s credits to BENHAR gave the secured creditors undue advantage
over RUBY’s prime properties and put these assets beyond the reach of the unsecured creditors. Each
time they go to court, Lim and MANCOM essentially advance the interest of the corporation itself. They
have consistently taken the position that RUBY’s assets should be preserved for the equal benefit of all its
creditors, and vigorously resisted any attempt of the controlling stockholders to favor any or some of its
creditors by entering into questionable deals or financing schemes under two BENHAR/RUBY Plans.
Viewed in this light, the CA was therefore correct in recognizing Lim’s right to institute a stockholder’s
action in which the real party in interest is the corporation itself.

A derivative action is a suit by a shareholder to enforce a corporate cause of action.51 It is a remedy

designed by equity and has been the principal defense of the minority shareholders against abuses by the
majority.52 For this purpose, it is enough that a member or a minority of stockholders file a derivative suit
for and in behalf of a corporation.53 An individual stockholder is permitted to institute a derivative suit on
behalf of the corporation wherein he holds stock in order to protect or vindicate corporate rights,
whenever officials of the corporation refuse to sue or are the ones to be sued or hold the control of the
corporation. In such actions, the suing stockholder is regarded as the nominal party, with the corporation
as the party in interest.54

Now, on the third and substantive issue concerning the SEC’s dismissal of RUBY’s petition for suspension
of payment.

The SEC based its action on Sec. 4-9 of the Rules of Procedure on Corporate Recovery,55 which provides:
SEC. 4-9. Period of Suspension Order. – The suspension order shall be effective for a period of sixty (60)
days from the date of its issuance. The order shall be automatically vacated upon the lapse of the sixty-
day period unless extended by the Commission. Upon motion, the Commission may grant an extension
thereof for a period of not more than sixty (60) days in each application if the Commission is satisfied
that the debtor and its officers have been acting in good faith and with due diligence, and that the debtor
would likely be able to make a viable rehabilitation plan. After the lapse of one hundred and eighty (180)
days from the issuance of the suspension order, no extension of the said order shall be granted by the
Commission if opposed in writing by a majority of any class of creditors. The Commission may grant an
extension beyond one hundred eighty (180) days only if it appears by convincing evidence that there is a
good chance for the successful rehabilitation of the debtor and the opposition thereto by the creditor
appears manifestly unreasonable.

In any event, the petition is deemed ipso facto denied and dismissed if no Rehabilitation Plan was
approved by the Commission upon the lapse of the order or the last extension thereof. In such case, the
debtor shall come under the dissolution and liquidation proceedings of Rule V of these Rules. (Emphasis
supplied.)

According to the SEC, even if the 180 days maximum period of suspension order is counted from the
finality of this Court’s decision in G.R. Nos. 124185-87 in December 1998, still this case had gone beyond
the period mandated in the Rules for a corporation under suspension of payment to have a rehabilitation
plan approved by the Commission.

While it is true that the Rules of Procedure on Corporate Recovery authorizes the dismissal of a petition
for suspension of payment where there is no rehabilitation plan approved within the maximum period of
the suspension order, it must be recalled that there was in fact not one, but two rehabilitation plans
(BENHAR/RUBY Plan and Revised BENHAR/RUBY Plan) submitted by the majority stockholders which
were approved by the SEC. The implementation of the first plan was enjoined when it was seriously
challenged in the courts by the minority stockholders through Lim. The second revised plan superseded
the first plan, but eventually nullified by the CA and the CA decision declaring it void was affirmed by this
Court in G.R. Nos. 124185-87. Given this factual milieu, the automatic application of the lifting of the
suspension order as interpreted by the SEC in its September 18, 2002 Order would be unfair and highly
prejudicial to the financially distressed corporation.

Moreover, records reveal that the delay in the proceedings after the case was set for hearing following
this Court’s final judgment in G.R. Nos. 124185-87, was not due to any fault or neglect on the part of
MANCOM or the minority stockholders. The idea propounded by the petitioners majority stockholders
that this case is about a minority in a corporation holding hostage the majority indefinitely by simple
assertion that the former’s rights have been transgressed by the latter is, downright misleading.

First, the SEC did not even mention in its September 18, 2002 Order that when this Court remanded to it
the case for further proceedings, there remained only the Alternative Plan of RUBY’s minority
stockholders which had earlier been forwarded to the SEC Hearing Panel. With the CA Decision setting
aside the SEC approval of the Revised BENHAR/RUBY Plan, as affirmed by this Court, it behooves on the
SEC to recognize the fact that the Alternative Plan was endorsed by 90% of the RUBY’s creditors who had
objected to the Revised BENHAR/RUBY Plan. Yet, not a single step was taken by the SEC to address those
findings and conclusions made by the CA and this Court on the highly disadvantageous and onerous
provisions of the Revised BENHAR/RUBY Plan.
Moreover, the SEC failed to act on motions filed by Lim and MANCOM to implement this Court’s January
20, 1998 Decision in G.R. Nos. 124185-87, by declaring all deeds of assignment with BENHAR and/or the
conduits of Henry Yu of no force and legal effect, which of course necessitates the surrender by the
concerned creditors of those void deeds of assignment. Petitioner China Bank dismisses it as unnecessary
and immaterial to the continued inability of RUBY to settle its long overdue debts. However, the CA said
that the foregoing acts should have been done by the SEC for proper documentation and orderly
settlement after proper accounting of the assignment transactions. The appellate court then concluded
that dismissal of the petition under Sec. 4-9 of the Rules of Procedure on Corporate Recovery would
impair the vested rights of the minority stockholders under this Court’s decision invalidating the
aforesaid deeds of assignment, thus:

We agree with the observations of the petition that if the illegal assignments not having been unwound
and the mortgages not canceled, the majority, their alter ego, and/or cohorts will claim to be secured
creditors and freely collect extra-judicially the obligations covered by the illegal assignments. Ruby has
very little money compared to the P200 Million probable liability to the illegal assignees as unilaterally
stated by Ruby without audit (previously merely totaled to P34 Million in 1998 as stated in the revised
rehabilitation plan). Foreclosure of the mortgages by the illegal assignees will follow; Ruby will lose all its
prime properties; there will be no assets left for unsecured creditors; and there will be no residual P600
Million assets to divide.56

Evidently, the minority stockholders and MANCOM had already foreseen the impossibility of
implementing a viable rehabilitation plan if the illegal assignments made by its creditors with BENHAR
and the majority stockholders, and subsequently, with conduits of RUBY or Henry Yu, are not properly
unwound and those directors responsible for the void transactions not required to make a full
accounting. Contrary to petitioner China Bank’s insinuation that the minority stockholders merely want
to prolong the litigation to the great prejudice and damage to RUBY’s creditors, MANCOM and Lim had
determined and moved for SEC-supervised liquidation proceedings as the more prudent course of action
for an orderly and equitable settlement of RUBY’s liabilities.

Records likewise revealed that the SEC chose to keep silent and failed to assist the MANCOM and
minority stockholders in their efforts to demand compliance from the majority stockholders or Yu Kim
Giang (who headed the first MANCOM) with the December 22, 1989 Order directing them to turn over
the cash, financial records and documents of RUBY, including certificates of title over RUBY’s real
properties, and render an accounting of all moneys received and payments made by RUBY. On January
18, 2002, the MANCOM even filed a Motion57 to require Yu Kim Giang to render report/accounting of
RUBY from 1983 to the 1st quarter of 1990, stating that despite a commitment from Mr. Giang, he has
seemingly delayed his compliance, hence frustrating the desire of MANCOM to submit a comprehensive
and complete report for the whole period of 1983 up to the present. To underscore the importance of
making the said records available for scrutiny of the SEC and MANCOM, Lim manifested before the SEC
that--

Indeed, the majority is actually unwilling (and not merely unable) to submit such records because these
will show, among others:

(1) The majority to minority ratio in the corporate ownership is 59.828% :40.172%;

(2) The actual amounts of the bank loans paid off by Benhar International[,] Inc. and/or Henry Yu
would be very low;
 (3) The illegal payment of the bank loans and illegal assignments of the mortgages to
Benhar/Henry Yu are contrary to the Honorable Commission’s Order of 20 December 1983 for
suspension of payments;

(4) The earnings of the corporation from 1983 to 1989 amounted to millions and cannot be
accounted for by the majority and the first Mancom;

(5) The money may have been spent to pay off some of the loans to the bank but Benhar and
Henry Yu fraudulently claim credit therefor.58

It must be noted that MANCOM had rejected the two rehabilitation plans proposed by BENHAR and the
majority stockholders. In shifting the blame to the MANCOM and minority stockholders for the delay in
the approval of a viable rehabilitation plan, the SEC apparently overlooked that from the time the SEC
approved the Revised BENHAR/RUBY Plan and dissolved the MANCOM, the majority stockholders has
denied MANCOM access to corporate papers, documents evidencing the amounts actually paid to creditor
banks/assignors, financial statements and titles over RUBY’s real properties.

Although the SEC granted MANCOM and Lim’s request for a hearing and direct a representative from BPI
to bring all documents relative to the assignment of RUBY’s credit, said hearing did not materialize after
the majority stockholders proposed a compromise agreement with the minority stockholders. But as it
turned out, this development only caused further delay because the majority stockholders were unwilling
to turn over documents, funds and properties in their possession, and would neither make a full
accounting or disclosure of RUBY’s transactions, especially the actual amounts paid and rates of interest
on the loan assignments. In this state of things, the MANCOM and minority stockholders resolved that the
more reasonable and practical option is to move for a SEC-supervised liquidation proceedings.

The other ground invoked by Lim and MANCOM for the propriety of liquidation is the expiration of
RUBY’s corporate term. The SEC, however, held that the filing of the amendment of articles of
incorporation by RUBY in 1996 complied with all the legal requisites and hence the presumption of
regularity stands. Records show that the validity of the infusion of additional capital which resulted in the
alleged increase in the shareholdings of petitioners majority stockholders in October 1991 was
questioned by MANCOM and Lim even before the majority stockholders filed their motion to dismiss in
the year 2000.

A stock corporation is expressly granted the power to issue or sell stocks.59 The power to issue shares of
stock in a corporation is lodged in the board of directors and no stockholders’ meeting is required to
consider it because additional issuances of shares of stock does not need approval of the
stockholders.60 What is only required is the board resolution approving the additional issuance of shares.
The corporation shall also file the necessary application with the SEC to exempt these from the
registration requirements under the Revised Securities Act (now the Securities Regulation Code).

The new management committee created pursuant to SEC Order dated September 18, 1991 apparently
had no participation in the October 2, 1991 board resolution approving the issuance of additional shares.
The move was part of the board’s assertion of control over the management in RUBY following the
approval of the Revised BENHAR/RUBY Plan. The minority stockholders registered their objection
during the said meeting by asking the board to defer action as the SEC September 18, 1991 Order was
still on appeal with the SEC En Banc. When the SEC En Banc denied their appeal and motion for
reconsideration under its July 30, 1993 and October 15, 1993 orders, Lim, MANCOM and ALFC filed
petitions for review with the CA which set aside the said orders. As already mentioned, this Court
affirmed the CA ruling in G.R. Nos. 124185-87.

Contrary to the assertion of petitioners majority stockholders, our decision in G.R. Nos. 124185-87
nullified the deeds of assignment not solely on the ground of violation of the injunction orders issued by
the SEC and CA. As earlier mentioned, we affirmed the CA’s finding that the re-lending scheme under the
Revised BENHAR/RUBY Plan will not only make rehabilitation more costly for RUBY, but also worsen its
financial condition because of the mortgage of its assets to a new creditor. To better illumine this point,
we quote from the CA decision in CA-G.R. SP Nos. 32404, 32469 and 32483 comparing the provisions of
the rehabilitation proposals submitted by the majority stockholders (Revised BENHAR/RUBY Plan) and
the minority stockholders (Alternative Plan):

…there is no need for Benhar to act as financier, as Ruby itself can very well secure such credit
accommodation using its assets as collateral. Verily, Benhar’s pretext at magnanimity is deception of the
highest order considering that: (1) as embodied in the heading Sources and Uses of Funds in the Revised
Benhar/Ruby Plan, the ₱80-Million loan/credit facility to be extended by Benhar will be used to pay
₱60.437-Million loans of Ruby. Of the ₱60.437-Million, ₱34.068-Million will be paid to Benhar as payment
for the amounts it paid in consideration of the nullified assignments; (2) The Deed of Assignment of
Credit Facility will be executed by Benhar in favor of Ruby only upon payment of Ruby of such amount
already advanced by Benhar, i.e. the ₱34.068-Million credit assigned to Benhar by the seven (7) secured
creditors.

The Revised Benhar/Ruby Plan, in fact, gives Benhar undue preference on the matter of repayment.
Under the said plan, the creditors of Ruby will be paid in accordance with the following schedules:

"Secured ₱17.022M To be paid in cash with

Creditors 12% interest p.a.
China Banking
Corp.
BPI
Philippine Orient
Unsecured ₱ 9.347M To be paid in cash
Creditors Allied interest-f[r]ee
Leasing
Filcor Finance
Benhar ₱34.068M To be paid in cash
For having paid with interest charge
Ruby obligations
to 7 creditors
Trade/Other ₱2.871M Totalling ₱8.614M to be
Creditors (p.a. for 3 paid in 3- year
years) installment, interest-
free"

(Rollo, CA-G.R. SP No. 32404, p. 727)

Needless to state, the foregoing payment schedules as embodied in the said plan which gives Benhar
undue advantage over the other creditors goes against the very essence of rehabilitation, which requires
that no creditor should be preferred over the other. Indeed, a comparison of the salient features of the
Revised Benhar/Ruby Plan and the Alternative Plan will readily show just how stacked in favor of Benhar
are the provisions of the former plan:

1âwphi1
Benhar/Ruby Plan Alternative Plan

1. Benhar plays a major role. It 1. The original creditors are the

will be paid ₱34.068M out of ones recognized. The amount
₱60.437 M total amount due to payable is lower because
creditors but not explained as interests are not capitalized.
to how arrived at.

2. Benhar will not assign the 2. Direct credit of P80M loan

credit facility of ₱80M unless and will be borrowed from the
the ₱34.068M above stated is bank(s) like Allied, UCPB,
paid. Metrobank or Equitable Bank
or even China Bank.

3. The main assets are to be 3. Mortgaged

mortgaged to the creditor- to bank(s) directly.
assignor of Benhar and if the
illegal assignments are
recognized, then Benhar shall
have to be recognized as
mortgagee even when it is a
disqualified creditor and/or
mortgagee.

4. Start up cost ₱16,880 and 4. Plant B = ₱25,640

based on 1988 figures and
projections. Year IV estimated ₱40. M

Plant A = 22.40

Year V estimated ₱30. M

5. Rehabilitation only of Plant 5. Rehabilitation of both plants.

B.

6. Recognition of Benhar re- 6. None

lender/financier.
7. Because of the SEC Order he 7. Pilipinas Shell representative
got an MC seat and and the be retained.
Pilipinas Shell representative
of trade creditors was retained.

8. Credit facility is being 8. Credit facility directly to

assigned or re-lent by Benhar. Ruby.

9. Authorized Benhar to 9. None going to the minority

mortgage assets of Ruby itself. but to actual lenders.
Only remaining unencumbered
asset is one (1) real property.
Two (2) prime properties
already encumbered to
Assignor of Benhar.

10. Capacity of only one (1) 10. Capacity of two (2) plants
plant stated at 72% progressive to 75% or 80%
(overrated) with purchase of new
machines.

11. Projection figures based on 11. Minority RP can be updated

May, 1990 forex exchange rate. at current foreign exchange
Cost of importation and other rate.
local supplier currently cannot
be met.

12. Market and economic slow 12. Taken into consideration so

down not taken into will upgrade to meet
consideration. competition.

13. Discriminatory to creditors 13. Not discriminatory.

Benhar-capitalized with
undisclosed rates of interest.

14. Original Figures of illegally 14. Original figures will be used

assigned loans from FEBTC, original figures plans 12%
PCIB, PTC which totaled to interest only.
₱11,419,036.87 but now
entered as ₱21,378,002.71. The
interest is undisclosed and may
have been capitalized. Figures
for the other four (4) secured
lenders not available
individually. Total of seven (7)
 secured lenders given as
₱34.068 M.

15. Interest is 28% with 15. Interest is 25% payable to

Benhar as conduit. the bank. This is still subject to
current market rates to be
negotiated by the minority.

16. Call on unissued shares for 15. Additional subscription of

₱11.814 M and if minority will ₱16M within 6 months by the
take up their pre-emptive minority stockholders.
rights and dilute minority
shareholdings.

x x x x61

Prior to the September 18, 1991 Order approving the Revised BENHAR/RUBY Plan and dissolving the
MANCOM, majority of RUBY’s creditors (90%) have already withdrawn their support to the revised plan
and manifested that they were only lately informed about another plan submitted by the minority
stockholders. Hence, these creditors wrote individual letters to the SEC Hearing Panel expressing their
agreement with and endorsement of the Alternative Plan of the minority stockholders.62

The Revised BENHAR/RUBY Plan had proposed the calling for subscription of unissued shares through a
Board Resolution from the ₱11.814 million of the ₱23.7 million ACS "in order to allow the long overdue
program of the REHAB Program." RUBY will offer for subscription 118,140 shares of stocks at par value
of ₱100 each to all stockholders on record, payable within 15 days, or within a reasonable period from
SEC approval of the revised plan.63 This was implemented by the October 2, 1991 meeting of the Board of
Directors led by Yu Kim Giang. The minority directors claimed they were not notified of said board
meeting. At any rate, the CA decision nullifying the Revised BENHAR/RUBY Plan was affirmed by this
Court on January 20, 1998. Hence, the legitimate concerns of the minority stockholders and MANCOM
who objected to the capital infusion which resulted in the dilution of their shareholdings, the expiration
of RUBY’s corporate term and the pending incidents on the void deeds of assignment of credit – all these
should have been duly considered and acted upon by the SEC when the case was remanded to it for
further proceedings. With the final rejection of the courts of the Revised BENHAR/RUBY Plan, it was
grave error for the SEC not to act decisively on the motions filed by the minority stockholders who have
maintained that the issuance of additional shares did not help improve the situation of RUBY except to
stifle the opposition coming from the MANCOM and minority stockholders by diluting the latter’s
shareholdings. Worse, the SEC ignored the evidence adduced by the minority stockholders indicating that
the correct amount of subscription of additional shares was not paid by the majority stockholders and
that SEC official records still reflect the 60%-40% percentage of ownership of RUBY.

The SEC remained indifferent to the reliefs sought by the minority stockholders, saying that the issue of
the validity of the additional capital infusion was belatedly raised. Even assuming the October 2, 1991
board meeting indeed took place, the SEC did nothing to ascertain whether indeed, as the minority
claimed: (1) the minority stockholders were not given notice as required and reasonable time to exercise
their pre-emptive rights; and (2) the capital infusion was not for the purpose of rehabilitation but a mere
ploy to divest the minority stockholders of their 40.172% shareholding and reduce it to a mere 25.25%.

The foregoing matters, along with the persistent refusal of the majority stockholders, led by Yu Kim
Giang, to give a full accounting of their transactions involving RUBY’s credits and properties, were
extensively argued by the minority stockholders in their opposition to the motions to dismiss/vacate
suspension order filed by the majority stockholders and BPI, as follows:

Their receipts only show supposed payment by the majority of a total of P1,759,150.00 out of the correct
amount of P7,068,079.92.00 (sic) (59.828% of P11.814 million required capital infusion under the MRP
and RRP) which should have been the amount paid by them under the RRP which requires full payment.
Thus, they sought to attain a 74.75% equity from a 59.828% original equity by playing more tricks and
stating that, under the general rule, they are supposedly allowed to pay-up only 25% of their
subscription. Unfortunately for them, in a rehabilitation supervised by the SEC and with an existing
Mancom, the general rule does not apply. What is stated in the rehabilitation plan must be strictly
followed provided the rehabilitation plan has been finally approved.

It must be remembered that in October 2 to 17, 1991, the amounts owed by Ruby to the banks who
illegally assigned their loans/credit was stated at P34 Million. Operations needed another P20 Million
plus. A capital infusion of P1,759,150.00 was so miniscule and clearly not for rehabilitation but was
intended to deprive the minority of its blocking position and property rights since distribution after
liquidation is based on the percentage of stockholdings. It is not only unfair, inequitable and not
meaningful – it is clearly dishonest.

xxxx

Assuming arguendo that the Board of Directors could act independently and this did not violate any
injunction, if the capital infusion was actually made, the Board of Directors had the duty to report this to
the Mancom because they would then fall under "existing assets" and would be part of the evaluation of
the proposed RRP, necessary for management and in the overall plan of rehabilitation. Nothing of this
kind happened and the belated proof cannot correct this situation.

xxxx

It is not true that there is benevolence on the part of the majority when they maneuvered the illegal
assignments and paid the banks. The loan obligations remain as accounts payable of Ruby and have even
been bloated to gigantic proportions and yet the SEC does not even ask them to account how much these
obligations are now and the majority should have reported these to the Mancom, but the majority has
not. These anomalous situations have been made to continue long enough and, we pray, should be
addressed by the Honorable Commission.

xxxx

…The SEC must understand that, being head of the first Mancom, YU KIM GIANG had the same obligation
to render a report to the SEC as the present Mancom now. To single out the present Mancom to do this
when a complete report cannot be made without these starting records is discriminatory, unfair and
violates the rules of accountancy. For example, where is the report on the illegal assignments and
mortgages complete with details? Where did the rentals for the period from 1983 to 1989 go? This
amounted to millions. There are no reports on these. By not requiring the first Mancom to Report, the
SEC is preventing the complete picture on the liabilities and finances of Ruby from being seen and is
sheltering Ruby and the majority.64 (Additional emphasis supplied.)

Pre-emptive right under Sec. 39 of the Corporation Code refers to the right of a stockholder of a stock
corporation to subscribe to all issues or disposition of shares of any class, in proportion to their
respective shareholdings. The right may be restricted or denied under the articles of incorporation, and
subject to certain exceptions and limitations. The stockholder must be given a reasonable time within
which to exercise their preemptive rights. Upon the expiration of said period, any stockholder who has
not exercised such right will be deemed to have waived it.65

The validity of issuance of additional shares may be questioned if done in breach of trust by the
controlling stockholders. Thus, even if the pre-emptive right does not exist, either because the issue
comes within the exceptions in Section 39 or because it is denied or limited in the articles of
incorporation, an issue of shares may still be objectionable if the directors acted in breach of trust and
their primary purpose is to perpetuate or shift control of the corporation, or to "freeze out" the minority
interest.66 In this case, the following relevant observations should have signaled greater circumspection
on the part of the SEC -- upon the third and last remand to it pursuant to our January 20, 1998 decision --
to demand transparency and accountability from the majority stockholders, in view of the illegal
assignments and objectionable features of the Revised BENHAR/RUBY Plan, as found by the CA and as
affirmed by this Court:

There can be no gainsaying the well-established rule in corporate practice and procedure that the will of
the majority shall govern in all matters within the limits of the act of incorporation and lawfully enacted
by-laws not proscribed by law. It is, however, equally true that other stockholders are afforded the right
to intervene especially during critical periods in the life of a corporation like reorganization, or in this
case, suspension of payments, more so, when the majority seek to impose their will and through
fraudulent means, attempt to siphon off Ruby’s valuable assets to the great prejudice of Ruby itself, as
well as the minority stockholders and the unsecured creditors.

Certainly, the minority stockholders and the unsecured creditors are given some measure of protection
by the law from the abuses and impositions of the majority, more so in this case, considering the give-
away signs of private respondents’ perfidy strewn all over the factual landscape. Indeed, equity cannot
deprive the minority of a remedy against the abuses of the majority, and the present action has been
instituted precisely for the purpose of protecting the true and legitimate interests of Ruby against the
Majority Stockholders. On this score, the Supreme Court, has ruled that:

"Generally speaking, the voice of the majority of the stockholders is the law of the corporation, but there
are exceptions to this rule. There must necessarily be a limit upon the power of the majority. Without
such a limit the will of the majority will be absolute and irresistible and might easily degenerate into
absolute tyranny. x x x"67 (Additional emphasis supplied.)

Lamentably, the SEC refused to heed the plea of the minority stockholders and MANCOM for the SEC to
order RUBY to commence liquidation proceedings, which is allowed under Sec. 4-9 of the Rules on
Corporate Recovery. Under the circumstances, liquidation was the only hope of the minority stockholders
for effecting an orderly and equitable settlement of RUBY’s obligations, and compelling the majority
stockholders to account for all funds, properties and documents in their possession, and make full
disclosure on the nullified credit assignments. Oblivious to these pending incidents so crucial to the
protection of the interest of the majority of creditors and minority shareholders, the SEC simply stated
that in the interim, RUBY’s corporate term was validly extended, as if such extension would provide the
solution to RUBY’s myriad problems.

Extension of corporate term requires the vote of 2/3 of the outstanding capital stock in a stockholders’
meeting called for the purpose.68 The actual percentage of shareholdings in RUBY as of September 3,
1996 -- when the majority stockholders allegedly ratified the board resolution approving the extension of
RUBY’s corporate life to another 25 years – was seriously disputed by the minority stockholders, and we
find the evidence of compliance with the notice and quorum requirements submitted by the majority
stockholders insufficient and doubtful. Consequently, the SEC had no basis for its ruling denying the
motion of the minority stockholders to declare as without force and effect the extension of RUBY’s
corporate existence.

Liquidation, or the settlement of the affairs of the corporation, consists of adjusting the debts and claims,
that is, of collecting all that is due the corporation, the settlement and adjustment of claims against it and
the payment of its just debts.69 It involves the winding up of the affairs of the corporation, which means
the collection of all assets, the payment of all its creditors, and the distribution of the remaining assets, if
any, among the stockholders thereof in accordance with their contracts, or if there be no special contract,
on the basis of their respective interests.70

Section 122 of the Corporation Code, which is applicable to the present case, provides:

SEC. 122. Corporate liquidation. -- Every corporation whose charter expires by its own limitation or is
annulled by forfeiture or otherwise, or whose corporate existence for other purposes is terminated in any
other manner, shall nevertheless be continued as a body corporate for three (3) years after the time
when it would have been so dissolved, for the purpose of prosecuting and defending suits by or against it
and enabling it to settle and close its affairs, to dispose of and convey its property and to distribute its
assets, but not for the purpose of continuing the business for which it was established.

At any time during said three (3) years, said corporation is authorized and empowered to convey all of its
property to trustees for the benefit of stockholders, members, creditors, and other persons in interest.
From and after any such conveyance by the corporation of its property in trust for the benefit of its
stockholders, members, creditors and others in interest, all interests which the corporation had in the
property terminates, the legal interest vests in the trustees, and the beneficial interest in the
stockholders, members, creditors or other persons in interest.

Upon winding up of the corporate affairs, any asset distributable to any creditor or stockholder or
member who is unknown or cannot be found shall be escheated to the city or municipality where such
assets are located.

Except by decrease of capital stock and as otherwise allowed by this Code, no corporation shall distribute
any of its assets or property except upon lawful dissolution and after payment of all its debts and
liabilities.

Since the corporate life of RUBY as stated in its articles of incorporation expired, without a valid
extension having been effected, it was deemed dissolved by such expiration without need of further
action on the part of the corporation or the State.71 With greater reason then should liquidation ensue
considering that the last paragraph of Sec. 4-9 of the Rules of Procedure on Corporate Recovery mandates
the SEC to order the dissolution and liquidation proceedings under Rule VI. Sec. 6-1, Rule VI likewise
authorizes the SEC on motion or motu proprio, or upon recommendation of the management committee,
to order dissolution of the debtor corporation and the liquidation of its remaining assets, appointing a
Liquidator for the purpose, if "the continuance in business of the debtor is no longer feasible or profitable
or no longer works to the best interest of the stockholders, parties-litigants, creditors, or the general
public."

It cannot be denied that with the current divisiveness, distrust and antagonism between the majority and
minority stockholders, the long agony and extreme prejudice caused by numerous litigations to the
creditors, and the bleak prospects for business recovery in the light of problems with the local
government which are implementing more restrictions and anti-pollution measures that practically
banned the operation of RUBY’s glass plant – liquidation becomes the only viable course for RUBY to
stave off any further losses and dissipation of its assets. Liquidation would also ensure an orderly and
equitable settlement of all creditors of RUBY, both secured and unsecured.

The SEC’s utter disregard of the rights of the minority in applying the provisions of the Rules of
Procedure on Corporate Recovery is inconsistent with the policy of liberal construction of the said rules
"to assist the parties in obtaining a just, expeditious and inexpensive settlement of cases. 72 Petitioners
majority stockholders, however, assert that the findings and conclusions of the SEC on the matter of the
dismissal of RUBY’s petition are binding and conclusive upon the CA and this Court. They contend that
reviewing courts are not supposed to substitute their judgment for those made by administrative bodies
specifically clothed with authority to pass upon matters over which they have acquired expertise.73 Given
our foregoing findings clearly showing that the SEC acted arbitrarily and committed patent errors and
grave abuse of discretion, this case falls under the exception to the general rule.

As we held in Ruby Industrial Corporation v. Court of Appeals:

The settled doctrine is that factual findings of an administrative agency are accorded respect and, at
times, finality for they have acquired the expertise inasmuch as their jurisdiction is confined to specific
matters. Nonetheless, these doctrines do not apply when the board or official has gone beyond his
statutory authority, exercised unconstitutional powers or clearly acted arbitrarily and without regard to
his duty or with grave abuse of discretion. In Leongson vs. Court of Appeals, we held: "once the actuation
of the administrative official or administrative board or agency is tainted by a failure to abide by the
command of the law, then it is incumbent on the courts of justice to set matters right, with this Tribunal
having the last say on the matter."74

Petitioners majority stockholders further insist that the minority stockholders were mistaken when they
contended that the rehabilitation of RUBY is dependent on the unwinding by the SEC of the illegal
assignments and mortgages. They assert that aside from the fact that the SEC had nothing to unwind
because the alleged illegal assignments and mortgages were already declared null and void, the said
assignments and mortgages will not affect the rehabilitation of Ruby; the same affecting only the issue of
how, as to who will be its creditors.

Such contention is untenable and contrary to our previous ruling in G.R. Nos. 124185-87. With the
nullification of the deeds of assignments of credit executed by some of Ruby’s secured creditors in favor
of BENHAR, it logically follows that the assignors or the original bank creditors remain as the creditors on
record of RUBY. We have noted that BENHAR, which is controlled by the family of Henry Yu who is also a
director and stockholder of RUBY, was not listed as one of RUBY’s creditors at the time RUBY filed the
petition for suspension of payment. Petitioners majority stockholders’ insinuation that RUBY’s credits
may have been assigned to third parties, if not referring to BENHAR or its conduits, implies two things:
either the assignments declared void by this Court’s January 20, 1998 decision continues to be recognized
by the majority stockholders, in violation of the said decision, or other third parties in connivance with
BENHAR and/or the controlling stockholders had subsequently entered the picture, without approval of
the SEC and while the SEC December 20, 1983 Order enjoining the disposition of RUBY’s properties was
in force.

The majority stockholders’ eagerness to have the suspension order lifted or vacated by the SEC without
any order for its liquidation evinces a total disregard of the mandate of Sec. 4-9 of the Rules of Procedure
on Corporate Recovery, and their obvious lack of any intent to render an accounting of all funds,
properties and details of the unlawful assignment transactions to the prejudice of RUBY, minority
stockholders and the majority of RUBY’s creditors. The majority stockholders and BENHAR’s conduits
must not be allowed to evade the duty to make such full disclosure and account any money due to RUBY
to enable the latter to effect a fair, orderly and equitable settlement of all its obligations, as well as
distribution of any remaining assets after paying all its debtors.

In fine, no error was committed by the CA when it set aside the September 18, 2002 Order of the SEC and
declared the nullity of the acts of majority stockholders in implementing capital infusion through
issuance of additional shares in October 1991, the board resolution approving the extension of RUBY’s
corporate term for another 25 years, and any illegal assignment of credit executed by RUBY’s creditors in
favor of third parties and/or conduits of the controlling stockholders. The CA likewise correctly ordered
the delivery of all documents relative to the said assignment of credits to the MANCOM or the Liquidator,
the unwinding of these void deeds of assignment, and their full accounting by the majority stockholders.

The petitioners majority stockholders and China Bank cannot be permitted to raise any issue again
regarding the validity of any assignment of credit made during the effectivity of the suspension order and
before the finality of the September 18, 2002 Order lifting the same. While China Bank is not precluded
from questioning the validity of the December 20, 1983 suspension order on the basis of res judicata, it is,
however, barred from doing so by the principle of law of the case. We have held that when the validity of
an interlocutory order has already been passed upon on appeal, the Decision of the Court on appeal
becomes the law of the case between the same parties. Law of the case has been defined as "the opinion
delivered on a former appeal. More specifically, it means that whatever is once irrevocably established as
the controlling legal rule of decision between the same parties in the same case continues to be the law of
the case, whether correct on general principles or not, so long as the facts on which such decision was
predicated continue to be the facts of the case before the court."75

The unwinding process of all such illegal assignment of RUBY’s credits is critical and necessary, in
keeping with good faith and as a matter of fairness and justice to all parties affected, particularly the
unsecured creditors who stands to suffer most if left with nothing of the assets of RUBY, and the minority
stockholders who waged legal battles to defend the interest of RUBY and protect the rights of the
minority from the abuses of the controlling stockholders. As correctly stated by the CA:

Liquidation is imperative because the unsecured creditor must negotiate the amount of the imputable
interest rate on its long unpaid credit, the decision on which assets are to be sold to liquidate the illegally
assigned credits must be made, the other secured credits and the trade credits must be determined, and
most importantly, the restoration of the 40.172% minority percentage of ownership must be done. 76
However, we do not agree that it is the SEC which has the authority to supervise RUBY’s liquidation.

In the case of Union Bank of the Philippines v. Concepcion,77 the Court is presented with the issue of
whether the SEC had jurisdiction to proceed with insolvency proceedings after it was shown that the
debtor corporation can no longer be rehabilitated. We held that although jurisdiction over a petition to
declare a corporation in a state of insolvency strictly lies with regular courts, the SEC possessed ample
power under P.D. No. 902-A, as amended, to declare a corporation insolvent as an incident of and in
continuation of its already acquired jurisdiction over the petition to be declared in a state of suspension
of payments in the two instances provided in Sec. 5 (d)78 thereof.

Subsequently, in Consuelo Metal Corporation v. Planters Development Bank79 the Court was again
confronted with the same issue. The original petition filed by the debtor corporation was for suspension
of payment, rehabilitation and appointment of a rehabilitation receiver or management committee.
Finding the petition sufficient in form and substance, the SEC issued an order suspending immediately all
actions for claims against the petitioner pending before any court, tribunal or body until further orders
from the court. It also created a management committee to undertake petitioner’s rehabilitation. Four
years later, upon the management committee’s recommendation, the SEC issued an omnibus order
directing the dissolution and liquidation of the petitioner, and that the proceedings on and
implementation of the order of liquidation be commenced at the Regional Trial Court to which the case
was transferred. However, the trial court refused to act on the motion filed by the petitioner who
requested for the issuance of a TRO against the extrajudicial foreclosure initiated by one of its creditors.
The trial court ruled that since the SEC had already terminated and decided on the merits the petition for
suspension of payment, the trial court no longer had legal basis to act on petitioner’s motion. It likewise
denied the motion for reconsideration stating that petition for suspension of payment could not be
converted into a petition for dissolution and liquidation because they covered different subject matters
and were governed by different rules. Petitioner’s remedy thus was to file a new petition for dissolution
and liquidation either with the SEC or the trial court.

When the case was elevated to the CA, the petition was dismissed affirming that under Sec. 121 of
the Corporation Code, the SEC had jurisdiction to hear the petition for dissolution and liquidation. On
motion for reconsideration, the CA remanded the case to the SEC for proceedings under Sec. 121 of
the Corporation Code. The CA denied the motion for reconsideration filed by the respondent creditor,
who then filed a petition for review with this Court.1âwphi1

We ruled that the SEC observed the correct procedure under the present law, in cases where it merely
retained jurisdiction over pending cases for suspension of payments/rehabilitation, thus:

Republic Act No. 8799 (RA 8799) transferred to the appropriate regional trial courts the SEC’s
jurisdiction defined under Section 5(d) of Presidential Decree No. 902-A. Section 5.2 of RA 8799 provides:

The Commission’s jurisdiction over all cases enumerated under Sec. 5 of Presidential Decree No. 902-A is
hereby transferred to the Courts of general jurisdiction or the appropriate Regional Trial Court: Provided,
That the Supreme Court in the exercise of its authority may designate the Regional Trial Court branches
that shall exercise jurisdiction over these cases. The Commission shall retain jurisdiction over pending
cases involving intra-corporate disputes submitted for final resolution which should be resolved within
one (1) year from the enactment of this Code. The Commission shall retain jurisdiction over pending
suspension of payments/rehabilitation cases filed as of 30 June 2000 until finally
disposed. (Emphasis supplied)
The SEC assumed jurisdiction over CMC’s petition for suspension of payment and issued a suspension
order on 2 April 1996 after it found CMC’s petition to be sufficient in form and substance. While CMC’s
petition was still pending with the SEC as of 30 June 2000, it was finally disposed of on 29 November
2000 when the SEC issued its Omnibus Order directing the dissolution of CMC and the transfer of the
liquidation proceedings before the appropriate trial court. The SEC finally disposed of CMC’s petition for
suspension of payment when it determined that CMC could no longer be successfully rehabilitated.

However, the SEC’s jurisdiction does not extend to the liquidation of a corporation. While the SEC has
jurisdiction to order the dissolution of a corporation, jurisdiction over the liquidation of the corporation
now pertains to the appropriate regional trial courts. This is the reason why the SEC, in its 29 November
2000 Omnibus Order, directed that "the proceedings on and implementation of the order of liquidation
be commenced at the Regional Trial Court to which this case shall be transferred." This is the correct
procedure because the liquidation of a corporation requires the settlement of claims for and against the
corporation, which clearly falls under the jurisdiction of the regular courts. The trial court is in the best
position to convene all the creditors of the corporation, ascertain their claims, and determine their
preferences.80 (Additional emphasis supplied.)

In view of the foregoing, the SEC should now be directed to transfer this case to the proper RTC which
shall supervise the liquidation proceedings under Sec. 122 of the Corporation Code. Under Sec. 6 (d) of
P.D. 902-A, the SEC is empowered, on the basis of the findings and recommendations of the management
committee or rehabilitation receiver, or on its own findings, to determine that the continuance in
business of a debtor corporation under suspension of payment or rehabilitation would not be feasible or
profitable nor work to the best interest of the stockholders, parties-litigants, creditors, or the general
public, order the dissolution of such corporation and its remaining assets liquidated accordingly. As
mentioned earlier, the procedure is governed by Rule VI of the SEC Rules of Procedure on Corporate
Recovery.

However, R.A. No. 1014281 otherwise known as the Financial Rehabilitation and Insolvency Act (FRIA) of
2010, now provides for court proceedings in the rehabilitation or liquidation of debtors, both juridical
and natural persons, in a manner that will "ensure or maintain certainty and predictability in commercial
affairs, preserve and maximize the value of the assets of these debtors, recognize creditor rights and
respect priority of claims, and ensure equitable treatment of creditors who are similarly situated."
Considering that this case was still pending when the new law took effect last year, the RTC to which this
case will be transferred shall be guided by Sec. 146 of said law, which states:

SEC. 146. Application to Pending Insolvency, Suspension of Payments and Rehabilitation Cases. – This Act
shall govern all petitions filed after it has taken effect. All further proceedings in insolvency, suspension
of payments and rehabilitation cases then pending, except to the extent that in opinion of the court their
application would not be feasible or would work injustice, in which event the procedures set forth in
prior laws and regulations shall apply.

WHEREFORE, the petitions for review on certiorari are DENIED. The Decision dated May 26, 2004 and
Resolution dated November 4, 2004 of the Court of Appeals in CA-G.R. SP No. 73195 are hereby
AFFIRMED with MODIFICATION in that the Securities and Exchange Commission is hereby ordered to
TRANSFER SEC Case No. 2556 to the appropriate Regional Trial Court which is hereby DIRECTED to
supervise the liquidation of Ruby Industrial Corporation under the provisions of R.A. No. 10142.

With costs against the petitioners.

SO ORDERED.

FIRST DIVISION

G.R. No. 150976 October 18, 2004

CECILIA CASTILLO, OSCAR DEL ROSARIO, ARTURO S. FLORES, XERXES NAVARRO, MARIA ANTONIA
TEMPLO and MEDICAL CENTER PARAÑAQUE, INC., petitioners,
vs.
ANGELES BALINGHASAY, RENATO BERNABE, ALODIA DEL ROSARIO, ROMEO FUNTILA, TERESITA
GAYANILO, 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.

DECISION

QUISUMBING, J.:

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 Parañaque City, Branch 258. The trial court declared the February 9,
2001, election of the board of directors of the Medical Center Parañaque, 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, Parañaque 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 MCPI’s 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 (₱2,000,000.00)
PESOS, Philippine Currency, divided into TWO THOUSAND (2,000) SHARES at a par value of ₱100
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 (₱5,000,000.00)
PESOS, divided as follows:

CLASS NO. OF SHARES PAR VALUE

"A" 1,000 ₱1,000.00
 "B" 4,000 ₱1,000.00

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:

CLASS NO. OF SHARES PAR VALUE

"A" 1,000 ₱1,000.00
"B" 31,000 1,000.00

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 MCPI’s 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 Parañaque
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 party-plaintiff 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 founder’s 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
founder’s 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 MCPI’s 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 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. 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 "founder’s 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.

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

Neither do we find 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 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
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 performed15on 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 Parañaque City, Branch 258, in Civil Case No. 01-0140 is REVERSED AND SET ASIDE. No
pronouncement as to costs.

SO ORDERED.

Republic of the Philippines

SUPREME COURT
Manila

EN BANC
G.R. No. L-21601 December 17, 1966

NIELSON & COMPANY, INC., plaintiff-appellant,

vs.
LEPANTO CONSOLIDATED MINING COMPANY, defendant-appellee.

W. H. Quasha and Associates for plaintiff-appellant.

Ponce Enrile, Siguion-Reyna, Montecillo and Belo for defendant-appellee.

ZALDIVAR, J.:

On February 6, 1958, plaintiff brought this action against defendant before the Court of First Instance of
Manila to recover certain sums of money representing damages allegedly suffered by the former in view
of the refusal of the latter to comply with the terms of a management contract entered into between them
on January 30, 1937, including attorney's fees and costs.

Defendant in its answer denied the material allegations of the complaint and set up certain special
defenses, among them, prescription and laches, as bars against the institution of the present action.

After trial, during which the parties presented testimonial and numerous documentary evidence, the
court a quo rendered a decision dismissing the complaint with costs. The court stated that it did not find
sufficient evidence to establish defendant's counterclaim and so it likewise dismissed the same.

The present appeal was taken to this Court directly by the plaintiff in view of the amount involved in the
case.

The facts of this case, as stated in the decision appealed from, are hereunder quoted for purposes of this
decision:

It appears that the suit involves an operating agreement executed before World War II between
the plaintiff and the defendant whereby the former operated and managed the mining properties
owned by the latter for a management fee of P2,500.00 a month and a 10% participation in the net
profits resulting from the operation of the mining properties. For brevity and convenience,
hereafter the plaintiff shall be referred to as NIELSON and the defendant, LEPANTO.

The antecedents of the case are: The contract in question (Exhibit `C') was made by the parties on
January 30, 1937 for a period of five (5) years. In the latter part of 1941, the parties agreed to
renew the contract for another period of five (5) years, but in the meantime, the Pacific War broke
out in December, 1941.

In January, 1942 operation of the mining properties was disrupted on account of the war. In
February of 1942, the mill, power plant, supplies on hand, equipment, concentrates on hand and
mines, were destroyed upon orders of the United States Army, to prevent their utilization by the
invading Japanese Army. The Japanese forces thereafter occupied the mining properties, operated
the mines during the continuance of the war, and who were ousted from the mining properties
only in August of 1945.
 After the mining properties were liberated from the Japanese forces, LEPANTO took possession
thereof and embarked in rebuilding and reconstructing the mines and mill; setting up new
organization; clearing the mill site; repairing the mines; erecting staff quarters and bodegas and
repairing existing structures; installing new machinery and equipment; repairing roads and
maintaining the same; salvaging equipment and storing the same within the bodegas; doing police
work necessary to take care of the materials and equipment recovered; repairing and renewing
the water system; and remembering (Exhibits "D" and "E"). The rehabilitation and reconstruction
of the mine and mill was not completed until 1948 (Exhibit "F"). On June 26, 1948 the mines
resumed operation under the exclusive management of LEPANTO (Exhibit "F-l").

Shortly after the mines were liberated from the Japanese invaders in 1945, a disagreement arose
between NIELSON and LEPANTO over the status of the operating contract in question which as
renewed expired in 1947. Under the terms thereof, the management contract shall remain in
suspense in case fortuitous event orforce majeure, such as war or civil commotion, adversely
affects the work of mining and milling.

"In the event of inundations, floodings of mine, typhoon, earthquake or any other force
majeure, war, insurrection, civil commotion, organized strike, riot, injury to the machinery
or other event or cause reasonably beyond the control of NIELSON and which adversely
affects the work of mining and milling; NIELSON shall report such fact to LEPANTO and
without liability or breach of the terms of this Agreement, the same shall remain in
suspense, wholly or partially during the terms of such inability." (Clause II of Exhibit "C").

NIELSON held the view that, on account of the war, the contract was suspended during the war;
hence the life of the contract should be considered extended for such time of the period of
suspension. On the other hand, LEPANTO contended that the contract should expire in 1947 as
originally agreed upon because the period of suspension accorded by virtue of the war did not
operate to extend further the life of the contract.

No understanding appeared from the record to have been bad by the parties to resolve the
disagreement. In the meantime, LEPANTO rebuilt and reconstructed the mines and was able to
bring the property into operation only in June of 1948, . . . .

Appellant in its brief makes an alternative assignment of errors depending on whether or not the
management contract basis of the action has been extended for a period equivalent to the period of
suspension. If the agreement is suspended our attention should be focused on the first set of errors
claimed to have been committed by the court a quo; but if the contrary is true, the discussion will then be
switched to the alternative set that is claimed to have been committed. We will first take up the question
whether the management agreement has been extended as a result of the supervening war, and after this
question shall have been determined in the sense sustained by appellant, then the discussion of the
defense of laches and prescription will follow as a consequence.

The pertinent portion of the management contract (Exh. C) which refers to suspension should any event
constitutingforce majeure happen appears in Clause II thereof which we quote hereunder:

In the event of inundations, floodings of the mine, typhoon, earthquake or any other force
majeure, war, insurrection, civil commotion, organized strike, riot, injury to the machinery or
other event or cause reasonably beyond the control of NIELSON and which adversely affects the
 work of mining and milling; NIELSON shall report such fact to LEPANTO and without liability or
breach of the terms of this Agreement, the same shall remain in suspense, wholly or partially
during the terms of such inability.

A careful scrutiny of the clause above-quoted will at once reveal that in order that the management
contract may be deemed suspended two events must take place which must be brought in a satisfactory
manner to the attention of defendant within a reasonable time, to wit: (1) the event constituting the force
majeure must be reasonably beyond the control of Nielson, and (2) it must adversely affect the work of
mining and milling the company is called upon to undertake. As long as these two condition exist the
agreement is deem suspended.

Does the evidence on record show that these two conditions had existed which may justify the conclusion
that the management agreement had been suspended in the sense entertained by appellant? Let us go to
the evidence.

It is a matter that this Court can take judicial notice of that war supervened in our country and that the
mines in the Philippines were either destroyed or taken over by the occupation forces with a view to
their operation. The Lepanto mines were no exception for not was the mine itself destroyed but the mill,
power plant, supplies on hand, equipment and the like that were being used there were destroyed as
well. Thus, the following is what appears in the Lepanto Company Mining Report dated March 13, 1946
submitted by its President C. A. DeWitt to the defendant:1 "In February of 1942, our mill, power plant,
supplies on hand, equipment, concentrates on hand, and mine, were destroyed upon orders of the U.S.
Army to prevent their utilization by the enemy." The report also mentions the report submitted by Mr.
Blessing, an official of Nielson, that "the original mill was destroyed in 1942" and "the original power
plant and all the installed equipment were destroyed in 1942." It is then undeniable that beginning
February, 1942 the operation of the Lepanto mines stopped or became suspended as a result of the
destruction of the mill, power plant and other important equipment necessary for such operation in view
of a cause which was clearly beyond the control of Nielson and that as a consequence such destruction
adversely affected the work of mining and milling which the latter was called upon to undertake under
the management contract. Consequently, by virtue of the very terms of said contract the same may be
deemed suspended from February, 1942 and as of that month the contract still had 60 months to go.

On the other hand, the record shows that the defendant admitted that the occupation forces operated its
mining properties subject of the management contract,2 and from the very report submitted by President
DeWitt it appears that the date of the liberation of the mine was August 1, 1945 although at the time
there were still many booby traps.3 Similarly, in a report submitted by the defendant to its stockholders
dated August 25, 1948, the following appears: "Your Directors take pleasure in reporting that June 26,
1948 marked the official return to operations of this Company of its properties in Mankayan, Mountain
Province, Philippines."4

It is, therefore, clear from the foregoing that the Lepanto mines were liberated on August 1, 1945, but
because of the period of rehabilitation and reconstruction that had to be made as a result of the
destruction of the mill, power plant and other necessary equipment for its operation it cannot be said
that the suspension of the contract ended on that date. Hence, the contract must still be deemed
suspended during the succeeding years of reconstruction and rehabilitation, and this period can only be
said to have ended on June 26, 1948 when, as reported by the defendant, the company officially resumed
the mining operations of the Lepanto. It should here be stated that this period of suspension from
February, 1942 to June 26, 1948 is the one urged by plaintiff.5
It having been shown that the operation of the Lepanto mines on the part of Nielson had been suspended
during the period set out above within the purview of the management contract, the next question that
needs to be determined is the effect of such suspension. Stated in another way, the question now to be
determined is whether such suspension had the effect of extending the period of the management
contract for the period of said suspension. To elucidate this matter, we again need to resort to the
evidence.

For appellant Nielson two witnesses testified, declaring that the suspension had the effect of extending
the period of the contract, namely, George T. Scholey and Mark Nestle. Scholey was a mining engineer
since 1929, an incorporator, general manager and director of Nielson and Company; and for some time he
was also the vice-president and director of the Lepanto Company during the pre-war days and, as such,
he was an officer of both appellant and appellee companies. As vice-president of Lepanto and general
manager of Nielson, Scholey participated in the negotiation of the management contract to the extent that
he initialed the same both as witness and as an officer of both corporations. This witness testified in this
case to the effect that the standard force majeure clause embodied in the management contract was taken
from similar mining contracts regarding mining operations and the understanding regarding the nature
and effect of said clause was that when there is suspension of the operation that suspension meant the
extension of the contract. Thus, to the question, "Before the war, what was the understanding of the
people in the particular trend of business with respect to the force majeure clause?", Scholey answered:
"That was our understanding that the suspension meant the extension of time lost."6

Mark Nestle, the other witness, testified along similar line. He had been connected with Nielson since
1937 until the time he took the witness stand and had been a director, manager, and president of the
same company. When he was propounded the question: "Do you know what was the custom or usage at
that time in connection with force majeure clause?", Nestle answered, "In the mining world the force
majeure clause is generally considered. When a calamity comes up and stops the work like in war, flood,
inundation or fire, etc., the work is suspended for the duration of the calamity, and the period of the
contract is extended after the calamity is over to enable the person to do the big work or recover his
money which he has invested, or accomplish what his obligation is to a third person ."7

And the above testimonial evidence finds support in the very minutes of the special meeting of the Board
of Directors of the Lepanto Company issued on March 10, 1945 which was then chairmaned by Atty. C. A.
DeWitt. We read the following from said report:

The Chairman also stated that the contract with Nielson and Company would soon expire if the
obligations were not suspended, in which case we should have to pay them the retaining fee of
P2,500.00 a month. He believes however, that there is a provision in the contract suspending the
effects thereof in cases like the present, and that even if it were not there, the law itself would
suspend the operations of the contract on account of the war. Anyhow, he stated, we shall have no
difficulty in solving satisfactorily any problem we may have with Nielson and Company.8

Thus, we can see from the above that even in the opinion of Mr. DeWitt himself, who at the time was the
chairman of the Board of Directors of the Lepanto Company, the management contract would then expire
unless the period therein rated is suspended but that, however, he expressed the belief that the period
was extended because of the provision contained therein suspending the effects thereof should any of the
case of force majeure happen like in the present case, and that even if such provision did not exist the law
would have the effect of suspending it on account of the war. In substance, Atty. DeWitt expressed the
opinion that as a result of the suspension of the mining operation because of the effects of the war the
period of the contract had been extended.

Contrary to what appellant's evidence reflects insofar as the interpretation of the force majeure clause is
concerned, however, appellee gives Us an opposite interpretation invoking in support thereof not only a
letter Atty. DeWitt sent to Nielson on October 20, 1945,9 wherein he expressed for the first time an
opinion contrary to what he reported to the Board of Directors of Lepanto Company as stated in the
portion of the minutes of its Board of Directors as quoted above, but also the ruling laid down by our
Supreme Court in some cases decided sometime ago, to the effect that the war does not have the effect of
extending the term of a contract that the parties may enter into regarding a particular transaction, citing
in this connection the cases of Victorias Planters Association v. Victorias Milling Company, 51 O.G.
4010; Rosario S. Vda. de Lacson, et al. v. Abelardo G. Diaz, 87 Phil. 150; and Lo Ching y So Young Chong Co.
v. Court of Appeals, et al., 81 Phil. 601.

To bolster up its theory, appellee also contends that the evidence regarding the alleged custom or usage
in mining contract that appellant's witnesses tried to introduce was incompetent because (a) said custom
was not specifically pleaded; (b) Lepanto made timely and repeated objections to the introduction of said
evidence; (c) Nielson failed to show the essential elements of usage which must be shown to exist before
any proof thereof can be given to affect the contract; and (d) the testimony of its witnesses cannot prevail
over the very terms of the management contract which, as a rule, is supposed to contain all the terms and
conditions by which the parties intended to be bound.

It is here necessary to analyze the contradictory evidence which the parties have presented regarding the
interpretation of the force majeure clause in the management contract.

At the outset, it should be stated that, as a rule, in the construction and interpretation of a document the
intention of the parties must be sought (Rule 130, Section 10, Rules of Court). This is the basic rule in the
interpretation of contracts because all other rules are but ancilliary to the ascertainment of the meaning
intended by the parties. And once this intention has been ascertained it becomes an integral part of the
contract as though it had been originally expressed therein in unequivocal terms (Shoreline Oil Corp. v.
Guy, App. 189, So., 348, cited in 17A C.J.S., p. 47). How is this intention determined?

One pattern is to ascertain the contemporaneous and subsequent acts of the contracting parties in
relation to the transaction under consideration (Article 1371, Civil Code). In this particular case, it is
worthy of note what Atty. C. A. DeWitt has stated in the special meeting of the Board of Directors of
Lepanto in the portion of the minutes already quoted above wherein, as already stated, he expressed the
opinion that the life of the contract, if not extended, would last only until January, 1947 and yet he said
that there is a provision in the contract that the war had the effect of suspending the agreement and that
the effect of that suspension was that the agreement would have to continue with the result that Lepanto
would have to pay the monthly retaining fee of P2,500.00. And this belief that the war suspended the
agreement and that the suspension meant its extension was so firm that he went to the extent that even if
there was no provision for suspension in the agreement the law itself would suspend it.

It is true that Mr. DeWitt later sent a letter to Nielson dated October 20, 1945 wherein apparently he
changed his mind because there he stated that the contract was merely suspended, but not extended, by
reason of the war, contrary to the opinion he expressed in the meeting of the Board of Directors already
adverted to, but between the two opinions of Atty. DeWitt We are inclined to give more weight and
validity to the former not only because such was given by him against his own interest but also because it
was given before the Board of Directors of Lepanto and in the presence, of some Nielson officials 10 who,
on that occasion were naturally led to believe that that was the true meaning of the suspension clause,
while the second opinion was merely self-serving and was given as a mere afterthought.

Appellee also claims that the issue of true intent of the parties was not brought out in the complaint, but
anent this matter suffice it to state that in paragraph No. 19 of the complaint appellant pleaded that the
contract was extended. 11 This is a sufficient allegation considering that the rules on pleadings must as a
rule be liberally construed.

It is likewise noteworthy that in this issue of the intention of the parties regarding the meaning and usage
concerning the force majeure clause, the testimony adduced by appellant is uncontradicted. If such were
not true, appellee should have at least attempted to offer contradictory evidence. This it did not do. Not
even Lepanto's President, Mr. V. E. Lednicky who took the witness stand, contradicted said evidence.

In holding that the suspension of the agreement meant the extension of the same for a period equivalent
to the suspension, We do not have the least intention of overruling the cases cited by appellee. We simply
want to say that the ruling laid down in said cases does not apply here because the material facts
involved therein are not the same as those obtaining in the present. The rule of stare decisis cannot be
invoked where there is no analogy between the material facts of the decision relied upon and those of the
instant case.

Thus, in Victorias Planters Association vs. Victorias Milling Company, 51 O.G. 4010, there was no evidence
at all regarding the intention of the parties to extend the contract equivalent to the period of suspension
caused by the war. Neither was there evidence that the parties understood the suspension to mean
extension; nor was there evidence of usage and custom in the industry that the suspension meant the
extension of the agreement. All these matters, however, obtain in the instant case.

Again, in the case of Rosario S. Vda. de Lacson vs. Abelardo G. Diaz, 87 Phil. 150, the issue referred to the
interpretation of a pre-war contract of lease of sugar cane lands and the liability of the lessee to pay rent
during and immediately following the Japanese occupation and where the defendant claimed the right of
an extension of the lease to make up for the time when no cane was planted. This Court, in holding that
the years which the lessee could not use the land because of the war could not be discounted from the
period agreed upon, held that "Nowhere is there any insinuation that the defendant-lessee was to have
possession of lands for seven years excluding years on which he could not harvest sugar." Clearly,
this ratio decidendi is not applicable to the case at bar wherein there is evidence that the parties
understood the "suspension clause by force majeure" to mean the extension of the period of agreement.

Lastly, in the case of Lo Ching y So Young Chong Co. vs. Court of Appeals, et al., 81 Phil. 601, appellant
leased a building from appellee beginning September 13, 1940 for three years, renewable for two years.
The lessee's possession was interrupted in February, 1942 when he was ousted by the Japanese who
turned the same over to German Otto Schulze, the latter occupying the same until January, 1945 upon the
arrival of the liberation forces. Appellant contended that the period during which he did not enjoy the
leased premises because of his dispossession by the Japanese had to be deducted from the period of the
lease, but this was overruled by this Court, reasoning that such dispossession was merely a simple
"perturbacion de merohecho y de la cual no responde el arrendador" under Article 1560 of the old Civil
Code Art. 1664). This ruling is also not applicable in the instant case because in that case there was no
evidence of the intention of the parties that any suspension of the lease by force majeure would be
understood to extend the period of the agreement.
In resume, there is sufficient justification for Us to conclude that the cases cited by appellee are
inapplicable because the facts therein involved do not run parallel to those obtaining in the present case.

We shall now consider appellee's defense of laches. Appellee is correct in its contention that the defense
of laches applies independently of prescription. Laches is different from the statute of limitations.
Prescription is concerned with the fact of delay, whereas laches is concerned with the effect of delay.
Prescription is a matter of time; laches is principally a question of inequity of permitting a claim to be
enforced, this inequity being founded on some change in the condition of the property or the relation of
the parties. Prescription is statutory; laches is not. Laches applies in equity, whereas prescription applies
at law. Prescription is based on fixed time, laches is not. (30 C.J.S., p. 522; See also Pomeroy's Equity
Jurisprudence, Vol. 2, 5th ed., p. 177).

The question to determine is whether appellant Nielson is guilty of laches within the meaning
contemplated by the authorities on the matter. In the leading case of Go Chi Gun, et al. vs. Go Cho, et al., 96
Phil. 622, this Court enumerated the essential elements of laches as follows:

(1) conduct on the part of the defendant, or of one under whom he claims, giving rise to the
situation of which complaint is made and for which the complaint seeks a remedy; (2) delay in
asserting the complainant's rights, the complainant having had knowledge or notice of the
defendant's conduct and having been afforded an opportunity to institute a suit; (3) lack of
knowledge or notice on the part of the defendant that the complainant would assert the right on
which he bases his suit; and (4) injury or prejudice to the defendant in the event relief is accorded
to the complainant, or the suit is not held barred.

Are these requisites present in the case at bar?

The first element is conceded by appellant Nielson when it claimed that defendant refused to pay its
management fees, its percentage of profits and refused to allow it to resume the management operation.

Anent the second element, while it is true that appellant Nielson knew since 1945 that appellee Lepanto
has refused to permit it to resume management and that since 1948 appellee has resumed operation of
the mines and it filed its complaint only on February 6, 1958, there being apparent delay in filing the
present action, We find the delay justified and as such cannot constitute laches. It appears that appellant
had not abandoned its right to operate the mines for even before the termination of the suspension of the
agreement as early as January 20, 194612 and even before March 10, 1945, it already claimed its right to
the extension of the contract,13 and it pressed its claim for the balance of its share in the profits from the
1941 operation14 by reason of which negotiations had taken place for the settlement of the claim15 and it
was only on June 25, 1957 that appellee finally denied the claim. There is, therefore, only a period of less
than one year that had elapsed from the date of the final denial of the claim to the date of the filing of the
complaint, which certainly cannot be considered as unreasonable delay.

The third element of laches is absent in this case. It cannot be said that appellee Lepanto did not know
that appellant would assert its rights on which it based suit. The evidence shows that Nielson had been
claiming for some time its rights under the contract, as already shown above.

Neither is the fourth element present, for if there has been some delay in bringing the case to court it was
mainly due to the attempts at arbitration and negotiation made by both parties. If Lepanto's documents
were lost, it was not caused by the delay of the filing of the suit but because of the war.
Another reason why appellant Nielson cannot be held guilty of laches is that the delay in the filing of the
complaint in the present case was the inevitable of the protracted negotiations between the parties
concerning the settlement of their differences. It appears that Nielson asked for arbitration16 which was
granted. A committee consisting of Messrs. DeWitt, Farnell and Blessing was appointed to act on said
differences but Mr. DeWitt always tried to evade the issue17 until he was taken ill and died. Mr. Farnell
offered to Nielson the sum of P13,000.58 by way of compromise of all its claim arising from the
management contract18 but apparently the offer was refused. Negotiations continued with the exchange
of letters between the parties but with no satisfactory result.19 It can be said that the delay due to
protracted negotiations was caused by both parties. Lepanto, therefore, cannot be permitted to take
advantage of such delay or to question the propriety of the action taken by Nielson. The defense of laches
is an equitable one and equity should be applied with an even hand. A person will not be permitted to
take advantage of, or to question the validity, or propriety of, any act or omission of another which was
committed or omitted upon his own request or was caused by his conduct (R. H. Stearns Co. vs. United
States, 291 U.S. 54, 78 L. Ed. 647, 54 S. Ct., 325; United States vs. Henry Prentiss & Co., 288 U.S. 73, 77 L.
Ed., 626, 53 S. Ct., 283).

Had the action of Nielson prescribed? The court a quo held that the action of Nielson is already barred by
the statute of limitations, and that ruling is now assailed by the appellant in this appeal. In urging that the
court a quo erred in reaching that conclusion the appellant has discussed the issue with reference to
particular claims.

The first claim is with regard to the 10% share in profits of 1941 operations. Inasmuch as appellee
Lepanto alleges that the correct basis of the computation of the sharing in the net profits shall be as
provided for in Clause V of the Management Contract, while appellant Nielson maintains that the basis
should be what is contained in the minutes of the special meeting of the Board of Directors of Lepanto on
August 21, 1940, this question must first be elucidated before the main issue is discussed.

The facts relative to the matter of profit sharing follow: In the management contract entered into
between the parties on January 30, 1937, which was renewed for another five years, it was stipulated
that Nielson would receive a compensation of P2,500.00 a month plus 10% of the net profits from the
operation of the properties for the preceding month. In 1940, a dispute arose regarding the computation
of the 10% share of Nielson in the profits. The Board of Directors of Lepanto, realizing that the mechanics
of the contract was unfair to Nielson, authorized its President to enter into an agreement with Nielson
modifying the pertinent provision of the contract effective January 1, 1940 in such a way that Nielson
shall receive (1) 10% of the dividends declared and paid, when and as paid, during the period of the
contract and at the end of each year, (2) 10% of any depletion reserve that may be set up, and (3) 10% of
any amount expended during the year out of surplus earnings for capital account. 20 Counsel for the
appellee admitted during the trial that the extract of the minutes as found in Exhibit B is a faithful copy
from the original. 21 Mr. George Scholey testified that the foregoing modification was agreed upon. 22

Lepanto claims that this new basis of computation should be rejected (1) because the contract was clear
on the point of the 10% share and it was so alleged by Nielson in its complaint, and (2) the minutes of the
special meeting held on August 21, 1940 was not signed.

It appearing that the issue concerning the sharing of the profits had been raised in appellant's complaint
and evidence on the matter was introduced 23 the same can be taken into account even if no amendment
of the pleading to make it conform to the evidence has been made, for the same is authorized by Section
4, Rule 17, of the old Rules of Court (now Section 5, Rule 10, of the new Rules of Court).
Coming now to the question of prescription raised by defendant Lepanto, it is contended by the latter that
the period to be considered for the prescription of the claim regarding participation in the profits is only
four years, because the modification of the sharing embodied in the management contract is merely
verbal, no written document to that effect having been presented. This contention is untenable. The
modification appears in the minutes of the special meeting of the Board of Directors of Lepanto held on
August 21, 1940, it having been made upon the authority of its President, and in said minutes the terms of
the modification had been specified. This is sufficient to have the agreement considered, for the purpose
of applying the statute of limitations, as a written contract even if the minutes were not signed by the
parties (3 A.L.R., 2d, p. 831). It has been held that a writing containing the terms of a contract if adopted
by two persons may constitute a contract in writing even if the same is not signed by either of the parties
(3 A.L.R., 2d, pp. 812-813). Another authority says that an unsigned agreement the terms of which are
embodied in a document unconditionally accepted by both parties is a written contract (Corbin on
Contracts, Vol. 1, p. 85)

The modification, therefore, made in the management contract relative to the participation in the profits
by appellant, as contained in the minutes of the special meeting of the Board of Directors of Lepanto held
on August 21, 1940, should be considered as a written contract insofar as the application of the statutes
of limitations is concerned. Hence, the action thereon prescribes within ten (10) years pursuant to
Section 43 of Act 190.

Coming now to the facts, We find that the right of Nielson to its 10% participation in the 1941 operations
accrued on December 21, 1941 and the right to commence an action thereon began on January 1, 1942 so
that the action must be brought within ten (10) years from the latter date. It is true that the complaint
was filed only on February 6, 1958, that is sixteen (16) years, one (1) month and five (5) days after the
right of action accrued, but the action has not yet prescribed for various reasons which We will hereafter
discuss.

The first reason is the operation of the Moratorium Law, for appellant's claim is undeniably a claim for
money. Said claim accrued on December 31, 1941, and Lepanto is a war sufferer. Hence the claim was
covered by Executive Order No. 32 of March 10, 1945. It is well settled that the operation of the
Moratorium Law suspends the running of the statue of limitations (Pacific Commercial Co. vs. Aquino,
G.R. No. L-10274, February 27, 1957).

This Court has held that the Moratorium Law had been enforced for eight (8) years, two (2) months and
eight (8) days (Tioseco vs. Day, et al., L-9944, April 30, 1957; Levy Hermanos, Inc. vs. Perez, L-14487,
April 29, 1960), and deducting this period from the time that had elapsed since the accrual of the right of
action to the date of the filing of the complaint, the extent of which is sixteen (16) years, one (1) month
and five (5) days, we would have less than eight (8) years to be counted for purposes of prescription.
Hence appellant's action on its claim of 10% on the 1941 profits had not yet prescribed.

Another reason that may be taken into account in support of the no-bar theory of appellant is the
arbitration clause embodied in the management contract which requires that any disagreement as to any
amount of profits before an action may be taken to court shall be subject to arbitration. 24 This agreement
to arbitrate is valid and binding. 25 It cannot be ignored by Lepanto. Hence Nielson could not bring an
action on its participation in the 1941 operations-profits until the condition relative to arbitration had
been first complied with. 26 The evidence shows that an arbitration committee was constituted but it
failed to accomplish its purpose on June 25, 1957. 27 From this date to the filing of the complaint the
required period for prescription has not yet elapsed.
Nielson claims the following: (1) 10% share in the dividends declared in 1941, exclusive of interest,
amounting to P17,500.00; (2) 10% in the depletion reserves for 1941; and (3) 10% in the profits for
years prior to 1948 amounting to P19,764.70.

With regard to the first claim, the Lepanto's report for the calendar year of 1954 28 shows that it declared
a 10% cash dividend in December, 1941, the amount of which is P175,000.00. The evidence in this
connection (Exhibits L and O) was admitted without objection by counsel for Lepanto. 29 Nielson claims
10% share in said amount with interest thereon at 6% per annum. The document (Exhibit L) was even
recognized by Lepanto's President V. L. Lednicky, 30 and this claim is predicated on the provision of
paragraph V of the management contract as modified pursuant to the proposal of Lepanto at the special
meeting of the Board of Directors on August 21, 1940 (Exh. B), whereby it was provided that Nielson
would be entitled to 10% of any dividends to be declared and paid during the period of the contract.

With regard to the second claim, Nielson admits that there is no evidence regarding the amount set aside
by Lepanto for depletion reserve for 1941 31 and so the 10% participation claimed thereon cannot be
assessed.

Anent the third claim relative to the 10% participation of Nielson on the sum of P197,647.08, which
appears in Lepanto's annual report for 1948 32 and entered as profit for prior years in the statement of
income and surplus, which amount consisted "almost in its entirety of proceeds of copper concentrates
shipped to the United States during 1947," this claim should to denied because the amount is not
"dividend declared and paid" within the purview of the management contract.

The fifth assignment of error of appellant refers to the failure of the lower court to order Lepanto to pay
its management fees for January, 1942, and for the full period of extension amounting to P150,000.00, or
P2,500.00 a month for sixty (60) months, — a total of P152,500.00 — with interest thereon from the date
of judicial demand.

It is true that the claim of management fee for January, 1942 was not among the causes of action in the
complaint, but inasmuch as the contract was suspended in February, 1942 and the management fees
asked for included that of January, 1942, the fact that such claim was not included in a specific manner in
the complaint is of no moment because an appellate court may treat the pleading as amended to conform
to the evidence where the facts show that the plaintiff is entitled to relief other than what is asked for in
the complaint (Alonzo vs. Villamor, 16 Phil. 315). The evidence shows that the last payment made by
Lepanto for management fee was for November and December, 1941. 33 If, as We have declared, the
management contract was suspended beginning February 1942, it follows that Nielson is entitled to the
management fee for January, 1942.

Let us now come to the management fees claimed by Nielson for the period of extension. In this respect, it
has been shown that the management contract was extended from June 27, 1948 to June 26, 1953, or for
a period of sixty (60) months. During this period Nielson had a right to continue in the management of
the mining properties of Lepanto and Lepanto was under obligation to let Nielson do it and to pay the
corresponding management fees. Appellant Nielson insisted in performing its part of the contract but
Lepanto prevented it from doing so. Hence, by virtue of Article 1186 of the Civil Code, there was a
constructive fulfillment an the part of Nielson of its obligation to manage said mining properties in
accordance with the contract and Lepanto had the reciprocal obligation to pay the corresponding
management fees and other benefits that would have accrued to Nielson if Lepanto allowed it (Nielson)
to continue in the management of the mines during the extended period of five (5) years.
We find that the preponderance of evidence is to the effect that Nielson had insisted in managing the
mining properties soon after liberation. In the report 34 of Lepanto, submitted to its stockholders for the
period from 1941 to March 13, 1946, are stated the activities of Nielson's officials in relation to Nielson's
insistence in continuing the management. This report was admitted in evidence without objection. We
find the following in the report:

Mr. Blessing, in May, 1945, accompanied Clark and Stanford to San Fernando (La Union) to await the
liberation of the mines. (Mr. Blessing was the Treasurer and Metallurgist of Nielson). Blessing with Clark
and Stanford went to the property on July 16 and found that while the mill site had been cleared of the
enemy the latter was still holding the area around the staff houses and putting up a strong defense. As a
result, they returned to San Fernando and later went back to the mines on July 26. Mr. Blessing made the
report, dated August 6, recommending a program of operation. Mr. Nielson himself spent a day in the
mine early in December, 1945 and reiterated the program which Mr. Blessing had outlined. Two or three
weeks before the date of the report, Mr. Coldren of the Nielson organization also visited the mine and told
President C. A. DeWitt of Lepanto that he thought that the mine could be put in condition for the delivery
of the ore within ten (10) days. And according to Mark Nestle, a witness of appellant, Nielson had several
men including engineers to do the job in the mines and to resume the work. These engineers were in fact
sent to the mine site and submitted reports of what they had done. 35

On the other hand, appellee claims that Nielson was not ready and able to resume the work in the mines,
relying mainly on the testimony of Dr. Juan Nabong, former secretary of both Nielson and Lepanto, given
in the separate case of Nancy Irving Romero vs. Lepanto Consolidated Mining Company (Civil Case No.
652, CFI, Baguio), to the effect that as far as he knew "Nielson and Company had not attempted to operate
the Lepanto Consolidated Mining Company because Mr. Nielson was not here in the Philippines after the
last war. He came back later," and that Nielson and Company had no money nor stocks with which to
start the operation. He was asked by counsel for the appellee if he had testified that way in Civil Case No.
652 of the Court of First Instance of Baguio, and he answered that he did not confirm it fully. When this
witness was asked by the same counsel whether he confirmed that testimony, he said that when he
testified in that case he was not fully aware of what happened and that after he learned more about the
officials of the corporation it was only then that he became aware that Nielson had really sent his men to
the mines along with Mr. Blessing and that he was aware of this fact personally. He further said that Mr.
Nielson was here in 1945 and "he was going out and contacting his people." 36

Lepanto admits, in its own brief, that Nielson had really insisted in taking over the management and
operation of the mines but that it (Lepanto) unequivocally refuse to allow it. The following is what
appears in the brief of the appellee:

It was while defendant was in the midst of the rehabilitation work which was fully described
earlier, still reeling under the terrible devastation and destruction wrought by war on its mine
that Nielson insisted in taking over the management and operation of the mine. Nielson thus put
Lepanto in a position where defendant, under the circumstances, had to refuse, as in fact it did,
Nielson's insistence in taking over the management and operation because, as was obvious, it was
impossible, as a result of the destruction of the mine, for the plaintiff to manage and operate the
same and because, as provided in the agreement, the contract was suspended by reason of the
war. The stand of Lepanto in disallowing Nielson to assume again the management of the mine in
1945 was unequivocal and cannot be misinterpreted, infra.37
Based on the foregoing facts and circumstances, and Our conclusion that the management contract was
extended, We believe that Nielson is entitled to the management fees for the period of extension. Nielson
should be awarded on this claim sixty times its monthly pay of P2,500.00, or a total of P150,000.00.

In its sixth assignment of error Nielson contends that the lower court erred in not ordering Lepanto to
pay it (Nielson) the 10% share in the profits of operation realized during the period of five (5) years from
the resumption of its post-war operations of the Mankayan mines, in the total sum of P2,403,053.20 with
interest thereon at the rate of 6% per annum from February 6, 1958 until full payment. 38

The above claim of Nielson refers to four categories, namely: (1) cash dividends; (2) stock dividends; (3)
depletion reserves; and (4) amount expended on capital investment.

Anent the first category, Lepanto's report for the calendar year 1954 39 contains a record of the cash
dividends it paid up to the date of said report, and the post-war dividends paid by it corresponding to the
years included in the period of extension of the management contract are as follows:

POST-WAR

8 10% November 1949 P 200,000.00

9 10% July 1950 300,000.00
10 10% October 1950 500,000.00
11 20% December 1950 1,000,000.00
12 20% March 1951 1,000,000.00
13 20% June 1951 1,000,000.00
14 20% September 1951 1,000,000.00
15 40% December 1951 2,000,000.00
16 20% March 1952 1,000,000.00
17 20% May 1952 1,000,000.00
18 20% July 1952 1,000,000.00
19 20% September 1952 1,000,000.00
20 20% December 1952 1,000,000.00
21 20% March 1953 1,000,000.00
22 20% June 1953 1,000,000.00
TOTAL P14,000,000.00

According to the terms of the management contract as modified, appellant is entitled to 10% of the
P14,000,000.00 cash dividends that had been distributed, as stated in the above-mentioned report, or the
sum of P1,400,000.00.
With regard to the second category, the stock dividends declared by Lepanto during the period of
extension of the contract are: On November 28, 1949, the stock dividend declared was 50% of the
outstanding authorized capital of P2,000,000.00 of the company, or stock dividends worth
P1,000,000.00; and on August 22, 1950, the stock dividends declared was 66-2/3% of the standing
authorized capital of P3,000,000.00 of the company, or stock dividends worth P2,000,000.00. 40

Appellant's claim that it should be given 10% of the cash value of said stock dividends with interest
thereon at 6% from February 6, 1958 cannot be granted for that would not be in accordance with the
management contract which entitles Nielson to 10% of any dividends declared paid, when and as paid.
Nielson, therefore, is entitled to 10% of the stock dividends and to the fruits that may have accrued to
said stock dividends pursuant to Article 1164 of the Civil Code. Hence to Nielson is due shares of stock
worth P100,000.00, as per stock dividends declared on November 28, 1949 and all the fruits accruing to
said shares after said date; and also shares of stock worth P200,000.00 as per stock dividends declared
on August 20, 1950 and all fruits accruing thereto after said date.

Anent the third category, the depletion reserve appearing in the statement of income and surplus
submitted by Lepanto corresponding to the years covered by the period of extension of the contract, may
be itemized as follows:

In 1948, as per Exh. F, p. 36 and Exh. Q, p. 5, the depletion reserve set up was P11,602.80.

In 1949, as per Exh. G, p. 49 and Exh. Q, p. 5, the depletion reserve set up was P33,556.07.

In 1950, as per Exh. H, p. 37, Exh. Q, p. 6 and Exh. I, p. 37, the depletion reserve set up was
P84,963.30.

In 1951, as per Exh. I, p. 45, Exh. Q, p. 6, and Exh. J, p. 45, the depletion reserve set up was
P129,089.88.

In 1952, as per Exh. J, p. 45, Exh. Q, p. 6 and Exh. K p. 41, the depletion reserve was P147,141.54.

In 1953, as per Exh. K, p. 41, and Exh. Q, p. 6, the depletion reserve set up as P277,493.25.

Regarding the depletion reserve set up in 1948 it should be noted that the amount given was for the
whole year. Inasmuch as the contract was extended only for the last half of the year 1948, said amount of
P11,602.80 should be divided by two, and so Nielson is only entitled to 10% of the half amounting to
P5,801.40.

Likewise, the amount of depletion reserve for the year 1953 was for the whole year and since the
contract was extended only until the first half of the year, said amount of P277,493.25 should be divided
by two, and so Nielson is only entitled to 10% of the half amounting to P138,746.62. Summing up the
entire depletion reserves, from the middle of 1948 to the middle of 1953, we would have a total of
P539,298.81, of which Nielson is entitled to 10%, or to the sum of P53,928.88.

Finally, with regard to the fourth category, there is no figure in the record representing the value of the
fixed assets as of the beginning of the period of extension on June 27, 1948. It is possible, however, to
arrive at the amount needed by adding to the value of the fixed assets as of December 31, 1947 one-half
of the amount spent for capital account in the year 1948. As of December 31, 1947, the value of the fixed
assets was P1,061,878.88 41 and as of December 31, 1948, the value of the fixed assets was
P3,270,408.07. 42 Hence, the increase in the value of the fixed assets for the year 1948 was P2,208,529.19,
one-half of which is P1,104,264.59, which amount represents the expenses for capital account for the first
half of the year 1948. If to this amount we add the fixed assets as of December 31, 1947 amounting to
P1,061,878.88, we would have a total of P2,166,143.47 which represents the fixed assets at the beginning
of the second half of the year 1948.

There is also no figure representing the value of the fixed assets when the contract, as extended, ended on
June 26, 1953; but this may be computed by getting one-half of the expenses for capital account made in
1953 and adding the same to the value of the fixed assets as of December 31, 1953 is
P9,755,840.41 43 which the value of the fixed assets as of December 31, 1952 is P8,463,741.82, the
difference being P1,292,098.69. One-half of this amount is P646,049.34 which would represent the
expenses for capital account up to June, 1953. This amount added to the value of the fixed assets as of
December 31, 1952 would give a total of P9,109,791.16 which would be the value of fixed assets at the
end of June, 1953.

The increase, therefore, of the value of the fixed assets of Lepanto from June, 1948 to June, 1953 is
P6,943,647.69, which amount represents the difference between the value of the fixed assets of Lepanto
in the year 1948 and in the year 1953, as stated above. On this amount Nielson is entitled to a share of
10% or to the amount of P694,364.76.

Considering that most of the claims of appellant have been entertained, as pointed out in this decision,
We believe that appellant is entitled to be awarded attorney's fees, especially when, according to the
undisputed testimony of Mr. Mark Nestle, Nielson obliged himself to pay attorney's fees in connection
with the institution of the present case. In this respect, We believe, considering the intricate nature of the
case, an award of fifty thousand (P50,000.00) pesos for attorney's fees would be reasonable.

IN VIEW OF THE FOREGOING CONSIDERATIONS, We hereby reverse the decision of the court a quo and
enter in lieu thereof another, ordering the appellee Lepanto to pay appellant Nielson the different
amounts as specified hereinbelow:

(1) 10% share of cash dividends of December, 1941 in the amount of P17,500.00, with legal interest
thereon from the date of the filing of the complaint;

(2) management fee for January, 1942 in the amount of P2,500.00, with legal interest thereon from the
date of the filing of the complaint;

(3) management fees for the sixty-month period of extension of the management contract, amounting to
P150,000.00, with legal interest from the date of the filing of the complaint;

(4) 10% share in the cash dividends during the period of extension of the management contract,
amounting to P1,400,000.00, with legal interest thereon from the date of the filing of the complaint;

(5) 10% of the depletion reserve set up during the period of extension, amounting to P53,928.88, with
legal interest thereon from the date of the filing of the complaint;

(6) 10% of the expenses for capital account during the period of extension, amounting to P694,364.76,
with legal interest thereon from the date of the filing of the complaint;
(7) to issue and deliver to Nielson and Co., Inc. shares of stock of Lepanto Consolidated Mining Co. at par
value equivalent to the total of Nielson's l0% share in the stock dividends declared on November 28,
1949 and August 22, 1950, together with all cash and stock dividends, if any, as may have been declared
and issued subsequent to November 28, 1949 and August 22, 1950, as fruits that accrued to said shares;

If sufficient shares of stock of Lepanto's are not available to satisfy this judgment, defendant-appellee
shall pay plaintiff-appellant an amount in cash equivalent to the market value of said shares at the time of
default (12 C.J.S., p. 130), that is, all shares of the stock that should have been delivered to Nielson before
the filing of the complaint must be paid at their market value as of the date of the filing of the complaint;
and all shares, if any, that should have been delivered after the filing of the complaint at the market value
of the shares at the time Lepanto disposed of all its available shares, for it is only then that Lepanto placed
itself in condition of not being able to perform its obligation (Article 1160, Civil Code);

(8) the sum of P50,000.00 as attorney's fees; and

(9) the costs. It is so ordered.

Republic of the Philippines

SUPREME COURT
Manila

FIRST DIVISION

G.R. No. L-67626 April 18, 1989

JOSE REMO, JR., petitioner,

vs.
THE HON. INTERMEDIATE APPELLATE COURT and E.B. MARCHA TRANSPORT COMPANY, INC.,
represented by APIFANIO B. MARCHA, respondents.

Orbos, Cabusora, Dumlao & Sta. Ana for petitioner.

GANCAYCO, J.:

A corporation is an entity separate and distinct from its stockholders. While not in fact and in reality a
person, the law treats a corporation as though it were a person by process of fiction or by regarding it as
an artificial person distinct and separate from its individual stockholders. 1

However, the corporate fiction or the notion of legal entity may be disregarded when it "is used to defeat
public convenience, justify wrong, protect fraud, or defend crime" in which instances "the law will regard
the corporation as an association of persons, or in case of two corporations, will merge them into one."
The corporate fiction may also be disregarded when it is the "mere alter ego or business conduit of a
person." 2 There are many occasions when this Court pierced the corporate veil because of its use to
protect fraud and to justify wrong. 3 The herein petition for review of a. resolution of the Intermediate
Appellate Court dated February 8, 1984 seeking the reversal thereof and the reinstatement of its earlier
decision dated June 30, 1983 in AC-G.R. No. 68496-R 4 calls for the application of the foregoing principles.
In the latter part of December, 1977 the board of directors of Akron Customs Brokerage Corporation
(hereinafter referred to as Akron), composed of petitioner Jose Remo, Jr., Ernesto Bañares, Feliciano
Coprada, Jemina Coprada, and Dario Punzalan with Lucia Lacaste as Secretary, adopted a resolution
authorizing the purchase of thirteen (13) trucks for use in its business to be paid out of a loan the
corporation may secure from any lending institution. 5

Feliciano Coprada, as President and Chairman of Akron, purchased thirteen trucks from private
respondent on January 25, 1978 for and in consideration of P525,000.00 as evidenced by a deed of
absolute sale. 6 In a side agreement of the same date, the parties agreed on a downpayment in the
amount of P50,000.00 and that the balance of P475,000.00 shall be paid within sixty (60) days from the
date of the execution of the agreement. The parties also agreed that until said balance is fully paid, the
down payment of P50,000.00 shall accrue as rentals of the 13 trucks; and that if Akron fails to pay the
balance within the period of 60 days, then the balance shall constitute as a chattel mortgage lien covering
said cargo trucks and the parties may allow an extension of 30 days and thereafter private respondent
may ask for a revocation of the contract and the reconveyance of all said trucks. 7

The obligation is further secured by a promissory note executed by Coprada in favor of Akron. It is stated
in the promissory note that the balance shall be paid from the proceeds of a loan obtained from the
Development Bank of the Philippines (DBP) within sixty (60) days. 8 After the lapse of 90 days, private
respondent tried to collect from Coprada but the latter promised to pay only upon the release of the DBP
loan. Private respondent sent Coprada a letter of demand dated May 10, 1978. 9 In his reply to the said
letter, Coprada reiterated that he was applying for a loan from the DBP from the proceeds of which
payment of the obligation shall be made. 10

Meanwhile, two of the trucks were sold under a pacto de retro sale to a certain Mr. Bais of the Perpetual
Loans and Savings Bank at Baclaran. The sale was authorized by a board resolution made in a meeting
held on March 15, 1978. 11

Upon inquiry, private respondent found that no loan application was ever filed by Akron with DBP. 12

In the meantime, Akron paid rentals of P500.00 a day pursuant to a subsequent agreement, from April 27,
1978 (the end of the 90-day period to pay the balance) to May 31, 1978. Thereafter, no more rental
payments were made.

On June 17, 1978, Coprada wrote private respondent begging for a grace period of until the end of the
month to pay the balance of the purchase price; that he will update the rentals within the week; and in
case he fails, then he will return the 13 units should private respondent elect to get back the
same. 13 Private respondent, through counsel, wrote Akron on August 1, 1978 demanding the return of
the 13 trucks and the payment of P25,000.00 back rentals covering the period from June 1 to August 1,
1978. 14

Again, Coprada wrote private respondent on August 8, 1978 asking for another grace period of up to
August 31, 1978 to pay the balance, stating as well that he is expecting the approval of his loan
application from a certain financing company, and that ten (10) trucks have been returned to Bagbag,
Novaliches. 15 On December 9, 1978, Coprada informed private respondent anew that he had returned
ten (10) trucks to Bagbag and that a resolution was passed by the board of directors confirming the deed
of assignment to private respondent of P475,000 from the proceeds of a loan obtained by Akron from the
State Investment House, Inc. 16
In due time, private respondent filed a compliant for the recovery of P525,000.00 or the return of the 13
trucks with damages against Akron and its officers and directors, Feliciano Coprada, Dario D. Punzalan,
Jemina Coprada, Lucia Lacaste, Wilfredo Layug, Arcadio de la Cruz, Francisco Clave, Vicente Martinez,
Pacifico Dollario and petitioner with the then Court of First Instance of Rizal. Only petitioner answered
the complaint denying any participation in the transaction and alleging that Akron has a distinct
corporate personality. He was, however, declared in default for his failure to attend the pre-trial.

In the meanwhile, petitioner sold all his shares in Akron to Coprada. It also appears that Akron amended
its articles of incorporation thereby changing its name to Akron Transport International, Inc. which
assumed the liability of Akron to private respondent.

After an ex parte reception of the evidence of the private respondent, a decision was rendered on October
28, 1980, the dispositive part of which reads as follows:

Finding the evidence sufficient to prove the case of the plaintiff, judgment is hereby rendered in favor of
the plaintiff and against the defendants, ordering them jointly and severally to pay;

a — the purchase price of the trucks in the amount of P525,000.00 with ... legal rate (of
interest) from the filing of the complaint until the full amount is paid;

b — rentals of Bagbag property at P1,000.00 a month from August 1978 until the premises
is cleared of the said trucks;

c — attorneys fees of P10,000.00, and

d — costs of suit.

The P50,000.00 given as down payment shall pertain as rentals of the trucks from June 1 to August 1,
1978 which is P25,000.00 (see demand letter of Atty. Aniano Exhibit "T") and the remaining P25,000.00
shall be from August 1, 1978 until the trucks are removed totally from the place." 17

A motion for new trial filed by petitioner was denied so he appealed to the then Intermediate Appellate
Court (IAC) wherein in due course a decision was rendered on June 30, 1 983 setting aside the said
decision as far as petitioner is concemed. However, upon a motion for reconsideration filed by private
respondent dent, the IAC, in a resolution dated February 8,1984, set aside the decision dated June 30,
1983. The appellate court entered another decision affirming the appealed decision of the trial court,
with costs against petitioner.

Hence, this petition for review wherein petitioner raises the following issues:

I. The Intermediate Appellate Court (IAC) erred in disregarding the corporate fiction and in
holding the petitioner personally liable for the obligation of the Corporation which decision
is patently contrary to law and the applicable decision thereon.

II. The Intermediate Appellate Court (IAC) committed grave error of law in its decision by
sanctioning the merger of the personality of the corporation with that of the petitioner
when the latter was held liable for the corporate debts. 18
We reverse.

The environmental facts of this case show that there is no cogent basis to pierce the corporate veil of
Akron and hold petitioner personally liable for its obligation to private respondent. While it is true that in
December, 1977 petitioner was still a member of the board of directors of Akron and that he participated
in the adoption of a resolution authorizing the purchase of 13 trucks for the use in the brokerage
business of Akron to be paid out of a loan to be secured from a lending institution, it does not appear that
said resolution was intended to defraud anyone and more particularly private respondent. It was
Coprada, President and Chairman of Akron, who negotiated with said respondent for the purchase of 13
cargo trucks on January 25, 1978. It was Coprada who signed a promissory note to guarantee the
payment of the unpaid balance of the purchase price out of the proceeds of a loan he supposedly sought
from the DBP. The word "WE' in the said promissory note must refer to the corporation which Coprada
represented in the execution of the note and not its stockholders or directors. Petitioner did not sign the
said promissory note so he cannot be personally bound thereby.

Thus, if there was any fraud or misrepresentation that was foisted on private respondent in that there
was a forthcoming loan from the DBP when it fact there was none, it is Coprada who should account for
the same and not petitioner.

As to the sale through pacto de retro of the two units to a third person by the corporation by virtue of a
board resolution, petitioner asserts that he never signed said resolution. Be that as it may, the sale is not
inherently fraudulent as the 13 units were sold through a deed of absolute sale to Akron so that the
corporation is free to dispose of the same. Of course, it was stipulated that in case of default in payment to
private respondent of the balance of the consideration, a chattel mortgage lien shag be constituted on the
13 units. Nevertheless, said mortgage is a prior lien as against the pacto de retro sale of the 2 units.

As to the amendment of the articles of incorporation of Akron thereby changing its name to Akron
Transport International, Inc., petitioner alleges that the change of corporate name was in order to include
trucking and container yard operations in its customs brokerage of which private respondent was duly
informed in a letter. 19Indeed, the new corporation confirmed and assumed the obligation of the old
corporation. There is no indication of an attempt on the part of Akron to evade payment of its obligation
to private respondent.

There is the fact that petitioner sold his shares in Akron to Coprada during the pendency of the case.
Since petitioner has no personal obligation to private respondent, it is his inherent right as a stockholder
to dispose of his shares of stock anytime he so desires.

Mention is also made of the alleged "dumping" of 10 units in the premises of private respondent at
Bagbag, Novaliches which to the mind of the Court does not prove fraud and instead appears to be an
attempt on the part of Akron to attend to its obligations as regards the said trucks. Again petitioner has
no part in this.

If the private respondent is the victim of fraud in this transaction, it has not been clearly shown that
petitioner had any part or participation in the perpetration of the same. Fraud must be established by
clear and convincing evidence. If at all, the principal character on whom fault should be attributed is
Feliciano Coprada, the President of Akron, whom private respondent dealt with personally all through
out. Fortunately, private respondent obtained a judgment against him from the trial court and the said
judgment has long been final and executory.
WHEREFORE, the petition is GRANTED. The questioned resolution of the Intermediate Appellate Court
dated February 8,1984 is hereby set aside and its decision dated June 30,1983 setting aside the decision
of the trial court dated October 28, 1980 insofar as petitioner is concemed is hereby reinstated and
affirmed, without costs.

SO ORDERED.

Republic of the Philippines

SUPREME COURT
Manila

FIRST DIVISION

G.R. No. 123553 July 13, 1998

(CA-G.R. No. 33291) July 13, 1998

NORA A. BITONG, petitioner,

vs.

COURT OF APPEALS (FIFTH DIVISION), EUGENIA D. APOSTOL, JOSE A. APOSTOL, MR. & MS.
PUBLISHING CO., LETTY J. MAGSANOC, AND ADORACION G. NUYDA, respondents.

(CA-G.R. No. 33873) July 13, 1998

NORA A. BITONG, petitioner,

vs.

COURT OF APPEALS (FIFTH DIVISION) and EDGARDO B. ESPIRITU, respondents.

BELLOSILLO, J.:

These twin cases originated from a derivative suit 1 filed by petitioner Nora A. Bitong before
the Securities and Exchange Commission (SEC hereafter) allegedly for the benefit of private
respondent Mr. & Ms. Publishing Co., Inc. (Mr. & Ms. hereafter), among others, to hold respondent
spouses Eugenia D. Apostol and Jose A. Apostol 2 liable for fraud, misrepresentation, disloyalty,
evident bad faith, conflict of interest and mismanagement in directing the affairs of Mr. & Ms. to
the damage and prejudice of Mr. & Ms. and its stockholders, including petitioner.

Alleging before the SEC that she had been the Treasurer and a Member of the Board of Directors of
Mr. & Ms. from the time it was incorporated on 29 October 1976 to 11 April 1989, and was the
registered owner of 1,000 shares of stock out of the 4,088 total outstanding shares, petitioner
complained of irregularities committed from 1983 to 1987 by Eugenia D. Apostol, President and
Chairperson of the Board of Directors. Petitioner claimed that except for the sale of the
name Philippine Inquirer to Philippine Daily Inquirer (PDI hereafter) all other transactions and
agreements entered into by Mr. & Ms. with PDI were not supported by any bond and/or
stockholders' resolution. And, upon instructions of Eugenia D. Apostol, Mr. & Ms. made several
cash advances to PDI on various occasions amounting to P3.276 million. On some of these
borrowings PDI paid no interest whatsoever. Despite the fact that the advances made by Mr. & Ms.
to PDI were booked as advances to an affiliate, there existed no board or stockholders' resolution,
contract nor any other document which could legally authorize the creation of and support to an
affiliate.

Petitioner further alleged that respondents Eugenia and Jose Apostol were stockholders, directors
and officers in both Mr. & Ms. and PDI. In fact on 2 May 1986 respondents Eugenia D. Apostol,
Leticia J. Magsanoc and Adoracion G. Nuyda subscribed to PDI shares of stock at P50,000.00 each
or a total of P150,000.00. The stock subscriptions were paid for by Mr. & Ms. and initially treated,
as receivables from officers and employees. But, no payments were ever received from
respondents, Magsanoc and Nuyda.

The petition principally sought to (a) enjoin respondents Eugenia D. Apostol and Jose A. Apostol
from further acting as president-director and director, respectively, of Mr. & Ms. and disbursing
any money or funds except for the payment of salaries and similar expenses in the ordinary
course of business, and from disposing of their Mr. & Ms. shares; (b) enjoin respondents Apostol
spouses, Magsanoc and Nuyda from disposing of the PDI shares of stock registered in their names;
(c) compel respondents Eugenia and Jose Apostol to account for and reconvey all profits and
benefits accruing to them as a result of their improper and fraudulent acts; (d) compel
respondents Magsanoc and Nuyda to account for and reconvey to Mr. & Ms. all shares of stock paid
from cash advances from it and all accessions or fruits thereof; (e) hold respondents Eugenia and
Jose Apostol liable for damages suffered by Mr. & Ms. and the other stockholders, including
petitioner, by reason of their improper and fraudulent acts; (f) appoint a management committee
for Mr. & Ms. during the pendency of the suit to prevent further dissipation and loss of its assets
and funds as well as paralyzation of business operations; and, (g) direct the management
committee for Mr. & Ms. to file the necessary action to enforce its rights against PDI and other
third parties.

Private respondents Apostol spouses, Magsanoc, Nuyda, and Mr. & Ms., on the other hand, refuted
the allegations of petitioner by starting with a narration of the beginnings of Mr. & Ms. They
recounted that on 9 March 1976 Ex Libris Publishing Co., Inc. (Ex Libris hereafter) was
incorporated for the purpose of publishing a weekly magazine. Its original principal stockholders
were spouses Senator Juan Ponce Enrile (then Minister of National Defense) and Cristina Ponce
Enrile through Jaka Investments Corporation (JAKA hereafter), and respondents Eugenia and Jose
Apostol. When Ex Libris suffered financial difficulties, JAKA and the Apostols, together with new
investors Luis Villafuerte and Ramon Siy, restructured Ex Libris by organizing a new corporation
known as Mr. & Ms.

The original stockholders of Mr. & Ms., i.e., JAKA, Luis Villafuerte, Ramon Siy, the Apostols and Ex
Libriscontinued to be virtually the same up to 1989. Thereafter it was agreed among them that,
they being close friends, Mr. & Ms. would be operated as a partnership or a close corporation;
respondent Eugenia D. Apostol would manage the affairs of Mr. & Ms.; and, no shares of stock
would be sold to third parties without first offering the shares to the other stockholders so that
transfers would be limited to and only among the original stockholders.

Private respondents also asserted that respondent Eugenia D. Apostol had been informing her
business partners of her actions as manager, and obtaining their advice and consent.
Consequently the other stockholders consented, either expressly or impliedly, to her
management. They offered no objections. As a result, the business prospered. Thus, as shown in a
statement prepared by the accounting firm Punongbayan and Araullo, there were increases from
1976 to 1988 in the total assets of Mr. & Ms. from P457,569.00 to P10,143,046.00; in the total
stockholders' equity from P203,378.00 to P2,324,954.00; and, in the net sales, from P301,489.00
to P16,325,610.00. Likewise, cash dividends were distributed and received by the stockholders.

Private respondents further contended that petitioner, being merely a holder-in-trust of JAKA
shares, only represented and continued to represent JAKA in the board. In the beginning,
petitioner cooperated with and assisted the management until mid-1986 when relations between
her and her principals on one hand, and respondent Eugenia D. Apostol on the other, became
strained due to political differences. Hence from mid-1986 to mid-1988 petitioner refused to
speak with respondent Eugenia D. Apostol, and in 1988 the former became openly critical of the
management of the latter. Nevertheless, respondent Eugenia D. Apostol always made available to
petitioner and her representatives all the books of the corporation.

Private respondents averred that all the PDI shares owned by respondents Eugenia and Jose
Apostol were acquired through their own private funds and that the loan of P750,000.00 by PDI
from Mr. & Ms. had been fully paid with 20% interest per annum. And, it was PDI, not Mr. & Ms.,
which loaned off P250,000.00 each to respondents Magsanoc and Nuyda. Private respondents
further argued that petitioner was not the true party to this case, the real party being JAKA which
continued to be the true stockholder of Mr. & Ms.; hence, petitioner did not have the personality to
initiate and prosecute the derivative suit which, consequently, must be dismissed.

On 6 December 1990, the SEC Hearing Panel 3 issued a writ of preliminary injunction enjoining
private respondents from disbursing any money except for the payment of salaries and other
similar expenses in the regular course of business. The Hearing Panel also enjoined respondent
Apostol spouses, Nuyda and Magsanoc from disposing of their PDI shares, and further ruled —

. . . respondents' contention that petitioner is not entitled to the provisional reliefs

prayed for because she is not the real party in interest . . . is bereft of any merit. No
less than respondents' Amended Answer, specifically paragraph V, No. 8 on
Affirmative Allegations/Defenses states that "The petitioner being herself a minor
stockholder and holder-in-trust of JAKA shares represented and continues to
represent JAKA in the Board." This statement refers to petitioner sitting in the board
of directors of Mr. & Ms. in two capacities, one as a minor stockholder and the other
as the holder in trust of the shares of JAKA in Mr. & Ms. Such reference alluded to by
the respondents indicates an admission on respondents' part of the petitioner's legal
personality to file a derivative suit for the benefit of the respondent Mr. & Ms.
Publishing Co., Inc.

The Hearing Panel however denied petitioner's prayer for the constitution of a
management committee.
On 25 March 1991 private respondents filed a Motion to Amend Pleadings to Conform to
Evidence alleging that the issue of whether petitioner is the real party-in-interest had been tried
by express or implied consent of the parties through the admission of documentary exhibits
presented by private respondents proving that the real party-in-interest was JAKA, not petitioner
Bitong. As such, No. 8, par. V (Affirmative Allegations/Defenses), Answer to the Amended Petition,
was stipulated due to inadvertence and excusable mistake and should be amended. On 10 October
1991 the Hearing Panel denied the motion for amendment.

Petitioner testified at the trial that she became the registered and beneficial owner of 997 shares
of stock of Mr. & Ms. out of the 4,088 total outstanding shares after she acquired them from JAKA
through a deed of sale executed on 25 July 1983 and recorded in the Stock and Transfer Book of
Mr. & Ms. under Certificate of Shares of Stock No. 008. She pointed out that Senator Enrile decided
that JAKA should completely divest itself of its holdings in Mr. & Ms. and this resulted in the sale to
her of JAKA's interest and holdings in that publishing firm.

Private respondents refuted the statement of petitioner that she was a stockholder of Mr. & Ms.
since 25 July 1983 as respondent Eugenia D. Apostol signed Certificate of Stock No. 008 only on 17
March 1989, and not on 25 July 1983. Respondent Eugenia D. Apostol explained that she stopped
using her long signature (Eugenia D. Apostol) in 1987 and changed it to E.D. Apostol, the signature
which appeared on the face of Certificate of Stock No. 008 bearing the date 25 July 1983. And,
since the Stock and Transfer Book which petitioner presented in evidence was not registered with
the SEC, the entries therein including Certificate of Stock No. 008 were fraudulent. Respondent
Eugenia D. Apostol claimed that she had not seen the Stock and Transfer Book at anytime until 21
March 1989 when it was delivered by petitioner herself to the office of Mr. & Ms., and that
petitioner repeatedly referred to Senator Enrile as "my principal" during the Mr. & Ms. board
meeting of 22 September 1988, seven (7) times no less.

On 3 August 1993, after trial on the merits, the SEC Hearing Panel dismissed the derivative suit
filed by petitioner and dissolved the writ of preliminary injunction barring private respondents
from disposing of their PDI shares and any of Mr. & Ms. assets. The Hearing Panel ruled that there
was no serious mismanagement of Mr. & Ms. which would warrant drastic corrective measures. It
gave credence to the assertion of respondent Eugenia D. Apostol that Mr. & Ms. was operated like
a close corporation where important matters were discussed and approved through informal
consultations at breakfast conferences. The Hearing Panel also concluded that while the evidence
presented tended to show that the real party-in-interest indeed was JAKA and/or Senator Enrile,
it viewed the real issue to be the alleged mismanagement, fraud and conflict of interest on the
part of respondent Eugenia D. Apostol, and allowed petitioner to prosecute the derivative suit if
only to resolve the real issues. Hence, for this purpose, the Hearing Panel considered petitioner to
be the real party-in-interest.

On 19 August 1993 respondent Apostol spouses sold the PDI shares registered in the name of
their holding company, JAED Management Corporation, to Edgardo B. Espiritu. On 25 August 1993
petitioner Bitong appealed to the SEC En Banc.

On 24 January 1994 the SEC En Banc 4 reversed the decision of the Hearing Panel and, among
others, ordered private respondents to account for, return and deliver to Mr. & Ms. any and all
funds and assets that they disbursed from the coffers of the corporation including shares of stock,
profits, dividends and/or fruits that they might have received as a result of their investment in
PDI, including those arising from the P150,000.00 advanced to respondents Eugenia D. Apostol,
Leticia J. Magsanoc and Adoracion G. Nuyda; account for and return any profits and fruits of all
amounts irregularly or unlawfully advanced to PDI and other third persons; and, cease and desist
from managing the affairs of Mr. & Ms. for reasons of fraud, mismanagement, disloyalty and
conflict of interest.

The SEC En Banc also declared the 19 August 1993 sale of the PDI shares of JAED Management
Corporation to Edgardo B. Espiritu to be tainted with fraud, hence, null and void, and considered
Mr. & Ms. as the true and lawful owner of all the PDI shares acquired by respondents Eugenia D.
Apostol, Magsanoc and Nuyda. It also declared all subsequent transferees of such shares as
trustees for the benefit of Mr. & Ms. and ordered them to forthwith deliver said shares to Mr. & Ms.

Consequently, respondent Apostol spouses, Magsanoc, Nuyda, and Mr. & Ms. filed a petition for
review before respondent Court of Appeals, docketed as CA-GR No. SP 33291, while respondent
Edgardo B. Espiritu filed a petition for certiorari and prohibition also before respondent Court of
Appeals, docketed as CA-GR No. SP 33873. On 8 December 1994 the two (2) petitions were
consolidated.

On 31 August 1995 respondent appellate court rendered a decision reversing the SEC En Banc and
held that from the evidence on record petitioner was not the owner of any share of stock in Mr. &
Ms. and therefore not the real party-in-interest to prosecute the complaint she had instituted
against private respondents. Accordingly, petitioner alone and by herself as an agent could not
file a derivative suit in behalf of her principal. For not being the real party-in-interest, petitioner's
complaint did not state a cause of action, a defense which was never waived; hence, her petition
should have been dismissed. Respondent appellate court ruled that the assailed orders of the SEC
were issued in excess of jurisdiction, or want of it, and thus were null and void. 5 On 18 January
1996, petitioner's motion for reconsideration was denied for lack of merit.

Before this Court, petitioner submits that in paragraph 1 under the caption "I. The Parties" of
her Amended Petition before the SEC, she stated that she was a stockholder and director of Mr. &
Ms. In par. 1 under the caption "II. The Facts" she declared that she "is the registered owner of
1,000 shares of stock of Mr. & Ms. out of the latter's 4,088 total outstanding shares" and that she
was a member of the Board of Directors of Mr. & Ms. and treasurer from its inception until 11
April 1989. Petitioner contends that private respondents did not deny the above allegations in
their answer and therefore they are conclusively bound by this judicial admission. Consequently,
private respondents' admission that petitioner has 1,000 shares of stock registered in her name
in the books of Mr. & Ms. forecloses any question on her status and right to bring a derivative suit
on behalf of Mr. & Ms.

Not necessarily. A party whose pleading is admitted as an admission against interest is entitled to
overcome by evidence the apparent inconsistency, and it is competent for the party against whom
the pleading is offered to show that the statements were inadvertently made or were made under
a mistake of fact. In addition, a party against whom a single clause or paragraph of a pleading is
offered may have the right to introduce other paragraphs which tend to destroy the admission in
the paragraph offered by the adversary. 6

The Amended Petition before the SEC alleges —

 I. THE PARTIES

1. Petitioner is a stockholder and director of Mr. & Ms. . . . .

II. THE FACTS

1. Petitioner is the registered owner of 1,000 shares of stock of Mr. & Ms. out of the
latter's 4,088 total outstanding shares. Petitioner, at all times material to this
petition, is a member of the Board of Directors of Mr. & Ms. and from the inception of
Mr. & Ms. until 11 April 1989 was its treasurer . . .

On the other hand, the Amended Answer to the Amended Petition states —

I. PARTIES

1. Respondents admit the allegations contained in Caption I, pars. 1 to 4 of the

Petition referring to the personality, addresses and capacity of the parties to the
petition except . . . but qualify said admission insofar as they are limited, qualified
and/or expanded by allegations in the Affirmative Allegations/Defenses . . .

II. THE FACTS

1. Respondents admit paragraph 1 of the Petition, but qualify said admission as to

the beneficial ownership of the shares of stock registered in the name of the
petitioner, the truth being as stated in the Affirmative Allegations/Defenses of this
Answer . . .

V. AFFIRMATIVE ALLEGATIONS/DEFENSES

Respondents respectfully allege by way of Affirmative Allegations/Defenses, that . . . .

3. Fortunately, respondent Apostol was able to convince Mr. Luis Villafuerte to take
interest in the business and he, together with the original investors, restructured the
Ex Libris Publishing Company by organizing a new corporation known as Mr. & Ms.
Publishing Co., Inc. . . . Mr. Luis Villafuerte contributed his own P100,000.00. JAKA
and respondent Jose Z. Apostol, original investors of Ex Libris contributed
P100,000.00 each; Ex Libris Publishing Company was paid 800 shares for the name
of Mr. & Ms. magazine and goodwill. Thus, the original stockholders of respondent
Mr. & Ms. were:

Cert./No./Date Name of Stockholder No. of Shares %

001-9-15-76 JAKA Investments Corp. 1,000 21%

002-9-15-76 Luis Villafuerte 1,000 21%

003-9-15-76 Ramon L. Siy 1,000 21%

 004-9-15-76 Jose Z. Apostol 1,000 21%

005-9-15-76 Ex Libris Publishing Co. 800 16%

—— ——

4,800 96%

4. The above-named original stockholders of respondent Mr. & Ms. continue to be

virtually the same stockholders up to this date . . . .

8. The petitioner being herself a minor stockholder and holder-in-trust of JAKA

shares, represented and continues to represent JAKA in the Board . . . .

21. Petitioner Nora A. Bitong is not the true party to this case, the true party being
JAKA Investments Corporation which continues to be the true stockholder of
respondent Mr. & Ms. Publishing Co., Inc., consequently, she does not have the
personality to initiate and prosecute this derivative suit, and should therefore be
dismissed . . . .

The answer of private respondents shows that there was no judicial admission that petitioner was
a stockholder of Mr. & Ms. to entitle her to file a derivative suit on behalf of the corporation.
Where the statements of the private respondents were qualified with phrases such as, "insofar as
they are limited, qualified and/or expanded by," "the truth being as stated in the Affirmative
Allegations/Defenses of this Answer" they cannot be considered definite and certain enough,
cannot be construed as judicial admissions. 7

More so, the affirmative defenses of private respondents directly refute the representation of
petitioner that she is a true and genuine stockholder of Mr. & Ms. by stating unequivocally that
petitioner is not the true party to the case but JAKA which continues to be the true stockholder of
Mr. & Ms. In fact, one of the reliefs which private respondents prayed for was the dismissal of the
petition on the ground that petitioner did not have the legal interest to initiate and prosecute the
same.

When taken in its totality, the Amended Answer to the Amended Petition, or even the Answer to
the Amended Petition alone, clearly raises an issue as to the legal personality of petitioner to file
the complaint. Every alleged admission is taken as an entirety of the fact which makes for the one
side with the qualifications which limit, modify or destroy its effect on the other side. The reason
for this is, where part of a statement of a party is used against him as an admission, the court
should weigh any other portion connected with the statement, which tends to neutralize or
explain the portion which is against interest.

In other words, while the admission is admissible in evidence, its probative value is to be
determined from the whole statement and others intimately related or connected therewith as an
integrated unit. Although acts or facts admitted do not require proof and cannot be contradicted,
however, evidence aliunde can be presented to show that the admission was made through
palpable mistake. 8 The rule is always in favor of liberality in construction of pleadings so that the
real matter in dispute may be submitted to the judgment of the court. 9
Petitioner also argues that since private respondents failed to appeal the 6 December 1990 Order
and the 3 August 1993 Decision of the SEC Hearing Panel declaring that she was the real party-in-
interest and had legal personality to sue, they are now estopped from questioning her personality.

Not quite. The 6 December 1990 Order is clearly an interlocutory order which cannot be
considered as having finally resolved on the merits the issue of legal capacity of petitioner. The
SEC Hearing Panel discussed the issue of legal capacity solely for the purpose of ruling on the
application for writ of preliminary injunction as an incident to the main issues raised in the
complaint. Being a mere interlocutory order, it is not appealable.

For, an interlocutory order refers to something between the commencement and end of the suit
which decides some point or matter but it is not the final decision of the whole
controversy. 10 Thus, even though the 6 December 1990 Order was adverse to private
respondents, they had the legal right and option not to elevate the same to the SEC En Banc but
rather to await the decision which resolves all the issues raised by the parties and to appeal
therefrom by assigning all errors that might have been committed by the Hearing Panel.

On the other hand, the 3 August 1993 Decision of the Hearing Panel dismissing the derivative suit
for failure to prove the charges of mismanagement, fraud, disloyalty and conflict of interest and
dissolving the writ of preliminary injunction, was favorable to private respondents. Hence, they
were not expected to appeal therefrom.

In fact, in the 3 August 1993 Decision, the Hearing Panel categorically stated that the evidence
presented showed that the real party-in-interest was not petitioner Bitong but JAKA and/or
Senator Enrile. Petitioner was merely allowed to prosecute her complaint so as not to sidetrack
"the real issue to be resolved (which) was the allegation of mismanagement, fraud and conflict of
interest allegedly committed by respondent Eugenia D. Apostol." It was only for this reason that
petitioner was considered to be capacitated and competent to file the petition.

Accordingly, with the dismissal of the complaint of petitioner against private respondents, there
was no compelling reason for the latter to appeal to the SEC En Banc. It was in fact petitioner's
turn as the aggrieved party to exercise her right to appeal from the decision. It is worthy to note
that even during the appeal of petitioner before the SEC En Banc private respondents maintained
their vigorous objection to the appeal and reiterated petitioner's lack of legal capacity to sue
before the SEC.

Petitioner then contends that she was a holder of the proper certificates of shares of stock and
that the transfer was recorded in the Stock and Transfer Book of Mr. & Ms. She invokes Sec. 63
of The Corporation Code which provides that no transfer shall be valid except as between the
parties until the transfer is recorded in the books of the corporation, and upon its recording the
corporation is bound by it and is estopped to deny the fact of transfer of said shares. Petitioner
alleges that even in the absence of a stock certificate, a stockholder solely on the strength of the
recording in the stock and transfer book can exercise all the rights as stockholder, including the
right to file a derivative suit in the name of the corporation. And, she need not present a separate
deed of sale or transfer in her favor to prove ownership of stock.

Sec. 63 of The Corporation Code expressly provides —

 Sec. 63. Certificate of stock and transfer of shares. — The capital stock of stock
corporations shall be divided into shares for which certificates signed by the
president or vice president, countersigned by the secretary or assistant secretary,
and sealed with the seal of the corporation shall be issued in accordance with the by-
laws. Shares of stock so issued are personal property and may be transferred by
delivery of the certificate or certificates indorsed by the owner or his attorney-in-
fact or other person legally authorized to make the transfer. No transfer however
shall be valid except as between the parties until the transfer is recorded in the
books of the corporation showing the names of the parties to the transaction, the
date of the transfer, the number of the certificate or certificates and the number of
shares transferred . . . .

This provision above quoted envisions a formal certificate of stock which can be issued only upon
compliance with certain requisites. First, the certificates must be signed by the president or vice-
president, countersigned by the secretary or assistant secretary, and sealed with the seal of the
corporation. A mere typewritten statement advising a stockholder of the extent of his ownership
in a corporation without qualification and/or authentication cannot be considered as a formal
certificate of stock. 11 Second, delivery of the certificate is an essential element of its issuance.
Hence, there is no issuance of a stock certificate where it is never detached from the stock books
although blanks therein are properly filled up if the person whose name is inserted therein has no
control over the books of the company. 12 Third, the par value, as to par value shares, or the full
subscription as to no par value shares, must first be fully paid. Fourth, the original certificate must
be surrendered where the person requesting the issuance of a certificate is a transferee from a
stockholder.

The certificate of stock itself once issued is a continuing affirmation or representation that the
stock described therein is valid and genuine and is at least prima facie evidence that it was legally
issued in the absence of evidence to the contrary. However, this presumption may be
rebutted. 13 Similarly, books and records of a corporation which include even the stock and
transfer book are generally admissible in evidence in favor of or against the corporation and its
members to prove the corporate acts, its financial status and other matters including one's status
as a stockholder. They are ordinarily the best evidence of corporate acts and proceedings.

However, the books and records of a corporation are not conclusive even against the corporation
but areprima facie evidence only. Parol evidence may be admitted to supply omissions in the
records, explain ambiguities, or show what transpired where no records were kept, or in some
cases where such records were contradicted. 14 The effect of entries in the books of the
corporation which purport to be regular records of the proceedings of its board of directors or
stockholders can be destroyed by testimony of a more conclusive character than mere suspicion
that there was an irregularity in the manner in which the books were kept. 15

The foregoing considerations are founded on the basic principle that stock issued without
authority and in violation of law is void and confers no rights on the person to whom it is issued
and subjects him to no liabilities. 16 Where there is an inherent lack of power in the corporation to
issue the stock, neither the corporation nor the person to whom the stock is issued is estopped to
question its validity since an estopped cannot operate to create stock which under the law cannot
have existence. 17
As found by the Hearing Panel and affirmed by respondent Court of Appeals, there is
overwhelming evidence that despite what appears on the certificate of stock and stock and
transfer book, petitioner was not a bona fide stockholder of Mr. & Ms. before March 1989 or at the
time the complained acts were committed to qualify her to institute a stockholder's derivative
suit against private respondents. Aside from petitioner's own admissions, several corporate
documents disclose that the true party-in-interest is not petitioner but JAKA.

Thus, while petitioner asserts in her petition that Certificate of Stock No. 008 dated 25 July 1983
was issued in her name, private respondents argue that this certificate was signed by respondent
Eugenia D. Apostol as President only in 1989 and was fraudulently antedated by petitioner who
had possession of the Certificate Book and the Stock and Transfer Book. Private respondents
stress that petitioner's counsel entered into a stipulation on record before the Hearing Panel that
the certificate was indeed signed by respondent Apostol only in 1989 and not in 1983.

In her reply, petitioner admits that while respondent Eugenia D. Apostol signed the Certificate of
Stock No. 008 in petitioner's name only in 1989, it was issued by the corporate secretary in 1983
and that the other certificates covering shares in Mr. & Ms. had not yet been signed by respondent
Eugenia D. Apostol at the time of the filing of the complaint with the SEC although they were
issued years before.

Based on the foregoing admission of petitioner, there is no truth to the statement written in
Certificate of Stock No. 008 that the same was issued and signed on 25 July 1983 by its duly
authorized officers specifically the President and Corporate Secretary because the actual date of
signing thereof was 17 March 1989. Verily, a formal certificate of stock could not be considered
issued in contemplation of law unless signed by the president or vice-president and
countersigned by the secretary or assistant secretary.

In this case, contrary to petitioner's submission, the Certificate of Stock No. 008 was only legally
issued on 17 March 1989 when it was actually signed by the President of the corporation, and not
before that date. While a certificate of stock is not necessary to make one a stockholder, e.g.,
where he is an incorporator and listed as stockholder in the articles of incorporation although no
certificate of stock has yet been issued, it is supposed to serve as paper representative of the stock
itself and of the owner's interest therein. Hence, when Certificate of Stock No. 008 was admittedly
signed and issued only on 17 March 1989 and not on 25 July 1983, even as it indicates that
petitioner owns 997 shares of stock of Mr. & Ms., the certificate has no evidentiary value for the
purpose of proving that petitioner was a stockholder since 1983 up to 1989.

And even the factual antecedents of the alleged ownership by petitioner in 1983 of shares of stock
of Mr. & Ms. are indistinctive if not enshrouded in inconsistencies. In her testimony before the
Hearing Panel, petitioner said that early in 1983, to relieve Mr. & Ms. from political pressure,
Senator Enrile decided to divest the family holdings in Mr. & Ms. as he was then part of the
government and Mr. & Ms. was evolving to be an opposition newspaper. The JAKA shares
numbering 1,000 covered by Certificate of Stock No. 001 were thus transferred to respondent
Eugenia D. Apostol in trust or in blank. 18

Petitioner now claims that a few days after JAKA's shares were transferred to respondent Eugenia
D. Apostol, Senator Enrile sold to petitioner 997 shares of JAKA. For this purpose, a deed of sale
was executed and antedated to 10 May 1983. 19 This submission of petitioner is however
contradicted by the records which show that a deed of sale was executed by JAKA transferring
1,000 shares of Mr. & Ms. to respondent Apostol on 10 May 1983 and not to petitioner. 20

Then Senator Enrile testified that in May or June 1983 he was asked at a media interview if his
family owned shares of stock in Mr. & Ms. Although he and his family were stockholders at that
time he denied it so as not to embarrass the magazine. He called up petitioner and instructed her
to work out the documentation of the transfer of shares from JAKA to respondent Apostol to be
covered by a declaration of trust. His instruction was to transfer the shares of JAKA in Mr. & Ms.
and Ex Libris to respondent Apostol as a nominal holder. He then finally decided to transfer the
shareholdings to petitioner. 21

When asked if there was any document or any written evidence of that divestment in favor of
petitioner, Senator Enrile answered that there was an endorsement of the shares of stock. He said
that there was no other document evidencing the assignment to petitioner because the stocks
were personal property that could be transferred even orally. 22 Contrary to Senator Enrile's
testimony, however, petitioner maintains that Senator Enrile executed a deed of sale in her favor.

A careful perusal of the records shows that neither the alleged endorsement of Certificate of Stock
No. 001 in the name of JAKA nor the alleged deed of sale executed by Senator Enrile directly in
favor of petitioner could have legally transferred or assigned on 25 July 1983 the shares of stock
in favor of petitioner because as of 10 May 1983 Certificate of Stock No. 001 in the name of JAKA
was already cancelled and a new one, Certificate of Stock No. 007, issued in favor of respondent
Apostol by virtue of a Declaration of Trust and Deed of Sale. 23

It should be emphasized that on 10 May 1983 JAKA executed, a deed of sale over 1,000 Mr. & Ms.
shares in favor of respondent Eugenio D. Apostol. On the same day, respondent Apostol signed a
declaration of trust stating that she was the registered owner of 1,000 Mr. & Ms. shares covered by
Certificate of Stock No. 007.

The declaration of trust further showed that although respondent Apostol was the registered
owner, she held the shares of stock and dividends which might be paid in connection therewith
solely in trust for the benefit of JAKA, her principal. It was also stated therein that being a trustee,
respondent Apostol agreed, on written request of the principal, to assign and transfer the shares
of stock and any and all such distributions or dividends unto the principal or such other person as
the principal would nominate or appoint.

Petitioner was well aware of this trust, being the person in charge of this documentation and
being one of the witnesses to the execution of this
document. 24 Hence, the mere alleged endorsement of Certificate of Stock No. 001 by Senator
Enrile or by a duly authorized officer of JAKA to effect the transfer of shares of JAKA to petitioner
could not have been legally feasible because Certificate of Stock No. 001 was already canceled by
virtue of the deed of sale to respondent Apostol.

And, there is nothing in the records which shows that JAKA had revoked the trust it reposed on
respondent Eugenia D. Apostol. Neither was there any evidence that the principal had requested
her to assign and transfer the shares of stock to petitioner. If it was true that the shares of stock
covered by Certificate of Stock No. 007 had been transferred to petitioner, the person who could
legally endorse the certificate was private respondent Eugenia D. Apostol, she being the
registered owner and trustee of the shares of stock covered by Certificate of Stock No. 007. It is a
settled rule that the trustee should endorse the stock certificate to validate the cancellation of her
share and to have the transfer recorded in the books of the corporation. 25

In fine, the records are unclear on how petitioner allegedly acquired the shares of stock of JAKA.
Petitioner being the chief executive officer of JAKA and the sole person in charge of all business
and financial transactions and affairs of JAKA 26 was supposed to be in the best position to show
convincing evidence on the alleged transfer of shares to her, if indeed there was a transfer.
Considering that petitioner's status is being questioned and several factual circumstances have
been presented by private respondents disproving petitioner's claim, it was incumbent upon her
to submit rebuttal evidence on the manner by which she allegedly became a stockholder. Her
failure to do so taken in the light of several substantial inconsistencies in her evidence is fatal to
her case.

The rule is that the endorsement of the certificate of stock by the owner or his attorney-in-fact or
any other person legally authorized to make the transfer shall be sufficient to effect the transfer of
shares only if the same is coupled with delivery. The delivery of the stock certificate duly
endorsed by the owner is the operative act of transfer of shares from the lawful owner to the new
transferee.

Thus, for a valid transfer of stocks, the requirements are as follows: (a) There must be delivery of
the stock certificate; (b) The certificate must be endorsed by the owner or his attorney-in-fact or
other persons legally authorized to make the transfer; and, (c) to be valid against third parties,
the transfer must be recorded in the books of the corporation. 27 At most, in the instant case,
petitioner has satisfied only the third requirement. Compliance with the first two requisites has
not been clearly and sufficiently shown.

Considering that the requirements provided under Sec. 63 of The Corporation Code should be
mandatorily complied with, the rule on presumption of regularity cannot apply. The regularity
and validity of the transfer must be proved. As it is, even the credibility of the stock and transfer
book and the entries thereon relied upon by petitioner to show compliance with the third
requisite to prove that she was a stockholder since 1983 is highly doubtful.

The records show that the original stock and transfer book and the stock certificate book of Mr. &
Ms. were in the possession of petitioner before their custody was transferred to the Corporate
Secretary, Atty. Augusto San Pedro. 28 On 25 May 1988, Assistant Corporate Secretary Renato Jose
Unson wrote Mr. & Ms. about the lost stock and transfer book which was also noted by the
corporation's external auditors, Punongbayan and Araullo, in their audit. Atty. Unson even
informed respondent Eugenia D. Apostol as President of Mr. & Ms. that steps would be undertaken
to prepare and register a new Stock and Transfer Book with the SEC. Incidentally, perhaps
strangely, upon verification with the SEC, it was discovered that the general file of the corporation
with the SEC was missing. Hence, it was even possible that the original Stock and Transfer Book
might not have been registered at all.

On 20 October 1988 respondent Eugenia D. Apostol wrote Atty. Augusto San Pedro noting the
changes he had made in the Stock and Transfer Book without prior notice to the corporate
officers. 29 In the 27 October 1988 directors' meeting, respondent Eugenia D. Apostol asked about
the documentation to support the changes in the Stock and Transfer Book with regard to the JAKA
shares. Petitioner answered that Atty. San Pedro made the changes upon her instructions
conformably with established practice. 30

This simply shows that as of 1988 there still existed certain issues affecting the ownership of the
JAKA shares, thus raising doubts whether the alleged transactions recorded in the Stock and
Transfer Book were proper, regular and authorized. Then, as if to magnify and compound the
uncertainties in the ownership of the shares of stock in question, when the corporate secretary
resigned, the Stock and Transfer Book was delivered not to the corporate office where the book
should be kept but to petitioner. 31

That JAKA retained its ownership of its Mr. & Ms. shares was clearly shown by its receipt of the
dividends issued in December 1986. 32 This only means, very obviously, that Mr. & Ms. shares in
question still belonged to JAKA and not to petitioner. For, dividends are distributed to
stockholders pursuant to their right to share in corporate profits. When a dividend is declared, it
belongs to the person who is the substantial and beneficial owner of the stock at the time
regardless of when the distribution profit was earned. 33

Finally, this Court takes notice of the glaring and open admissions of petitioner made, not just
seven (7) but nine (9) times, during the 22 September 1988 meeting of the board of directors that
the Enriles were her principals or shareholders, as shown by the minutes thereof which she duly
signed 34 —

5. Mrs. E. Apostol explained to the Directors that through her efforts, the asset base
of the Company has improved and profits were realized. It is for this reason that the
Company has declared a 100% cash dividend in 1986. She said that it is up for the
Board to decide based on this performance whether she should continue to act as
Board Chairman or not. In this regard, Ms. N.A. Bitong expressed her recollection of
how Ex-Libris/Mr. & Ms. were organized and her participation for and on behalf
of her principals, as follows: She recalled that her principalswere invited by Mrs. E.
Apostol to invest in Ex-Libris and eventually Mr. & Ms. The relationship between her
principals and Mrs. E. Apostol made it possible for the latter to have access to several
information concerning certain political events and issues. In many instances, her
principals supplied first hand and newsworthy information that made Mr. & Ms. a
popular
paper . . . .

6. According to Ms. Bitong, her principals were instrumental in helping Mr. & Ms.
survive during those years that it was cash strapped . . . . Ms. N.A. Bitong pointed out
that the practice of using the former Minister's influence and stature in the
government is one thing which her principalsthemselves are strongly against . . . .

7. . . . . At this point, Ms. N. Bitong again expressed her recollection of the subject
matter as follows: (a) Mrs. E. Apostol, she remembers, brought up the concept of a
cooperative-ran newspaper company in one of her breakfast session with her
principals sometime during the end of 1985. Her principals when asked for an
opinion, said that they recognized the concept as something very noble and visible . .
. . Then Ms. Bitong asked a very specific question — "When you conceptualized Ex-
Libris and Mr. & Ms., did you not think of my shareholders the Ponce Enriles as
 liabilities? How come you associated yourself with them then and not now? What is
the difference?" Mrs. Apostol did not answer the question.

The admissions of a party against his interest inscribed upon the record books of a corporation
are competent and persuasive evidence against him. 35 These admissions render nugatory any
argument that petitioner is a bona fide stockholder of Mr. & Ms. at any time before 1988 or at the
time the acts complained of were committed. There is no doubt that petitioner was an employee
of JAKA as its managing officer, as testified to by Senator Enrile himself. 36 However, in the
absence of a special authority from the board of directors of JAKA to institute a derivative suit for
and in its behalf, petitioner is disqualified by law to sue in her own name. The power to sue and be
sued in any court by a corporation even as a stockholder is lodged in the board of directors that
exercises its corporate powers and not in the president or officer thereof. 37

It is well settled in this jurisdiction that where corporate directors are guilty of a breach of trust,
not of mere error of judgment or abuse of discretion, and intracorporate remedy is futile or
useless, a stockholder may institute a suit in behalf of himself and other stockholders and for the
benefit of the corporation, to bring about a redress of the wrong inflicted directly upon the
corporation and indirectly upon the stockholders. 38The stockholder's right to institute a
derivative suit is not based on any express provision of The Corporation Code but is impliedly
recognized when the law makes corporate directors or officers liable for damages suffered by the
corporation and its stockholders for violation of their fiduciary duties.

Hence, a stockholder may sue for mismanagement, waste or dissipation of corporate assets
because of a special injury to him for which he is otherwise without redress. 39 In effect, the suit is
an action for specific performance of an obligation owed by the corporation to the stockholders to
assist its rights of action when the corporation has been put in default by the wrongful refusal of
the directors or management to make suitable measures for its protection. 40

The basis of a stockholder's suit is always one in equity. However, it cannot prosper without first
complying with the legal requisites for its institution. The most important of these is the bona
fide ownership by a stockholder of a stock in his own right at the time of the transaction
complained of which invests him with standing to institute a derivative action for the benefit of
the corporation. 41

WHEREFORE, the petition is DENIED. The 31 August 1995 Decision of the Court of Appeals
dismissing the complaint of petitioner Nora A. Bitong in CA-G.R. No. SP 33291, and granting the
petition for certiorari and prohibition filed by respondent Edgardo U. Espiritu as well as annulling
the 5 November 1993, 24 January 1993 and 18 February 1994 Orders of the SEC En Banc in CA-
G.R. No. SP 33873, is AFFIRMED. Costs against petitioner.

SO ORDERED.

FIRST DIVISION

G.R. No. 128606 December 4, 2000

REPUBLIC OF THE PHILIPPINES, petitioner,

vs.
SANDIGANBAYAN (3RD DIVISION), JOSE L. AFRICA, UNIMOLCO, ROBERTO BENEDICTO, ANDRES
AFRICA and SMART COMMUNICATIONS, respondents.

DECISION

YNARES-SANTIAGO, J.:

This is a petition for review assailing the Resolutions1 of the Sandiganbayan dated December 6, 19962 and
March 17, 19973 in Civil Case No. 0009, entitled "Republic of the Philippines, Plaintiff versus Jose L. Africa,
et al., Defendants," which upheld the sale by Universal Molasses Corporation (UNIMOLCO) of its shares of
stock in Eastern Telecommunications Philippines, Inc. (ETPI), to Smart Communications. Petitioner
contends that the sale violated its preemptive right as stockholder of ETPI, which is guaranteed in the
Articles of Incorporation.

ETPI was one of the corporations sequestered by the Presidential Commission on Good Government
(PCGG). Among its stockholders were Roberto S. Benedicto and UNIMOLCO.

Sometime in 1990, PCGG and Benedicto entered into a compromise agreement whereby Benedicto ceded
to the government 204,000 shares of stock in ETPI, representing his fifty-one percent (51%) equity
therein. The other forty-nine percent (49%), consisting of 196,000 shares of stock, were released from
sequestration and adjudicated by final judgment to Benedicto and UNIMOLCO. Furthermore, the
government agreed to withdraw the cases filed against Benedicto and free him from further criminal
prosecution.

In a written notice received on April 24, 1996 by Melquiades Gutierrez, the President and Chairman of
the Board of ETPI, UNIMOLCO offered to sell to ETPI its 196,000 shares of stock therein.

Meanwhile, on motion of petitioner, through the PCGG, the Sandiganbayan issued a Resolution, dated May
7, 1996, authorizing the entry in the Stock and Transfer Book of ETPI of the transfer of ownership of
204,000 shares of stock to petitioner, to be taken out of the shareholdings of UNIMOLCO. On June 5, 1996,
Benedicto filed a "Manifestation and Motion" with the Sandiganbayan, praying that the Resolution dated
May 7, 1996 be modified such that the entry of the 204,000 shares of stock of petitioner in ETPI be taken
out of the shareholdings of UNIMOLCO and/or Roberto S. Benedicto.

On June 21, 1996, PCGG issued Resolution No. 96-142 enjoining all stockholders of ETPI from selling
shares of stock therein without the written conformity of the PCGG.4

Subsequently, on July 24, 1996, UNIMOLCO and Smart Communications executed a Deed of Absolute Sale
whereby UNIMOLCO sold its 196,000 shares of stock in ETPI to Smart.5 Prior to the sale, Smart was not a
stockholder of ETPI.

Thus, on August 8, 1996, petitioner filed with the Sandiganbayan a "Motion to Cite Defendant Benedicto
and the Parties to the Sale of UNIMOLCO Shares in ETPI in Contempt of Court and to Rescind and/or
Annul Said Sale." Petitioner alleged that the sale of the 196,000 shares of stock of UNIMOLCO to Smart
was in defiance of the May 7, 1996 Resolution of the Sandiganbayan, which provided that the 204,000
shares of the government shall come from the shareholdings of UNIMOLCO, and it interfered with the
proceedings thereon. In support of its prayer for the rescission and annulment of the sale, petitioner
argued that the same violated its right of first refusal to purchase shares of stock in ETPI.
The right of first refusal is contained in Article 10 of the Articles of Incorporation of ETPI, which states:

ARTICLE TENTH: In the event any stockholder (hereinafter referred to as the "Offeror") desires to
dispose, transfer, sell or assign any shares of stock of the Corporation (hereinafter referred to as the
"Offered Stock"), except in the case of any disposal, transfer, sale or assignment between or among the
incorporators or to corporation controlled by the incorporators, the Offeror shall give a right of first
refusal to the Corporation and, thereafter in the event that the Corporation shall refuse or fail to accept all
of the Offered Stock to all then stockholders of record of the Corporation (except the Offeror) to purchase
the Offered Stock pro rata, at a price and upon terms and conditions specified by the Offeror based upon a
firm, bona fide, written cash offer from a bona fide purchaser.

The Corporation shall be entitled to exercise its right of first refusal with respect to all, but not less than
all, of the Offered Stock for a period (hereinafter referred to as the "First Period") of thirty (30) days,
from the receipt by it of a written offer to sell from the Offeror.

If the Corporation shall fail or refuse within the First Period to accept the offer for all of the Offered Stock,
then on or before the end of such First Period, the Secretary of the Corporation shall transmit by
registered mail and by telegram or cable a copy of such offer to each stockholder of record (other than
the Offeror) at his/its address appearing on the books of the Corporation and shall also notify each
stockholder of the expiry date of such offer (such expiry date being thirty (30) days after the end of the
First Period). All then stockholders of record of the Corporation, other than the Offeror, shall be entitled
for a period (hereinafter referred to as the Second Period) ending thirty (30) days after the First Period
to exercise their rights of first refusal with respect to all or any portion of the Offered Stock for which
they have a right of first refusal and may in addition offer to purchase any shares thereof not subscribed
for by the other stockholders pursuant to rights of first refusal. Such shares shall be allocated among
stockholders offering to purchase such shares, pro rata, up to the limits, if any, specified by such
purchasing stockholders. Each such purchasing stockholder shall transmit to the Corporation with his/its
acceptance cash, or a certified check or checks drawn on a Philippine bank or banks, in an amount
sufficient to meet the terms of the offer corresponding to such number of shares of Offered Stock
specified in his/its acceptance.

In its Resolution dated December 6, 1996, the Sandiganbayan denied petitioner’s motion for contempt
and to rescind or annul the sale of the 196,000 ETPI shares of stock to Smart.6 Petitioner filed a motion
for reconsideration but the same was denied in a Resolution dated March 17, 1997.7

Hence, this petition for review raising the following grounds:

I. THE SANDIGANBAYAN ERRED IN NOT RECOGNIZING PETITIONER PCGG’S EXERCISE OF ITS

RIGHT OF FIRST REFUSAL AS STOCKHOLDER, TO PURCHASE THE 196,000 ETPI SHARES
REGISTERED IN THE NAME OF UNIMOLCO.

II. THE SANDIGANBAYAN ERRED IN APPROVING/RATIFYING THE SALE OF THE 196,000 SHARES
BY PRIVATE RESPONDENTS UNIMOLCO, BENEDICTO AND AFRICA IN FAVOR OF SMART.

Petitioner argues that it received the notice of UNIMOLCO’s offer to sell its shares of stock only on August
30, 1996. The written notice, issued by Atty. Bayani K. Tan, ETPI Corporate Secretary, gave the
stockholders, including petitioner, until September 26, 1996 within which to exercise their preemptive
right. On September 24, 1996, petitioner sent a letter to the Corporate Secretary stating that the
government is exercising its right of first refusal and offering payment thereof in the form of
compensation or set-off against the assets of respondent Benedicto still due to the Philippine government
under the Compromise Agreement.

Respondents UNIMOLCO, Benedicto and Andres L. Africa filed their Comment,8 arguing that petitioner’s
offer of payment by way of set-off was invalid, inasmuch as the Articles of Incorporation of ETPI
specifically provided that tender of payment should be in cash, certified check or checks drawn on a
Philippine bank.

Respondent SMART filed its Comment,9 likewise arguing that petitioner’s proposal to off-set the purchase
price for the shares of stock with assets of Benedicto did not constitute a valid tender of payment.
Moreover, petitioner cannot use assets recovered as ill-gotten wealth for the purchase of the shares of
stock because under Section 63 of Republic Act No. 6657, any amounts derived therefrom shall be
appropriated to fund the Comprehensive Agrarian Reform Program.

On October 2, 1997, Victor Africa filed a Motion for Leave to Intervene and a Comment-in-
Intervention.10 He alleges that petitioner’s exercise of the right of first refusal is preconditioned on its
being a stockholder of ETPI. However, intervenor has a pending motion before the Sandiganbayan
precisely questioning petitioner’s right to become a transferee of ETPI shares and to enjoin the
registration of petitioner as a legitimate stockholder in the Stock and Transfer Book of ETPI. On
December 10, 1997, the motion for leave to intervene was granted and the Comment-in-Intervention was
admitted.11

The petition is without merit.

The records of the case clearly show that the written notice by UNIMOLCO, the Offeror, of its intention to
sell its 196,000 shares of stock was duly received on April 24, 1996 by the President and Chairman of the
Board of ETPI. The Sandiganbayan correctly held that this was valid service of the written offer to the
corporation, applying by analogy the Rules of Court provisions on service of summons. Petitioner does
not dispute that the written notice to the President and Chairman of the Board of ETPI was service to the
corporation. It merely argues that after receipt of the offer, ETPI did not act in accordance with the
procedure laid down in the Articles of Incorporation. Thus, in its petition for review, petitioner states:

The April 24, 1996 offer sent to ETPI Chairman and President Melquiades Gutierrez did not become valid
and effective as it was not able to completely comply with the requirements of Article 10 of the ETPI
Articles of Incorporation. Indeed, after receipt by ETPI of the April 24, 1996 offer, ETPI never acted on
it. Assuming that ETPI, as a corporation did not exercise its right of first refusal within the first thirty day
period pursuant to Article 10, it did not send notices to then stockholders of record of ETPI about the
offered sale and their privilege to exercise their rights of first refusal. In other words, the ETPI
stockholders were denied of its formal notice from ETPI about the said offer to sell the 196,000 share of
stock.12

Hence, the First Period of thirty days contemplated in the Articles of Incorporation commenced to run on
April 24, 1996, giving the corporation until May 24, 1996 within which to exercise its right of first refusal.
ETPI’s inaction simply means that it did not desire to purchase the shares of stock. The stockholders’
right of first refusal, thus, accrued upon the expiration of the First Period and within the succeeding thirty
days, known as the Second Period. The Sandiganbayan held that the First Period and the Second Period
are "continuous in character because the Second Period ends, in the very words of Article 10 of the ETPI
Articles, ‘thirty (30) days after the First Period’, and the ‘expiry date being thirty (30) days after the end
of the First Period.’"13 The Second Period, therefore, covered the period from May 24, 1996 to June 23,
1996.

Petitioner maintains that under the Articles of Incorporation, the Corporate Secretary of ETPI should
have given the stockholders written notice of the offer to sell on or before the expiration of the First
Period. However, Resolution No. 96-142, adopted by PCGG on June 21, 1996, states among others:

WHEREAS, on 4 June 1996, the PCGG received copy of a letter of 29 May 1996 from Atty. Juan de Ocampo,
alleging that he is the Corporate Secretary of ETPI, copy of which is hereto attached, stating that under
Article Tenth of the ETPI articles of Incorporation, all stockholders of record have the right of first refusal
to purchase pro rata to their holdings in ETPI to expire 20 days (supposed to be 30) from expiry date of
ETPI’s right of first refusal which was allegedly 24 May 1996, giving the Government up to 18 June 1996
to exercise the right of first refusal to purchase up to 22,148 shares of stock.14

From the above, it clearly appears that, by petitioner’s own admission and contrary to its belated
protestation, the procedure outlined in the Articles of Incorporation relating to the right of first refusal
was observed. But petitioner takes exception to Atty. De Ocampo’s authority to act as Corporate Secretary
of ETPI. In this connection, the Sandiganbayan held:

xxx. The question of who are the legitimate directors and officers of ETPI has been elevated to the
Supreme Court but has not yet been finally resolved. This should not, however, detract from the fact that
PCGG has actually been informed of the intended sale.15

We agree with the Sandiganbayan. The purpose of the notice requirement in Article 10 of the ETPI
Articles of Incorporation is to give the stockholders knowledge of the intended sale of shares of stock of
the corporation, in order that they may exercise their preemptive right. Where it is shown that a
stockholder had actual knowledge of the intended sale within the period prescribed to exercise the right,
the notice requirement had been sufficiently met. In the case at bar, PCGG had actual knowledge of
UNIMOLCO’s offer to sell its shares of stock. In fact, it issued Resolution No. 96-142 enjoining the sale of
the said shares of stock to Smart. Petitioner, thus, cannot feign lack of notice.16

Parenthetically, PCGG had no more authority to enjoin the sale of UNIMOLCO’s 196,000 shares of stock,
as it endeavored to do in Resolution No. 96-142. As correctly found by the Sandiganbayan, since the
196,000 shares of stock had already been adjudicated by final judgment to Benedicto and UNIMOLCO,
PCGG could no longer exercise power and authority over the same.17

Therefore, we sustain the Sandiganbayan’s ruling that petitioner’s right of first refusal was not
seasonably exercised.18

Even on the assumption that petitioner exercised its right of first refusal on time, it nonetheless failed to
follow the requirement in the Articles of Incorporation that payment must be tendered in "cash or
certified checks or checks drawn on a Philippine bank or banks". The set-off or compensation it proposed
does not fall under any of the recognized modes of payment in the Articles. In order that compensation
may be proper, Article 1279 of the Civil Code requires:

(1) That each one of the obligors be bound principally, and that he be at the same time a principal
creditor of the other;
 (2) That both debts consist in a sum of money, or if the things are consumable, they be of the same
kind, and also of the same quality if the later has been stated;

(3) That the two debts be due;

(4) That they be liquidated and demandable, and

(5) That over neither of them there be any retention or controversy, commenced by third persons
and communicated in due time to the debtor.

Petitioner sought the offsetting of the price of the shares of stock with assets of respondent Benedicto,
whom it claimed was indebted to it for certain lands and dividends due to it under their Compromise
Agreement. Benedicto was only a stockholder of UNIMOLCO, the Offeror. While he may be the majority
stockholder, UNIMOLCO cannot be said to be liable for Benedicto’s supposed obligations to petitioner. To
be sure, Benedicto and UNIMOLCO are separate and distinct persons. On the basis of this alone, there can
be no valid set-off. Petitioner and UNIMOLCO are not principal debtors and creditors of each other.

Petitioner counters that UNIMOLCO’s corporate fiction should be pierced since it is also owned by
Benedicto. However, mere majority ownership of the stocks of a corporation is not per se a cause for
piercing the corporate veil. There was no evidence that UNIMOLCO’s corporate entity was used by
respondent Benedicto to commit fraud or to do wrong on petitioner; neither was it shown that the
corporate entity was merely a farce and that it was used as an alter ego, business conduit or
instrumentality of a person or another entity or that piercing the corporation fiction is necessary to
achieve justice or equity.19 Only in these instances may the fiction be pierced and disregarded.20 Being the
party that invoked it, petitioner has the burden of substantiating by clear and convincing evidence that
UNIMOLCO’s corporate veil must be pierced.

Besides, petitioner’s claims on the lands and dividends allegedly due it from respondent Benedicto’s
other business holdings are not enforceable in court. Only liquidated debts are enforceable in court, there
being no apparent defenses inherent in them.21 "For compensation to take place, a distinction must be
made between a debt and a mere claim. A debt is a claim which has been formally passed upon by the
highest authority to which it can in law be submitted and has been declared to be a debt. A claim, on the
other hand, is a debt in embryo. It is mere evidence of a debt and must pass through the process
prescribed by law before it develops into what is properly called a debt."22 There being no two debts for
which either party may be said as principally bound to each other, again, there can be no set-off.

In the final analysis, the resolution of this case hinges on questions of fact.1âwphi1 It is axiomatic that
factual findings of the Sandiganbayan are conclusive on the Supreme Court.23 None of the exceptions to
this rule24 is present in this case.

WHEREFORE, the petition is DENIED. The Resolutions of the Sandiganbayan dated December 6, 1996
and March 17, 1997 in Civil Case No. 0009 are AFFIRMED.

SO ORDERED.

SPECIAL FIRST DIVISION

G.R. No. 124293 January 31, 2005

J.G. SUMMIT HOLDINGS, INC., petitioner,
vs.
COURT OF APPEALS; COMMITTEE ON PRIVATIZATION, its Chairman and Members; ASSET
PRIVATIZATION TRUST; and PHILYARDS HOLDINGS, INC., respondents.

RESOLUTION

PUNO, J.:

For resolution before this Court are two motions filed by the petitioner, J.G. Summit Holdings, Inc. for
reconsideration of our Resolution dated September 24, 2003 and to elevate this case to the Court En
Banc. The petitioner questions the Resolution which reversed our Decision of November 20, 2000, which
in turn reversed and set aside a Decision of the Court of Appeals promulgated on July 18, 1995.

I. Facts

The undisputed facts of the case, as set forth in our Resolution of September 24, 2003, are as follows:

On January 27, 1997, the National Investment and Development Corporation (NIDC), a government
corporation, entered into a Joint Venture Agreement (JVA) with Kawasaki Heavy Industries, Ltd. of Kobe,
Japan (KAWASAKI) for the construction, operation and management of the Subic National Shipyard, Inc.
(SNS) which subsequently became the Philippine Shipyard and Engineering Corporation (PHILSECO).
Under the JVA, the NIDC and KAWASAKI will contribute ₱330 million for the capitalization of PHILSECO
in the proportion of 60%-40% respectively. One of its salient features is the grant to the parties of
the right of first refusal should either of them decide to sell, assign or transfer its interest in the joint
venture, viz:

1.4 Neither party shall sell, transfer or assign all or any part of its interest in SNS [PHILSECO] to any third
party without giving the other under the same terms the right of first refusal. This provision shall not
apply if the transferee is a corporation owned or controlled by the GOVERNMENT or by a KAWASAKI
affiliate.

On November 25, 1986, NIDC transferred all its rights, title and interest in PHILSECO to the Philippine
National Bank (PNB). Such interests were subsequently transferred to the National Government pursuant
to Administrative Order No. 14. On December 8, 1986, President Corazon C. Aquino issued Proclamation
No. 50 establishing the Committee on Privatization (COP) and the Asset Privatization Trust (APT) to take
title to, and possession of, conserve, manage and dispose of non-performing assets of the National
Government. Thereafter, on February 27, 1987, a trust agreement was entered into between the National
Government and the APT wherein the latter was named the trustee of the National Government's share in
PHILSECO. In 1989, as a result of a quasi-reorganization of PHILSECO to settle its huge obligations to
PNB, the National Government's shareholdings in PHILSECO increased to 97.41% thereby reducing
KAWASAKI's shareholdings to 2.59%.

In the interest of the national economy and the government, the COP and the APT deemed it best to sell
the National Government's share in PHILSECO to private entities. After a series of negotiations between
the APT and KAWASAKI, they agreed that the latter's right of first refusal under the JVA be "exchanged"
for the right to top by five percent (5%) the highest bid for the said shares. They further agreed that
KAWASAKI would be entitled to name a company in which it was a stockholder, which could exercise the
right to top. On September 7, 1990, KAWASAKI informed APT that Philyards Holdings, Inc. (PHI)1 would
exercise its right to top.

At the pre-bidding conference held on September 18, 1993, interested bidders were given copies of the
JVA between NIDC and KAWASAKI, and of the Asset Specific Bidding Rules (ASBR) drafted for the
National Government's 87.6% equity share in PHILSECO. The provisions of the ASBR were explained to
the interested bidders who were notified that the bidding would be held on December 2, 1993. A portion
of the ASBR reads:

1.0 The subject of this Asset Privatization Trust (APT) sale through public bidding is the National
Government's equity in PHILSECO consisting of 896,869,942 shares of stock (representing 87.67% of
PHILSECO's outstanding capital stock), which will be sold as a whole block in accordance with the rules
herein enumerated.

xxx xxx xxx

2.0 The highest bid, as well as the buyer, shall be subject to the final approval of both the APT Board of
Trustees and the Committee on Privatization (COP).

2.1 APT reserves the right in its sole discretion, to reject any or all bids.

3.0 This public bidding shall be on an Indicative Price Bidding basis. The Indicative price set for the
National Government's 87.67% equity in PHILSECO is PESOS: ONE BILLION THREE HUNDRED MILLION
(₱1,300,000,000.00).

xxx xxx xxx

6.0 The highest qualified bid will be submitted to the APT Board of Trustees at its regular meeting
following the bidding, for the purpose of determining whether or not it should be endorsed by the APT
Board of Trustees to the COP, and the latter approves the same. The APT shall advise Kawasaki Heavy
Industries, Inc. and/or its nominee, [PHILYARDS] Holdings, Inc., that the highest bid is acceptable to the
National Government. Kawasaki Heavy Industries, Inc. and/or [PHILYARDS] Holdings, Inc. shall then
have a period of thirty (30) calendar days from the date of receipt of such advice from APT within which
to exercise their "Option to Top the Highest Bid" by offering a bid equivalent to the highest bid plus five
(5%) percent thereof.

6.1 Should Kawasaki Heavy Industries, Inc. and/or [PHILYARDS] Holdings, Inc. exercise their "Option to
Top the Highest Bid," they shall so notify the APT about such exercise of their option and deposit with
APT the amount equivalent to ten percent (10%) of the highest bid plus five percent (5%) thereof within
the thirty (30)-day period mentioned in paragraph 6.0 above. APT will then serve notice upon Kawasaki
Heavy Industries, Inc. and/or [PHILYARDS] Holdings, Inc. declaring them as the preferred bidder and
they shall have a period of ninety (90) days from the receipt of the APT's notice within which to pay the
balance of their bid price.

6.2 Should Kawasaki Heavy Industries, Inc. and/or [PHILYARDS] Holdings, Inc. fail to exercise their
"Option to Top the Highest Bid" within the thirty (30)-day period, APT will declare the highest bidder as
the winning bidder.
 xxx xxx xxx

12.0 The bidder shall be solely responsible for examining with appropriate care these rules, the official
bid forms, including any addenda or amendments thereto issued during the bidding period. The bidder
shall likewise be responsible for informing itself with respect to any and all conditions concerning the
PHILSECO Shares which may, in any manner, affect the bidder's proposal. Failure on the part of the
bidder to so examine and inform itself shall be its sole risk and no relief for error or omission will be
given by APT or COP. . . .

At the public bidding on the said date, petitioner J.G. Summit Holdings, Inc.2 submitted a bid of Two
Billion and Thirty Million Pesos (₱2,030,000,000.00) with an acknowledgment of
KAWASAKI/[PHILYARDS'] right to top, viz:

4. I/We understand that the Committee on Privatization (COP) has up to thirty (30) days to act on APT's
recommendation based on the result of this bidding. Should the COP approve the highest bid, APT shall
advise Kawasaki Heavy Industries, Inc. and/or its nominee, [PHILYARDS] Holdings, Inc. that the highest
bid is acceptable to the National Government. Kawasaki Heavy Industries, Inc. and/or [PHILYARDS]
Holdings, Inc. shall then have a period of thirty (30) calendar days from the date of receipt of such advice
from APT within which to exercise their "Option to Top the Highest Bid" by offering a bid equivalent to
the highest bid plus five (5%) percent thereof.

As petitioner was declared the highest bidder, the COP approved the sale on December 3, 1993 "subject
to the right of Kawasaki Heavy Industries, Inc./[PHILYARDS] Holdings, Inc. to top JGSMI's bid by 5% as
specified in the bidding rules."

On December 29, 1993, petitioner informed APT that it was protesting the offer of PHI to top its bid on
the grounds that: (a) the KAWASAKI/PHI consortium composed of KAWASAKI, [PHILYARDS], Mitsui,
Keppel, SM Group, ICTSI and Insular Life violated the ASBR because the last four (4) companies were the
losing bidders thereby circumventing the law and prejudicing the weak winning bidder; (b) only
KAWASAKI could exercise the right to top; (c) giving the same option to top to PHI constituted
unwarranted benefit to a third party; (d) no right of first refusal can be exercised in a public bidding or
auction sale; and (e) the JG Summit consortium was not estopped from questioning the proceedings.

On February 2, 1994, petitioner was notified that PHI had fully paid the balance of the purchase price of
the subject bidding. On February 7, 1994, the APT notified petitioner that PHI had exercised its option to
top the highest bid and that the COP had approved the same on January 6, 1994. On February 24, 1994,
the APT and PHI executed a Stock Purchase Agreement. Consequently, petitioner filed with this Court a
Petition for Mandamus under G.R. No. 114057. On May 11, 1994, said petition was referred to the Court
of Appeals. On July 18, 1995, the Court of Appeals denied the same for lack of merit. It ruled that the
petition for mandamus was not the proper remedy to question the constitutionality or legality of the right
of first refusal and the right to top that was exercised by KAWASAKI/PHI, and that the matter must be
brought "by the proper party in the proper forum at the proper time and threshed out in a full blown
trial." The Court of Appeals further ruled that the right of first refusal and the right to top are prima facie
legal and that the petitioner, "by participating in the public bidding, with full knowledge of the right to
top granted to KAWASAKI/[PHILYARDS] is…estopped from questioning the validity of the award given to
[PHILYARDS] after the latter exercised the right to top and had paid in full the purchase price of the
subject shares, pursuant to the ASBR." Petitioner filed a Motion for Reconsideration of said Decision
which was denied on March 15, 1996. Petitioner thus filed a Petition for Certiorari with this Court
alleging grave abuse of discretion on the part of the appellate court.

On November 20, 2000, this Court rendered x x x [a] Decision ruling among others that the Court of
Appeals erred when it dismissed the petition on the sole ground of the impropriety of the special civil
action of mandamus because the petition was also one of certiorari. It further ruled that a shipyard like
PHILSECO is a public utility whose capitalization must be sixty percent (60%) Filipino-owned.
Consequently, the right to top granted to KAWASAKI under the Asset Specific Bidding Rules (ASBR)
drafted for the sale of the 87.67% equity of the National Government in PHILSECO is illegal — not only
because it violates the rules on competitive bidding — but more so, because it allows foreign
corporations to own more than 40% equity in the shipyard. It also held that "although the petitioner had
the opportunity to examine the ASBR before it participated in the bidding, it cannot be estopped from
questioning the unconstitutional, illegal and inequitable provisions thereof." Thus, this Court voided the
transfer of the national government's 87.67% share in PHILSECO to Philyard[s] Holdings, Inc., and upheld
the right of JG Summit, as the highest bidder, to take title to the said shares, viz:

WHEREFORE, the instant petition for review on certiorari is GRANTED. The assailed Decision and
Resolution of the Court of Appeals are REVERSED and SET ASIDE. Petitioner is ordered to pay to APT its
bid price of Two Billion Thirty Million Pesos (₱2,030,000,000.00), less its bid deposit plus interests upon
the finality of this Decision. In turn, APT is ordered to:

(a) accept the said amount of ₱2,030,000,000.00 less bid deposit and interests from petitioner;

(b) execute a Stock Purchase Agreement with petitioner;

(c) cause the issuance in favor of petitioner of the certificates of stocks representing 87.6% of
PHILSECO's total capitalization;

(d) return to private respondent PHGI the amount of Two Billion One Hundred Thirty-One Million
Five Hundred Thousand Pesos (₱2,131,500,000.00); and

(e) cause the cancellation of the stock certificates issued to PHI.

SO ORDERED.

In separate Motions for Reconsideration, respondents submit[ted] three basic issues for x x x resolution:
(1) Whether PHILSECO is a public utility; (2) Whether under the 1977 JVA, KAWASAKI can exercise its
right of first refusal only up to 40% of the total capitalization of PHILSECO; and (3) Whether the right to
top granted to KAWASAKI violates the principles of competitive bidding.3 (citations omitted)

In a Resolution dated September 24, 2003, this Court ruled in favor of the respondents. On the first issue,
we held that Philippine Shipyard and Engineering Corporation (PHILSECO) is not a public utility, as by
nature, a shipyard is not a public utility4 and that no law declares a shipyard to be a public utility.5 On the
second issue, we found nothing in the 1977 Joint Venture Agreement (JVA) which prevents Kawasaki
Heavy Industries, Ltd. of Kobe, Japan (KAWASAKI) from acquiring more than 40% of PHILSECO’s total
capitalization.6 On the final issue, we held that the right to top granted to KAWASAKI in exchange for its
right of first refusal did not violate the principles of competitive bidding.7
On October 20, 2003, the petitioner filed a Motion for Reconsideration8 and a Motion to Elevate This Case
to the Court En Banc.9 Public respondents Committee on Privatization (COP) and Asset Privatization
Trust (APT), and private respondent Philyards Holdings, Inc. (PHILYARDS) filed their Comments on J.G.
Summit Holdings, Inc.’s (JG Summit’s) Motion for Reconsideration and Motion to Elevate This Case to the
Court En Banc on January 29, 2004 and February 3, 2004, respectively.

II. Issues

Based on the foregoing, the relevant issues to resolve to end this litigation are the following:

1. Whether there are sufficient bases to elevate the case at bar to the Court en banc.

2. Whether the motion for reconsideration raises any new matter or cogent reason to warrant a
reconsideration of this Court’s Resolution of September 24, 2003.

Motion to Elevate this Case to the

Court En Banc

The petitioner prays for the elevation of the case to the Court en banc on the following grounds:

1. The main issue of the propriety of the bidding process involved in the present case has been
confused with the policy issue of the supposed fate of the shipping industry which has never been
an issue that is determinative of this case.10

2. The present case may be considered under the Supreme Court Resolution dated February 23,
1984 which included among en banc cases those involving a novel question of law and those
where a doctrine or principle laid down by the Court en banc or in division may be modified or
reversed.11

3. There was clear executive interference in the judicial functions of the Court when the Honorable
Jose Isidro Camacho, Secretary of Finance, forwarded to Chief Justice Davide, a memorandum
dated November 5, 2001, attaching a copy of the Foreign Chambers Report dated October 17,
2001, which matter was placed in the agenda of the Court and noted by it in a formal resolution
dated November 28, 2001.12

Opposing J.G. Summit’s motion to elevate the case en banc, PHILYARDS points out the petitioner’s
inconsistency in previously opposing PHILYARDS’ Motion to Refer the Case to the Court En
Banc. PHILYARDS contends that J.G. Summit should now be estopped from asking that the case be
referred to the Court en banc. PHILYARDS further contends that the Supreme Court en banc is not an
appellate court to which decisions or resolutions of its divisions may be appealed citing Supreme Court
Circular No. 2-89 dated February 7, 1989.13 PHILYARDS also alleges that there is no novel question of law
involved in the present case as the assailed Resolution was based on well-settled jurisprudence. Likewise,
PHILYARDS stresses that the Resolution was merely an outcome of the motions for reconsideration filed
by it and the COP and APT and is "consistent with the inherent power of courts to ‘amend and control its
process and orders so as to make them conformable to law and justice.’ (Rule 135, sec. 5)"14 Private
respondent belittles the petitioner’s allegations regarding the change in ponente and the alleged
executive interference as shown by former Secretary of Finance Jose Isidro Camacho’s memorandum
dated November 5, 2001 arguing that these do not justify a referral of the present case to the Court en
banc.

In insisting that its Motion to Elevate This Case to the Court En Banc should be granted, J.G. Summit
further argued that: its Opposition to the Office of the Solicitor General’s Motion to Refer is different from
its own Motion to Elevate; different grounds are invoked by the two motions; there was unwarranted
"executive interference"; and the change in ponente is merely noted in asserting that this case should be
decided by the Court en banc.15

We find no merit in petitioner’s contention that the propriety of the bidding process involved in the
present case has been confused with the policy issue of the fate of the shipping industry which, petitioner
maintains, has never been an issue that is determinative of this case. The Court’s Resolution of September
24, 2003 reveals a clear and definitive ruling on the propriety of the bidding process. In discussing
whether the right to top granted to KAWASAKI in exchange for its right of first refusal violates the
principles of competitive bidding, we made an exhaustive discourse on the rules and principles of public
bidding and whether they were complied with in the case at bar.16This Court categorically ruled on the
petitioner’s argument that PHILSECO, as a shipyard, is a public utility which should maintain a 60%-40%
Filipino-foreign equity ratio, as it was a pivotal issue. In doing so, we recognized the impact of our ruling
on the shipbuilding industry which was beyond avoidance.17

We reject petitioner’s argument that the present case may be considered under the Supreme Court
Resolution dated February 23, 1984 which included among en banc cases those involving a novel
question of law and those where a doctrine or principle laid down by the court en banc or in division may
be modified or reversed. The case was resolved based on basic principles of the right of first refusal in
commercial law and estoppel in civil law. Contractual obligations arising from rights of first refusal are
not new in this jurisdiction and have been recognized in numerous cases.18 Estoppel is too known a civil
law concept to require an elongated discussion. Fundamental principles on public bidding were likewise
used to resolve the issues raised by the petitioner. To be sure, petitioner leans on the right to top in a
public bidding in arguing that the case at bar involves a novel issue. We are not swayed. The right to top
was merely a condition or a reservation made in the bidding rules which was fully disclosed to all bidding
parties. In Bureau Veritas, represented by Theodor H. Hunermann v. Office of the President, et
al., 19 we dealt with this conditionality, viz:

x x x It must be stressed, as held in the case of A.C. Esguerra & Sons v. Aytona, et al., (L-18751, 28 April
1962, 4 SCRA 1245), that in an "invitation to bid, there is a condition imposed upon the bidders to the
effect that the bidding shall be subject to the right of the government to reject any and all bids
subject to its discretion. In the case at bar, the government has made its choice and unless an
unfairness or injustice is shown, the losing bidders have no cause to complain nor right to dispute
that choice. This is a well-settled doctrine in this jurisdiction and elsewhere."

The discretion to accept or reject a bid and award contracts is vested in the Government agencies
entrusted with that function. The discretion given to the authorities on this matter is of such wide
latitude that the Courts will not interfere therewith, unless it is apparent that it is used as a shield to a
fraudulent award (Jalandoni v. NARRA, 108 Phil. 486 [1960]). x x x The exercise of this discretion is a
policy decision that necessitates prior inquiry, investigation, comparison, evaluation, and deliberation.
This task can best be discharged by the Government agencies concerned, not by the Courts. The role of
the Courts is to ascertain whether a branch or instrumentality of the Government has transgressed its
constitutional boundaries. But the Courts will not interfere with executive or legislative discretion
exercised within those boundaries. Otherwise, it strays into the realm of policy decision-making.

It is only upon a clear showing of grave abuse of discretion that the Courts will set aside the award of a
contract made by a government entity. Grave abuse of discretion implies a capricious, arbitrary and
whimsical exercise of power (Filinvest Credit Corp. v. Intermediate Appellate Court, No. 65935, 30
September 1988, 166 SCRA 155). The abuse of discretion must be so patent and gross as to amount to an
evasion of positive duty or to a virtual refusal to perform a duty enjoined by law, as to act at all in
contemplation of law, where the power is exercised in an arbitrary and despotic manner by reason of
passion or hostility (Litton Mills, Inc. v. Galleon Trader, Inc., et al[.], L-40867, 26 July 1988, 163 SCRA
489).

The facts in this case do not indicate any such grave abuse of discretion on the part of public respondents
when they awarded the CISS contract to Respondent SGS. In the "Invitation to Prequalify and Bid" (Annex
"C," supra), the CISS Committee made an express reservation of the right of the Government to
"reject any or all bids or any part thereof or waive any defects contained thereon and accept an
offer most advantageous to the Government." It is a well-settled rule that where such reservation
is made in an Invitation to Bid, the highest or lowest bidder, as the case may be, is not entitled to
an award as a matter of right (C & C Commercial Corp. v. Menor, L-28360, 27 January 1983, 120 SCRA
112). Even the lowest Bid or any Bid may be rejected or, in the exercise of sound discretion, the award
may be made to another than the lowest bidder (A.C. Esguerra & Sons v. Aytona, supra, citing 43 Am. Jur.,
788). (emphases supplied)1awphi1.nét

Like the condition in the Bureau Veritas case, the right to top was a condition imposed by the
government in the bidding rules which was made known to all parties. It was a condition imposed on
all bidders equally, based on the APT’s exercise of its discretion in deciding on how best to
privatize the government’s shares in PHILSECO. It was not a whimsical or arbitrary condition plucked
from the ether and inserted in the bidding rules but a condition which the APT approved as the best way
the government could comply with its contractual obligations to KAWASAKI under the JVA and its
mandate of getting the most advantageous deal for the government. The right to top had its history in the
mutual right of first refusal in the JVA and was reached by agreement of the government and KAWASAKI.

Further, there is no "executive interference" in the functions of this Court by the mere filing of a
memorandum by Secretary of Finance Jose Isidro Camacho. The memorandum was merely "noted" to
acknowledge its filing. It had no further legal significance. Notably too, the assailed Resolution dated
September 24, 2003 was decided unanimously by the Special First Division in favor of the
respondents.

Again, we emphasize that a decision or resolution of a Division is that of the Supreme Court20 and the
Court en banc is not an appellate court to which decisions or resolutions of a Division may be appealed.21

For all the foregoing reasons, we find no basis to elevate this case to the Court en banc.

Motion for Reconsideration

Three principal arguments were raised in the petitioner’s Motion for Reconsideration. First, that a fair
resolution of the case should be based on contract law, not on policy considerations; the contracts do not
authorize the right to top to be derived from the right of first refusal.22 Second, that neither the right of
first refusal nor the right to top can be legally exercised by the consortium which is not the proper party
granted such right under either the JVA or the Asset Specific Bidding Rules (ASBR).23 Third, that the
maintenance of the 60%-40% relationship between the National Investment and Development
Corporation (NIDC) and KAWASAKI arises from contract and from the Constitution because PHILSECO is
a landholding corporation and need not be a public utility to be bound by the 60%-40% constitutional
limitation.24

On the other hand, private respondent PHILYARDS asserts that J.G. Summit has not been able to show
compelling reasons to warrant a reconsideration of the Decision of the Court.25 PHILYARDS denies that
the Decision is based mainly on policy considerations and points out that it is premised on principles
governing obligations and contracts and corporate law such as the rule requiring respect for contractual
stipulations, upholding rights of first refusal, and recognizing the assignable nature of contracts
rights.26 Also, the ruling that shipyards are not public utilities relies on established case law and
fundamental rules of statutory construction. PHILYARDS stresses that KAWASAKI’s right of first refusal
or even the right to top is not limited to the 40% equity of the latter.27 On the landholding issue raised by
J.G. Summit, PHILYARDS emphasizes that this is a non-issue and even involves a question of fact. Even
assuming that this Court can take cognizance of such question of fact even without the benefit of a trial,
PHILYARDS opines that landholding by PHILSECO at the time of the bidding is irrelevant because what is
essential is that ultimately a qualified entity would eventually hold PHILSECO’s real estate
properties.28 Further, given the assignable nature of the right of first refusal, any applicable nationality
restrictions, including landholding limitations, would not affect the right of first refusal itself, but only the
manner of its exercise.29 Also, PHILYARDS argues that if this Court takes cognizance of J.G. Summit’s
allegations of fact regarding PHILSECO’s landholding, it must also recognize PHILYARDS’ assertions that
PHILSECO’s landholdings were sold to another corporation.30 As regards the right of first refusal, private
respondent explains that KAWASAKI’s reduced shareholdings (from 40% to 2.59%) did not translate to a
deprivation or loss of its contractually granted right of first refusal.31 Also, the bidding was valid because
PHILYARDS exercised the right to top and it was of no moment that losing bidders later joined
PHILYARDS in raising the purchase price.32

In cadence with the private respondent PHILYARDS, public respondents COP and APT contend:

1. The conversion of the right of first refusal into a right to top by 5% does not violate any
provision in the JVA between NIDC and KAWASAKI.

2. PHILSECO is not a public utility and therefore not governed by the constitutional restriction on
foreign ownership.

3. The petitioner is legally estopped from assailing the validity of the proceedings of the public
bidding as it voluntarily submitted itself to the terms of the ASBR which included the provision on
the right to top.

4. The right to top was exercised by PHILYARDS as the nominee of KAWASAKI and the fact that
PHILYARDS formed a consortium to raise the required amount to exercise the right to top the
highest bid by 5% does not violate the JVA or the ASBR.

5. The 60%-40% Filipino-foreign constitutional requirement for the acquisition of lands does not
apply to PHILSECO because as admitted by petitioner itself, PHILSECO no longer owns real
property.
 6. Petitioner’s motion to elevate the case to the Court en banc is baseless and would only delay the
termination of this case.33

In a Consolidated Comment dated March 8, 2004, J.G. Summit countered the arguments of the public and
private respondents in this wise:

1. The award by the APT of 87.67% shares of PHILSECO to PHILYARDS with losing bidders
through the exercise of a right to top, which is contrary to law and the constitution is null and void
for being violative of substantive due process and the abuse of right provision in the Civil Code.

a. The bidders[’] right to top was actually exercised by losing bidders.

b. The right to top or the right of first refusal cannot co-exist with a genuine competitive
bidding.

c. The benefits derived from the right to top were unwarranted.

2. The landholding issue has been a legitimate issue since the start of this case but is shamelessly
ignored by the respondents.

a. The landholding issue is not a non-issue.

b. The landholding issue does not pose questions of fact.

c. That PHILSECO owned land at the time that the right of first refusal was agreed upon and
at the time of the bidding are most relevant.

d. Whether a shipyard is a public utility is not the core issue in this case.

3. Fraud and bad faith attend the alleged conversion of an inexistent right of first refusal to the
right to top.

a. The history behind the birth of the right to top shows fraud and bad faith.

b. The right of first refusal was, indeed, "effectively useless."

4. Petitioner is not legally estopped to challenge the right to top in this case.

a. Estoppel is unavailing as it would stamp validity to an act that is prohibited by law or

against public policy.

b. Deception was patent; the right to top was an attractive nuisance.

c. The 10% bid deposit was placed in escrow.

J.G. Summit’s insistence that the right to top cannot be sourced from the right of first refusal is not new
and we have already ruled on the issue in our Resolution of September 24, 2003. We upheld the mutual
right of first refusal in the JVA.34 We also ruled that nothing in the JVA prevents KAWASAKI from
acquiring more than 40% of PHILSECO’s total capitalization.35 Likewise, nothing in the JVA or ASBR bars
the conversion of the right of first refusal to the right to top. In sum, nothing new and of significance in
the petitioner’s pleading warrants a reconsideration of our ruling.

Likewise, we already disposed of the argument that neither the right of first refusal nor the right to top
can legally be exercised by the consortium which is not the proper party granted such right under either
the JVA or the ASBR. Thus, we held:

The fact that the losing bidder, Keppel Consortium (composed of Keppel, SM Group, Insular Life
Assurance, Mitsui and ICTSI), has joined PHILYARDS in the latter's effort to raise ₱2.131 billion necessary
in exercising the right to top is not contrary to law, public policy or public morals. There is nothing in the
ASBR that bars the losing bidders from joining either the winning bidder (should the right to top is not
exercised) or KAWASAKI/PHI (should it exercise its right to top as it did), to raise the purchase price. The
petitioner did not allege, nor was it shown by competent evidence, that the participation of the losing
bidders in the public bidding was done with fraudulent intent. Absent any proof of fraud, the formation
by [PHILYARDS] of a consortium is legitimate in a free enterprise system. The appellate court is thus
correct in holding the petitioner estopped from questioning the validity of the transfer of the National
Government's shares in PHILSECO to respondent.36

Further, we see no inherent illegality on PHILYARDS’ act in seeking funding from parties who were losing
bidders. This is a purely commercial decision over which the State should not interfere absent any legal
infirmity. It is emphasized that the case at bar involves the disposition of shares in a corporation which
the government sought to privatize. As such, the persons with whom PHILYARDS desired to enter into
business with in order to raise funds to purchase the shares are basically its business. This is in contrast
to a case involving a contract for the operation of or construction of a government infrastructure where
the identity of the buyer/bidder or financier constitutes an important consideration. In such cases, the
government would have to take utmost precaution to protect public interest by ensuring that the parties
with which it is contracting have the ability to satisfactorily construct or operate the infrastructure.

On the landholding issue, J.G. Summit submits that since PHILSECO is a landholding company, KAWASAKI
could exercise its right of first refusal only up to 40% of the shares of PHILSECO due to the constitutional
prohibition on landholding by corporations with more than 40% foreign-owned equity. It further argues
that since KAWASAKI already held at least 40% equity in PHILSECO, the right of first refusal was inutile
and as such, could not subsequently be converted into the right to top. 37 Petitioner also asserts that, at
present, PHILSECO continues to violate the constitutional provision on landholdings as its shares are
more than 40% foreign-owned.38 PHILYARDS admits that it may have previously held land but had
already divested such landholdings.39 It contends, however, that even if PHILSECO owned land, this
would not affect the right of first refusal but only the exercise thereof. If the land is retained, the right of
first refusal, being a property right, could be assigned to a qualified party. In the alternative, the land
could be divested before the exercise of the right of first refusal. In the case at bar, respondents assert
that since the right of first refusal was validly converted into a right to top, which was exercised not by
KAWASAKI, but by PHILYARDS which is a Filipino corporation (i.e., 60% of its shares are owned by
Filipinos), then there is no violation of the Constitution.40 At first, it would seem that questions of fact
beyond cognizance by this Court were involved in the issue. However, the records show that PHILYARDS
admits it had owned land up until the time of the bidding.41 Hence, the only issue is whether
KAWASAKI had a valid right of first refusal over PHILSECO shares under the JVA considering that
PHILSECO owned land until the time of the bidding and KAWASAKI already held 40% of
PHILSECO’s equity.
We uphold the validity of the mutual rights of first refusal under the JVA between KAWASAKI and NIDC.
First of all, the right of first refusal is a property right of PHILSECO shareholders, KAWASAKI and NIDC,
under the terms of their JVA. This right allows them to purchase the shares of their co-shareholder before
they are offered to a third party. The agreement of co-shareholders to mutually grant this right to
each other, by itself, does not constitute a violation of the provisions of the Constitution limiting
land ownership to Filipinos and Filipino corporations. As PHILYARDS correctly puts it, if PHILSECO
still owns land, the right of first refusal can be validly assigned to a qualified Filipino entity in order to
maintain the 60%-40% ratio. This transfer, by itself, does not amount to a violation of the Anti-Dummy
Laws, absent proof of any fraudulent intent. The transfer could be made either to a nominee or such other
party which the holder of the right of first refusal feels it can comfortably do business with. Alternatively,
PHILSECO may divest of its landholdings, in which case KAWASAKI, in exercising its right of first refusal,
can exceed 40% of PHILSECO’s equity. In fact, it can even be said that if the foreign shareholdings of
a landholding corporation exceeds 40%, it is not the foreign stockholders’ ownership of the
shares which is adversely affected but the capacity of the corporation to own land – that is, the
corporation becomes disqualified to own land. This finds support under the basic corporate law principle
that the corporation and its stockholders are separate juridical entities. In this vein, the right of first
refusal over shares pertains to the shareholders whereas the capacity to own land pertains to the
corporation. Hence, the fact that PHILSECO owns land cannot deprive stockholders of their right of first
refusal. No law disqualifies a person from purchasing shares in a landholding corporation even if
the latter will exceed the allowed foreign equity, what the law disqualifies is the corporation from
owning land. This is the clear import of the following provisions in the Constitution:

Section 2. All lands of the public domain, waters, minerals, coal, petroleum, and other mineral oils, all
forces of potential energy, fisheries, forests or timber, wildlife, flora and fauna, and other natural
resources are owned by the State. With the exception of agricultural lands, all other natural resources
shall not be alienated. The exploration, development, and utilization of natural resources shall be under
the full control and supervision of the State. The State may directly undertake such activities, or it may
enter into co-production, joint venture, or production-sharing agreements with Filipino citizens, or
corporations or associations at least sixty per centum of whose capital is owned by such citizens.
Such agreements may be for a period not exceeding twenty-five years, renewable for not more than
twenty-five years, and under such terms and conditions as may be provided by law. In cases of water
rights for irrigation, water supply, fisheries, or industrial uses other than the development of water
power, beneficial use may be the measure and limit of the grant.

xxx xxx xxx

Section 7. Save in cases of hereditary succession, no private lands shall be transferred or conveyed
except to individuals, corporations, or associations qualified to acquire or hold lands of the public
domain.42(emphases supplied)

The petitioner further argues that "an option to buy land is void in itself (Philippine Banking Corporation
v. Lui She, 21 SCRA 52 [1967]). The right of first refusal granted to KAWASAKI, a Japanese corporation, is
similarly void. Hence, the right to top, sourced from the right of first refusal, is also void."43 Contrary to
the contention of petitioner, the case of Lui She did not that say "an option to buy land is void in itself,"
for we ruled as follows:
x x x To be sure, a lease to an alien for a reasonable period is valid. So is an option giving an alien
the right to buy real property on condition that he is granted Philippine citizenship. As this Court
said in Krivenko vs. Register of Deeds:

[A]liens are not completely excluded by the Constitution from the use of lands for residential purposes.
Since their residence in the Philippines is temporary, they may be granted temporary rights such as a
lease contract which is not forbidden by the Constitution. Should they desire to remain here forever and
share our fortunes and misfortunes, Filipino citizenship is not impossible to acquire.

But if an alien is given not only a lease of, but also an option to buy, a piece of land, by virtue of
which the Filipino owner cannot sell or otherwise dispose of his property, this to last for 50 years,
then it becomes clear that the arrangement is a virtual transfer of ownership whereby the owner
divests himself in stages not only of the right to enjoy the land (jus possidendi, jus utendi, jus
fruendi and jus abutendi) but also of the right to dispose of it (jus disponendi) — rights the sum
total of which make up ownership. It is just as if today the possession is transferred, tomorrow,
the use, the next day, the disposition, and so on, until ultimately all the rights of which
ownership is made up are consolidated in an alien. And yet this is just exactly what the parties in this
case did within this pace of one year, with the result that Justina Santos'[s] ownership of her property
was reduced to a hollow concept. If this can be done, then the Constitutional ban against alien
landholding in the Philippines, as announced in Krivenko vs. Register of Deeds, is indeed in grave
peril.44 (emphases supplied; Citations omitted)

In Lui She, the option to buy was invalidated because it amounted to a virtual transfer of ownership as
the owner could not sell or dispose of his properties. The contract in Lui She prohibited the owner of the
land from selling, donating, mortgaging, or encumbering the property during the 50-year period of the
option to buy. This is not so in the case at bar where the mutual right of first refusal in favor of NIDC and
KAWASAKI does not amount to a virtual transfer of land to a non-Filipino. In fact, the case at bar involves
a right of first refusal over shares of stock while the Lui She case involves an option to buy the land
itself. As discussed earlier, there is a distinction between the shareholder’s ownership of shares and the
corporation’s ownership of land arising from the separate juridical personalities of the corporation and
its shareholders.

We note that in its Motion for Reconsideration, J.G. Summit alleges that PHILSECO continues to violate the
Constitution as its foreign equity is above 40% and yet owns long-term leasehold rights which are
real rights.45It cites Article 415 of the Civil Code which includes in the definition of immovable property,
"contracts for public works, and servitudes and other real rights over immovable property."46 Any
existing landholding, however, is denied by PHILYARDS citing its recent financial statements. 47 First,
these are questions of fact, the veracity of which would require introduction of evidence. The Court needs
to validate these factual allegations based on competent and reliable evidence. As such, the Court cannot
resolve the questions they pose. Second, J.G. Summit misreads the provisions of the Constitution cited in
its own pleadings, to wit:

29.2 Petitioner has consistently pointed out in the past that private respondent is not a 60%-40%
corporation, and this violates the Constitution x x x The violation continues to this day because under the
law, it continues to own real property…

xxx xxx xxx

32. To review the constitutional provisions involved, Section 14, Article XIV of the 1973 Constitution (the
JVA was signed in 1977), provided:

"Save in cases of hereditary succession, no private lands shall be transferred or conveyed except to
individuals, corporations, or associations qualified to acquire or hold lands of the public domain."

32.1 This provision is the same as Section 7, Article XII of the 1987 Constitution.

32.2 Under the Public Land Act, corporations qualified to acquire or hold lands of the public domain are
corporations at least 60% of which is owned by Filipino citizens (Sec. 22, Commonwealth Act 141, as
amended). (emphases supplied)

As correctly observed by the public respondents, the prohibition in the Constitution applies only to
ownership of land.48 It does not extend to immovable or real property as defined under Article 415
of the Civil Code.Otherwise, we would have a strange situation where the ownership of immovable
property such as trees, plants and growing fruit attached to the land49 would be limited to Filipinos and
Filipino corporations only.

III.

WHEREFORE, in view of the foregoing, the petitioner’s Motion for Reconsideration is DENIED WITH
FINALITY and the decision appealed from is AFFIRMED. The Motion to Elevate This Case to the Court En
Banc is likewise DENIED for lack of merit.

SO ORDERED.

Republic of the Philippines

SUPREME COURT
Manila

THIRD DIVISION

G.R. No. 181455-56 December 4, 2009

SANTIAGO CUA, JR., SOLOMON S. CUA and EXEQUIEL D. ROBLES, in their capacity as Directors of
PHILIPPINE RACING CLUB, INC., Petitioners,
vs.
MIGUEL OCAMPO TAN, JEMIE U. TAN and ATTY. BRIGIDO J. DULAY, Respondents.

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

G.R. No. 182008

SANTIAGO CUA, SR., in his capacity as Director of PHILIPPINE RACING CLUB, INC., Petitioner,
vs.
COURT OF APPEALS, MIGUEL OCAMPO TAN, JEMIE U. TAN, ATTY. BRIGIDO J. DULAY, and HON.
CESAR UNTALAN, Presiding Judge, Makati Regional Trial Court, Br. 149, Respondents.
 DECISION

CHICO-NAZARIO, J.:

Before this Court are two Petitions: (1) a Petition for Review on Certiorari 1 under Rule 45 of the Rules of
Court filed by petitioners Santiago Cua, Jr. (Santiago Jr.), Solomon S. Cua (Solomon), and Exequiel D.
Robles (Robles), in their capacity as directors of the Philippine Racing Club, Inc. (PRCI), with Miguel
Ocampo Tan (Miguel), Jemie U. Tan (Jemie) and Atty. Brigido J. Dulay (Dulay) as respondents, docketed as
G.R. No. 181455-56; and (2) a Petition for Certiorari and Prohibition2 under Rule 65 of the Rules of Court
filed by petitioner Santiago Cua, Sr. (Santiago Sr.), also in his capacity as PRCI director, likewise naming
Miguel, Jemie, and Dulay as respondents, together with the Court of Appeals and Presiding Judge Cesar
Untalan (Judge Untalan) of the Regional Trial Court (RTC), Branch 149 of Makati City, docketed as G.R.
No. 182008.

Both Petitions assail the Decision3 dated 6 September 2007 and Resolution4 dated 22 January 2008 of the
Court of Appeals in the consolidated cases CA-G.R. SP No. 99769 and No. 99780. In its 6 September 2007
Decision, the Court of Appeals dismissed for lack of merit, mootness, and prematurity, the Petition for
Certiorari of petitioners Santiago Jr., Solomon, and Robles (Santiago Jr., et al.); and the Petition for
Certiorari and Prohibition of petitioner Santiago Sr., which sought the nullification of the
Resolution5 dated 16 July 2007 of the RTC in Civil Case No. 07-610 granting the Temporary Restraining
Order (TRO) prayed for by respondents Miguel, Jemie, and Dulay (Miguel, et al.). In its 22 January 2008
Resolution, the appellate court denied the Motions for Reconsideration of petitioners and the Motion to
Admit Supplemental Petition for Certiorari of petitioner Santiago Jr, et al. The same Resolution did not
consider the Supplemental Petition for Certiorari and Prohibition filed by petitioner Santiago Sr. for the
latter’s failure to seek leave of court for its filing and admittance. Petitioners would have wanted to
challenge in their Supplemental Petitions the Resolution6 dated 8 October 2007 of the RTC in Civil Case
No. 07-610 granting the issuance of a "permanent injunction" against petitioners and the other PRCI
directors until the said case was resolved.

I
FACTUAL AND PROCEDURAL ANTECEDENTS

PRCI is a corporation organized and established under Philippine laws to: (1) carry on the business of a
race course in all its branches and, in particular, to conduct horse races or races of any kind, to accept
bets on the results of the races, and to construct grand or other stands, booths, stablings, paddocks,
clubhouses, refreshment rooms and other erections, buildings, and conveniences, and to conduct, hold
and promote race meetings and other shows and exhibitions; and (2) promote the breeding of better
horses in the Philippines, lend all possible aid in the development of sports, and uphold the principles of
good sportsmanship and fair play.7 To pursue its avowed purposes, PRCI holds a franchise granted under
Republic Act No. 6632, as amended by Republic Act No. 7953, to operate a horse racetrack and manage
betting stations. Under its franchise, PRCI may operate only one racetrack.

In 1999, the Articles of Incorporation of PRCI was amended to include a secondary purpose, viz:

To acquire real properties and/or develop real properties into mix-use realty projects including but not
limited to leisure, recreational and memorial parks and to own, operate, manage and/or sell these real
estate projects.8
PRCI is publicly listed with the Philippine Stock Exchange (PSE). In 2006, PRCI had an authorized capital
stock of ₱1,000,000,000.00 divided into 1,000,000,000 shares, with a par value of ₱1.00 each; of which a
total of ₱569,857,749.00, representing 569,857,749 shares, had been subscribed and paid up. 9

PRCI owns only two real properties, each covered by several transfer certificates of title. One is known as
the Sta. Ana Racetrack, located along A. P. Reyes Avenue, Makati City (Makati property), measuring
around 21.2 hectares; and the other is located in the towns of Naic and Tanza in the province of Cavite
(Cavite property).

Following the trend in the development of properties in the same area,10 PRCI wished to convert its
Makati property from a racetrack to urban residential and commercial use. Given the location and size of
its Makati property, PRCI believed that said property was severely under-utilized. Hence, PRCI
management decided to transfer its racetrack from Makati to Cavite. PRCI began developing its Cavite
property as a racetrack, scheduled to be completed by April 2008.

Now as to its Makati property, PRCI management decided that it was best to spin off the management and
development of the same to a wholly owned subsidiary, so that PRCI could continue to focus its efforts on
pursuing its core business competence of horse racing. Instead of organizing and establishing a new
corporation for the said purpose, PRCI management opted to acquire another domestic corporation, JTH
Davies Holdings, Inc. (JTH).11

JTH was then owned by Jardine Matheson Europe B.V. (JME).12 It had an authorized capital stock of
₱25,000,000.00, divided into 50,000,000 common shares with a par value of ₱0.50 each. JTH was publicly
listed with the PSE. Its tangible assets substantially consisted of cash. To determine the value of JTH, PRCI
engaged the services of the accounting firm Sycip Gorres Velayo & Co. (SGV) to conduct a due diligence
study.13

Using the results of the SGV study, PRCI management determined that PRCI could initially acquire
41,928,290 shares, or 95.55% of the outstanding capital stock of JTH, for the price of ₱10.71 per share, or
for a total of ₱449,250,000.00; in this case, PRCI would be paying a premium of ₱42,410,450.00 for the
said JTH shares, computed as follows:

Total price for all of the issued and subscribed JTH

shares (at P10.71/share) P 470,418,848.00
Less: Unaudited net worth of JTH (purely cash) - 426,010,000.00
Total premium for 100% of JTH 44,408,848.00
Multiply: Interest in JTH to be initially acquired by
PRCI (95.5%) x 0.955
Premium for the 95.5% interest in JTH to be acquired
by PRCI P 42,410,450.00

The PRCI Board of Directors held a meeting on 26 September 2006. Among the directors present were
petitioners Santiago Sr., Santiago Jr., and Solomon, as well as respondent Dulay. After discussing and
deliberating on the matter of the acquisition of JTH by PRCI, all the directors present, except respondent
Dulay, voted affirmatively to pass and approve the following resolutions:

1. Declaration of Intention to Acquire and Purchase Shares of Stock of Another Company -

 RESOLVED, as it is hereby resolved, that the Corporation intends to acquire up to one
hundred percent (100%) of the common shares of stock of JTH Davies Holdings, Inc. by
way of negotiated sale;

RESOLVED FURTHER, That Management and the Corporate Secretary shall prepare and
submit the Tender Offer, as well as, to file all the necessary disclosures and notices in
compliance with the Securities Regulation Code, its implementing rules, and other
prevailing regulations;

RESOLVED FURTHERMORE, That the Corporation authorizes its President, Mr. Solomon S.
Cua, to sign and execute any purchase agreements, memoranda, and such other deeds, and
to deliver any documents and papers, perform any acts, necessary and incidental to
implement the foregoing, as well as to source the funds to implement the same.

2. Special Stockholders’ Meeting -

RESOLVED, That a Special Stockholders’ Meeting of PRCI shall be held on October 26, 2006
at 10:00 A.M., or at such later date as may be practicable under the circumstances, in the
principal place of business of PRCI at Santa Ana Park, A.P. Reyes Avenue, Makati City;

RESOLVED FURTHER, That only those stockholders of record as of end of business day of
October 11, 2006 shall be entitled to notice, to vote and/or to be voted upon, in accordance
with the laws, regulations and by-laws of PRCI;

RESOLVED FURTHERMORE, That the Corporate Secretary shall be authorized to issue the
required notices, set the time for the submission of, and to receive and validate proxies, as
well as, to order publication of notices and undertake such appropriate and necessary
steps, including the filing of the required disclosures to the regulating agencies, to effect the
foregoing.

3. Authorized Attorney-In-Fact and Proxy -

In the event of a successful acquisition of the shares of JTH Davies Holdings, Inc., the Board passed
and approved the following resolutions:

RESOLVED, that the Corporation shall hereby authorize SANTIAGO CUA, or in his absence,
EXEQUIEL ROBLES, or in his absence, SOLOMON S. CUA, or in his absence, SANTIAGO CUA,
JR., or in his absence, DATUK SURIN UPATKOON, or in his absence, Laurence Lim Swee Lim,
or in his absence, LIM TEONG LEONG, to act as its attorney-in-fact/proxy and to vote all
shares as may be registered in the name of the Corporation/lodged with the PCD System,
and to exercise all rights appurtenant thereto during the Annual Stockholders’ Meeting/s
and all regular/special meeting/s of JTH DAVIES HOLDINGS, INC. (formerly JARDINE
DAVIES, INC.);

RESOLVED FURTHER, That these Directors, in the said order of priority, shall have full
power and authority and discretion to nominate, appoint, and/or vote into office such
directors and/or officers during the said Annual Stockholders’ Meeting/s and
regular/special meeting/s of JTH HOLDINGS, INC. (formerly JARDINE DAVIES, INC.);
 RESOLVED FINALLY, That these Directors be, as they are hereby granted full power and
authority whatsoever requisite or necessary or proper to be done in these matters.14

The next day, 27 September 2006, PRCI entered into a Sale and Purchase Agreement for the acquisition
from JME of 41,928,290 common shares or 95.55% of the outstanding capital stock of JTH. Among the
principal terms of the Sale and Purchase Agreement were:

(a) The consideration for the acquisition was ₱10.71 per share or ₱449,250,000.00;

(b) Upon the signing of the [A]greement, the [PRCI] shall pay P20 Million to an Escrow Agent as
deposit; and

(c) The sale and purchase transaction contemplated in the Agreement shall be consummated at a
closing not later than November 30, 2006 or the 50th day from the start of the JTH Offer or such
date which shall in no case be later than December 11, 2006.15

PRCI also made a tender offer for the remaining 4.45% or 1,954,883 issued and outstanding common
shares of JTH at ₱10.71 each.

In the Special Stockholders’ Meeting held on 7 November 2006, attended by stockholders with
481,045,887 shares or 84.42% of the outstanding capital stock of PRCI, the acquisition by PRCI of JTH
was presented for approval. The events during said meeting were duly recorded in the Minutes, to wit:

V. APPROVAL OF THE ACQUISITION OF THE SHARES OF STOCK OF JTH DAVIES HOLDINGS, INC.

Thereafter, the Corporate Secretary informed that the President will present to the stockholders the
rationale for the acquisition of the shares of JTH Davies Holdings, Inc.

According to the President PRCI is intending to acquire up to 100% of the shares of JTH Davies Holdings,
Inc. another listed company in the PSE. For reference, the President informed that the latest Annual
Report of JTH has been appended to the Information Statement for guidance. Also copies of the Board’s
resolution presented for approval and ratification by the stockholders has been posted in the room for
convenient reading of the stockholders.

The President explained that JTH is one of the oldest holdings company and the name JTH Davies is an
internationally acclaimed name with a reputation for solid and sound financial standing. With PRCI’s
acquisition of JTH, it gives PRCI the necessary vehicle within which to enlarge and broaden the business
and operational alternatives or options of our company. PRCI believes that this JTH will complement the
direction of PRCI in fast tracking the development of PRCI’s plans and provide it investment
opportunities. It is for this reason that we call this special meeting so you may know soonest the present
opportunity faced by PRCI without need for you to wait until next year’s annual meeting.

The Vice-Chairman then informed that the resolution approving the purchase of JTH Davies Holdings, Inc.
as presented in the Information Statement which were furnished to the stockholders is presented for
approval to the body. A stockholder thereafter moved that the the (sic) resolution be approved which
was duly seconded by another stockholder. The Vice-Chairman declared the resolution approved.
Thereafter, Atty. Pagunsan took the floor and informed that he is the proxy of various stockholders (10%)
and would like to manifest his vote as "NO" which the Vice-Chairman duly noted. Notwithstanding the
objection of Atty. Pagunsan, considering the more than 2/3 of the outstanding capital stock of PRCI has
approved and ratified the resolution, (74%) the Corporate Secretary declared the resolution as duly
approved and ratified.

Thereafter, another stockholder, Mr. Ngo, asked the President what are the plans of PRCI on the assets of
JTH. The President informed that as of now, JTH has no material hard assets other than its retained
earnings. Mr. Ngo asked again what will be the direction of PRCI on the substantial retained earnings of
JTH to which the President replied that there are several options being considered once the purchase is
complete one of which is the declaration of cash dividend.

Another stockholder took the floor and informed the Management that he is happy with the transaction
of PRCI and the purchase by PRCI of the JTH shares is a good deal since the value of the goodwill of JTH is
substantial by his estimate. He proceeded to thank the President and shook hands with him.16

By 22 November 2006, PRCI was able to additionally acquire 1,160,137 common shares of JTH from the
minority stockholders of the latter, giving PRCI ownership of 98.19% of the outstanding capital stock of
JTH.

PRCI prepared consolidated financial statements for itself and for JTH for the fiscal year ending 31
December 2006. The financial statements were audited by the accounting firm Punongbayan & Araullo
which gave the following unqualified opinion of the same: "In our opinion, based on our audit and the
report of other auditors, the consolidated financial statements present fairly, in all material respects, the
consolidated financial position of the Philippine Racing Club, Inc. and Subsidiary as of December 31,
2006, and their consolidated financial performance and their cash flows for the year then ended in
accordance with Philippine Financial Reporting Standards." The audited financial statements of PRCI and
JTH for 2006 were presented to the stockholders of PRCI and submitted to the Securities and Exchange
Commission (SEC), the Bureau of Internal Revenue (BIR), and the Philippine Stock Exchange (PSE).

Thereafter, PRCI again engaged the assistance of SGV in executing its intended spin-off to JTH of the
management and development of PRCI’s Makati property. It was then determined that the Makati
property, with a total zonal value of ₱3,817,242,000.00, could be transferred to JTH in exchange for the
unissued portion of the latter’s recently increase authorized capital stock,17 amounting to
₱397,908,894.50, divided into 795,817,789 shares with a par value of ₱0.50 per share. The difference of
₱3,419,333,105.50 between the total zonal value of the Makati property and the aggregate par value of
the JTH shares to be issued in exchange for the same, would be reflected as additional paid-in capital of
PRCI in JTH.

The matter of the proposed exchange was taken up and approved by the PRCI Board of Directors in its
meeting held on 11 May 2007, again with the lone dissent of respondent Dulay. According to the Minutes
of the said meeting, the following occurred:

A. Exchange of the Corporation’s Makati Property with Shares of JTH Davies Holdings, Inc.

President Cua reported on certain essential matters regarding the Corporation’s Makati Property. After
doing so, President Cua proposed the exchange of this Property with shares of JTH Davies Holdings, Inc.
He then presented to the Board financial facts and figures heavily favoring the transaction.
After due discussion and deliberation, all the Directors present approved and passed the following
resolution, except Director Brigido Dulay who registered a negative vote:

RESOLVED, That the Corporation hereby approves and authorizes the exchange of its Makati property
with shares of JTH Davies Holdings, Inc.;

RESOLVED FURTHER, That, for this purpose, the Corporation hereby authorizes its Executive Committee
to determine and approve the terms and conditions governing the exchange as it shall consider for the
best interest of the Corporation subject to approval by the stockholders in compliance with the
Corporation Code;

RESOLVED FURTHER, That the Executive Committee, be, as it is hereby granted full power and authority
whatsoever requisite or necessary or proper to accomplish these;

RESOLVED FINALLY, That SOLOMON CUA, President & CEO, be, as he is hereby authorized to negotiate
with JTH Davies Holdings, Inc. and to execute, sign, and/or deliver any and all documents covering the
exchange in accordance with the terms and conditions of the Executive Committee.18

Subsequently, the Annual Stockholders’ Meeting of PRCI was scheduled on 17 July 2007, the Agenda for
which is reproduced below:

I. Call to Order;

II. Proof of Notice;

III. Certification of Quorum;

IV. Approval of the Minutes of the Annual Stockholders’ Meeting held last June 19, 2006 and of the
Special Stockholders’ Meeting held last November 7, 2006;

V. Report of the President;

VI. Approval of the Audited Financial Statement for the year ended December 31, 2006;

VII. Approval and Ratification of the acts of the Board of Directors, the Executive Committee and
the Management of the Corporation for the Fiscal Year 2006;

VIII. Approval of the Planned Exchange of PRCI’s Makati property for shares of stock;

IX. Approval of the Amendments of the By-Laws to conform with the Manual of Corporate
Governance;

X. Election of the members of the Board of Directors;

XI. Appointment of Independent External Auditors;

XII. Other Matters;

 XIII. Adjournment.19

The 11 May 2007 Resolution of the PRCI Board of Directors on the property-for-shares exchange
between PRCI and JTH was supposed to be presented for approval by the stockholders under the afore-
quoted Items No. VII and No. VIII of the Agenda.

However, on 10 July 2007, respondents Miguel, et al., as minority stockholders of PRCI, with the following
shareholdings:

Stockholder No. of Shares Percentage

Miguel Ocampo-Tan 16,380,000 2.87
Jemie U. Tan 15,972,720 2.80
Atty. Brigido J. 1 0.00
Dulay20
Total 32,352,721 5.67

filed before the RTC a Complaint, denominated as a Derivative Suit with prayer for Issuance of
TRO/Preliminary Injunction, against the rest of the directors of PRCI and/or JTH. The Complaint was
docketed as Civil Case No. 07-610.

The Complaint was based on three causes of action: (1) the approval by the majority directors of PRCI of
the Board Resolutions dated 26 September 2006 and 11 May 2007 -- with undue haste and deliberate
speed, despite the absence of any disclosure and information -- was not only anomalous and fraudulent,
but also extremely prejudicial and inimical to interest of PRCI, committed in violation of their fiduciary
duty as directors of the said corporation; (2) respondent Solomon, as PRCI President, with the
acquiescence of the majority directors of PRCI, maliciously refused and resisted the request of
respondents Miguel, et al., for complete and adequate information relative to the disputed Board
Resolutions, brazenly and unlawfully violating the rights of the minority stockholders to information and
to inspect corporate books and records; and (3) without being officially and formally nominated, the
majority directors of PRCI illegally and unlawfully constituted themselves as members of the Board of
Directors and/or Executive Officers of JTH, rendering all the actions they have taken as such null and void
ab initio. In the end, respondents Miguel, et al., prayed to the RTC, after notice and hearing, that:

1. A temporary restraining order and/or writ of preliminary injunction be issued restraining and
enjoining the holding of the Annual Stockholders’ Meeting scheduled on 17 July 2007 and
restraining and enjoining the defendants [PRCI directors] from enforcing, implementing,
"railroading", or taking any further action in reliance upon or in substitution or in furtherance of
the Disputed Resolutions, which would inflict grave and irreparable injury in fraud of the
Corporation.

2. A receiver and/or management committee be constituted and appointed to undertake the

management and operations of the Corporation and to take over its assets to prevent its further
loss, wastage and dissipation.

3. To compel the defendant Majority Directors to render a complete and adequate disclosure of all
documents and information relating to the subject matter of the Disputed Resolutions as well as
 the business and affairs of the Corporation and its wholly-owned subsidiary from the time of the
latter’s acquisition until final judgment.

4. After trial on the merits, that judgment be rendered in favor of the plaintiffs and against the
defendants, as follows:

(a) Permanently enjoining and prohibiting defendants from enforcing, implementing, or

taking any action in reliance upon the Disputed Resolutions.

(b) Declaring the Disputed Resolutions dated 26 September 2006 and 11 May 2007 and the
approval by the Executive Committee of the exchange of the Corporation’s Makati Property
for JTH shares, as well as any and all actions taken in reliance upon or pursuant to or in
furtherance of the Disputed Resolutions and/or approval of the Executive Committee, as
null and void ab initio.

(c) Declaring the assumption by defendant Majority Directors as Directors and/or officers
of JTH, including all acts done by defendant Majority Directors as such Directors and/or
officers of JTH, as null and void ab initio.

(d) Ordering defendants to pay plaintiffs the sum of ₱500,000.00, and by way of attorney’s
fees, plus ₱10,000.00 per court appearance, plus costs of suit.

Other reliefs just and equitable under the premises are likewise prayed for.21

After conducting hearings on the prayer for the issuance of a TRO, RTC Judge Untalan issued a Resolution
on 16 July 2007, the dispositive portion of which reads:

WHEREFORE, premises considered, this court hereby partially grants the prayer of PRCI for the issuance
of Temporary Restraining Order upon the herein defendants subject to the posting of Php100,000.00
bond on condition that such bond shall answer to any damage that the Defendants may sustain by reason
of this TRO if the court should finally decide that the applicants are not entitled thereto. This TRO shall be
effective for TWENTY (20) DAYS only from service of the same upon the Defendants after posting of the
bond.

Therefore, the Defendants, their agents, proxies and representatives are hereby enjoined, prohibited and
forbidden to present to, discuss, much more to approve the same, at the 2007 Annual Stockholders’
Meeting of PRCI to be held on July 17, 2007 at 8:00 A.M. at the VIP Room, Santa Ana Park, A.P. Reyes Ave.,
Makati City, the following Agenda included in the Notice of said stockholders’ meeting:

1. Agenda Roman No. IV – Approval of the Minutes of the Annual Stockholders’ Meeting held last
June 19, 2006 and the Special Stockholders’ meeting held last November 7, 2006.

2. Agenda Roman No. VII – Approval and Ratification of the acts of the Board of Directors, the
Executive Committee and the Management of the Corporation for the Fiscal Year 2006.

3. Agenda Roman No. VIII – Approval of the Planned Exchange of PRCI’s Makati property for
shares of stock.
Thus, in order that these subject matters and items of the Agenda of the aforesaid Stockholders’ Meeting
shall not be taken up, the herein Defendants, their agents, proxies and representatives, jointly and
severally, are hereby ordered to delete and remove from the Agenda said three (3) above stated items of
the Agenda before the start and conduct of the said stockholders’ meeting. Therefore, in case herein
Defendants, their agents, proxies and representatives defy and disobey this mandate, they have
committed already four (4) distinct contemptuous acts: delete, present, discuss and approve.

This Court appealed to the Corporate Secretary as Officer of the Court, to please make sure that this
mandate is obeyed and observed by the Defendants, their agents, proxies and representatives, before and
during the conduct of said stockholders’ meeting.

Let the hearing of the main injunction be set on July 23 and 24, 2007 and August 2, 2007, all at two
o’clock in the afternoon.22

The Annual Stockholders’ Meeting of PRCI scheduled the next day, 17 July 2007, failed to push through
for lack of quorum.

On 19 July 2007, petitioners Santiago Jr., et al., as PRCI directors filed a Petition for Certiorari with the
Court of Appeals, docketed as CA-G.R. SP No. 99769. On 20 July 2007, Santiago Sr., also as PRCI director,
filed his own Petition for Certiorari and Prohibition, docketed as CA-G.R. SP No. 99780. Both Petitions
assailed the RTC Resolution dated 16 July 2007, granting the issuance of a TRO, for being rendered with
grave abuse of discretion amounting to lack or excess of jurisdiction. CA-G.R. SP No. 99769 and No. 99780
were subsequently consolidated.

The Court of Appeals promulgated its Decision on 6 September 2007 dismissing the Petitions in CA-G.R.
SP No. 99769 and No. 99780 for lack of merit, mootness, and prematurity.

According to the Court of Appeals, the TRO issued by the RTC enjoined the presentation, discussion, and
approval of only three of the 13 items on the Agenda of the 2007 Annual Stockholders’ Meeting. There is
no evidence that the TRO issued by the RTC legally impaired the holding of the scheduled stockholders’
meeting. Indeed, the lack of quorum during the said meeting was due to the absence of petitioners
themselves who comprised the majority interest in PRCI. Consequently, the appellate court found no
grave abuse of discretion in the issuance by the RTC of the TRO.

The Court of Appeals also noted that the Petitions in CA-G.R. SP No. 99769 and No. 99780 as regards the
issuance of the TRO already became moot when the 20-day period of effectivity of said restraining order
expired on 5 August 2007, even before the Petitions were submitted for resolution.

Lastly, the Court of Appeals held that the issues raised by petitioners were factual and evidentiary in
nature which must be threshed out before the RTC as the designated commercial court in Makati. The
appellate court would not interfere with the proceedings a quo considering that Civil Case No. 07-610
had not yet gone to trial and had not yet been resolved or terminated by the RTC. Therefore, for being
premature, the Court of Appeals could not prohibit the continuance of the RTC proceedings in Civil Case
No. 07-610.

The Court of Appeals ruled that there was no reason to dismiss the Complaint in Civil Case No. 07-610.
Although the Complaint contained mere allegations, which had yet to be supported by evidence, it was
sufficient in form and substance, and the RTC properly took cognizance of the same. The Court of Appeals
reasoned that:

Rule 8, Section 1 of the Interim Rules of Procedure for Intra-Corporate Controversies (Interim Rules)
provides:

"SECTION 1. Derivative action. – A stockholder or member may bring an action in the name of a
corporation or association, as the case may be, provided, that:

(1) He was a stockholder or member at the time the acts or transactions subject of the action
occurred and at the time the action was filed;

(2) He exerted all reasonable efforts, and alleges the same with particularity in the complaint, to
exhaust all remedies available under the articles of incorporation, by-laws, laws or rules
governing the corporation or partnership to obtain the relief he desires;

(3) No appraisal rights are available for the act or acts complained of; and

(4) The suit is not a nuisance or harassment suit.

In case of nuisance or harassment suit, the court shall forthwith dismiss the case."

A reading of the Complaint reveals that the same sufficiently alleges the foregoing requirements.
Complainants essentially allege that they are PRCI stockholders, that they have opposed the issuance and
approval of the questioned resolutions during the board stockholders’ (sic) meetings, that prior resort to
intra-corporate remedies are futile, that nevertheless, they have asked for copies of the pertinent
documents pertaining to the questioned transactions which the board has declined to furnish, that they
have instituted the derivative suit in the name of the corporation, that they are questioning the acts of the
majority of the board of directors believing that the herein petitioners have committed a wrong against
the corporation and seeking a nullification of the questioned board resolutions on the ground of wastage
of the corporate assets.

Thus, contrary to petitioners’ averment, the Complaint does state a cause of action.23

Petitioners in CA-G.R. SP No. 99769 and No. 99780 filed their respective Motions for Reconsideration of
the foregoing Decision of the Court of Appeals.

In the meantime, upon the expiration of the TRO issued by RTC Judge Untalan in Civil Case No. 07-610,
the Annual Stockholders’ Meeting of PRCI was again scheduled on 10 October 2007. However, Judge
Untalan issued on 8 October 2007 a Resolution with the following decree:

WHEREFORE, premises considered, this court hereby GRANTS the issuance of PERMANENT INJUNCTION
against the defendants until the instant case is finally resolved, subject to the posting by plaintiffs of a
Php 100,000.00 bond, on condition that such bond shall answer to any damage that the Defendants may
sustain by reason of this injunction if the court should finally decide that the applicants are not entitled
thereto. This injunction shall be effective from service of the same upon the Defendants after posting of
the bond.
Therefore, the Defendants, their agents, proxies and representatives are hereby enjoined, prohibited and
forbidden to present to, discuss, much more to approve the same, at any stockholders’ meeting,
whatsoever kind and nature, of PRCI of the following Agenda:

1. Approval of the Minutes of the Annual Stockholders’ Meeting held last June 19, 2006 and the
Special Stockholders’ meeting held last November 7, 2006 of PRCI.

2. Approval and Ratification of the acts of the Board of Directors, the Executive Committee and the
Management of PRCI for the Fiscal Year 2006, as far as the acquisition of JTH and the planned
exchange of PRCI’s Makati property for shares of stock of JTH are concerned.

3. Approval of the Planned Exchange of PRCI’s Makati property for shares of stock of JTH.24

As a result, the Annual Stockholders’ Meeting of PRCI proceeded as scheduled on 10 October 2007
without taking up the matters covered by the permanent injunction issued by the RTC.

Petitioners Santiago Jr., et al. filed in CA-G.R. SP No. 99769 their Motion to Admit Supplemental Petition
for Certiorari with the attached Supplemental Petition for Certiorari;25 and petitioner Santiago Sr. filed in
CA-G.R. SP No. 99780 a Supplemental Petition for Certiorari and Prohibition,26 to be followed shortly
thereafter by a Motion to Admit (Supplemental Petition).27 Petitioners intended to additionally assail in
their Supplemental Petitions the 8 October 2007 Resolution of the RTC granting the issuance of the
permanent injunction.

In its Resolution dated 22 January 2008, the Court of Appeals denied the Motions for Reconsideration of
petitioners and the Motion to Admit Supplemental Petition for Certiorari of petitioners Santiago Jr., et al.

The Court of Appeals found that petitioners’ Motions for Reconsideration merely reiterated the issues
and arguments which were raised in the Petitions and/or which the appellate court already discussed
and passed upon. The Court of Appeals reiterated its ruling that it was premature to prohibit the
continuance of the proceedings in Civil Case No. 07-610 before the RTC; and that the Complaint therein
sufficiently stated a cause of action.

The Court of Appeals likewise refused to admit petitioners’ Supplemental Petitions for Certiorari. It noted
that Santiago Sr. filed his Supplemental Petition without asking for leave to file the same. Apparently, the
appellate court disregarded the Motion to Admit (Supplemental Petition) which petitioner Santiago filed
separately from and at a later date than his Supplemental Petition. In addition, the Court of Appeals
adjudged that the Supplemental Petitions which petitioners hoped to be admitted involved a subject
matter not covered in their original Petitions. Although the TRO and the permanent injunction were both
issued by the RTC in Civil Case No. 07-610, the two issuances were independent of each other, and only
the TRO was the subject of the original Petitions. Hence, the Supplemental Petitions assailing the
permanent injunction granted by the RTC could not be considered as merely augmenting the matters,
issues, and causes of action of the original Petitions; and should be challenged in a separate petition for
certiorari.

Failing to obtain any relief from the Court of Appeals, petitioners turned to this Court.

Petitioners Santiago Jr., et al., filed a Petition for Review on Certiorari under Rule 45 of the Rules of Court,
docketed as G.R. No. 181455-56; while petitioner Santiago Sr. filed a Petition for Certiorari under Rule 65
of the Rules of Court, docketed as G.R. No. 182008. According to petitioners, the appellate court
committed reversible errors of law and grave abuse of discretion in its Decision dated 6 September 2007
and Resolution dated 22 January 2008 in CA-G.R. SP No. 99769 and No. 99780.

Petitioners insisted that Civil Case No. 07-610 pending before the RTC did not constitute a valid
derivative suit. Respondents Miguel, et al., failed to allege in their Complaint that they had no appraisal
rights for the acts they were complaining of. In fact, the very allegations made by respondents Miguel, et
al. in their Complaint supported the availability of appraisal rights to them. The Complaint in Civil Case
No. 07-610 was nothing more than a nuisance or harassment suit against petitioners and the other PRCI
directors.

Petitioners averred that, by finding no grave abuse of discretion on the part of the RTC in issuing the TRO
against petitioners and the other PRCI directors, the Court of Appeals substituted its own judgment for
that of the PRCI Board of Directors, arbitrarily and capriciously disregarding the business judgment made
by the said Board and approved by PRCI stockholders. The TRO issued by the RTC was not for the benefit
of the PRCI stockholders. Furthermore, the expiration of the 20-day TRO did not make their Petitions for
Certiorari in CA-GR SP No. 99769 and No. 99780 moot. Said Petitions included the prayer that the RTC be
restrained from proceeding with Civil Case No. 07-610 in view of the fatally defective Complaint, the
grant or denial of which the appellate court should have still determined despite the expiration of the
TRO.

Petitioners also challenged the refusal by the Court of Appeals to admit their Supplemental Petitions in
CA-GR SP No. 99769 and No. 99780. They asserted that the issues in their Supplemental Petitions were
closely intertwined with those in their original Petitions.

The prayer of petitioners Santiago Jr., et al., in their Petition in G.R. No. 181455-56 reads:

PRAYER

WHEREFORE, in view of the foregoing and in the interest of justice, it is most respectfully prayed of the
Honorable Supreme Court that:

A. The Decision of the Court of Appeals dated 06 September 2007 (Annex "I") and the Resolution
of the Court of Appeals dated 22 January 2008 (Annex "M") be NULLIFIED, REVERSED and SET
ASIDE for having been issued on the basis of reversible error of law and with grave abuse of
discretion amounting to lack of jurisdiction.

B. The Resolutions of Judge Cesar Untalan of Makati Regional Trial Court, Branch 149 dated 16 July
2007 (Annex "F") and 08 October 2007 (Annex "G") be accordingly NULLIFIED, REVERSED and
SET ASIDE for having been issued with grave abuse of discretion amounting to lack of jurisdiction.

C. The complaint of Respondents be DISMISSED outright for lack of jurisdiction and cause of
action.

D. Such further reliefs just and equitable under the circumstances be GRANTED.28

Petitioners Santiago Jr., et al., subsequently filed in G.R. No. 181455-56 an Urgent Motion for Issuance of a
Temporary Restraining Order (Status Quo Ante) and/or Writ of Preliminary Injunction, in which they
additionally asked the Court that "a Temporary Restraining Order (Status Quo Ante) and/or Writ of
Preliminary Injunction be immediately issued restraining the implementation (sic) Judge Cesar Untalan’s
Resolutions dated 16 July 2007 and 08 October 2007 so as not to render inutile this Most Honorable
Court’s exercise of jurisdiction over this action and to prevent the decision on this case from being
rendered ineffectual and academic."29

Meanwhile, petitioner Santiago Sr. sought the following reliefs from this Court in his Petition in G.R. No.
182008:

PRAYER

WHEREFORE, premises considered, it is respectfully prayed that the petition be given due course, and
that:

1. Upon the filing of this petition, a temporary restraining order and/or writ of preliminary
injunction be immediately issued restraining and enjoining the enforcement or execution of the
assailed Court of Appeals’ Decision and Resolution, and the assailed trial court’s resolutions,
particularly that which mandates the continued enforcement of the Writ of PERMANENT
Injunction issued by the trial, which prevents the stockholders of the corporation from acting on
matters that have to be submitted to them for approval and/ratification at the regular annual
stockholders’ meetings.

2. Thereafter, a writ of prohibition be issued and/or the preliminary injunction be made

permanent and continuing, during the pendency of the instant case before the Honorable court.

3. After due hearing, that the Honorable Court:

(a) Declare null and void the Honorable Court of Appeals’ 06 September 2007 Decision and
22 January 2008 Resolution, in CA-G.R. SP No. 99780, as well as the Trial Court’s 16 July
2007 and 8 October 2007 Resolutions in Civil Case No. 07-610 of the Makati Regional Trial
Court, and

(b) Order the dismissal of the Complaint filed by the private respondents against petitioner,
et al., docketed as Civil Case No. 07-610 of the RTC of Makati City.

Other reliefs just and equitable in the premises are likewise prayed for. 30

In a Resolution dated 9 April 2008 in G.R. No. 182008, the Court granted petitioner Santiago Sr.’s prayer
for the issuance of a TRO, to wit:

Acting on the prayer for the issuance of a temporary restraining order and/or a writ of preliminary
injunction dated 24 March 2008, the Court likewise resolves to ISSUE a TEMPORARY RESTRAINING
ORDER enjoining respondents from enforcing or executing the assailed Court of Appeals’ decision and
resolution and the assailed trial court’s resolutions particularly that which mandates the continued
enforcement of the writ of permanent injunction issued by the trial court, until further orders from this
Court, and to require petitioner to POST a CASH BOND or a SURETY BOND from a reputable bonding
company of indubitable solvency with terms and conditions acceptable to the Court, in the amount of
TWO HUNDRED THOUSAND PESOS (P200,000.00), within five (5) days from notice, otherwise, the
temporary restraining order herein issued shall automatically be lifted. Unless and until the Court directs
otherwise, the bond shall be effective from its approval by the Court until this case is finally decided,
resolved or terminated.31

Accordingly, the Court issued the TRO32 on even date, directed against the respondents of G.R. No.
182008, namely, respondents Miguel, et al., and Judge Untalan.

On 21 April 2008, respondents Miguel, et al. filed with the Court their Comment with Prayer for the
Immediate Lifting or Dissolution of the Temporary Restraining Order in G.R. No. 182008.

Respondents Miguel, et al., argued that the Petition for Certiorari in G.R. No. 182008 was dismissible due
to several procedural errors. Petitioner Solomon, who signed the Petition in G.R. No. 182008 on behalf of
Santiago Sr., was guilty of forum shopping for failing to inform the Court of the Petition for Review in G.R.
No. 181455-56, of which he was one of the petitioners. Both Petitions involved the same transactions,
essential facts, and circumstances, as well as identical causes of action, subject matter, and issues. The
Petition for Certiorari in G.R. No. 182008 was also not personally verified by petitioner Santiago Sr. as
required by rules and jurisprudence. Moreover, the Petition for Certiorari was not a proper remedy, since
it was only proper when there was no other plain, speedy, and adequate remedy in the ordinary course of
law. Petitioner Cua himself admitted the availability of other remedies, except that he was "avoiding the
tortuous manner offered by other remedies." In fact, petitioners Santiago Jr., et al., filed a Petition for
Review in G.R. No. 181455-56. Lastly, errors of judgment could not be remedied by a Petition for
Certiorari. Petitioner Santiago Sr.’s Petition in G.R. No. 182008 raised issues that were factual and
evidentiary in nature, on which the RTC has yet to make finding.

On substantial grounds, respondents Miguel, et al., explained that their Complaint in Civil Case No. 07-610
was comprised of several causes of action. It was not merely a derivative suit, but was also an intra-
corporate action arising from devices or schemes employed by the PRCI Board of Directors amounting to
fraud or misrepresentation and were detrimental to the interest of the PRCI stockholders. Additionally,
the fraudulent acts and breach of fiduciary duties by the PRCI directors had already been established by
prima facie factual evidence, which warranted the continuation of the proceedings in Civil Case No. 07-
610 before the RTC for adjudication on the merits. It was also established that there were no appraisal
rights available for the acts complained of, since (1) the PRCI directors were being charged with
mismanagement, misrepresentation, fraud, and breach of fiduciary duties, which were not subject to
appraisal rights; (2) appraisal rights would only obtain for acts of the Board of Directors in good faith;
and (3) appraisal rights may be exercised by a stockholder who had voted against the proposed
corporate action, and no corporate action had yet been taken herein by PRCI stockholders, who still had
not voted on the intended property-for-shares exchange between PRCI and JTH. Furthermore, the Court
of Appeals correctly denied admission of the Supplemental Petitions in CA-GR SP No. 99769 and No.
99780. A new and independent cause of action could not be set by supplemental complaint. The issues
raised in the original Petitions pertain to the grave abuse of discretion committed by the RTC in issuing
the TRO and in taking cognizance of Civil Case No. 07-610, by setting the same for hearing on the main
injunction; in contrast, the issues in the Supplemental Petitions referred to the issuance of the Writ of
Preliminary Injunction.

In support of their prayer for the immediate lifting or dissolution of the TRO issued by this Court,
respondents Miguel, et al., contended that:

I
 The Temporary Restraining Order issued by this Honorable Court has impelled herein petitioner
and his co-majority directors to schedule a stockholders’ meeting with the view TO RENDER
MOOT AND ACADEMIC the action and proceedings before the Regional Trial Court of Makati,
Branch 149.

II

The Petitioner herein, having been impleaded as director and fiduciary of PRCI, does NOT stand to
suffer any irreparable injury.

III

To the contrary, it is PRCI who stand to suffer grave and irreparable injury if the TRO is not lifted
and/or dissolved.

IV

The petitioner herein has failed to establish any clear legal right that entitles him to the issuance
of a TRO and/or Writ of preliminary injunction.

The TRO was improperly issued as petitioner has failed to show any extreme urgency to
necessitate the issuance thereof.33

In the end, respondents Miguel, et al., prayed:

PRAYER

WHEREFORE, premises considered, it is respectfully prayed of this Honorable Supreme Court that the
Temporary Restraining Order be LIFTED or DISSOLVED IMMEDIATELY, and that the instant Petition be
DISMISSED.

Other just and equitable reliefs are likewise prayed for.34

Only two days later, on 23 April 2008, respondents Miguel, et al., again urgently moved35 for the lifting
and/or dissolution of the TRO issued by this Court. They informed the Court that the PRCI Board of
Directors passed and approved on 22 April 2008 a Resolution setting the Annual Stockholders’ Meeting
of PRCI on 18 June 2008, including in the proposed Agenda therefor the following items:

(d) Approval of the Minutes of the Special Stockholders’ Meeting held on 7 November 2006, and the
Minutes of the Annual Stockholders’ Meeting held on 10 October 2007;

xxxx

(g) Approval and ratification of the acts of the Board of Directors, the Executive Committee, and
Management of the Corporation for Fiscal Years 2006 and 2007;
(h) Approval of the Planned Exchange of PRCI’s Makati Property for shares of stock of JTH Davies
Holdings, Inc.36

On the same day, 23 April 2008, the Court issued a Resolution37 consolidating G.R. No. 181455-56 and No.
182008.

Thereafter, on 16 June 2008, Aris Prime Resources, Inc. (APRI), a minority stockholder of PRCI – with
5,000,000.00 shares or 0.88% of the outstanding capital stock of PRCI – filed a Very Respectful Motion for
Leave to Intervene as Co-Respondent in the Petition with the attached Very Respectful Urgent Motion to
Lift Restraining Order.38 It relayed to the Court that it received Notice of the Annual Stockholders’
Meeting of PRCI set on 18 June 2008, where the items on the property-for-shares exchange between PRCI
and JTH were included in the Agenda.

Considering that the validity of the acts of the PRCI Board of Directors concerning the property-for-
shares exchange are the very issues raised in the Petitions presently before the Court, while the factual
issues relating to the same are still being litigated before the RTC in Civil Case No. 07-610, the submission
of the exchange to the PRCI stockholders for their approval will render the aforementioned proceedings
before this Court and the RTC moot and academic. It will amount to a denial of the right of APRI and of
respondents Miguel, et al., to be heard before the RTC where they are still to present their evidence on
the factual issues. It will likewise unduly pave the way for the validation of the abuse committed by the
majority directors of PRCI in denying the right of the minority directors and stockholders of the
corporation to information, and for the sanction of the blatant disregard by the majority directors of their
duties of fidelity and transparency. Unless the TRO is lifted forthwith, APRI, respondents Miguel, et al.,
and all other minority stockholders stand to suffer prejudice. Expectedly, petitioners seek the dismissal,
while respondents Miguel, et al., pray for the grant of the motion to intervene of APRI.

Pending action on the foregoing incidents, petitioners Santiago Jr., et al., filed before the Court a
Manifestation and Motion to Set Case for Oral Arguments.39

In their Manifestation, petitioners Santiago Jr., et al., admitted that the PRCI Board of Directors had
already called and set the Annual Stockholders’ Meeting on 18 June 2008, and among the items on the
Agenda for confirmation and approval by the stockholders was the property-for-shares exchange
between PRCI and JTH.

Petitioners Santiago Jr., et al., brought to the attention of the Court the fact that on 5 June 2008, another
set of minority stockholders of PRCI, namely, Jalane Christie U. Tan, Marilou U. Pua, Aristeo G. Puyat, and
Ricardo S. Parreno (Jalane, et al.) filed with the RTC of Makati a Complaint against petitioners and the
other directors of PRCI and/or JTH, docketed as Civil Case No. 08-458. Jalane, et al., have the following
shareholdings in PRCI:

Stockholder No. of Shares Percentage

Jalane Christie U. 16,927,560 2.97
Tan
Marilou U. Pua 3,884,400 0.68
Artisteo G. Puyat 1,633,666 0.29
 Ricardo S. 5,850 0.00
Pareño
Total 22,451,476 3.94

Jalane, et al., claimed in their Complaint in Civil Case No. 08-458 that "[a]part from being a derivative suit,
this suit is also filed based on devices or schemes employed by the Board of Directors amounting to fraud
or misrepresentation which is detrimental to the interest of the corporation, the public and/or
stockholders as provided for under Section 1(a)(1) of the Interim Rules of Procedure for Intra-Corporate
Controversies (A.M. No. 01-2-04-SC)."40 The Complaint was based on four causes of action: (1) the
acquisition of JTH by PRCI; (2) sale of 29.92% of JTH shares by PRCI;41 (3) exchange of the Makati
property of PRCI for JTH shares; and (4) interlocking of Directors of PRCI and JTH. The Complaint of
Jalane, et al., contained the following prayer:

PRAYER

WHEREFORE, it is respectfully prayed of this Honorable Court, after due notice and hearing, that:

1. A Temporary Restraining Order and/or Writ of Preliminary Mandatory Injunction be

issued enjoining the presentation, discussion and ratification of portions of the Agenda of
the Annual Stockholders Meeting of PRCI scheduled on June 18, 2008, particularly items IV,
VII and VIII;

2. An order be issued nullifying the Sale and Purchase Agreement dated September 27,
2006 for the acquisition of JTH Davies Holdings, Inc.

3. An order be issued nullifying the sale of PRCI shares in JTH in April 2007 and May 7,
2007;

[Paragraph crossed-out.]

5. An order be issued directing defendants to pay plaintiffs the sum of ₱500,000.00 as and
by way of attorney’s fees, plus cost of suit.

Other reliefs, just and equitable under the premises are likewise prayed for.42

Acting on the Complaint of Jalane, et al. in Civil Case No. 08-458, Executive Judge Winlove Dumayas
(Executive Judge Dumayas) of the Makati City RTC issued a 72-hour TRO, enjoining PRCI directors from
presenting, discussing, and ratifying the items in the Agenda for the Annual Stockholders’ Meeting set on
18 June 2008 related to the property-for-shares exchange between PRCI and JTH. However, upon being
apprised of the TRO issued by this Court on 9 April 2008 in G.R. No. 182008, in relation to Civil Case No.
07-610 pending before the Makati City RTC, Branch 149, Executive Judge Dumayas gave verbal advice
that the Annual Stockholders’ Meeting of PRCI should proceed on 18 June 2008 as if the 72-hour TRO had
not been issued. Consequently, the Annual Stockholders’ Meeting of PRCI proceeded on 18 June
2008.1avvphi1

The Annual Stockholders’ Meeting of PRCI, held on 18 June 2008, was attended by stockholders with a
total of 493,017,509 shares or 86.52% of the outstanding capital stock of PRCI, more than the necessary
2/3 to constitute a quorum. Discussed in the meeting were the same items, whose presentation to the
stockholders was sought to be enjoined by respondents Miguel, et al., in Civil Case No. 07-610 and by
Jalane, et al., in Civil Case No. 08-458. The actions taken by the stockholders on the controversial items
were duly recorded in the Minutes of the meeting, as follows:

IV. APPROVAL OF THE MINUTES OF THE PREVIOUS STOCKHOLDERS’ MEETINGS

Before the next agenda was tackled in the meeting, a stockholder, Atty. Benjamin Santos asked to be
recognized on the floor. The Chairman gave Atty. Santos permission to speak. Atty. Santos inquired from
the Corporate Secretary if there has already been official notice of service on him regarding a 72-hour
temporary restraining order which was issued by the Executive Judge of the Makati Regional Trial Court
(RTC). The Corporation (sic) Secretary answered in the negative.

For the information of the stockholders present, Atty. Santos mentioned that a case has been filed by
certain minority shareholders, namely, Jalane Christie U. Tan, Marilou U. Pua, Aristeo G. Puyat and
Ricardo S. Parreno, against the Board of Directors of PRCI (Civil Case No. 08-458, Makati RTC), and a 72-
hour TRO was issued on 17 June 2008 "enjoining defendants (directors of PRCI), their representatives,
employees and/or all those acting for and in their behalf to refrain from the presentation, discussion and
ratification of portions of the Agenda of the Annual Stockholders’ Meeting of PRCI scheduled on June 18,
2008 particularly items IV, VII and VIII." x x x.

xxxx

According to Atty. Santos, the TRO enjoins them in their capacity as Directors of PRCI. He further stated
that the attendance of all the directors present in the stockholders’ meeting, is in their capacity as
stockholders of PRCI and not as directors of PRCI. The Chairman is present merely to preside over the
meeting, and the Corporate Secretary is not a member of the Board of Directors. Atty. Santos likewise
informed the stockholders present of the existence of a temporary restraining order issued by the
Supreme Court dated 09 April 2008 (in SC G.R. No. 182008) which "enjoin(ed) respondents from
enforcing or executing the assailed Court of Appeals’ decision and resolution, and the assailed trial court’s
resolutions particularly that which mandates the continued enforcement of the writ of permanent
injunction issued by the trial court, until further orders from this Court." Thereafter, Atty. Santos moved
that Agenda Item IV as well as the rest of the items to be taken up since the TRO of the Makati RTC is
defective and should not prevail over the TRO of the Supreme Court.

Atty. Santos added that the case recently filed by the abovementioned minority shareholders is a
duplicate of another pending case filed by other minority shareholders also in the Makati RTC. It was
pointed out that the shareholders in the recent case are guilty of forum shopping since they primarily
have the same interests as those who had earlier filed a suit against PRCI. Atty. Santos clarified that the
pending case is currently the subject of a Petition to the Supreme Court wherein the aforementioned TRO
was issued. With this Comment, the Corporate Secretary took note of the Petition filed with the Supreme
Court and the TRO issued by the Supreme Court.

xxxx

x x x With all the foregoing comments, Atty. Santos moved that the stockholders proceed with the
meeting and that the item under Agenda IV be approved, which are the following: the Minutes of the
Annual Stockholders’ Meeting held on June 19, 2006, the Minutes of the Special Stockholders’ Meeting
held on November 7, 2006 and the Minutes of the Annual Stockholders’ Meeting held on October 10,
2007.

Thereafter, Atty. Alexander Carandang asked to be given permission to speak. The Chairman asked Atty.
Carandang his name and authority to speak, to which, he answered his name and said he was stockholder
of record and a proxy of Aristeo Puyat and Jose L. Santos. After Atty. Carandang was recognized, he stated
that, contrary to Atty. Santos’ earlier actuations, the recent complaint filed is different from the complaint
earlier filed by the Dulay group. He also mentioned that the case which Puyat earlier filed is different
because it is a case for inspection and photocopying of PRCI documents. He thereafter warned against the
tackling of Agenda Item No. 4.

Atty. Brigido Dulay, as a stockholder and proxy to the Tan group (Miguel Ocampo Tan, Jemie U. Tan, JUT
Holdings, Inc., Jalane Christie U. Tan, etc.) likewise took the floor to manifest his continuing objection to
the proceedings.

Atty. Amado Paolo Dimayuga also took the floor as a proxy to Marilou Pua and manifested that the
complainants in the recent case filed are not guilty of forum shopping and also manifested his objection
to the taking up of Item IV in the agenda and the continuance of the proceedings in the stockholders’
meeting. Atty. Pelagio Ricalde also took the floor as proxy for Aries Prime Resources, Inc. and also
manifested objection to the proceedings. Both Atty. Dimayuga and Atty. Ricalde manifested continuing
objections.

Atty. Dimayuga also mentioned that he received word that a Motion to Lift was just filed by the PRCI
Directors regarding the recent TRO issued by the Makati RTC. As a reply, the Corporate Secretary asked
that the counsel for the PRCI directors be allowed to explain such allegations. Atty. Garbriel Q. Enriquez,
the counsel for PRCI Directors Cua, Cua, Jr., De Villa and Robles informed the stockholders of the wrong
information being given by Atty. Dimayuga. They had filed a manifestation before the Executive Judge of
the RTC which issued the TRO and informed him of the facts mentioned by Atty. Santos. The Executive
Judge said that today’s meeting should proceed because the plaintiffs therein suppressed the existing
TRO in the Supreme Court, and the TRO of the RTC cannot rise above the Supreme Court TRO. There is
therefore no legal obstacle to holding the Annual Stockholders’ Meeting, which should proceed so as not
to prejudice the stockholders.

The Corporate Secretary stated that all the objections are duly noted. There being an earlier motion for
the approval of the Minutes, a stockholder seconded said motion. The motion having been duly seconded,
the Chairman declared all the minutes for approval as duly approved.

xxxx

VI. RATIFICATION OF THE ACTS OF THE BOARD OF DIRECTORS, THE EXECUTIVE COMMITTEE AND THE
MANAGEMENT OF THE CORPORATION FOR FISCAL YEARS 2006 AND 2007

The Chairman then proceeded by stating that the next item on the agenda is the ratification by the
Stockholders of the acts of the Board of Directors, the Executive Committee, and the Management during
the last fiscal years 2006 and 2007. The Chairman then explained that as to all other matters and action
affecting the operations, financial performance and strategic posture of the Corporation, all have been
subsumed and discussed in the Annual Report of the President and likewise reflected in the Information
Statement sent to all stockholders of record and to the SEC.
Once more, Atty. Dulay, Atty. Carandang, Atty. Dimayuga and Atty. Ricalde all took the floor successively
and objected to this item in the agenda and the Corporate Secretary duly noted these objections.

A stockholder later moved that all the acts of the Board of Directors, the Executive Committee, and the
corporate management be confirmed, ratified and approved by the stockholders. The said motion was
duly seconded, thus, the stockholders thereafter approved and ratified all the said acts.

At this juncture, Atty. Dulay requested that the stockholders who moved and seconded the
aforementioned acts be named and their authority to speak be made known. Atty. Carandang likewise
inquired about the same information about a lady stockholder who earlier seconded the motion. With
this, Atty. Jose Miguel Manalo stated his name and said he was a stockholder of record. The other
stockholders stated that they were proxies of Mr. Santiago Cualoping III.

VII. APPROVAL OF THE EXCHANGE OF PRCI’S MAKATI PROPERTY FOR SHARES OF STOCK OF JTH
DAVIES HOLDINGS, INC.

When asked by the Chairman as to the next item in the agenda, the Corporate Secretary informed all
present that the next item is the approval of the exchange of PRCI’s Makati property for shares of stock of
JTH Davies Holdings which was duly approved by the Board of Directors during its 11 May 2007 meeting.
The exchange was duly reported and disclosed to the SEC and the information thereof was included in the
Information Statements mailed to all stockholders of PRCI.

Yet again, Atty. Dulay, Atty. Carandang, Atty. Dimayuga and Atty. Ricalde all took the floor successively
and objected to this item in the agenda which were duly noted by the Corporate Secretary.

The Chairman then called the President of PRCI, Mr. Solomon Cua to officiate on this matter. At this point,
one stockholder moved that the exchange of PRCI’s Makati property for JTH shares be approved by the
stockholders, which was duly seconded by another stockholder. President Cua then asked that the total
percentage of those who are in favor of the exchange be taken. Mr. Santiago Cua, Jr., a stockholder and a
proxy of approximately 31.39% of the shareholdings voted in favor of the exchange. Then, Mr. Lawrence
Lim Swee Lin, representing Magnum Investment Ltd. and Leisure Management Ltd. who own 39.15% of
the shareholdings, also voted in favor of the exchange. Mr. Exequiel D. Robles also voted in favor of the
exchange, as proxy of Sta. Lucia Realty & Development, Inc. owning 4.19% of the shares. Lastly, Atty.
Santos also wanted his vote of approval be counted whi his shares of stock of 117 shares.

With 75.23% of the outstanding capital stock of PRCI voting in favor of the exchange of its Makati
property for shares of stock of JTH Davies, the Chairman then declared said motion as carried and
approved.43

Hence, at their annual meeting on 18 June 2008, the PRCI stockholders had already confirmed and
approved the actions and resolutions of the PRCI Board of Directors, which were to subject matters of
Civil Cases No. 07-610 and No. 08-458. Resultantly, on 7 July 2008, PRCI and JTH duly signed and
executed a Deed of Transfer with Subscription Agreement, covering the exchange of the Makati property
of PRCI for shares of stock of JTH. Paragraph 4 of said Deed expressly provides:

4. The parties understand, acknowledge and agree that this Deed is executed with the intention of
availing of the benefits of Sections 40(C)(2) of the National Internal Revenue Code of 1997 (NIRC), as
amended, where, upon subscription of shares hereunder, the Subscriber shall gain further control of the
Company. The parties obtained a ruling from the Bureau of Internal Revenue to the effect that no gain or
loss will be recognized on the part of each of the parties, pursuant to this Deed, in accordance with
Sections 40(C)(2) of the NIRC, as amended. The ruling confirmed that the transfer of the Subscriber’s
parcels of land to the Company in exchange for the shares of stock of the latter is not subject to income
tax, capital gains tax, donor’s tax, value-added tax and documentary stamp tax, except for documentary
stamp tax on the original issuance of the Company’s shares of stock to the Subscriber. 44(Emphases ours.)

However, in a letter dated 15 July 2008, the BIR reversed/revoked its earlier ruling that the property-for-
shares exchange between PRCI and JTH was a tax-free transaction under Section 40(C)(2) of the National
Internal Revenue Code of 1997; and subjected the exchange to value-added tax. As a result, PRCI and JTH
executed on 22 August 2008 a Disengagement Agreement,45 by virtue of which, effective immediately,
PRCI and JTH would disengaged and would no longer implement the Deed of Transfer with Subscription
Agreement dated 7 July 2008. For all intents and purposes, the said Deed of Transfer with Subscription
Agreement was rescinded. PRCI disclosed the Disengagement Agreement to the SEC on 26 August 2008.

Civil Case No. 08-458 was eventually also assigned to the only commercial court of Makati City, i.e., RTC,
Branch 149, presided over by Judge Untalan. Petitioners Santiago Jr., et al. averred that Judge Untalan
refused to dismiss Civil Case No. 08-458 on the ground of forum shopping, even when it was no different
from Civil Case No. 07-610. They further asserted that Judge Untalan showed evident partiality in favor of
Jalane, et al., during the hearings in Civil Case No. 08-458, openly making hasty conclusions as to certain
marked exhibits and demonstrating his pre-judgment of the case. On 25 September 2008 and 30
September 2008, the PRCI directors filed before the RTC a Motion to Inhibit46 and a Supplemental Motion
to Inhibit,47 respectively, urging Judge Untalan to inhibit himself from Civil Case No. 08-458, since he had
revealed in several instances his utter bias and prejudice against the PRCI directors and admitted his
being a relative by affinity of Atty. Amado Paulo Dimayuga,48 the initial counsel of Jalane, et al. Judge
Untalan has yet to act on such motions.

At the end of their Manifestation, petitioners Santiago Jr., et al., asked that this Court grant them the
following reliefs:

PRAYER

WHEREFORE, it is respectfully prayed that the foregoing Manifestation be noted, and that the First Suit
[Civil Case No. 07-610] as well as the Second Suit [Civil Case No. 08-458] should now be dismissed for
being moot and academic, without need of remand to the trial (sic) Court for further proceedings.

It is further respectfully prayed that should the Honorable Court find it proper and necessary, the instant
cases be set for oral arguments on such date and time as it may deem convenient to its calendar.

Herein petitioners furthermore pray for such other reliefs as may be just and equitable in the premises. 49

Petitioner Santiago Sr. also filed his own Manifestation (To Update the Honorable Court on Relevant
Supervening Proceedings and Incidents) with Motion to Resolve Merits of Petition and of the Case in the
Lower Court (In View of Supervening Proceedings and Incidents),50 essentially recounting the same
events in the Manifestation of petitioners Santiago Jr., et al. The prayer of Santiago Sr. in his Manifestation
and Motion reads:

PRAYER
 WHEREFORE, it is respectfully prayed that the Honorable Court:

1. TAKE COGNIZANCE of the instant Manifestation on relevant supervening proceedings and

incidents in this case, especially and specifically, after the issuance by the Honorable Court on 09
April 2008 of a temporary restraining order, addressed to the Court of Appeals, the presiding
judge of the Regional Trial Court, Branch 149, Makati City, and the private respondents, and their
agents, representatives and/or any person or persons acting upon their orders or in their place of
stead, who are:

"ENJOINED from enforcing or executing the assailed Court of Appeals’ decision and resolution, and
the assailed trial court’s resolutions particularly that which mandates the continued enforcement
of the writ of permanent injunction issued by the trial court, until further orders from this Court."

2. ORDER the dismissal of the complaint below on the ground that the same is not a legitimate and
valid derivative suit.

3. ORDER the dismissal of the complaint below, in any case, on the ground that the issues raised in
the complaint, specifically with respect to the so-called "disputed" resolutions, have been mooted
and/or no longer subsist.

4. ORDER the private respondents to explain why they should not be cited for contempt of court
for violation of the temporary restraining order issued by the Court on 09 April 2008.

5. ORDER the private respondents to explain why they should not be cited for contempt of court
for engaging in forum-shopping.

6. ORDER that the temporary restraining order issued by the Court on 09 April 2008 be made
PERMANENT.

Other reliefs just and equitable in the premises are likewise prayed for. 51

II
ISSUES

The Court identifies the following fundamental issues for its resolution in the Petitions at bar:

(1) Whether the Petition of Santiago Sr. in G.R. No. 180028 should be dismissed for its procedural
infirmities?

(2) Whether Civil Case No. 07-610 instituted by respondents Miguel, et al. before the RTC should
be ordered dismissed?

(3) Whether Civil Case No. 08-458 instituted by Jalane, et al., before the RTC should be ordered
dismissed?

(4) Whether APRI should be allowed to intervene in the instant Petitions?

 III
RULING OF THE COURT

Procedural infirmities of Petition in G.R. No. 180028

Respondents Miguel, et al., call attention to two procedural infirmities of the Petition for Certiorari of
petitioner Santiago Sr. in G.R. No. 180028: (1) the failure to inform the Court of the pendency of the
Petition in G.R. No. 181455-56, thus, violating the rule against forum-shopping; and (2) its being the
wrong mode of appeal.

The Verification and Certification of Non-Forum Shopping attached to the Petition for Certiorari of
petitioner Santiago Sr. in G.R. No. 180028 was actually signed by his attorney-in-fact, Solomon,52 who is
also a petitioner in G.R. No. 181455-56. It contains the following paragraph:

4. In compliance with the 1997 Rules of Civil Procedure, I hereby certify that the petitioner, by himself
personally and/or acting through his attorneys-in fact, has not heretofore commenced any other action
or proceeding involving the same issues in the Supreme Court, the Court of Appeals, or different Divisions
thereof, or any other tribunal or agency, and that to the best of my knowledge, no such action or
proceeding is pending in the Supreme Court, the Court of Appeals, or different Divisions thereof, or any
other tribunal or agency. If I should learn that a similar action or proceeding has been filed or is pending
before the Supreme Court, Court of Appeals, or different Divisions thereof, or any other tribunal or
agency, I undertake to promptly inform this Honorable Court, the aforesaid courts and other tribunal or
agency within five (5) days therefrom.53

Respondents Miguel, et al., maintain that the failure of Solomon, as petitioner Santiago Sr.’s attorney-in-
fact, to inform the Court as regards the pendency of the Petition for Review in G.R. No. 181455-56, of
which Solomon is one of the petitioners, is in violation of the rule against forum-shopping and warrants
the summary dismissal of the Petition in G.R. No. 182008.

Forum shopping is the institution of two or more actions or proceedings grounded on the same cause on
the supposition that one or the other court would make a favorable disposition. It is an act of malpractice
and is prohibited and condemned as trifling with courts and abusing their processes. In determining
whether or not there is forum shopping, what is important is the vexation caused the courts and parties-
litigants by a party who asks different courts and/or administrative bodies to rule on the same or related
causes and/or grant the same or substantially the same reliefs and in the process creates the possibility
of conflicting decisions being rendered by the different bodies upon the same issues.54

Forum shopping is present when, in two or more cases pending, there is identity of (1) parties (2) rights
or causes of action and reliefs prayed for, and (3) the two preceding particulars, such that any judgment
rendered in the other action will, regardless of which party is successful, amount to res judicata in the
action under consideration.55

It is evident that Santiago Sr., the petitioner in G.R. No. 182008, is not a party to G.R. No. 181455-56. Even
though Solomon is admittedly a petitioner in G.R. No. 181455-56, he is only acting in G.R. No. 182008 as
the attorney-in-fact of Santiago Sr., the actual petitioner in the latter case. Thus, the very first element for
forum shopping, identity of parties, is lacking.
Respondents Miguel, et al., cannot insist on identity of interests between petitioner Santiago Sr. in G.R.
No. 182008 and petitioners Santiago Jr., et al., in G.R. No. 181455-56, when the Complaint itself of
respondents Miguel, et al., before the RTC, docketed as Civil Case No. 07-610, impleads the petitioners
Santiago Sr. and Santiago Jr., et al., as defendants a quo in their individual capacities as PRCI directors,
and not collectively as the PRCI Board of Directors. Each individual PRCI director, therefore, is not
precluded from hiring his own counsel, presenting his own arguments and defenses, and resorting to his
own procedural remedies, apart and independent from the other PRCI directors. In addition, the
consolidation of G.R. No. 181455-56 and G.R. No. 182008 has already eliminated the danger of conflicting
decisions being issued in said cases.

Assuming arguendo that Solomon did have the legal obligation to inform the Court in G.R. No. 182008 of
the pendency of G.R. No. 181455-56, his failure to do so does not necessarily result in the dismissal of the
former. Although the submission of a certificate against forum shopping is deemed obligatory, it is not
jurisdictional.56Hence, in this case in which such a certification was in fact submitted – only, it was
defective -- the Court may still refuse to dismiss and may, instead, give due course to the Petition in light
of attendant exceptional circumstances.57

Santiago Sr. committed another procedural faux pas by filing before this Court a Petition for Certiorari
under Rule 65 of the Rules of Court to assail the Decision dated 6 September 2007 and Resolution dated
22 January 2008 of the Court of Appeals in CA-G.R. SP No. 99769 and No. 99780.

The proper remedy of a party aggrieved by a decision of the Court of Appeals is a petition for review
under Rule 45, which is not similar to a petition for certiorari under Rule 65 of the Rules of Court. As
provided in Rule 45 of the Rules of Court, decisions, final orders or resolutions of the Court of Appeals in
any case, i.e., regardless of the nature of the action or proceedings involved, may be appealed to this Court
by filing a petition for review, which would be but a continuation of the appellate process over the
original case. On the other hand, a special civil action under Rule 65 is an independent action based on
the specific grounds therein provided and, as a general rule, cannot be availed of as a substitute for the
lost remedy of an ordinary appeal, including that under Rule 45.58

Accordingly, when a party adopts an improper remedy, as in this case, his Petition may be dismissed
outright. However, in the interest of substantial justice, the strict application of procedural technicalities
should not hinder the speedy disposition of this case on the merits. Thus, while the instant Petition is one
for certiorari under Rule 65 of the Rules of Court, the assigned errors are more properly addressed in a
petition for review under Rule 45.59

The merits of the Petitions in both G.R. No. 181455-56 and No. 182008 compel this Court to give more
weight to substantive justice, instead of technical rules. Indeed, where, as here, there is a strong showing
that a grave miscarriage of justice would result from the strict application of the Rules, the Court will not
hesitate to relax the same in the interest of substantial justice. It bears stressing that the rules of
procedure are merely tools designed to facilitate the attainment of justice. They were conceived and
promulgated to effectively aid the court in the dispensation of justice. Courts are not slaves to or robots of
technical rules, shorn of judicial discretion. In rendering justice, courts have always been, as they ought to
be, conscientiously guided by the norm that, on the balance, technicalities take a backseat against
substantive rights, and not the other way around. Thus, if the application of the Rules would tend to
frustrate rather than promote justice, it is always within the power of the Court to suspend the Rules, or
except a particular case from its operation.60
Derivative suits, in general

A corporation, such as PRCI, is but an association of individuals, allowed to transact under an assumed
corporate name, and with a distinct legal personality. In organizing itself as a collective body, it waives no
constitutional immunities and perquisites appropriate to such body. As to its corporate and management
decisions, therefore, the State will generally not interfere with the same. Questions of policy and of
management are left to the honest decision of the officers and directors of a corporation, and the courts
are without authority to substitute their judgment for the judgment of the board of directors. The board
is the business manager of the corporation, and so long as it acts in good faith, its orders are not
reviewable by the courts.61

The governing body of a corporation is its board of directors. Section 23 of the Corporation Code provides
that "[u]nless otherwise provided in this Code, the corporate powers of all corporations formed under
this Code shall be exercised, all business conducted and all property of such corporations controlled and
held by the board of directors or trustees x x x." The concentration in the board of the powers of control
of corporate business and of appointment of corporate officers and managers is necessary for efficiency
in any large organization. Stockholders are too numerous, scattered and unfamiliar with the business of a
corporation to conduct its business directly. And so the plan of corporate organization is for the
stockholders to choose the directors who shall control and supervise the conduct of corporate business.62

The following discourse on the corporate powers of the board of directors under Section 23 of the
Corporation Code establishes the extent thereof:

Under the above provision, it is quite clear that, except in the instances where the Code expressly grants a
specific power to the stockholders or member, the board has the sole power and responsibility to decide
whether a corporation should sue, purchase and sell property, enter into any contract, or perform any
act. Stockholders’ or members’ resolutions dealing with matters other than the exceptions are not legally
effective nor binding on the board, and may be treated by it as merely advisory, or may even be
completely disregarded. Since the law has vested the responsibility of managing the corporate affairs on
the board, the stockholders must abide by its decisions. If they do not agree with the policies of the board,
their remedy is to wait for the next election of the directors and choose new ones to take their place. The
theory of the law is that although stockholders are to have all the profit, the complete management of the
enterprise shall be with the board.63

The board of directors of a corporation is a creation of the stockholders. The board of directors, or the
majority thereof, controls and directs the affairs of the corporation; but in drawing to itself the power of
the corporation, it occupies a position of trusteeship in relation to the minority of the stock. The board
shall exercise good faith, care, and diligence in the administration of the affairs of the corporation, and
protect not only the interest of the majority but also that of the minority of the stock. Where the majority
of the board of directors wastes or dissipates the funds of the corporation or fraudulently disposes of its
properties, or performs ultra vires acts, the court, in the exercise of its equity jurisdiction, and upon
showing that intracorporate remedy is unavailing, will entertain a suit filed by the minority members of
the board of directors, for and in behalf of the corporation, to prevent waste and dissipation and the
commission of illegal acts and otherwise redress the injuries of the minority stockholders against the
wrongdoing of the majority. The action in such a case is said to be brought derivatively in behalf of the
corporation to protect the rights of the minority stockholders thereof.64
It is well settled in this jurisdiction that where corporate directors are guilty of a breach of trust — not of
mere error of judgment or abuse of discretion — and intracorporate remedy is futile or useless, a
stockholder may institute a suit in behalf of himself and other stockholders and for the benefit of the
corporation, to bring about a redress of the wrong inflicted directly upon the corporation and indirectly
upon the stockholders.65

A derivative suit must be differentiated from individual and representative or class suits, thus:

Suits by stockholders or members of a corporation based on wrongful or fraudulent acts of directors or

other persons may be classified into individual suits, class suits, and derivative suits. Where a stockholder
or member is denied the right of inspection, his suit would be individual because the wrong is done to
him personally and not to the other stockholders or the corporation. Where the wrong is done to a group
of stockholders, as where preferred stockholders’ rights are violated, a class or representative suit will be
proper for the protection of all stockholders belonging to the same group. But where the acts complained
of constitute a wrong to the corporation itself, the cause of action belongs to the corporation and not to
the individual stockholder or member. Although in most every case of wrong to the corporation, each
stockholder is necessarily affected because the value of his interest therein would be impaired, this fact of
itself is not sufficient to give him an individual cause of action since the corporation is a person distinct
and separate from him, and can and should itself sue the wrongdoer. Otherwise, not only would the
theory of separate entity be violated, but there would be multiplicity of suits as well as a violation of the
priority rights of creditors. Furthermore, there is the difficulty of determining the amount of damages
that should be paid to each individual stockholder.

However, in cases of mismanagement where the wrongful acts are committed by the directors or trustees
themselves, a stockholder or member may find that he has no redress because the former are vested by
law with the right to decide whether or not the corporation should sue, and they will never be willing to
sue themselves. The corporation would thus be helpless to seek remedy. Because of the frequent
occurrence of such a situation, the common law gradually recognized the right of a stockholder to sue on
behalf of a corporation in what eventually became known as a "derivative suit." It has been proven to be
an effective remedy of the minority against the abuses of management. Thus, an individual stockholder is
permitted to institute a derivative suit on behalf of the corporation wherein he holds stock in order to
protect or vindicate corporate rights, whenever officials of the corporation refuse to sue or are the ones
to be sued or hold the control of the corporation. In such actions, the suing stockholder is regarded as the
nominal party, with the corporation as the party in interest.66

The afore-quoted exposition is relevant considering the claim of respondents Miguel, et al., that its
Complaint in Civil Case No. 07-610 is not just a derivative suit, but also an intracorporate action arising
from devices or schemes employed by the PRCI Board of Directors amounting to fraud or
misrepresentation.67 A thorough study of the said Complaint, however, reveals that the distinction is
deceptive. The supposed devices and schemes employed by the PRCI Board of Directors amounting to
fraud or misrepresentation are the very same bases for the derivative suit. They are the very same acts of
the PRCI Board of Directors that have supposedly caused injury to the corporation. From the very
beginning of their Complaint, respondents have alleged that they are filing the same "as shareholders, for
and in behalf of the Corporation, in order to redress the wrongs committed against the Corporation and
to protect or vindicate corporate rights, and to prevent wastage and dissipation of corporate funds and
assets and the further commission of illegal acts by the Board of Directors." Although respondents Miguel,
et al., also aver that they are seeking "redress for the injuries of the minority stockholders against the
wrongdoings of the majority," the rest of the Complaint does not bear this out, and is utterly lacking any
allegation of injury personal to them or a certain class of stockholders to which they belong.68

Indeed, the Court notes American jurisprudence to the effect that a derivative suit, on one hand, and
individual and class suits, on the other, are mutually exclusive, viz:

As the Supreme Court has explained: "A shareholder's derivative suit seeks to recover for the benefit of
the corporation and its whole body of shareholders when injury is caused to the corporation that may not
otherwise be redressed because of failure of the corporation to act. Thus, ‘the action is derivative, i.e., in
the corporate right, if the gravamen of the complaint is injury to the corporation, or to the whole body of
its stock and property without any severance or distribution among individual holders, or it seeks to
recover assets for the corporation or to prevent the dissipation of its assets.’ [Citations.]" (Jones, supra, 1
Cal.3d 93, 106, 81 Cal.Rptr. 592, 460 P.2d 464.) In contrast, "a direct action [is one] filed by the
shareholder individually (or on behalf of a class of shareholders to which he or she belongs) for injury to
his or her interest as a shareholder. ... [¶] ... [T]he two actions are mutually exclusive: i.e., the right of
action and recovery belongs to either the shareholders (direct action) *651 or the corporation (derivative
action)." (Friedman, Cal. Practice Guide: Corporations, supra, ¶ 6:598, p. 6-127.)

Thus, in Nelson v. Anderson (1999) 72 Cal.App.4th 111, 84 Cal.Rptr.2d 753, the **289 minority
shareholder alleged that the other shareholder of the corporation negligently managed the business,
resulting in its total failure. (Id. at p. 125, 84 Cal.Rptr.2d 753) The appellate court concluded that the
plaintiff could not maintain the suit as a direct action: "Because the gravamen of the complaint is injury to
the whole body of its stockholders, it was for the corporation to institute and maintain a remedial action.
[Citation.] A derivative action would have been appropriate if its responsible officials had refused or
failed to act." (Id. at pp. 125-126, 84 Cal.Rptr.2d 753) The court went on to note that the damages shown
at trial were the loss of corporate profits. (Id. at p. 126, 84 Cal.Rptr.2d 753) Since "[s]hareholders own
neither the property nor the earnings of the corporation," any damages that the plaintiff alleged that
resulted from such loss of corporate profits "were incidental to the injury to the corporation."69

Based on allegations in the Complaint of Miguel, et al., in Civil Case No. 07-610, the Court determines that
there is only a derivative suit, based on the devices and schemes employed by the PRCI Board of
Directors that amounts to mismanagement, misrepresentation, fraud, and bad faith.

At the crux of the Complaint of respondents Miguel, et al., in Civil Case No. 07-610 is their dissent from
the passage by the majority of the PRCI Board of Directors of the "disputed resolutions," particularly: (1)
the Resolution dated 26 September 2006, authorizing the acquisition by PRCI of up to 100% of the
common shares of JTH; and (2) the Resolution dated 11 May 2007, approving the property-for-shares
exchange between PRCI and JTH.

Derivative suit (re: acquisition of JTH)

It is important for the Court to mention that the 26 September 2006 Resolution of the PRCI Board of
Directors not only authorized the acquisition by PRCI of up to 100% of the common stock of JTH, but it
also specifically appointed petitioner Santiago Sr.70 to act as attorney-in-fact and proxy who could vote all
the shares of PRCI in JTH, as well as nominate, appoint, and vote into office directors and/or officers
during regular and special stockholders’ meetings of JTH. It was by this authority that PRCI directors
were able to constitute the JTH Board of Directors. Thus, the protest of respondents Miguel, et al., against
the interlocking directors of PRCI and JTH is also rooted in the 26 September 2006 Resolution of the PRCI
Board of Directors.

After a careful study of the allegations concerning this derivative suit, the Court rules that it is dismissible
for being moot and academic.

That a court will not sit for the purpose of trying moot cases and spend its time in deciding questions, the
resolution of which cannot in any way affect the rights of the person or persons presenting them, is well
settled. Where the issues have become moot and academic, there is no justiciable controversy, thereby
rendering the resolution of the same of no practical use or value.71

The Resolution dated 26 September 2006 of the PRCI Board of Directors was approved and ratified by
the stockholders, holding 74% of the outstanding capital stock in PRCI, during the Special Stockholders’
Meeting held on 7 November 2006.72

Respondents Miguel, et al., instituted Civil Case No. 07-610 only on 10 July 2007, against herein
petitioners Santiago Sr., Santiago Jr., Solomon, and Robles, together with Renato de Villa, Lim Teong
Leong, Lawrence Lim Swee Lin, Tham Ka Hon, and Dato Surin Upatkoon, in their capacity as directors of
PRCI and/or JTH. Clearly, the acquisition by PRCI of JTH and the constitution of the JTH Board of
Directors are no longer just the acts of the majority of the PRCI Board of Directors, but also of the
majority of the PRCI stockholders. By ratification, even an unauthorized act of an agent becomes the
authorized act of the principal.73 To declare the Resolution dated 26 September 2006 of the PRCI Board
of Directors null and void will serve no practical use or value, or affect any of the rights of the parties,
because the Resolution dated 7 November 2006 of the PRCI stockholders -- approving and ratifying said
acquisition and the manner in which PRCI shall constitute the JTH Board of Directors -- will still remain
valid and binding.

In fact, if the derivative suit, insofar as it concerns the Resolution dated 26 September 2006 of the PRCI
Board of Directors, is not dismissible for mootness, it is still vulnerable to dismissal for failure to implead
indispensable parties, namely, the majority of the PRCI stockholders.

Under Rule 3, Section 7 of the Rules of Court, an indispensable party is a party-in-interest, without whom
there can be no final determination of an action. The interests of such indispensable party in the subject
matter of the suit and the relief are so bound with those of the other parties that his legal presence as a
party to the proceeding is an absolute necessity. As a rule, an indispensable party’s interest in the subject
matter is such that a complete and efficient determination of the equities and rights of the parties is not
possible if he is not joined.74

The majority of the stockholders of PRCI are indispensable parties to Civil Case No. 07-610, for they have
approved and ratified, during the Special Stockholders’ Meeting on 7 November 2006, the Resolution
dated 26 September 2006 of the PRCI Board of Directors. Obviously, no final determination of the validity
of the acquisition by PRCI of JTH or of the constitution of the JTH Board of Directors can be had without
consideration of the effect of the approval and ratification thereof by the majority stockholders.

Respondents Miguel, et al., cannot simply assert that the majority of the PRCI Board of Directors named
as defendants in Civil Case No. 07-610 are also the PRCI majority stockholders, because respondents
Miguel, et al., explicitly impleaded said defendants in their capacity as directors of PRCI and/or JTH, not
as stockholders.
Derivative suit (re: property-for-shares exchange)

The derivative suit, with respect to the Resolution dated 11 May 2007 of the PRCI Board of Directors, is
similarly dismissible for lack of cause of action.

The Court has recognized that a stockholder’s right to institute a derivative suit is not based on any
express provision of the Corporation Code, or even the Securities Regulation Code, but is impliedly
recognized when the said laws make corporate directors or officers liable for damages suffered by the
corporation and its stockholders for violation of their fiduciary duties. In effect, the suit is an action for
specific performance of an obligation, owed by the corporation to the stockholders, to assist its rights of
action when the corporation has been put in default by the wrongful refusal of the directors or
management to adopt suitable measures for its protection. The basis of a stockholder’s suit is always one
of equity. However, it cannot prosper without first complying with the legal requisites for its institution.75

Rule 8, Section 1 of the Interim Rules of Procedure for Intra-Corporate Controversies (IRPICC) lays down
the following requirements which a stockholder must comply with in filing a derivative suit:

Sec. 1. Derivative action. – A stockholder or member may bring an action in the name of a corporation or
association, as the case may be, provided, that:

(1) He was a stockholder or member at the time the acts or transactions subject of the action
occurred and at the time the action was filed;

(2) He exerted all reasonable efforts, and alleges the same with particularity in the complaint, to
exhaust all remedies available under the articles of incorporation, by-laws, laws or rules
governing the corporation or partnership to obtain the relief he desires;

(3) No appraisal rights are available for the act or acts complained of; and

(4) The suit is not a nuisance or harassment suit. (Emphasis ours.)

In their Complaint before the RTC in Civil Case No. 07-610, respondents Miguel, et al., made no mention at
all of appraisal rights, which could or could not have been available to them. In their Comment on the
Petitions at bar, respondents Miguel, et al., contend that there are no appraisal rights available for the
acts complained of, since (1) the PRCI directors are being charged with mismanagement,
misrepresentation, fraud, and breach of fiduciary duties, which are not subject to appraisal rights; (2)
appraisal rights will only obtain for acts of the Board of Directors in good faith; and (3) appraisal rights
may be exercised by a stockholder who shall have voted against the proposed corporate action, and no
corporate action has yet been taken herein by PRCI stockholders, who still have not voted on the
intended property-for-shares exchange between PRCI and JTH.

The Court disagrees.

It bears to point out that every derivative suit is necessarily grounded on an alleged violation by the
board of directors of its fiduciary duties, committed by mismanagement, misrepresentation, or fraud,
with the latter two situations already implying bad faith. If the Court upholds the position of respondents
Miguel, et al. – that the existence of mismanagement, misrepresentation, fraud, and/or bad faith renders
the right of appraisal unavailable – it would give rise to an absurd situation. Inevitably, appraisal rights
would be unavailable in any derivative suit. This renders the requirement in Rule 8, Section 1(3) of the
IPRICC superfluous and effectively inoperative; and in contravention of an elementary rule of legal
hermeneutics that effect must be given to every word, clause, and sentence of the statute, and that a
statute should be so interpreted that no part thereof becomes inoperative or superfluous.76

The import of establishing the availability or unavailability of appraisal rights to the minority stockholder
is further highlighted by the fact that it is one of the factors in determining whether or not a complaint
involving an intra-corporate controversy is a nuisance and harassment suit. Section 1(b), Rule 1 of IRPICC
provides:

(b) Prohibition against nuisance and harassment suits. - Nuisance and harassment suits are prohibited. In
determining whether a suit is a nuisance or harassment suit, the court shall consider, among others, the
following:

(1) The extent of the shareholding or interest of the initiating stockholder or member;

(2) Subject matter of the suit;

(3) Legal and factual basis of the complaint;

(4) Availability of appraisal rights for the act or acts complained of; and

(5) Prejudice or damage to the corporation, partnership, or association in relation to the relief
sought. [Emphasis ours.]

In case of nuisance or harassment suits, the court may, motu proprio or upon motion, forthwith dismiss
the case.

The availability or unavailability of appraisal rights should be objectively based on the subject matter of
the complaint, i.e., the specific act or acts performed by the board of directors, without regard to the
subjective conclusion of the minority stockholder instituting the derivative suit that such act constituted
mismanagement, misrepresentation, fraud, or bad faith.

The raison d’etre for the grant of appraisal rights to minority stockholders has been explained thus:

x x x [Appraisal right] means that a stockholder who dissented and voted against the proposed corporate
action, may choose to get out of the corporation by demanding payment of the fair market value of his
shares. When a person invests in the stocks of a corporation, he subjects his investment to all the risks of
the business and cannot just pull out such investment should the business not come out as he expected.
He will have to wait until the corporation is finally dissolved before he can get back his investment, and
even then, only if sufficient assets are left after paying all corporate creditors. His only way out before
dissolution is to sell his shares should he find a willing buyer. If there is no buyer, then he has no recourse
but to stay with the corporation. However, in certain specified instances, the Code grants the stockholder
the right to get out of the corporation even before its dissolution because there has been a major change
in his contract of investment with which he does not agree and which the law presumes he did not
foresee when he bought his shares. Since the will of two-thirds of the stocks will have to prevail over his
objections, the law considers it only fair to allow him to get back his investment and withdraw from the
corporation. x x x,77 (Emphasis ours.)
The Corporation Code expressly made appraisal rights available to the dissenting stockholder in the
following instances:

Sec. 42. Power to invest corporate funds in another corporation or business or for any other purpose. –
Subject to the provisions of this Code, a private corporation may invest its funds in any other corporation
or business or for any purpose other than the primary purpose for which it was organized when
approved by a majority of the board of directors or trustees and ratified by the stockholders representing
at least two-thirds (2/3) of the outstanding capital stock, or by at least two-thirds (2/3) of the members
in case of non-stock corporations, at a stockholders’ or members’ meeting duly called for the purpose.
Written notice of the proposed investment and the time and place of the meeting shall be addressed to
each stockholder or member at his place of residence as shown on the books of the corporation and
deposited to the addressee in the post office with postage prepaid, or served personally; Provided, That
any dissenting stockholder shall have appraisal right as provided in this Code: Provided, however, That
where the investment by the corporation is reasonably necessary to accomplish its primary purpose as
stated in the articles of incorporation, the approval of the stockholders or members shall not be
necessary.

Sec. 81. Instances of appraisal right. – Any stockholder of a corporation shall have the right to dissent and
demand payment of the fair value of his shares in the following instances:

1. In case any amendment to the articles of incorporation has the effect of changing or restricting
the rights of any stockholders or class of shares, or of authorizing preferences in any respect
superior to those of outstanding shares of any class, or of extending or shortening the term of
corporate existence;

2. In case of sale, lease, exchange, transfer, mortgage, pledge or other disposition of all or
substantially all of the corporate property and assets as provided in this Code; and

3. In case of merger or consolidation. (Emphasis ours.)

Respondents Miguel, et al., themselves admitted that the property-for-shares exchange between PRCI and
JTH, approved by majority of the PRCI Board of Directors in the Resolution dated 11 May 2007, involved
all or substantially all of the properties and assets of PRCI. They alleged in their Complaint in Civil Case
No. 07-610 that:

49. The Corporation’s Makati Property, consisting of prime property in the heart of Makati City worth
billions of pesos in its current value constitutes substantially all of the assets of the Corporation and is the
sole and exclusive location on which it conducts its business of a race course.

50. The exchange of the Corporation’s property for JTH shares would therefore constitute a sale of
substantially all of the assets of the corporation. (Emphasis ours.)

Irrefragably, the property-for-shares exchange between PRCI and JTH, involving as it did substantially all
of the properties and assets of PRCI, qualified as one of the instances when dissenting stockholders, such
as respondents Miguel, et al., could have exercised their appraisal rights.

The Court finds specious the averment of respondents Miguel, et al., that appraisal rights were not
available to them, because appraisal rights may only be exercised by stockholders who had voted against
the proposed corporate action; and that at the time respondents Miguel, et al., instituted Civil Case No.
07-610, PRCI stockholders had yet to vote on the intended property-for-shares exchange between PRCI
and JTH. Respondents Miguel, et al., themselves caused the unavailability of appraisal rights by filing the
Complaint in Civil Case No. 07-610, in which they prayed that the 11 May 2007 Resolution of the Board of
Directors approving the property-for-shares exchange between PRCI and JTH be declared null and void,
even before the said Resolution could be presented to the PRCI stockholders for approval or rejection.
More than anything, the argument of respondents Miguel, et al., raises questions of whether their
derivative suit was prematurely filed for they had failed to exert all reasonable efforts to exhaust all other
remedies available under the articles of incorporation, by-laws, laws, or rules governing the corporation
or partnership, as required by Rule 8, Section 1(2) of the IRPICC. The obvious intent behind the rule is to
make the derivative suit the final recourse of the stockholder, after all other remedies to obtain the relief
sought have failed.78

Personal action for inspection of corporate books and records

Respondents Miguel, et al., allege another cause of action, other than the derivative suit -- the violation of
their right to information relative to the disputed Resolutions, i.e., the Resolutions dated 16 September
2006 and 11 May 2007 of the PRCI Board of Directors.

Rule 7 of the IRPICC shall apply to disputes exclusively involving the rights of stockholders or members
to inspect the books and records and/or to be furnished with the financial statements of a corporation,
under Sections 7479and 7580 of the Corporation Code.81

Rule 7, Section 2 of IRPICC enumerates the requirements particular to a complaint for inspection of
corporate books and records:

Sec. 2. Complaint. - In addition to the requirements in section 4, Rule 2 of these Rules, the complaint must
state the following:

(1) The case is for the enforcement of plaintiff's right of inspection of corporate orders or records
and/or to be furnished with financial statements under Sections 74 and 75 of the Corporation
Code of the Philippines;

(2) A demand for inspection and copying of books and records and/or to be furnished with
financial statements made by the plaintiff upon defendant;

(3) The refusal of defendant to grant the demands of the plaintiff and the reasons given for such
refusals, if any; and

(4) The reasons why the refusal of defendant to grant the demands of the plaintiff is unjustified
and illegal, stating the law and jurisprudence in support thereof. (Emphasis ours.)

As has already been previously established herein, the right to information, which includes the right to
inspect corporate books and records, is a right personal to each stockholder. After a closer reading of the
Complaint in Civil Case No. 07-610, the Court observes that only respondent Dulay actually made a
demand for a copy of "all the records, documents, contracts, and agreements, emails, letters,
correspondences, relative to the acquisition of JTH x x x." There is no allegation that his co-respondents
(who are his co-plaintiffs in Civil Case No. 07-610) made similar demands for the inspection or copying of
corporate books and records. Only respondent Dulay complied then with the requirement under Rule 7,
Section 2(2) of IRPICC.

Even so, respondent Dulay’s Complaint should be dismissed for lack of cause of action, for his demand for
copies of pertinent documents relative to the acquisition of JTH shares was not denied by any of the
defendants named in the Complaint in Civil Case No. 07-610, but by Atty. Jesulito A. Manalo (Manalo), the
Corporate Secretary of PRCI, in a letter dated 17 January 2006. Section 74 of the Corporation Code, the
substantive law on which respondent Dulay’s Complaint for inspection and copying of corporate books
and records is based, states that:

Sec. 74. Books to be kept; stock transfer agent. –

xxxx

Any officer or agent of the corporation who shall refuse to allow any director, trustees, stockholder or
member of the corporation to examine and copy excerpts from its records or minutes, in accordance with
the provisions of this Code, shall be liable to such director, trustee, stockholder or member for damages,
and in addition, shall be guilty of an offense which shall be punishable under Section 144 of this Code:
Provided, That if such refusal is pursuant to a resolution or order of the Board of Directors or Trustees,
the liability under this section for such action shall be imposed upon the directors or trustees who voted
for such refusal: x x x (Emphasis ours.)

Based on the foregoing, it is Corporate Secretary Manalo who should be held liable for the supposedly
wrongful and unreasonable denial of respondent Dulay’s demand for inspection and copying of corporate
books and records; but, as previously mentioned, Corporate Secretary Manalo is not among the
defendants named in the Complaint in Civil Case No. 07-610. There is also utter lack of any allegation in
the Complaint that Corporate Secretary Manalo denied respondent Dulay’s demand pursuant to a
resolution or order of the PRCI Directors, so that the latter (who are actually named defendants in the
Complaint) could also be held liable for the denial.

Supervening events

During the pendency of the cases at bar, supervening events took place that further justified the dismissal
of Civil Case No. 07-610 for already being moot and academic.

First, during the 2008 Annual Stockholders’ Meeting of PRCI, held on 18 June 2008, the following agenda
items were finally presented to the stockholders, who approved and ratified the same by a majority vote:
(1) the Minutes of the Special Stockholders’ Meeting dated 7 November 2006, during which the majority
of the stockholders approved and ratified the acquisition of JTH by PRCI; (2) the acts of the Board of
Directors, the Executive Committee, and the Management of PRCI for 2006, which included the
acquisition of JTH by PRCI; and (3) the planned property-for-shares exchange between PRCI and JTH.
Even respondents Miguel, et al., themselves admitted in their Comment with Prayer for the Immediate
Lifting or Dissolution of the Temporary Restraining Order in G.R. No. 182008 that:

12. Indeed, the approval and/or ratification of the transfer of PRCI’s Sta. Ana racetrack property to JTH
during the upcoming stockholders’ meeting would render nugatory, moot and academic the action and
proceedings before the Regional Trial Court of Makati, Branch 149, inasmuch as the acts assailed by
private respondents would have already been consummated by such approval and/or ratification.
13. In the same vein, such approval and/or ratification during the forthcoming PRCI stockholder’s (sic)
meeting would likewise render moot and academic the proceedings before this Honorable Court in that it
would have effectively granted the reliefs sought by herein petitioner even before this Honorable Court
could finally rule on the propriety of the Court of Appeals’ Decision/Resolution by herein petitioners.82

Second, although already approved and ratified by majority vote of the PRCI stockholders, and PRCI and
JTH executed a Deed of Transfer with Subscription Agreement on 7 July 2008 to effect the property-for-
shares exchange between the two corporations, the controversial transaction will no longer push
through. A major consideration for the exchange is that it will be tax-free; but the BIR ruled that such
transaction shall be subject to VAT. Resultantly, PRCI and JTH executed on 22 August 2008 a
Disengagement Agreement, by virtue of which, both corporations rescinded the Deed of Transfer with
Subscription Agreement dated 7 July 2008 and immediately disengaged from implementing the said
Deed.

Civil Case No. 08-458

The very nature of Civil Case No. 07-610 as a derivative suit bars Civil Case No. 08-458 and warrants the
latter’s dismissal.

In Chua v. Court of Appeals,83 the Court stresses that the corporation is the real party in interest in a
derivative suit, and the suing stockholder is only a nominal party:

An individual stockholder is permitted to institute a derivative suit on behalf of the corporation wherein
he holds stocks in order to protect or vindicate corporate rights, whenever the officials of the corporation
refuse to sue, or are the ones to be sued, or hold the control of the corporation. In such actions, the suing
stockholder is regarded as a nominal party, with the corporation as the real party in interest.

xxxx

x x x For a derivative suit to prosper, it is required that the minority stockholder suing for and on behalf
of the corporation must allege in his complaint that he is suing on a derivative cause of action on behalf of
the corporation and all other stockholders similarly situated who may wish to join him in the suit. It is a
condition sine qua non that the corporation be impleaded as a party because not only is the corporation
an indispensable party, but it is also the present rule that it must be served with process. The judgment
must be made binding upon the corporation in order that the corporation may get the benefit of the suit
and may not bring subsequent suit against the same defendants for the same cause of action. In other
words, the corporation must be joined as party because it is its cause of action that is being litigated and
because judgment must be a res adjudicata against it. (Emphases ours.)

The more extensive discussion by the Court of the nature of a derivative suit in Asset Privatization Trust
v. Court of Appeals84 is presented below:

Settled is the doctrine that in a derivative suit, the corporation is the real party in interest while the
stockholder filing suit for the corporation’s behalf is only a nominal party. The corporation should be
included as a party in the suit.

An individual stockholder is permitted to institute a derivative suit on behalf of the corporation wherein
he holds stock in order to protect or vindicate corporate rights, whenever the officials of the corporation
refuse to sue, or are the ones to be sued or hold the control of the corporation. In such actions, the suing
stockholder is regarded as a nominal party, with the corporation as the real party in interest. x x x.

It is a condition sine qua non that the corporation be impleaded as a party because-

x x x. Not only is the corporation an indispensable party, but it is also the present rule that it must be
served with process. The reason given is that the judgment must be made binding upon the corporation
and in order that the corporation may get the benefit of the suit and may not bring a subsequent suit
against the same defendants for the same cause of action. In other words the corporations must be joined
as party because it is its cause of action that is being litigated and because judgment must be a res
ajudicata against it.

The reasons given for not allowing direct individual suit are:

(1) x x x "the universally recognized doctrine that a stockholder in a corporation has no title legal
or equitable to the corporate property; that both of these are in the corporation itself for the
benefit of the stockholders." In other words, to allow shareholders to sue separately would conflict
with the separate corporate entity principle;

(2) x x x that the prior rights of the creditors may be prejudiced. Thus, our Supreme Court held in
the case of Evangelista v. Santos, that "the stockholders may not directly claim those damages for
themselves for that would result in the appropriation by, and the distribution among them of part
of the corporate assets before the dissolution of the corporation and the liquidation of its debts
and liabilities, something which cannot be legally done in view of Section 16 of the Corporation
Law xxx;"

(3) the filing of such suits would conflict with the duty of the management to sue for the
protection of all concerned;

(4) it would produce wasteful multiplicity of suits; and

(5) it would involve confusion in ascertaining the effect of partial recovery by an individual on the
damages recoverable by the corporation for the same act.

As established in the foregoing jurisprudence, in a derivative suit, it is the corporation that is the
indispensable party, while the suing stockholder is just a nominal party. Under Rule 7, Section 3 of the
Rules of Court, an indispensable party is a party-in-interest, without whom no final determination can be
had of an action without that party being impleaded. Indispensable parties are those with such an
interest in the controversy that a final decree would necessarily affect their rights, so that the court
cannot proceed without their presence. "Interest," within the meaning of this rule, should be material,
directly in issue, and to be affected by the decree, as distinguished from a mere incidental interest in the
question involved. On the other hand, a nominal or pro forma party is one who is joined as a plaintiff or
defendant, not because such party has any real interest in the subject matter or because any relief is
demanded, but merely because the technical rules of pleadings require the presence of such party on the
record.85

With the corporation as the real party-in-interest and the indispensable party, any ruling in one of the
derivative suits should already bind the corporation as res judicata in the other. Allowing two different
minority stockholders to institute separate derivative suits arising from the same factual background,
alleging the same causes of action, and praying for the same reliefs, is tantamount to allowing the
corporation, the real party-in-interest, to file the same suit twice, resulting in the violation of the rules
against a multiplicity of suits and even forum-shopping. It is also in disregard of the separate-corporate-
entity principle, because it is to look beyond the corporation and to give recognition to the different
identities of the stockholders instituting the derivative suits.

It is for these reasons that the derivative suit, Civil Case No. 08-458, although filed by a different set of
minority stockholders from those in Civil Case No. 07-610, should still not be allowed to proceed.

Furthermore, the highly suspicious circumstances surrounding the institution of Civil Case No. 08-458
are not lost upon the Court. To recall, on 9 April 2008, the Court already issued in G.R. No. 182008 a TRO
enjoining the execution and enforcement of the writ of permanent injunction issued by the RTC in Civil
Case No. 07-610, which prevented the PRCI Board of Directors from presenting to the PRCI stockholders
at the Annual Stockholders’ Meeting, for approval and ratification, the agenda items on the acquisition by
PRCI of JTH shares and the property-for-shares exchange between PRCI and JTH. The Complaint in Civil
Case No. 08-458 was filed with the RTC on 16 June 2008, just two days before the scheduled Annual
Stockholders’ Meeting on 18 June 2008, where the items subject of the permanent injunction were again
included in the agenda. The 72-hour TRO issued by the RTC in Civil Case No. 08-458 enjoined the very
same acts covered by the writ of permanent injunction issued by the RTC in Civil Case No. 07-610, the
execution and enforcement of which, in turn, was already enjoined by the TRO dated 9 April 2008 of this
Court. Considering that it is PRCI which is the real party-in-interest in both Civil Cases No. 07-610 and No.
08-458, then its acquisition in the latter of a TRO exactly similar to the writ of permanent injunction in
the former is but an obvious attempt to circumvent the TRO of this Court enjoining the execution and
enforcement of the permanent injunction.

Intervention of APRI

It is also the nature of a derivative suit that prompts the Court to deny the intervention by APRI in Civil
Case No. 07-610. Once more, the Court emphasizes that PRCI is the real party-in-interest in Civil Case No.
07-610, not respondents Miguel, et al., whose participation therein is deemed nominal. APRI, moreover,
merely echoes the position of respondents Miguel, et al., and, hence, renders the participation of APRI in
Civil Case No. 07-610 redundant.

Also, the main concern of APRI was the lifting of the TRO issued by this Court on 9 April 2008 and the
execution and enforcement of the permanent injunction issued by the RTC, enjoining the presentation by
the PRCI Board of Directors -- at the Annual Stockholders’ Meeting scheduled on 18 June 2008, for
approval and ratification by the stockholders – of the agenda items on the acquisition by PRCI of JTH
shares and the property-for-shares exchange between PRCI and JTH. Given that the Annual Stockholders’
Meeting already took place on 18 June 2008, during which the subject agenda items were presented to
and approved and ratified by the stockholders, the intervention of APRI is already moot.

As a final note, respondent Miguel, et al. made repeated allegations that foreigners were taking over PRCI,
and that this must be stopped to protect the Filipino stockholders. They even invoked the ruling of this
Court in Manila Prince Hotel v. Government Service Insurance System (GSIS).86

Respondents Miguel, et al., however, cannot rely on Manila Prince Hotel as judicial precedent, for the facts
therein are far different from those in the cases at bar. The Government, through GSIS, owned Manila
Hotel Corporation (MHC), which, in turn, owned the historic Manila Hotel. The case arose from the efforts
of GSIS at privatizing MHC by holding a public bidding for 30-51% of the issued and outstanding shares of
MHC. The Court ruled that since the Filipino corporation was able to match the higher bid made by a
foreign corporation, then preference should be given to the former, considering that Manila Hotel had
become a landmark, a living testimonial to Philippine heritage, and part of Philippine economy and
patrimony. This was in accord with the Filipino-first policy in the 1987 Constitution.

In contrast, PRCI is a publicly listed corporation. Its shares can be freely sold and traded to the public,
subject to regulation by the PSE and the SEC. Without any legal basis therefor, the Court cannot be
expected to allocate or impose limitations on ownership of PRCI shares by foreigners. What is more,
PRCI, which operates and maintains a horse racetrack and conducts horse racing and betting, can hardly
claim to be "a living testimonial of Philippine heritage," like Manila Hotel, that would justify judicial
intervention to protect the interests of Filipino stockholders as against foreign stockholders.

WHEREFORE, the Court renders the following judgment:

(1) The Court GRANTS the Petitions of petitioners Santiago, et al., and petitioner Santiago Sr. in
G.R. No. 181455-56 and G.R. No. 182008, respectively. It REVERSES and SETS ASIDE the Decision
dated 6 September 2007 and Resolution dated 22 January 2008 of the Court of Appeals in CA-G.R.
SP No. 99769 and No. 99780;

(2) The Court LIFTS the TRO issued on 9 April 2008 in G.R. No. 180028 and CANCELS and
RETURNS the cash bond posted by petitioner Santiago Sr. The permanent injunction issued by the
RTC on 8 October 2007, the execution and enforcement of which the TRO dated 9 April 2008 of
this Court enjoins, has been rendered moot, since the agenda items subject of said permanent
injunction were already presented to, and approved and ratified by a majority of the PRCI
stockholders at the Annual Stockholders’ Meeting held on 18 June 2008;

(3) The Court ORDERS the DISMISSAL of the Complaint of respondents Miguel, et al., in Civil Case
No. 07-610 before the RTC for lack of cause of action, failure to implead indispensable parties, and
mootness;

(4) The Court ORDERS the DISMISSAL of the Complaint of Jalane, et al., in Civil Case No. 08-458,
for being in violation of the rules on the multiplicity of suits and forum shopping; and

(5) The Court DENIES the Very Respectful Motion for Leave to Intervene as Co-Respondent in the
Petition with the attached Very Respectful Urgent Motion to Lift Restraining Order of APRI, for
redundancy and mootness.

No costs.

SO ORDERED.

Republic of the Philippines

SUPREME COURT
Manila

EN BANC
G.R. No. L-16982 September 30, 1961

CATALINA R. REYES, petitioner,

vs.
HON. BIENVENIDO A. TAN, as Judge of the Court of First Instance of Manila, Branch XIII and
FRANCISCA R. JUSTINIANI, respondents.

Jose W. Diokno for petitioner.

Norberto J. Quisumbing for respondents.

LABRADOR, J.:

This is a petition for certiorari to review and set aside an order of the Court of First Instance of Manila,
Hon. Bienvenido A. Tan, presiding, in Civil Case No. 42375, entitled "Francisca R. Justiniani vs. Wadhumal
Dalamal, et al.", appointing a receiver of the corporation Roxas-Kalaw Textile Mills, Inc. In said action,
plaintiff Justiniani asks the court to order the directors of the corporation, jointly and severally, to repair
the damage caused to the corporation, of which all the plaintiff and defendants are members. The action
was filed about January of 1960 and the order for the appointment of the receiver issued on February 15,
1960, while the designation of the receiver was made in an order of the court dated April 30, 1960.

In the complaint in said Civil Case No. 42375, it is alleged that the corporation, Roxas-Kalaw Textile Mills,
Inc., was organized on June 5, 1954 by defendants Cesar K. Roxas, Adelia K. Roxas, Benjamin M. Roxas,
Jose Ma. Barcelona and Morris Wilson, for and on behalf of the following primary principals with the
following shareholdings: Adelia K. Roxas, 1200 Class A shares; I. Sherman, 900 Class A shares; Robert W.
Born, 450 Class A shares and Morris Wilson, 450 Class A shares; that the plaintiff holds both Class A and
Class B shares and number and value thereof are is follows: Class A — 50 shares, Class B — 1,250 shares;
that on May 8, 1957, the Board of Directors approved a resolution designating one Dayaram as co-
manager with the specific understanding that he was to act as defendant Wadhumal Dalamal's designee,
Morris Wilson was likewise designated as co-manager with responsibilities for the management of the
factory only, that an office in New York was opened for the purpose of supervising purchases, which
purchases must have the unanimous agreement of Cesar K. Roxas, New York resident member of the
board of directors, Robert Born and Wadhumal Dalamal or their respective representatives; that several
purchases aggregating $289,678.86 were made in New York for raw materials such as greige cloth, rayon
and grey goods for the textile mill and shipped to the Philippines, which shipment were found out to
consist not of raw materials but already finished products, such as, West Point Khaki rayon suiting
materials dyed in the piece, finished rayon tafetta in cubes, cotton eyelets, etc., for which reasons the
Central Bank of the Philippines stopped all dollar allocations for raw materials for the corporation which
necessarily led to the paralyzation of the operation of the textile mill and its business; that the supplier of
the aforesaid finished goods was the United Commercial Company of New York in which defendant
Dalamal had interests and the letter of credit for said goods were guaranteed by the Indian Commercial
Company and the Indian Traders in which firms defendant Dalamal likewise held interests; that the
resale of the finished goods was the business of the Indian Commercial Company of Manila, which
company could not obtain dollar allocations for importations of finished goods under the Central Bank
regulations; that plaintiff and some members of the board of directors urged defendants to proceed
against Dalamal, exposing his offense to the Central Bank, and to initiate suit against Dalamal for his fraud
against the corporation; that defendants refused to proceed against Dalamal and instead continued to
deal with the Indian Commercial Company to the damage and prejudice of the corporation. The prayer
asks for the appointment of a receiver and a judgment marking defendants jointly and severally liable for
the damages.

After a denial of a motion to dismiss and the filing of an answer alleging that the complaint states no
cause of action, the motion for the appointment of a receiver was set for hearing and subsequently the
court entered the order for the appointment of a receiver. The court found and held:

The second ground of the defendant's motion to dismiss and or deny the petition is the allegedly
want of a cause of action of the plaintiff's complaint. Philippine jurisprudence is complete with
authorities upholding the principle that this ground for dismissal must appear in the face of the
complaint itself; and that to determine the sufficiency of the cause of action, only the facts alleged
in the complaint and no other, should be considered; in fine, the test of sufficiency of cause of
action is whether or not, admitting the facts alleged in the complaint, the Court could render a
valid judgment upon the same in accordance with the prayer of the petition (e.g., Paminsan v.
Costales, 29 Phil. 587, 489). The complaint in the instant case abounds with arguments
establishing and supporting plaintiff's cause of action for and in behalf of the Roxas-Kalaw Textile
Mills, Inc. against all the defendants (See e.g. paragraphs 4, 5, 6 and 7 of the Complaint). Taking
these paragraphs of the complaint in context, it is clear that the plaintiff has sufficient averred
facts constituting a cause or basis for a derivative suit for "injuries to the corporation, as by
negligence, mismanagement or fraud of its directors, are normally dealt with as wrong to the
whole group of share holders in their corporate capacity, to be redressed in a suit by or on behalf
of the corporation.1awphîl.nèt

Evident from the defendants' motion to dismiss and/or to deny the petition for receivership is
their complete failure to come up with a valid and substantial defense against or denial of the
complaint's allegations of mismanagement, if not the actual commission of ultra vires and illegal
acts. Invariably the props of defendants' motion consist of the unconvincing countercharges of the
plaintiff's non-observance of the technicalities of our procedural law and disregard of technical
and evidently futile intracorporate remedies to redress the violations charged against the
defendants. It is clear that the controlling majority did nothing for two years to protect the
interests of corporation. (See pars. 5-7, complaint.)

The defendants themselves having admitted in open court during the oral discussion of their
motion to dismiss and the plaintiff's motion for receivership that the majority stockholders will
under any condition entertain any suggestion of the minority shareholders, the appointment of an
independent third party in the management of the corporation becomes imperative for the
survival of the company. (Order dated Feb. 15, 1960).

On April 30, 1960, the court issued mother order which reads as follows:

After this incident wherein it was clearly shown that the minority stockholders, represented by
the plaintiff, have no recourse whatsoever before the majority stockholders of the company, and
after it has been shown that the majority has violated the law by importing into the Philippines
finished goods instead of raw materials as stipulated in their license, and since these acts are
prejudicial to the company because it might result in the cancellation of their license, the Court is
of the opinion and so holds that the appointment of a receiver is absolutely necessary for the
 protection not only of the rights of the minority but also those of the majority stockholders of the
company.

In the first assignment of error, petitioner claims that respondent Justiniani neither alleged nor proved
the existence of an emergency requiring the immediate appoinment of a receiver of the Roxas-Kalaw
Textile Mill, Inc.; that the alleged fraudulent transaction took place more than two years before the
application for receivership, and so was the refusal of the directors to sue or prosecute Dalamal. This
contention is not well founded. At the hearing of the petition for the appointment of a receiver held on
January 30, 1960, various records of shipments of finished textile goods on dollar allocations for raw
materials were exhibited. Publicity had also been given to the importations of textiles by the corporation,
in place of cotton raw materials. The record shows the list of the various documents proving the purchase
of letters of credit for textiles. These textiles were denied importation and had to be re-exported. The fact
of the importation of finished textiles on dollar allocations for raw materials in violation of Central Bank
regulations was, therefore, conclusively shown.

It is also not denied by petitioner that the allocation of dollars to the corporation for the importation of
raw materials was suspended. In the eyes of the court below, as well as in our own, the importation of
textiles instead of raw materials, as well as the failure of the Board of Directors to take action against
those directly responsible for the misuse of dollar allocations constitute fraud, or consent thereto on the
part of the directors. Therefore, a breach of trust was committed which justified the derivative suit by a
minority stockholder on behalf of the corporation.

It is well settled in this jurisdiction that where corporate directors are guilty of a breach of trust —
not of mere error of judgment or abuse of discretion — and intracorporate remedy is futile or
useless, a stockholder may institute a suit in behalf of himself and other stockholders and for the
benefit of the corporation, to bring about a redress of the wrong inflicted directly upon the
corporation and indirectly upon the stockholders. An illustration of a suit of this kind is found in
the case of Pascual vs. Del Saz Orozco (19 Phil. 82), decided by this Court as early as 1911. In that
case, the Banco Español-Filipino suffered heavy losses due to fraudulent connivance between a
depositor and an employee of the bank, which losses, it was contended, could have been avoided if
the president and directors had been more vigilant in the administration of the affairs of the bank.
The stockholders constituting the minority brought a suit in behalf of the bank against the
directors to recover damages, and this over the objection of the majority of the stockholders and
the directors. This court held that the suit could properly be maintained. (64 Phil., Angeles vs.
Santos [G.R. No. L-43413, prom. August 31, 1937] p. 697).

The claim that respondent Justiniani did not take steps to remedy the illegal importation for a period of
two years is also without merit. During that period of time respondent had the right to assume and expect
that the directors would remedy the anomalous situation of the corporation brought about by their own
wrong doing. Only after such period of time had elapsed could respondent conclude that the directors
were remiss in their duty to protect the corporation property and business.

Counsel for petitioner claims that respondent Justiniani was treasurer of the corporation for sometime
and had control of funds and this notwithstanding, she had not taken the steps to remedy the situation. In
answer we state that the fraud consisted in importing finished textile instead of raw cotton for the textile
mill; the fraud, therefore, was committed by the manager of the business and was consented to by the
directors, evidently beyond reach of respondent.
The directors permitted the fraudulent transaction to go unpunished and nothing appears to have been
done to remove the erring purchasing managers. In a way the appointment of a receiver may have been
thought of by the court below so that the dollar allocation for raw material may be revived and the textile
mill placed on an operating basis. It is possible that if a receiver in which the Central Bank may have
confidence is appointed, the dollar allocation for raw material may be restored. Claim is made that if a
receiver is appointed, the Philippine National Bank to which the corporation owes considerable sums of
money might be led to foreclose the mortgage. Precisely the appointment of a receiver in whom the bank
may have had confidence might rehabilitate the business and bring a restoration of the dollar allocation
much needed for raw material and an improvement in the business and assets the corporation, thus
insuring the collection of the bank's loan.

Considering the above circumstances we are led to agree with the judge below that the appointment of a
receiver was not only expedient but also necessary to restore the faith and confidence of the Central Bank
authorities in the administration of the affairs of the corporation, thus ultimately leading to a restoration
of the dollar allocation so essential to the operation of the textile mills. The first assignment of error is,
therefore, overruled.

In the second assignment of error, petitioner claims that the management has been changed and the new
management has not been afforded a chance to show what it can do. This ground of the petition was not
mentioned or raised as a ground of defense or objection to the appointment of a receiver in the court
below. It is only raised for the first time before Us in the petition for certiorari. The principle has long ago
been enunciated by Us that an appellate court may not consider any ground of objection that was not
raised in the court below. (Tan Machan v. Trinidad, 3 Phil. 684; Ramiro v. Graño, 54 Phil. 744; Vda. de
Villaruel, et al. v. Manila Motor Co., Inc., et al., G.R. No. L-10394, Dec. 13, 1958; Collector of Internal
Revenue v. Estate of F. P. Buan, et al., G.R. Nos. L-11438-39, and L-11542-46, July 31, 1958; S.V.S. Pictures,
Inc., et al. v. The Court of Appeals, et al., G.R. No. L-7075, January 29, 1960; Elena Peralta Vda. de Caina vs.
Hon. Andres Reyes, et al., G.R. No. L-15792, May 30, 1960).

The supposed new management, alleged as a ground for the reversal of the order of the court below
appointing a receiver, is not in itself a ground of objection to the appointment of a receiver. The parties
found to be guilty of the fraud, as a cause of which receivership proceedings were instituted, were the
Board of Directors, which took no action to stop the anomalies being perpetrated by the management.
But it appears that the management must have acted directly under orders of the Board of Directors. The
appointment of a new management, therefore, would not remedy the anomalous situation in which the
corporation is found, because such situation was not due to the management alone but principally
because of direction of the Board of Directors.

The second ground for the petition is, therefore, also without merit.

WHEREFORE, the court finds that the court below did not commit an abuse of discretion in appointing a
receiver for the corporation and the petition to set aside the order for the appointment of a receiver
should be, as it is hereby, dismissed. With costs against the petitioner.

Republic of the Philippines

SUPREME COURT
Manila

EN BANC
G.R. No. L-22399 March 30, 1967

REPUBLIC BANK, represented in this action by DAMASO P. PEREZ, etc., plaintiff-appellant,

vs.
MIGUEL CUADERNO, BIENVENIDO DIZON, PABLO ROMAN,
THE BOARD OF DIRECTORS OF THE REPUBLIC BANK AND THE MONETARY BOARD OF THE
CENTRAL BANK OF THE PHILIPPINES, defendants-appellees.
Crispin D. Baizas and Associates and Halili, Bolinao and Associates for plaintiff-appellant.

N. M. Balboa, F.E. Evangelista and S. Malvar for defendant-appellee Monetary Board.

Norberto J. Quisumbing and H.V. Quisumbing for other defendants-appellees.

REYES, J.B.L., J.:

Direct appeal from an order of the Court of First Instance of Manila, in its civil case No. 53936, dismissing
the petitioner's complaint on the ground of failure to state cause of action.

In the Court below, Damaso Perez, a stockholder of the Republic Bank, a Philippine banking corporation
domiciled in Manila, instituted a derivative suit for and in behalf of said Bank, against Miguel Cuaderno,
Bienvenido Dizon, the Board of Directors of the Republic Bank, and the Monetary Board of the Central
Bank of the Philippines. Paragraph 6 of the Complaint (Rec. on Appeal, p. 7) expressly pleaded the
following: .

6. That the relator herein filed the present derivative suit without any further demand on the
Board of Directors of the Republic Bank for the reason that such formal demand to institute the
present complaint would be a futile formality since the members of the board are personally
chosen by defendant Pablo Roman himself.

For a cause of action plaintiff alleged, inter alia, that Damaso Perez had complained to the Monetary
Board of the Central Bank against certain frauds allegedly committed by defendant Pablo Roman, in that
being chairman of the Board of Directors of the Republic Bank, and of its Executive Loan Committee, in
1957 to 1959, "in grave abuse of his fiduciary duty and taking advantage of his said positions and in
connivance with other officials of the Republic Bank", Roman had fraudulently granted or caused to be
granted loans to fictitious and non-existing persons and to their close friends, relatives and/or
employees, who were in reality their dummies, on the basis of fictitious and inflated appraised values of
real estate properties; that said loans amounted to almost 4 million pesos; that acting upon the
complaint, Miguel Cuaderno (then Governor of the Central Bank) and the Monetary Board ordered an
investigation, which was carried out by Bank Examiners; that they and the Superintendent of Banks of
the Central Bank reported that certain mortgage loans amounting to P2,303,400.00 were granted in
violation of sections 77, 78 and 88 of the General Banking Act; that acting on said reports, the Monetary
Board, of which defendant Cuaderno was a member, ordered a new Board of Directors of the Republic
Bank to be elected, which was done, and subsequently approved by the Monetary Board; that on January
5, 1960, the latter accepted the offer of Pablo Roman to put up adequate security for the questioned loans
made by the Republic Bank, and such security was made a condition for the resumption of the Bank's
normal operations; that subsequently, the Central Bank through its Governor, Miguel Cuaderno, referred
to special prosecutors of the Department of Justice on July 22, 1960, the banking frauds and violations of
the Banking Act, reported by the Superintendent of Banks, for investigation and prosecution, but no
information was filed up to the time of the retirement of Cuaderno in 1961; that other similar frauds
were subsequently discovered; that to neutralize the impending action against him, Pablo Roman
engaged Miguel Cuaderno as technical consultant at a compensation of P12,500.00 per month, and
selected Bienvenido Dizon as chairman of the Board of Directors of the Republic Bank; that the Board of
Directors composed of individuals personally selected and chosen by Roman, connived and confederated
in approving the appointment and selection of Cuaderno and Dizon; that such action was motivated by
bad faith and without intention to protect the interest of the Republic Bank but were prompted to protect
Pablo Roman from criminal prosecution; that the appointment of Cuaderno and his acceptance of the
position of technical consultant are immoral, anomalous and illegal, and his compensation highly
unconscionable, because court actions involving the actuations of Cuaderno as Governor and Member or
Chairman of the Monetary Board are still pending in court; that as member of the Monetary Board from
1961 to 1962, Bienvenido Dizon exercised supervision over the Republic Bank; that the selection of Dizon
as chairman of the Board of the Republic Bank after he was forced to resign from the presidency of the
Philippine National Bank and from membership of the Monetary Board and within one year thereafter is
in violation of option 3, sub-paragraph (d) of the Anti-Graft and Corrupt Practices Act; that both Cuaderno
and Dizon were alter egos of Pablo Roman; that the Monetary Board was about to approve the
appointment of Cuaderno and Dizon and would do so unless enjoined.

The complaint, therefore, prayed for a writ of preliminary injunction against the Monetary Board to
prevent its confirmation of the appointments of Dizon and Cuaderno; against the Board of Directors of
the Republic Bank from recognizing Cuaderno as technical consultant and Dizon as Chairman of the
Board; and against Pablo Roman from appointing or selecting officers or directors of the Republic Bank,
and against the recognition of any such appointees until final determination of the action. And concluded
by praying that after due hearing, judgment be rendered, —

a) making the writ of injunction permanent;

b) declaring the appointment of defendant Miguel Cuaderno as technical consultant with monthly
compensation of P12,500.00 unconscionable, immoral, illegal and null and void;

c) declaring the selection of defendant Bienvenido Dizon as chairman of the Board of Directors of
the Republic Bank violative of Section 3, sub-paragraph (d) of Republic Act No. 5019, otherwise
known as the Anti-Graft and Corrupt Practices Act, and therefore, illegal and null and void;

d) declaring that defendant Pablo Roman, in view of his criminal liability for the fraudulent real
estate mortgage loans in the Republic Bank amounting to P4 million, has no right to select or to be
allowed to select person or persons who are his alter egos to manage the Republic Bank, and
enjoining the defendant Board of Directors of the Republic Bank from recognizing any officers or
directors appointed or selected by defendant Pablo Roman;

e) ordering defendants Miguel Cuaderno and Bienvenido Dizon to return to the Republic Bank all
amounts they may have received either in the form of compensation, remuneration or emolument,
with an interest thereon at the rate of 6%; or to order defendant Pablo Roman to refund the
amounts paid to said defendant Miguel Cuaderno and defendant Bienvenido Dizon, and to pay
such reasonable damages to the plaintiff Republic Bank;

f) ordering all the defendants to pay the sum of P25,000.00 as attorney's fees, including all
expenses of litigation and costs of this suit.
The Monetary Board filed an answer with denials, admissions and affirmative defenses; but the other
defendants filed separate motions to dismiss on practically the same grounds: no valid cause of action
against the individual movants; lack of legal capacity of plaintiff-relator to sue; and non-exhaustion of
intra-corporate remedies. These motions were duly opposed by plaintiff Damaso Perez.1äwphï1.ñët

On October 24, 1963, the court, "taking into consideration the grounds alleged in the motions to dismiss
and the opposition for the issuance of a writ of preliminary injunction and the affirmative defenses filed
by the defendants and the arguments in support thereof", and "that there are already eight cases pending
in the different branches of this court between practically the same parties", denied the petition for a writ
of preliminary injunction and dismissed the case. The court in effect suggested that the matter at issue in
the case may be presented in any of the pending eight cases by means of amended and supplemental
pleadings.

Plaintiff Damaso Perez thereupon appealed to this Court.

The issue in this appeal, then, is whether or not the Court below erred in dismissing the complaint. In this
connection, it should be remembered that the defenses of the Monetary Board of the Central Bank, being
interposed in an answer and not in a motion to dismiss, are not here at issue. Our sole concern is with the
motions to dismiss of the other defendants, Roman, Cuaderno, Dizon, and the Board of Directors of the
Republic Bank.

They mainly controvert the right of plaintiff to question the appointment and selection of defendants
Cuaderno and Dizon, which they contend to be the result of corporate acts with which plaintiff, as
stockholder, cannot interfere. Normally, this is correct, but Philippine jurisprudence is settled that an
individual stockholder is permitted to institute a derivative or representative suit on behalf of the
corporation wherein he holds stock in order to protect or vindicate corporate rights, whenever the
officials of the corporation refuse to sue, or are the ones to be sued or hold the control of the corporation.
In such actions, the suing stockholder is regarded as a nominal party, with the corporation as the real
party in interest (Pascual vs. Del Saz Orozco, 19 Phil. 82, 85; Everett vs. Asia Banking Corp., 45 Phil. 518;
Angeles vs. Santos, 64 Phil. 697; Evangelista vs. Santos, 86 Phil. 388). Plaintiff-appellant's action here is
precisely in conformity, with these principles. He is neither alleging nor vindicating his own individual
interest or prejudice, but the interest of the Republic Bank and the damage caused to it. The action he has
brought is a derivative one, expressly manifested to be for and in behalf of the Republic Bank, because it
was futile to demand action by the corporation, since its Directors were nominees and creatures of
defendant Pablo Roman (Complaint, p. 6). The frauds charged by plaintiff are frauds against the Bank that
redounded to its prejudice.

The complaint expressly pleads that the appointment of Cuaderno as technical consultant, and of
Bienvenido Dizon to head the Board of Directors of the Republic Bank, were made only to shield Pablo
Roman from criminal prosecution and not to further the interests of the Bank, and avers that both men
are Roman's alter egos. There is no denying that the facts thus pleaded in the complaint constitute a cause
of action for the bank: if the questioned appointments were made solely to protect Roman from criminal
prosecution, by a Board composed by Roman's creatures and nominees, then the moneys disbursed in
favor of Cuaderno and Dizon would be an unlawful wastage or diversion of corporate funds, since the
Republic Bank would have no interest in shielding Roman, and the directors in approving the
appointments would be committing a breach of trust; the Bank, therefore, could sue to nullify the
appointments, enjoin disbursement of its funds to pay them, and recover those paid out for the purpose,
as prayed for in the complaint in this case (Angeles vs. Santos, supra.).
Facts pleaded in the complaint are to be deemed accepted by the defendants who file a motion to dismiss
the complaint for failure to state a cause of action. This is the cardinal principle in the matter. And, it has
been ruled that the test of sufficiency of the facts alleged is whether or not the Court could render a valid
judgment as prayed for, accepting as true the exclusive facts set forth in the complaint.1So rigid is the
norm prescribed that if the Court should doubt the truth of the facts averred it must not dismiss the
complaint but require an answer and proceed to trial on the merits.2

Defendants urge that the action is improper because the plaintiff was not authorized by the corporation
to bring suit in its behalf. Any such authority could not be expected as the suit is aimed to nullify the
action taken by the manager and the board of directors of the Republic Bank; and any demand for intra-
corporate remedy would be futile, as expressly pleaded in the complaint. These circumstances permit a
stockholder to bring a derivative suit (Evangelista vs. Santos, 86 Phil. 394). That no other stockholder has
chosen to make common cause with plaintiff Perez is irrelevant, since the smallness of plaintiff's holdings
is no ground for denying him relief (Ashwander vs. TVA, 80 L. Ed. 688). At any rate, it is yet too early in
the proceedings for the absence of other stockholders to be of any significance, no issues having even
been joined.

There remains the procedural question whether the corporation itself must be made party defendant.
The English practice is to make the corporation a party plaintiff, while in the United States, the usage
leans in favor of its being joined as party defendant (see Editorial Note, 51 LRA [NS] 123). Objections can
be raised against either method. Absence of corporate authority would seem to militate against making
the corporation a party plaintiff, while joining it as defendant places the entity in the awkward position of
resisting an action instituted for its benefit. What is important is that the corporation' should be made a
party, in order to make the Court's judgment binding upon it, and thus bar future relitigation of the
issues. On what side the corporation appears loses importance when it is considered that it lay within the
power of the trial court to direct the making of such amendments of the pleadings, by adding or dropping
parties, as may be required in the interest of justice (Revised Rule 3, sec. 11). Misjoinder of parties is not
a ground to dismiss an action. (Ibid.)

We see no reason to support the contention of defendant Bienvenido Dizon that the action of plaintiff
amounts to a quo warranto proceeding. Plaintiff Perez is not claiming title to Dizon's position as head of
the Republic Bank's board of directors. The suit is aimed at preventing the waste or diversion of
corporate funds in paying officers appointed solely to protect Pablo Roman from criminal prosecution,
and not to carry on the corporation's bank business. Whether the complaint's allegations to such effect
are true or not must be determined after due hearing.

Independently of the grounds advanced by the defendants in their motions to dismiss, the Court a
quo gave as a further pretext for the dismissal of the action the pendency of eight other lawsuits between
practically the same parties; reasoning that the question at issue in the present case could be
incorporated in any one of the other actions by amended or supplemental pleading. We fail to see that
this justifies the dismissal of the case under appeal. In the first place, there is no pretense that the cause
of action here was already included in any of the other pending cases. As a matter of fact, dismissal of the
present action was not sought on the ground of pendency of another action between the same parties.
Secondly, the amendment of a complaint after a responsive pleading is filed, would rest upon the
discretion of the party and the Court. Hence, this case cannot be dismissed simply because of the
possibility that the cause of action here can be incorporated or introduced in any of those of the pending
cases.
In view of the foregoing, the order dismissing the complaint is reversed and set aside. The case is
remanded to the court of origin with instructions to overrule the motions to dismiss and require the
defendants to answer the complaint. Thereafter, the case shall be tried and decided on its merits. Costs
against defendants-appellees. So ordered.

Republic of the Philippines

SUPREME COURT
Manila

FIRST DIVISION

G.R. No. 85339 August 11, 1989

SAN MIGUEL CORPORATION, represented by EDUARDO DE LOS ANGELES, petitioners,

vs.
ERNEST KAHN, ANDRES SORIANO III, BENIGNO TODA, JR., ANTONIO ROXAS, ANTONIO PRIETO,
FRANCISCO EIZMENDI, JR., EDUARDO SORIANO, RALPH KAHN and RAMON DEL ROSARIO,
JR., respondents.

Romulo, Mabanta, Buenaventura, Sayoc & De Los Angeles petitioner.

Roco & Bunag Law Offices for respondent Ernest Kahn.

Siguion Reyna, Montecillo and Ongsiako for other respondents.

NARVASA, J.:

On December 15, 1983, 33,133,266 shares of the outstanding capital stock of the San Miguel Corporation
were acquired 1 by fourteen (14) other corporations, 2 and were placed under a Voting Trust Agreement
in favor of the late Andres Soriano, Jr. When the latter died, Eduardo M. Cojuangco, Jr. was elected
Substitute Trustee on April 9, 1984 with power to delegate the trusteeship in writing to Andres Soriano
III. 3 Shortly after the Revolution of February, 1986, Cojuangco left the country amid "persistent reports"
that "huge and unusual cash disbursements from the funds of SMC" had been irregularly made, and the
resources of the firm extensively used in support of the candidacy of Ferdinand Marcos during the snap
elections in February, 1986 .4

On March 26, 1986, an "Agreement" was executed between Andres Soriano III, as "Buyer," and the 14
corporations, as "Sellers," for the purchase by Soriano, "for himself and as agent of several persons," of
the 33,133,266 shares of stock at the price of P100.00 per share, or "an aggregate sum of Three Billion
Three Hundred Thirteen Million Three Hundred Twenty Six Thousand Six Hundred (P3,313,326,600.00)
Pesos payable in specified installments. 5 The Agreement revoked the voting trust above mentioned, and
expressed the desire of the 14 corporations to sell the shares of stock "to pay certain outstanding and
unpaid debts," and Soriano's own wish to purchase the same "in order to institutionalize and stabilize the
management of the COMPANY in .. (himself) and the professional officer corps, mandated by the
COMPANY's By- laws, and to direct the COMPANY towards giving the highest priority to its principal
products and extensive support to agriculture programme of' the Government ... 6 Actually, according to
Soriano and the other private respondents, the buyer of the shares was a foreign company, Neptunia
Corporation Limited (of Hongkong, a wholly owned subsidiary of San Miguel International which is, in
turn, a wholly owned subsidiary of San Miguel Corporation; 7 and it was Neptunia which on or about April
1, 1986 had made the down payment of P500,000,000.00, "from the proceeds of certain loans". 8

At this point the 33,133,266 SMC shares were sequestered by the Presidential Commission on Good
Government (PCGG), on the ground that the stock belonged to Eduardo Cojuangco, Jr., allegedly a close
associate and dummy of former President Marcos, and the sale thereof was "in direct contravention of ..
Executive Orders Numbered 1 and 2 (.. dated February 28, 1986 and March 12, 1986, respectively) which
prohibit .. the transfer, conveyance, encumbrance, concealment or liquidation of assets and properties
acquired by former President Ferdinand Marcos and/or his wife, Mrs. Imelda Romualdez Marcos, their
close relatives, subordinates, business associates. 9 The sequestration was subsequently lifted, and the
sale allowed to proceed, on representations by San Miguel Corporation x x that the shares were 'owned
by 1.3 million coconut farmers;' the seller corporations were 'fully owned' by said farmers and Cojuangco
owned only 2 shares in one of the companies, etc. However, the sequestration was soon re-imposed by
Order of the PCGG dated May 19, 1986 .. The same order forbade the SMC corporate Secretary to register
any transfer or encumbrance of any of the stock without the PCGG's prior written authority. 10

San Miguel promptly suspended payment of the other installments of the price to the fourteen (14) seller
corporations. The latter as promptly sued for rescission and damages.11

On June 4,1986, the PCGG directed San Miguel Corporation"to issue qualifying shares" in the corporation
to seven (7) individuals, including Eduardo de los Angeles, "from the sequestered shares registered as
street certificates under the control of Anscor- Hagedorn Securities, Inc.," to "be held in trust by .. (said
seven [7] persons) for the benefit of Anscor-Hagedom Securities, Inc. and/or whoever shall finally be
determined to be the owner/owners of said shares. 12

In December, 1986, the SMC Board, by Resolution No. 86-122, "decided to assume the loans incurred by
Neptunia for the down payment ((P500M)) on the 33,133,266 shares." The Board opined that there was
"nothing illegal in this assumption (of liability for the loans)," since Neptunia was "an indirectly wholly
owned subsidiary of SMC," there "was no additional expense or exposure for the SMC Group, and there
were tax and other benefits which would redound to the SMC group of companies. 13

However, at the meeting of the SMC Board on January 30, 1987, Eduardo de los Angeles, one of the PCGG
representatives in the SMC board, impugned said Resolution No. 86-12-2, denying that it was ever
adopted, and stating that what in truth was agreed upon at the meeting of December 4, 1986 was merely
a "further study" by Director Ramon del Rosario of a plan presented by him for the assumption of the
loan. De los Angeles also pointed out certain "deleterious effects" thereof. He was however overruled by
private respondents. 14 When his efforts to obtain relief within the corporation and later the PCGG proved
futile, he repaired to the Securities and Exchange Commission (SEC).lâwphî1.ñèt

He filed with the SEC in April, 1987, what he describes as a derivative suit in behalf of San Miguel
Corporation, against ten (10) of the fifteen-member Board of Directors who had "either voted to approve
and/or refused to reconsider and revoke Board Resolution No. 86-12-2." 15 His Amended Petition in the
SEC recited substantially the foregoing antecedents and the following additional facts, to wit:

a) On April 1, 1986 Soriano, Kahn and Roxas, as directors of' Neptunia Corporation, Ltd.,
had met and passed a resolution authorizing the company to borrow up to US
 $26,500,000.00 from the Hongkong & Shanghai Banking Corporation, Hongkong "to enable
the Soriano family to initiate steps and sign an agreement for the purchase of some
33,133,266 shares of San ,Miguel Corporation. 16

b) The loan of $26,500,000.00 was obtained on the same day, the corresponding loan
agreement having been signed for Neptunia by Ralph Kahn and Carl Ottiger. At the latter's
request, the proceeds of the loan were deposited in different banks 17 for the account of
"Eduardo J. Soriano".

c) Three (3) days later, on April 4, 1986, Soriano III sent identical letters to the
stockholders of San Miguel Corporation, 18 inter alia soliciting their proxies and announcing
that "the Soriano family, friends and affiliates acquired a considerable block of San Miguel
Corporation shares only a few days ago .., the transaction .. (having been) made through the
facilities of the Manila Stock Exchange, and 33,133,266 shares .. (having thereby been)
purchased for the aggregate price of' P3,313,326,600.00." The letters also stated that the
purchase was "an exercise of the Sorianos' right to buy back the same number of shares
purchased in 1983 by the .. (14 seller corporations)."

d) In implementing the assumption of the Neptunia loan and the purchase agreement for
which said loan was obtained, which assumption constituted an improper use of corporate
funds to pay personal obligations of Andres Soriano III, enabling him; to purchase stock of
the corporation using funds of' the corporation itself, the respondents, through various
subsequent machinations and manipulations, for interior motives and in breach of
fiduciary duty, compound the damages caused San Miguel Corporation by, among other
things: (1) agreeing to pay a higher price for the shares than was originally covenanted in
order to prevent a rescission of the purchase agreement by the sellers; (2) urging UCPB to
accept San Miguel Corporation and Neptunia as buyers of the shares, thereby committing
the former to the purchase of its own shares for at least 25% higher than the price at which
they were fairly traded in the stock exchanges, and shifting to said corporations the
personal obligations of Soriano III under the purchase agreement; and (3) causing to be
applied to the part payment of P1,800,000.00 on said purchase, various assets and
receivables of San Miguel Corporation.

The complaint closed with a prayer for injunction against the execution or consummation of any
agreement causing San Miguel Corporation to purchase the shares in question or entailing the use of its
corporate funds or assets for said purchase, and against Andres Soriano III from further using or
disposing of the funds or assets of the corporation for his obligations; for the nullification of the SMC
Board's resolution of April 2, 1987 making San Miguel Corporation a party to the purchase agreement;
and for damages.

Ernest Kahn moved to dismiss de los Angeles' derivative suit on two grounds, to wit:

1 De los Angeles has no legal capacity to sue because —

a) having been merely imposed by the PCGG as a director on

San Miguel, he has no standing to bring a minority derivative
suit;
 b) he personally holds only 20 shares and hence cannotfairly
and adequately represent the minority stockholders of the
corporation;

c) he has not come to court with clean hands; and

2. The Securities & Exchange Commission has no jurisdiction over the controversy because
the matters involved are exclusively within the business judgment of the Board of
Directors. 19

Kahn's motion to dismiss was subsequently adopted by his correspondents .20

The motion to dismiss was denied by SEC Healing Officer Josefina L. Pasay Paz, by order dated September
4, 1987. 21 In her view —

1) the fact that de los Angeles was a PCGG nominee was irrelevant because in law,
ownership of even one share only, sufficed to qualify a person to bring a derivative suit;

2) it is indisputable that the action had been brought by de los Angeles for the benefit of the
corporation and all the other stockholders;

3) he was a stockholder at the time of the commission of the acts complained of, the
number of shares owned by him being to repeat, immaterial;

4) there is no merit in the assertion that he had come to Court with unclean hands, it not
having been shown that he participated in the act complained of or ratified the same; and

5) where business judgment transgresses the law, the securities and Exchange Commission
always has competence to inquire thereinto.

Kahn filed a petition for certiorari and prohibition with the Court of Appeals, seeking the annulment of
this adverse resolution of the SEC Hearing Officer and her perpetual inhibition from proceeding with SEC
Case No. 3152.

A Special Division of that Court sustained him, upon a vote of three-to-two. The majority 22 ruled that de
los Angeles had no egal capacity to institute the derivative suit, a conclusion founded on the following
propositions:

1) a party "who files a derivative suit should adequately represent the interests of the
minority stockholders;" since "De los Angeles holds 20 shares of stock out of 121,645,860
or 0.00001644% (appearing to be undisputed), (he) cannot even be remotely said to
adequately represent the interests of the minority stockholders, (e)specially so when .. de
los Angeles was put by the PCGG to vote the majority stock," a situation generating "a
genuine conflict of interest;"

2) de los Angeles has not met this conflict-of-interest argument, i.e., that his position as
PCGG-nominated director is inconsistent with his assumed role of representative of
 minority stockholders; not having been elected by the minority, his voting would
expectedly consider the interest of the entity which placed him in the board of directors;

3) Baseco v. PCGG, May 27,1987, 23 has laid down the principle that the (a) PCGG cannot
exercise acts of dominion over sequestered property, (b) it has only powers of
administration, and (c) its voting of sequestered stock must be done only pursuant to its
power of administration; and

4) de los Angeles' suit is not a derivative suit, a derivative suit being one brought for the
benefit of the corporation.

The dissenting Justices, 24 on the other hand, were of the opinion that the suit had been properly brought
by de los Angeles because —

1) the number of shares owned by him was immaterial, he being a stockholder in his own
right;

2) he had not voted in favor of the resolution authorizing the purchase of the shares; and

3) even if PCGG was not the owner of the sequestered shares, it had the right to seek the
protection of the interest of the corporation, it having been held that even an unregistered
shareholder or an equitable owner of shares and pledgees of shares may be deemed a
shareholder for purposes of instituting a derivative suit.

De los Angeles has appealed to this Court. He prays for reversal of the judgment of the Court of Appeals,
imputing to the latter the following errors:

1) having granted the writ of certiorari despite the fact that Kahn had not first resorted to
the plain remedy available to him, i.e., appeal to the SEC en banc and despite the fact that no
question of jurisdiction was involved;

2) having ruled on Kahn's petition on the basis merely of his factual allegations, although
he (de los Angeles) had disputed them and there had been no trial in the SEC; and

3) having held that he (de los Angeles) could not file a derivative suit as stockholder and/or
director of the San Miguel Corporation.

For their part, and in this Court, the respondents make the following assertions:

1) SEC has no jurisdiction over the dispute at bar which involves the ownership of the
33,133,266 shares of SMC stock, in light of this Court's Resolution in G.R. Nos. 74910, 5075,
75094, 76397, 79459 and 79520, promulgated on August 10, 1988; 25

2) de los Angeles was beholden to the controlling stockholder in the corporation (PCGG),
which had "imposed" him on the corporation; since the PCGG had a clear conflict of interest
with the minority, de los Angeles, as director of the former, had no legal capacity to sue on
behalf of the latter;
 3) even assuming absence of conflict of interest, de los Angeles does not fairly and
adequately represent the interest of the minority stockholders;

4) the respondents had properly applied for certiorari with the Court of Appeals because —

a) that Court had, by law, exclusive appellate jurisdiction over officers and agencies
exercising quasi-judicial functions, and hence file competence to issue the writ of certiorari;

b) the principle of exhaustion of administrative remedies does not apply since the issue
involved is one of law;

c) said respondents had no plain, speedy and adequate remedy within SEC;

d) the Order of the SEC Investigating Officer — denying the motion to dismiss — was
issued without or in excess of jurisdiction, hence was correctly nullified by the Court of
Appeals; and

e) de los Angeles had not raised the issue of absence of a motion for reconsideration by
respondents in the SEC case; in any event, such a motion was unnecessary in the premises.

De los Angeles' Reply seeks to make the following points:

1) since the law lays down three (3) requisites for a derivative suit, viz:

a) the party bringing suit should be a shareholder as of the time of the act or
transaction complained of,

b) he has exhausted intra-corporate remedies, i.e., has made a demand on the

board of directors for the appropriate relief but the latter has failed or
refused to heed his plea; and

c) c)the cause of action actually devolves on the corporation, the ,wrongdoing

or harm having been caused to the corporation and not to .the particular
stockholder bringing the suit;

and since (1) he is admittedly the owner of 20 shares of SMC stock in his own right, having acquired those
shares as early as 1977, (2) he had sought without success to have the board of' directors remedy with
wrong, and (3) that wrong was in truth a 'wrong against the stockholders of the corporation, generally,
,and not against him individually — and it was the corporation, and not he, particularly, that would be
entitled to the appropriate' relief — the propriety of his suit cannot be gainsaid;

2) Kahn had not limited himself to questions of law in the proceedings in the Court of
Appeals and hence could not claim exclusion from the scope of the doctrine of exhaustion
of remedies; moreover, Rule 65, invoked by him, bars a resort to certiorari. where a plain,
speedy and accurate remedy was available to him in this case, to wit, a motion for
reconsideration before the Sec en banc and, contrary to the respondent's claim, De Los
Angeles had in fact asserted to this propositions before the Appellate Tribunal; and
 3) the respondent had not raised the issue of jurisdiction before the Court of Appeals;
indeed, they admit to their Comment that that

issue has not yet been resolved by the SEC," be this as it may, the derivative suit does not
fall within the BASECO doctrine since it does not involve any question of ownership of the
33,133,266 sequestered SMC shares but rather, the validity of the resolution of the board of
directors for the assumption by the corporation, for the benefit of certain of its officers and
stockholders, of liability for loans contracted by another corporation, which is an intra-
corporate dispute within the exclusive jurisdiction of the SEC.

1. De los Angeles is not opposed to the asserted position of the PCGG that the sequestered
SMC shares of stock belong to Ferdinand Marcos and/or his dummies and/or cronies. His
consent to sit in the board as nominee of PCGG unquestionably indicates his advocacy of
the PCGG position. He does not here seek, and his complaint in the SEC does not pray for,
the annulment of the purchase by SMC of the stock in question, or even the subsequent
purchase of the same stock by others 26 which proposition was challenged by (1) one Evio,
in SEC Case No. 3000; (2) by the 14 corporations which sold the stock to SMC, in Civil Case
No. 13865 of the Manila RTC, said cases having later become subject of G.R. No. 74910 of
this Court; (3) by Neptunia, SMC, and others, in G.R. No. 79520 of this Court; and (4) by
Eduardo Cojuangco and others in Civil Case No. 16371 of the RTC, Makati, [on the theory
that the sequestered stock in fact belonged to coconut planters and oil millers], said case
later having become subject of G.R. No. 79459 of this court .27 Neither does de los Angeles
impugn, obviously, the right of the PCGG to vote the sequestered stock thru its nominee
directors — as was done by United Coconut Planters Bank and the 14 seller corporations
(in SEC Case No. 3005, later consolidated with SEC Case No. 3000 above mentioned, these
two (2) cases later having become subject of G.R.No. 76397) as well as by one Clifton
Ganay, a UCPB stockholder (in G.R. No. 75094 of this Court).lâwphî1.ñèt 28

The subject matter of his complaint in the SEC does not therefore fall within the ambit of this Court's
Resolution of August 10, 1988 on the cases just mentioned, to the effect that, citing PCGG v. Pena, et
al 29 an cases of the Commission regarding 'the funds, moneys, assets, and properties illegally acquired or
misappropriated by former President Ferdinand Marcos, Mrs. Imelda Romualdez Marcos, their close
relatives, Subordinates, Business Associates, Dummies, Agents, or Nominees, whether civil or criminal,
are lodged within the exclusive and original jurisdiction of the Sandiganbayan,' and all incidents arising
from, incidental to, or related to, such cases necessarily fall likewise under the Sandiganbayan's exclusive
and original jurisdiction, subject to review on certiorari exclusively by the Supreme Court." His complaint
does not involve any property illegally acquired or misappropriated by Marcos, et al., or "any incidents
arising from, incidental to, or related to" any case involving such property, but assets indisputably
belonging to San Miguel Corporation which were, in his (de los Angeles') view, being illicitly committed
by a majority of its board of directors to answer for loans assumed by a sister corporation, Neptunia Co.,
Ltd.

De los Angeles' complaint, in fine, is confined to the issue of the validity of the assumption by the
corporation of the indebtedness of Neptunia Co., Ltd., allegedly for the benefit of certain of its officers and
stockholders, an issue evidently distinct from, and not even remotely requiring inquiry into the matter of
whether or not the 33,133,266 SMC shares sequestered by the PCGG belong to Marcos and his cronies or
dummies (on which- issue, as already pointed out, de los Angeles, in common with the PCGG, had in fact
espoused the affirmative). De los Angeles' dispute, as stockholder and director of SMC, with other SMC
directors, an intra-corporate one, to be sure, is of no concern to the Sandiganbayan, having no relevance
whatever to the ownership- of the sequestered stock. The contention, therefore, that in view of this
Court's ruling as regards the sequestered SMC stock above adverted to, the SEC has no jurisdiction over
the de los Angeles complaint, cannot be sustained and must be rejected. The dispute concerns acts of the
board of directors claimed to amount to fraud and misrepresentation which may be detrimental to the
interest of the stockholders, or is one arising out of intra-corporate relations between and among
stockholders, or between any or all of them and the corporation of which they are stockholders .30

2. The theory that de los Angeles has no personality to bring suit in behalf of the
corporation — because his stockholding is minuscule, and there is a "conflict of interest"
between him and the PCGG — cannot be sustained, either.

It is claimed that since de los Angeles 20 shares (owned by him since 1977) represent only. 00001644%
of the total number of outstanding shares (1 21,645,860), he cannot be deemed to fairly and adequately
represent the interests of the minority stockholders. The implicit argument — that a stockholder, to be
considered as qualified to bring a derivative suit, must hold a substantial or significant block of stock —
finds no support whatever in the law. The requisites for a derivative suit 31 are as follows:

a) the party bringing suit should be a shareholder as of the time of the act or transaction
complained of, the number of his shares not being material; 32

b) he has tried to exhaust intra-corporate remedies, i.e., has made a demand on the board
of directors for the appropriate relief but the latter has failed or refused to heed his
plea; 33 and

c) the cause of action actually devolves on the corporation, the wrongdoing or harm having
been, or being caused to the corporation and not to the particular stockholder bringing the
suit. 34

The bona fide ownership by a stockholder of stock in his own right suffices to invest him with standing to
bring a derivative action for the benefit of the corporation. The number of his shares is immaterial since
he is not suing in his own behalf, or for the protection or vindication of his own particular right, or the
redress of a wrong committed against him, individually, but in behalf and for the benefit of the
corporation.

3. Neither can the "conflict-of-interest" theory be upheld. From the conceded premise that
de los Angeles now sits in the SMC Board of Directors by the grace of the PCGG, it does not
follow that he is legally obliged to vote as the PCGG would have him do, that he cannot
legitimately take a position inconsistent with that of the PCGG, or that, not having been
elected by the minority stockholders, his vote would necessarily never consider the latter's
interests. The proposition is not only logically indefensible, non sequitur, but also
constitutes an erroneous conception of a director's role and function, it being plainly a
director's duty to vote according to his own independent judgment and his own conscience
as to what is in the best interests of the company. Moreover, it is undisputed that apart
from the qualifying shares given to him by the PCGG, he owns 20 shares in his own right, as
regards which he cannot from any aspect be deemed to be "beholden" to the PCGG, his
ownership of these shares being precisely what he invokes as the source of his authority to
bring the derivative suit.
 4. It is also theorized, on the authority of the BASECO decision, that the PCGG has no power
to vote sequestered shares of stock as an act of dominion but only in pursuance — to its
power of administration. The inference is that the PCGG's act of voting the stock to elect de
los Angeles to the SMC Board of Directors was unauthorized and void; hence, the latter
could not bring suit in the corporation's behalf. The argument is strained and obviously of
no merit. As already more than plainly indicated, it was not necessary for de los Angeles to
be a director in order to bring a derivative action; all he had to be was a stockholder, and
that he was owning in his own right 20 shares of stock, a fact not disputed by the
respondents.

Nor is there anything in the Baseco decision which can be interpreted as ruling that sequestered stock
may not under any circumstances be voted by the PCGG to elect a director in the company in which such
stock is held. On the contrary, that it held such act permissible is evident from the context of its reference
to the Presidential Memorandum of June 26, 1986 authorizing the PCGG, "pending the outcome of
proceedings to determine the ownership of .. sequestered shares of stock,"'to vote such shares .. at all
stockholders' meetings called for the election of directors ..," the only caveat being that the stock is not to
be voted simply because the power to do so exists, whether it be to oust and replace directors or to effect
substantial changes in corporate policy, programs or practice, but only "for demonstrably weighty and
defensible grounds" or "when essential to prevent disappearance or wastage of corporate property."

The issues raised here do not peremptorily call for a determination of whether or not in voting petitioner
de los Angeles to the San Miguel Board, the PCGG kept within the parameters announced in Baseco; and
absent any showing to the contrary, consistently with the presumption that official duty is regularly
performed, it must be assumed to have done so.

WHEREFORE, the petition is GRANTED. The appealed decision of the Court of Appeals in CA- G.R. SP No.
12857 — setting aside the order of September 4, 1987 issued in SEC Case No. 3153 and dismissing said
case — is REVERSED AND SET ASIDE. The further disposition in the appealed decision for the issuance of
a writ of preliminary injunction upon the filing and approval of a bond of P500,000.00 by respondent
Ernest Kahn (petitioner in the Appellate Court) is also SET ASIDE, and any writ of injunction issued
pursuant thereto is lifted. Costs against private respondents.

SO ORDERED.

Republic of the Philippines

SUPREME COURT
Manila

SECOND DIVISION

G.R. No. 85318 June 3, 1991

COMMART (PHILS.) INC., JESUS, CORAZON, ALBERTO, AND BERNARD all surnamed
MAGLUTAC,petitioners,
vs.
SECURITIES & EXCHANGE COMMISSION and ALICE MAGLUTAC, respondents.
Monsod, Tamargo & Associates for petitioners.
Panganiban, Benitez, Barinaga & Bautista Law Offices for private respondent.

PARAS, J.:

Petitioners, in the instant petition for review on certiorari, seek the reversal of the en banc Order of the
respondent Securities & Exchange Commission dated September 12, 1988 denying the petition
for certiorari (SEC-EB No. 115-117) filed by the petitioners herein and ordering that the original
complaint (SEC Case No. 2673) be remanded to the Securities Investigation and Clearing Department for
further proceeding, for having been rendered in grave abuse of discretion amounting to lack of or in
excess of jurisdiction and in contravention of existing laws and jurisprudence.

Commart (Phils.), Inc., (Command for short) is a corporation organized by two brothers, Jesus and
Mariano Maglutac, to engage in the brokerage business for the importation of fertilizers and other
products/commodities.

Jesus T. Maglutac (Jesus for short) ran the company as president, chairman of the board, and chairman of
the executive committee, while Mariano T. Maglutac (Mariano for short) served as executive vice-
president and vice-chairman of the executive committee until April 1984.

Sometime in June 1984, the two brothers agreed to go their separate ways, with Mariano being
persuaded to sell to Jesus his shareholdings in Commart amounting to 25% of the outstanding capital
stock. As part of the deal, a "Cooperative Agreement" was signed, between Commart (represented by
Jesus) and Mariano, in which, among others, Commart ceded to Mariano or to an "acceptable entity" he
may create, a portion of its business, with a pledge of mutual cooperation for a certain period so as to
enable Mariano to get his own corporation off the ground, so to speak.

Mariano's wife, Alice M. Maglutac (private respondent herein) who has been for years a stockholder and
director of Commart, did not dispose of her shareholdings, and thus continued as such even after the sale
of Mariano's equity.

As broker and indentor, Commart's principal income came from commissions paid to it in U.S. dollars by
foreign suppliers of fertilizers and other commodities imported by Planters Products, Inc. and other local
importers.

Shortly after the sale of his equity in Commart to Jesus, Mariano allegedly discovered that for several
years, Jesus and his wife Corazon (who was herself a director) had been siphoning and diverting to their
private bank accounts in the United States and in Hongkong gargantuan amounts sliced off from
commissions due Commart from some foreign suppliers. Consequently, on August 22, 1989, spouses
Mariano and Alice Maglutac filed a complaint (SEC Case No. 2673) with the Securities & Exchange
Commission (SEC for short) against Jesus T. Maglutac, Victor Cipriano, Clemente Ramos, Carolina de los
Reyes, Corazon Maglutac, Alberto Maglutac and Bernardo Maglutac (Jesus as Chairman) and the rest as
members of the Board of Directors of Commart).
In their Complaint, Mariano and Alice Maglutac alleged, among others, that "Jesus T. Maglutac, by means
of secret arrangements with foreign suppliers, embodied in and evidenced by, correspondences and
other documents discovered just recently, has been diverting into his private bank accounts and
converting to his own personal benefit and advantage substantial portions of the commission income of
the corporation, to the prejudice of the corporation, its stockholders and its creditors." (Petition, Annex B,
p. 2; Rollo, p. 20) Thus, complainants prayed, among others, that judgment be rendered as follows ––

(a) Ordering respondents Jesus T. Maglutac, Corazon Maglutac, and Victor Cipriano to account for
and to turn over or deliver to the Corporation the sum of US$2,539,918.97, or its equivalent in
Philippine currency, with legal interest thereon from the respective dates of misappropriation or,
at the very least, from date of filing of this suit, together with such other and further sums as may
be proved to have likewise been misappropriated by them;

(b) Ordering all the respondents, as members of the Board of Directors, to take such remedial
steps as would protect the corporation from further depredation of its funds and property;

(c) Declaring rescinded or annulled the disposition of complainant Mariano T. Maglutac's shares of
stock to respondent Jesus T. Maglutac and ordering the restoration to the former of all his
executive positions with all the rights and privileges thereunto appertaining; or, in the alternative,
ordering that said complainant be paid the equivalent of one-fourth of the actual market value of
COMMART's present assets including goodwill, taking into consideration also the total sums
misappropriated by respondents Jesus T. Maglutac, Corazon Maglutac, and Victor Cipriano which
rightfully belonged to COMMART; and

(d) Ordering respondents to pay complainants attorney's fees equivalent to twenty (20%) per
cent of the total amounts awarded and recovered, plus such further sums as may be proved to
have been incurred as and by way of litigation expenses. (pp. 24-25, Rollo)

In response to the aforementioned Complaint, two Motions to Dismiss were filed. The records reveal that:

(a) On October 17, 1984, Albert and Bernard Maglutac moved to dismiss on the ground that
Mariano Maglutac has no capacity to sue and the complaint states no cause of action against them.

(b) On October 20, 1984, Jesus & Corazon Maglutac likewise moved to dismiss on the ground that
respondent Commission does not have jurisdiction over the nature of the suit.

These motions were opposed by complainants Alice and Mariano Maglutac. While said incidents were
pending, complainants filed an Amended Complaint hereby Commart was impleaded as party
complainant and praying that Commart be placed under receivership and the properties of Jesus &
Corazon Maglutac and Victor Cipriano be attached. It is alleged in the Amended Complaint that
complainant Commart is the corporation in whose behalf and for whose benefit this derivative suit is
brought; that complainant Alice M. Maglutac is a minority stockholder in good standing of Commart while
her husband complainant Mariano T. Maglutac was, likewise, until June 25, 1984 or thereabouts, a
stockholder of Commart.

Motions to dismiss said Amended Complaint were also filed by present petitioners and were also duly
opposed by complainants Mariano and his wife.
On May 10, 1985 Commart filed a Manifestation/Notice of Dismissal, manifesting that "it withdraws and
dismisses the action taken in its behalf by complainants Mariano T. Maglutac and Alice M. Maglutac
against all respondents." (Petition, Annex E, p. 3; Rollo, pp. 42-44)

This was opposed by complainants on the ground, among other doctrines, that in a derivative suit the
corporation is not allowed to be an active participant and has no control over the suit against the real
defendants; that the suing shareholder has the right of control.

On May 27, 1985, the Hearing Panel issued an Order denying all the motions to dismiss as well as the so
called manifestation/notice of dismissal on the finding inter alia that ––

Respondents maintain that the present action is basically one for annulment/rescission of sale
with alternative prayer for reinstatement of employment status; that the action is not a derivative
suit considering that the nature of the action is one for annulment and the fact that complainant
Mariano T. Maglutac being a non-stockholder is not qualified to institute a derivative suit; that the
action does not in any way make mention of an actionable wrong against respondents Albert and
Bernard Maglutac, Clemente Ramos and Carolina de los Reyes.

By way of opposition, complainants alleged that the instant action should be characterized as a
minority stockholders' derivative suit; that complainant Alice Maglutac is not merely a nominal
party but a real party in interest; that Mariano T. Maglutac's rights as a stockholder have been
injured through the machinations and maneuvering of respondent Jesus Maglutac; that the prayer
for rescission or annulment of contract is merely the logical consequence of the exercise of
jurisdiction by this Commission.

Respondents' contention that the Commission has no jurisdiction over the subject matter or the
nature of the action is devoid of merit. It is a cardinal principle in legal procedure that what
determined the subject matter or the nature of the action are the facts a complaint as constituting
the cause of action. A perusal of the complaint, as well as, the amended complaint would show that
the action is one for "mismanagement", for the complainants alleged, inter alia, that ". . .
respondent Jesus T. Maglutac, by means of secret arrangements with foreign suppliers embodied
in, and evidenced by, correspondences and other documents discovered just recently, has been
diverting into his private bank accounts and to his own personal benefit and advantage substantial
portions of the commission income of the corporation, to the prejudice of the corporation, its
stockholders and its creditors and enumerated immediately thereafter the alleged specific acts of
mismanagement. Viewed therefrom, the Commission has jurisdiction. (pp. 127-128, Rollo)

On June 18, 1985 Commart filed a motion for reconsideration and on August 29, 1985, Jesus and Corazon
Maglutac also filed a similar motion to have the Order of May 27, 1985 reconsidered and set aside. These
motions were duly opposed by Mariano and Alice Maglutac.

Acting on the Motion for Reconsideration, the Hearing Panel issued on November 12, 1985, an Order
modifying its previous order "by dismissing this case insofar as Mariano T. Maglutac is concerned" but
affirming the said order "in all other respects." (Annex F to Petition, pp. 46, 49, Rollo)

Not satisfied with such modification present petitioners as respondents in SEC Case No. 2673 went to the
SEC en banc on a petition for certiorari, prohibition and mandamus with prayer for preliminary
injunction. They contend –– (a) that the Hearing Panel acted with grave abuse of discretion in not
dismissing the case for failure of Alice Maglutac to exhaust intra-corporate remedies, and (b) that grave
abuse was likewise committed in not dismissing the case on the ground that the complaint did not show
clearly that Alice Maglutac was a stockholder at the time the questioned transaction occurred.

On September 12, 1988, the Commission en banc issued an Order denying the aforesaid petition and
remanding the case to the Securities Investigation and Clearing Department for further proceedings. It
ruled (a) that exhaustion of intra-corporate remedy before filing suit "may be dispensed with where it is
clear that it is unavailable or futile" as was the case here. (p. 2, Order of Sept. 12, 1988, Annex A to
Petition) citing Everett v. Asia Banking Corp., 49 Phil. 512, and Republic Bank v. Cuaderno, 19 SCRA 671,
and (b) that the mere allegation in the complaint that complainant is still a stockholder of Commart "is
sufficient to vest jurisdiction to this Commission" but complainant must prove at the time of reception of
evidence that she was also a stockholder at the time the acts complained of occurred. (Id., p. 3)

Although complainant Alice Maglutac failed to exhaust an intra-corporate remedy before filing this
case, the said condition precedent may be dispensed with where it is clear that it is unavailable or
futile. Thus it was held that:

Where the board of directors in a corporation is under the complete control of the principal
defendants in the case and it is obvious that a demand upon the board of directors to
institute an action and prosecute the same effectively would be useless, the action may be
brought by one or more of the stockholders without such demand (Everett v. Asia Banking
Corp., 49 Phil. 512; Republic Bank v. Cuaderno, et al., No. L-22399, March 30, 1967).

A stockholder can file a derivative suit provided there is an allegation in the complaint that she is
such at the time the acts complained of occurred, and at the time the suit is brought (Hawes v.
Oakland, 14 Otto [104 U.S.], 450,456; S.C. 5972, 13 Fletcher 345, cited in Alvendia, The Law of
Private Corporations in the Philippines, First Ed., p. 361). The requirement that said facts be
pleaded is merely procedural although the necessity of the existence of these facts in order to give
rise to the right of action is substantive (Pascual v. Del Saz Orozco, 19 Phil. 97). And equity
considerations warrant the liberal interpretation of the rules of procedure to the end that
technicalities should not stand in the way of equitable relief (Vol. I, Francisco, Civil Procedure, 2nd
ed., p. 157, 1973 ed.) Mere allegation therefore that complainant is still a stockholder of Commart
is sufficient to vest jurisdiction to this Commission. Complainant must however prove at the time
of reception of evidence that she was also a stockholder at the time the acts complained of
occurred. (pp. 10-11, Memorandum by public respondent)

Hence, this petition.

The petitioners invoke two grounds for reversal of the Order under review thereby raising these two
issues, to wit:

1. Did the Securities and Exchange Commission err and/or commit "grave abuse of discretion" in
denying the petition for certiorari and remanding the case for further proceedings despite the so-
called "notice of dismissal" filed by Commart?

2. Did the Securities and Exchange Commission err and/or commit "grave abuse of discretion" in
its handling of the "conflict of interest issue?" (Petition, p. 6; Rollo, p. 81)
We find the petition devoid of merit.

The complaint in SEC Case No. 2673, particularly paragraphs 2 to 9 under First Cause of Action, readily
shows that it avers the diversion of corporate income into the private bank accounts of petitioner Jesus T.
Maglutac and his wife. Likewise, the principal relief prayed for in the complaint is the recovery of a sum
of money in favor of the corporation. This being the case, the complaint is definitely a derivative suit.
Consequently, the SEC correctly held that the case was a minority stockholder's derivative suit and
correctly sustained the hearing panel's denial — insofar as Alice Maglutac was concerned — of the
motions to dismiss it.

A derivative suit has been the principal defense of the minority shareholder against abuses by the
majority.1âwphi1 It is a remedy designed by equity for those situations where the management, through
fraud, neglect of duty, or other cause, declines to take the proper and necessary steps to assert the
corporation's rights. Indeed, to grant to Commart the right of withdrawing or dismissing the suit, at the
instance of majority stockholders and directors who themselves are the persons alleged to have
committed breaches of trust against the interest of the corporation, would be to emasculate the right of
minority stockholders to seek redress for the corporation. To consider the Notice of Dismissal filed by
Commart as quashing the complaint filed by Alice Maglutac in favor of the corporation would be to defeat
the very nature and function of a derivative suit and render the right to institute the action illusory.

In any case, the suit is for the benefit of Commart itself, for a judgment in favor of the complainants will
necessarily mean recovery by the corporation of the US$2.5 million alleged to have been diverted from its
coffers to the private bank accounts of its top managers and directors. Thus, the prayer in the Amended
Complaint is for judgment ordering respondents Jesus and Corazon Maglutac, as well as Victor Cipriano,
"to account for and to turn over or deliver to the Corporation" the aforesaid sum, with legal interest, and
"ordering all the respondent, as members of the Board of Directors to take such remedial steps as would
protect the corporation from further depredation of the funds and property." (pars. [a] & [b], Annex 2,
Comment)

On the "conflict of interest" issue, petitioners allege that private respondent Alice Maglutac "is a majority
stockholder of M.M. International Sales, a business rival/competitor of Commart and holds only less than
one percent (1%) of the entire shareholdings of Commart." According to petitioners, this being the case it
is easier to believe that this so called derivative suit was filed because it is to the best interest of the
company where she has a bigger and substantial interest, which in this case is M.M. International Sales,
Inc.

In disposing of this contention respondent SEC ruled that jurisdiction cannot be made to depend upon the
pleas and defenses set up by a defendant in a motion to dismiss or answer, otherwise jurisdiction should
become dependent almost entirely upon the defendant (citing Cardenas v. Camus, infra.) But it left the
door open to a further consideration of the issue by stating that complainant's ownership of majority
stocks of a rival corporation could not at this stage of the proceedings, defeat complainant's claims:

Jurisdiction of the court cannot be made to depend upon the pleas or defenses pleaded by the
defendant in his motion to dismiss or answer, for were we to be governed by such rule, the
question of jurisdiction would depend almost entirely upon the defendant (Cardenas v. Camus, 5
SCRA 639). Respondents' assertion in their motion to dismiss of complainant's ownership of the
majority stocks of a rival corporation, could not at this stage of the proceedings, defeat
complainant's claim. (pp. 83-84, Rollo)
In other words, no real prejudice has been inflicted upon petitioners' right to be heard on this matter
raised by them, since the same can still be looked into during the hearing of a derivative suit on the
merits. There was, therefore, neither error nor grave abuse of discretion in the decision of the Securities
& Exchange Commission not to dismiss the case but to remand it instead to the Hearing Panel for further
proceedings.

WHEREFORE, for lack of merit, this Petition is DISMISSED. Costs against petitioners.

SO ORDERED.

Republic of the Philippines

SUPREME COURT
Manila

FIRST DIVISION

G.R. No. 113032 August 21, 1997

WESTERN INSTITUTE OF TECHNOLOGY, INC., HOMERO L. VILLASIS, DIMAS ENRIQUEZ, PRESTON F.

VILLASIS & REGINALD F. VILLASIS, petitioner,
vs.
RICARDO T. SALAS, SALVADOR T. SALAS, SOLEDAD SALAS-TUBILLEJA, ANTONIO S. SALAS,
RICHARD S. SALAS & HON. JUDGE PORFIRIO PARIAN, respondents.

HERMOSISIMA, JR., J.:

Up for review on certiorari are: (1) the Decision dated September 6, 1993 and (2) the Order dated
November 23, 1993 of Branch 33 of the Regional Trial Court of Iloilo City in Criminal Cases Nos. 37097
and 37098 for estafa and falsification of a public document, respectively. The judgment acquitted the
private respondents of both charges, but petitioners seek to hold them civilly liable.

Private respondents Ricardo T. Salas, Salvador T. Salas, Soledad Salas-Tubilleja, Antonio S. Salas, and
Richard S. Salas, belonging to the same family, are the majority and controlling members of the Board of
Trustees of Western Institute of Technology, Inc. (WIT, for short), a stock corporation engaged in the
operation, among others, of an educational institution. According to petitioners, the minority
stockholders of WIT, sometime on June 1, 1986 in the principal office of WIT at La Paz, Iloilo City, a
Special Board Meeting was held. In attendance were other members of the Board including one of the
petitioners Reginald Villasis. Prior to aforesaid Special Board Meeting, copies of notice thereof, dated May
24, 1986, were distributed to all Board Members. The notice allegedly indicated that the meeting to be
held on June 1, 1986 included Item No. 6 which states:

Possible implementation of Art. III, Sec. 6 of the Amended By-Laws of Western Institute of
Technology, Inc. on compensation of all officers of the corporation.1
In said meeting, the Board of Trustees passed Resolution No. 48, s. 1986, granting monthly compensation
to the private respondents as corporate officers retroactive June 1, 1985, viz.:

Resolution No. 48 s. 1986

On the motion of Mr. Richard Salas (accused), duly seconded by Mrs. Soledad Tubilleja (accused),
it was unanimously resolved that:

The Officers of the Corporation be granted monthly compensation for services

rendered as follows: Chairman — P9,000.00/month, Vice Chairman —
P3,500.00/month, Corporate Treasurer — P3,500.00/month and Corporate
Secretary — P3,500.00/month, retroactive June 1, 1985 and the ten per centum of
the net profits shall be distributed equally among the ten members of the Board of
Trustees. This shall amend and superceed (sic) any previous resolution.

There were no other business.

The Chairman declared the meeting adjourned at 5:11 P.M.

This is to certify that the foregoing minutes of the regular meeting of the Board of Trustees of
Western Institute of Technology, Inc. held on March 30, 1986 is true and correct to the best of my
knowledge and belief.

(Sgd) ANTONIO S. SALAS

Corporate Secretary2

A few years later, that is, on March 13, 1991, petitioners Homero Villasis, Prestod Villasis, Reginald
Villasis and Dimas Enriquez filed an affidavit-complaint against private respondents before the Office of
the City Prosecutor of Iloilo, as a result of which two (2) separate criminal informations, one for
falsification of a public document under Article 171 of the Revised Penal Code and the other for estafa
under Article 315, par. 1(b) of the RPC, were filed before Branch 33 of the Regional Trial Court of Iloilo
City. The charge for falsification of public document was anchored on the private respondents'
submission of WIT's income statement for the fiscal year 1985-1986 with the Securities and Exchange
Commission (SEC) reflecting therein the disbursement of corporate funds for the compensation of private
respondents based on Resolution No. 4, series of 1986, making it appear that the same was passed by the
board on March 30, 1986, when in truth, the same was actually passed on June 1, 1986, a date not
covered by the corporation's fiscal year 1985-1986 (beginning May 1, 1985 and ending April 30, 1986).
The Information for falsification of a public document states:

The undersigned City Prosecutor accuses RICARDO T. SALAS, SALVADOR T. SALAS, SOLEDAD
SALAS-TUBILLEJA, ANTONIO S. SALAS and RICHARD S. SALAS (whose dates and places of birth
cannot be ascertained) of the crime of FALSIFICATION OF A PUBLIC DOCUMENT, Art. 171 of the
Revised Penal Code, committed as follows:

That on or about the 10th day of June, 1986, in the City of Iloilo, Philippines and
within the jurisdiction of this Honorable Court, the above-named accused, being
then the Chairman, Vice-Chairman, Treasurer, Secretary, and Trustee (who later
became Secretary), respectively, of the board of trustees of the Western Institute of
 Technology, Inc., a corporation duly organized and existing under the laws of the
Republic of the Philippines, conspiring and confederating together and mutually
helping one another, to better realized (sic) their purpose, did then and there
wilfully, unlawfully and criminally prepare and execute and subsequently cause to
be submitted to the Securities and Exchange Commission an income statement of
the corporation for the fiscal year 1985-1986, the same being required to be
submitted every end of the corporation fiscal year by the aforesaid Commission, and
therefore, a public document, including therein the disbursement of the retroactive
compensation of accused corporate officers in the amount of P186,470.70, by then
and there making it appear that the basis thereof Resolution No. 4, Series of 1986
was passed by the board of trustees on March 30, 1986, a date covered by the
corporation's fiscal year 1985-1986 (i.e., from May 1, 1985 to April 30, 1986), when
in truth and in fact, as said accused well knew, no such Resolution No. 48, Series of
1986 was passed on March 30, 1986.

CONTRARY TO LAW.

Iloilo City, Philippines, November 22, 1991.3 [Emphasis ours].

The Information, on the other hand, for estafa reads:

The undersigned City Prosecutor accuses RICARDO SALAS, SALVADOR T. SALAS, SOLEDAD
SALAS-TUBILLEJA, ANTONIO S. SALAS, RICHARD S. SALAS (whose dates and places of birth
cannot be ascertained) of the crime of ESTAFA, Art. 315, par. 1 (b) of the Revised Penal Code,
committed as follows:

That on or about the 1st day of June, 1986, in the City of Iloilo, Philippines, and
within the jurisdiction of this Honorable Court, the above-named accused, being
then the Chairman, Vice-Chairman, Treasurer, Secretary, and Trustee (who later
became Secretary), respectively; of the Board of Trustees of Western Institute of
Technology, Inc., a corporation duly organized and existing under the laws of the
Republic of the Philippines, conspiring and confederating together and mutually
helping one another to better realize their purpose, did then and there wilfully,
unlawfully and feloniously defraud the said corporation (and its stockholders) in the
following manner, to wit: herein accused, knowing fully well that they have no
sufficient, lawful authority to disburse — let alone violation of applicable laws and
jurisprudence, disbursed the funds of the corporation by effecting payment of their
retroactive salaries in the amount of P186,470.00 and subsequently paying
themselves every 15th and 30th of the month starting June 15, 1986 until the
present, in the amount of P19,500.00 per month, as if the same were their own, and
when herein accused were informed of the illegality of these disbursements by the
minority stockholders by way of objections made in an annual stockholders'
meeting held on June 14, 1986 and every year thereafter, they refused, and still
refuse, to rectify the same to the damage and prejudice of the corporation (and its
stockholders) in the total sum of P1,453,970.79 as of November 15, 1991.

CONTRARY TO LAW.
 Iloilo City, Philippines, November 22, 1991.4 [Emphasis ours]

Thereafter, trial for the two criminal cases, docketed as Criminal Cases Nos. 37097 and 37098, was
consolidated. After a full-blown hearing, Judge Porfirio Parian handed down a verdict of acquittal on both
counts5 dated September 6, 1993 without imposing any civil liability against the accused therein.

Petitioners filed a Motion for Reconsideration6 of the civil aspect of the RTC Decision which was,
however, denied in an Order dated November 23, 1993.7

Hence, the instant petition.

Significantly on December 8, 1994, a Motion for Intervention, dated December 2, 1994, was filed before
this Court by Western Institute of Technology, Inc., supposedly one of the petitioners herein, disowning
its inclusion in the petition and submitting that Atty. Tranquilino R. Gale, counsel for the other
petitioners, had no authority whatsoever to represent the corporation in filing the petition. Intervenor
likewise prayed for the dismissal of the petition for being utterly without merit. The Motion for
Intervention was granted on January 16, 1995.8

Petitioners would like us to hold private respondents civilly liable despite their acquittal in Criminal
Cases Nos. 37097 and 37098. They base their claim on the alleged illegal issuance by private respondents
of Resolution No. 48, series of 1986 ordering the disbursement of corporate funds in the amount of
P186,470.70 representing retroactive compensation as of June 1, 1985 in favor of private respondents,
board members of WIT, plus P1,453,970.79 for the subsequent collective salaries of private respondents
every 15th and 30th of the month until the filing of the criminal complaints against them on March 1991.
Petitioners maintain that this grant of compensation to private respondents is proscribed under Section
30 of the Corporation Code. Thus, private respondents are obliged to return these amounts to the
corporation with interest.

We cannot sustain the petitioners. The pertinent section of the Corporation Code provides:

Sec. 30. Compensation of directors — In the absence of any provision in the by-laws fixing their
compensation, the directors shall not receive any compensation, as such directors, except for
reasonable per diems: Provided, however, That any such compensation (other than per diems) may
be granted to directors by the vote of the stockholders representing at least a majority of the
outstanding capital stock at a regular or special stockholders' meeting. In no case shall the total
yearly compensation of directors, as such directors, exceed ten (10%) percent of the net income
before income tax of the corporation during the preceding year. [Emphasis ours]

There is no argument that directors or trustees, as the case may be, are not entitled to salary or other
compensation when they perform nothing more than the usual and ordinary duties of their office. This
rule is founded upon a presumption that directors/trustees render service gratuitously, and that the
return upon their shares adequately furnishes the motives for service, without compensation.9 Under the
foregoing section, there are only two (2) ways by which members of the board can be granted
compensation apart from reasonable per diems: (1) when there is a provision in the by-laws fixing their
compensation; and (2) when the stockholders representing a majority of the outstanding capital stock at
a regular or special stockholders' meeting agree to give it to them.
This proscription, however, against granting compensation to directors/trustees of a corporation is not a
sweeping rule. Worthy of note is the clear phraseology of Section 30 which states: ". . . [T]he directors
shall not receive any compensation, as such directors, . . . ." The phrase as such directors is not without
significance for it delimits the scope of the prohibition to compensation given to them for services
performed purely in their capacity as directors or trustees. The unambiguous implication is that
members of the board may receive compensation, in addition to reasonable per diems, when they render
services to the corporation in a capacity other than as directors/trustees.10In the case at bench,
Resolution No. 48, s. 1986 granted monthly compensation to private respondents not in their capacity as
members of the board, but rather as officers of the corporation, more particularly as Chairman, Vice-
Chairman, Treasurer and Secretary of Western Institute of Technology. We quote once more Resolution
No. 48, s. 1986 for easy reference, viz.:

Resolution No. 48 s. 1986

On the motion of Mr. Richard Salas (accused), duly seconded by Mrs. Soledad Tubilleja (accused),
it was unanimously resolved that:

The Officers of the Corporation be granted monthly compensation for services

rendered as follows: Chairman — P9,000.00/month, Vice Chairman —
P3,500.00/month, Corporate Treasurer — P3,500.00/month and Corporate
Secretary — P3,500.00/month, retroactive June 1, 1985 and the ten per centum of
the net profits shall be distributed equally among the ten members of the Board of
Trustees. This shall amend and superceed (sic) any previous resolution.

There were no other business.

The Chairman declared the meeting adjourned at 5:11 P.M.

This is to certify that the foregoing minutes of the regular meeting of the Board of Trustees of
Western Institute of Technology, Inc. held on March 30, 1986 is true and correct to the best of my
knowledge and belief.

(Sgd) ANTONIO S. SALAS

Corporate Secretary11 [Emphasis ours]

Clearly, therefore, the prohibition with respect to granting compensation to corporate

directors/trustees as suchunder Section 30 is not violated in this particular case. Consequently, the last
sentence of Section 30 which provides:

. . . . . . . In no case shall the total yearly compensation of directors, as such directors, exceed ten
(10%) percent of the net income before income tax of the corporation during the preceding year.
(Emphasis ours]

does not likewise find application in this case since the compensation is being given to private
respondents in their capacity as officers of WIT and not as board members.
Petitioners assert that the instant case is a derivative suit brought by them as minority shareholders of
WIT for and on behalf of the corporation to annul Resolution No. 48, s. 1986 which is prejudicial to the
corporation.

We are unpersuaded. A derivative suit is an action brought by minority shareholders in the name of the
corporation to redress wrongs committed against it, for which the directors refuse to sue.12 It is a remedy
designed by equity and has been the principal defense of the minority shareholders against abuses by the
majority.13 Here, however, the case is not a derivative suit but is merely an appeal on the civil aspect of
Criminal Cases Nos. 37097 and 37098 filed with the RTC of Iloilo for estafa and falsification of public
document. Among the basic requirements for a derivative suit to prosper is that the minority shareholder
who is suing for and on behalf of the corporation must allege in his complaint before the proper forum
that he is suing on a derivative cause of action on behalf of the corporation and all other shareholders
similarly situated who wish to join.14 This is necessary to vest jurisdiction upon the tribunal in line with
the rule that it is the allegations in the complaint that vests jurisdiction upon the court or quasi-judicial
body concerned over the subject matter and nature of the action.15 This was not complied with by the
petitioners either in their complaint before the court a quo nor in the instant petition which, in part,
merely states that "this is a petition for review on certiorari on pure questions of law to set aside a
portion of the RTC decision in Criminal Cases Nos. 37097 and 37098"16 since the trial court's judgment of
acquittal failed to impose any civil liability against the private respondents. By no amount of equity
considerations, if at all deserved, can a mere appeal on the civil aspect of a criminal case be treated as a
derivative suit.

Granting, for purposes of discussion, that this is a derivative suit as insisted by petitioners, which it is not,
the same is outrightly dismissible for having been wrongfully filed in the regular court devoid of any
jurisdiction to entertain the complaint. The ease should have been filed with the Securities and Exchange
Commission (SEC) which exercises original and exclusive jurisdiction over derivative suits, they being
intra-corporate disputes, per Section 5 (b) of P.D. No. 902-A:

In addition to the regulatory and adjudicative functions of the Securities and Exchange
Commission over corporations, partnerships and other forms of associations registered with it as
expressly granted under existing laws and decrees, it shall have original and exclusive jurisdiction
to hear and decide cases involving:

xxx xxx xxx

b) Controversies arising out of intra-corporate or partnership relations, between and among

stockholders, members, or associates; between any or all of them and the corporation, partnership
or association of which they are stockholders, members or associates, respectively; and between
such corporation, partnership or association and the State insofar as it concerns their individual
franchise or right to exist as such entity;

xxx xxx xxx

[Emphasis ours]

Once the case is decided by the SEC, the losing party may file a petition for review before the Court of
Appeals raising questions of fact, of law, or mixed questions of fact and law.17 It is only after the case has
ran this course, and not earlier, can it be brought to us via a petition for review on certiorari under Rule
45 raising only pure questions of law.18 Petitioners, in pleading that we treat the instant petition as a
derivative suit, are trying to short-circuit the entire process which we cannot here sanction.

As an appeal on the civil aspect of Criminal Cases Nos. 37097 and 37098 for falsification of public
document and estafa, which this petition truly is, we have to deny the petition just the same. It will be
well to quote the respondent court's ratiocinations acquitting the private respondents on both counts:

The prosecution wants this Court to believe and agree that there is falsification of public
document because, as claimed by the prosecution, Resolution No. 48, Series of 1986 (Exh. "1-E-1")
was not taken up and passed during the Regular Meeting of the Board of Trustees of the Western
Institute of Technology (WIT), Inc. on March 30, 1986, but on June 1, 1986 special meeting of the
same board of trustees.

This Court is reluctant to accept this claim of falsification. The prosecution omitted to submit the
complete minutes of the regular meeting of the Board of Trustees on March 30, 1986. It only
presented in evidence Exh. "C", which is page 5 or the last page of the said minutes. Had the
complete minutes (Exh. "1") consisting of five (5) pages, been submitted, it can be readily seen and
understood that Resolution No. 48, Series of 1986 (Exh. "1-E-1") giving compensation to corporate
officers, was indeed included in Other Business, No. 6 of the Agenda, and was taken up and passed
on March 30, 1986. The mere fact of existence of Exh. "C" also proves that it was passed on March
30, 1986 for Exh. "C" is part and parcel of the whole minutes of the Board of Trustees Regular
Meeting on March 30, 1986. No better and more credible proof can be considered other than the
Minutes (Exh. "1") itself of the Regular Meeting of the Board of Trustees on March 30, 1986. The
imputation that said Resolution No. 48 was neither taken up nor passed on March 30, 1986
because the matter regarding compensation was not specifically stated or written in the
Agenda and that the words "possible implementation of said Resolution No. 48, was expressly written
in the Agenda for the Special Meeting of the Board on June 1, 1986, is simply an implication. This
evidence by implication to the mind of the court cannot prevail over the Minutes (Exh. "1") and
cannot ripen into proof beyond reasonable doubt which is demanded in all criminal prosecutions.

This Court finds that under the Eleventh Article (Exh. "3-D-1") of the Articles of Incorporation
(Exh. "3-B") of the Panay Educational Institution, Inc., now the Western Institute of Technology,
Inc., the officers of the corporation shall receive such compensation as the Board of Directors may
provide. These Articles of Incorporation was adopted on May 17, 1957 (Exh. "3-E"). The Officers of
the corporation and their corresponding duties are enumerated and stated in Sections 1, 2, 3 and 4
of Art. III of the Amended By-Laws of the Corporation (Exh. "4-A") which was adopted on May 31,
1957. According to Sec. 6, Art. III of the same By-Laws, all officers shall receive such compensation
as may be fixed by the Board of Directors.

It is the perception of this Court that the grant of compensation or salary to the accused in their
capacity as officers of the corporation, through Resolution No. 48, enacted on March 30, 1986 by
the Board of Trustees, is authorized by both the Articles of Incorporation and the By-Laws of the
corporation. To state otherwise is to depart from the clear terms of the said articles and by-laws.
In their defense the accused have properly and rightly asserted that the grant of salary is not for
directors, but for their being officers of the corporation who oversee the day to day activities and
operations of the school.

xxx xxx xxx

 . . .[O]n the question of whether or not the accused can be held liable for estafa under Sec. 1 (b) of
Art. 315 of the Revised Penal Code, it is perceived by this Court that the receipt and the holding of
the money by the accused as salary on basis of the authority granted by the Articles and By-Laws
of the corporation are not tainted with abuse of confidence. The money they received belongs to
them and cannot be said to have been converted and/or misappropriated by them.

xxx xxx xxx 19

[Emphasis ours]

From the foregoing factual findings, which we find to be amply substantiated by the records, it is evident
that there is simply no basis to hold the accused, private respondents herein, civilly liable. Section 2(b) of
Rule 111 on the New Rules on Criminal Procedure provides:

Sec. 2. Institution of separate civil action.

xxx xxx xxx

(b) Extinction of the penal action does not carry with it extinction of the civil, unless the extinction
proceeds from a declaration in a final judgment that the fact from which the civil might arise did
not exist. [Emphasis ours]

Likewise, the last paragraph of Section 2, Rule 120 reads:

Sec. 2. Form and contents of judgment.

xxx xxx xxx

In case of acquittal, unless there is a clear showing that the act from which the civil liability might
arise did not exist, the judgment shall make a finding on the civil liability of the accused in favor of
the offended party. [Emphasis ours]

The acquittal in Criminal Cases Nos. 37097 and 37098 is not merely based on reasonable doubt but
rather on a finding that the accused-private respondents did not commit the criminal acts complained of.
Thus, pursuant to the above rule and settled jurisprudence, any civil action ex delicto cannot prosper.
Acquittal in a criminal action bars the civil action arising therefrom where the judgment of acquittal holds
that the accused did not commit the criminal acts imputed to them.20

WHEREFORE, the instant petition is hereby DENIED with costs against petitioners.

SO ORDERED.

THIRD DIVISION

G.R. No. 138343 February 19, 2001

GILDA C. LIM, WILHELMINA V. JOVEN and DITAS A. LERIOS, petitioners,

vs.
PATRICIA LIM-YU, in her capacity as a minority stockholder of LIMPAN INVESTMENT
CORPORATION,respondent.

PANGANIBAN, J.:

A suit to enforce preemptive rights in a corporation is not a derivative suit. Thus, a temporary restraining
order enjoining a person from representing the corporation will not bar such action, because it is
instituted on behalf and for the benefit of the shareholder, not the corporation.

Statement of the Case

Petitioners seek the reversal,1 under Rule 45 of the Rules of Court, of the July 31, 1998 Decision2 of the
Court of Appeals3 (CA) in CA-GR SP No. 46292 and of its March 25, 1999 Resolution4 denying
reconsideration. The decretal portion of the appealed Decision, which affirmed the Securities and
Exchange Commission (SEC), reads as follows:

"WHEREFORE, judgment is hereby rendered DISMISSING the Petition for lack of merit. The
preliminary injunction previously issued is hereby LIFTED."5

The Facts

The undisputed facts are summarized by the Court of Appeals as follows:

"At a special meeting on 07 October 1994, the Board of Directors of Limpan Investment
Corporation (LIMPAN) approved a resolution of the following tenor:

'RESOLVED that the corporation make a partial payment [for] the legal services of Gilda C.
Lim in the handling of various cases on behalf of, or involving the corporation in the
amount of P1,551,500.00 to be paid in equivalent value in shares of stock of the
corporation totaling 15,515 shares, the same being found to be reasonable, and there being
no available funds to pay the same.1âwphi1.nêt

'RESOLVED FURTHER, that the Corporate Secretary be authorized, as he is hereby

authorized, to secure and comply with necessary requirements of the law for the issuance
of said shares.'

"On 18 October 1994, the Corporate Secretary Jaime G. Manzano filed a request before the
Corporate and legal Affairs Department of the SEC asking for the exemption of the 15,515 shares
from the registration requirements of the Revised Securities Act; the request was granted in a
Resolution dated 14 November 1994. Due to the issuance of the unsubscribed shares to the
petitioner GILDA C. LIM (LIM), all of LIMPAN's authorized capital stock became fully subscribed,
with LIM ending up controlling 62.5% of the shares.

"In July 1996, the private respondent PATRICIA LIM YU (YU), a sister of the petitioner, LIM, filed a
complaint against the members of the Board of Directors of LIMPAN who approved the aforesaid
resolution (GILDA C. LIM, WILHEIMINA V. JOVEN, DITAS A. LERIOS, AUGUSTO R. BUNDANG,
TERESITA C. VELEZ and JAIME MANZANO). The action was docketed as SEC Case No. 07-95-5114.
"BUNDANG, VELEZ, and MANZANO filed an Answer, asserting as affirmative defenses that the
complaint failed to state a cause of action against them; that YU had no legal capacity to sue; and
that the issuance of the shares in LIM's favor was bona fide and valid pursuant to law and
LIMPAN's By-laws. In turn, the herein petitioners LIM, JOVEN and LERIOS filed a Motion to
Dismiss on the following grounds: that YU had no legal capacity to sue; that the complaint failed to
state a cause of action against JOVEN and LERIOS, and that no earnest efforts were exerted
towards a compromise, YU and LIM being siblings.

"In support of their ground that YU ha[d] no legal capacity to sue, the petitioners pointed out that
LIM had previously filed a petition for guardianship before the Regional Trial Court of Manila,
docketed as Special proceeding No. 94-71010, praying for the issuance of letters of guardianship
over YU. On 14 July 1994, the Presiding Judge of Branch 48, the Hon. Demetrio M. Batario, Jr.,
issued an Order, the relevant portion of which enjoined YU 'from entering into, or signing,
contracts or documents on her behalf or on behalf of others' x x x.' On 16 August 1994, LIM was
appointed [as] YU's general guardian, and the former took her oath as such on the same day. YU
appealed LIM's appointment to the Supreme Court ("Patricia C. Lim-Yu, et al. v. Hon. Judge
Demetrio M. Batario, Jr., et al.,' G.R. No.116926). On 27 February 1994, the High Court issued a
Resolution giving due course to YU's petition. It likewise issued a temporary restraining order, the
(pertinent portion of which is quoted hereunder:

'(b) to ISSUE the TEMPORARY RESTRAINING ORDER prayed for, limited however, to the
'Writ of Preliminary Injunction' dated 22 August 1994 and the order dated 14 July 1994
both issued in SP Proceeding No. 94-71010 which in the opinion of the Court are all too
encompassing and should be limited in scope and subject to the conditions set forth in the
resolution of September 28, 1994 that, '(D)uring the effectivity of the temporary
restraining order, petitioner Patricia C. Lim, her attorneys, representatives, agents and any
other persons assisting petitioner Patricia C. Lim will be able to act, enter into or sign
contracts or documents solely for and on behalf of Patricia C. Lim; said actions, contracts or
documents should not in any way bind or affect the interests of her parents, Isabelo P. Lim
an Purificacion C. Lim, her brothers and sisters and any family owned or controlled
corporation in particular, the Limpan Investment Corporation.'

'NOW THEREFORE, You (Respondent Hon. Judge Demetrio M. Batario, Jr.), your agents,
representatives, and/or any person or persons, acting upon your orders or in your place or
stead, are hereby RESTRAINED and ENJOINED from enforcing and carrying out the Writ of
Preliminary Injunction dated 22 August 1994 and the Order dated 14 July 1994 both issued
by respondent Judge In SP Proceeding No. 94-71010.' (underscoring supplied)

"The petitioners argued that, under the aforesaid order YU [was] incapacitated from filing a
derivative suit. YU naturally espoused the opposite view.

"Acting on the petitioners' Motion to Dismiss, the Hearing Officer, Atty. Manuel Perea, issued an
Order dated 05 January 1996, holding in abeyance the resolution of the motion to dismiss, which
reads as follows:

'Before this Commission is the motion to dismiss filed by respondents Gilda C. Lim, et al., as
well as the opposition thereto.
 'In view of the conflicting interpretation of the order issued by the Supreme Court in Sp.
Proc. No. 94-70010 regarding the legal capacity of the plaintiff [--] x x x who is allegedly
under guardianship [-- to file the instant action] either or both parties are directed to file a
motion for clarification of the orders invoked by respondent Gilda C. Lim, et al. The desired
clarification is perceived to settle the issue of plaintiff's capacity to file the instant action.

'Meanwhile, resolution of the pending incident shall be held in abeyance until the parties
shall have secured the desired interpretation/opinion of the Supreme Court on the matter.'

"Yu filed a Motion for Reconsideration dated 08 April 1996, which was denied in an Order dated
25 April 1996, on the ground that it was filed beyond the ten-day period allowed for seeking
reconsideration. Yu filed a Motion for Leave to Admit Second Motion for Reconsideration dated 02
July 1996 which the Hearing Officer also denied.

"From the denial of her second motion for reconsideration, Yu filed a petition for certiorari before
the SEC En Banc seeking to set aside the Order of 05 January 1994. On 04 February 1994, the SEC
En Banc issued the first assailed order granting the petition for certiorari, and ordering the
Securities Investigation & Clearing Department (SICD) to hear the other grounds of the Motion to
Dismiss and to continue the case until its final determination. A motion for reconsideration filed
by L[im] having been denied, the instant petition for review was instituted before this Court. x x
x."6

Ruling of the Court of Appeal

Ruling that the Supreme Court's TRO was clear, the CA agreed with the SEC that, pending clarification
thereof, there was no need for the hearing officer to defer ruling on the Motion to Dismiss. The appellate
court stated that the TRO did not prohibit herein Respondent Patricia Lim-Yu from acting or entering into
contracts on her own behalf or from protecting her rights. The root of the present controversy -- the
Complaint she filed before the SEC -- relates to a denial of her preemptive right as a shareholder. Thus,
her capacity to file the suit must be sustained. Finally, on the question of the timeliness of respondent's
Petition for Certiorari. before the SEC, the CA ruled that adherence to strict technical rules should be
relaxed to prevent palpable injustice.

Hence, this recourse.7

Issues

In their Memorandum,8 petitioners raise the following issues:

"I

The Honorable Court of Appeals erred in sustaining the respondent's legal capacity to sue the
petitioners by relying solely on the first half of this Honorable Court's TRO and without
considering the second half of said TRO.

"II
 The Honorable Court of Appeals erred in disregarding the sole power/authority of the Supreme
Court to enforce/clarify its own resolutions/orders under the Rules of Court.

"III

The Honorable Court of Appeals in effect allowed the Securities and Exchange Commission (SEC)
to maintain two conflicting positions on similar matters before it (SEC) when it upheld the SEC's
position that clarification of this Honorable Court's TRO was not needed in SEC Case No. 07-95-
5114.

"IV.

The Honorable Court of Appeals failed to consider that herein respondent had been repeatedly
and notoriously guilty of laches.

Simply put, the main issue is whether respondent had the legal capacity to file her Complaint before the
SEC. The others are merely incidental to this main point.

The Court's Ruling

The Petition has no merit.

First Issue:

Legal Capacity to Sue

Petitioners point out that both the SEC and the Court of Appeals considered only the first part of the
Supreme Court TRO and completely ignored the second part. Supposedly, the latter part barred
respondent from entering into agreements that would affect her family and the corporation. Hence, they
claim that the TRO, taken as a whole, proscribed respondent's "derivative suit," which sought to "enjoin
herein [P]etitioner Gilda C. Lim from further voting or exercising any and all rights arising from the
issuance to her of 15,515 shares of stock of the corporation."9

We do not agree. The pertinent portion of the TRO issued by this Court reads as follows:

"(b) to ISSUE the TEMPORARY RESTRAINING ORDER prayed for, limited however, to the 'Writ of
Preliminary Injunction' dated 22 August 1994 and the Order dated 14 July 1994 both issued in SP
Proceeding No. 94-71010 which in the opinion of the Court are all too encompassing and should
be limited in scope and subject to the conditions set forth in the Resolution of September 28, 1994
that, '(D)uring the effectivity of the Temporary Restraining Order, petitioner Patricia C. Lim, her
attorneys, representatives, agents and any other persons assisting petitioner Patricia C. Lim will
be able to act, enter into or sign contracts or documents solely for and on behalf of Patricia C. Lim;
said actions, contracts or documents should not in any way bind or affect the interests of her
parents, Isabelo P. Lim and Purificacion C. Lim, her brothers and sisters and any family owned or
controlled corporation in particular, the Limpan Investment Corporation."

Simply put, the TRO allows Respondent Patricia Lim-Yu to act for herself and to enter into any contract
on her own behalf. However, she cannot transact in representation of or for the benefit of her parents,
brothers or sisters, or the Limpan Investment Corporation. Contrary to what petitioners suggest, all that
is prohibited is any action that will bind them. In short, she can act only on and in her own behalf, not that
of petitioners or the Corporation.

There appears to be a confusion on the nature of the suit initiated before the SEC. Petitioners describe it
as a derivative suit, which has been defined as "an action brought by minority shareholders in the name
of the corporation to redress wrongs committed against it, for which the directors refuse to sue. It is a
remedy designed by equity and has been the principal defense of the minority shareholders against
abuses by the majority."10 In a derivative action, the real party in interest is the corporation itself, I not
the shareholder(s) who actually instituted it.

"If the suit filed by respondent was indeed derivative in character, then respondent may not have the
capacity to sue. The reason is that she would be acting in representation of the corporation, an act which
the TRO enjoins her from doing.

We hold, however, that the suit of respondent cannot be characterized as derivative, because she was
complaining only of the violation of her preemptive right under Section 39 of the Corporation Code.11 She
was merely praying that she be allowed to subscribe to the additional issuances of stocks in proportion to
her shareholdings to enable her to preserve her percentage of ownership in the corporation. She was
therefore not acting for the benefit of the corporation. Quite the contrary, she was suing on her own
behalf, out of a desire to protect and preserve her preemptive rights. Unquestionably, the TRO did not
prevent her from pursuing that action.

To repeat, the TRO issued by this Court had two components: (1) it allowed respondent to enter into
agreements on her own behalf; and (2) it clarified that respondent's acts could not bind or affect the
interests of her parents, brothers or sisters, or Limpan. In other words, respondent was, as a rule, allowed
to act; but, as an exception, was prohibited from doing anything that would bind the corporation or any of
the above-named persons.

In this light, the TRO did not prohibit respondent from filing, on and in her own behalf; a suit for the
alleged violation of her preemptive rights to purchase additional stock subscriptions. In other words, it
did not restrain respondent from acting and enforcing her own rights. It merely barred her from acting in
representation of the corporation.

Petitioners fail to appreciate the distinction between the act itself and its net result. The act of filing the
suit did not in any way bind the corporation. The result of such act affected it, however. Similarly,
respondent can sell her shares to the corporation or make a will and designate her parents, for example,
as beneficiaries. It would be quite far-fetched to say that these acts are prohibited by the TRO, even if they
will definitely affect the corporation and her parents.

Section 2 of Rule 3 of the Rules of Court12 defines a real party in interest - as one who is entitled to the
avails of any judgment rendered in a suit, or who stands to be benefited or injured by it. In the present
case, it is clear that respondent was suing on her own behalf in order to enforce her preemptive rights.
Nothing, not the TRO, barred her from filing that suit.1âwphi1.nêt

Incidental Issues

Power to Clarify Own Resolutions

Petitioners also assail the ruling of the Court of Appeals that the SEC hearing officer "was bound to
interpret the Supreme Court's order instead of burdening [it] with the responsibility of 'clarifying' what
already appears to be a clear order." Citing Section 5 (5) of Article VIII13 of the Constitution and Section 5
of Rule 135,14 petitioners contend that the ruling disregarded the Supreme Court's power to control and
to clarify its own orders, as granted by the Constitution.

The argument must be rejected outright. First, as stated earlier the TRO was very clear. In such instances,
it was axiomatic that there was no need for interpretation, only for application.15 Hence, there was no
reason for the SEC hearing officer to rely on the rules of statutory construction or for this Court to clarify
its Order. Second, even assuming that there was a need to interpret the TRO, the hearing officer was duty-
bound to do so. Indeed, the mandate to apply and interpret pertinent laws and rulings is necessarily
included in the "adjudicative functions"16 of the SEC or of any other quasi-judicial body for that matter.17

Verily, the power of this Court to clarify its own orders does not divest the SEC of its function to apply
those orders to cases before it. If parties disagree with the SEC, they can file the proper suit in a regular
court in accordance with law." In any event, the seeming obscurity or ambiguity of a TRO is not an excuse
for a quasi-judicial body, or any regular court or judge, to shirk from the responsibility of applying and
interpreting it.18

Alleged Conflicting Positions of the SEC

Petitioners further contend that the CA effectively allowed the SEC to maintain contradictory positions on
similar matters. They cite Philippine Commercial International Bank v. Aquaventures
Corporation, docketed as SEC En Banc Case No. 455, in "which the SEC referred a TRO to this Court for
clarification.19

This argument is untenable. The alleged contradictory SEC ruling in the said case is irrelevant and
unnecessary to the resolution of the present one. Petitioners do not claim that the factual milieu of the
former is similar to that of the latter. Moreover, the actions of the SEC in the above-mentioned, case have
not been put at issue by the proper parties in these proceedings. In any event, they are neither binding
nor conclusive on appeal. They may be the subject of the Court's review in accordance with the applicable
provisions of the Rules of Court.

Laches

Petitioners further contend that the CA failed to appreciate that respondent had been "repeatedly and
notoriously guilty of laches." They point out that she filed a Motion for Reconsideration of the SEC
hearing officer's Order almost four months late. They further allege that it took her another two and a
half months to file a Motion for Leave to Admit Second Motion for Reconsideration.20

We reject this argument. It has been held that it is the better rule that courts, under the principle of
equity, shall not be bound strictly by the doctrine of laches, when a manifest wrong or injustice would
result.21 To rule that respondent can no longer question the hearing officer would deprive her of the
opportunity to sue in order to enforce her preemptive rights, an act that is not proscribed by this Court's
TRO.

WHEREFORE, the Petition is hereby DENIED and the assailed Decision AFFIRMED. Costs against
petitioners.
SO ORDERED.

Republic of the Philippines

SUPREME COURT
Manila

SECOND DIVISION

G.R. No. 165744 August 11, 2008

OSCAR C. REYES, petitioner,

vs.
HON. REGIONAL TRIAL COURT OF MAKATI, Branch 142, ZENITH INSURANCE CORPORATION, and
RODRIGO C. REYES, respondents.

DECISION

BRION, J.:

This Petition for Review on Certiorari under Rule 45 of the Rules of Court seeks to set aside the Decision
of the Court of Appeals (CA)1 promulgated on May 26, 2004 in CA-G.R. SP No. 74970. The CA Decision
affirmed the Order of the Regional Trial Court (RTC), Branch 142, Makati City dated November 29,
20022 in Civil Case No. 00-1553 (entitled "Accounting of All Corporate Funds and Assets, and Damages")
which denied petitioner Oscar C. Reyes’ (Oscar) Motion to Declare Complaint as Nuisance or Harassment
Suit.

BACKGROUND FACTS

Oscar and private respondent Rodrigo C. Reyes (Rodrigo) are two of the four children of the spouses
Pedro and Anastacia Reyes. Pedro, Anastacia, Oscar, and Rodrigo each owned shares of stock of Zenith
Insurance Corporation (Zenith), a domestic corporation established by their family. Pedro died in 1964,
while Anastacia died in 1993. Although Pedro’s estate was judicially partitioned among his heirs
sometime in the 1970s, no similar settlement and partition appear to have been made with Anastacia’s
estate, which included her shareholdings in Zenith. As of June 30, 1990, Anastacia owned 136,598 shares
of Zenith; Oscar and Rodrigo owned 8,715,637 and 4,250 shares, respectively.3

On May 9, 2000, Zenith and Rodrigo filed a complaint4 with the Securities and Exchange Commission
(SEC) against Oscar, docketed as SEC Case No. 05-00-6615. The complaint stated that it is "a derivative suit
initiated and filed by the complainant Rodrigo C. Reyes to obtain an accounting of the funds and assets
of ZENITH INSURANCE CORPORATION which are now or formerly in the control, custody, and/or
possession of respondent [herein petitioner Oscar] and to determine the shares of stock of deceased
spouses Pedro and Anastacia Reyes that were arbitrarily and fraudulently appropriated [by Oscar] for
himself [and] which were not collated and taken into account in the partition, distribution, and/or
settlement of the estate of the deceased spouses, for which he should be ordered to account for all the income
from the time he took these shares of stock, and should now deliver to his brothers and sisters their just and
respective shares."5 [Emphasis supplied.]
In his Answer with Counterclaim,6 Oscar denied the charge that he illegally acquired the shares of
Anastacia Reyes. He asserted, as a defense, that he purchased the subject shares with his own funds from
the unissued stocks of Zenith, and that the suit is not a bona fide derivative suit because the requisites
therefor have not been complied with. He thus questioned the SEC’s jurisdiction to entertain the
complaint because it pertains to the settlement of the estate of Anastacia Reyes.

When Republic Act (R.A.) No. 87997 took effect, the SEC’s exclusive and original jurisdiction over cases
enumerated in Section 5 of Presidential Decree (P.D.) No. 902-A was transferred to the RTC designated as
a special commercial court.8The records of Rodrigo’s SEC case were thus turned over to the RTC, Branch
142, Makati, and docketed as Civil Case No. 00-1553.

On October 22, 2002, Oscar filed a Motion to Declare Complaint as Nuisance or Harassment Suit.9 He
claimed that the complaint is a mere nuisance or harassment suit and should, according to the Interim
Rules of Procedure for Intra-Corporate Controversies, be dismissed; and that it is not a bona
fide derivative suit as it partakes of the nature of a petition for the settlement of estate of the deceased
Anastacia that is outside the jurisdiction of a special commercial court. The RTC, in its Order dated
November 29, 2002 (RTC Order), denied the motion in part and declared:

A close reading of the Complaint disclosed the presence of two (2) causes of action, namely: a) a
derivative suit for accounting of the funds and assets of the corporation which are in the control,
custody, and/or possession of the respondent [herein petitioner Oscar] with prayer to appoint a
management committee; and b) an action for determination of the shares of stock of deceased
spouses Pedro and Anastacia Reyes allegedly taken by respondent, its accounting and the
corresponding delivery of these shares to the parties’ brothers and sisters. The latter is not a
derivative suit and should properly be threshed out in a petition for settlement of estate.

Accordingly, the motion is denied. However, only the derivative suit consisting of the first cause of
action will be taken cognizance of by this Court.10

Oscar thereupon went to the CA on a petition for certiorari, prohibition, and mandamus11 and prayed that
the RTC Order be annulled and set aside and that the trial court be prohibited from continuing with the
proceedings. The appellate court affirmed the RTC Order and denied the petition in its Decision dated
May 26, 2004. It likewise denied Oscar’s motion for reconsideration in a Resolution dated October 21,
2004.

Petitioner now comes before us on appeal through a petition for review on certiorari under Rule 45 of the
Rules of Court.

ASSIGNMENT OF ERRORS

Petitioner Oscar presents the following points as conclusions the CA should have made:

1. that the complaint is a mere nuisance or harassment suit that should be dismissed under the Interim
Rules of Procedure of Intra-Corporate Controversies; and

2. that the complaint is not a bona fide derivative suit but is in fact in the nature of a petition for
settlement of estate; hence, it is outside the jurisdiction of the RTC acting as a special commercial court.
Accordingly, he prays for the setting aside and annulment of the CA decision and resolution, and the
dismissal of Rodrigo’s complaint before the RTC.

THE COURT’S RULING

We find the petition meritorious.

The core question for our determination is whether the trial court, sitting as a special commercial court,
has jurisdiction over the subject matter of Rodrigo’s complaint. To resolve it, we rely on the judicial
principle that "jurisdiction over the subject matter of a case is conferred by law and is determined by the
allegations of the complaint, irrespective of whether the plaintiff is entitled to all or some of the claims
asserted therein."12

JURISDICTION OF SPECIAL COMMERCIAL COURTS

P.D. No. 902-A enumerates the cases over which the SEC (now the RTC acting as a special commercial
court) exercises exclusive jurisdiction:

SECTION 5. In addition to the regulatory and adjudicative functions of the Securities and Exchange
Commission over corporations, partnership, and other forms of associations registered with it as
expressly granted under existing laws and decrees, it shall have original and exclusive jurisdiction
to hear and decide cases involving:

a) Devices or schemes employed by or any acts of the board of directors, business

associates, its officers or partners, amounting to fraud and misrepresentation which may
be detrimental to the interest of the public and/or of the stockholders, partners, members
of associations or organizations registered with the Commission.

b) Controversies arising out of intra-corporate or partnership relations, between and

among stockholders, members, or associates; between any or all of them and the
corporation, partnership or association of which they are stockholders, members, or
associates, respectively; and between such corporation, partnership or association and the
State insofar as it concerns their individual franchise or right to exist as such entity; and

c) Controversies in the election or appointment of directors, trustees, officers, or managers

of such corporations, partnerships, or associations.

The allegations set forth in Rodrigo’s complaint principally invoke Section 5, paragraphs (a) and (b)
above as basis for the exercise of the RTC’s special court jurisdiction. Our focus in examining the
allegations of the complaint shall therefore be on these two provisions.

Fraudulent Devices and Schemes

The rule is that a complaint must contain a plain, concise, and direct statement of the ultimate facts
constituting the plaintiff’s cause of action and must specify the relief sought.13 Section 5, Rule 8 of the
Revised Rules of Court provides that in all averments of fraud or mistake, the circumstances
constituting fraud or mistake must be stated with particularity.14These rules find specific application
to Section 5(a) of P.D. No. 902-A which speaks of corporate devices or schemes that amount to fraud or
misrepresentation detrimental to the public and/or to the stockholders.

In an attempt to hold Oscar responsible for corporate fraud, Rodrigo alleged in the complaint the
following:

3. This is a complaint…to determine the shares of stock of the deceased spouses Pedro and
Anastacia Reyes that were arbitrarily and fraudulently appropriated for himself [herein
petitioner Oscar] which were not collated and taken into account in the partition, distribution,
and/or settlement of the estate of the deceased Spouses Pedro and Anastacia Reyes, for which he
should be ordered to account for all the income from the time he took these shares of stock, and
should now deliver to his brothers and sisters their just and respective shares with the
corresponding equivalent amount of P7,099,934.82 plus interest thereon from 1978 representing
his obligations to the Associated Citizens’ Bank that was paid for his account by his late mother,
Anastacia C. Reyes. This amount was not collated or taken into account in the partition or
distribution of the estate of their late mother, Anastacia C. Reyes.

3.1. Respondent Oscar C. Reyes, through other schemes of fraud including

misrepresentation, unilaterally, and for his own benefit, capriciously transferred and took
possession and control of the management of Zenith Insurance Corporation which is
considered as a family corporation, and other properties and businesses belonging to Spouses
Pedro and Anastacia Reyes.

xxxx

4.1. During the increase of capitalization of Zenith Insurance Corporation, sometime in 1968, the
property covered by TCT No. 225324 was illegally and fraudulently used by respondent as a
collateral.

xxxx

5. The complainant Rodrigo C. Reyes discovered that by some manipulative scheme, the
shareholdings of their deceased mother, Doña Anastacia C. Reyes, shares of stocks and [sic]
valued in the corporate books at P7,699,934.28, more or less, excluding interest and/or
dividends, had been transferred solely in the name of respondent. By such fraudulent
manipulations and misrepresentation, the shareholdings of said respondent Oscar C. Reyes
abruptly increased to P8,715,637.00 [sic] and becomes [sic] the majority stockholder of Zenith
Insurance Corporation, which portion of said shares must be distributed equally amongst the
brothers and sisters of the respondent Oscar C. Reyes including the complainant herein.

xxxx

9.1 The shareholdings of deceased Spouses Pedro Reyes and Anastacia C. Reyes valued at
P7,099,934.28 were illegally and fraudulently transferred solely to the respondent’s
[herein petitioner Oscar] name and installed himself as a majority stockholder of
Zenith Insurance Corporation [and] thereby deprived his brothers and sisters of their respective
equal shares thereof including complainant hereto.
 xxxx

10.1 By refusal of the respondent to account of his [sic] shareholdings in the company, he
illegally and fraudulently transferred solely in his name wherein [sic] the shares of stock of
the deceased Anastacia C. Reyes [which] must be properly collated and/or distributed
equally amongst the children, including the complainant Rodrigo C. Reyes herein, to their
damage and prejudice.

xxxx

11.1 By continuous refusal of the respondent to account of his [sic] shareholding with Zenith
Insurance Corporation[,] particularly the number of shares of stocks illegally and fraudulently
transferred to him from their deceased parents Sps. Pedro and Anastacia Reyes[,] which are all
subject for collation and/or partition in equal shares among their children. [Emphasis supplied.]

Allegations of deceit, machination, false pretenses, misrepresentation, and threats are largely conclusions
of law that, without supporting statements of the facts to which the allegations of fraud refer, do not
sufficiently state an effective cause of action.15 The late Justice Jose Feria, a noted authority in Remedial
Law, declared that fraud and mistake are required to be averred with particularity in order to enable the
opposing party to controvert the particular facts allegedly constituting such fraud or mistake.16

Tested against these standards, we find that the charges of fraud against Oscar were not properly
supported by the required factual allegations. While the complaint contained allegations of fraud
purportedly committed by him, these allegations are not particular enough to bring the controversy
within the special commercial court’s jurisdiction; they are not statements of ultimate facts, but are mere
conclusions of law: how and why the alleged appropriation of shares can be characterized as "illegal and
fraudulent" were not explained nor elaborated on.

Not every allegation of fraud done in a corporate setting or perpetrated by corporate officers will bring
the case within the special commercial court’s jurisdiction. To fall within this jurisdiction, there must be
sufficient nexus showing that the corporation’s nature, structure, or powers were used to facilitate the
fraudulent device or scheme. Contrary to this concept, the complaint presented a reverse situation. No
corporate power or office was alleged to have facilitated the transfer of the shares; rather, Oscar, as an
individual and without reference to his corporate personality, was alleged to have transferred the shares
of Anastacia to his name, allowing him to become the majority and controlling stockholder of Zenith, and
eventually, the corporation’s President. This is the essence of the complaint read as a whole and is
particularly demonstrated under the following allegations:

5. The complainant Rodrigo C. Reyes discovered that by some manipulative scheme, the
shareholdings of their deceased mother, Doña Anastacia C. Reyes, shares of stocks and [sic] valued
in the corporate books at P7,699,934.28, more or less, excluding interest and/or dividends, had
been transferred solely in the name of respondent. By such fraudulent manipulations and
misrepresentation, the shareholdings of said respondent Oscar C. Reyes abruptly increased
to P8,715,637.00 [sic] and becomes [sic] the majority stockholder of Zenith Insurance
Corporation, which portion of said shares must be distributed equally amongst the brothers and
sisters of the respondent Oscar C. Reyes including the complainant herein.

xxxx
 9.1 The shareholdings of deceased Spouses Pedro Reyes and Anastacia C. Reyes valued at
P7,099,934.28 were illegally and fraudulently transferred solely to the respondent’s [herein
petitioner Oscar] name and installed himself as a majority stockholder of Zenith Insurance
Corporation [and] thereby deprived his brothers and sisters of their respective equal shares
thereof including complainant hereto. [Emphasis supplied.]

In ordinary cases, the failure to specifically allege the fraudulent acts does not constitute a ground for
dismissal since such defect can be cured by a bill of particulars. In cases governed by the Interim Rules of
Procedure on Intra-Corporate Controversies, however, a bill of particulars is a prohibited pleading.17 It is
essential, therefore, for the complaint to show on its face what are claimed to be the fraudulent corporate
acts if the complainant wishes to invoke the court’s special commercial jurisdiction.

We note that twice in the course of this case, Rodrigo had been given the opportunity to study the
propriety of amending or withdrawing the complaint, but he consistently refused. The court’s function in
resolving issues of jurisdiction is limited to the review of the allegations of the complaint and, on the
basis of these allegations, to the determination of whether they are of such nature and subject that they
fall within the terms of the law defining the court’s jurisdiction. Regretfully, we cannot read into the
complaint any specifically alleged corporate fraud that will call for the exercise of the court’s special
commercial jurisdiction. Thus, we cannot affirm the RTC’s assumption of jurisdiction over Rodrigo’s
complaint on the basis of Section 5(a) of P.D. No. 902-A.18

Intra-Corporate Controversy

A review of relevant jurisprudence shows a development in the Court’s approach in classifying what
constitutes an intra-corporate controversy. Initially, the main consideration in determining whether a
dispute constitutes an intra-corporate controversy was limited to a consideration of the intra-corporate
relationship existing between or among the parties.19 The types of relationships embraced under Section
5(b), as declared in the case of Union Glass & Container Corp. v. SEC,20were as follows:

a) between the corporation, partnership, or association and the public;

b) between the corporation, partnership, or association and its stockholders, partners, members,
or officers;

c) between the corporation, partnership, or association and the State as far as its franchise, permit
or license to operate is concerned; and

d) among the stockholders, partners, or associates themselves. [Emphasis supplied.]

The existence of any of the above intra-corporate relations was sufficient to confer jurisdiction to the SEC,
regardless of the subject matter of the dispute. This came to be known as the relationship test.

However, in the 1984 case of DMRC Enterprises v. Esta del Sol Mountain Reserve, Inc.,21 the Court
introduced the nature of the controversy test. We declared in this case that it is not the mere existence
of an intra-corporate relationship that gives rise to an intra-corporate controversy; to rely on the
relationship test alone will divest the regular courts of their jurisdiction for the sole reason that the
dispute involves a corporation, its directors, officers, or stockholders. We saw that there is no legal sense
in disregarding or minimizing the value of the nature of the transactions which gives rise to the dispute.
Under the nature of the controversy test, the incidents of that relationship must also be considered for the
purpose of ascertaining whether the controversy itself is intra-corporate.22 The controversy must not
only be rooted in the existence of an intra-corporate relationship, but must as well pertain to the
enforcement of the parties’ correlative rights and obligations under the Corporation Code and the
internal and intra-corporate regulatory rules of the corporation. If the relationship and its incidents are
merely incidental to the controversy or if there will still be conflict even if the relationship does not exist,
then no intra-corporate controversy exists.

The Court then combined the two tests and declared that jurisdiction should be determined by
considering not only the status or relationship of the parties, but also the nature of the question under
controversy.23 This two-tier test was adopted in the recent case of Speed Distribution, Inc. v. Court of
Appeals:24

To determine whether a case involves an intra-corporate controversy, and is to be heard and

decided by the branches of the RTC specifically designated by the Court to try and decide such
cases, two elements must concur: (a) the status or relationship of the parties; and (2) the nature of
the question that is the subject of their controversy.

The first element requires that the controversy must arise out of intra-corporate or partnership
relations between any or all of the parties and the corporation, partnership, or association of
which they are stockholders, members or associates; between any or all of them and the
corporation, partnership, or association of which they are stockholders, members, or associates,
respectively; and between such corporation, partnership, or association and the State insofar as it
concerns their individual franchises. The second element requires that the dispute among the
parties be intrinsically connected with the regulation of the corporation. If the nature of the
controversy involves matters that are purely civil in character, necessarily, the case does not
involve an intra-corporate controversy.

Given these standards, we now tackle the question posed for our determination under the specific
circumstances of this case:

Application of the Relationship Test

Is there an intra-corporate relationship between the parties that would characterize the case as an intra-
corporate dispute?

We point out at the outset that while Rodrigo holds shares of stock in Zenith, he holds them in two
capacities: in his own right with respect to the 4,250 shares registered in his name, and as one of the
heirs of Anastacia Reyes with respect to the 136,598 shares registered in her name. What is material in
resolving the issues of this case under the allegations of the complaint is Rodrigo’s interest as an
heir since the subject matter of the present controversy centers on the shares of stocks belonging to
Anastacia, not on Rodrigo’s personally-owned shares nor on his personality as shareholder owning these
shares. In this light, all reference to shares of stocks in this case shall pertain to the shareholdings of the
deceased Anastacia and the parties’ interest therein as her heirs.

Article 777 of the Civil Code declares that the successional rights are transmitted from the moment of
death of the decedent. Accordingly, upon Anastacia’s death, her children acquired legal title to her estate
(which title includes her shareholdings in Zenith), and they are, prior to the estate’s partition, deemed co-
owners thereof.25 This status as co-owners, however, does not immediately and necessarily make them
stockholders of the corporation. Unless and until there is compliance with Section 63 of the Corporation
Code on the manner of transferring shares, the heirs do not become registered stockholders of the
corporation. Section 63 provides:

Section 63. Certificate of stock and transfer of shares. – The capital stock of stock corporations shall
be divided into shares for which certificates signed by the president or vice-president,
countersigned by the secretary or assistant secretary, and sealed with the seal of the corporation
shall be issued in accordance with the by-laws. Shares of stock so issued are personal property
and may be transferred by delivery of the certificate or certificates indorsed by the owner or his
attorney-in-fact or other person legally authorized to make the transfer. No transfer, however,
shall be valid, except as between the parties, until the transfer is recorded in the books of
the corporation so as to show the names of the parties to the transaction, the date of the
transfer, the number of the certificate or certificates, and the number of shares
transferred. [Emphasis supplied.]

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

Simply stated, the transfer of title by means of succession, though effective and valid between the parties
involved (i.e., between the decedent’s estate and her heirs), does not bind the corporation and third
parties. The transfer must be registered in the books of the corporation to make the transferee-heir a
stockholder entitled to recognition as such both by the corporation and by third parties.26

We note, in relation with the above statement, that in Abejo v. Dela Cruz27 and TCL Sales Corporation v.
Court of Appeals28we did not require the registration of the transfer before considering the transferee a
stockholder of the corporation (in effect upholding the existence of an intra-corporate relation between
the parties and bringing the case within the jurisdiction of the SEC as an intra-corporate controversy). A
marked difference, however, exists between these cases and the present one.

In Abejo and TCL Sales, the transferees held definite and uncontested titles to a specific number of
shares of the corporation; after the transferee had established prima facie ownership over the shares of
stocks in question, registration became a mere formality in confirming their status as stockholders. In the
present case, each of Anastacia’s heirs holds only an undivided interest in the shares. This interest, at this
point, is still inchoate and subject to the outcome of a settlement proceeding; the right of the heirs to
specific, distributive shares of inheritance will not be determined until all the debts of the estate of the
decedent are paid. In short, the heirs are only entitled to what remains after payment of the decedent’s
debts;29whether there will be residue remains to be seen. Justice Jurado aptly puts it as follows:

No succession shall be declared unless and until a liquidation of the assets and debts left by the
decedent shall have been made and all his creditors are fully paid. Until a final liquidation is made
and all the debts are paid, the right of the heirs to inherit remains inchoate. This is so because
under our rules of procedure, liquidation is necessary in order to determine whether or not
the decedent has left any liquid assets which may be transmitted to his heirs.30 [Emphasis
supplied.]

Rodrigo must, therefore, hurdle two obstacles before he can be considered a stockholder of Zenith with
respect to the shareholdings originally belonging to Anastacia. First, he must prove that there are
shareholdings that will be left to him and his co-heirs, and this can be determined only in a settlement of
the decedent’s estate. No such proceeding has been commenced to date. Second, he must register the
transfer of the shares allotted to him to make it binding against the corporation. He cannot demand that
this be done unless and until he has established his specific allotment (and prima facieownership) of the
shares. Without the settlement of Anastacia’s estate, there can be no definite partition and distribution of
the estate to the heirs. Without the partition and distribution, there can be no registration of the transfer.
And without the registration, we cannot consider the transferee-heir a stockholder who may invoke the
existence of an intra-corporate relationship as premise for an intra-corporate controversy within the
jurisdiction of a special commercial court.

In sum, we find that – insofar as the subject shares of stock (i.e., Anastacia’s shares) are concerned –
Rodrigo cannot be considered a stockholder of Zenith. Consequently, we cannot declare that an intra-
corporate relationship exists that would serve as basis to bring this case within the special commercial
court’s jurisdiction under Section 5(b) of PD 902-A, as amended. Rodrigo’s complaint, therefore, fails the
relationship test.

Application of the Nature of Controversy Test

The body rather than the title of the complaint determines the nature of an action.31 Our examination of
the complaint yields the conclusion that, more than anything else, the complaint is about the protection
and enforcement of successional rights. The controversy it presents is purely civil rather than corporate,
although it is denominated as a "complaint for accounting of all corporate funds and assets."

Contrary to the findings of both the trial and appellate courts, we read only one cause of action alleged in
the complaint. The "derivative suit for accounting of the funds and assets of the corporation which are in
the control, custody, and/or possession of the respondent [herein petitioner Oscar]" does not constitute a
separate cause of action but is, as correctly claimed by Oscar, only an incident to the "action for
determination of the shares of stock of deceased spouses Pedro and Anastacia Reyes allegedly taken by
respondent, its accounting and the corresponding delivery of these shares to the parties’ brothers and
sisters." There can be no mistake of the relationship between the "accounting" mentioned in the
complaint and the objective of partition and distribution when Rodrigo claimed in paragraph 10.1 of the
complaint that:

10.1 By refusal of the respondent to account of [sic] his shareholdings in the company, he illegally
and fraudulently transferred solely in his name wherein [sic] the shares of stock of the deceased
Anastacia C. Reyes [which] must be properly collated and/or distributed equally amongst the
children including the complainant Rodrigo C. Reyes herein to their damage and prejudice.

We particularly note that the complaint contained no sufficient allegation that justified the need for an
accounting other thanto determine the extent of Anastacia’s shareholdings for purposes of distribution.

Another significant indicator that points us to the real nature of the complaint are Rodrigo’s repeated
claims of illegal and fraudulent transfers of Anastacia’s shares by Oscar to the prejudice of the other heirs
of the decedent; he cited these allegedly fraudulent acts as basis for his demand for the collation and
distribution of Anastacia’s shares to the heirs. These claims tell us unequivocally that the present
controversy arose from the parties’ relationship as heirs of Anastacia and not as shareholders of Zenith.
Rodrigo, in filing the complaint, is enforcing his rights as a co-heir and not as a stockholder of Zenith. The
injury he seeks to remedy is one suffered by an heir (for the impairment of his successional rights) and
not by the corporation nor by Rodrigo as a shareholder on record.

More than the matters of injury and redress, what Rodrigo clearly aims to accomplish through his
allegations of illegal acquisition by Oscar is the distribution of Anastacia’s shareholdings without a prior
settlement of her estate – an objective that, by law and established jurisprudence, cannot be done. The
RTC of Makati, acting as a special commercial court, has no jurisdiction to settle, partition, and distribute
the estate of a deceased. A relevant provision – Section 2 of Rule 90 of the Revised Rules of Court – that
contemplates properties of the decedent held by one of the heirs declares:

Questions as to advancement made or alleged to have been made by the deceased to any
heir may be heard and determined by the court having jurisdiction of the estate proceedings;
and the final order of the court thereon shall be binding on the person raising the questions and
on the heir. [Emphasis supplied.]

Worth noting are this Court’s statements in the case of Natcher v. Court of Appeals:32

Matters which involve settlement and distribution of the estate of the decedent fall within
the exclusive province of the probate court in the exercise of its limited jurisdiction.

xxxx

It is clear that trial courts trying an ordinary action cannot resolve to perform acts
pertaining to a special proceeding because it is subject to specific prescribed rules. [Emphasis
supplied.]

That an accounting of the funds and assets of Zenith to determine the extent and value of Anastacia’s
shareholdings will be undertaken by a probate court and not by a special commercial court is completely
consistent with the probate court’s limited jurisdiction. It has the power to enforce an accounting as a
necessary means to its authority to determine the properties included in the inventory of the estate to be
administered, divided up, and distributed. Beyond this, the determination of title or ownership over the
subject shares (whether belonging to Anastacia or Oscar) may be conclusively settled by the probate
court as a question of collation or advancement. We had occasion to recognize the court’s authority to act
on questions of title or ownership in a collation or advancement situation in Coca v. Pangilinan33 where
we ruled:

It should be clarified that whether a particular matter should be resolved by the Court of First
Instance in the exercise of its general jurisdiction or of its limited probate jurisdiction is in reality
not a jurisdictional question. In essence, it is a procedural question involving a mode of practice
"which may be waived."

As a general rule, the question as to title to property should not be passed upon in the testate or
intestate proceeding. That question should be ventilated in a separate action. That general rule has
qualifications or exceptions justified by expediency and convenience.

Thus, the probate court may provisionally pass upon in an intestate or testate proceeding the
question of inclusion in, or exclusion from, the inventory of a piece of property without prejudice
to its final determination in a separate action.
 Although generally, a probate court may not decide a question of title or ownership, yet
if the interested parties are all heirs, or the question is one of collation or advancement, or the
parties consent to the assumption of jurisdiction by the probate court and the rights of third
parties are not impaired, the probate court is competent to decide the question of
ownership. [Citations omitted. Emphasis supplied.]

In sum, we hold that the nature of the present controversy is not one which may be classified as an intra-
corporate dispute and is beyond the jurisdiction of the special commercial court to resolve. In short,
Rodrigo’s complaint also fails the nature of the controversy test.

DERIVATIVE SUIT

Rodrigo’s bare claim that the complaint is a derivative suit will not suffice to confer jurisdiction on the
RTC (as a special commercial court) if he cannot comply with the requisites for the existence of a
derivative suit. These requisites are:

a. the party bringing suit should be a shareholder during the time of the act or transaction
complained of, the number of shares not being material;

b. the party has tried to exhaust intra-corporate remedies, i.e., has made a demand on the board of
directors for the appropriate relief, but the latter has failed or refused to heed his plea; and

c. the cause of action actually devolves on the corporation; the wrongdoing or harm having been
or being caused to the corporation and not to the particular stockholder bringing the suit.34

Based on these standards, we hold that the allegations of the present complaint do not amount to a
derivative suit.

First, as already discussed above, Rodrigo is not a shareholder with respect to the shareholdings
originally belonging to Anastacia; he only stands as a transferee-heir whose rights to the share are
inchoate and unrecorded. With respect to his own individually-held shareholdings, Rodrigo has not
alleged any individual cause or basis as a shareholder on record to proceed against Oscar.

Second, in order that a stockholder may show a right to sue on behalf of the corporation, he must allege
with some particularity in his complaint that he has exhausted his remedies within the corporation by
making a sufficient demand upon the directors or other officers for appropriate relief with the expressed
intent to sue if relief is denied.35 Paragraph 8 of the complaint hardly satisfies this requirement since
what the rule contemplates is the exhaustion of remedies within the corporate setting:

8. As members of the same family, complainant Rodrigo C. Reyes has resorted [to] and exhausted
all legal means of resolving the dispute with the end view of amicably settling the case, but the
dispute between them ensued.

Lastly, we find no injury, actual or threatened, alleged to have been done to the corporation due to Oscar’s
acts. If indeed he illegally and fraudulently transferred Anastacia’s shares in his own name, then the
damage is not to the corporation but to his co-heirs; the wrongful transfer did not affect the capital stock
or the assets of Zenith. As already mentioned, neither has Rodrigo alleged any particular cause or
wrongdoing against the corporation that he can champion in his capacity as a shareholder on record.36
In summary, whether as an individual or as a derivative suit, the RTC – sitting as special commercial
court – has no jurisdiction to hear Rodrigo’s complaint since what is involved is the determination and
distribution of successional rights to the shareholdings of Anastacia Reyes. Rodrigo’s proper remedy,
under the circumstances, is to institute a special proceeding for the settlement of the estate of the
deceased Anastacia Reyes, a move that is not foreclosed by the dismissal of his present complaint.

WHEREFORE, we hereby GRANT the petition and REVERSE the decision of the Court of Appeals dated
May 26, 2004 in CA-G.R. SP No. 74970. The complaint before the Regional Trial Court, Branch 142,
Makati, docketed as Civil Case No. 00-1553, is ordered DISMISSED for lack of jurisdiction.

SO ORDERED.

THIRD DIVISION

G.R. No. 131889 March 12, 2001

VIRGINIA O. GOCHAN, FELIX Y. GOCHAN III, MAE GOCHAN EFANN, LOUISE Y. GOCHAN, ESTEBAN Y.
GOCHAN JR., DOMINIC Y.GOCHAN, FELIX 0. GOCHAN III, MERCEDES R. GOCHAN, ALFREDO R.
GOCHAN, ANGELINA R. GOCHAN-HERNAEZ, MARIA MERCED R. GOCHAN, CRISPO R. GOCHAN JR.,
MARION R. GOCHAN, MACTAN REALTY DEVELOPMENT CORPORATION and FELIX GOCHAN & SONS
REALTY CORPORATION, petitioner,
vs.
RICHARD G. YOUNG, DAVID G. YOUNG, JANE G. YOUNG-LLABAN, JOHN D. YOUNG JR., MARY G.
YOUNG-HSU and ALEXANDER THOMAS G. YOUNG as heirs of Alice Gochan; the INTESTATE ESTATE
OF JOHN D. YOUNG SR.; and CECILIA GOCHAN-UY and MIGUEL C. UY, for themselves and on behalf
and for the benefit of FELIX GOCHAN & SONS REALTY CORPORATION, respondents.

PANGANIBAN, J.:

A court or tribunal's jurisdiction over the subject matter is determined by the allegations in the
complaint. The fact that certain persons are not registered as stockholders in the books of the
corporation will not bar them from filing a derivative suit, if it is evident from the allegations in the
complaint that they are bona fide stockholders. In view of RA 8799, intra-corporate controversies are
now within the jurisdiction of courts of general jurisdiction, no longer of the Securities and Exchange
Commission. 1âwphi1.nêt

The Case

Before us is a Petition for Review on Certiorari under Rule 45 of the Rules of Court. The Petition assails
the February 28, 1996 Decision1 of the Court of Appeals (CA), as well as its December 18, 1997
Resolution denying petitioner's Motion for Reconsideration. The dispositive part of the CA Decision reads
as follows:

"WHEREFORE, the petition as far as the heirs of Alice Gochan, is DISMISSED, without prejudice to
filing the same in the regular courts.

SO ORDERED."2
In dismissing the Complaint before the SEC regarding only Alice Gochan's heirs but not the other
complainants, the CA effectively modified the December 9, 1994 Order of the hearing officer3 of the
Securities and Exchange Commission (SEC). The Order, which was affirmed in full by the SEC en banc,
dismissed the entire case.

The Facts

The undisputed facts are summarized by the Court of Appeals as follows:

"Felix Gochan and Sons Realty Corporation (Gochan Realty, for brevity) was registered with the
SEC on June, 1951, with Felix Gochan, Sr., Maria Pan Nuy Go Tiong, Pedro Gochan, Tomasa Gochan,
Esteban Gochan and Crispo Gochan as its incorporators.

"Felix Gochan Sr.'s daughter, Alice, mother of [herein respondents], inherited 50 shares of stock in
Gochan Realty from the former.

"Alice died in 1955, leaving the 50 shares to her husband, John Young, Sr.

"In 1962, the Regional Trial Court of Cebu adjudicated 6/14 of these shares to her children, herein
[respondents] Richard Young, David Young, Jane Young Llaban, John Young Jr., Mary Young Hsu
and Alexander Thomas Young.

"Having earned dividends, these stocks numbered 179 by 20 September 1979.

"Five days later (25 September), at which time all the children had reached the age of majority,
their father John Sr., requested Gochan Realty to partition the shares of his late wife by cancelling
the stock certificates in his name and issuing in lieu thereof, new stock certificates in the names of
[herein respondents].

"On 17 October 1979, respondent Gochan Realty refused, citing as reason, the right of first refusal
granted to the remaining stockholders by the Articles of Incorporation.

"On 21, 1990, [sic] John, Sr. died, leaving the shares to the [respondents].

"On 8 February 1994, [respondents] Cecilia Gochan Uy and Miguel Uy filed a complaint with the
SEC for issuance of shares of stock to the rightful owners, nullification of shares of stock,
reconveyance of property impressed with trust, accounting, removal of officers and directors and
damages against respondents. A Notice of Lis Pendens was annotated as [sic] real properties of the
corporation.

"On 16 March 1994, [herein petitioners] moved to dismiss the complaint alleging that: (1) the SEC
ha[d] no jurisdiction over the nature of the action; (2) the [respondents] [were] not the real
parties-in-interest and ha[d] no capacity to sue; and (3) [respondents'] causes of action [were]
barred by the Statute of Limitations.

"The motion was opposed by herein [respondents].

"On 29 March 1994, [petitioners'] filed a Motion for cancellation of Notice of Lis Pendens.
[Respondents] opposed the said motion.

"On 9 December 1994, the SEC, through its Hearing Officer, granted the motion to dismiss and
ordered the cancellation of the notice of lis pendens annotated upon the titles of the corporate
lands. In its order, the SEC opined:

'In the instant case, the complaint admits that complainants Richard G. Young, David G.
Young, Jane G. Young Llaban, John D. Young, Jr., Mary G. Young Hsu and Alexander Thomas
G. Young, who are the children of the late Alice T. Gochan and the late John D. Young, Sr. are
suing in their own right and as heirs of and/or as the beneficial owners of the shares in the
capital stock of FGSRC held in trust for them during his lifetime by the late John D. Young.
Moreover, it has been shown that said complainants ha[d] never been x x x stockholder[s]
of record of FGSRC to confer them with the legal capacity to bring and maintain their
action. Conformably, the case cannot be considered as an intra-corporate controversy
within the jurisdiction of this Commission.

'The complainant heirs base what they perceived to be their stockholders' rights upon the
fact of their succession to all the rights, property and interest of their father, John D. Young,
Sr. While their heirship is not disputed, their right to compel the corporation to register
John D. Young's Sr. shares of stock in their names cannot go unchallenged because the
devolution of property to the heirs by operation of law in succession is subject to just
obligations of the deceased before such property passes to the heirs. Conformably, until
therefore the estate is settled and the payment of the debts of the deceased is
accomplished, the heirs cannot as a matter of right compel the delivery of the shares of
stock to them and register such transfer in the books of the corporation to recognize them
as stockholders. The complainant heirs succeed to the estate of [the] deceased John D.
Young, Sr. but they do not thereby become stockholders of the corporation.

'Moreover, John D. [Young Sr.'s] shares of stocks form part of his estate which is the subject
of Special Proceedings No. 3694-CEB in the Regional Trial Court of Cebu, Branch VIII, [par.
4 of the complaint]. As complainants clearly claim[,] the Intestate Estate of John D. Young,
Sr. has an interest in the subject matter of the instant case. However, actions for the
recovery or protection of the property [such as the shares of stock in question] may be
brought or defended not by the heirs but by the executor or administrator thereof.

'Complainants further contend that the alleged wrongful acts of the corporation and its
directors constitute fraudulent devices or schemes which may be detrimental to the
stockholders. Again, the injury [is] perceived[,] as is alleged[,] to have been suffered by
complainants as stockholders, which they are not. Admittedly, the SEC has no jurisdiction
over a controversy wherein one of the parties involved is not or not yet a stockholder of the
corporation. [SEC vs. CA, 201 SCRA 134].

'Further, by the express allegation of the complaint, herein complainants bring this action
as [a] derivative suit on their own behalf and on behalf of respondent FGSRC.

'Section 5, Rule III of the Revised Rules of Procedure in the Securities and Exchange
Commission provides:
 'Section 5. Derivative Suit. No action shall be brought by stockholder in the right of a
corporation unless the complainant was a stockholder at the time the questioned
transaction occurred as well as at the time the action was filed and remains a
stockholder during the pendency of the action. x x x.'

'The rule is in accord with well settled jurisprudence holding that a stockholder bringing a
derivative action must have been [so] at the time the transaction or act complained of
[took] place. (Pascual vs. Orozco, 19 Phil. 82; Republic vs. Cuaderno, 19 SCRA 671; San
Miguel Corporation vs. Khan, 176 SCRA 462-463) The language of the rule is mandatory,
strict compliance with the terms thereof thus being a condition precedent, a jurisdictional
requirement to the filing of the instant action.

'Otherwise stated, proof of compliance with the requirement must be sufficiently

established for the action to be given due course by this Commission. The failure to comply
with this jurisdictional requirement on derivative action must necessarily result in the
dismissal of the instant complaint.' (pp. 77-79, Rollo)

"[Respondents] moved for a reconsideration but the same was denied for being pro-forma.

"[Respondents] appealed to the SEC en banc, contending, among others, that the SEC ha[d]
jurisdiction over the case.

"[Petitioners], on the other hand, contend that the appeal was 97 days late, beyond the 30-day
period for appeals.

"On 3 March 1995, the SEC en banc ruled for the [petitioners,] holding that the [respondents']
motion for reconsideration did not interrupt the 30-day period for appeal because said motion
was pro-forma."4

Aggrieved, herein respondents then filed a Petition for Review with the Court of Appeals.

Ruling of the Court of Appeals

The Court of Appeals ruled that the SEC had no jurisdiction over the case as far as the heirs of Alice
Gochan were concerned, because they were not yet stockholders of the corporation. On the other hand, it
upheld the capacity of Respondents Cecilia Gochan Uy and her spouse, Miguel Uy. It also held that the
Intestate Estate of John Young Sr. was an indispensable party.

The appellate court further ruled that the cancellation of the notice of lis pendens on the titles of the
corporate real estate was not justified. Moreover, it declared that respondents' Motion for
Reconsideration before the SEC was not pro forma; thus, its filing tolled the appeal period.

Hence, this Petition.5

The Issues

These are the issues presented before us:

 "A. Whether or not the Spouses Uy have the personality to file an action before the SEC against
Gochan Realty Corporation.

"B. Whether or not the Spouses Uy could properly bring a derivative suit in the name of Gochan
Realty to redress wrongs allegedly committed against it for which the directors refused to sue.

"C. Whether or not the intestate estate of John D. Young Sr. is an indispensable party in the SEC
case considering that the individual heirs' shares are still in the decedent stockholder's name.

"D. Whether or not the cancellation of [the] notice of lis pendens was justified considering that the
suit did not involve real properties owned by Gochan Realty."6

In addition, the Court will determine the effect of Republic Act No.87997 on this case.

The Court's Ruling

The Petition has no merit. In view of the effectivity of RA 8799, however, the case should be remanded to
the proper regional trial court, not to the Securities and Exchange Commission.

First Issue:

Personality of the Spouses Uy to File a Suit Before the SEC

Petitioners argue that Spouses Cecilia and Miguel Uy had no capacity or legal standing to bring the suit
before the SEC on February 8, 1994, because the latter were no longer stockholders at the time. Allegedly,
the stocks had already been purchased by the corporation. Petitioners further assert that, being allegedly
a simple contract of sale cognizable by the regular courts, the purchase by Gochan Realty of Cecilia
Gochan Uy's 210 shares does not come within the purview of an intra-corporate controversy.

As a general rule, the jurisdiction of a court or tribunal over the subject matter is determined by the
allegations in the complaint.8 For purposes of resolving a motion to dismiss, Cecilia Uy's averment in the
Complaint -that the purchase of her stocks by the corporation was null and void ab initio - is deemed
admitted. It is elementary that a void contract produces no effect either against or in favor of anyone; it
cannot create, modify or extinguish the juridical relation to which it refers.9 Thus, Cecilia remains a
stockholder of the corporation in view of the nullity of the Contract of Sale. Although she was no longer
registered as a stockholder in the corporate records as of the filing of the case before the SEC, the
admitted allegations in the Complaint made her still a bona fide stockholder of Felix Gochan & Sons
Realty Corporation (FGSRC), as between said parties.

In any event, the present controversy, whether intra-corporate or not, is no longer cognizable by the SEC,
in view of RA 8799, which transferred to regional trial courts the former's jurisdiction over cases
involving intra-corporate disputes.

Action Has Not Prescribed

Petitioners contend that the statute of limitations already bars the Uy spouses' action, be it one for
annulment of a voidable contract or one based upon a written contract. The Complaint, however, contains
respondents' allegation that the sale of the shares of stock was not merely voidable, but was void ab
initio. Below we quote its relevant portion:

"38. That on November 21, 1979, respondent Felix Gochan & Sons Realty Corporation did not have
unrestricted retained earnings in its books to cover the purchase price of the 208 shares of stock it
was then buying from complainant Cecilia Gochan Uy, thereby rendering said purchase null and
void ab initio for being violative of the trust fund doctrine and contrary to law, morals good
customs, public order and public policy;"

Necessarily, petitioners' contention that the action has prescribed cannot be sustained. Prescription
cannot be invoked as a ground if the contract is alleged to be void ab initio.10 It is axiomatic that the
action or defense for the declaration of nullity of a contract does not prescribe.11

Second Issue:

Derivative Suit and the Spouses Uy

Petitioners also contend that the action filed by the Spouses Uy was not a derivative suit, because the
spouses and not the corporation were the injured parties. The Court is not convinced. The following
quoted portions of the Complaint readily shows allegations of injury to the corporation itself:

"16. That on information and belief, in further pursuance of the said conspiracy and for the
fraudulent purpose of depressing the value of the stock of the Corporation and to induce the
minority stockholders to sell their shares of stock for an inadequate consideration as aforesaid,
respondent Esteban T. Gochan . . ., in violation of their duties as directors and officers of the
Corporation . . ., unlawfully and fraudulently appropriated [for] themselves the funds of the
Corporation by drawing excessive amounts in the form of salaries and cash advances. . . and by
otherwise charging their purely personal expenses to the Corporation."

xxx xxx xxx

"41. That the payment of P1,200,000.00 by the Corporation to complainant Cecilia Gochan Uy for
her shares of stock constituted an unlawful, premature and partial liquidation and distribution of
assets to a stockholder, resulting in the impairment of the capital of the Corporation and
prevented it from otherwise utilizing said amount for its regular and lawful business, to the
damage and prejudice of the Corporation, its creditors, and of complainants as minority
stockholders;"12

As early as 1911, this Court has recognized the right of a single stockholder to file derivative suits. In its
words:

"[W]here corporate directors have committed a breach of trust either by their frauds, ultra vires
acts, or negligence, and the corporation is unable or unwilling to institute suit to remedy the
wrong, a single stockholder may institute that suit, suing on behalf of himself and other
stockholders and for the benefit of the corporation, to bring about a redress of the wrong done
directly to the corporation and indirectly to the stockholders."13
In the present case, the Complaint alleges all the components of a derivative suit. The allegations of injury
to the Spouses Uy can coexist with those pertaining to the corporation. The personal injury suffered by
the spouses cannot disqualify them from filing a derivative suit on behalf of the corporation. It merely
gives rise to an additional cause of action for damages against the erring directors. This cause of action is
also included in the Complaint filed before the SEC.

The Spouses Uy have the capacity to file a derivative suit in behalf of and for the benefit of the
corporation. The reason is that, as earlier discussed, the allegations of the Complaint make them out as
stockholders at the time the questioned transaction occurred, as well as at the time the action was filed
and during the pendency of the action.

Third Issue:

Capacity of the Intestate Estate of John D. Young Sr.

Petitioners contend that the Intestate Estate of John D. Young Sr. is not an indispensable party, as there is
no showing that it stands to be benefited or injured by any court judgement.

It would be useful to point out at this juncture that one of the causes of action stated in the Complaint
filed with the SEC refers to the registration, in the name of the other heirs of Alice Gochan Young, of
6/14th of the shares still registered under the name of John D. Young Sr. Since all the shares that
belonged to Alice are still in his name, no final determination can be had without his estate being
impleaded in the suit. His estate is thus an indispensable party with respect to the cause of action dealing
with the registration of the shares in the names of the heirs of Alice.

Petitioners further claim that the Estate of John Young Sr. was not properly represented. They claim that
"when the estate is under administration, suits for the recovery or protection of the property or rights of
the deceased may be brought only by the administrator or executor as approved by the court."14 The
rules relative to this matter do not, however, make any such categorical and confining statement.

Section 3 of Rule 3 of the Rules of Court, which is cited by petitioners in support of their position, reads:

"Sec. 3. Representatives as parties. - Where the action is allowed to be prosecuted or defended by a

representative or someone acting in a fiduciary capacity, the beneficiary shall be included in the
title of the case and shall be deemed to be the real party in interest. A representative may be a
trustee of an express trust, a guardian, an executor or administrator, or a party authorized by law
or these Rules. An agent acting in his own name and for the benefit of an undisclosed principal
may sue or be sued without joining the principal except when the contract involves things
belonging to the principal."

Section 2 of Rule 87 of the same Rules, which also deals with administrators, states:

"Sec. 2. Executor or administrator may bring or defend actions which survive. -For the recovery or
protection of the property or rights of the deceased, an executor or administrator may bring or
defend, in the right of the deceased, actions for causes which survive."

The above-quoted rules, while permitting an executor or administrator to represent or to bring suits on
behalf of the deceased, do not prohibit the heirs from representing the deceased. These rules are easily
applicable to cases in which an administrator has already been appointed. But no rule categorically
addresses the situation in which special proceedings for the settlement of an estate have already been
instituted, yet no administrator has been appointed. In such instances, the heirs cannot be expected to
wait for the appointment of an administrator; then wait further to see if the administrator appointed
would care enough to file a suit to protect the rights and the interests of the deceased; and in the
meantime do nothing while the rights and the properties of the decedent are violated or
dissipated.1âwphi1.nêt

The Rules are to be interpreted liberally in order to promote their objective of securing a just, speedy and
inexpensive disposition of every action and proceeding.15 They cannot be interpreted in such a way as to
unnecessarily put undue hardships on litigants. For the protection of the interests of the decedent, this
Court has in previous instances16 recognized the heirs as proper representatives of the decedent, even
when there is already an administrator appointed by the court. When no administrator has been
appointed, as in this case, there is all the more reason to recognize the heirs as the proper representatives
of the deceased. Since the Rules do not specifically prohibit them from representing the deceased, and
since no administrator had as yet been appointed at the time of the institution of the Complaint with the
SEC, we see nothing wrong with the fact that it was the heirs of John D. Young Sr. who represented his
estate in the case filed before the SEC.

Fourth Issue

Notice of Lis Pendens

On the issue of the annotation of the Notice of Lis Pendens on the titles of the properties of the
corporation and the other respondents, we still find no reason to disturb the ruling of the Court of
Appeals.

Under the third, fourth and fifth causes of action of the Complaint, there are allegations of breach of trust
and confidence and usurpation of business opportunities in conflict with petitioners' fiduciary duties to
the corporation, resulting in damage to the Corporation. Under these causes of action, respondents are
asking for the delivery to the Corporation of possession of the parcels of land and their corresponding
certificates of title. Hence, the suit necessarily affects the title to or right of possession of the real property
sought to be reconveyed. The Rules of Court17 allows the annotation of a notice of lis pendens in actions
affecting the title or right of possession of real property.18 Thus, the Court of Appeals was correct in
reversing the SEC Order for the cancellation of the notice of lis pendens.

The fact that respondents are not stockholders of the Mactan Realty Development Corporation and the
Lapu-Lapu Real Estate Corporation does not make them non-parties to this case. To repeat, the
jurisdiction of a court or tribunal over the subject matter is determined by the allegations in the
Complaint. In this case, it is alleged that the aforementioned corporations are mere alter egos of the
directors-petitioners, and that the former acquired the properties sought to be re conveyed to FGSRC in
violation of the directors-petitioners' fiduciary duty to FGSRC. The notion of corporate entity will be
pierced or disregarded and the individuals composing it will be treated as identical19 if, as alleged in the
present case, the corporate entity is being used as a cloak or cover for fraud or illegality; as a justification
for a wrong; or as an alter ego, an adjunct, or a business conduit for the sole benefit of the stockholders.

Effect of RA 8799
While we sustain the appellate court, the case can no longer be remanded to the SEC. As earlier stated, RA
8799, which became effective on August 8, 2000, transferred SEC's jurisdiction over cases involving intra-
corporate disputes to courts of general jurisdiction or to the regional trial courtS.20 Section 5.2 thereof
reads as follows:

"5.2. The Commission's jurisdiction over all cases enumerated under Section 5 of Presidential
Decree No. 902-A is hereby transferred to the Courts of general jurisdiction or the appropriate
Regional Trial Court: Provided, That the Supreme Court in the exercise of its authority may
designate the Regional Trial Court branches that shall exercise jurisdiction over these cases. The
Commission shall retain jurisdiction over pending cases involving intra-corporate disputes
submitted for final resolution which should be resolved within one (1) year from the enactment of
this Code. The Commission shall retain jurisdiction over pending suspension of
payments/rehabilitation cases filed as of 30 June 2000 until finally disposed."

In the light of the Resolution issued by this Court in AM No. 00-8-10-SC,21 the Court Administrator and
the Securities and Exchange Commission should be directed to cause the transfer of the records of SEC
Case No. 02-94-4674 to the appropriate court of general jurisdiction.

WHEREFORE, the Petition is hereby DENIED and the assailed Decision AFFIRMED, subject to the
modification that the case be remanded to the proper regional trial court. The December 9, 1994 Order of
Securities and Exchange Commission hearing officer dismissing the Complaint and directing the
cancellation of the notice of lis pendens, as well as the March 3, 1995 Order denying complainants' motion
for reconsideration are REVERSED and SET ASIDE. Pursuant to AM No. 00-8-10-SC, the Office of the Court
Administrator and the SEC are DIRECTED to cause the actual transfer of the records of SEC Case No.02-
94-467 4 to the appropriate regional trial court.

SO ORDERED.

SECOND DIVISION

G.R. No. 122452 January 29, 2001

TAM WING TAK, petitioner,

vs.
HON. RAMON P. MAKASIAR (in his Capacity as Presiding Judge of the Regional Trial Court of
Manila, Branch 35) and ZENON DE GUIA (in his capacity as Chief State Prosecutor), respondents.

QUISUMBING, J.:

This is a petition for review on certiorari of the decision of the Regional Trial Court of Manila, Branch 35,
dated September 14, 1995, which dismissed herein petitioner's special civil action for mandamus and
sustained the Letter-Order of respondent Chief State Prosecutor. The latter dismissed petitioner's appeal
from the resolution of the City Prosecutor of Quezon City, which, in turn, dismissed petitioner's complaint
against Vic Ang Siong for violation of the Bouncing Checks Law or B.P. Blg. 22.

The factual background of this case is as follows:

On November 11, 1992, petitioner, in his capacity as director of Concord-World Properties, Inc., (Concord
for brevity), a domestic corporation, filed an affidavit-complaint with the Quezon City Prosecutor's Office,
charging Vic Ang Siong with violation of B.P. Blg. 22. Docketed by the Prosecutor as I.S. No. 93-15886, the
complaint alleged that a check for the amount of P83,550,000.00, issued by Vic Ang Siong in favor of
Concord, was dishonored when presented for encashment.

Vic Ang Siong sought the dismissal of the case on two grounds: First, that petitioner had no authority to
file the case on behalf of Concord, the payee of the dishonored check, since the firm's board of directors
had not empowered him to act on its behalf. Second, he and Concord had already agreed to amicably
settle the issue after he made a partial payment of P19,000,000.00 on the dishonored check.1âwphi1.nêt

On March 23, 1994, the City Prosecutor dismissed I.S. No. 93-15886 on the following grounds: (1) that
petitioner lacked the requisite authority to initiate the criminal complaint for and on Concord's behalf;
and (2) that Concord and Vic Ang Siong had already agreed upon the payment of the latter's balance on
the dishonored check.

A copy of the City Prosecutor's resolution was sent by registered mail to petitioner in the address he
indicated in his complaint-affidavit. Notwithstanding that petitioner was represented by counsel, the
latter was not furnished a copy of the resolution.

On June 27, 1994, petitioner's counsel was able to secure a copy of the resolution dismissing I.S. No. 93-
15886. Counting his 15-day appeal period from said date, petitioner moved for reconsideration on July 7,
1994.

On October 21, 1994, the City Prosecutor denied petitioner's motion for reconsideration. Petitioner's
counsel received a copy of the denial order on November 3, 1994.

On November 7, 1994, petitioner's lawyer filed a motion to extend the period to appeal by an additional
15 days counted from November 3, 1994 with the Chief State Prosecutor. He manifested that it would
take time to communicate with petitioner who is a Hong Kong resident and enable the latter to verify the
appeal as procedurally required.

On November 8, 1994, petitioner appealed the dismissal of his complaint by the City Prosecutor to the
Chief State Prosecutor. The appeal was signed by petitioner's attorney only and was not verified by
petitioner until November 23, 1994.

On December 8, 1994, the Chief State Prosecutor dismissed the appeal for having been filed out of time.
Petitioner's lawyer received a copy of the letter-resolution dismissing the appeal on January 20, 1995.

On January 30, 1995, petitioner moved for reconsideration.

On March 9, 1995, respondent Chief State Prosecutor denied the motion for reconsideration.

Petitioner then filed Civil Case No. 95-74394 for mandamus with the Regional Trial Court of Quezon City
to compel the Chief State Prosecutor to file or cause the filing of an information charging Vic Ang Siong
with violation of B.P. Blg. 22.

On September 14, 1995, the trial court disposed of the action as follows:
 WHEREFORE, for utter lack of merit, the petition for mandamus of petitioner is DENIED and
DISMISSED.

SO ORDERED.1

Petitioner moved for reconsideration, but the trial court denied this motion in its order dated October 24,
1995.

Hence, the instant petition.

Before this Court, petitioner claims respondent judge committed grave errors of law in sustaining
respondent Chief State Prosecutor whose action flagrantly contravenes: (1) the established rule on
service of pleadings and orders upon parties represented by counsel; (b) the basic principle that except in
private crimes, any competent person may initiate a criminal case; and (3) the B.P. Blg. 22 requirement
that arrangement for full payment of a bounced check must be made by the drawer with the drawee
within five (5) banking days from notification of the check's dishonor.2

We find pertinent for our resolution the following issues:

(1) Was there valid service of the City Prosecutor's resolution upon petitioner?

(2) Will mandamus lie to compel the City Prosecutor to file the necessary information in court?

In upholding respondent Chief State Prosecutor, the court a quo held:

It is generally accepted principle in the service of orders, resolutions, processes and other papers
to serve them on the party or his counsel, either in his office, if known, or else in the residence,
also if known. As the party or his counsel is not expected to be present at all times in his office or
residence, service is allowed to be made with a person in charge of the office, or with a person of
sufficient discretion to receive the same in the residence.

In the case under consideration, it is not disputed that the controverted Resolution dismissing the
complaint of the petitioner against Vic Ang Siong was served on the former by registered mail and
was actually delivered by the postmaster on April 9, 1994 at said petitioner's given address in the
record at No. 5 Kayumanggi Street, West Triangle, Quezon City. The registered mail was in fact
received by S. Ferraro. The service then was complete and the period for filing a motion for
reconsideration or appeal began to toll from that date. It expired on April 24, 1994. Considering
that his motion for reconsideration was filed only on July 7, 1994, the same was filed beyond the
prescribed period, thereby precluding further appeal to the Office of the respondent.3

Petitioner, before us, submits that there is no such "generally accepted practice" which gives a tribunal
the option of serving pleadings, orders, resolutions, and other papers to either the opposing party himself
or his counsel. Petitioner insists that the fundamental rule in this jurisdiction is that if a party appears by
counsel, then service can only be validly made upon counsel and service upon the party himself becomes
invalid and without effect. Petitioner relies upon Rule 13, Section 2 of the Rules of Court4 and our ruling
in J.M. Javier Logging Corp. v. Mardo, 24 SCRA 776 (1968) to support his stand. In the J.M. Javier case, we
held:
 [W]here a party appears by attorney, notice to the former is not a notice in law, unless service
upon the party himself is ordered by the court…5

The Solicitor General, for respondents, contends that the applicable rule on service in the present case is
Section 2 of the Department of Justice (DOJ) Order No. 223,6 which allows service to be made upon either
party or his counsel. Respondents argue that while a preliminary investigation has been considered as
partaking of the nature of a judicial proceeding,7 nonetheless, it is not a court proceeding and hence, falls
outside of the ambit of the Rules of Court.

We agree with petitioner that there is no "generally accepted practice" in the service of orders,
resolutions, and processes, which allows service upon either the litigant or his lawyer. As a rule, notice or
service made upon a party who is represented by counsel is a nullity,8 However, said rule admits of
exceptions, as when the court or tribunal order service upon the party9 or when the technical defect is
waived.10

To resolve the issue on validity of service, we must make a determination as to which is the applicable
rule – the on service in the Rules of Court, as petitioner insists or the rule on service in DOJ Order No.
223?

The Rules of Court were promulgated by this Court pursuant to Section 13, Article VII of the 1935
Constitution11(now Section 5 [5], Article VIII of the Constitution)12 to govern "pleadings, practice and
procedure in all courts of the Philippines." The purpose of the Rules is clear and does not need any
interpretation. The Rules were meant to govern court (stress supplied) procedures and pleadings. As
correctly pointed out by the Solicitor General, a preliminary investigation, notwithstanding its judicial
nature, is not a court proceeding. The holding of a preliminary investigation is a function of the Executive
Department and not of the Judiciary.13 Thus, the rule on service provided for in the Rules of Court cannot
be made to apply to the service of resolutions by public prosecutors, especially as the agency concerned,
in this case, the Department of Justice, has its own procedural rules governing said service.

A plain reading of Section 2 of DOJ Order No. 223 clearly shows that in preliminary investigation, service
can be made upon the party himself or through his counsel. It must be assumed that when the Justice
Department crafted the said section, it was done with knowledge of the pertinent rule in the Rules of
Court and of jurisprudence interpreting it. The DOJ could have just adopted the rule on service provided
for in the Rules of Court, but did not. Instead, it opted to word Section 2 of DOJ Order No. 223 in such a
way as to leave no doubt that in preliminary investigations, service of resolutions of public prosecutors
could be made upon either the party or his counsel.

Moreover, the Constitution provides that "Rules of procedure of special courts and quasi-judicial bodies
shall remain effective unless disapproved by the Supreme Court."14 There is naught in the records to
show that we have disapproved and nullified Section 2 of DOJ Order No. 223 and since its validity is not
an issue in the instant case, we shall refrain from ruling upon its validity.

We hold that there was valid service upon petitioner pursuant to Section 2 of DOJ Order No. 223.

On the issue of whether mandamus will lie. In general, mandamus may be resorted to only where one's
right is founded clearly in law and not when it is doubtful.15 The exception is to be found in criminal cases
where mandamus is available to compel the performance by the public prosecutor of an ostensibly
discretionary function, where by reason of grave abuse of discretion on his part, he willfully refuses to
perform a duty mandated by law.16Thus, mandamus may issue to compel a prosecutor to file an
information when he refused to do so in spite of the prima facie evidence of guilt.17

Petitioner takes the stance that it was grave abuse for discretion on the part of respondent Chief State
Prosecutor to sustain the dismissal of I.S. No. 93-15886 on the grounds that: (1) Vic Ang Siong's
obligation which gave rise to the bounced check had already been extinguished by partial payment and
agreement to amicably settle balance, and (2) petitioner had no standing to file the criminal complaint
since he was neither the payee nor holder of the bad check. Petitioner opines that neither ground justifies
dismissal of his complaint.

Petitioner's stand is unavailing. Respondent Chief State Prosecutor in refusing to order the filing of an
information for violation of B.P. Blg. 22 against Vic Ang Siong did not act without or in excess of
jurisdiction or with grave abuse of discretion.

First, with respect to the agreement between Concord and Victor Ang Siong to amicably settle their
difference, we find this resort to an alternative dispute settlement mechanism as not contrary to law,
public policy, or public order. Efforts of parties to solve their disputes outside of the courts are looked on
with favor, in view of the clogged dockets of the judiciary.

Second, it is not disputed in the instant case that Concord, a domestic corporation, was the payee of the
bum check, not petitioner. Therefore, it is Concord, as payee of the bounced check, which is the injured
party. Since petitioner was neither a payee nor a holder of the bad check, he had neither the personality
to sue nor a cause of action against Vic Ang Siong. Under Section 36 of the Corporation Code18, read in
relation to Section 23,19 it is clear that where a corporation is an injured party, its power to sue is lodged
with its board of directors or turstees.20 Note that petitioner failed to show any proof that he was
authorized or deputized or granted specific powers by Concord's board of director to sue Victor And
Siong for and on behalf of the firm. Clearly, petitioner as a minority stockholder and member of the board
of directors had no such power or authority to sue on Concord's behalf. Nor can we uphold his act as a
derivative suit. For a derivative suit to prosper, it is required that the minority stockholder suing for and
on behalf of the corporation must allege in his complaint that he is suing on a derivative cause of action
on behalf of the corporation and all other stockholders similarly situated who may wish to join him in the
suit.21 There is no showing that petitioner has complied with the foregoing requisites. It is obvious that
petitioner has not shown any clear legal right which would warrant the overturning of the decision of
public respondents to dismiss the complaint against Vic Ang Siong. A public prosecutor, by the nature of
his office, is under no compulsion to file a criminal information where no clear legal justification has been
shown, and no sufficient evidence of guilt nor prima faciecase has been presented by the petitioner.22 No
reversible error may be attributed to the court a quo when it dismissed petitioner's special civil action for
mandamus.1âwphi1.nêt

WHEREFORE, the instant petition is DISMISSED for lack of merit. Costs against petitioner.

SO ORDERED.

Republic of the Philippines

SUPREME COURT
Manila

THIRD DIVISION
G.R. No. 121171 December 29, 1998

ASSET PRIVATIZATION TRUST, petitioner,

vs.
COURT OF APPEALS, JESUS S. CABARRUS, SR., JESUS S. CABARRUS, JR., JAIME T. CABARRUS, JOSE
MIGUEL CABARRUS, ALEJANDRO S. PASTOR, JR., ANTONIO U. MIRANDA, and MIGUEL M. ANTONIO,
as Minority Stock-Holders of Marinduque Mining and Industrial Corporation, respondents.

KAPUNAN, J.:

The petition for review on certiorari before us seeks to reverse and set aside the decision of the Court of
Appeals which denied due course to the petition for certiorari filed by the Asset Privatization Trust (APT)
assailing the order of the Regional Trial Court (RTC) Branch 62, Makati City. The Makati RTC's order
upheld and confirmed the award made by the Arbitration Committee in favor of Marinduque Mining and
Industrial Corporation (MMIC) and against the Government, represented by herein petitioner APT for
damages in the amount of P2.5 BILLION (or approximately P4.5 BILLION, including interest).

Ironically, the staggering amount of damages was imposed on the Government for exercising its
legitimate right of foreclosure as creditor against the debtor MMIC as a consequence of the latter's failure
to pay its overdue and unpaid obligation of P22 billion to the Philippine National Bank (PNB) and the
Development Bank of the Philippines (DBP).

The antecedent facts

of the case.

The development, exploration and utilization of the mineral deposits in the Surigao Mineral Reservation
have been authorized by Republic Act No. 1528, as amended by Republic Acts Nos. 2077 and 4167, by
virtue of which laws, a Memorandum of Agreement was drawn on July 3, 1968, whereby the Republic of
the Philippines thru the Surigao Mineral Reservation Board, granted MMIC the exclusive right to explore,
develop and exploit nickel, cobalt and other minerals in the Surigao mineral reservation.1 MMIC is a
domestic corporation engaged in mining with respondent Jesus S. Cabarrus, Sr. as President and
among its original stockholders.

The Philippine Government undertook to support the financing of MMIC by purchase of MMIC
debenture bonds and extension of guarantees. Further, the Philippine Government obtained a
firm commitment form the DBP and/or other government financing institutions to subscribe in
MMIC and issue guarantee/s for foreign loans or deferred payment arrangements secured from
the US Eximbank, Asian Development Bank, Kobe Steel, of amount not exceeding US$100 Million.2

DBP approved guarantees in favor of MMIC and subsequent requests for guarantees were based
on the unutilized portion of the Government commitment. Thereafter, the Government extended
accommodations to MMIC in various amounts.
On July 13, 1981, MMIC, PNB and DBP executed a Mortgage Trust Agreement 3 whereby MMIC, as
mortgagor, agreed to constitute a mortgage in favor or PNB and DBP as mortgagees, over all
MMIC's assets; subject of real estate and chattel mortgage executed by the mortgagor, and
additional assets described and identified, including assets of whatever kind, nature or
description, which the mortgagor may acquire whether in substitution of, in replenishment, or in
addition thereto.

Article IV of the Mortgage Trust Agreement provides for Events of Default, which expressly
includes the event that the MORTGAGOR shall fail to pay any amount secured by this Mortgage
Trust Agreement when due. 4

Article V of the Mortgage Trust Agreement prescribes in detail, and in addition to the enumerated
events of defaults, circumstances by which the mortgagor may be declared in default, the
procedure therefor, waiver of period to foreclose, authority of Trustee before, during and after
foreclosure, including taking possession of the mortgaged properties.5

In various requests for advances/remittances of loans if huge amounts, Deeds of Undertaking,

Promissory Notes, Loan Documents, Deeds of Real Estate Mortgages, MMIC invariably committed
to pay either on demand or under certain terms the loans and accommodations secured from or
guaranteed by both DBP and PNB.

By 1984, DBP and PNB's financial both in loans and in equity in MMIC had reached tremendous
proportions, and MMIC was having a difficult time meeting its financial obligations. MMIC had an
outstanding loan with DBP in the amount of P13,792,607,565.92 as of August 31, 1984 and with
PNB in the amount of P8,789,028,249.38 as July 15, 1984 or a total Government expose of Twenty
Two Billion Six Hundred Sixty-Eight Million Five Hundred Thirty-Seven Hundred Seventy and
05/100 (P22, 668,537,770.05), Philippine Currency. 6 Thus, a financial restructuring plan (FRP)
designed to reduce MMIC's interest expense through debt conversion to equity was drafted by the
Sycip Gorres Velayo accounting firm. 7 On April 30, 1984, the FRP was approved by the Board of
Directors of the MMIC.8 However, the proposed FRP had never been formally adopted, approved
or ratified by either PNB or DBP.9

In August and September 1984, as the various loans and advances made by DBP and PNB to MMIC
had become overdue and since any restructuring program relative to the loans was no longer
feasible, and in compliance with the directive of Presidential Decree No. 385, DBP and PNB as
mortgagees of MMIC assets, decided to exercise their right to extrajudicially foreclose the
mortgages in accordance with the Mortgage Trust Agreement. 10

The foreclosed assets were sold to PNB as the lone bidder and were assigned to three newly
formed corporations, namely, Nonoc Mining Corporation, Maricalum Mining and Industrial
Corporation, and Island Cement Corporation. In 1986, these assets were transferred to the Asset
Privatization Trust (APT). 11

On February 28, 1985, Jesus S. Cabarrus, Sr., together with the other stockholders of MMIC, filed a
derivative suit against DBP and PNB before the RTC of Makati, Branch 62, for Annulment of
Foreclosures, Specific Performance and Damages. 12 The suit, docketed as Civil Case No. 9900,
prayed that the court: (1) annul the foreclosures, restore the foreclosed assets to MMIC, and
require the banks to account for their use and operation in the interim; (2) direct the banks to
honor and perform their commitments under the alleged FRP; and (3) pay moral and exemplary
damages, attorney's fees, litigation expenses and costs.

In the course of the trial, private respondents and petitioner APT, as successor of the DBP and the
PNB's interest in MMIC, mutually agreed to submit the case to arbitration by entering into a
"Compromise and Arbitration Agreement," stipulating, inter alia:

NOW THEREFORE, for and in consideration of the foregoing premises and the mutual
covenants contained herein the parties agree as follows:

1. Withdrawal and Compromise. The parties have agreed to withdraw their

respective claims from the Trial Court and to resolve their dispute through
arbitration by praying to the Trial Court to issue a Compromise Judgment based on
this Compromise and Arbitration Agreement.

In withdrawing their dispute from the court and in choosing to resolve it through
arbitration, the parties have agreed that:

(a) their respective money claims shall be reduced to purely money claims; and

(b) as successor and assignee of the PNB and DBP interests in MMIC and the MMIC
accounts, APT shall likewise succeed to the rights and obligations of PNB and DBP in
respect of the controversy subject of Civil Case No. 9900 to be transferred to
arbitration and any arbitral award/order against either PNB and/or DBP shall be the
responsibility be discharged by and be enforceable against APT, the parties having
agreed to drop PNB and DBP from the arbitration.

2. Submission. The parties hereby agree that (a) the controversy in Civil Case No.
9900 shall be submitted instead to arbitration under RA 876 and (b) the reliefs
prayed for in Civil Case No. 9900 shall, with the approval of the Trial Court of this
Compromise and Arbitration Agreement, be transferred and reduced to pure
pecuniary/money claims with the parties waiving and foregoing all other forms of
reliefs which they prayed for or should have prayed for in Civil Case No. 9900. 13

The Compromise and Arbitration Agreement limited the issues to the following:

5. Issues The issues to be submitted for the Committee's resolution shall be (a)
Whether PLAINTIFFS have the capacity or the personality to institute this derivative
suit in behalf of the MMIC or its directors, (b) Whether or not the actions leading to,
and including,. the PNB-DBP foreclosure of the MMIC assets were proper, valid and in
good
faith. 14

This agreement was presented for approval to the trial court. On October 14, 1992, the Makati
RTC, Branch 61, issued an order, to wit:

WHEREFORE, this Court orders:

 1. Substituting PNB and DBP with the Asset Privatization Trust as party
defendant.

2. Approving the Compromise and Arbitration Agreement dated

October 6, 1997, attached as Annex "C" of the Omnibus Motion.

3. Approving the Transformation of the reliefs prayed for [by] the

plaintiffs in this case into pure money claims; and

4. The Complaint is hereby DISMISSED. 15

The Arbitration Committee was composed of retired Supreme Court Justice Abraham Sarmiento
as Chairman, Atty. Jose C. Sison and former Court of Appeals Justice Magdangal Elma as Members.
On November 24, 1993, after conducting several hearings, the Arbitration Committee rendered a
majority decision in favor of MMIC, the pertinent portions of which read as follows:

Since, as this Committee finds, there is no foreclosure at all as it was not legally and
validly done, the Committee holds and so declares that the loans of PNB and DBP to
MMIC. for the payment and recovery of which the void foreclosure sales were
undertaken, continue to remain outstanding and unpaid. Defendant APT as the
successor-in-interest of PNB and DBP to the said loans is therefore entitled and
retains the right, to collect the same from MMIC pursuant to, and based on the loan
documents signed by MMIC, subject to the legal and valid defenses that the latter
may duly and seasonably interpose. Such loans shall, however, be reduced by the
amount which APT may have realized from the sale of the seized assets of MMIC
which by agreement should no longer be returned even if the foreclosures were
found to be null and void.

The documentary evidence submitted and adopted by the parties (Exhibits "3", "3-
B"; Exhibit "100"; and also Exhibit "ZZZ") as their exhibits would show that the total
outstanding obligation due to DBP and PNB as of the date of foreclosure is
P22,668,537,770.05, more or less.

Therefore defendant APT can, and is still entitled to, collect the outstanding
obligations of MMIC to PNB and DBP amounting to P22,668,537,770.05, more or less,
with interest thereon as stipulated in the loan documents from the date of
foreclosure up to the time they are fully paid less the proportionate liability of DBP
as owner of 87% of the total capitalization of MMIC under the FRP. Simply put, DBP
shall share in the award of damages to, and in the obligations of, MMIC in proportion
to its 87% equity in tile total capital stock of MMIC.

xxx xxx xxx

As this Committee holds that the FRP is valid, DBP's equity in MMIC is raised to 87%.
So pursuant to the above provision of the Compromise and Arbitration Agreement,
the 87% equity of DBP is hereby deducted from the actual damages of
P19,486,118,654.00 resulting in the net actual damages of P2,531,635,425.02 plus
interest.
 DISPOSITION

WHEREFORE, premises considered, judgment is hereby rendered:

1. Ordering the defendant to pay to the Marinduque Mining and Industrial

Corporation, except the DBP, the sum of P2,531,635,425.02 with interest thereon at
the legal rate of six per cent (6%)per annum reckoned from August 3, 9, and 24,
1984, pari passu, as and for actual damages. Payment of these actual damages shall
be offset by APT from the outstanding and unpaid loans of MMIC with DBP and PNB,
which have not been converted into equity. Should there be any balance due to MMIC
after the offsetting, the same shall be satisfied from the funds representing the
purchase price of the sale of the shares of Island Cement Corporation in the amount
of P503,000,000.00 held under escrow pursuant to the Escrow Agreement dated
April 22, 1988 or to such subsequent escrow agreement that would supercede [sic] it
pursuant to paragraph (9) of the Compromise and Arbitration Agreement;

2. Ordering the defendant to pay to the Marinduque Mining and Industrial

Corporation, except the DBP, the sum of P13,000.000.00, as and for moral and
exemplary damages. Payment of these moral and exemplary damages shall be offset
by APT from the outstanding and unpaid loans of MMIC with DBP and PNB, which
have not been converted into equity. Should there be any balance due to MMIC after
the offsetting, the same shall be satisfied from the funds representing the purchase
price of the sale of the shares of Island Cement Corporation in the amount of
P503,000,000.00 held under escrow pursuant to the Escrow Agreement dated April
22, 1988 or to such subsequent escrow agreement that would supercede [sic] it
pursuant to paragraph (9) of the Compromise and Arbitration Agreement;

3. Ordering the defendant to pay to the plaintiff, Jesus S. Cabarrus, Sr., the sum of
P10,000,000.00, to be satisfied likewise from the funds held under escrow pursuant
to the Escrow Agreement dated April 22, 1988 or to such subsequent escrow
agreement that would supersede it, pursuant to paragraph (9) of the Compromise
and Arbitration Agreement, as and for moral damages; and

4. Ordering the defendant to pay arbitration costs.

This Decision is FINAL and EXECUTORY.

IT IS SO ORDERED. 16

Motions for reconsideration were filed by both parties, but the same were denied.

On October 17, 1993, private respondents filed in the same Civil Case No. 9900 an
"Application/Motion for Confirmation of Arbitration Award." Petitioner countered with an
"Opposition and Motion to Vacate Judgment" raising the following grounds.

1. The plaintiffs Application/Motion is improperly filed with this branch of the Court,
considering that the said motion is neither a part nor the continuation of the
proceedings in Civil Case No. 9900 which was dismissed upon motion of the parties.
 In fact, the defendants in the said Civil Case No. 9900 were the Development Bank of
the Philippines and the Philippine National Bank (PNB);

2. Under Section 71 of Rep. Act 876, an arbitration under a contract or submission

shall be deemed a special proceedings and a party to the controversy which was
arbitrated may apply to the court having jurisdiction, (not necessarily with this
Honorable Court) for an order confirming the award;

3. The issues submitted for arbitration have been limited to two: (1) propriety of the
plaintiffs filing the derivative suit and (2) the regularity of the foreclosure
proceedings. The arbitration award sought to be confirmed herein, far exceeded the
issues submitted and even granted moral damages to one of the herein plaintiffs;

4. Under Section 24 of Rep. Act 876, the Court must make an order vacating the
award where the arbitrators exceeded their powers, or so imperfectly executed
them, that a mutual, final and definite award upon the subject matter submitted to
them was not made. 17

Private respondents filed a "REPLY AND OPPOSITION" dated November 10, 1984, arguing that a
dismissal of Civil Case No. 9900 was merely a "qualified dismissal" to pave the way for the
submission of the controversy to arbitration and operated simply as "a mere suspension of the
proceedings" They denied that the Arbitration Committee had exceeded its powers.

In an Order dated November 28, 1993, the trial court confirmed the award of the Arbitration
Committee. The dispositive portion of said order reads:

WHEREFORE, premises considered, and in the light of the parties [sic] Compromise
and Arbitration Agreement dated October 6, 1992, the Decision of the Arbitration
Committee promulgated on November 24, 1993, as affirmed in a Resolution dated
July 26, 1994, and finally settled and clarified in the Separate Opinion dated
September 2, 1994 of Committee Member Elma, and the pertinent provisions of RA
876, also known as the Arbitration Law, this Court GRANTS PLAINTIFFS'
APPLICATION AND THUS CONFIRMS THE ARBITRATION AWARD, AND JUDGMENT IS
HEREBY RENDERED:

(a) Ordering the defendant APT to the Marinduque Mining and Industrial
Corporation (MMIC), except the DBP, the sum of P3,811,757,425.00, as and for actual
damages, which shall be partially satisfied from the funds held under escrow in the
amount of P503,000,000.00 pursuant to the Escrow Agreement dated April 22, 1988.
The balance of the award, after the escrow funds are fully applied, shall be executed
against the APT;

(b) Ordering the defendant to pay to the MMIC, except the DBP, the sum of
P13,000,000.00 as and for moral and exemplary damages;

(c) Ordering the defendant to pay to Jesus S. Cabarrus, Sr., the sum of P10,000,000.00
as and for moral damages; and
 (d) Ordering the defendant to pay the herein plaintiffs/applicants/movants the sum
of P1,705,410.23 as arbitration costs.

In reiteration of the mandates of Stipulation No. 10 and Stipulation No. 8 paragraph 2

of the Compromise and Arbitration Agreement, and the final edict of the Arbitration
Committee's decision, and with this Court's Confirmation, the issuance of the
Arbitration Committee's Award shall henceforth be final and executory.

SO ORDERED. 18

On December 27, 1994, petitioner filed its motion for reconsideration of the Order dated
November 28, 1994. Private respondents, in turn, submitted their reply and opposition thereto.

On January 18, 1995, the trial court handed down its order denying APT's motion for
reconsideration for lack of merit and for having been filed out of time. The trial court declared
that "considering that the defendant APT, through counsel, officially and actually received a copy
of the Order of this Court dated November 28, 1994 on December 6, 1994, the Motion for
Reconsideration thereof filed by the defendant APT on December 27, 1994, or after the lapse of 21
days, was clearly filed beyond the 15-day reglementary period prescribed or provided for by law
for the filing of an appeal from final orders, resolutions, awards, judgments or decisions of any
court in all cases, and by necessary implication for the filing of a motion for reconsideration
thereof."

On February 7, 1995, petitioner received private respondents' Motion for Execution and
Appointment of Custodian of Proceeds of Execution dated February 6, 1995.

Petitioner thereafter filed with the Court of Appeals a special civil action for certiorari with
temporary restraining order and/or preliminary injunction dated February 13, 1996 to annul and
declare as void the Orders of the RTC-Makati dated November 28, 1994 and January 18, 1995 for
having been issued without or in excess of jurisdiction and/or with grave abuse of discretion. 19 As
ground therefor, petitioner alleged that:

THE RESPONDENT JUDGE HAS NOT VALIDLY ACQUIRED JURISDICTION MUCH LESS,
HAS THE COURT AUTHORITY, TO CONFIRM THE ARBITRAL AWARD CONSIDERING
THAT THE ORIGINAL CASE, CIVIL CASE NO. 9900, HAD PREVIOUSLY BEEN DISMISSED.

II

THE RESPONDENT JUDGE COMMITTED GRAVE ABUSE OF DISCRETION AND ACTED

WITHOUT OR IN EXCESS OF JURISDICTION, IN ISSUING THE QUESTIONED ORDERS
CONFIRMING THE ARBITRAL AWARD AND DENYING THE MOTION FOR
RECONSIDERATION OF ORDER OF AWARD.

III
 THE RESPONDENT JUDGE GROSSLY ABUSED HIS DISCRETION AND ACTED WITHOUT
OR IN EXCESS OF AND WITHOUT JURISDICTION IN RECKONING THE COUNTING OF
THE PERIOD TO FILE MOTION FOR RECONSIDERATION, NOT FROM THE DATE OF
SERVICE OF THE COURT'S COPY CONFIRMING THE AWARD, BUT FROM RECEIPT OF A
XEROX COPY OF WHAT PRESUMABLY IS THE OPPOSING COUNSEL'S COPY
THEREOF. 20

On July 12, 1995, he Court of Appeals, through its Fifth-Division, denied due course and dismissed
the petition for certiorari.

Hence, the instant petition for review on certiorari imputing to the Court of Appeals the following
errors:

ASSIGNMENT OF ERRORS

THE COURT OF APPEALS ERRED IN NOT HOLDING THAT THE MAKATI REGIONAL
TRIAL COURT, BRANCH 62 WHICH HAS PREVIOUSLY DISMISSED CIVIL CASE NO. 9900
HAD LOST JURISDICTION TO CONFIRM THE ARBITRAL AWARD UNDER THE SAME
CIVIL CASE AND NOT RULING THAT THE APPLICATION FOR CONFIRMATION SHOULD
HAVE BEEN FILED AS A NEW CASE TO BE RAFFLED OFF AMONG THE DIFFERENT
BRANCHES OF THE RTC.

II

THE COURT OF APPEALS LIKEWISE ERRED IN HOLDING THAT PETITIONER WAS

ESTOPPED FROM QUESTIONING THE ARBITRATION AWARD, WHEN PETITIONER
QUESTIONED THE JURISDICTION OF THE RTC-MAKATI, BRANCH 62 AND AT THE
SAME TIME MOVED TO VACATE THE ARBITRAL AWARD.

III

THE COURT OF APPEALS ERRED IN NOT HOLDING THAT THE RESPONDENT TRIAL
COURT SHOULD HAVE EITHER DISMISSED/DENIED PRIVATE RESPONDENTS'
MOTION/PETITION FOR CONFIRMATION OF ARBITRATION AWARD AND/OR
SHOULD HAVE CONSIDERED THE MERITS OF THE MOTION TO VACATE ARBITRAL
AWARD.

IV

THE COURT OF APPEALS ERRED IN NOT TREATING PETITIONER APT'S PETITION

FORCERTIORARI AS AN APPEAL TAKEN FROM THE ORDER CONFIRMING THE AWARD.

V
 THE COURT OF APPEALS ERRED IN NOT RULING ON THE LEGAL ISSUE OF WHEN TO
RECKON THE COUNTING OF THE PERIOD TO FILE A MOTION FOR
RECONSIDERATION. 21

The petition is impressed with merit.

The RTC of Makati, Branch 62,

did not have jurisdiction to confirm

the arbitral award.

The use of the term "dismissed" is not "a mere semantic imperfection". The dispositive portion of
the Order of the trial court dated October 14, 1992 stated in no uncertain terms:

4. The Complaint is hereby DISMISSED. 22

The term "dismiss" has a precise definition in law. "To dispose of an action, suit, or motion
without trial on the issues involved. Conclude, discontinue, terminate, quash." 23

Admittedly, the correct procedure was for the parties to go back to the court where the case was
pending to have the award confirmed by said court. However, Branch 62 made the fatal mistake of
issuing a final order dismissing the case. While Branch 62 should have merely suspended the case
and not dismissed it,24neither of the parties questioned said dismissal. Thus, both parties as well
as said court are bound by such error.

It is erroneous then to argue, as private respondents do, that petitioner APT was charged with the
knowledge that the "case was merely stayed until arbitration finished," as again, the order of
Branch 62 in very clear terms stated that the "complaint was dismissed." By its own action,
Branch 62 had lost jurisdiction over the case. It could not have validly reacquired jurisdiction
over the said case on mere motion of one of the parties. The Rules of Court is specific on how a
new case may be initiated and such is not done by mere motion in a particular branch of the RTC.
Consequently, as there was no "pending action" to speak of, the petition to confirm the arbitral
award should have been filed as a new case and raffled accordingly to one of the branches of the
Regional Trial Court.

II

Petitioner was not estopped from

questioning the jurisdiction of

Branch 62 of the RTC of Makati.

The Court of Appeals ruled that APT was already estopped to question the jurisdiction of the RTC
to confirm the arbitral award because it sought affirmative relief in said court by asking that the
arbitral award be vacated.

The rule is that "Where the court itself clearly has no jurisdiction over the subject matter or the
nature of the action, the invocation of this defense may be done at any time. It is neither for the
courts nor for the parties to violate or disregard that rule, let alone to confer that jurisdiction this
matter being legislative in character." 25 As a rule then, neither waiver nor estoppel shall apply to
confer jurisdiction upon a courtbarring highly meritorious and exceptional circumstances. 26 One
such exception was enunciated in Tijam vs. Sibonghanoy, 27 where it was held that "after
voluntarily submitting a cause and encountering an adverse decision on the merits, it is too late
for the loser to question the jurisdiction or power of the court."

Petitioner's situation is different because from the outset, it has consistently held the position
that the RTC, Branch 62 had no jurisdiction to confirm the arbitral award; consequently, it cannot
be said that it was estopped from questioning the RTC's jurisdiction. Petitioner's prayer for the
setting aside of the arbitral award was not inconsistent with its disavowal of the court's
jurisdiction.

III

Appeal of petitioner to the

Court of Appeals thru certiorari

under Rule 65 was proper.

The Court of Appeals in dismissing APT's petition for certiorari upheld the trial court's denial of
APT's motion for reconsideration of the trial court's order confirming the arbitral award, on the
ground that said motion was filed beyond the 15-day reglementary period; consequently, the
petition for certiorari could not be resorted to as substitute to the lost right of appeal.

We do not agree.

Section 99 of Republic Act No. 876, 28 provides that:

. . . An appeal may be taken from an order made in a proceeding under this Act, or
from a judgment entered upon an award through certiorari proceedings, but such
appeals shall be limited to questions of law. . . ..

The aforequoted provision, however, does not preclude a party aggrieved by the arbitral award
from resorting to the extraordinary remedy of certiorari under Rule 65 of the Rules of Court
where, as in this case, the Regional Trial Court to which the award was submitted for confirmation
has acted without jurisdiction or with grave abuse of discretion and there is no appeal, nor any
plain, speedy remedy in the course of law.

Thus, Section 1 of Rule 65 provides:

 Sec 1. Petition for Certiorari: — When any tribunal, board or officer exercising
judicial functions, has acted without or in excess of its or his jurisdiction, or with
grave abuse of discretion and there is no appeal, nor any plain, speed, and adequate
remedy in the ordinary course of law, a person aggrieved thereby may file a verified
petition in the proper court alleging the facts with certainty and praying that
judgment be rendered annulling or modifying the proceedings, as the law requires,
of such tribunal, board or officer.

In the instant case, the respondent court erred in dismissing the special civil action for certiorari,
it being clear from the pleadings and the evidence that the trial court lacked jurisdiction and/or
committed grave abuse of discretion in taking cognizance of private respondents' motion to
confirm the arbitral award and, worse, in confirming said award which is grossly and patently not
in accord with the arbitration agreement, as will be hereinafter demonstrated.

IV

The nature and limits of the

Arbitrators' power.

As a rule, the award of an arbitrator cannot be set aside for mere errors of judgment either as to
the law or as to the facts. 29 Courts are without power to amend or overrule merely because of
disagreement with matters of law or facts determined by the arbitrators. 30 They will not review
the findings of law and fact contained in an award, and will not undertake to substitute their
judgment for that of the arbitrators, since any other rule would make an award the
commencement, not the end, of litigation. 31 Errors of law and fact, or an erroneous decision of
matters submitted to the judgment of the arbitrators, are insufficient to invalidate an award fairly
and honestly made. 32 Judicial review of an arbitration is thus, more limited than judicial review of
a trial. 33

Nonetheless, the arbitrators' award is not absolute and without exceptions. The arbitrators
cannot resolve issues beyond the scope of the submission agreement. 34 The parties to such an
agreement are bound by the arbitrators' award only to the extent and in the manner prescribed
by the contract and only if the award is rendered in conformity thereto. 35 Thus, Sections 24 and
25 of the Arbitration Law provide grounds for vacating, rescinding or modifying an arbitration
award. Where the conditions described in Articles 2038, 36
2039, 37 and 1040 38 of the Civil Code applicable to compromises and arbitration are attendant,
the arbitration award may also be annulled.

In Chung Fu Industries (Phils.) vs. Court of Appeals, 39 we held:

. . . . It is stated explicitly under Art. 2044 of the Civil Code that the finality of the
arbitrators' award is not absolute and without exceptions. Where the conditions
described in Articles 2038, 2039 and 2040 applicable to both compromises and
arbitrations are obtaining, the arbitrator's award may be annulled or rescended.
Additionally, under Sections 24 and 25 of the Arbitration Law, there are grounds for
vacating, modifying or rescinding an arbitrator's award. Thus, if and when the
 factual circumstances referred to the above-cited provisions are present, judicial
review of the award is properly warranted.

According, Section 20 of R.A. 876 provides:

Sec. 20. Form and contents of award. — The award must be made in writing and
signed and acknowledge by a majority of the arbitrators, if more than one; and by
the sole arbitrator, if there is only only. Each party shall be furnished with a copy of
the award. The arbitrators in their award may grant any remedy or relief which they
deem just and equitable and within the scope of the agreement of the parties, which
shall include, but not be limited to, the specific performance of a contract.

xxx xxx xxx

The arbitrators shall have the power to decide only those matters which have been
submitted to them. The terms of the award shall be confined to such disputes.
(Emphasis ours).

xxx xxx xxx

Sec. 24 of the same law enumerating the grounds for vacating an award states:

Sec. 24. Grounds for vacating award. — In any one of the following cases, the court
must make an order vacating the award upon the petition of any party to the
controversy when such party proves affirmatively that in the arbitration proceeding:

(a) The award was procured by corruption, fraud, or other undue means; or

(b) That there was evident partiality or corruption in the arbitrators or any of them;
or

(c) That the arbitrators were guilty of misconduct in refusing to postpone the
hearing upon sufficient cause shown, or in refusing to hear evidence pertinent and
material to the controversy; that one or more of the arbitrators was disqualified to
act as such under section nine hereof, and willfully refrained from disclosing such
disqualifications or any other misbehavior by which the rights of any party have
been materially prejudiced; or

(d) That the arbitrators exceeded their powers, or so imperfectly executed them, that a
mutual, final and definite award upon the subject matter submitted to them was not
made. (Emphasis ours)

xxx xxx xxx.

Section 25 which enumerates the grounds for modifying the award provides:
 Sec. 25. Grounds for modifying or correcting award — In anyone of the following
cases, the court must make an order modifying or correcting the award, upon the
application of any party to the controversy which was arbitrated:

(a) Where there was an evident miscalculation of figures, or an evident mistake in

the description of any person, thing or property referred to in the award; or

(b) Where the arbitrators have awarded upon a matter not submitted to them, not
affecting the merits of the decision upon the matter submitted; or

(c) Where the award is imperfect in a matter of form not affecting the merits of the
controversy, and if it had been a commissioner's report, the defect could have been
amended or disregarded by the court.

xxx xxx xxx

Finally, it should be stressed that while a court is precluded from overturning an award for errors
in the determination of factual issues, nevertheless, if an examination of the record reveals no
support whatever for the arbitrators determinations, their award must be vacated. 40 in the same
manner, an award must be vacated if it was made in "manifest disregard of the law." 41

Against the backdrop of the foregoing provisions and principles, we find that the arbitrators came
out with an award in excess of their powers and palpably devoid of factual and legal basis.

There was no financial

structuring program:

foreclosure of mortgage

was fully justified.

The point need not be belabored that PNB and DBP had the legitimate right to foreclose of the
mortgages of MMIC whose obligations were past due. The foreclosure was not a wrongful act of
the banks and, therefore, could not be the basis of any award of damages. There was no financial
restructuring agreement to speak of that could have constituted an impediment to the exercise of
the banks' right to foreclose.

As correctly stated by Mr. Jose C. Sison, a member of the Arbitration Committee who wrote a
separate opinion:

1. The various loans and advances made by DBP and PNB to MMIC have become
overdue and remain unpaid. The fact that a FRP was drawn up is enough to establish
that MMIC has not been complying with the terms of the loan agreement.
Restructuring simply connotes that the obligations are past due that is why it is
"restructurable";
2. When MMIC thru its board and the stockholders agreed and adopted the FRP, it
only means that MMIC had been informed or notified that its obligations were past
due and that foreclosure is forthcoming;

3. At that stage, MMIC also knew that PNB-DBP had the option of either approving the
FRP or proceeding with the foreclosure. Cabarrus, who filed this case supposedly in
behalf of MMIC should have insisted on the FRP. Yet Cabarrus himself opposed the
FRP;

4. So when PNB-DBP proceeded with the foreclosure, it was done without bad faith
but with the honest and sincere belief that foreclosure was the only alternative; a
decision further explained by Dr. Placido Mapa who testified that foreclosure was, in
the judgment of PNB, the best move to save MMIC itself.

Q : Now in this portion of Exh. "L" which was marked as Exh. "L-1", and we adopted as
Exh. 37-A for the respondent, may I know from you, Dr. Mapa what you meant by
"that the decision to foreclose was neither precipitate nor arbitrary"?

A : Well, it is not a whimsical decision but rather decision arrived at after weighty
consideration of the information that we have received, and listening to the
prospects which reported to us that what we had assumed would be the premises of
the financial rehabilitation plan was not materialized nor expected to materialize.

Q : And this statement that "it was premised upon the known fact" that means, it was
referring to the decision to foreclose, was premised upon the known fact that the
rehabilitation plan earlier approved by the stockholders was no longer feasible, just
what is meant "by no longer feasible"?

A : Because the revenue that they were counting on to make the rehabilitation plan
possible, was not anymore expected to be forthcoming because it will result in a
short fall compared to the prices that were actually taking place in the market.

Q : And I suppose that was what you were referring to when you stated that the
production targets and assumed prices of MMIC's products, among other projections,
used in the financial reorganization program that will make it viable were not met
nor expected to be met?

A : Yes.

xxx xxx xxx

Which brings me to my last point in this separate opinion. Was PNB and DBP
absolutely unjustified in foreclosing the mortgages?

In this connection, it can readily be seen and it cannot quite be denied that MMIC
accounts in PNB-DBP were past due. The drawing up of the FRP is the best proof of
this. When MMIC adopted a restructuring program for its loan, it only meant that
these loans were already due and unpaid. If these loans were restructurable because
 they were already due and unpaid, they are likewise "forecloseable". The option is
with the PNB-DBP on what steps to take.

The mere fact that MMIC adopted the FRP does not mean that DBP-PNB lost the
option to foreclose. Neither does it mean that the FRP is legally binding and
implementable. It must be pointed that said FRP will, in effect, supersede the existing
and past due loans of MMIC with PNB-DBP. It will become the new loan agreement
between the lenders and the borrowers. As in all other contracts, there must
therefore be a meeting of minds of the parties; the PNB and DBP must have to validly
adopt and ratify such FRP before they can be bound by it; before it can be
implemented. In this case, not an iota of proof has been presented by the PLAINTIFFS
showing that PNB and DBP ratified and adopted the FRP. PLAINTIFFS simply relied
on a legal doctrine of promissory estoppel to support its allegations in this regard. 42

Moreover, PNB and DBP had to initiate foreclosure proceedings as mandated by P.D. No. 385,
which took effect on January 31, 1974. The decree requires government financial institutions to
foreclose collaterals for loans where the arrearages amount to 20% of the total outstanding
obligations. The pertinent provisions of said decree read as follow:

Sec. 1. It shall be mandatory for government financial institutions, after the lapse of
sixty (60) days from the issuance of this Decree, to foreclose the collaterals and/or
securities for any loan, credit, accommodation, and/or guarantees granted by them
whenever the arrearages on such account, including accrued interest and other
charges, amount to at least twenty percent (20%) of the total outstanding
obligations, including interest and other charges, as appearing in the books of
account and/or related records of the financial institutions concerned. This shall be
without prejudice to the exercise by the government financial institutions of such
rights and/or remedies available to them under their respective contracts with their
debtors, including the right to foreclosure on loans, credits, accommodations and/or
guarantees on which the arrearages are less than twenty percent (20%).

Sec. 2. No restraining order temporary or permanent injunction shall be issued by

the court against any government financial institution in any action taken by such
institution in compliance with the mandatory foreclosure provided in Section
1 hereof, whether such restraining order, temporary or permanent injunction is
sought by the borrower(s) or any third party or parties, except after due hearing in
which it is established by the borrower and admitted by the government financial
institution concerned that twenty percent (20%) of the outstanding arrearages has
been paid after the filing of foreclosure proceedings. (Emphasis supplied.)

Private respondents' thesis that the foreclosure proceedings were null and void because of lack of
publication in the newspaper is nothing more than a mere unsubstantiated aliegation not borne
out by the evidence. In any case, a disputable presumption exists in favor of petitioner that official
duty has been regularly performed and ordinary course of business has been followed. 43

VI
Not only was the foreclosure rightfully exercised by the PNB and DBP, but also, from the facts of
the case, the arbitrators in making the award went beyond the arbitration agreement.

In their complaint filed before the trial court, private respondent Cabarrus, et al. prayed for
judgment in their favor:

1. Declaring the foreclosures effected by the defendants DBP and PNB on the assets
of MMIC null and void and directing said defendants to restore the foreclosed assets
to the possession of MMIC, to render an accounting of their use and/or operation of
said assets and to indemnify MMIC for the loss occasioned by its dispossession or the
deterioration thereof;

2. Directing the defendants DBP and PNB to honor and perform their commitments
under the financial reorganization plan which was approved at the annual
stockholders' meeting of MMIC on 30 April 1984;

3. Condemning the defendants DBP and PNB, jointly and severally to pay the
plaintiffs actual damages consisting of the loss of value of their investments
amounting to not less than P80,000,000, the damnum emergens and lucrum cessans in
such amount as may be established during the trial, moral damages in such amount
as this Honorable Court may deem just and equitable in the premises, exemplary
damages in such amount as this Honorable Court may consider appropriate for the
purpose of setting an example for the public good, attorney's fees and litigation
expenses in such amounts as may be proven during the trial, and the costs legally
taxable in this litigation.

Further, plaintiffs pray for such other reliefs as may be just and equitable in the
premises. 44

Upon submission for arbitration, the Compromise and Arbitration Agreement of the parties
clearly and explicitly defined and limited the issues to the following:

(a) whether PLAINTIFFS have the capacity or the personality to institute this
derivative suit in behalf of the MMIC or its directors;

(b) whether or not the actions leading to, and including, the PNB-DBP foreclosure of
the MMIC assets were proper, valid and in good faith. 45

Item No. 8 of the Agreement provides for the period by which the Committee was to render its
decision, as well as the nature thereof:

8. Decision. The committee shall issue a decision on the controversy not later than six
(6) months from the date of its constitution.

In the event the committee finds that PLAINTIFFS have the personality to file this suit
and the extra-judicial foreclosure of the MMIC assets wrongful, it shall make an
award in favor of the PLAINTIFFS (excluding DBP), in an amount as may be
established or warranted by the evidence which shall be payable in Philippine Pesos at
 the time of the award. Such award shall be paid by the APT or its successor-in-
interest within sixty (60) days from the date of the award in accordance with the
provisions of par. 9 hereunder. . . . . The PLAINTIFFS' remedies under this Section
shall be in addition to other remedies that may be available to the PLAINTIFFS, all
such remedies being cumulative and not exclusive of each other.

On the other hand, in case the arbitration committee finds that PLAINTIFFS have no
capacity to sue and/or that the extra-judicial foreclosure is valid and legal, it shall
also make an award in favor of APT based on the counterclaims of DBP and PNB in an
amount as may be established or warranted by the evidence. This decision of the
arbitration committee in favor of APT shall likewise finally settle all issues regarding
the foreclosure of the MMIC assets so that the funds held in escrow mentioned in par.
9 hereunder will thus be released in full in favor of
APT. 46

The clear and explicit terms of the submission notwithstanding, the Arbitration Committee clearly
exceeded its powers or so imperfectly executed them: (a) in ruling on and declaring valid the FRP;
(b) in awarding damages to MMIC which was not a party to the derivative suit; and (c) in awarding
moral damages to Jesus S. Cabarrus, Sr.

The arbiters overstepped

their powers by declaring as

valid the proposed Financial

Restructuring Program.

The Arbitration Committee went beyond its mandate and thus acted in excess of its powers when
it ruled on the validity of, and gave effect to, the proposed FRP.

In submitting the case to arbitration, the parties had mutually agreed to limit the issue to the
"validity of the foreclosure" and to transform the relief prayed for therein into pure money
claims.

There is absolutely no evidence that the DBP and PNB agreed, expressly or impliedly, to the
proposed FRP. It cannot be overemphasized that a FRP, as a contract, requires the consent of the
parties thereto. 47 The contract must bind both contracting parties. 48 Private respondents even by
their own admission recognized that the FRP had yet not been carried out and that the loans of
MMIC had not yet been converted into equity. 49

However, the Arbitration Committee not only declared the FRP valid and effective, but also
converted the loans of MMIC into equity raising the equity of DBP to 87%. 50

The Arbitration Committee ruled that there was "a commitment to carry out the FRP" 51 on the
ground of promissory estoppel.
 Similarly, the principle of promissory estoppel applies in the present case
considering as we observed, the fact that the government (that is, Alfredo Velayo)
was the FRP's proponent. Although the plaintiffs are agreed that the government
executed no formal agreement, the fact remains that the DBP itself which made
representations that the FRP constituted a "way out" for MMIC. The Committee
believes that although the DBP did not formally agree (assuming that the board and
stockholders' approvals were not formal enough), it is bound nonetheless if only for
its conspicuous representations.

Although the DBP sat in the board in a dual capacity — as holder of 36% of MMIC's
equity (at that time) and as MMIC's creditor — the DBP can not validly renege on its
commitments simply because at the same time, it held interests against the MMIC.

The fact, of course, is that as APT itself asserted, the FRP was being "carried out"
although apparently, it would supposedly fall short of its targets. Assuming that the
FRP would fail to meet its targets, the DBP — and so this Committee holds — can not,
in any event, brook any denial that it was bound to begin with, and the fact is that
adequate or not (the FRP), the government is still bound by virtue of its acts.

The FRP, of course, did not itself promise a resounding success, although it raised
DBP's equity in MMIC to 87%. It is not an excuse, however, for the government to
deny its commitments. 52

Atty. Sison, however, did not agree and correctly observed that:

But the doctrine of promissory estoppel can hardly find application here. The
nearest that there can be said of any estoppel being present in this case is the fact
that the board of MMIC was, at the time the FRP was adopted, mostly composed of
PNB and DBP representatives. But those representatives, singly or collectively, are
not themselves PNB or DBP. They are individuals with personalities separate and
distinct from the banks they represent. PNB and DBP have different boards with
different members who may have different decisions. It is unfair to impose upon
them the decision of the board of another company and thus pin them down on the
equitable principle of estoppel. Estoppel is a principle based on equity and it is
certainly not equitable to apply it in this particular situation. Otherwise the rights of
entirely separate distinct and autonomous legal entities like PNB and DBP with
thousands of stockholders will be suppressed and rendered nugatory. 53

As a rule, a corporation exercises its powers, including the power to enter into contracts, through
its board of directors. While a corporation may appoint agents to enter into a contract in its
behalf, the agent should not exceed his authority. 54 In the case at bar, there was no showing that
the representatives of PNB and DBP in MMIC even had the requisite authority to enter into a debt-
for-equity swap. And if they had such authority, there was no showing that the banks, through
their board of directors, had ratified the FRP.

Further, how could the MMIC be entitled to a big amount of moral damages when its credit
reputation was not exactly something to be considered sound and wholesome. Under Article 2217
of the Civil Code, moral damages include besmirched reputation which a corporation may
possibly suffer. A corporation whose overdue and unpaid debts to the Government alone reached
a tremendous amount of P22 Billion Pesos cannot certainly have a solid business reputation to
brag about. As Atty. Sison in his separate opinion persuasively put it:

Besides, it is not yet a well settled jurisprudence that corporations are entitled to
moral damages. While the Supreme Court may have awarded moral damages to a
corporation for besmirched reputation in Mambulao vs. PNB, 22 SCRA 359, such
ruling cannot find application in this case. It must be pointed out that when the
supposed wrongful act of foreclosure was done, MMIC's credit reputation was no
longer a desirable one. The company then was already suffering from serious
financial crisis which definitely projects an image not compatible with good and
wholesome reputation. So it could not be said that there was a "reputation"
besmirched by the act of foreclosure. 55

The arbiters exceeded their

authority in awarding damages

to MMIC, which is not impleaded

as a party to the derivative suit.

Civil Case No. 9900 filed before the RTC being a derivative suit, MMIC should have been impleaded
as a party. It was not joined as a party plaintiff or party defendant at any stage of the proceedings.
As it is, the award of damages to MMIC, which was not a party before the Arbitration Committee, is
a complete nullity.

Settled is the doctrine that in a derivative suit, the corporation is the real party in interest while
the stockholder filing suit for the corporation's behalf is only a nominal party. The corporation
should be included as a party in the suit.

An individual stockholder is permitted to institute a derivative suit on behalf of the

corporation wherein he holds stock in order to protect or vindicate corporate rights,
whenever the officials of the corporation refuse to sue, or are the ones to be sued or
hold the control of the corporation. In such actions, the suing stockholder is
regarded as a nominal party, with the corporation as the real party in interest. . . . . 56

It is a condition sine qua non that the corporation be impleaded as a party because —

. . . Not only is the corporation an indispensable party, but it is also the present rule
that it must be served with process. The reason given is that the judgment must be
made binding upon the corporation in order that the corporation may get the benefit
of the suit and may not bring a subsequent suit against the same defendants for the
same cause of action. In other words the corporation must be joined as party because
it is its cause of action that is being litigated and because judgment must be a res
ajudicata against it. 57

The reasons given for not allowing direct individual suit are:
 (1) . . . "the universally recognized doctrine that a stockholder in a corporation has
no title legal or equitable to the corporate property; that both of these are in the
corporation itself for the benefit of the stockholders." In other words, to allow
shareholders to sue separately would conflict with the separate corporate entity
principle;

(2) . . . that the prior rights of the creditors may be prejudiced. Thus, our Supreme
Court held in the case of Evangelista v. Santos, that "the stockholders may not
directly claim those damages for themselves for that would result in the
appropriation by, and the distribution among them of part of the corporate assets
before the dissolution of the corporation and the liquidation of its debts and
liabilities, something which cannot be legally done in view of section 16 of the
Corporation Law . . .;

(3) the filing of such suits would conflict with the duty of the management to sue for
the protection of all concerned;

(4) it would produce wasteful multiplicity of suits; and

(5) it would involve confusion in a ascertaining the effect of partial recovery by an

individual on the damages recoverable by the corporation for the same act. 58

If at all an award was due MMIC, which it was not, the same should have been
given sans deduction, regardless of whether or not the party liable had equity in the corporation,
in view of the doctrine that a corporation has a personality separate and distinct from its
individual stockholders or members. DBP's alleged equity, even if it were indeed 87%, did not
give it ownership over any corporate property, including the monetary award, its right over said
corporate property being a mere expectancy or inchoate right. 59Notably, the stipulation even had
the effect of prejudicing the other creditors of MMIC.

The arbiters, likewise,

exceeded their authority

in awarding moral damages

to Jesus Cabarrus, Sr.

It is perplexing how the Arbitration Committee can in one breath rule that the case before it is a
derivative suit, in which the aggrieved party or the real party in interest is supposedly the MMIC,
and at the same time award moral damages to an individual stockholder, to wit:

WHEREFORE, premises considered, judgment is hereby rendered:

xxx xxx xxx

3. Ordering the defendant to pay to the plaintiff, Jesus S. Cabarrus, Sr., the sum of
P10,000,000.00, to be satisfied likewise from the funds held under escrow pursuant
 to the Escrow Agreement dated April 22, 1988 or to such subsequent escrow
agreement that would supersede it, pursuant to paragraph (9), Compromise and
Arbitration Agreement, as and for moral damages; . . . 60

The majority decision of the Arbitration Committee sought to justify its award of moral damages
to Jesus S. Cabarrus, Sr. by pointing to the fact that among the assets seized by the government
were assets belonging to Industrial Enterprise Inc. (IEI), of which Cabarrus is the majority
stockholder. It then acknowledged that Cabarrus had already recovered said assets in the RTC,
but that "he won no more than actual damages. While the Committee cannot possibly speak for
the RTC, there is no doubt that Jesus S. Cabarrus, Sr., suffered moral damages on account of that
specific foreclosure, damages the Committee believes and so holds, he, Jesus S. Cabarrus, Sr., may
be awarded in this proceeding." 61

Cabarrus cause of action for the seizure of the assets belonging to IEI, of which he is the majority
stockholder, having been ventilated in a complaint he previously filed with the RTC, from which
he obtained actual damages, he was barred by res judicata from filing a similar case in another
court, this time asking for moral damages which he failed to get from the earlier case. 62 Worse,
private respondents violated the rule against non-forum shopping.

It is a basic postulate that a corporation has a personality separate and distinct from its
stockholders. 63 The properties foreclosed belonged to MMIC, not to its stockholders. Hence, if
wrong was committed in the foreclosure, it was done against the corporation. Another reason is
that Jesus S. Cabarrus, Sr. cannot directly claim those damages for himself that would result in the
appropriation by, and the distribution to, him part of the corporation's assets before the
dissolution of the corporation and the liquidation of its debts and liabilities. The Arbitration
Committee, therefore, passed upon matters nor submitted to it. Moreover, said cause of action
had already been decided in a separate case. It is thus quite patent that the arbitration committee
exceeded the authority granted to it by the parties' Compromise and Arbitration Agreement by
awarding moral damages to Jesus S. Cabarrus, Sr.

Atty. Sison, in his separate opinion, likewise expressed befuddlement to the award of moral
damages to Jesus S. Cabarrus, Sr.:

It is clear and it cannot be disputed therefore that based on these stipulated issues,
the parties themselves have agreed that the basic ingredient of the causes of action in
this case is the wrong committed on the corporation (MMIC) for the alleged illegal
foreclosure of its assets. By agreeing to this stipulation, PLAINTIFFS themselves
(Cabarrus, et al.) admit that the cause of action pertains only to the corporation
(MMIC) and that they are filing this for and in behalf of MMIC.

Perforce this has to be so because it is the basic rule in Corporation Law that "the
shareholders have no title, legal or equitable to the property which is owned by the
corporation (13 Am. Jur. 165; Pascual vs. Oresco, 14 Phil. 83). In Ganzon & Sons vs.
Register of Deeds, 6 SCRA 373, the rule has been reiterated that "a stockholder is not
the co-owner of corporate property." Since the property or assets foreclosed belongs
[sic] to MMIC, the wrong committed, if any, is done against the corporation. There is
therefore no direct injury or direct violation of the rights of Cabarrus et al. There is no
way, legal or equitable, by which Cabarrus et al. could recover damages in their
 personal capacities even assuming or just because the foreclosure is improper or
invalid. The Compromise and Arbitration Agreement itself and the elementary
principles of Corporation Law say so. Therefore, I am constrained to dissent from the
award of moral damages to Cabarrus. 64

From the foregoing discussions, it is evident that, not only did the arbitration committee exceed
its powers or so imperfectly execute them, but also, its findings and conclusions are palpably
devoid of any factual basis, and in manifest disregard of the law.

We do not find it necessary to remand this case to the RTC for appropriate action. The pleadings
and memoranda filed with this Court, as well as in the Court of Appeals, raised and extensively
discussed the issues on the merits. Such being the case, there is sufficient basis for us to resolve
the controversy between the parties anchored on the records and the pleadings before us. 65

WHEREFORE, the Decision of the Court of Appeals dated July 17, 1995, as well as the Orders of the
Regional Trial Court of Makati, Branch 62, dated November 28, 1994 and January 19, 1995, is
hereby REVERSED and SET ASIDE, and the decision of the Arbitration Committee is hereby
VACATED.

SO ORDERED.

Republic of the Philippines

SUPREME COURT
Manila

SECOND DIVISION

G.R. No. 165744 August 11, 2008

OSCAR C. REYES, petitioner,

vs.
HON. REGIONAL TRIAL COURT OF MAKATI, Branch 142, ZENITH INSURANCE CORPORATION, and
RODRIGO C. REYES, respondents.

DECISION

BRION, J.:

This Petition for Review on Certiorari under Rule 45 of the Rules of Court seeks to set aside the Decision
of the Court of Appeals (CA)1 promulgated on May 26, 2004 in CA-G.R. SP No. 74970. The CA Decision
affirmed the Order of the Regional Trial Court (RTC), Branch 142, Makati City dated November 29,
20022 in Civil Case No. 00-1553 (entitled "Accounting of All Corporate Funds and Assets, and Damages")
which denied petitioner Oscar C. Reyes’ (Oscar) Motion to Declare Complaint as Nuisance or Harassment
Suit.

BACKGROUND FACTS
Oscar and private respondent Rodrigo C. Reyes (Rodrigo) are two of the four children of the spouses
Pedro and Anastacia Reyes. Pedro, Anastacia, Oscar, and Rodrigo each owned shares of stock of Zenith
Insurance Corporation (Zenith), a domestic corporation established by their family. Pedro died in 1964,
while Anastacia died in 1993. Although Pedro’s estate was judicially partitioned among his heirs
sometime in the 1970s, no similar settlement and partition appear to have been made with Anastacia’s
estate, which included her shareholdings in Zenith. As of June 30, 1990, Anastacia owned 136,598 shares
of Zenith; Oscar and Rodrigo owned 8,715,637 and 4,250 shares, respectively.3

On May 9, 2000, Zenith and Rodrigo filed a complaint4 with the Securities and Exchange Commission
(SEC) against Oscar, docketed as SEC Case No. 05-00-6615. The complaint stated that it is "a derivative suit
initiated and filed by the complainant Rodrigo C. Reyes to obtain an accounting of the funds and assets
of ZENITH INSURANCE CORPORATION which are now or formerly in the control, custody, and/or
possession of respondent [herein petitioner Oscar] and to determine the shares of stock of deceased
spouses Pedro and Anastacia Reyes that were arbitrarily and fraudulently appropriated [by Oscar] for
himself [and] which were not collated and taken into account in the partition, distribution, and/or
settlement of the estate of the deceased spouses, for which he should be ordered to account for all the income
from the time he took these shares of stock, and should now deliver to his brothers and sisters their just and
respective shares."5 [Emphasis supplied.]

In his Answer with Counterclaim,6 Oscar denied the charge that he illegally acquired the shares of
Anastacia Reyes. He asserted, as a defense, that he purchased the subject shares with his own funds from
the unissued stocks of Zenith, and that the suit is not a bona fide derivative suit because the requisites
therefor have not been complied with. He thus questioned the SEC’s jurisdiction to entertain the
complaint because it pertains to the settlement of the estate of Anastacia Reyes.

When Republic Act (R.A.) No. 87997 took effect, the SEC’s exclusive and original jurisdiction over cases
enumerated in Section 5 of Presidential Decree (P.D.) No. 902-A was transferred to the RTC designated as
a special commercial court.8The records of Rodrigo’s SEC case were thus turned over to the RTC, Branch
142, Makati, and docketed as Civil Case No. 00-1553.

On October 22, 2002, Oscar filed a Motion to Declare Complaint as Nuisance or Harassment Suit.9 He
claimed that the complaint is a mere nuisance or harassment suit and should, according to the Interim
Rules of Procedure for Intra-Corporate Controversies, be dismissed; and that it is not a bona
fide derivative suit as it partakes of the nature of a petition for the settlement of estate of the deceased
Anastacia that is outside the jurisdiction of a special commercial court. The RTC, in its Order dated
November 29, 2002 (RTC Order), denied the motion in part and declared:

A close reading of the Complaint disclosed the presence of two (2) causes of action, namely: a) a
derivative suit for accounting of the funds and assets of the corporation which are in the control,
custody, and/or possession of the respondent [herein petitioner Oscar] with prayer to appoint a
management committee; and b) an action for determination of the shares of stock of deceased
spouses Pedro and Anastacia Reyes allegedly taken by respondent, its accounting and the
corresponding delivery of these shares to the parties’ brothers and sisters. The latter is not a
derivative suit and should properly be threshed out in a petition for settlement of estate.

Accordingly, the motion is denied. However, only the derivative suit consisting of the first cause of
action will be taken cognizance of by this Court.10
Oscar thereupon went to the CA on a petition for certiorari, prohibition, and mandamus11 and prayed that
the RTC Order be annulled and set aside and that the trial court be prohibited from continuing with the
proceedings. The appellate court affirmed the RTC Order and denied the petition in its Decision dated
May 26, 2004. It likewise denied Oscar’s motion for reconsideration in a Resolution dated October 21,
2004.

Petitioner now comes before us on appeal through a petition for review on certiorari under Rule 45 of the
Rules of Court.

ASSIGNMENT OF ERRORS

Petitioner Oscar presents the following points as conclusions the CA should have made:

1. that the complaint is a mere nuisance or harassment suit that should be dismissed under the Interim
Rules of Procedure of Intra-Corporate Controversies; and

2. that the complaint is not a bona fide derivative suit but is in fact in the nature of a petition for
settlement of estate; hence, it is outside the jurisdiction of the RTC acting as a special commercial court.

Accordingly, he prays for the setting aside and annulment of the CA decision and resolution, and the
dismissal of Rodrigo’s complaint before the RTC.

THE COURT’S RULING

We find the petition meritorious.

The core question for our determination is whether the trial court, sitting as a special commercial court,
has jurisdiction over the subject matter of Rodrigo’s complaint. To resolve it, we rely on the judicial
principle that "jurisdiction over the subject matter of a case is conferred by law and is determined by the
allegations of the complaint, irrespective of whether the plaintiff is entitled to all or some of the claims
asserted therein."12

JURISDICTION OF SPECIAL COMMERCIAL COURTS

P.D. No. 902-A enumerates the cases over which the SEC (now the RTC acting as a special commercial
court) exercises exclusive jurisdiction:

SECTION 5. In addition to the regulatory and adjudicative functions of the Securities and Exchange
Commission over corporations, partnership, and other forms of associations registered with it as
expressly granted under existing laws and decrees, it shall have original and exclusive jurisdiction
to hear and decide cases involving:

a) Devices or schemes employed by or any acts of the board of directors, business

associates, its officers or partners, amounting to fraud and misrepresentation which may
be detrimental to the interest of the public and/or of the stockholders, partners, members
of associations or organizations registered with the Commission.
 b) Controversies arising out of intra-corporate or partnership relations, between and
among stockholders, members, or associates; between any or all of them and the
corporation, partnership or association of which they are stockholders, members, or
associates, respectively; and between such corporation, partnership or association and the
State insofar as it concerns their individual franchise or right to exist as such entity; and

c) Controversies in the election or appointment of directors, trustees, officers, or managers

of such corporations, partnerships, or associations.

The allegations set forth in Rodrigo’s complaint principally invoke Section 5, paragraphs (a) and (b)
above as basis for the exercise of the RTC’s special court jurisdiction. Our focus in examining the
allegations of the complaint shall therefore be on these two provisions.

Fraudulent Devices and Schemes

The rule is that a complaint must contain a plain, concise, and direct statement of the ultimate facts
constituting the plaintiff’s cause of action and must specify the relief sought.13 Section 5, Rule 8 of the
Revised Rules of Court provides that in all averments of fraud or mistake, the circumstances
constituting fraud or mistake must be stated with particularity.14These rules find specific application
to Section 5(a) of P.D. No. 902-A which speaks of corporate devices or schemes that amount to fraud or
misrepresentation detrimental to the public and/or to the stockholders.

In an attempt to hold Oscar responsible for corporate fraud, Rodrigo alleged in the complaint the
following:

3. This is a complaint…to determine the shares of stock of the deceased spouses Pedro and
Anastacia Reyes that were arbitrarily and fraudulently appropriated for himself [herein
petitioner Oscar] which were not collated and taken into account in the partition, distribution,
and/or settlement of the estate of the deceased Spouses Pedro and Anastacia Reyes, for which he
should be ordered to account for all the income from the time he took these shares of stock, and
should now deliver to his brothers and sisters their just and respective shares with the
corresponding equivalent amount of P7,099,934.82 plus interest thereon from 1978 representing
his obligations to the Associated Citizens’ Bank that was paid for his account by his late mother,
Anastacia C. Reyes. This amount was not collated or taken into account in the partition or
distribution of the estate of their late mother, Anastacia C. Reyes.

3.1. Respondent Oscar C. Reyes, through other schemes of fraud including

misrepresentation, unilaterally, and for his own benefit, capriciously transferred and took
possession and control of the management of Zenith Insurance Corporation which is
considered as a family corporation, and other properties and businesses belonging to Spouses
Pedro and Anastacia Reyes.

xxxx

4.1. During the increase of capitalization of Zenith Insurance Corporation, sometime in 1968, the
property covered by TCT No. 225324 was illegally and fraudulently used by respondent as a
collateral.
 xxxx

5. The complainant Rodrigo C. Reyes discovered that by some manipulative scheme, the
shareholdings of their deceased mother, Doña Anastacia C. Reyes, shares of stocks and [sic]
valued in the corporate books at P7,699,934.28, more or less, excluding interest and/or
dividends, had been transferred solely in the name of respondent. By such fraudulent
manipulations and misrepresentation, the shareholdings of said respondent Oscar C. Reyes
abruptly increased to P8,715,637.00 [sic] and becomes [sic] the majority stockholder of Zenith
Insurance Corporation, which portion of said shares must be distributed equally amongst the
brothers and sisters of the respondent Oscar C. Reyes including the complainant herein.

xxxx

9.1 The shareholdings of deceased Spouses Pedro Reyes and Anastacia C. Reyes valued at
P7,099,934.28 were illegally and fraudulently transferred solely to the respondent’s
[herein petitioner Oscar] name and installed himself as a majority stockholder of
Zenith Insurance Corporation [and] thereby deprived his brothers and sisters of their respective
equal shares thereof including complainant hereto.

xxxx

10.1 By refusal of the respondent to account of his [sic] shareholdings in the company, he
illegally and fraudulently transferred solely in his name wherein [sic] the shares of stock of
the deceased Anastacia C. Reyes [which] must be properly collated and/or distributed
equally amongst the children, including the complainant Rodrigo C. Reyes herein, to their
damage and prejudice.

xxxx

11.1 By continuous refusal of the respondent to account of his [sic] shareholding with Zenith
Insurance Corporation[,] particularly the number of shares of stocks illegally and fraudulently
transferred to him from their deceased parents Sps. Pedro and Anastacia Reyes[,] which are all
subject for collation and/or partition in equal shares among their children. [Emphasis supplied.]

Allegations of deceit, machination, false pretenses, misrepresentation, and threats are largely conclusions
of law that, without supporting statements of the facts to which the allegations of fraud refer, do not
sufficiently state an effective cause of action.15 The late Justice Jose Feria, a noted authority in Remedial
Law, declared that fraud and mistake are required to be averred with particularity in order to enable the
opposing party to controvert the particular facts allegedly constituting such fraud or mistake.16

Tested against these standards, we find that the charges of fraud against Oscar were not properly
supported by the required factual allegations. While the complaint contained allegations of fraud
purportedly committed by him, these allegations are not particular enough to bring the controversy
within the special commercial court’s jurisdiction; they are not statements of ultimate facts, but are mere
conclusions of law: how and why the alleged appropriation of shares can be characterized as "illegal and
fraudulent" were not explained nor elaborated on.
Not every allegation of fraud done in a corporate setting or perpetrated by corporate officers will bring
the case within the special commercial court’s jurisdiction. To fall within this jurisdiction, there must be
sufficient nexus showing that the corporation’s nature, structure, or powers were used to facilitate the
fraudulent device or scheme. Contrary to this concept, the complaint presented a reverse situation. No
corporate power or office was alleged to have facilitated the transfer of the shares; rather, Oscar, as an
individual and without reference to his corporate personality, was alleged to have transferred the shares
of Anastacia to his name, allowing him to become the majority and controlling stockholder of Zenith, and
eventually, the corporation’s President. This is the essence of the complaint read as a whole and is
particularly demonstrated under the following allegations:

5. The complainant Rodrigo C. Reyes discovered that by some manipulative scheme, the
shareholdings of their deceased mother, Doña Anastacia C. Reyes, shares of stocks and [sic] valued
in the corporate books at P7,699,934.28, more or less, excluding interest and/or dividends, had
been transferred solely in the name of respondent. By such fraudulent manipulations and
misrepresentation, the shareholdings of said respondent Oscar C. Reyes abruptly increased
to P8,715,637.00 [sic] and becomes [sic] the majority stockholder of Zenith Insurance
Corporation, which portion of said shares must be distributed equally amongst the brothers and
sisters of the respondent Oscar C. Reyes including the complainant herein.

xxxx

9.1 The shareholdings of deceased Spouses Pedro Reyes and Anastacia C. Reyes valued at
P7,099,934.28 were illegally and fraudulently transferred solely to the respondent’s [herein
petitioner Oscar] name and installed himself as a majority stockholder of Zenith Insurance
Corporation [and] thereby deprived his brothers and sisters of their respective equal shares
thereof including complainant hereto. [Emphasis supplied.]

In ordinary cases, the failure to specifically allege the fraudulent acts does not constitute a ground for
dismissal since such defect can be cured by a bill of particulars. In cases governed by the Interim Rules of
Procedure on Intra-Corporate Controversies, however, a bill of particulars is a prohibited pleading.17 It is
essential, therefore, for the complaint to show on its face what are claimed to be the fraudulent corporate
acts if the complainant wishes to invoke the court’s special commercial jurisdiction.

We note that twice in the course of this case, Rodrigo had been given the opportunity to study the
propriety of amending or withdrawing the complaint, but he consistently refused. The court’s function in
resolving issues of jurisdiction is limited to the review of the allegations of the complaint and, on the
basis of these allegations, to the determination of whether they are of such nature and subject that they
fall within the terms of the law defining the court’s jurisdiction. Regretfully, we cannot read into the
complaint any specifically alleged corporate fraud that will call for the exercise of the court’s special
commercial jurisdiction. Thus, we cannot affirm the RTC’s assumption of jurisdiction over Rodrigo’s
complaint on the basis of Section 5(a) of P.D. No. 902-A.18

Intra-Corporate Controversy

A review of relevant jurisprudence shows a development in the Court’s approach in classifying what
constitutes an intra-corporate controversy. Initially, the main consideration in determining whether a
dispute constitutes an intra-corporate controversy was limited to a consideration of the intra-corporate
relationship existing between or among the parties.19 The types of relationships embraced under Section
5(b), as declared in the case of Union Glass & Container Corp. v. SEC,20were as follows:

a) between the corporation, partnership, or association and the public;

b) between the corporation, partnership, or association and its stockholders, partners, members,
or officers;

c) between the corporation, partnership, or association and the State as far as its franchise, permit
or license to operate is concerned; and

d) among the stockholders, partners, or associates themselves. [Emphasis supplied.]

The existence of any of the above intra-corporate relations was sufficient to confer jurisdiction to the SEC,
regardless of the subject matter of the dispute. This came to be known as the relationship test.

However, in the 1984 case of DMRC Enterprises v. Esta del Sol Mountain Reserve, Inc.,21 the Court
introduced the nature of the controversy test. We declared in this case that it is not the mere existence
of an intra-corporate relationship that gives rise to an intra-corporate controversy; to rely on the
relationship test alone will divest the regular courts of their jurisdiction for the sole reason that the
dispute involves a corporation, its directors, officers, or stockholders. We saw that there is no legal sense
in disregarding or minimizing the value of the nature of the transactions which gives rise to the dispute.

Under the nature of the controversy test, the incidents of that relationship must also be considered for the
purpose of ascertaining whether the controversy itself is intra-corporate.22 The controversy must not
only be rooted in the existence of an intra-corporate relationship, but must as well pertain to the
enforcement of the parties’ correlative rights and obligations under the Corporation Code and the
internal and intra-corporate regulatory rules of the corporation. If the relationship and its incidents are
merely incidental to the controversy or if there will still be conflict even if the relationship does not exist,
then no intra-corporate controversy exists.

The Court then combined the two tests and declared that jurisdiction should be determined by
considering not only the status or relationship of the parties, but also the nature of the question under
controversy.23 This two-tier test was adopted in the recent case of Speed Distribution, Inc. v. Court of
Appeals:24

To determine whether a case involves an intra-corporate controversy, and is to be heard and

decided by the branches of the RTC specifically designated by the Court to try and decide such
cases, two elements must concur: (a) the status or relationship of the parties; and (2) the nature of
the question that is the subject of their controversy.

The first element requires that the controversy must arise out of intra-corporate or partnership
relations between any or all of the parties and the corporation, partnership, or association of
which they are stockholders, members or associates; between any or all of them and the
corporation, partnership, or association of which they are stockholders, members, or associates,
respectively; and between such corporation, partnership, or association and the State insofar as it
concerns their individual franchises. The second element requires that the dispute among the
parties be intrinsically connected with the regulation of the corporation. If the nature of the
 controversy involves matters that are purely civil in character, necessarily, the case does not
involve an intra-corporate controversy.

Given these standards, we now tackle the question posed for our determination under the specific
circumstances of this case:

Application of the Relationship Test

Is there an intra-corporate relationship between the parties that would characterize the case as an intra-
corporate dispute?

We point out at the outset that while Rodrigo holds shares of stock in Zenith, he holds them in two
capacities: in his own right with respect to the 4,250 shares registered in his name, and as one of the
heirs of Anastacia Reyes with respect to the 136,598 shares registered in her name. What is material in
resolving the issues of this case under the allegations of the complaint is Rodrigo’s interest as an
heir since the subject matter of the present controversy centers on the shares of stocks belonging to
Anastacia, not on Rodrigo’s personally-owned shares nor on his personality as shareholder owning these
shares. In this light, all reference to shares of stocks in this case shall pertain to the shareholdings of the
deceased Anastacia and the parties’ interest therein as her heirs.

Article 777 of the Civil Code declares that the successional rights are transmitted from the moment of
death of the decedent. Accordingly, upon Anastacia’s death, her children acquired legal title to her estate
(which title includes her shareholdings in Zenith), and they are, prior to the estate’s partition, deemed co-
owners thereof.25 This status as co-owners, however, does not immediately and necessarily make them
stockholders of the corporation. Unless and until there is compliance with Section 63 of the Corporation
Code on the manner of transferring shares, the heirs do not become registered stockholders of the
corporation. Section 63 provides:

Section 63. Certificate of stock and transfer of shares. – The capital stock of stock corporations shall
be divided into shares for which certificates signed by the president or vice-president,
countersigned by the secretary or assistant secretary, and sealed with the seal of the corporation
shall be issued in accordance with the by-laws. Shares of stock so issued are personal property
and may be transferred by delivery of the certificate or certificates indorsed by the owner or his
attorney-in-fact or other person legally authorized to make the transfer. No transfer, however,
shall be valid, except as between the parties, until the transfer is recorded in the books of
the corporation so as to show the names of the parties to the transaction, the date of the
transfer, the number of the certificate or certificates, and the number of shares
transferred. [Emphasis supplied.]

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

Simply stated, the transfer of title by means of succession, though effective and valid between the parties
involved (i.e., between the decedent’s estate and her heirs), does not bind the corporation and third
parties. The transfer must be registered in the books of the corporation to make the transferee-heir a
stockholder entitled to recognition as such both by the corporation and by third parties.26
We note, in relation with the above statement, that in Abejo v. Dela Cruz27 and TCL Sales Corporation v.
Court of Appeals28we did not require the registration of the transfer before considering the transferee a
stockholder of the corporation (in effect upholding the existence of an intra-corporate relation between
the parties and bringing the case within the jurisdiction of the SEC as an intra-corporate controversy). A
marked difference, however, exists between these cases and the present one.

In Abejo and TCL Sales, the transferees held definite and uncontested titles to a specific number of
shares of the corporation; after the transferee had established prima facie ownership over the shares of
stocks in question, registration became a mere formality in confirming their status as stockholders. In the
present case, each of Anastacia’s heirs holds only an undivided interest in the shares. This interest, at this
point, is still inchoate and subject to the outcome of a settlement proceeding; the right of the heirs to
specific, distributive shares of inheritance will not be determined until all the debts of the estate of the
decedent are paid. In short, the heirs are only entitled to what remains after payment of the decedent’s
debts;29whether there will be residue remains to be seen. Justice Jurado aptly puts it as follows:

No succession shall be declared unless and until a liquidation of the assets and debts left by the
decedent shall have been made and all his creditors are fully paid. Until a final liquidation is made
and all the debts are paid, the right of the heirs to inherit remains inchoate. This is so because
under our rules of procedure, liquidation is necessary in order to determine whether or not
the decedent has left any liquid assets which may be transmitted to his heirs.30 [Emphasis
supplied.]

Rodrigo must, therefore, hurdle two obstacles before he can be considered a stockholder of Zenith with
respect to the shareholdings originally belonging to Anastacia. First, he must prove that there are
shareholdings that will be left to him and his co-heirs, and this can be determined only in a settlement of
the decedent’s estate. No such proceeding has been commenced to date. Second, he must register the
transfer of the shares allotted to him to make it binding against the corporation. He cannot demand that
this be done unless and until he has established his specific allotment (and prima facieownership) of the
shares. Without the settlement of Anastacia’s estate, there can be no definite partition and distribution of
the estate to the heirs. Without the partition and distribution, there can be no registration of the transfer.
And without the registration, we cannot consider the transferee-heir a stockholder who may invoke the
existence of an intra-corporate relationship as premise for an intra-corporate controversy within the
jurisdiction of a special commercial court.

In sum, we find that – insofar as the subject shares of stock (i.e., Anastacia’s shares) are concerned –
Rodrigo cannot be considered a stockholder of Zenith. Consequently, we cannot declare that an intra-
corporate relationship exists that would serve as basis to bring this case within the special commercial
court’s jurisdiction under Section 5(b) of PD 902-A, as amended. Rodrigo’s complaint, therefore, fails the
relationship test.

Application of the Nature of Controversy Test

The body rather than the title of the complaint determines the nature of an action.31 Our examination of
the complaint yields the conclusion that, more than anything else, the complaint is about the protection
and enforcement of successional rights. The controversy it presents is purely civil rather than corporate,
although it is denominated as a "complaint for accounting of all corporate funds and assets."
Contrary to the findings of both the trial and appellate courts, we read only one cause of action alleged in
the complaint. The "derivative suit for accounting of the funds and assets of the corporation which are in
the control, custody, and/or possession of the respondent [herein petitioner Oscar]" does not constitute a
separate cause of action but is, as correctly claimed by Oscar, only an incident to the "action for
determination of the shares of stock of deceased spouses Pedro and Anastacia Reyes allegedly taken by
respondent, its accounting and the corresponding delivery of these shares to the parties’ brothers and
sisters." There can be no mistake of the relationship between the "accounting" mentioned in the
complaint and the objective of partition and distribution when Rodrigo claimed in paragraph 10.1 of the
complaint that:

10.1 By refusal of the respondent to account of [sic] his shareholdings in the company, he illegally
and fraudulently transferred solely in his name wherein [sic] the shares of stock of the deceased
Anastacia C. Reyes [which] must be properly collated and/or distributed equally amongst the
children including the complainant Rodrigo C. Reyes herein to their damage and prejudice.

We particularly note that the complaint contained no sufficient allegation that justified the need for an
accounting other thanto determine the extent of Anastacia’s shareholdings for purposes of distribution.

Another significant indicator that points us to the real nature of the complaint are Rodrigo’s repeated
claims of illegal and fraudulent transfers of Anastacia’s shares by Oscar to the prejudice of the other heirs
of the decedent; he cited these allegedly fraudulent acts as basis for his demand for the collation and
distribution of Anastacia’s shares to the heirs. These claims tell us unequivocally that the present
controversy arose from the parties’ relationship as heirs of Anastacia and not as shareholders of Zenith.
Rodrigo, in filing the complaint, is enforcing his rights as a co-heir and not as a stockholder of Zenith. The
injury he seeks to remedy is one suffered by an heir (for the impairment of his successional rights) and
not by the corporation nor by Rodrigo as a shareholder on record.

More than the matters of injury and redress, what Rodrigo clearly aims to accomplish through his
allegations of illegal acquisition by Oscar is the distribution of Anastacia’s shareholdings without a prior
settlement of her estate – an objective that, by law and established jurisprudence, cannot be done. The
RTC of Makati, acting as a special commercial court, has no jurisdiction to settle, partition, and distribute
the estate of a deceased. A relevant provision – Section 2 of Rule 90 of the Revised Rules of Court – that
contemplates properties of the decedent held by one of the heirs declares:

Questions as to advancement made or alleged to have been made by the deceased to any
heir may be heard and determined by the court having jurisdiction of the estate proceedings;
and the final order of the court thereon shall be binding on the person raising the questions and
on the heir. [Emphasis supplied.]

Worth noting are this Court’s statements in the case of Natcher v. Court of Appeals:32

Matters which involve settlement and distribution of the estate of the decedent fall within
the exclusive province of the probate court in the exercise of its limited jurisdiction.

xxxx
 It is clear that trial courts trying an ordinary action cannot resolve to perform acts
pertaining to a special proceeding because it is subject to specific prescribed rules. [Emphasis
supplied.]

That an accounting of the funds and assets of Zenith to determine the extent and value of Anastacia’s
shareholdings will be undertaken by a probate court and not by a special commercial court is completely
consistent with the probate court’s limited jurisdiction. It has the power to enforce an accounting as a
necessary means to its authority to determine the properties included in the inventory of the estate to be
administered, divided up, and distributed. Beyond this, the determination of title or ownership over the
subject shares (whether belonging to Anastacia or Oscar) may be conclusively settled by the probate
court as a question of collation or advancement. We had occasion to recognize the court’s authority to act
on questions of title or ownership in a collation or advancement situation in Coca v. Pangilinan33 where
we ruled:

It should be clarified that whether a particular matter should be resolved by the Court of First
Instance in the exercise of its general jurisdiction or of its limited probate jurisdiction is in reality
not a jurisdictional question. In essence, it is a procedural question involving a mode of practice
"which may be waived."

As a general rule, the question as to title to property should not be passed upon in the testate or
intestate proceeding. That question should be ventilated in a separate action. That general rule has
qualifications or exceptions justified by expediency and convenience.

Thus, the probate court may provisionally pass upon in an intestate or testate proceeding the
question of inclusion in, or exclusion from, the inventory of a piece of property without prejudice
to its final determination in a separate action.

Although generally, a probate court may not decide a question of title or ownership, yet
if the interested parties are all heirs, or the question is one of collation or advancement, or the
parties consent to the assumption of jurisdiction by the probate court and the rights of third
parties are not impaired, the probate court is competent to decide the question of
ownership. [Citations omitted. Emphasis supplied.]

In sum, we hold that the nature of the present controversy is not one which may be classified as an intra-
corporate dispute and is beyond the jurisdiction of the special commercial court to resolve. In short,
Rodrigo’s complaint also fails the nature of the controversy test.

DERIVATIVE SUIT

Rodrigo’s bare claim that the complaint is a derivative suit will not suffice to confer jurisdiction on the
RTC (as a special commercial court) if he cannot comply with the requisites for the existence of a
derivative suit. These requisites are:

a. the party bringing suit should be a shareholder during the time of the act or transaction
complained of, the number of shares not being material;

b. the party has tried to exhaust intra-corporate remedies, i.e., has made a demand on the board of
directors for the appropriate relief, but the latter has failed or refused to heed his plea; and
 c. the cause of action actually devolves on the corporation; the wrongdoing or harm having been
or being caused to the corporation and not to the particular stockholder bringing the suit.34

Based on these standards, we hold that the allegations of the present complaint do not amount to a
derivative suit.

First, as already discussed above, Rodrigo is not a shareholder with respect to the shareholdings
originally belonging to Anastacia; he only stands as a transferee-heir whose rights to the share are
inchoate and unrecorded. With respect to his own individually-held shareholdings, Rodrigo has not
alleged any individual cause or basis as a shareholder on record to proceed against Oscar.

Second, in order that a stockholder may show a right to sue on behalf of the corporation, he must allege
with some particularity in his complaint that he has exhausted his remedies within the corporation by
making a sufficient demand upon the directors or other officers for appropriate relief with the expressed
intent to sue if relief is denied.35 Paragraph 8 of the complaint hardly satisfies this requirement since
what the rule contemplates is the exhaustion of remedies within the corporate setting:

8. As members of the same family, complainant Rodrigo C. Reyes has resorted [to] and exhausted
all legal means of resolving the dispute with the end view of amicably settling the case, but the
dispute between them ensued.

Lastly, we find no injury, actual or threatened, alleged to have been done to the corporation due to Oscar’s
acts. If indeed he illegally and fraudulently transferred Anastacia’s shares in his own name, then the
damage is not to the corporation but to his co-heirs; the wrongful transfer did not affect the capital stock
or the assets of Zenith. As already mentioned, neither has Rodrigo alleged any particular cause or
wrongdoing against the corporation that he can champion in his capacity as a shareholder on record.36

In summary, whether as an individual or as a derivative suit, the RTC – sitting as special commercial
court – has no jurisdiction to hear Rodrigo’s complaint since what is involved is the determination and
distribution of successional rights to the shareholdings of Anastacia Reyes. Rodrigo’s proper remedy,
under the circumstances, is to institute a special proceeding for the settlement of the estate of the
deceased Anastacia Reyes, a move that is not foreclosed by the dismissal of his present complaint.

WHEREFORE, we hereby GRANT the petition and REVERSE the decision of the Court of Appeals dated
May 26, 2004 in CA-G.R. SP No. 74970. The complaint before the Regional Trial Court, Branch 142,
Makati, docketed as Civil Case No. 00-1553, is ordered DISMISSED for lack of jurisdiction.

SO ORDERED.

Republic of the Philippines

SUPREME COURT
Manila

THIRD DIVISION

G.R. No. 177549 June 18, 2009

ANTHONY S. YU, ROSITA G. YU and JASON G. YU, Petitioners,
vs.
JOSEPH S. YUKAYGUAN, NANCY L. YUKAYGUAN, JERALD NERWIN L. YUKAYGUAN, and JILL NESLIE
L. YUKAYGUAN, [on their own behalf and on behalf of] WINCHESTER INDUSTRIAL SUPPLY,
INC.,Respondents.

DECISION

CHICO-NAZARIO, J.:

Before Us is a Petition for Review on Certiorari1 under Rule 45 of the Rules of Court, which seeks to
reverse and set aside the Resolutions dated 18 July 20062 and 19 April 20073 of the Court of Appeals in
CA-G.R. SP No. 00185. Upon herein respondents’ motion, the Court of Appeals rendered the assailed
Resolution dated 18 July 2006, reconsidering its Decision4 dated 15 February 2006; and remanding the
case to the Regional Trial Court (RTC) of Cebu City, Branch 11, for necessary proceedings, in effect,
reversing the Decision5 dated 10 November 2004 of the RTC which dismissed respondents’ Complaint in
SRC Case No. 022-CEB. Herein petitioners’ Motion for Reconsideration of the Resolution dated 18 July
2006 was denied by the appellate court in the other assailed Resolution dated 19 April 2007.

Herein petitioners are members of the Yu Family, particularly, the father, Anthony S. Yu (Anthony); the
wife, Rosita G. Yu (Rosita); and their son, Jason G. Yu (Jason).

Herein respondents composed the Yukayguan Family, namely, the father, Joseph S. Yukayguan (Joseph);
the wife, Nancy L. Yukayguan (Nancy); and their children Jerald Nerwin L. Yukayguan (Jerald) and Jill
Neslie Yukayguan (Jill).

Petitioner Anthony is the older half-brother of respondent Joseph.

Petitioners and the respondents were all stockholders of Winchester Industrial Supply, Inc. (Winchester,
Inc.), a domestic corporation engaged in the operation of a general hardware and industrial supply and
equipment business.

On 15 October 2002, respondents filed against petitioners a verified Complaint for Accounting,
Inspection of Corporate Books and Damages through Embezzlement and Falsification of Corporate
Records and Accounts6before the RTC of Cebu. The said Complaint was filed by respondents, in their own
behalf and as a derivative suit on behalf of Winchester, Inc., and was docketed as SRC Case No. 022-CEB.
The factual background of the Complaint was stated in the attached Affidavit executed by respondent
Joseph.

According to respondents,7 Winchester, Inc. was established and incorporated on 12 September 1977,
with petitioner Anthony as one of the incorporators, holding 1,000 shares of stock worth
₱100,000.00.8 Petitioner Anthony paid for the said shares of stock with respondent Joseph’s money, thus,
making the former a mere trustee of the shares for the latter. On 14 November 1984, petitioner Anthony
ceded 800 of his 1,000 shares of stock in Winchester, Inc. to respondent Joseph, as well as Yu Kay
Guan,9 Siao So Lan, and John S. Yu.10 Petitioner Anthony remained as trustee for respondent Joseph of the
200 shares of stock in Winchester, Inc., still in petitioner Anthony’s name.
Respondents then alleged that on 30 June 1985, Winchester, Inc. bought from its incorporators, excluding
petitioner Anthony, their accumulated 8,500 shares in the corporation.11 Subsequently, on 7 November
1995, Winchester, Inc. sold the same 8,500 shares to other persons, who included respondents Nancy,
Jerald, and Jill; and petitioners Rosita and Jason.12

Respondents further averred that although respondent Joseph appeared as the Secretary and Treasurer
in the corporate records of Winchester, Inc., petitioners actually controlled and ran the said corporation
as if it were their own family business. Petitioner Rosita handled the money market placements of the
corporation to the exclusion of respondent Joseph, the designated Treasurer of Winchester, Inc.
Petitioners were also misappropriating the funds and properties of Winchester, Inc. by understating the
sales, charging their personal and family expenses to the said corporation, and withdrawing stocks for
their personal use without paying for the same. Respondents attached to the Complaint various
receipts13 to prove the personal and family expenses charged by petitioners to Winchester, Inc.

Respondents, therefore, prayed that respondent Joseph be declared the owner of the 200 shares of stock
in petitioner Anthony’s name. Respondents also prayed that petitioners be ordered to: (1) deposit the
corporate books and records of Winchester, Inc. with the Branch Clerk of Court of the RTC for
respondents’ inspection; (2) render an accounting of all the funds of Winchester, Inc. which petitioners
misappropriated; (3) reimburse the personal and family expenses which petitioners charged to
Winchester, Inc., as well as the properties of the corporation which petitioners withheld without
payment; and (4) pay respondents’ attorney’s fees and litigation expenses. In the meantime, respondents
sought the appointment of a Management Committee and the freezing of all corporate funds by the trial
court.

On 13 November 2002, petitioners filed an Answer with Compulsory Counterclaim,14 attached to which
was petitioner Anthony’s Affidavit.15 Petitioners vehemently denied the allegation that petitioner
Anthony was a mere trustee for respondent Joseph of the 1,000 shares of stock in Winchester, Inc. in
petitioner Anthony’s name. For the incorporation of Winchester, Inc., petitioner Anthony contributed
₱25,000.00 paid-up capital, representing 25% of the total par value of the 1,000 shares he subscribed to,
the said amount being paid out of petitioner Anthony’s personal savings and petitioners Anthony and
Rosita’s conjugal funds. Winchester, Inc. was being co-managed by petitioners and respondents, and the
attached receipts, allegedly evidencing petitioners’ use of corporate funds for personal and family
expenses, were in fact signed and approved by respondent Joseph.

By way of special and affirmative defenses, petitioners contended in their Answer with Compulsory
Counterclaim that respondents had no cause of action against them. Respondents’ Complaint was purely
intended for harassment. It should be dismissed under Section 1(j), Rule 1616 of the Rules of Court for
failure to comply with conditions precedent before its filing. First, there was no allegation in respondents’
Complaint that earnest efforts were exerted to settle the dispute between the parties. Second, since
respondents’ Complaint purportedly constituted a derivative suit, it noticeably failed to allege that
respondents exerted effort to exhaust all available remedies in the Articles of Incorporation and By-Laws
of Winchester, Inc., as well as in the Corporation Code. And third, given that respondents’ Complaint was
also for inspection of corporate books, it lacked the allegation that respondents made a previous demand
upon petitioners to inspect the corporate books but petitioners refused. Prayed for by petitioners, in
addition to the dismissal of respondents’ Complaint, was payment of moral and exemplary damages,
attorney’s fees, litigation expenses, and cost of suit.
On 30 October 2002, the hearing on the application for the appointment of a Management Committee was
commenced. Respondent Joseph submitted therein, as his direct testimony, the same Affidavit that he
executed, which was attached to the respondents’ Complaint. On 4 November 2002, respondent Joseph
was cross-examined by the counsel for petitioners. Thereafter, the continuation of the hearing was set for
29 November 2002, in order for petitioners to adduce evidence in support of their opposition to the
application for the appointment of a Management Committee.17

During the hearing on 29 November 2002, the parties manifested before the RTC that there was an
ongoing mediation between them, and so the hearing on the appointment of a Management Committee
was reset to another date.

In amicable settlement of their dispute, the petitioners and respondents agreed to a division of the stocks
in trade,18the real properties, and the other assets of Winchester, Inc. In partial implementation of the
afore-mentioned amicable settlement, the stocks in trade and real properties in the name of Winchester,
Inc. were equally distributed among petitioners and respondents. As a result, the stockholders and
members of the Board of Directors of Winchester, Inc. passed, on 4 January 2003, a unanimous
Resolution19 dissolving the corporation as of said date.

On 22 February 2004, respondents filed their pre-trial brief.20

On 25 June 2004, petitioners filed a Manifestation21 informing the RTC of the existence of their amicable
settlement with respondents. Respondents, however, made their own manifestation before the RTC that
they were repudiating said settlement, in view of the failure of the parties thereto to divide the remaining
assets of Winchester, Inc. Consequently, respondents moved to have SRC Case No. 022-CEB set for pre-
trial.

On 23 August 2004, petitioners filed their pre-trial brief.22

On 26 August 2004, instead of holding a formal pre-trial conference and resuming the hearing on the
application for the appointment of a Management Committee, petitioners and respondents agreed that
the RTC may already render a judgment based on the pleadings. In accordance with the agreement of the
parties, the RTC issued, on even date, an Order23 which stated:

ORDER

During the pre-trial conference held on August 26, 2004, counsels of the parties manifested, agreed and
suggested that a judgment may be rendered by the Court in this case based on the pleadings, affidavits,
and other evidences on record, or to be submitted by them, pursuant to the provision of Rule 4, Section 4
of the Rule on Intra-Corporate Controversies. The suggestion of counsels was approved by the Court.

Accordingly, the Court hereby orders the counsels of the parties to file simultaneously their respective
memoranda within a non-extendible period of twenty (20) days from notice hereof. Thereafter, the
instant case will be deemed submitted for resolution.

xxxx

Cebu City, August 26, 2004.

(signed)
SILVESTRE A. MAAMO, JR.
Acting Presiding Judge

Petitioners and respondents duly filed their respective Memoranda,24 discussing the arguments already
set forth in the pleadings they had previously submitted to the RTC. Respondents, though, attached to
their Memorandum a Supplemental Affidavit25 of respondent Joseph, containing assertions that refuted
the allegations in petitioner Anthony’s Affidavit, which was earlier submitted with petitioners’ Answer
with Compulsory Counterclaim. Respondents also appended to their Memorandum additional
documentary evidence,26 consisting of original and duplicate cash invoices and cash disbursement
receipts issued by Winchester, Inc., to further substantiate their claim that petitioners were understating
sales and charging their personal expenses to the corporate funds.

The RTC subsequently promulgated its Decision on 10 November 2004 dismissing SRC Case No. 022-CEB.
The dispositive portion of said Decision reads:

WHEREFORE, in view of the foregoing premises and for lack of merit, this Court hereby renders judgment
in this case DISMISSING the complaint filed by the [herein respondents].

The Court also hereby dismisses the [herein petitioners’] counterclaim because it has not been
indubitably shown that the filing by the [respondents] of the latter’s complaint was done in bad faith and
with malice.27

The RTC declared that respondents failed to show that they had complied with the essential requisites for
filing a derivative suit as set forth in Rule 8 of the Interim Rules of Procedure Governing Intra-Corporate
Controversies:

(1) He was a stockholder or member at the time the acts or transactions subject of the action
occurred and at the time the action was filed;

(2) He exerted all reasonable efforts, and alleges the same with particularity in the complaint, to
exhaust all remedies available under the articles of incorporation, by-laws, laws or rules
governing the corporation or partnership to obtain the relief he desires;

(3) No appraisal rights are available for the act or acts complained of; and

(4) The suit is not a nuisance or harassment suit.

As to respondents’ prayer for the inspection of corporate books and records, the RTC adjudged that they
had likewise failed to comply with the requisites entitling them to the same. Section 2, Rule 7 of the
Interim Rules of Procedure Governing Intra-Corporate Controversies requires that the complaint for
inspection of corporate books or records must state that:

(1) The case is for the enforcement of plaintiff's right of inspection of corporate orders or records
and/or to be furnished with financial statements under Sections 74 and 75 of the Corporation
Code of the Philippines;
 (2) A demand for inspection and copying of books and records and/or to be furnished with
financial statements made by the plaintiff upon defendant;

(3) The refusal of defendant to grant the demands of the plaintiff and the reasons given for such
refusals, if any; and

(4) The reasons why the refusal of defendant to grant the demands of the plaintiff is unjustified
and illegal, stating the law and jurisprudence in support thereof.

The RTC further noted that respondent Joseph was the corporate secretary of Winchester, Inc. and, as
such, he was supposed to be the custodian of the corporate books and records; therefore, a court order
for respondents’ inspection of the same was no longer necessary. The RTC similarly denied respondents’
demand for accounting as it was clear that Winchester, Inc. had been engaging the services of an audit
firm. Respondent Joseph himself described the audit firm as competent and independent, and believed
that the audited financial statements the said audit firm prepared were true, faithful, and correct.

Finding the claims of the parties for damages against each other to be unsubstantiated, the RTC thereby
dismissed the same.

Respondents challenged the foregoing RTC Decision before the Court of Appeals via a Petition for Review
under Rule 43 of the Rules of Court, docketed as CA-G.R. SP No. 00185.

On 15 February 2006, the Court of Appeals rendered its Decision, affirming the 10 December 2004
Decision of the RTC. Said the appellate court:

After a careful and judicious scrutiny of the extant records of the case, together with the applicable laws
and jurisprudence, WE see no reason or justification for granting the present appeal.

xxxx

x x x [T]his Court sees that the instant petition would still fail taking into consideration all the pleadings
and evidence of the parties except the supplemental affidavit of [herein respondent] Joseph and its
corresponding annexes appended in [respondents’] memorandum before the Court a quo. The Court a
quo have (sic) outrightly dismissed the complaint for its failure to comply with the mandatory provisions
of the Interim Rules of Procedure for Intra-Corporate Controversies particularly Rule 2, Section 4(3),
Rule 8, Section [1(2)] and Rule 7, Section 2 thereof, which reads as follows:

RULE 2
COMMENCEMENT OF ACTION AND PLEADINGS

Sec. 4. Complaint. – The complaint shall state or contain:

xxxx

(3) the law, rule, or regulation relied upon, violated, or sought to be enforced;

xxxx
 RULE 8
DERIVATIVE SUITS

Sec. 1. Derivative action. – x x x

xxxx

(2) He exerted all reasonable efforts, and alleges the same with particularity in the complaint, to exhaust
all remedies available under the articles of incorporation, by-laws, laws or rules governing the
corporation or partnership to obtain the relief he desires.

xxxx

RULE 7
INSPECTION OF CORPORATE BOOKS AND RECORDS

Sec. 2. Complaint – In addition to the requirements in section 4, Rule 2 of these Rules, the complaint must
state the following:

(1) The case is set (sic) for the enforcement of plaintiff’s right of inspection of corporate orders or
records and/or to be furnished with financial statements under Section 74 and 75 of the
Corporation Code of the Philippines;

(2) A demand for inspection and copying of books [and/or] to be furnished with financial
statements made by the plaintiffs upon defendant;

(3) The refusal of the defendant to grant the demands of the plaintiff and the reasons given for
such refusal, if any; and

(4) The reasons why the refusal of defendant to grant the demands of the plaintiff is unjustified
and illegal, stating the law and jurisprudence in support thereof.

xxxx

A perusal of the extant record shows that [herein respondents] have not complied with the above quoted
provisions. [Respondents] should be mindful that in filing their complaint which, as admitted by them, is
a derivative suit, should have first exhausted all available remedies under its (sic) Articles of
Incorporation, or its by-laws, or any laws or rules governing the corporation. The contention of
[respondent Joseph] that he had indeed made several talks to (sic) his brother [herein petitioner
Anthony] to settle their differences is not tantamount to exhaustion of remedies. What the law requires is
to bring the grievance to the Board of Directors or Stockholders for the latter to take the opportunity to
settle whatever problem in its regular meeting or special meeting called for that purpose which
[respondents] failed to do. x x x The requirements laid down by the Interim Rules of Procedure for Intra-
Corporate Controversies are mandatory which cannot be dispensed with by any stockholder of a
corporation before filing a derivative suit.28 (Emphasis ours.)
The Court of Appeals likewise sustained the refusal by the RTC to consider respondent Joseph’s
Supplemental Affidavit and other additional evidence, which respondents belatedly submitted with their
Memorandum to the said trial court. The appellate court ratiocinated that:

With regard to the claim of [herein respondents] that the supplemental affidavit of [respondent] Joseph
and its annexes appended to their memorandum should have been taken into consideration by the Court
a quo to support the reliefs prayed [for] in their complaint. (sic) This Court rules that said supplemental
affidavit and its annexes is (sic) inadmissible.

A second hard look of (sic) the extant records show that during the pre-trial conference conducted on
August 26, 2004, the parties through their respective counsels had come up with an agreement that the
lower court would render judgment based on the pleadings and evidence submitted. This agreement is in
accordance with Rule 4, Sec. 4 of the Interim Rules of Procedure for Intra-Corporate Controversies which
explicitly states:

SECTION. 4. Judgment before pre-trial. – If, after submission of the pre-trial briefs, the court determines
that, upon consideration of the pleadings, the affidavits and other evidence submitted by the parties, a
judgment may be rendered, the court may order the parties to file simultaneously their respective
memoranda within a non-extendible period of twenty (20) days from receipt of the order. Thereafter, the
court shall render judgment, either full or otherwise, not later than ninety (90) days from the expiration
of the period to file the memoranda.

xxxx

Clearly, the supplemental affidavit and its appended documents which were submitted only upon the
filing of the memorandum for the [respondents] were not submitted in the pre-trial briefs for the
stipulation of the parties during the pre-trial, hence, it cannot be accepted pursuant to Rule 2, Sec. 8 of the
same rules which reads as follows:

SEC. 8. Affidavits, documentary and other evidence. – Affidavits shall be based on personal knowledge,
shall set forth such facts as would be admissible in evidence, and shall show affirmatively that the affiant
is competent to testify on the matters stated therein. The affidavits shall be in question and answer form,
and shall comply with the rules on admissibility of evidence.

Affidavits of witnesses as well as documentary and other evidence shall be attached to the appropriate
pleading; Provided, however, that affidavits, documentary and other evidence not so submitted may be
attached to the pre-trial brief required under these Rules. Affidavits and other evidence not so submitted
shall not be admitted in evidence, except in the following cases:

(1) Testimony of unwilling, hostile, or adverse party witnesses. A witness is presumed prima
facie hostile if he fails or refuses to execute an affidavit after a written request therefor;

(2) If the failure to submit the evidence is for meritorious and compelling reasons; and

(3) Newly discovered evidence.

In case of (2) and (3) above, the affidavit and evidence must be submitted not later than five (5) days
prior to its introduction in evidence.
There is no showing in the case at bench that the supplemental affidavit and its annexes falls (sic) within
one of the exceptions of the above quoted proviso, hence, inadmissible.

It must be noted that in the case at bench, like any other civil cases, "the party making an allegation in a
civil case has the burden of proving it by preponderance of evidence." Differently stated, upon the
plaintiff in [a] civil case, the burden of proof never parts. That is, appellants must adduce evidence that
has greater weight or is more convincing that (sic) which is offered to oppose it. In the case at bar, no one
should be blamed for the dismissal of the complaint but the [respondents] themselves for their
lackadaisical attitude in setting forth and appending their defences belatedly. To admit them would be a
denial of due process for the opposite party which this Court cannot allow.29

Ultimately, the Court of Appeals decreed:

WHEREFORE, judgment is hereby rendered DISMISSING the instant petition and the assailed Decision of
the Regional Trial Court (RTC), 7th Judicial Region, Branch II, Cebu City, dated November 10, 2004, in SRC
Case No. 022-CEB is AFFIRMED in toto. Cost against the [herein respondents].30

Unperturbed, respondents filed before the Court of Appeals, on 23 February 2006, a Motion for
Reconsideration and Motion to Set for Oral Arguments the Motion for Reconsideration,31 invoking the
following grounds:

(1) The [herein respondents] have sufficiently exhausted all remedies before filing the present
action; and

(2) [The] Honorable Court erred in holding that the supplemental affidavit and its annexes is (sic)
inadmissible because the rules and the lower court expressly allowed the submission of the same
in its order dated August 26, 2004 x x x.32

In a Resolution33 dated 8 March 2006, the Court of Appeals granted respondents’ Motion to Set for Oral
Arguments the Motion for Reconsideration.

On 4 April 2006, the Court of Appeals issued a Resolution34 setting forth the events that transpired during
the oral arguments, which took place on 30 March 2006. Counsels for the parties manifested before the
appellate court that they were submitting respondents’ Motion for Reconsideration for resolution. Justice
Magpale, however, still called on the parties to talk about the possible settlement of the case considering
their familial relationship. Independent of the resolution of respondents’ Motion for Reconsideration, the
parties were agreeable to pursue a settlement for the dissolution of the corporation, which they had
actually already started.

In a Resolution35 dated 11 April 2006, the Court of Appeals ordered the parties to submit, within 10 days
from notice, their intended amicable settlement, since the same would undeniably affect the resolution of
respondents’ pending Motion for Reconsideration. If the said period should lapse without the parties
submitting an amicable settlement, then they were directed by the appellate court to file within 10 days
thereafter their position papers instead.

On 5 May 2006, respondents submitted to the Court of Appeals their Position Paper,36 stating that the
parties did not reach an amicable settlement. Respondents informed the appellate court that prior to the
filing with the Securities and Exchange Commission (SEC) of a petition for dissolution of Winchester, Inc.,
the parties already divided the stocks in trade and the real assets of the corporation among themselves.
Respondents posited, though, that the afore-mentioned distribution of the assets of Winchester, Inc.
among the parties was null and void, as it violated the last paragraph of Section 122 of the Corporation
Code, which provides that, "[e]xcept by a decrease of capital stock and as otherwise allowed by the
Corporation Code, no corporation shall distribute any of its assets or property except upon lawful
dissolution and after payment of all its debts and liabilities." At the same time, however, respondents
brought to the attention of the Court of Appeals that the parties did eventually file with the SEC a petition
for dissolution of Winchester, Inc., which the SEC approved.37

Respondents no longer discussed in their Position Paper the grounds they previously invoked in their
Motion for Reconsideration of the Court of Appeals Decision dated 15 February 2006, affirming in toto
the RTC Decision dated 10 November 2004. They instead argued that the RTC Decision in question was
null and void as it did not clearly state the facts and the law on which it was based. Respondents sought
the remand of the case to the RTC for further proceedings on their derivative suit and completion of the
dissolution of Winchester, Inc., including the legalization of the prior partial distribution among the
parties of the assets of said corporation.

Petitioners filed their Position Paper38 on 23 May 2006, wherein they accused respondents of attempting
to incorporate extraneous matters into the latter’s Motion for Reconsideration. Petitioners pointed out
that the issue before the Court of Appeals was not the dissolution and division of assets of Winchester,
Inc., thus, a remand of the case to the RTC was not necessary.

On 18 July 2006, the Court of Appeals rendered the assailed Resolution, granting respondents’ Motion for
Reconsideration. The Court of Appeals reasoned in this wise:

After a second look and appreciation of the facts of the case, vis-à-vis the issues raised by the [herein
respondents’] motion for reconsideration and in view of the formal dissolution of the corporation which
leaves unresolved up to the present the settlement of the properties and assets which are now in danger
of dissipation due to the unending litigation, this Court finds the need to remand the instant case to the
lower court (commercial court) as the proper forum for the adjudication, disposition, conveyance and
distribution of said properties and assets between and amongst its stockholders as final settlement
pursuant to Sec. 122 of the Corporation Code after payment of all its debts and liabilities as provided for
under the same proviso. This is in accord with the pronouncement of the Supreme Court in the case of
Clemente et. al. vs. Court of Appeals, et. al. where the high court ruled and which WE quote, viz:

"the corporation continues to be a body corporate for three (3) years after its dissolution for purposes of
prosecuting and defending suits by and against it and for enabling it to settle and close its affairs,
culminating in the disposition and distribution of its remaining assets. It may, during the three-year term,
appoint a trustee or a receiver who may act beyond that period. The termination of the life of a juridical
entity does not by itself cause the extinction or diminution of the rights and liabilities of such entity x x x
nor those of its owners and creditors. If the three-year extended life has expired without a trustee or
receiver having been expressly designated by the corporation within that period, the board of directors
(or trustees) xxx may be permitted to so continue as "trustees" by legal implication to complete the
corporate liquidation. Still in the absence of a board of directors or trustees, those having any pecuniary
interest in the assets, including not only the shareholders but likewise the creditors of the corporation,
acting for and in its behalf, might make proper representation with the Securities and Exchange
Commission, which has primary and sufficiently broad jurisdiction in matters of this nature, for working
out a final settlement of the corporate concerns."
In the absence of a trustee or board of director in the case at bar for purposes above mentioned, the
lower court under Republic Act No. [8799] (otherwise known as the Securities and Exchange
Commission) as implemented by A.M. No. 00-8-10-SC (Transfer of Cases from the Securities and
Exchange Commission to the Regional Trial Courts) which took effect on October 1, 2001, is the proper
forum for working out the final settlement of the corporate concern.39

Hence, the Court of Appeals ruled:

WHEREFORE, premises considered, the motion for reconsideration is GRANTED. The order dated
February 15, 2006 is hereby SET ASIDE and the instant case is REMANDED to the lower court to take the
necessary proceedings in resolving with deliberate dispatch any and all corporate concerns towards final
settlement.40

Petitioners filed a Motion for Reconsideration41 of the foregoing Resolution, but it was denied by the
Court of Appeals in its other assailed Resolution dated 19 April 2007.

In the Petition at bar, petitioners raise the following issues:

I.

WHETHER OR NOT THE ASSAILED RESOLUTIONS[,] WHICH VIOLATED THE CONSTITUTION OF THE
PHILIPPINES, JURISPRUDENCE AND THE LAW[,] ARE NULL AND VOID[.]

II.

WHETHER OR NOT THE ASSAILED RESOLUTIONS WAS (sic) ISSUED WITHOUT JURISDICTION[.]

III.

WHETHER OR NOT THE HONORABLE COURT OF APPEALS SERIOUSLY ERRED IN REMANDING THIS
CASE TO THE LOWER COURT FOR THE REASON CITED IN THE ASSAILED RESOLUTIONS, AND WITHOUT
RESOLVING THE GROUNDS FOR THE [RESPONDENTS’] MOTION FOR RECONSIDERATION. (sic)
INASMUCH AS [THE] REASON CITED WAS A NON-ISSUE IN THE CASE.

IV.

WHETHER OR NOT REMANDING THIS CASE TO THE REGIONAL TRIAL COURT VIOLATES THE
SUMMARY PROCEDURE FOR INTRA-CORPORATE CASES.42

The crux of petitioners’ contention is that the Court of Appeals committed grievous error in reconsidering
its Decision dated 15 February 2006 on the basis of extraneous matters, which had not been previously
raised in respondents’ Complaint before the RTC, or in their Petition for Review and Motion for
Reconsideration before the appellate court; i.e., the adjudication, disposition, conveyance, and
distribution of the properties and assets of Winchester, Inc. among its stockholders, allegedly pursuant to
the amicable settlement of the parties. The fact that the parties were able to agree before the Court of
Appeals to submit for resolution respondents’ Motion for Reconsideration of the 15 February 2006
Decision of the same court, independently of any intended settlement between the parties as regards the
dissolution of the corporation and distribution of its assets, only proves the distinction and independence
of these matters from one another. Petitioners also contend that the assailed Resolution dated 18 July
2006 of the Court of Appeals, granting respondents’ Motion for Reconsideration, failed to clearly and
distinctly state the facts and the law on which it was based. Remanding the case to the RTC, petitioners
maintain, will violate the very essence of the summary nature of the Interim Rules of Procedure
Governing Intra-Corporate Controversies, as this will just entail delay, protract litigation, and revert the
case to square one.

The Court finds the instant Petition meritorious.

To recapitulate, the case at bar was initiated before the RTC by respondents as a derivative suit, on their
own behalf and on behalf of Winchester, Inc., primarily in order to compel petitioners to account for and
reimburse to the said corporation the corporate assets and funds which the latter allegedly
misappropriated for their personal benefit. During the pendency of the proceedings before the court a
quo, the parties were able to reach an amicable settlement wherein they agreed to divide the assets of
Winchester, Inc. among themselves. This amicable settlement was already partially implemented by the
parties, when respondents repudiated the same, for which reason the RTC proceeded with the case on its
merits. On 10 November 2004, the RTC promulgated its Decision dismissing respondents’ Complaint for
failure to comply with essential pre-requisites before they could avail themselves of the remedies under
the Interim Rules of Procedure Governing Intra-Corporate Controversies; and for inadequate
substantiation of respondents’ allegations in said Complaint after consideration of the pleadings and
evidence on record.

In its Decision dated 15 February 2006, the Court of Appeals affirmed, on appeal, the findings of the RTC
that respondents did not abide by the requirements for a derivative suit, nor were they able to prove
their case by a preponderance of evidence. Respondents filed a Motion for Reconsideration of said
judgment of the appellate court, insisting that they were able to meet all the conditions for filing a
derivative suit. Pending resolution of respondents’ Motion for Reconsideration, the Court of Appeals
urged the parties to again strive to reach an amicable settlement of their dispute, but the parties were
unable to do so. The parties were not able to submit to the appellate court, within the given period, any
amicable settlement; and filed, instead, their Position Papers. This effectively meant that the parties
opted to submit respondents’ Motion for Reconsideration of the 15 February 2006 Decision of the Court
of Appeals, and petitioners’ opposition to the same, for resolution by the appellate court on the merits.

It was at this point that the case took an unexpected turn.

In accordance with respondents’ allegation in their Position Paper that the parties subsequently filed
with the SEC, and the SEC already approved, a petition for dissolution of Winchester, Inc., the Court of
Appeals remanded the case to the RTC so that all the corporate concerns between the parties regarding
Winchester, Inc. could be resolved towards final settlement.

In one stroke, with the use of sweeping language, which utterly lacked support, the Court of Appeals
converted the derivative suit between the parties into liquidation proceedings.

The general rule is that where a corporation is an injured party, its power to sue is lodged with its board
of directors or trustees. Nonetheless, an individual stockholder is permitted to institute a derivative suit
on behalf of the corporation wherein he holds stocks in order to protect or vindicate corporate rights,
whenever the officials of the corporation refuse to sue, or are the ones to be sued, or hold the control of
the corporation. In such actions, the suing stockholder is regarded as a nominal party, with the
corporation as the real party in interest. A derivative action is a suit by a shareholder to enforce a
corporate cause of action. The corporation is a necessary party to the suit. And the relief which is granted
is a judgment against a third person in favor of the corporation. Similarly, if a corporation has a defense
to an action against it and is not asserting it, a stockholder may intervene and defend on behalf of the
corporation.43 By virtue of Republic Act No. 8799, otherwise known as the Securities Regulation Code,
jurisdiction over intra-corporate disputes, including derivative suits, is now vested in the Regional Trial
Courts designated by this Court pursuant to A.M. No. 00-11-03-SC promulgated on 21 November 2000.

In contrast, liquidation is a necessary consequence of the dissolution of a corporation. It is specifically

governed by Section 122 of the Corporation Code, which reads:

SEC. 122. Corporate liquidation. – Every corporation whose charter expires by its own limitation or is
annulled by forfeiture or otherwise, or whose corporate existence for other purposes is terminated in any
other manner, shall nevertheless be continued as a body corporate for three (3) years after the time
when it would have been so dissolved, for the purpose of prosecuting and defending suits by or against it
and enabling it to settle and close its affairs, to dispose of and convey its property and to distribute its
assets, but not for the purpose of continuing the business for which it was established.

At any time during said three (3) years, said corporation is authorized and empowered to convey all of its
property to trustees for the benefit of stockholders, members, creditors, and other persons in interest.
From and after any such conveyance by the corporation of its property in trust for the benefit of its
stockholders, members, creditors and others in interest, all interest which the corporation had in the
property terminates, the legal interest vests in the trustees, and the beneficial interest in the
stockholders, members, creditors or other persons in interest.

Upon winding up of the corporate affairs, any asset distributable to any creditor or stockholder or
member who is unknown or cannot be found shall be escheated to the city or municipality where such
assets are located.

Except by decrease of capital stock and as otherwise allowed by this Code, no corporation shall distribute
any of its assets or property except upon lawful dissolution and after payment of all its debts and
liabilities.

Following the voluntary or involuntary dissolution of a corporation, liquidation is the process of settling
the affairs of said corporation, which consists of adjusting the debts and claims, that is, of collecting all
that is due the corporation, the settlement and adjustment of claims against it and the payment of its just
debts.44 More particularly, it entails the following:

Winding up the affairs of the corporation means the collection of all assets, the payment of all its
creditors, and the distribution of the remaining assets, if any among the stockholders thereof in
accordance with their contracts, or if there be no special contract, on the basis of their respective
interests. The manner of liquidation or winding up may be provided for in the corporate by-laws and this
would prevail unless it is inconsistent with law.45

It may be undertaken by the corporation itself, through its Board of Directors; or by trustees to whom all
corporate assets are conveyed for liquidation; or by a receiver appointed by the SEC upon its decree
dissolving the corporation.46lawphil.net
Glaringly, a derivative suit is fundamentally distinct and independent from liquidation proceedings. They
are neither part of each other nor the necessary consequence of the other. There is totally no justification
for the Court of Appeals to convert what was supposedly a derivative suit instituted by respondents, on
their own behalf and on behalf of Winchester, Inc. against petitioners, to a proceeding for the liquidation
of Winchester, Inc.

While it may be true that the parties earlier reached an amicable settlement, in which they agreed to
already distribute the assets of Winchester, Inc., and in effect liquidate said corporation, it must be
pointed out that respondents themselves repudiated said amicable settlement before the RTC, even after
the same had been partially implemented; and moved that their case be set for pre-trial. Attempts to
again amicably settle the dispute between the parties before the Court of Appeals were unsuccessful.

Moreover, the decree of the Court of Appeals to remand the case to the RTC for the "final settlement of
corporate concerns" was solely grounded on respondents’ allegation in its Position Paper that the parties
had already filed before the SEC, and the SEC approved, the petition to dissolve Winchester, Inc. The
Court notes, however, that there is absolute lack of evidence on record to prove said allegation.
Respondents failed to submit copies of such petition for dissolution of Winchester, Inc. and the SEC
Certification approving the same. It is a basic rule in evidence that each party must prove his affirmative
allegation. Since it was respondents who alleged the voluntary dissolution of Winchester, Inc.,
respondents must, therefore, prove it.47 This respondents failed to do.

Even assuming arguendo that the parties did submit a petition for the dissolution of Winchester, Inc. and
the same was approved by the SEC, the Court of Appeals was still without jurisdiction to order the final
settlement by the RTC of the remaining corporate concerns. It must be remembered that the Complaint
filed by respondents before the RTC essentially prayed for the accounting and reimbursement by
petitioners of the corporate funds and assets which they purportedly misappropriated for their personal
use; surrender by the petitioners of the corporate books for the inspection of respondents; and payment
by petitioners to respondents of damages. There was nothing in respondents’ Complaint which sought
the dissolution and liquidation of Winchester, Inc. Hence, the supposed dissolution of Winchester, Inc.
could not have resulted in the conversion of respondents’ derivative suit to a proceeding for the
liquidation of said corporation, but only in the dismissal of the derivative suit based on either
compromise agreement or mootness of the issues.

Clearly, in issuing its assailed Resolutions dated 18 July 2006 and 19 April 2007, the Court of Appeals
already went beyond the issues raised in respondents’ Motion for Reconsideration. Instead of focusing on
whether it erred in affirming, in its 15 February 2006 Decision, the dismissal by the RTC of respondents’
Complaint due to respondents’ failure to comply with the requirements for a derivative suit and submit
evidence to support their allegations, the Court of Appeals unduly concentrated on respondents’
unsubstantiated allegation that Winchester, Inc. was already dissolved and speciously ordered the
remand of the case to the RTC for proceedings so vitally different from that originally instituted by
respondents.

Despite the foregoing, the Court still deems it appropriate to already look into the merits of respondents’
Motion for Reconsideration of the 15 February 2006 Decision of the Court of Appeals, for the sake of
finally putting an end to the case at bar.

In their said Motion for Reconsideration, respondents argued that: (1) they had sufficiently exhausted all
remedies before filing the derivative suit; and (2) respondent Joseph’s Supplemental Affidavit and its
annexes should have been taken into consideration, since the submission thereof was allowed by the
rules of procedure, as well as by the RTC in its Order dated 26 August 2004.

As regards the first ground of sufficient exhaustion by respondents of all remedies before filing a
derivative suit, the Court subscribes to the ruling to the contrary of the Court of Appeals in its Decision
dated 16 February 2006.1avvphi1

The Court has recognized that a stockholder’s right to institute a derivative suit is not based on any
express provision of the Corporation Code, or even the Securities Regulation Code, but is impliedly
recognized when the said laws make corporate directors or officers liable for damages suffered by the
corporation and its stockholders for violation of their fiduciary duties. Hence, a stockholder may sue for
mismanagement, waste or dissipation of corporate assets because of a special injury to him for which he
is otherwise without redress. In effect, the suit is an action for specific performance of an obligation owed
by the corporation to the stockholders to assist its rights of action when the corporation has been put in
default by the wrongful refusal of the directors or management to make suitable measures for its
protection. The basis of a stockholder’s suit is always one in equity. However, it cannot prosper without
first complying with the legal requisites for its institution.48

Section 1, Rule 8 of the Interim Rules of Procedure Governing Intra-Corporate Controversies lays down
the following requirements which a stockholder must comply with in filing a derivative suit:

Sec. 1. Derivative action. – A stockholder or member may bring an action in the name of a corporation or
association, as the case may be, provided, that:

(1) He was a stockholder or member at the time the acts or transactions subject of the action
occurred and at the time the action was filed;

(2) He exerted all reasonable efforts, and alleges the same with particularity in the complaint, to
exhaust all remedies available under the articles of incorporation, by-laws, laws or rules
governing the corporation or partnership to obtain the relief he desires;

(3) No appraisal rights are available for the act or acts complained of; and

(4) The suit is not a nuisance or harassment suit.

A perusal of respondents’ Complaint before the RTC would reveal that the same did not allege with
particularity that respondents exerted all reasonable efforts to exhaust all remedies available under the
articles of incorporation, by-laws, laws or rules governing Winchester, Inc. to obtain the relief they desire.

Respondents assert that their compliance with said requirement was contained in respondent Joseph’s
Affidavit, which was attached to respondents’ Complaint. Respondent Joseph averred in his Affidavit that
he tried for a number of times to talk to petitioner Anthony to settle their differences, but the latter would
not listen. Respondents additionally claimed that taking further remedies within the corporation would
have been idle ceremony, considering that Winchester, Inc. was a family corporation and it was
impossible to expect petitioners to take action against themselves who were the ones accused of
wrongdoing.

The Court is not persuaded.

The wordings of Section 1, Rule 8 of the Interim Rules of Procedure Governing Intra-Corporate
Controversies are simple and do not leave room for statutory construction. The second paragraph thereof
requires that the stockholder filing a derivative suit should have exerted all reasonable efforts to exhaust
all remedies available under the articles of incorporation, by-laws, laws or rules governing the
corporation or partnership to obtain the relief he desires; and to allege such fact with particularity in the
complaint. The obvious intent behind the rule is to make the derivative suit the final recourse of the
stockholder, after all other remedies to obtain the relief sought had failed.

The allegation of respondent Joseph in his Affidavit of his repeated attempts to talk to petitioner Anthony
regarding their dispute hardly constitutes "all reasonable efforts to exhaust all remedies available."
Respondents did not refer to or mention at all any other remedy under the articles of incorporation or
by-laws of Winchester, Inc., available for dispute resolution among stockholders, which respondents
unsuccessfully availed themselves of. And the Court is not prepared to conclude that the articles of
incorporation and by-laws of Winchester, Inc. absolutely failed to provide for such remedies.

Neither can this Court accept the reasons proffered by respondents to excuse themselves from complying
with the second requirement under Section 1, Rule 8 of the Interim Rules of Procedure Governing Intra-
Corporate Controversies. They are flimsy and insufficient, compared to the seriousness of respondents’
accusations of fraud, misappropriation, and falsification of corporate records against the petitioners. The
fact that Winchester, Inc. is a family corporation should not in any way exempt respondents from
complying with the clear requirements and formalities of the rules for filing a derivative suit. There is
nothing in the pertinent laws or rules supporting the distinction between, and the difference in the
requirements for, family corporations vis-à-vis other types of corporations, in the institution by a
stockholder of a derivative suit.

The Court further notes that, with respect to the third and fourth requirements of Section 1, Rule 8 of the
Interim Rules of Procedure Governing Intra-Corporate Controversies, the respondents’ Complaint failed
to allege, explicitly or otherwise, the fact that there were no appraisal rights available for the acts of
petitioners complained of, as well as a categorical statement that the suit was not a nuisance or a
harassment suit.

As to respondents’ second ground in their Motion for Reconsideration, the Court agrees with the ruling of
the Court of Appeals, in its 15 February 2006 Decision, that respondent Joseph’s Supplemental Affidavit
and additional evidence were inadmissible since they were only appended by respondents to their
Memorandum before the RTC. Section 8, Rule 2 of the Interim Rules of Procedure Governing Intra-
Corporate Controversies is crystal clear that:

Sec. 8. Affidavits, documentary and other evidence. – Affidavits shall be based on personal knowledge,
shall set forth such facts as would be admissible in evidence, and shall show affirmatively that the affiant
is competent to testify on the matters stated therein. The affidavits shall be in question and answer form,
and shall comply with the rules on admissibility of evidence.

Affidavits of witnesses as well as documentary and other evidence shall be attached to the appropriate
pleading, Provided, however, that affidavits, documentary and other evidence not so submitted may be
attached to the pre-trial brief required under these Rules. Affidavits and other evidence not so submitted
shall not be admitted in evidence, except in the following cases:
 (1) Testimony of unwilling, hostile, or adverse party witnesses. A witness is presumed prima
facie hostile if he fails or refuses to execute an affidavit after a written request therefor;

(2) If the failure to submit the evidence is for meritorious and compelling reasons; and

(3) Newly discovered evidence.

In case of (2) and (3) above, the affidavit and evidence must be submitted not later than five (5) days
prior to its introduction in evidence. (Emphasis ours.)

According to the afore-quoted provision, the parties should attach the affidavits of witnesses and other
documentary evidence to the appropriate pleading, which generally should mean the complaint for the
plaintiff and the answer for the respondent. Affidavits and documentary evidence not so submitted must
already be attached to the respective pre-trial briefs of the parties. That the parties should have already
identified and submitted to the trial court the affidavits of their witnesses and documentary evidence by
the time of pre-trial is strengthened by the fact that Section 1, Rule 4 of the Interim Rules of Procedure
Governing Intra-Corporate Controversies require that the following matters should already be set forth
in the parties’ pre-trial briefs:

Section 1. Pre-trial conference, mandatory nature. – Within five (5) days after the period for availment of,
and compliance with, the modes of discovery prescribed in Rule 3 hereof, whichever comes later, the
court shall issue and serve an order immediately setting the case for pre-trial conference, and directing
the parties to submit their respective pre-trial briefs. The parties shall file with the court and furnish each
other copies of their respective pre-trial brief in such manner as to ensure its receipt by the court and the
other party at least five (5) days before the date set for the pre-trial.

The parties shall set forth in their pre-trial briefs, among other matters, the following:

xxxx

(4) Documents not specifically denied under oath by either or both parties;

xxxx

(7) Names of witnesses to be presented and the summary of their testimony as contained in their
affidavits supporting their positions on each of the issues;

(8) All other pieces of evidence, whether documentary or otherwise and their respective purposes.

Also, according to Section 2, Rule 4 of the Interim Rules of Procedure Governing Intra-Corporate
Controversies,49 it is the duty of the court to ensure during the pre-trial conference that the parties
consider in detail, among other things, objections to the admissibility of testimonial, documentary, and
other evidence, as well as objections to the form or substance of any affidavit, or part thereof.

Obviously, affidavits of witnesses and other documentary evidence are required to be attached to a
party’s pre-trial brief, at the very last instance, so that the opposite party is given the opportunity to
object to the form and substance, or the admissibility thereof. This is, of course, to prevent unfair
surprises and/or to avoid the granting of any undue advantage to the other party to the case.
True, the parties in the present case agreed to submit the case for judgment by the RTC, even before pre-
trial, in accordance with Section 4, Rule 4 of the Interim Rules of Procedure Governing Intra-Corporate
Controversies:

Sec. 4. Judgment before pre-trial. – If after submission of the pre-trial briefs, the court determines that,
upon consideration of the pleadings, the affidavits and other evidence submitted by the parties, a
judgment may be rendered, the court may order the parties to file simultaneously their respective
memoranda within a non-extendible period of twenty (20) days from receipt of the order. Thereafter, the
court shall render judgment, either full or otherwise, not later than ninety (90) days from the expiration
of the period to file the memoranda.

Even then, the afore-quoted provision still requires, before the court makes a determination that it can
render judgment before pre-trial, that the parties had submitted their pre-trial briefs and the court took
into consideration the pleadings, affidavits and other evidence submitted by the parties. Hence, cases
wherein the court can render judgment prior to pre-trial, do not depart from or constitute an exception
to the requisite that affidavits of witnesses and documentary evidence should be submitted, at the latest,
with the parties’ pre-trial briefs. Taking further into account that under Section 4, Rule 4 of the Interim
Rules of Procedure Governing Intra-Corporate Controversies parties are required to file their
memoranda simultaneously, the same would mean that a party would no longer have any opportunity to
dispute or rebut any new affidavit or evidence attached by the other party to its memorandum. To violate
the above-quoted provision would, thus, irrefragably run afoul the former party’s constitutional right to
due process.

In the instant case, therefore, respondent Joseph’s Supplemental Affidavit and the additional
documentary evidence, appended by respondents only to their Memorandum submitted to the RTC, were
correctly adjudged as inadmissible by the Court of Appeals in its 15 February 2006 Decision for having
been belatedly submitted. Respondents neither alleged nor proved that the documents in question fall
under any of the three exceptions to the requirement that affidavits and documentary evidence should be
attached to the appropriate pleading or pre-trial brief of the party, which is particularly recognized under
Section 8, Rule 2 of the Interim Rules of Procedure Governing Intra-Corporate Controversies.

WHEREFORE, premises considered, the Petition for Review under Rule 45 of the Rules of Court is hereby
GRANTED. The assailed Resolutions dated 18 July 2006 and 19 April 2007 of the Court of Appeals in CA-
G.R. SP No. 00185 are hereby REVERSED AND SET ASIDE. The Decision dated 15 February 2006 of the
Court of Appeals is hereby AFFIRMED. No costs.

SO ORDERED.

Republic of the Philippines

SUPREME COURT
Manila

SECOND DIVISION

G.R. No. 168863 June 23, 2009

HI-YIELD REALTY, INCORPORATED, Petitioner,

vs.
HON. COURT OF APPEALS, HON. CESAR O. UNTALAN, in his capacity as PRESIDING JUDGE OF RTC-
MAKATI, BRANCH 142, HONORIO TORRES & SONS, INC., and ROBERTO H. TORRES, Respondents.

DECISION

QUISUMBING, J.:

This is a special civil action for certiorari seeking to nullify and set aside the Decision1 dated March 10,
2005 and Resolution2 dated May 26, 2005 of the Court of Appeals in CA-G.R. SP. No. 83919. The appellate
court had dismissed the petition for certiorari and prohibition filed by petitioner and denied its
reconsideration.

The antecedent facts of the case are undisputed.

On July 31, 2003, Roberto H. Torres (Roberto), for and on behalf of Honorio Torres & Sons, Inc. (HTSI),
filed a Petition for Annulment of Real Estate Mortgage and Foreclosure Sale3 over two parcels of land
located in Marikina and Quezon City. The suit was filed against Leonora, Ma. Theresa, Glenn and
Stephanie, all surnamed Torres, the Register of Deeds of Marikina and Quezon City, and petitioner Hi-
Yield Realty, Inc. (Hi-Yield). It was docketed as Civil Case No. 03-892 with Branch 148 of the Regional
Trial Court (RTC) of Makati City.

On September 15, 2003, petitioner moved to dismiss the petition on grounds of improper venue and
payment of insufficient docket fees. The RTC denied said motion in an Order4 dated January 22, 2004. The
trial court held that the case was, in nature, a real action in the form of a derivative suit cognizable by a
special commercial court pursuant to Administrative Matter No. 00-11-03-SC.5 Petitioner sought
reconsideration, but its motion was denied in an Order6 dated April 27, 2004.

Thereafter, petitioner filed a petition for certiorari and prohibition before the Court of Appeals. In a
Decision dated March 10, 2005, the appellate court agreed with the RTC that the case was a derivative
suit. It further ruled that the prayer for annulment of mortgage and foreclosure proceedings was merely
incidental to the main action. The dispositive portion of said decision reads:

WHEREFORE, premises considered, this Petition is hereby DISMISSED. However, public respondent is
hereby DIRECTED to instruct his Clerk of Court to compute the proper docket fees and thereafter, to
order the private respondent to pay the same IMMEDIATELY.

SO ORDERED.7

Petitioner’s motion for reconsideration8 was denied in a Resolution dated May 26, 2005.

Hence, this petition which raises the following issues:

I.

WHETHER THE HONORABLE COURT OF APPEALS GRAVELY ABUSED ITS DISCRETION IN NOT
DISMISSING THE CASE AGAINST HI-YIELD FOR IMPROPER VENUE DESPITE FINDINGS BY THE TRIAL
COURT THAT THE ACTION IS A REAL ACTION.
 II.

WHETHER THE HONORABLE COURT OF APPEALS ERRED IN NOT DISMISSING THE COMPLAINT AS
AGAINST HI-YIELD EVEN IF THE JOINDER OF PARTIES IN THE COMPLAINT VIOLATED THE RULES ON
VENUE.

III.

WHETHER THE HONORABLE COURT OF APPEALS ERRED IN HOLDING THAT THE ANNULMENT OF
REAL ESTATE MORTGAGE AND FORECLOSURE SALE IN THE COMPLAINT IS MERELY INCIDENTAL [TO]
THE DERIVATIVE SUIT.9

The pivotal issues for resolution are as follows: (1) whether venue was properly laid; (2) whether there
was proper joinder of parties; and (3) whether the action to annul the real estate mortgage and
foreclosure sale is a mere incident of the derivative suit.

Petitioner imputes grave abuse of discretion on the Court of Appeals for not dismissing the case against it
even as the trial court found the same to be a real action. It explains that the rule on venue under the
Rules of Court prevails over the rule prescribing the venue for intra-corporate controversies; hence, HTSI
erred when it filed its suit only in Makati when the lands subjects of the case are in Marikina and Quezon
City. Further, petitioner argues that the appellate court erred in ruling that the action is mainly a
derivative suit and the annulment of real estate mortgage and foreclosure sale is merely incidental
thereto. It points out that the caption of the case, substance of the allegations, and relief prayed for
revealed that the main thrust of the action is to recover the lands. Lastly, petitioner asserts that it should
be dropped as a party to the case for it has been wrongly impleaded as a non-stockholder defendant in
the intra-corporate dispute.

On the other hand, respondents maintain that the action is primarily a derivative suit to redress the
alleged unauthorized acts of its corporate officers and major stockholders in connection with the lands.
They postulate that the nullification of the mortgage and foreclosure sale would just be a logical
consequence of a decision adverse to said officers and stockholders.

After careful consideration, we are in agreement that the petition must be dismissed.

A petition for certiorari is proper if a tribunal, board or officer exercising judicial or quasi-judicial
functions acted without or in excess of jurisdiction or with grave abuse of discretion amounting to lack or
excess of jurisdiction and there is no appeal, or any plain, speedy and adequate remedy in the ordinary
course of law.10

Petitioner sought a review of the trial court’s Orders dated January 22, 2004 and April 27, 2004 via a
petition for certiorari before the Court of Appeals. In rendering the assailed decision and resolution, the
Court of Appeals was acting under its concurrent jurisdiction to entertain petitions for certiorari under
paragraph 2,11 Section 4 of Rule 65 of the Rules of Court. Thus, if erroneous, the decision and resolution of
the appellate court should properly be assailed by means of a petition for review on certiorari under Rule
45 of the Rules of Court. The distinction is clear: a petition for certiorari seeks to correct errors of
jurisdiction while a petition for review on certiorari seeks to correct errors of judgment committed by the
court a quo.12 Indeed, this Court has often reminded members of the bench and bar that a special civil
action for certiorari under Rule 65 lies only when there is no appeal nor plain, speedy and adequate
remedy in the ordinary course of law.13 In the case at hand, petitioner impetuously filed a petition for
certiorari before us when a petition for review was available as a speedy and adequate remedy. Notably,
petitioner filed the present petition 5814 days after it received a copy of the assailed resolution dated May
26, 2005. To our mind, this belated action evidences petitioner’s effort to substitute for a lost appeal this
petition for certiorari.

For the extraordinary remedy of certiorari to lie by reason of grave abuse of discretion, the abuse of
discretion must be so patent and gross as to amount to an evasion of positive duty, or a virtual refusal to
perform the duty enjoined or to act in contemplation of law, or where the power is exercised in an
arbitrary and despotic manner by reason of passion and personal hostility.15 We find no grave abuse of
discretion on the part of the appellate court in this case.

Simply, the resolution of the issues posed by petitioner rests on a determination of the nature of the
petition filed by respondents in the RTC. Both the RTC and Court of Appeals ruled that the action is in the
form of a derivative suit although captioned as a petition for annulment of real estate mortgage and
foreclosure sale.

A derivative action is a suit by a shareholder to enforce a corporate cause of action.16 Under the
Corporation Code, where a corporation is an injured party, its power to sue is lodged with its board of
directors or trustees. But an individual stockholder may be permitted to institute a derivative suit on
behalf of the corporation in order to protect or vindicate corporate rights whenever the officials of the
corporation refuse to sue, or are the ones to be sued, or hold control of the corporation. In such actions,
the corporation is the real party-in-interest while the suing stockholder, on behalf of the corporation, is
only a nominal party.17

In the case of Filipinas Port Services, Inc. v. Go,18 we enumerated the foregoing requisites before a
stockholder can file a derivative suit:

a) the party bringing suit should be a shareholder as of the time of the act or transaction
complained of, the number of his shares not being material;

b) he has tried to exhaust intra-corporate remedies, i.e., has made a demand on the board of
directors for the appropriate relief but the latter has failed or refused to heed his plea; and

c) the cause of action actually devolves on the corporation, the wrongdoing or harm having been,
or being caused to the corporation and not to the particular stockholder bringing the suit.19

Even then, not every suit filed on behalf of the corporation is a derivative suit. For a derivative suit to
prosper, the minority stockholder suing for and on behalf of the corporation must allege in his complaint
that he is suing on a derivative cause of action on behalf of the corporation and all other stockholders
similarly situated who may wish to join him in the suit.20 The Court finds that Roberto had satisfied this
requirement in paragraph five (5) of his petition which reads:

5. Individual petitioner, being a minority stockholder, is instituting the instant proceeding by way of a
derivative suit to redress wrongs done to petitioner corporation and vindicate corporate rights due to the
mismanagement and abuses committed against it by its officers and controlling stockholders, especially
by respondent Leonora H. Torres (Leonora, for brevity) who, without authority from the Board of
Directors, arrogated upon herself the power to bind petitioner corporation from incurring loan
obligations and later allow company properties to be foreclosed as hereinafter set forth;21

Further, while it is true that the complaining stockholder must satisfactorily show that he has exhausted
all means to redress his grievances within the corporation; such remedy is no longer necessary where the
corporation itself is under the complete control of the person against whom the suit is being filed. The
reason is obvious: a demand upon the board to institute an action and prosecute the same effectively
would have been useless and an exercise in futility.221avvphi1

Here, Roberto alleged in his petition that earnest efforts were made to reach a compromise among family
members/stockholders before he filed the case. He also maintained that Leonora Torres held 55% of the
outstanding shares while Ma. Theresa, Glenn and Stephanie excluded him from the affairs of the
corporation. Even more glaring was the fact that from June 10, 1992, when the first mortgage deed was
executed until July 23, 2002, when the properties mortgaged were foreclosed, the Board of Directors of
HTSI did nothing to rectify the alleged unauthorized transactions of Leonora. Clearly, Roberto could not
expect relief from the board.

Derivative suits are governed by a special set of rules under A.M. No. 01-2-04-SC23 otherwise known as
the Interim Rules of Procedure Governing Intra-Corporate Controversies under Republic Act No.
8799.24 Section 1,25 Rule 1 thereof expressly lists derivative suits among the cases covered by it.

As regards the venue of derivative suits, Section 5, Rule 1 of A.M. No. 01-2-04-SC states:

SEC. 5. Venue. - All actions covered by these Rules shall be commenced and tried in the Regional Trial
Court which has jurisdiction over the principal office of the corporation, partnership, or association
concerned. Where the principal office of the corporation, partnership or association is registered in the
Securities and Exchange Commission as Metro Manila, the action must be filed in the city or municipality
where the head office is located.

Thus, the Court of Appeals did not commit grave abuse of discretion when it found that respondents
correctly filed the derivative suit before the Makati RTC where HTSI had its principal office.

There being no showing of any grave abuse of discretion on the part of the Court of Appeals the other
alleged errors will no longer be passed upon as mere errors of judgment are not proper subjects of a
petition for certiorari.

WHEREFORE, the instant petition is hereby DISMISSED. The Decision dated March 10, 2005 and the
Resolution dated May 26, 2005 of the Court of Appeals in CA-G.R. SP. No. 83919 are AFFIRMED.

No pronouncement as to costs.

SO ORDERED.

Republic of the Philippines

SUPREME COURT
Manila

THIRD DIVISION
G.R. No. 170783 June 18, 2012

LEGASPI TOWERS 300, INC., LILIA MARQUINEZ PALANCA, ROSANNA D. IMAI, GLORIA DOMINGO
and RAY VINCENT, Petitioners,
vs.
AMELIA P. MUER, SAMUEL M. TANCHOCO, ROMEO TANKIANG, RUDEL PANGANIBAN, DOLORES
AGBAYANI, ARLENEDAL A. YASUMA, GODOFREDO M. CAGUIOA and EDGARDO M.
SALANDANAN,Respondents.

DECISION

PERALTA, J.:

This is a petition for review on certiorari of the Court of Appeals’ Decision1 dated July 22, 2005 in CA-G.R.
CV No. 87684, and its Resolution2 dated November 24, 2005, denying petitioners’ motion for
reconsideration.

The Court of Appeals held that Judge Antonio I. De Castro of the Regional Trial Court (RTC) of Manila,
Branch 3, did not commit grave abuse of discretion in issuing the Orders dated July 21, 2004 and
September 24, 2004 in Civil Case No. 04-109655, denying petitioners’ Motion to Admit Second Amended
Complaint.

The facts, as stated by the Court of Appeals, are as follows:

Pursuant to the by-laws of Legaspi Towers 300, Inc., petitioners Lilia Marquinez Palanca, Rosanna D.
Imai, Gloria Domingo and Ray Vincent, the incumbent Board of Directors, set the annual meeting of the
members of the condominium corporation and the election of the new Board of Directors for the years
2004-2005 on April 2, 2004 at 5:00 p.m. at the lobby of Legaspi Towers 300, Inc.

Out of a total number of 5,723 members who were entitled to vote, 1,358 were supposed to vote through
their respective proxies and their votes were critical in determining the existence of a quorum, which was
at least 2,863 (50% plus 1). The Committee on Elections of Legaspi Towers 300, Inc., however, found
most of the proxy votes, at its face value, irregular, thus, questionable; and for lack of time to authenticate
the same, petitioners adjourned the meeting for lack of quorum.

However, the group of respondents challenged the adjournment of the meeting. Despite petitioners'
insistence that no quorum was obtained during the annual meeting held on April 2, 2004, respondents
pushed through with the scheduled election and were elected as the new Board of Directors and officers
of Legaspi Towers 300, Inc. Subsequently, they submitted a General Information Sheet to the Securities
and Exchange Commission (SEC) with the following new set of officers: Amelia P. Muer, President;
Samuel M. Tanchoco, Internal Vice President; Romeo V. Tankiang, External Vice-President; Rudel H.
Panganiban, Secretary; Dolores B. Agbayani, Assistant Secretary; Arlenedal A. Yasuma, Treasurer;
Godofredo M. Caguioa, Assistant Treasurer; and Edgardo M. Salandanan, Internal Auditor.

On April 13, 2004, petitioners filed a Complaint for the Declaration of Nullity of Elections with Prayers for
the lssuance of Temporary Restraining Orders and Writ of Preliminary Injunction and Damages against
respondents with the RTC of Manila. Before respondents could file an Answer to the original
Complaint, petitioners filed an Amended Complaint, which was admitted by the RTC in an Order dated
April 14, 2004.

On April 20, 2004, before respondents could submit an Answer to the Amended Complaint, petitioners
again filed an Urgent Ex-Parte Motion to Admit Second Amended Complaint and for the lssuance of Ex-Parte
Temporary Restraining Order Effective only for Seventy-Two (72) Hours. It was stated in the said pleading
that the case was raffled to Branch 24, but Presiding Judge Antonio Eugenio, Jr. inhibited himself from
handling the case; and when the case was assigned to Branch 46, Presiding Judge Artemio S. Tipon also
inhibited himself from the case.

On April 21, 2004, Executive Judge Enrico A. Lanzanas of the RTC of Manila acted on the Motion for the
Issuance of an Ex Parte Temporary Restraining Order, and issued an Order disposing, thus:

WHEREFORE, pursuant to administrative Circular No. 20-95 of the Supreme Court, a seventy-two (72)
hour Temporary Restraining Order is hereby issued, enjoining defendants from taking over management,
or to maintain a status quo, in order to prevent further irreparable damages and prejudice to the
corporation, as day-to-day activities will be disrupted and will be paralyzed due to the legal controversy.3

On the same date, April 21, 2004, respondents filed their Answer4 to the Amended Complaint, alleging
that the election on April 2, 2004 was lawfully conducted. Respondents cited the Report5 of SEC Counsel
Nicanor P. Patricio, who was ordered by the SEC to attend the annual meeting of Legaspi Towers 300, Inc.
on April 2, 2004. Atty. Patricio stated in his Report that at 5:40 p.m. of April 2, 2004, a representative of
the Board of the condominium corporation stated that the scheduled elections could not proceed because
the Election Committee was not able to validate the authenticity of the proxies prior to the election due to
limited time available as the submission was made only the day before. Atty. Patricio noted that the
Board itself fixed the deadline for submission of proxies at 5:00 p.m. of April 1, 2004. One holder of proxy
stood up and questioned the motives of the Board in postponing the elections. The Board objected to this
and moved for a declaration of adjournment. There was an objection to the adjournment, which was
ignored by the Board. When the Board adjourned the meeting despite the objections of the unit owners,
the unit owners who objected to the adjournment gathered themselves at the same place of the meeting
and proceeded with the meeting. The attendance was checked from among the members who stayed at
the meeting. Proxies were counted and recorded, and there was a declaration of a quorum – out of a total
of 5,721 votes, 2,938 were present either in person or proxy. Thereafter, ballots were prepared, proxies
were counterchecked with the number of votes entitled to each unit owner, and then votes were cast. At
about 9:30 p.m., canvassing started, and by 11:30 p.m., the newly-elected members of the Board of
Directors for the years 2004-2005 were named.

Respondents contended that from the proceedings of the election reported by SEC representative, Atty.
Patricio, it was clear that the election held on April 2, 2004 was legitimate and lawful; thus, they prayed
for the dismissal of the complaint for lack cause of action against them.

This case was scheduled to be re-raffled to regular courts on April 22, 2004, and was assigned to Judge
Antonio I. De Castro of the RTC of Manila, Branch 3 (trial court).

On April 26, 2004, the trial court conducted a hearing on the injunction sought by petitioners, and issued
an Order clarifying that the TRO issued by Executive Judge Enrico A. Lanzanas, enjoining respondents
from taking over management, was not applicable as the current Board of Directors (respondents) had
actually assumed management of the corporation. The trial court stated that the status quo mentioned in
the said TRO shall mean that the current board of directors shall continue to manage the affairs of the
condominium corporation, but the court shall monitor all income earned and expenses incurred by the
corporation. The trial court stated:

Precisely this complaint seeks to annul the election of the Board due to alleged questionable proxy votes
which could not have produced a quorum. As such, there is nothing to enjoin and so injunction shall fail.
As an answer has been filed, the case is ripe for pre-trial and the parties are directed to file their pre-trial
briefs by May 3, 2004.

As plaintiffs’ second amended complaint is admitted by the Court, defendants are given up to May 3, 2004
to file a comment thereto. In the meantime, the banks and other persons & entities are advised to
recognize the Board headed by its president, Amelia Muer. All transactions made by the Board and its
officers for the corporation are considered legal for all intents and purposes.6

On May 3, 2004, respondents filed a Comment on the Motion to Amend Complaint, praying that the name
of Legaspi Towers 300, Inc., as party-plaintiff in the Second Amended Complaint, be deleted as the said
inclusion by petitioners was made without the authority of the current Board

of Directors, which had been recognized by the trial court in its Order dated April 26, 2004.

During the pre-trial conference held on July 21, 2004, the trial court resolved various incidents in the case
and other issues raised by the contending parties. One of the incidents acted upon by the trial court was
petitioners' motion to amend complaint to implead Legaspi Towers 300, Inc. as plaintiff, which motion
was denied with the issuance of two Orders both dated July 21, 2004. The first Order7 held that the said
motion could not be admitted for being improper, thus:

xxxx

On plaintiffs’ motion to admit amended complaint (to include Legaspi Towers 300, Inc. as plaintiff), the
Court rules to deny the motion for being improper. (A separate Order of even date is issued.) As prayed
for, movants are given 10 days from today to file a motion for reconsideration thereof, while defendants
are given 10 days from receipt thereof to reply.8

The second separate Order,9 also dated July 21, 2004, reads:

This resolves plaintiffs’ motion to amend complaint to include Legaspi Towers 300, Inc. as party-plaintiff
and defendants’ comment thereto. Finding no merit therein and for the reasons stated in the comment,
the motion is hereby DENIED.

Petitioners filed a Motion for Reconsideration of the Orders dated July 21, 2004. In the Order10 dated
September 24, 2004, the trial court denied the motion for reconsideration for lack of merit.

Petitioners filed a petition for certiorari with the Court of Appeals alleging that the trial court gravely
abused its discretion amounting to lack or excess of jurisdiction in issuing the Orders dated July 21, 2004
and September 24, 2004, and praying that judgment be rendered annulling the said Orders and directing
RTC Judge De Castro to admit their Second Amended Complaint.
In a Decision dated July 22, 2005, the Court of Appeals dismissed the petition for lack of merit. It held that
RTC Judge De Castro did not commit grave abuse of discretion in denying petitioners' Motion To Admit
Second Amended Complaint.

The Court of Appeals stated that petitioners’ complaint sought to nullify the election of the Board of
Directors held on April 2, 2004, and to protect and enforce their individual right to vote. The appellate
court held that as the right to vote is a personal right of a stockholder of a corporation, such right can only
be enforced through a direct action; hence, Legaspi Towers 300, Inc. cannot be impleaded as plaintiff in
this case.

Petitioners’ motion for reconsideration was denied by the Court of Appeals in a Resolution dated
November 24, 2005.

Petitioners filed this petition raising the following issues:

THE HONORABLE COURT OF APPEALS ERRED IN RESOLVING THAT PUBLIC RESPONDENT-

APPELLEE DID NOT COMMIT ANY WHIMSICAL, ARBITRARY AND OPPRESSIVE EXERCISE OF
JUDICIAL AUTHORITY WHEN THE LATTER REVERSED HIS EARLIER RULING ALREADY
ADMITTING THE SECOND AMENDED COMPLAINT OF PETITIONERS-APPELLANTS.

II

THERE IS NO LEGAL BASIS FOR THE HONORABLE COURT OF APPEALS TO RESOLVE THAT
PETITIONERS-APPELLANTS HAVE NO RIGHT AS BOARD OF DIRECTORS TO BRING AN ACTION IN
BEHALF OF LEGASPI TOWERS 300, INC.

III

THERE IS NO LEGAL BASIS FOR THE HONORABLE COURT OF APPEALS TO RESOLVE THAT THE
ELECTIONS CONDUCTED IN LEGASPI TOWERS 300, INC. FOR THE PERIOD OF 2005 TO 2006
HAVE RENDERED THE ISSUE IN CIVIL CASE NO. 04-10655 MOOT AND ACADEMIC.11

Petitioners contend that the Court of Appeals erred in not finding that RTC Judge Antonio I. De Castro
committed grave abuse of discretion amounting to lack or excess of jurisdiction in denying the admission
of the Second Amended Complaint in the Orders dated July 21, 2004 and September 24, 2004, despite the
fact that he had already ordered its admission in a previous Order dated April 26, 2004.

Petitioners’ contention is unmeritorious.

It is clear that in the Orders dated July 21, 2004, the trial court did not admit the Second Amended
Complaint wherein petitioners made the condominium corporation, Legaspi Towers 300, Inc., the party-
plaintiff. In the Order dated September 24, 2004, denying petitioners’ motion for reconsideration of the
Orders dated July 21, 2004, the RTC explained its action, thus:
x x x The word "admitted" in the 3rd paragraph of the Order dated April 26, 2004 should read "received"
for which defendants were told to comment thereon as an answer has been filed. It was an oversight of
the clerical error in said Order.

The Order of July 21, 2004 states "amended complaint" in the 3rd paragraph thereof and so it does not
refer to the second amended complaint. The amended complaint was admitted by the court of origin – Br.
24 in its Order of April 14, 2004 as there was no responsive pleading yet.

Nonetheless, admission of the second amended complaint is improper. Why should Legaspi Towers 300,
Inc. x x x be included as party-plaintiff when defendants are members thereof too like plaintiffs. Both
parties are deemed to be acting in their personal capacities as they both claim to be the lawful board of
directors. The motion for reconsideration for the admission of the second amended complaint is hereby
DENIED.12

The courts have the inherent power to amend and control their processes and orders so as to make them
conformable to law and justice.13 A judge has an inherent right, while his judgment is still under his
control, to correct errors, mistakes, or injustices.14

Next, petitioners state that the Court of Appeals seems to be under the impression that the action
instituted by them is one brought forth solely by way of a derivative suit. They clarified that the inclusion
of Legaspi Towers 300, Inc. as a party-plaintiff in the Second Amended Complaint was, first and foremost,
intended as a direct action by the corporation acting through them (petitioners) as the reconstituted
Board of Directors of Legaspi Towers 300, Inc. Petitioners allege that their act of including the
corporation as party-plaintiff is consistent with their position that the election conducted by respondents
was invalid; hence, petitioners, under their by-laws, could reconstitute themselves as the Board of
Directors of Legaspi Towers 300, Inc. in a hold-over capacity for the succeeding term. By so doing,
petitioners had the right as the rightful Board of Directors to bring the action in representation of Legaspi
Towers 300, Inc. Thus, the Second Amended Complaint was intended by the petitioners as a direct suit by
the corporation joined in by the petitioners to protect and enforce their common rights.

Petitioners contend that Legaspi Towers 300, Inc. is a real party-in- interest as it stands to be affected the
most by the controversy, because it involves the determination of whether or not the corporation’s by-
laws was properly carried out in the meeting held on April 2, 2004, when despite the adjournment of the
meeting for lack of quorum, the elections were still conducted. Although petitioners admit that the action
involves their right to vote, they argue that it also involves the right of the condominium corporation to
be managed and run by the duly-elected Board of Directors, and to seek redress against those who
wrongfully occupy positions of the corporation and who may mismanage the corporation.

Petitioners’ argument is unmeritorious.

The Court notes that in the Amended Complaint, petitioners as plaintiffs stated that they are the
incumbent reconstituted Board of Directors of Legaspi Towers 300, Inc., and that defendants, herein
respondents, are the newly-elected members of the Board of Directors; while in the Second Amended
Complaint, the plaintiff is Legaspi Towers 300, Inc., represented by petitioners as the allegedly incumbent
reconstituted Board of Directors of Legaspi Towers 300, Inc.

The Second Amended Complaint states who the plaintiffs are, thus:
1. That the plaintiffs are: LEGASPI TOWERS 300, INC., non-stock corporation xxx duly represented by the
incumbent reconstituted Board of Directors of Legaspi Towers 300, Inc., namely: ELIADORA FE BOTE
VERA xxx, as President; BRUNO C. HAMAN xxx, as Director; LILY MARQUINEZ PALANCA xxx, as
Secretary; ROSANNA DAVID IMAI xxx, as Treasurer; and members of the Board of Directors, namely:
ELIZABETH GUERRERO xxx, GLORIA DOMINGO xxx, and RAY VINCENT. 15

The Court agrees with the Court of Appeals that the Second Amended Complaint is meant to be a
derivative suit filed by petitioners in behalf of the corporation. The Court of Appeals stated in its Decision
that petitioners justified the inclusion of Legaspi Towers 300, Inc. as plaintiff in Civil Case No. 0410655 by
invoking the doctrine of derivative suit, as petitioners specifically argued, thus:

xxxx

x x x [T]he sudden takeover by private respondents of the management of Legaspi Towers 300, Inc. has
only proven the rightfulness of petitioners’ move to include Legaspi Towers 300, Inc. as party-plaintiff.
This is because every resolution passed by private respondents sitting as a board result[s] in violation of
Legaspi Towers 300, Inc.’s right to be managed and represented by herein petitioners.

In short, the amendment of the complaint [to include] Legaspi Towers 300, Inc. was done in order to
protect the interest and enforce the right of the Legaspi [Towers 300,] Inc. to be administered and
managed [by petitioners] as the duly constituted Board of Directors. This is no different from and may in
fact be considered as a DERIVATIVE SUIT instituted by an individual stockholder against those
controlling the corporation but is being instituted in the name of and for the benefit of the corporation
whose right/s are being violated.16

Is a derivative suit proper in this case?

Cua, Jr. v. Tan17 differentiates a derivative suit and an individual/class suit as follows:

A derivative suit must be differentiated from individual and representative or class suits, thus:

Suits by stockholders or members of a corporation based on wrongful or fraudulent acts of directors or

other persons may be classified into individual suits, class suits, and derivative suits. Where a stockholder
or member is denied the right of inspection, his suit would be individual because the wrong is done to
him personally and not to the other stockholders or the corporation. Where the wrong is done to a group
of stockholders, as where preferred stockholders' rights are violated, a class or representative suit will
be proper for the protection of all stockholders belonging to the same group. But where the acts
complained of constitute a wrong to the corporation itself, the cause of action belongs to the corporation
and not to the individual stockholder or member. Although in most every case of wrong to the
corporation, each stockholder is necessarily affected because the value of his interest therein would be
impaired, this fact of itself is not sufficient to give him an individual cause of action since the corporation
is a person distinct and separate from him, and can and should itself sue the wrongdoer. Otherwise, not
only would the theory of separate entity be violated, but there would be multiplicity of suits as well as a
violation of the priority rights of creditors. Furthermore, there is the difficulty of determining the amount
of damages that should be paid to each individual stockholder.

However, in cases of mismanagement where the wrongful acts are committed by the directors or trustees
themselves, a stockholder or member may find that he has no redress because the former are vested by
law with the right to decide whether or not the corporation should sue, and they will never be willing to
sue themselves. The corporation would thus be helpless to seek remedy. Because of the frequent
occurrence of such a situation, the common law gradually recognized the right of a stockholder to sue on
behalf of a corporation in what eventually became known as a "derivative suit." It has been proven to be
an effective remedy of the minority against the abuses of management. Thus, an individual stockholder is
permitted to institute a derivative suit on behalf of the corporation wherein he holds stock in order to
protect or vindicate corporate rights, whenever officials of the corporation refuse to sue or are the ones
to be sued or hold the control of the corporation. In such actions, the suing stockholder is regarded as the
nominal party, with the corporation as the party-in- interest.18

Since it is the corporation that is the real party-in-interest in a derivative suit, then the reliefs prayed for
must be for the benefit or interest of the corporation.19 When the reliefs prayed for do not pertain to the
corporation, then it is an improper derivative suit.20

The requisites for a derivative suit are as follows:

a) the party bringing suit should be a shareholder as of the time of the act or transaction
complained of, the number of his shares not being material;

b) he has tried to exhaust intra-corporate remedies, i.e., has made a demand on the board of
directors for the appropriate relief but the latter has failed or refused to heed his plea; and

c) the cause of action actually devolves on the corporation, the wrongdoing or harm having been,
or being caused to the corporation and not to the particular stockholder bringing the suit.21

In this case, petitioners, as members of the Board of Directors of the condominium corporation before the
election in question, filed a complaint against the newly-elected members of the Board of Directors for
the years 2004-2005, questioning the validity of the election held on April 2, 2004, as it was allegedly
marred by lack of quorum, and praying for the nullification of the said election.

As stated by the Court of Appeals, petitioners’ complaint seek to nullify the said election, and to protect
and enforce their individual right to vote. Petitioners seek the nullification of the election of the Board of
Directors for the years 2004-2005, composed of herein respondents, who pushed through with the
election even if petitioners had adjourned the meeting allegedly due to lack of quorum. Petitioners are
the injured party, whose rights to vote and to be voted upon were directly affected by the election of the
new set of board of directors. The party-in-interest are the petitioners as stockholders, who wield such
right to vote. The cause of action devolves on petitioners, not the condominium corporation, which did
not have the right to vote. Hence, the complaint for nullification of the election is a direct action by
petitioners, who were the members of the Board of Directors of the corporation before the election,
against respondents, who are the newly-elected Board of Directors. Under the circumstances, the
derivative suit filed by petitioners in behalf of the condominium corporation in the Second Amended
Complaint is improper.

The stockholder’s right to file a derivative suit is not based on any express provision of The Corporation
Code, but is impliedly recognized when the law makes corporate directors or officers liable for damages
suffered by the corporation and its stockholders for violation of their fiduciary duties,22 which is not the
issue in this case.
Further, petitioners’ change of argument before this Court, asserting that the Second Amended Complaint
is a direct action filed by the corporation, represented by the petitioners as the incumbent Board of
Directors, is an afterthought, and lacks merit, considering that the newly-elected Board of Directors had
assumed their function to manage corporate affairs.23

In fine, the Court of Appeals correctly upheld the Orders of the trial court dated July 21, 2004 and
September 24, 2004 denying petitioners’ Motion to Admit Second Amended Complaint.

Lastly, petitioners contend that the Court of Appeals erred in resolving that the recent elections
conducted by Legaspi Towers, 300, Inc. have rendered the issue raised via the special civil action for
certiorari before the appellate court moot and academic.

The Court of Appeals, in its Resolution dated November 24, 2005, stated:

x x x [T]he election of the corporation’s new set of directors for the years 2005-2006 has, finally,
rendered the petition at bench moot and academic. As correctly argued by private respondents, the
nullification of the orders assailed by petitioners would, therefore, be of little or no practical and legal
purpose.24

The statement of the Court of Appeals is correct.

Petitioners question the validity of the election of the Board of Directors for the years 2004-2005, which
election they seek to nullify in Civil Case No. 04-109655. However, the valid election of a new set of Board
of Directors for the years 2005-2006 would, indeed, render this petition moot and academic.

WHEREFORE, the petition is DENIED. The Decision of the Court of Appeals in CA-G.R. CV No. 87684, dated
July 22, 2005, and its Resolution dated November 24, 2005 are AFFIRMED.

Costs against petitioners.

SO ORDERED.

Republic of the Philippines

SUPREME COURT
Manila

SECOND DIVISION

G.R. No. 201675 June 19, 2013

JUANITO ANG, for and in behalf of SUNRISE MARKETING (BACOLOD), INC.,* Petitioner,
vs.
SPOUSES ROBERTO and RACHEL ANG, Respondents.

DECISION

CARPIO, J.:
 The Case

This petition for review1 assails the Decision2 of the Court of Appeals-Cebu (CA-Cebu) dated 20
September 2011 in CA-G.R. SP No. 05546. The CA-Cebu reversed and set aside the Order3 of the Regional
Trial Court, Branch 53, Bacolod City (RTC Bacolod) dated 27 September 2010 in Commercial Court Case
No. 09-070 entitled Sunrise Marketing (Bacolod), Inc., represented by Juanita Ang -v: Spouses Roberto
and Rachel Ang.

The Facts

Sunrise Marketing (Bacolod), Inc. (SMBI) is a duly registered corporation owned by the Ang family.4 Its
current stockholders and their respective stockholdings are as follows:5

Stockholder Number of Shares

Juanito Ang 8,750
Anecita Ang 1,250
Jeannevie Ang 2,500
Roberto Ang 8,750
Rachel Ang 3,750
Total 25,000

Juanito Ang (Juanito) and Roberto Ang (Roberto) are siblings. Anecita Limoco-Ang (Anecita) is Juanito’s
wife and Jeannevie is their daughter. Roberto was elected President of SMBI, while Juanito was elected as
its Vice President. Rachel Lu-Ang (Rachel) and Anecita are SMBI’s Corporate Secretary and Treasurer,
respectively.

On 31 July 1995, Nancy Ang (Nancy), the sister of Juanito and Roberto, and her husband, Theodore Ang
(Theodore), agreed to extend a loan to settle the obligations of SMBI and other corporations owned by
the Ang family, specifically Bayshore Aqua Culture Corporation, Oceanside Marine Resources and JR Aqua
Venture.6 Nancy and Theodore issued a check in the amount of $1,000,000.00 payable to "Juanito Ang
and/or Anecita Ang and/or Roberto Ang and/or Rachel Ang." Nancy was a former stockholder of SMBI,
but she no longer appears in SMBI’s General Information Sheets as early as 1996.7 Nancy and Theodore
are now currently residing in the United States. There was no written loan agreement, in view of the close
relationship between the parties. Part of the loan was also used to purchase real properties for SMBI, for
Juanito, and for Roberto.8

On 22 December 2005, SMBI increased its authorized capital stock to ₱10,000,000.00. The Certificate of
Increase of Capital Stock was signed by Juanito, Anecita, Roberto, and Rachel as directors of
SMBI.9 Juanito claimed, however, that the increase of SMBI’s capital stock was done in contravention of
the Corporation Code.10 According to Juanito, when he and Anecita left for Canada:

x x x Sps. Roberto and Rachel Ang took over the active management of [SMBI]. Through the employment
of sugar coated words, they were able to successfully manipulate the stocks sharings between themselves
at 50-50 under the condition that the procedures mandated by the Corporation Code on increase of
capital stock be strictly observed (valid Board Meeting). No such meeting of the Board to increase capital
stock materialized. It was more of an accommodation to buy peace x x x.11

Juanito claimed that payments to Nancy and Theodore ceased sometime after 2006. On 24 November
2008, Nancy and Theodore, through their counsel here in the Philippines, sent a demand letter to
"Spouses Juanito L. Ang/Anecita L. Ang and Spouses Roberto L. Ang/Rachel L. Ang" for payment of the
principal amounting to $1,000,000.00 plus interest at ten percent (10%) per annum, for a total of
$2,585,577.37 within ten days from receipt of the letter. 12 Roberto and Rachel then sent a letter to Nancy
and Theodore’s counsel on 5 January 2009, saying that they are not complying with the demand letter
because they have not personally contracted a loan from Nancy and Theodore.

On 8 January 2009, Juanito and Anecita executed a Deed of Acknowledgment and Settlement Agreement
(Settlement Agreement) and an Extra-Judicial Real Estate Mortgage (Mortgage). Under the foregoing
instruments, Juanito and Anecita admitted that they, together with Roberto and Rachel, obtained a loan
from Nancy and Theodore for $1,000,000.00 on 31 July 1995 and such loan shall be secured by:

a) Juanito and Anecita’s fifty percent share over a parcel of land registered in the name of SMBI;

b) a parcel of land registered in the name of Juanito Ang;

c) Juanito’s fifty percent share in 7 parcels of land registered in his and Roberto’s name;

d) a parcel of land registered in the name of Roberto;

e) a parcel of land registered in the name of Rachel; and

f) Roberto and Rachel’s fifty percent share in 2 parcels of land registered in the name of their son,
Livingstone L. Ang (Livingstone), and in another lot registered in the name of Livingstone and
Alvin Limoco Ang.13

A certain Kenneth C. Locsin (Locsin) signed on behalf of Nancy and Theodore, under a Special Power of
Attorney which was not attached as part of the Settlement Agreement or the Mortgage, nor included in
the records of this case.

Thereafter, Juanito filed a "Stockholder Derivative Suit with prayer for an ex-parte Writ of
Attachment/Receivership" (Complaint) before the RTC Bacolod on 29 January 2009. He alleged that "the
intentional and malicious refusal of defendant Sps. Roberto and Rachel Ang to settle their 50% share x x x
of the total obligation x x x will definitely affect the financial viability of plaintiff SMBI."14 Juanito also
claimed that he has been "illegally excluded from the management and participation in the business of
[SMBI through] force, violence and intimidation" and that Rachel and Roberto have seized and carted
away SMBI’s records from its office.15

The Complaint sought the following reliefs:

a) Issuance of an ex-parte Writ of Attachment and/or Garnishment, with a Break Open Order
covering the assets of the spouses Roberto and Rachel Ang, or any interest they may have against
third parties;
 b) Placement of SMBI under Receivership pending resolution of the case;

c) Enforcement of Juanito’s right to actively participate in the management of SMBI;

d) Issuance of an Order compelling the Spouses Roberto and Rachel Ang to:

i. Render an accounting of the utilization of the loan amounting to $2,585,577.37 or

₱120,229,347.26;

ii. Pay fifty percent of the aforementioned loan, amounting to ₱60,114,673.62;

iii. Explain why Nancy was removed as a stockholder as far as SMBI’s reportorial
requirements with the SEC are concerned;

iv. Restore Juanito’s right to actively manage the affairs of the corporation; and

v. Pay attorney’s fees amounting to ₱20,000.00.

On 29 January 2009, the RTC Bacolod issued an Order16 granting the application for an ex-parte writ of
attachment and break open order. Atty. Jerry Basiao, who filed an application for appointment as
Receiver of SMBI, was directed by the RTC Bacolod to furnish the required Receivership Bond.17 On the
same date, Roberto and Rachel moved to quash the writ of attachment and set aside the break open order
and appointment of receiver.18 They claimed that these were issued in violation of their right to due
process:

Records of this case would show that the complaint was filed before the RTC Bacolod at 2:50 p.m. of
January 29, 2009. x x x Counsel for the defendant-spouses went to the RTC Bacolod at around 3:00 p.m.
on January 29, 2009 to inquire on the status of the case and was informed that the last pleading on record
is his entry of appearance with the conformity of the defendant Rachel Ang. Counsel was however
informed by the clerk of court that the Honorable Judge has already issued an order directing the
issuance of the writ of preliminary attachment, receivership and break open order but said order was not
officially released yet x x x. Due to the undersigned counsel’s insistence, however, said clerk of court of
this Honorable Court furnished him a copy of said order x x x. The clerk of court and the clerk in charge of
civil cases assured counsel that no writ of preliminary attachment was prepared or issued x x x. Despite
such assurance x x x [and counsel’s advice that they shall move to quash the order the following
morning], that afternoon, the clerk of court x x x clandestinely, hurriedly and surreptitiously, for reasons
known only to her, x x x prepared the writ of attachment x x x.19

In her Verified Answer Ad Cautelam which was filed on 10 February 2009, Rachel prayed that the
Complaint be dismissed as it was not a bona fide derivative suit as defined under the Interim Rules of
Procedure for Intra-Corporate Controversies20 (Interim Rules). According to Rachel, the Complaint,
although labelled as a derivative suit, is actually a collection suit since the real party in interest is not
SMBI, but Nancy and Theodore:

The cause of action does not devolve on the corporation as the alleged harm or wrong pertains to the
right of the Sps. Theodore and Nancy Ang, as creditors, to collect the amount allegedly owed to them. x x x

xxxx
That the instant suit is for the benefit of a non-stockholder and not the corporation is obvious when the
primary relief prayed for in the Complaint which is for the defendants "to pay the amount of Php
60,114,673.62 plus interest which is 50% of the loan obligations of plaintff [SMBI] to its creditor Sps.
Theodore and Nancy Ang." Otherwise stated, the instant suit is nothing but a complaint for sum of money
shamelessly masked as a derivative suit.21

Rachel also argued that the Complaint failed to allege that Juanito "exerted all reasonable efforts to
exhaust all intra-corporate remedies available under the articles of incorporation, by-laws, laws or rules
governing the corporation to obtain the relief he desires," as required by the Interim Rules.

During cross-examination, Juanito admitted that there was no prior demand for accounting or liquidation
nor any written objection to SMBI’s increase of capital stock. He also conceded that the loan was
extended by persons who are not stockholders of SMBI. Thus, Rachel filed a Motion for Preliminary
Hearing on Affirmative Defenses on 27 November 2009, arguing that in view of Juanito’s admissions, the
Complaint should be dismissed pursuant to Section 1 of the Interim Rules. Juanito filed his Opposition
thereto on 8 January 2010,22 arguing that applying this Court’s ruling in Hi-Yield Realty, Inc. v. Court of
Appeals,23 the requirement for exhaustion of intra-corporate remedies is no longer needed when the
corporation itself is "under the complete control of the persons against whom the suit is filed." Juanito
also alleged that he and Anecita were deceived into signing checks to pay off bogus loans purportedly
extended by Rachel’s relatives in favor of SMBI. Some of the checks were payable to cash, and were
allegedly deposited in Rachel’s personal account.24 He also claimed that Rachel’s Motion is disallowed
under the Interim Rules.

On 9 February 2009, Juanito moved that Rachel and her daughter, Em Ang (Em), as well as their counsel,
Atty. Filomeno Tan, Jr. (Atty. Tan) be held in contempt. Juanito claimed that on the date the writ of
attachment and break open order were issued, Atty. Tan, accompanied by Rachel and Em, "arrogantly
demanded from the Clerk in charge of Civil Cases that he be furnished a copy of the [said orders] x x x
otherwise he will tear the records of the subject commercial case." Juanito also accused Atty. Tan of
surreptitiously photocopying the said orders prior to service of the summons, Complaint, Writ of
Attachment and Attachment Bond. According to Juanito, the purpose of obtaning a copy of the orders was
to thwart its implementation. Thus, when the authorities proceeded to the SMBI premises to enforce the
orders, they found that the place was padlocked, and that all corporate documents and records were
missing. On 14 December 2010, the Sheriff and other RTC Bacolod employees then filed a Verified
Complaint against Atty. Tan before this Court, which also contained the foregoing allegations.25

Rachel then filed a Reply on 27 January 2010, claiming that Juanito’s reliance on the Hi-Yield case is
misplaced:

The facts x x x of this case are strikingly different from that in Hi-Yield Realty. In that case, the Supreme
Court noted that the complaining stockholder was a minority stockholder. However, in the case at bar,
Juanito Ang is one of the biggest stockholders of [SMBI]. x x x He is a member of [SMBI’s] Board of
Directors and is even the vice-president thereof. Furthermore, in Hi-Yield Realty, the Supreme Court
noted that the complaining stockholder was excluded from the affairs of the corporation. However, the
evidence thus far presented, particularly Juanito Ang’s admission, show that he and his wife, Anecita,
participate in the disbursement of [SMBI’s] funds x x x.26

Juanito filed his Rejoinder on 2 March 2010.

 The Ruling of the RTC Bacolod

On 27 September 2010, the RTC Bacolod issued an Order which stated that:

WHEREFORE, premises considered, the court hereby rules that the present action is a DERIVATIVE SUIT
and the Motion to Dismiss based on Affirmative Defenses raised by defendants is DENIED for lack of
merit.27

The RTC Bacolod found that the issuance of the checks to settle the purported obligations to Rachel’s
relatives, as well as the removal of Nancy as a stockholder in SMBI’s records as filed with the SEC, shows
that Rachel and Roberto committed fraud. The Order likewise stated that the requirement of exhaustion
of intra-corporate remedies is no longer necessary since Rachel and Roberto exercised complete control
over SMBI.

Aggrieved, Rachel filed a Petition for Certiorari with the CA-Cebu.

The Ruling of the CA-Cebu

On 20 September 2011, the CA-Cebu promulgated its Decision which reversed and set aside the Order of
the RTC Bacolod dated 27 September 2010. According to the CA-Cebu, the Complaint filed by Juanito
should be dismissed because it is a harassment suit, and not a valid derivative suit as defined under the
Interim Rules. The CA-Cebu also found that Juanito failed to exhaust intra-corporate remedies and that
the loan extended by Nancy and Theodore was not SMBI’s corporate obligation. There is nothing on
record to show that non-payment of the loan will result in any damage or prejudice to SMBI.

Juanito then filed a Motion for Reconsideration with Prayer for Voluntary Inhibition on 28 October 2011.
In his Motion, Juanito pointed out that Rachel filed her Petition for Certiorari without previously filing a
Motion for Reconsideration, warranting the dismissal of the said Petition. The CA-Cebu denied the
Motion.

Hence, this petition.

The Issues

The issues raised in the instant petition are:

<
p align="justify">I. Whether based on the allegations of the complaint, the nature of the case is one
of a derivative suit or not.

Corollary to the above, whether the Honorable Court of Appeals erred x x x in ordering the
dismissal of the Complaint on the ground that the case is not a derivative suit.

II. Whether the Honorable Court of Appeals x x x seriously erred in considering evidence aliunde,
that is, other than the four corners of the complaint, in determining the nature of the complaint, in
utter violation of the doctrine that the jurisdiction is determined by law and allegations of the
complaint alone.
 III. Granting arguendo, but without necessarily admitting that the complaint is not one of a
derivative suit, but only an ordinary civil action, whether the Honorable Court of Appeals x x x
gravely erred in dismissing the petition entirely, when the Regional Trial Court a quo has
jurisdiction also over the case as an ordinary civil action, and can just proceed to hear the same as
such.28

The Ruling of this Court

The petition has no merit.

We uphold the CA-Cebu’s finding that the Complaint is not a derivative suit. A derivative suit is an action
brought by a stockholder on behalf of the corporation to enforce corporate rights against the
corporation’s directors, officers or other insiders.29 Under Sections 2330 and 3631 of the Corporation Code,
the directors or officers, as provided under the by-laws,32 have the right to decide whether or not a
corporation should sue. Since these directors or officers will never be willing to sue themselves, or
impugn their wrongful or fraudulent decisions, stockholders are permitted by law to bring an action in
the name of the corporation to hold these directors and officers accountable.33 In derivative suits, the real
party ininterest is the corporation, while the stockholder is a mere nominal party.

This Court, in Yu v. Yukayguan,34 explained:

The Court has recognized that a stockholder’s right to institute a derivative suit is not based on any
express provision of the Corporation Code, or even the Securities Regulation Code, but is impliedly
recognized when the said laws make corporate directors or officers liable for damages suffered by the
corporation and its stockholders for violation of their fiduciary duties. Hence, a stockholder may sue for
mismanagement, waste or dissipation of corporate assets because of a special injury to him for which he
is otherwise without redress. In effect, the suit is an action for specific performance of an obligation owed
by the corporation to the stockholders to assist its rights of action when the corporation has been put in
default by the wrongful refusal of the directors or management to make suitable measures for its
protection. The basis of a stockholder’s suit is always one in equity. However, it cannot prosper without
first complying with the legal requisites for its institution. (Emphasis in the original)

Section 1, Rule 8 of the Interim Rules imposes the following requirements for derivative suits:

(1) The person filing the suit must be a stockholder or member at the time the acts or transactions
subject of the action occurred and the time the action was filed;

(2) He must have exerted all reasonable efforts, and alleges the same with particularity in the
complaint, to exhaust all remedies available under the articles of incorporation, by-laws, laws or
rules governing the corporation or partnership to obtain the relief he desires;

(3) No appraisal rights are available for the act or acts complained of; and

(4) The suit is not a nuisance or harassment suit.

Applying the foregoing, we find that the Complaint is not a derivative suit. The Complaint failed to show
how the acts of Rachel and Roberto resulted in any detriment to SMBI. The CA-Cebu correctly concluded
that the loan was not a corporate obligation, but a personal debt of the Ang brothers and their spouses.
The check was issued to "Juanito Ang and/or Anecita Ang and/or Roberto Ang and/or Rachel Ang" and
not SMBI. The proceeds of the loan were used for payment of the obligations of the other corporations
owned by the Angs as well as the purchase of real properties for the Ang brothers. SMBI was never a
party to the Settlement Agreement or the Mortgage. It was never named as a co-debtor or guarantor of
the loan. Both instruments were executed by Juanito and Anecita in their personal capacity, and not in
their capacity as directors or officers of SMBI. Thus, SMBI is under no legal obligation to satisfy the
obligation.

The fact that Juanito and Anecita attempted to constitute a mortgage over "their" share in a corporate
asset cannot affect SMBI. The Civil Code provides that in order for a mortgage to be valid, the mortgagor
must be the "absolute owner of the thing x x x mortgaged."35 Corporate assets may be mortgaged by
authorized directors or officers on behalf of the corporation as owner, "as the transaction of the lawful
business of the corporation may reasonably and necessarily require."36 However, the wording of the
Mortgage reveals that it was signed by Juanito and Anecita in their personal capacity as the "owners" of a
pro-indiviso share in SMBI’s land and not on behalf of SMBI:

This Mortgage is made and executed by and between:

Spouses JUANITO and ANECITA ANG, of legal age, Filipino citizens, residents of Sunrise Marketing
Building at Hilado Street, Capitol Shopping Center, Bacolod City, hereinafter referred to as the
MORTGAGORS;

Spouses THEODORE and NANCY ANG, x x x hereinafter referred to as the MORTGAGEES represented in
this instance through their attorney-in-fact, Mr. Kenneth Locsin;

xxxx

In order to ensure payment x x x the MORTGAGORS hereby CONVEY unto the MORTGAGEES by way of
EXTRA-JUDICIAL REAL ESTATE MORTGAGE their 50% rights and interests over the following real
properties to wit:

a. Those registered in the name of SUNRISE MARKETING (BACOLOD), INC. x x x

x x x x37 (Emphasis supplied)

Juanito and Anecita, as stockholders of SMBI, are not co-owners of SMBI assets. They do not own pro-
indiviso shares, and therefore, cannot mortgage the same except in their capacity as directors or officers
of SMBI.

We also find that there is insufficient evidence to suggest that Roberto and Rachel fraudulently and
wrongfully removed Nancy as a stockholder in SMBI’s reportorial requirements. As early as 2005, when
SMBI increased its capital stock, Juanito and Anecita already knew that Nancy was not listed as a
stockholder of SMBI. However, they attempted to rectify the error only in 2009, when the Complaint was
filed. That it took four years for them to make any attempt to question Nancy’s exclusion as stockholder
negates their allegation of fraud.
Since damage to the corporation was not sufficiently proven by Juanito, the Complaint cannot be
considered a bona fide derivative suit. A derivative suit is one that seeks redress for injury to the
corporation, and not the stockholder. No such injury was proven in this case.

The Complaint also failed to allege that all available corporate remedies under the articles of
incorporation, by-laws, laws or rules governing the corporation were exhausted, as required under the
Interim Rules. The CA-Cebu, applying our ruling in the Yu case, pointed out:

x x x No written demand was ever made for the board of directors to address private respondent Juanito
Ang’s concerns.1âwphi1

The fact that [SMBI] is a family corporation does not exempt private respondent Juanito Ang from
complying with the Interim Rules. In the x x x Yu case, the Supreme Court held that a family corporation
is not exempt from complying with the clear requirements and formalities of the rules for filing a
derivative suit. There is nothing in the pertinent laws or rules which state that there is a distinction
between x x x family corporations x x x and other types of corporations in the institution by a stockholder
of a derivative suit.38

Furthermore, there was no allegation that there was an attempt to remove Rachel or Roberto as director
or officer of SMBI, as permitted under the Corporation Code and the by-laws of the corporation. Thus, the
Complaint failed to satisfy the requirements for a derivative suit under the

Interim Rules.

The CA-Cebu correctly ruled that the Complaint should be dismissed since it is a nuisance or harassment
suit under Section 1(b) of the Interim Rules. Section 1(b) thereof provides:

b) Prohibition against nuisance and harassment suits. - Nuisance and harassment suits are prohibited. In
determining whether a suit is a nuisance or harassment suit, the court shall consider, among others, the
following:

(1) The extent of the shareholding or interest of the initiating stockholder or member;

(2) Subject matter of the suit;

(3) Legal and factual basis of the complaint;

(4) Availability of appraisal rights for the act or acts complained of; and

(5) Prejudice or damage to the corporation, partnership, or association in relation to the relief
sought.

In case of nuisance or harassment suits, the court may, motu proprio or upon motion, forthwith dismiss
the case.

Records show that Juanito, apart from being Vice President, owns the highest number of shares, equal to
those owned by Roberto. Also, as explained earlier, there appears to be no damage to SMBI if the loan
extended by Nancy and Theodore remains unpaid. The CA-Cebu correctly concluded that "a plain reading
of the allegations in the Complaint would readily show that the case x x x was mainly filed to collect a
debt allegedly extended by the spouses Theodore and Nancy Ang to [SMBI]. Thus, the aggrieved party is
not SMBI x x x but the spouses Theodore and Nancy Ang, who are not even x x x stockholders."39

WHEREFORE, we DENY the petition. We AFFIRM the 20 September 2011 Decision of the Court of
Appeals-Cebu in CA-G.R. SP No. 05546.

SO ORDERED.

Republic of the Philippines

SUPREME COURT
Manila

FIRST DIVISION

G.R. No. 174353 September 10, 2014

NESTOR CHING and ANDREW WELLINGTON, Petitioners,

vs.
SUBIC BAY GOLF AND COUNTRY CLUB, INC., HU HO HSIU LIEN alias SUSAN HU, HU TSUNG CHIEH
alias JACK HU, HU TSUNG HUI, HU TSUNG TZU and REYNALD R. SUAREZ, Respondents.

DECISION

LEONARDO-DE CASTRO, J.:

This is a Petition for Review on Certiorari under Rule 45 of the Rules of Court seeking the review of the
Decision1dated October 27, 2005 of the Court of Appeals in CA-G.R. CV No. 81441, which affirmed the
Order2 dated July 8, 2003 of the Regional Trial Court (RTC), Branch 72 of Olongapo City in Civil Case No.
03-001 dismissing the Complaint filed by herein petitioners.

On February 26, 2003, petitioners Nestor Ching and Andrew Wellington filed a Complaint3 with the RTC
of Olongapo City on behalf of the members of Subic Bay Golf and Country Club, Inc. (SBGCCI) against the
said country club and its Board of Directors and officers under the provisions of Presidential Decree No.
902-A in relation to Section 5.2 of the Securities Regulation Code. The Subic Bay Golfers and Shareholders
Incorporated (SBGSI), a corporation composed of shareholders of the defendant corporation, was also
named as plaintiff. The officers impleaded as defendants were the following: (1) itsPresident, Hu Ho Hsiu
Lien alias Susan Hu; (2) its treasurer, Hu Tsung Chieh alias Jack Hu; (3) corporate secretary Reynald
Suarez; and (4) directors Hu Tsung Hui and Hu Tsung Tzu. The case was docketed as Civil Case No. 03-
001. The complaint alleged that the defendant corporation sold shares to plaintiffs at US$22,000.00 per
share, presenting to them the Articles of Incorporation which contained the following provision:

No profit shall inure to the exclusive benefit of any of its shareholders, hence, no dividends shall be
declared in their favor. Shareholders shall be entitled only to a pro-rata share of the assets of the Club at
the time of its dissolution or liquidation.4

However, on June 27, 1996, an amendment to the Articles of Incorporation was approved by the
Securities and Exchange Commission (SEC), wherein the above provision was changed as follows:
No profit shall inure to the exclusive benefit of any of its shareholders, hence, no dividends shall be
declared in their favor. In accordance with the Lease and Development Agreement by and between Subic
Bay Metropolitan Authority and The Universal International Group of Taiwan, where the golf courseand
clubhouse component thereof was assigned to the Club, the shareholders shall not have proprietary
rights or interests over the properties of the Club.5x x x. (Emphasis supplied.)

Petitioners claimed in the Complaint that defendant corporation did not disclose to them the above
amendment which allegedly makes the shares non-proprietary, as it takes away the rightof the
shareholders to participate in the pro-rata distribution of the assets of the corporation after its
dissolution. According to petitioners, this is in fraud of the stockholders who only discovered the
amendment when they filed a case for injunction to restrain the corporation from suspending their rights
to use all the facilities of the club. Furthermore, petitioners alleged that the Board of Directors and
officers of the corporation did not call any stockholders’ meeting from the time of the incorporation, in
violation of Section 50 of the Corporation Code and the By-Laws of the corporation. Neither did the
defendant directors and officers furnish the stockholders with the financial statements of the corporation
nor the financial report of the operation of the corporation in violation of Section 75 of the Corporation
Code. Petitioners also claim that on August 15, 1997, SBGCCI presented to the SEC an amendment to the
By-Laws of the corporation suspending the voting rights of the shareholders except for the five founders’
shares. Said amendment was allegedly passed without any stockholders’ meeting or notices to the
stockholders in violation of Section 48 of the Corporation Code.

The Complaint furthermore enumerated several instances of fraud in the management of the corporation
allegedly committed by the Board of Directors and officers of the corporation, particularly:

a. The Board of Directors and the officers of the corporation did not indicate in its financial report
for the year 1999 the amount of ₱235,584,000.00 collected from the subscription of 409
shareholders who paid U.S.$22,000.00 for one (1) share of stock at the then prevailing rate of
₱26.18 to a dollar. The stockholders were not informed how these funds were spent or its
whereabouts.

b. The Corporation has been collecting green fees from the patrons of the golf course at an average
sum of ₱1,600.00 per eighteen (18) holes but the income is not reported in their yearly report. The
yearly report for the year 1999 contains the report of the Independent Public Accountant who
stated that the company was incorporated on April 1, 1996 but has not yet started its regular
business operation. The golf course has been in operation since 1997 and as such has collected
green fees from non-members and foreigners who played golf in the club. There is no financial
report as to the income derived from these sources.

c. There is reliable information that the Defendant Corporation has not paid its rentals to the Subic
Bay Metropolitan Authority which up to the present is estimated to be not less than one (1)
million U.S. Dollars. Furthermore, the electric billings of the corporation [have] not been paid
which amounts also to several millions of pesos.

d. That the Supreme Court sustained the pre-termination of its contract with the SBMA and
presently the club is operating without any valid contract with SBMA. The defendant was ordered
by the Supreme Court to yield the possession, the operation and the management of the golf
course to SBMA. Up to now the defendants [have] defied this Order.
 e. That the value of the shares of stock of the corporation has drastically declined from its issued
value of U.S.$22,000.00 to only Two Hundred Thousand Pesos, (₱200,000.00) Philippine Currency.
The shareholders [have] lost in terms ofinvestment the sum estimated to be more than two
hundred thousand pesos.This loss is due to the fact that the Club is mismanaged and the golf
course is poorly maintained. Other amenities of the Club has (sic) not yet been constructed and
are not existing despite the lapse of morethan five (5) years from the time the stocks were offered
for sale to the public. The cause of the decrease in value of the sharesof stocks is the fraudulent
mismanagement of the club.6

Alleging that the stockholders suffered damages as a result of the fraudulent mismanagement of the
corporation, petitioners prayed in their Complaint for the following:

WHEREFORE, it is most respectfully prayed that upon the filing of this case a temporary restraining order
be issued enjoining the defendants from acting as Officers and Board of Directors of the Corporation.
After hearing[,] a writ of preliminary injunction be issued enjoining defendants to act as Board of
Directors and Officers of the Corporation. In the meantime a Receiver be appointed by the Court to act as
such until a duly constituted Board of Directors and Officers of the Corporation be elected and qualified.

That defendants be ordered to pay the stockholders damages in the sum of Two Hundred Thousand
Pesos each representing the decrease in value of their shares of stocks plus the sum of ₱100,000.00 as
legal expense and attorney’s fees, as well as appearance fee of ₱4,000.00 per hearing.7

In their Answer, respondents specifically denied the allegations of the Complaint and essentially averred
that:

(a) The subscriptions of the 409 shareholders were paid to Universal International Group
Development Corporation (UIGDC), the majority shareholder of SBGCCI, from whom plaintiffs and
other shareholders bought their shares;8

(b) Contrary to the allegations in the Complaint, said subscriptions were reflected inSBGCCI’s
balance sheets for the fiscal years 1998 and 1999;9

(c) Plaintiffs were never presented the original Articles of Incorporation of SBGCCI since their
shares were purchased after the amendment of the Articles of Incorporation and such amendment
was publicly known to all members prior and subsequent to the said amendment;10

(d) Shareholders’ meetingshad been held and the corporate acts complained of were approved at
shareholders’ meetings;11

(e) Financial statements of SBGCCI had always been presented to shareholders justifiably
requesting copies;12

(f) Green fees collected were reported in SBGCCI’s audited financial statements;13

(g) Any unpaid rentals are the obligation of UIGDC with SBMA and SBGCCI continued to operate
under a valid contract with the SBMA;14 and
 (h) SBGCCI’s Board of Directors was not guilty of any mismanagement and in fact the value of
members’ shares have increased.15

Respondents further claimed by way ofdefense that petitioners failed (a) to show that it was authorized
by SBGSI to file the Complaint on the said corporation’s behalf; (b) to comply with the requisites for filing
a derivative suit and an action for receivership; and (c) to justify their prayer for injunctive relief since
the Complaint may be considered a nuisance or harassment suit under Section 1(b), Rule1 of the Interim
Rules of Procedure for Intra-Corporate Controversies.16 Thus, they prayed for the dismissal of the
Complaint.

On July 8, 2003, the RTC issued an Order dismissing the Complaint. The RTC held that the action is a
derivative suit, explaining thus:

The Court finds that this case is intended not only for the benefit of the two petitioners. This is
apparentfrom the caption of the case which reads Nestor Ching, Andrew Wellington and the Subic Bay
Golfers and Shareholders, Inc., for and in behalf of all its members as petitioners. This is also shown in the
allegations of the petition[.] x x x.

On the bases of these allegations of the petition, the Court finds that the case is a derivative suit. Being a
derivative suit in accordance with Rule 8 of the Interim Rules, the stockholders and members may bring
an action in the name of the corporation or association provided that he (the minority stockholder)
exerted all reasonable efforts and allege[d] the same with particularity in the complaint to exhaust of
(sic) all remedies available under the articles of incorporation, by-laws or rules governing the
corporation or partnership to obtain the reliefs he desires. An examination of the petition does not show
any allegation that the petitioners applied for redress to the Board of Directors of respondent
corporation there being no demand, oralor written on the respondents to address their complaints.
Neither did the petitioners appl[y] for redress to the stockholders of the respondent corporation and
ma[k]e an effort to obtain action by the stockholders as a whole. Petitioners should have asked the Board
of Directors of the respondent corporation and/or its stockholders to hold a meeting for the taking up of
the petitioners’ rights in this petition.17

The RTC held that petitioners failed to exhaust their remedies within the respondent corporation itself.
The RTC further observed that petitioners Ching and Wellington were not authorized by their co-
petitioner Subic Bay Golfers and Shareholders Inc. to filethe Complaint, and therefore had no personality
to file the same on behalf ofthe said shareholders’ corporation. According to the RTC, the shareholdings of
petitioners comprised of two shares out of the 409 alleged outstanding shares or 0.24% is an indication
that the action is a nuisance or harassment suit which may be dismissed either motu proprio or upon
motion in accordance with Section 1(b) of the Interim Rules of Procedure for Intra-Corporate
Controversies.18

Petitioners Ching and Wellington elevated the case to the Court of Appeals, where it was docketed as CA-
G.R. CV No. 81441. On October 27, 2005, the Court of Appeals rendered the assailed Decision affirming
that of the RTC.

Hence, petitioners resort to the present Petition for Review, wherein they argue that the Complaint they
filed with the RTC was not a derivative suit. They claim that they filed the suit in their own right as
stockholders against the officers and Board of Directors of the corporation under Section 5(a) of
Presidential DecreeNo. 902-A, which provides:
Sec. 5. In addition tothe regulatory and adjudicative functions of the Securities and Exchange Commission
over corporations, partnerships and other forms of associations registered with it as expressly granted
under existing laws and decrees, it shall have original and exclusive jurisdiction to hear and decide cases
involving:

(a) Devices or schemes employed by or any acts of the board of directors, business associates, its
officers or partners, amounting to fraud and misrepresentation which may be detrimental to the
interest of the public and/or of the stockholders, partners, members of associations or
organizations registered with the Commission.

According to petitioners, the above provision (which should be read in relation to Section 5.2 of the
Securities Regulation Code which transfers jurisdiction over such cases to the RTC) allows any
stockholder to file a complaint against the Board of Directors for employing devices or schemes
amounting to fraud and misrepresentation which is detrimental to the interest of the public and/or the
stockholders.

In the alternative, petitioners allege that if this Court rules that the Complaint is a derivative suit, it
should nevertheless reverse the RTC’s dismissal thereof on the ground of failure to exhaust remedies
within the corporation. Petitioners cite Republic Bank v. Cuaderno19 wherein the Court allowed the
derivative suit even without the exhaustion of said remedies as it was futile to do so since the Board
ofDirectors were all members of the same family. Petitioners also point out that in Cuadernothis Court
held that the fact that therein petitioners had only one share of stock does not justify the denial of the
relief prayed for.

To refute the lower courts’ ruling that there had been non-exhaustion of intra-corporate remedies on
petitioners’ part, they claim that they filed in Court a case for Injunction docketed as Civil Case No. 103-0-
01, to restrain the corporation from suspending their rights to use all the facilities of the club, on the
ground that the club cannot collect membership fees until they have completed the amenities as
advertised when the shares of stock were sold to them. They allegedly asked the Club to produce the
minutes of the meeting of the Board of Directors allowing the amendments of the Articles of
Incorporation and By-Laws. Petitioners likewise assail the dismissal of the Complaint for being a
harassment ornuisance suit before the presentation of evidence. They claim that the evidence they were
supposed to present will show that the members of the Board of Directors are not qualified managers of a
golf course.

We find the petition unmeritorious.

At the outset, it should be noted thatthe Complaint in question appears to have been filed only by the two
petitioners, namely Nestor Ching and Andrew Wellington, who each own one stock in the respondent
corporation SBGCCI. While the caption of the Complaint also names the "Subic Bay Golfers and
Shareholders Inc. for and in behalf of all its members," petitioners did not attach any authorization from
said alleged corporation or its members to file the Complaint. Thus, the Complaint is deemed filed only by
petitioners and not by SBGSI.

On the issue of whether the Complaint is indeed a derivative suit, we are mindful of the doctrine that the
nature of an action, as well as which court or body has jurisdiction over it, isdetermined based on the
allegations contained in the complaint of the plaintiff, irrespective of whether or not the plaintiff is
entitled to recover upon all or some of the claims asserted therein.20
We have also held that the body rather than the title of the complaint determines the nature of an
action.21

In Cua, Jr. v. Tan,22 the Court previously elaborated on the distinctions among a derivative suit,
anindividual suit, and a representative or class suit:

A derivative suit must be differentiated from individual and representative or class suits, thus:

"Suits by stockholders or members of a corporation based on wrongful or fraudulent acts of directors or

other persons may be classified intoindividual suits, class suits, and derivative suits. Where a stockholder
or member is denied the right of inspection, his suit would be individual because the wrong is done to
him personally and not to the other stockholders or the corporation. Where the wrong is done to a group
of stockholders, as where preferred stockholders’ rights are violated, a class or representative suitwill be
proper for the protection of all stockholders belonging to the same group. But where the acts complained
of constitute a wrong to the corporation itself, the cause of action belongs to the corporation and not to
the individual stockholder or member. Although in most every case of wrong to the corporation, each
stockholder is necessarily affected because the value of his interest therein would be impaired, this fact of
itself is not sufficient to give him an individual cause of action since the corporation is a person distinct
and separate from him, and can and should itself sue the wrongdoer. Otherwise, not only would the
theory of separate entity be violated, but there would be multiplicity of suits as well as a violation of the
priority rights of creditors. Furthermore,there is the difficulty of determining the amount of damages that
should be paid to each individual stockholder.

However, in cases of mismanagement where the wrongful acts are committed by the directors or trustees
themselves, a stockholder or member may find that he has no redress because the former are vested by
law with the right to decide whether or notthe corporation should sue, and they will never be willing to
sue themselves. The corporation would thus be helpless to seek remedy. Because of the frequent
occurrence of such a situation, the common law gradually recognized the right of a stockholder to sue on
behalf of a corporation in what eventually became known as a "derivative suit." It has been proven to be
an effective remedy of the minority against the abuses of management. Thus, an individual stockholder is
permitted to institute a derivative suit on behalf of the corporation wherein he holds stock in order to
protect or vindicate corporate rights, whenever officials of the corporation refuse to sue orare the ones to
be sued or hold the control of the corporation. In such actions, the suing stockholder is regarded as the
nominal party, with the corporation as the party in interest."

xxxx

Indeed, the Court notes American jurisprudence to the effect that a derivative suit, on one hand, and
individual and class suits, on the other, are mutually exclusive, viz.:

"As the Supreme Court has explained: "A shareholder’s derivative suit seeks to recover for the benefit of
the corporation and its whole body of shareholders when injury is caused to the corporation that may not
otherwise be redressed because of failureof the corporation to act. Thus, ‘the action is derivative, i.e., in
the corporate right, if the gravamen of the complaint is injury to the corporation, or to the whole body of
its stock and property without any severance or distribution among individual holders, or it seeks to
recover assets for the corporation or to prevent the dissipation of its assets.’ x x x. In contrast, "a
directaction [is one] filed by the shareholder individually (or on behalf of a classof shareholders to which
he or she belongs) for injury to his or her interestas a shareholder. x x x. [T]he two actions are mutually
exclusive: i.e., the right of action and recovery belongs to either the shareholders (direct action) *651 or
the corporation(derivative action)." x x x.

Thus, in Nelson v. Anderson(1999), x x x, the **289 minority shareholder alleged that the other
shareholder of the corporation negligently managed the business, resulting in its total failure. x x x. The
appellate court concluded that the plaintiff could not maintain the suit as a direct action: "Because the
gravamen of the complaint is injury to the whole body of its stockholders, it was for the corporation to
institute and maintain a remedial action. x x x. A derivative action would have been appropriate if its
responsible officials had refused or failed to act." x x x. The court wenton to note that the damages shown
at trial were the loss of corporate profits. x x x. Since "[s]hareholders own neither the property nor the
earnings of the corporation," any damages that the plaintiff alleged that resulted from such loss of
corporate profits "were incidental to the injury to the corporation." (Citations omitted.)

The reliefs sought in the Complaint, namely that of enjoining defendants from acting as officers and Board
of Directors of the corporation, the appointment of a receiver, and the prayer for damages in the amount
of the decrease in the value of the sharesof stock, clearly show that the Complaint was filed to curb the
alleged mismanagement of SBGCCI. The causes of action pleaded by petitioners do not accrue to a single
shareholder or a class of shareholders but to the corporation itself.

However, as minority stockholders, petitioners do not have any statutory right to override the business
judgments of SBGCCI’s officers and Board of Directors on the ground of the latter’s alleged lackof
qualification to manage a golf course. Contraryto the arguments of petitioners, Presidential Decree No.
902-A, which is entitled REORGANIZATION OF THE SECURITIES AND EXCHANGE COMMISSION WITH
ADDITIONAL POWERS AND PLACING THE SAID AGENCY UNDER THE ADMINISTRATIVE SUPERVISION
OF THE OFFICE OF THE PRESIDENT, does not grant minority stockholders a cause of action against
waste and diversion by the Board of Directors, but merely identifies the jurisdiction of the SEC over
actionsalready authorized by law or jurisprudence. It is settled that a stockholder’s right to institute a
derivative suit is not based on any express provisionof the Corporation Code, or even the Securities
Regulation Code, but is impliedly recognized when the said laws make corporate directors or officers
liable for damages suffered by the corporation and its stockholders for violation of their fiduciary
duties.23

At this point, we should take note that while there were allegations in the Complaint of fraud in their
subscription agreements, such as the misrepresentation of the Articles of Incorporation, petitioners do
not pray for the rescission of their subscription or seekto avail of their appraisal rights. Instead, they ask
that defendants be enjoined from managing the corporation and to pay damages for their
mismanagement. Petitioners’ only possible cause of action as minority stockholders against the actions of
the Board of Directors is the common law right to file a derivative suit. The legal standing of minority
stockholders to bring derivative suits is not a statutory right, there being no provision in the Corporation
Code or related statutes authorizing the same, but is instead a product of jurisprudence based on equity.
However, a derivative suit cannot prosper without first complying with the legal requisites for its
institution.24

Section 1, Rule 8 of the Interim Rules of Procedure Governing IntraCorporate Controversies imposes the
following requirements for derivative suits:

(1) He was a stockholder or member at the time the acts or transactions subject of the action
occurred and at the time the action was filed;
 (2) He exerted all reasonable efforts, and alleges the same with particularity in the complaint, to
exhaust all remedies available under the articles of incorporation, by-laws, laws or rules
governing the corporation or partnership to obtain the relief he desires;

(3) No appraisal rights are available for the act or acts complained of; and

(4) The suit is not a nuisance or harassment suit.

The RTC dismissed the Complaint for failure to comply with the second and fourth requisites above.

Upon a careful examination of the Complaint, this Court finds that the same should not have been
dismissed on the ground that it is a nuisance or harassment suit. Although the shareholdings of
petitioners are indeed only two out of the 409 alleged outstanding shares or 0.24%, the Court has held
that it is enough that a member or a minority of stockholders file a derivative suit for and in behalf of a
corporation.25

With regard, however, to the second requisite, we find that petitioners failed to state with particularity in
the Complaint that they had exerted all reasonable efforts to exhaust all remedies available under the
articles of incorporation, by-laws, and laws or rules governing the corporation to obtain the relief they
desire. The Complaint contained no allegation whatsoever of any effort to avail of intra-corporate
remedies. Indeed, even if petitioners thought it was futile to exhaust intra-corporate remedies, they
should have stated the same in the Complaint and specified the reasons for such opinion. Failure to do so
allows the RTC to dismiss the Complaint, even motu proprio, in accordance with the Interim Rules. The
requirement of this allegation in the Complaint is not a useless formality which may be disregarded at
will.1âwphi1 We ruled in Yu v. Yukayguan26:

The wordings of Section 1, Rule8 of the Interim Rules of Procedure Governing Intra-Corporate
Controversies are simple and do not leave room for statutory construction. The second paragraph thereof
requires that the stockholder filing a derivative suit should have exerted all reasonable efforts to exhaust
all remedies availableunder the articles of incorporation, by-laws, laws or rules governing the
corporation or partnership to obtain the relief he desires; and to allege such fact with particularityin the
complaint. The obvious intent behind the rule is to make the derivative suit the final recourse of the
stockholder, after all other remedies to obtain the relief sought had failed.

WHEREFORE, the Petition for Review is hereby DENIED. The Decision of the Court of Appeals in CA-G.R.
CV No. 81441 which affirmed the Order of the Regional Trial Court (RTC) of Olongapo City dismissing the
Complaint filed thereon by herein petitioners is AFFIRMED.

SO ORDERED.

Republic of the Philippines

SUPREME COURT
Manila

SECOND DIVISION

G.R. No. 172843 September 24, 2014

ALFREDO L. VILLAMOR, JR., Petitioner,
vs.
JOHN S. UMALE, in substitution of HERNANDO F. BALMORES, Respondent.

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

G.R. No. 172881

ODIVAL E. REYES, HANS M. PALMA and DOROTEO M. PANGILINAN, Petitioners,

vs.
HERNANDO F. BALMORES, Respondent.

DECISION

LEONEN, J.:

Before us is a petition for review on certiorari1 under Rule 45 of the Rules of Court, assailing the
decision2 of the Court of Appeals dated March 2, 2006 and its resolution3 dated May 29, 2006, denying
petitioners’ motions for reconsideration. The Court of Appeals placed Pasig Printing Corporation (PPC)
under receivership and appointed an interim management committee for the corporation. 4

MC Home Depot occupied a prime property (Rockland area) in Pasig. The property was part of the area
owned by Mid-Pasig Development Corporation (Mid-Pasig).5

On March 1, 2004, PPC obtained an option to lease portions of MidPasig’s property, including the
Rockland area.6

On November 11, 2004, PPC’s board of directors issued a resolution7 waiving all its rights, interests, and
participation in the option to lease contract in favor of the law firm of Atty. Alfredo Villamor, Jr.
(Villamor), petitioner in G.R. No. 172843. PPC received no consideration for this waiver in favor of
Villamor’s law firm.8

On November 22, 2004, PPC, represented by Villamor, entered into a memorandum of agreement (MOA)
with MC Home Depot.9 Under the MOA, MC Home Depot would continue to occupy the area as PPC’s
sublessee for four (4) years, renewable for another four (4) years, at a monthly rental of ₱4,500,000.00
plus goodwill of ₱18,000,000.00.10

In compliance with the terms of the MOA, MC Home Depot issued 20 post-dated checks representing
rentalpayments for one year and the goodwill money. The checks were given to Villamor who did not
turn these or the equivalent amount over to PPC, upon encashment.11

Hernando Balmores, respondent inG.R. No. 172843 and G.R. No. 172881 and a stockholder and director
of PPC,12wrote a letter addressed to PPC’s directors, petitioners inG.R. No. 172881, on April 4, 2005. 13 He
informed them that Villamor should bemade to deliver to PPC and account for MC Home Depot’s checks
or their equivalent value.14

Due to the alleged inaction of the directors, respondent Balmores filed with the Regional Trial Court an
intra-corporate controversy complaint under Rule 1, Section 1(a)(1) of the Interim Rules for Intra-
Corporate Controversies15 (Interim Rules) against petitioners for their alleged devices or schemes
amounting to fraud or misrepresentation "detrimental to the interest of the corporation and its
stockholders."16

Respondent Balmores alleged in his complaint that because of petitioners’ actions, PPC’s assets were ". . .
not only in imminent danger, but have actually been dissipated,lost, wasted and destroyed."17

Respondent Balmores prayed that a receiver be appointed from his list of nominees.18 He also prayed for
petitioners’ prohibition from "selling, encumbering, transferring or disposing in any manner any of
[PPC’s] properties, including the MC Home [Depot] checks and/or their proceeds."19 He prayed for the
accounting and remittance to PPC of the MC Home Depot checks or their proceeds and for the annulment
of the board’s resolution waiving PPC’s rights in favor of Villamor’s law firm.20

Ruling of the Regional Trial Court

In its resolution21 dated June 15, 2005, the Regional Trial Court denied respondent Balmores’ prayer for
the appointment of a receiver or the creation of a management committee.The dispositive portion reads:

WHEREFORE, premises considered the appointment of a Receiver and the creation of a Management
Committee applied for by plaintiff Hernando F. Balmores are, as they are hereby, DENIED.22 (Emphasis in
the original)

According to the trial court, PPC’s entitlement to the checks was doubtful. The resolution issued by PPC’s
board of directors, waiving its rights to the option to lease contract infavor of Villamor’s law firm, must be
accorded prima facie validity.23

The trial court also noted that there was a pending case filed by one Leonardo Umale against Villamor,
involving the same checks. Umale was also claiming ownership of the checks.24 This, according to the trial
court, weakened respondent Balmores’ claim that the checks were properties of PPC.25

The trial court also found that there was "no clear and positive showing of dissipation, loss, wastage, or
destruction of [PPC’s] assets . . . [that was] prejudicial to the interestof the minority stockholders,
partieslitigants or the general public."26 The board’s failure to recover the disputed amounts was not an
indication of mismanagement resulting in the dissipation of assets.27

The trial court noted that PPC was earning substantial rental income from its other sub-lessees.28

The trial court added that the failure to implead PPCwas fatal. PPC should have been impleaded as an
indispensable party, without which, there would be no final determination of the action. 29

Ruling of the Court of Appeals

Respondent Balmores filed with the Court of Appeals a petition for certiorari under Rule 65 of the Rules
of Court.30He assailed the decision of the trial court, which denied his "application for the appointment of
a [r]eceiver and the creation ofa [m]anagement [c]ommittee."31
In the decision promulgated on March 2, 2006, the Court of Appeals gave due course to respondent
Balmores’ petition. It reversed the trial court’s decision, and issued a new order placing PPC under
receivership and creating an interim management committee.32 The dispositive portion reads:

WHEREFORE, premises considered, the instant petition is hereby GRANTED and GIVEN DUE COURSE and
the June 15, 2005 Order/Resolution of the commercial court, the Regional Trial Court of Pasig City,
Branch 167, in S.E.C. Case No. 05-62, is hereby REVERSED and SET ASIDE and a NEW ORDER is ISSUED
that, during the pendency of the derivative suit, untiljudgment on the merits is rendered by the
commercial court, in order toprevent dissipation, loss, wastage or destruction of the assets, in order to
prevent paralization of business operations which may be prejudicial to the interest of stockholders,
parties-litigants or the general public, and in order to prevent violations of the corporation laws: (1)
Pasig Printing Corporation (PPC) is hereby placed under receivership pursuant to the Rules Governing
Intra-Corporate Controversies under R.A. No. 8799;(2) an Interim Management Committee is hereby
created for Pasig Printing Corporation (PPC) composed of Andres Narvasa, Jr., Atty. Francis Gustilo and
Ms Rosemarie Salvio-Leonida; (3) the interim management committee is hereby directed to forthwith,
during the pendency of the derivative suit until judgment on the merits is rendered by the commercial
court, to: (a) take over the business of Pasig Printing Corporation (PPC), (b) take custody and control of
all assets and properties owned and possessed by Pasig Printing Corporation (PPC), (c) take the place of
the management and the board of directors of Pasig Printing Corporation (PPC), (d) preserve Pasig
Printing Corporation’s assets and properties, (e) stop and prevent any disposal, in any manner, of any of
the properties of Pasig Printing Corporation (PPC) including the MC Home Depot checks and/or their
proceeds; and (3) [sic] restore the status quo ante prevailing by directing respondents their associates
and agents to account and return to the Interim Management Committee for Pasig Printing Corporation
(PPC) all the money proceeds of the 20 MC Home Depot checks taken by them and to account and
surrender to the Interim Management Committee all subsequent MC Home Depot checks or
proceeds.33(Citation omitted)

The Court of Appeals characterizedthe assailed order/resolution of the trial court as an interlocutory
order that is not appealable.34 In reversing the trial court order/resolution, the Court of Appeals
considered the danger of dissipation, wastage, and loss of PPC’s assets if the review of the trial court’s
judgment would be delayed.35

The Court of Appeals ruled that the case filed by respondent Balmores with the trial court "[was] a
derivative suit because there were allegations of fraud or ultra vires acts . . . by [PPC’s directors]."36

According to the Court of Appeals,the trial court abandoned its duty to the stockholders in a derivative
suit when it refused to appoint a receiver or create a management committee, all during the pendency of
the proceedings. The assailed order ofthe trial court removed from the stockholders their right, in an
intra-corporate controversy, to be allowed the remedy of appointment of a receiverduring the pendency
of a derivative suit, leaving the corporation under the control of an outsider and its assets prone to
dissipation.37 The Court of Appeals also ruled that this amounts to "despotic, capricious, or
whimsicalexercise of judicial power"38 on the part of the trial court.

In justifying its decision to place PPCunder receivership and to create a management committee, the
Court of Appeals stated that the board’s waiver of PPC’s rights in favor ofVillamor’s law firm without any
consideration and its inaction on Villamor’s failure to turn over the proceeds of rental payments to PPC
warrant the creation of a management committee.39 The circumstances resulted in the imminent danger
of loss, waste, or dissipation of PPC’s assets.40
Petitioners filed separatemotions for reconsideration. Both motions were denied by the Court of Appeals
on May 29, 2006. The dispositive portion of the Court of Appeals’ resolution reads:

WHEREFORE, for lack of merit, respondents’ March 10, 2006 and March 20, 2006 Motions for
Reconsideration are hereby DENIED.41

Petitioners filed separatepetitions for review under Rule 45, raising the following threshold issues:

I. Whether the Court of Appeals correctly characterized respondent Balmores’ action as a

derivative suit

II. Whether the Court of Appeals properly placed PPC under receivership and created a receiver or
management committee

PPC’s directors argued that the Court of Appeals erred in characterizing respondent Balmores’ suit as a
derivative suit because of his failure to implead PPC as party in the case. Hence, the appellate court did
not acquire jurisdiction over the corporation, and the appointment of a receiver or management
committee is not valid.42

The directors further argued that the requirements for the appointment of a receiver or management
committee under Rule 943 of the Interim Rules were not satisfied. The directors pointed out that
respondent Balmores failed to prove that the assets of the corporation were in imminent danger of being
dissipated.44

According to the directors, assuming that a receiver or management committee may be appointed in the
case, it is the Regional Trial Court only and not the Court of Appeals that must appoint them.45

Meanwhile, Villamor argued that PPC’s entitlement to the checks or their proceeds was still in dispute. In
a separate civil case against Villamor, a certain Leonardo Umale was claiming ownership of the checks.46

Villamor also argued that the Court of Appeals’ order to place PPC under receivership and to appoint a
management committee does not endanger PPC’s assets because the MC Home Depot checks were not
the only assets of PPC.47 Therefore, it would not affect the operation of PPC or result in its paralysation.48

In his comment, respondent Balmores argued that Villamor’s and the directors’ petitions raise questions
of facts, which cannot be allowed in a petition for review under Rule 45.49

On the appointment of a receiver or management committee, respondent Balmores stated that the ". . .
very practice of waiving assets and income for no consideration can in factlead, not only to the
paralyzation of business, but to the complete loss or cessation of business of PPC[.] It is

precisely because of this fraudulent practice that a receiver/management committee must be appointed
to protect the assets of PPC from further fraudulent acts, devices and schemes."50

The petitions have merit.

I
 Petition for review on
certiorari under Rule 45 was proper

First, we rule on the issue of whether petitioners properly filed a petition for review on certiorari under
Rule 45.

Respondent Balmores argued that the petition raises questions of fact.

Under Rule 45, only questionsof law may be raised.51 There is a question of law "when there is doubt or
controversy as to what the law is on a certain [set] of facts."52 The test is "whether the appellate court can
determine the issue raised without reviewing or evaluating the evidence."53 Meanwhile, there is a
question of fact when there is "doubt . . . as to the truth or falsehood of facts."54 The question must involve
the examination of probative value of the evidence presented.

In this case, petitioners raise issues on the correctness of the Court of Appeals’ conclusions. Specifically,
petitioners ask (1) whether respondent Balmores’ failure to implead PPC in his action with the trial court
was fatal; (2) whether the Court of Appeals correctly characterized respondent Balmores’ action as a
derivative suit; (3) whether the Court of Appeals’ appointment of a management committee was proper;
and (4) whether the Court of Appeals may exercise the power to appoint a management committee.

These are questions of law that may be determined without looking into the evidence presented. The
question of whether the conclusion drawn by the Court of Appeals from a set of facts is correct is a
question of law, cognizable by this court.55

Petitioners, therefore, properly filed a petition for review under Rule 45.

II

Respondent Balmores’ action

in the trial court is not a derivative suit

A derivative suit is an action filed by stockholders to enforce a corporate action.56 It is an exception to the
general rule that the corporation’s power to sue57 is exercised only by the board of directors or
trustees.58

Individual stockholders may be allowed to sue on behalf of the corporation whenever the directors or
officers of the corporation refuse to sue to vindicate the rights of the corporation or are the ones to be
sued and are in control of the corporation.59 It is allowed when the "directors [or officers] are guilty of
breach of . . . trust, [and] not of mere error of judgment."60

In derivative suits, the real party in interest is the corporation, and the suing stockholder is a mere
nominal party.61

Thus, this court noted:

The Court has recognized that a stockholder’s right to institute a derivative suit is not based on any
express provision of the Corporation Code, or even the Securities Regulation Code, but is impliedly
recognized when the said laws make corporate directors or officers liable for damages suffered by the
corporation and its stockholders for violation of their fiduciary duties. In effect, the suit isan action for
specific performance of an obligation, owed by the corporation to the stockholders, to assist its rights of
action when the corporation has been put in default by the wrongful refusal of the directors or
management to adopt suitable measures for its protection.62

Rule 8, Section 1 of the Interim Rules of Procedure for Intra Corporate Controversies (Interim Rules)
provides the five (5) requisites63 for filing derivative suits:

SECTION 1. Derivative action. – A stockholder or member may bring an action in the name of a
corporation or association, as the case may be, provided, that:

(1) He was a stockholder or member at the time the acts or transactions subject of the action
occurred and at the time the action was filed;

(2) He exerted all reasonable efforts, and alleges the same with particularity in the complaint,
toexhaust all remedies available under the articles of incorporation, by-laws, laws or rules
governing the corporation or partnership to obtain the relief he desires;

(3) No appraisal rights are available for the act or acts complained of; and

(4) The suit is not a nuisance or harassment suit.

In case of nuisance or harassment suit, the court shall forthwith dismiss the case.

The fifth requisite for filing derivative suits, while not included in the enumeration, is implied in the first
paragraph of Rule 8, Section 1 of the Interim Rules: The action brought by the stockholder or member
must be "in the name of [the] corporation or association. . . ." This requirement has already been settled
in jurisprudence.

Thus, in Western Institute of Technology, Inc., et al. v. Salas, et al.,64 this court said that "[a]mong the basic
requirements for a derivative suit to prosper is that the minority shareholder who is suing for and on
behalf of the corporation must allege in his complaint before the proper forum that he is suing on a
derivative cause of action on behalf of the corporation and all other shareholders similarly situated who
wish to join [him]."65 This principle on derivative suits has been repeated in, among other cases, Tam
Wing Tak v. Hon. Makasiar and De Guia66 and in Chua v. Court of Appeals,67 which was cited in Hi-Yield
Realty, Incorporated v. Court of

Appeals.68

Moreover, it is important that the corporation be made a party to the case.69

This court explained in Asset Privatization Trust v. Court of Appeals70 why it is a condition sine qua
nonthat the corporation be impleaded as party in derivative suits. Thus:

Not only is the corporation an indispensible party, but it is also the present rule that it must be served
with process. The reason given is that the judgment must be made binding upon the corporation inorder
that the corporation may get the benefit of the suit and may not bring a subsequent suit against the same
defendants for the same cause of action. In other words the corporation must be joined as party because
it is its cause of action that is being litigated and because judgment must be a res judicata against it. 71

In the same case, this court enumerated the reasons for disallowing a direct individual suit.

The reasons given for not allowing direct individual suit are:

(1) . . . "the universally recognized doctrine that a stockholder in a corporation has no title legal or
equitable to the corporate property; that both of these are in the corporation itself for the benefit
of the stockholders." Inother words, to allow shareholders to sue separately would conflict with
the separate corporate entity principle;

(2) . . . that the prior rights of the creditors may be prejudiced. Thus, our Supreme Court held in
the case of Evangelista v. Santos, that ‘the stockholders may not directly claim those damages for
themselves for that would result in the appropriation by, and the distribution among them of part
of the corporate assets before the dissolution of the corporation and the liquidation of its debts
and liabilities, something which cannot be legally donein view of Section 16 of the Corporation
Law. . .";

(3) the filing of such suits would conflict with the duty of the management to sue for the
protection of all concerned;

(4) it would produce wasteful multiplicity of suits; and

(5) it would involve confusion in ascertaining the effect of partial recovery by an individual on the
damages recoverable by the corporation for the same act.72

While it is true that the basis for allowing stockholders to file derivative suits on behalf of corporations is
based on equity, the above legal requisites for its filing must necessarily be complied with for its
institution.73

Respondent Balmores’ action in the trial court failed to satisfy all the requisites of a derivative suit.

Respondent Balmores failed to exhaust all available remedies to obtain the reliefs he prayed for. Though
he tried to communicate with PPC’s directors about the checks in Villamor’s possession before he filed an
action with the trial court, respondent Balmores was not able to show that this comprised all the
remedies available under the articles of incorporation, bylaws, laws, or rules governing PPC.

An allegation that appraisal rights were not available for the acts complained of is another requisite for
filing derivative suits under Rule 8, Section 1(3) of the Interim Rules.

Section 81 of the Corporation Code provides the instances of appraisal right:

SEC. 81. Instances of appraisal right.— Any stockholder of a corporation shall have the right to dissent
and demand payment of the fair value of his shares in the following instances:

1. In case any amendment to the articles of incorporation has the effect of changing or restricting
the rights of any stockholders or class of shares, or of authorizing preferences in any respect
 superior to those of outstanding shares of any class, or of extending or shortening the term of
corporate existence;

2. In case of sale, lease, exchange, transfer, mortgage, pledge or other disposition of all or
substantially all of the corporate property and assets as provided in this Code; and

3. In case of merger or consolidation.

Section 82 of the Corporation Codeprovides that the stockholder may exercise the right if he or she voted
against the proposed corporate action and if he made a written demand for payment on the corporation
within thirty (30) days after the date of voting.

Respondent Balmores complained aboutthe alleged inaction of PPC’s directors in his letter informing
themthat Villamor should be made to deliver to PPC and accountfor MC Home Depot’s checks or their
equivalent value. He alleged that these are devices or schemes amounting to fraud or misrepresentation
detrimental to the corporation’s and the stockholders’ interests. He also alleged that the directors’
inaction placed PPC’s assets in imminent and/or actual dissipation, loss, wastage, and destruction.

Granting that (a) respondent Balmores’ attempt to communicate with the other PPC directors already
comprised all the available remedies that he could have exhausted and (b) the corporation was under full
control of petitioners that exhaustion of remedies became impossible or futile,74 respondent Balmores
failed toallege that appraisal rights were not available for the acts complained of here.

Neither did respondent Balmores implead PPC as party in the case nor did he allege that he was filing on
behalf of the corporation.

The non-derivative character of respondent Balmores’ action may also be gleaned from his allegations in
the trial court complaint. In the complaint, he described the nature ofhis action as an action under Rule 1,
Section 1(a)(1) of the Interim Rules, and not an action under Rule 1, Section 1(a)(4) of the Interim Rules,
which refers to derivative suits. Thus, respondent Balmores said:

1.1 This is an action under Section 1 (a) (1), Rule 1 of the Interim Rules of Procedure for Intra-corporate
Controversies, involving devices or schemes employed by, or acts of, the defendants as board of directors,
business associates and officers of Pasig Printing Corporation (PPC), amounting to fraud or
misrepresentation, which are detrimental to the interest of the plaintiff as stockholder of
PPC.75 (Emphasis supplied)

Rule 1, Section 1(a)(1) of the Interim Rules refers to acts of the board, associates, and officers, amounting
to fraud or misrepresentation, which may be detrimental to the interest of the stockholders. This is
different from a derivative suit.

While devices and schemes of the board of directors, business associates, or officers amounting to fraud
under Rule 1, Section 1(a)(1) of the Interim Rules are causes of a derivative suit, it is not always the case
that derivative suits are limited to such causes or that they are necessarily derivative suits. Hence, they
are separately enumerated in Rule 1, Section 1(a) of the Interim Rules:

SECTION 1. (a) Cases covered. – These Rules shall govern the procedure to be observed in civil cases
involving the following:
 (1) Devices or schemes employed by, or any act of, the board of directors, business associates,
officers or partners, amounting to fraud or misrepresentation which may be detrimental to the
interest of the public and/or of the stockholders, partners, or members of any corporation,
partnership, or association;

(2) Controversies arising out of intra-corporate, partnership, or association relations, between

and among stockholders, members, or associates; and between, any or all of them and the
corporation, partnership, or association of which they are stockholders, members, or associates,
respectively;

(3) Controversies in the election orappointment of directors, trustees, officers, or managers

ofcorporations, partnerships, or associations;

(4) Derivative suits;and

(5) Inspection of corporate books. (Emphasis supplied)

Stockholder/s’ suits based on fraudulent or wrongful acts of directors, associates, or officers may also
beindividual suits or class suits.

Individual suits are filed when the cause of action belongs to the individual stockholder personally, and
notto the stockholders as a group or to the corporation, e.g., denial of right to inspection and denial of
dividends to a stockholder.76 If the cause of action belongs to a group of stockholders, such as when the
rights violated belong to preferred stockholders, a class or representative suit may be filed to protect the
stockholders in the group.77

In this case, respondent Balmores filed an individual suit. His intent was very clear from his manner of
describing the nature of his action:

1.1 This is an action under Section 1 (a) (1), Rule 1 of the Interim Rules of Procedure for Intra-corporate
Controversies, involving devices or schemes employed by, or acts of, the defendants as board of directors,
business associates and officers of Pasig Printing Corporation (PPC),amounting to fraud or
misrepresentation, which are detrimental to the interest of the plaintiff as stockholder of PPC.78

(Emphasis supplied)

His intent was also explicit from his prayer:

WHEREFORE, plaintiff respectfully prays that the Honorable Court –

....

2. After notice and due proceedings –

Declare that the acts of defendant Directorsin allowing defendant VILLAMOR to retain custody of the MC
Home checks and encash them upon maturity, as well as their refusal or failure to take any action against
defendant VILLAMOR to make him account and deliver the MC Home checks and/or their proceeds to
Pasig Printing Corporation are devices, schemes or acts amounting to fraud that are detrimental to
plaintiff’s interest as a stockholder of PPC;79 (Emphasis supplied)

Respondent Balmores did not bring the action for the benefit of the corporation. Instead, hewas alleging
that the acts of PPC’s directors, specifically the waiver of rights in favor of Villamor’s law firm and their
failure to take back the MC Home Depot checks from Villamor, were detrimental to his individual interest
as a stockholder. In filing an action, therefore, his intention was to vindicate his individual interest and
not PPC’s or a group of stockholders’.

The essence of a derivative suit is thatit must be filed on behalf of the corporation. This is because the
cause of action belongs, primarily, to the corporation. The stockholder who sues on behalf of a
corporation is merely a nominal party.

Respondent Balmores’ intent to file an individual suit removes it from the coverage of derivative suits.

III

Respondent Balmores has no cause of action that would

entitle him to the reliefs sought

Corporations have a personality that is separate and distinct from their stockholders and directors. A
wrong tothe corporation does not necessarily create an individual cause of action. "A cause of action is
the act or omission by which a party violates the right of another."80 A cause of action must pertain to
complainant if he or she is to be entitled to the reliefs sought. Thus, in Cua v. Tan,81 this court
emphasized:

. . . where the acts complainedof constitute a wrong to the corporation itself, the cause of action belongs
to the corporation and not to the individual stockholder or member. Although in most every case of
wrong to the corporation, each stockholder is necessarily affected because the value of his interest
therein would beimpaired, this fact of itself is not sufficient to give him an individual cause of action since
the corporation is a person distinct and separate from him, and can and should itself sue the wrongdoer.
Otherwise, not only would the theory of separate entity be violated, but there would be multiplicity of
suits as well as a violation of the priority rights of creditors. Furthermore, there is the difficulty of
determining the amount of damages that should be paid to each individual stockholder.82

In this case, respondent Balmores did not allege any cause of action that is personal to him. His
allegations are limited to the facts that PPC’s directors waived their rights to rental income in favor of
Villamor’s law firm without consideration and that they failed to take action when Villamor refused to
turn over the amounts to PPC. These are wrongsthat pertain to PPC. Therefore, the cause of action
belongs to PPC — not to respondent Balmores or any stockholders as individuals.

For this reason, respondent Balmoresis not entitled to the reliefs sought in the complaint. Only the
corporation, or arguably the stockholders as a group, is entitled to these reliefs, which should have been
sought in a proper derivative suit filed on behalf of the corporation.

PPC will not be bound by a decision granting the application for the appointment of a receiver or
management committee. Since it was not impleaded in the complaint, the courtsdid not acquire
jurisdiction over it. On this matter, it is an indispensable party, without which, no final determination can
be had.

Hence, it is not only respondent Balmores’ failure to implead PPC that is fatal to his action, as petitioners
point out. It is the fact that he alleged no cause of action that pertains personally to him that disqualifies
him from the reliefs he sought in his complaint.

On this basis alone, the Court of Appeals erred in giving due course to respondent Balmores’ petition for
certiorari, reversing the trial court’s decision, and issuing a new order placing PPC under receivership
and creating an interim management committee.

IV

Appointment of a management committee was not proper

Assuming that respondent Balmores has an individual cause of action, the Court of Appeals still erred in
placing PPC under receivership and in creating and appointing a management committee.

A corporation may be placed under receivership, or management committees may be created to

preserveproperties involved in a suit and to protect the rights of the parties under the control and
supervision of the court.83Management committees and receivers are appointed when the corporation is
in imminent danger of "(1) [d]issipation, loss, wastage or destruction of assets or other properties; and
(2) [p]aralysation of its business operations that may be prejudicial to the interest of the minority
stockholders, parties-litigants, or the general public."84

Applicants for the appointment of a receiver or management committee need to establish the confluence
of these two requisites.1âwphi1 This is because appointed receivers and management committees will
immediately take over the management of the corporation and will have the management powers
specified in law.85 This may have a negative effect on the operations and affairs of the corporation with
third parties,86 as persons who are more familiar with its operations are necessarily dislodged from their
positions in favor of appointees who are strangers to the corporation’s operations and affairs.

Thus, in Sy Chim v. Sy Siy Ho & Sons, Inc.,87 this court said:

. . . the creation and appointment of a management committee and a receiver is an extra ordinary and
drastic remedy to be exercised with care and caution; and only when the requirements under the Interim
Rules are shown. It is a drastic course for the benefit of the minority stockholders, the parties-litigants or
the general public are allowed only under pressing circumstances and, when there is inadequacy,
ineffectual or exhaustion of legal or other remedies . . . The powerof the court to continue a business of a
corporation . . . must be exercised with the greatest care and caution. There should be a full consideration
ofall the attendant facts, including the interest of all the parties concerned.88

PPC waived its rights, without any consideration in favor of Villamor. The checks were already in
Villamor’s possession. Some of the checks may have already been encashed. This court takes judicial
notice that the goodwill money of ₱18,000,000.00 and the rental payments of ₱4,500,000.00 every month
are not meager amounts only to be waived without any consideration. It is, therefore, enough to
constitute loss or dissipation of assets under the Interim Rules.
Respondent Balmores, however, failed to show that there was an imminent danger of paralysis of PPC’s
business operations. Apparently, PPC was earning substantial amounts from its other sub-lessees.
Respondent Balmores did not prove otherwise. He, therefore, failed to show at least one of the requisites
for appointment of a receiver or management committee.

The Court of Appeals had no

jurisdiction to appoint the receiver or management

committee

The Court of Appeals has no power to appoint a receiver or management committee. The Regional Trial
Court has original and exclusive jurisdiction89 to hear and decide intra-corporate
controversies,90 including incidents of such controversies.91 These incidents include applications for the
appointment of receivers or management committees.

"The receiver and members of the management committee . . . are considered officers of the court and
shall be under its control and supervision."92 They are required to report tothe court on the status of the
corporation within sixty (60) days from their appointment and every three (3) months after.93

When respondent Balmores filed his petition for certiorari with the Court of Appeals, there was still a
pending action in the trial court. No less than the Court of Appeals stated that it allowed respondent
Balmores’ petition under Rule 65 because the order or resolution in question was an interlocutory one.
This means that jurisdiction over the main case was still lodged with the trial court.

The court making the appointment controls and supervises the appointed receiver or management
committee.1âwphi1Thus, the Court of Appeals’ appointment of a management committee would result in
an absurd scenario wherein while the main case is still pending before the trial court, the receiver or
management committee reports to the Court of Appeals.

WHEREFORE, the petitions are GRANTED. The decision of the Court of Appeals dated March 2, 2006 and
its resolution dated May 29, 2006 are SET ASIDE.

SO ORDERED.

SECOND DIVISION

January 20, 2016

GR. No. 174909

MARCELINO M. FLORETE, JR., MARIA ELENA F. MUYCO and RAUL A. MUYCO, Petitioners,
vs.
ROGELIO M. FLORETE, IMELDA C. FLORETE, DIAMEL CORPORATION, ROGELIO C. FLORETE JR., and
MARGARET RUTH C. FLORETE, Respondents.

x-----------------------x
G.R. No. 177275

ROGELIO M. FLORETE SR., Petitioner,

vs.
MARCELINO M. FLORETE, JR., MARIA ELENA F. MUYCO AND RAUL A. MUYCO, Respondents.

DECISION

LEONEN, J.:

A stockholder may suffer from a wrong done to or involving a corporation, but this does not vest in the
aggrieved stockholder a sweeping license to sue in his or her own capacity. The determination of the
stockholder’s appropriate remedy—whether it is an individual suit, a class suit, or a derivative suit—
hinges on the object of the wrong done. When the object of the wrong done is the corporation itself or
"the whole body of its stock and property without any severance or distribution among individual
holders,"1 it is a derivative suit, not an individual suit or class/representative suit, that a
stockholder must resort to.

This resolves consolidated cases involving a Complaint for Declaration of Nullity of Issuances, Transfers
and Sale of Shares in People’s Broadcasting Service, Inc. and All Posterior Subscriptions and Increases
thereto with Damages.2The Complaint did not implead as parties the concerned corporation, some of the
transferees, transferors and other parties involved in the assailed transactions. The Petition3 docketed as
G.R. No. 174909 assails the Court of Appeals Decision affirming the dismissal of the Complaint and
sustaining the award of ₱25,000,000.00 as moral damages and ₱5,000,000.00 as exemplary damages in
favor of Rogelio Florete, Sr. The Petition4 docketed as G.R. No. 177275 assails the Court of Appeals
Decision that disallowed the immediate execution of the same award of damages.

Spouses Marcelino Florete, Sr. and Salome Florete (now both deceased) had four (4) children: Marcelino
Florete, Jr. (Marcelino, Jr.), Maria Elena Muyco (Ma. Elena), Rogelio Florete, Sr. (Rogelio, Sr.), and Teresita
Menchavez (Teresita), now deceased.5

People’s Broadcasting Service, Inc. (People’s Broadcasting) is a private corporation authorized to operate,
own, maintain, install, and construct radio and television stations in the Philippines. 6 In its incorporation
on March 8, 1966,7 it had an authorized capital stock of ₱250,000.00 divided into 2,500 shares at ₱100.00
par value per share.8Twenty-five percent (25%) of the corporation’s authorized capital stock were then
subscribed to as follows:

Number of
Stockholder
Shares
Marcelino Florete, Sr. (Marcelino, Sr.) 250 shares
Salome Florete (Salome) 100 shares
Ricardo Berlin (Berlin) 50 shares
Pacifico Sudario (Sudario) 50 shares
Atty. Santiago Divinagracia (Divinagracia), now 50 shares10
deceased9
On November 17, 1967, Berlin and Sudario resigned from their positions as General Manager and Station
Supervisor, respectively.11 Berlin and Sudario each transferred 20 shares to Raul Muyco and Estrella
Mirasol.12

Salome died on November 22, 1980.13 Marcelino, Sr. suffered a stroke on July 12, 1982, which left him
paralyzed and bedridden until his death on October 3, 1990.14 After Marcelino, Sr.’s stroke, their son,
Rogelio, Sr. started managing the affairs of People’s Broadcasting.15

In October 1993, People’s Broadcasting sought the services of the accounting and auditing firm Sycip
Gorres Velayo and Co. in order to determine the ownership of equity in the corporation.16 On November
2, 1994, Sycip Gorres Velayo and Co. submitted a report detailing the movements of the corporation’s
shares from November 23, 1967 to December 8, 1989.17 The relevant portion of this report reads:

B. PEOPLE’S BROADCASTING SERVICE, INC. (PBS)

The movements in the capital stock accounts (by beneficial stockholders) are as follows:

1âwphi1
Transfer Transfer
of Transfer of
Additional
Shareholdings Shares of Shares
Beneficial Subscription Increase Shareholdings
Nov. 27, 1967 of Stock Shares of Stock
Stockholder Sept. 1, (F) Oct. 31, 1993
(A) March of Stock June 5,
1982 (B)
1, 1983 (D) 1987
(C) (E)
Marcelino M. 560 - 750 (680) - 62,344.19 62,974.19
Florete, Sr.
Salome M. 30 (30) - - -
Florete
Rogelio M. 20 5 1110 370 (5) 149,624.75 151,124.75
Florete
Ma. Elena F. 20 5 - - (25) 2,493.68 2,493.68
Muyco
Teresita F. - 5 - 20 (25) 2,493.69 2,493.69
Menchavez
Marcelino M. - 5 - 20 (20) 2,493.44 2,493.44
Florete, Jr.
Santiago C. 20 - - 270 75 29,925.25 30,290.25
Divinagracia
Newsound 610 - (610)
Broadcasting18
Consolidated - 1,250 (1,250)
Broadcasting
 Total 1,260 1,250 249,375.00 251,875.00

(A) The People’s Broadcasting Service, Inc. was incorporated in 1965 with an authorized capital stock of
P250,000 divided into 2,500 shares at P100 par value. As of November 23, 1967, the total subscribed
shares of stock was [sic] 1,260. The 610 shares issued in the name of [Newsounds Broadcasting Network,
Inc.] was [sic] authorized by the Board of Directors in payment for the obligation of the Corporation to
[Newsounds Broadcasting Network, Inc.].

....

(B) On August 5, 1982, the Board of Directors passed Resolution No. 4 which authorized Atty.
Divinagracia to negotiate the purchase of two stations of Consolidated Broadcasting System, Inc. (CBS),
DYMF and DXMF in Cebu and Davao, respectively. In consideration thereof, [People’s Broadcasting
Service, Inc.] shall issue 1,250 shares of stock in favor of [Consolidated Broadcasting System, Inc.]. In
pursuance thereof, on September 1, 1982, the Corporation issued the remaining 1,240 shares of unissued
capital stock to [Consolidated Broadcasting System, Inc.]. To complete the consideration of 1,250 shares,
it was explained that [Salome] transferred her 10 shares to [Consolidated Broadcasting System, Inc.] and
distributed her remaining 20 shares to her children, at 5 shares each.

(C) On March 1, 1983, all the 610 shares of [Newsounds Broadcasting Network, Inc.] were transferred to
[Rogelio, Sr.]. We were not able to determine the person who endorsed the certificate in [sic] behalf [of]
[Newsounds Broadcasting Network, Inc.] as the certificate was not found on file. On the same day, the
entire investment of [Consolidated Broadcasting System, Inc.] were transferred to [Marcelino, Sr.] and
[Rogelio, Sr.] at the proportion of 750 shares and 500 shares, respectively. The cancelled certificates of
[Consolidated Broadcasting System, Inc.] were endorsed by [Rogelio, Sr.] in [sic] its behalf.

(D) On February 28 and August 1, 1983, [Marcelino, Sr.] transferred 680 shares from his block to the
following:

Transferee No. of Date of Transfer

Shares

Rogelio M. Florete [Sr.] 370 February 28,

1983
Santiago C. 270 August 1, 1983
Divinagracia
Marcelino M. Florete, 20 August 1, 1983
Jr.
Teresita F. Menchavez 20 August 1, 1983
Total 680

(E) On June 3, 1987, the Corporation effected the transfer of 75 shares to [Divinagracia] by virtue of the
deeds of sale executed by the transferors concerned in his favor.
(F) On December 8, 1989, the [Securities and Exchange Commission] approved the application of the
Corporation to increase the authorized capital stock to ₱100,000,000.00 divided into 1,000,000 shares at
₱100 par value. Of the increase, 249,375 shares were subscribed for ₱24,937,500 and ₱6,234,375 thereof
was paid-up. The subscribers to the increase were as indicated in the foregoing.

There were no other transactions affecting the interest of the beneficial stockholders up to October 31,
1993 except transfers to and from designated nominees[.]19

Even as it tracked the movements of shares, Sycip Gorres Velayo and Co. declined to give a categorical
statement on equity ownership as People’s Broadcasting’s corporate records were incomplete. 20 The
report contained the following disclaimer on the findings regarding the corporation’s capital structure:

Because the procedures included certain assumptions as represented by the corporate secretaries
mentioned in Attachment I and we have not verified the documents supporting some of the transactions, we
do not express an opinion on the capital stock accounts of the respective companies [including People’s
Broadcasting] as at October 31, 1993.21 (Emphasis supplied)

On February 1, 1997, the Board of Directors of People’s Broadcasting approved Sycip Gorres Velayo and
Co.’s report.22

In the meantime, Rogelio, Sr. transferred a portion of his shareholdings to the members of his immediate
family, namely: Imelda Florete, Rogelio Florete, Jr., and Margaret Ruth Florete, as well as to Diamel
Corporation, a corporation owned by Rogelio, Sr.’s family.23

As of April 27, 2002, the stockholders of record of People’s Broadcasting were the following:24

Stockholder No. of Shares

1. Diamel Corporation 30,000.00
2. Rogelio Florete [Sr.] 153,881.53
3. Marcelino Florete, Jr. 18,240.99
4. Ma. Elena Muyco 18,227.23
5. Santiago Divinagracia 30,289.25
6. Imelda Florete 1,000.00
7. Rogelio Florete, Jr. 100.00
8. Margaret Ruth Florete 100.00
9. Raul Muyco 10.00
10. Manuel Villa, Jr. 10.00
11. Gregorio Rubias 1.00
12. Cyril Regaldao 1.00
13. Jose Mari Treñas 1.00
 14. Enrico Jacomille 1.00
15. Joseph Vincent Go 1.00
16. Jerry Treñas 1.00
17. Efrain Treñas 10.00

On June 23, 2003, Marcelino, Jr., Ma. Elena, and Raul Muyco (Marcelino, Jr. Group) filed before the
Regional Trial Court a Complaint25 for Declaration of Nullity of Issuances, Transfers and Sale of Shares in
People’s Broadcasting Service, Inc. and All Posterior Subscriptions and Increases thereto with
Damages26 against Diamel Corporation, Rogelio, Sr., Imelda Florete, Margaret Florete, and Rogelio
Florete, Jr. (Rogelio, Sr. Group).

On July 25, 2003, the Rogelio, Sr. Group filed their Answer with compulsory counterclaim.27

On August 2, 2005, the Regional Trial Court issued a Decision (which it called a "Placitum") dismissing
the Marcelino, Jr. Group’s Complaint. It ruled that the Marcelino, Jr. Group did not have a cause of action
against the Rogelio, Sr. Group and that the former is estopped from questioning the assailed movement of
shares of People’s Broadcasting. It also ruled that indispensible parties were not joined in their
Complaint.

According to the trial court, the indispensable parties would include:

[Marcelino, Sr.] and/or his estate and/or his heirs, [Salome] and/or her estate and/or her heirs,
[Divinagracia] and/or his estate and/or his successors-in-interest, [Teresita] and/or her estate and/or
her own successors-in-interest, the other [People’s Broadcasting Service, Inc.] stockholders who may be
actually beneficial owners and not purely nominees, all the so called nominal stockholders. . . [and] the
various [People’s Broadcasting Service, Inc.] Corporate Secretaries[.]"28

The Regional Trial Court granted Rogelio, Sr.’s compulsory counterclaim for moral and exemplary
damages amounting to ₱25,000,000.00 and ₱5,000,000.00, respectively, reasoning that Rogelio, Sr.
suffered from the besmirching of his personal and commercial reputation.29

The dispositive portion of the Regional Trial Court Decision reads:

WHEREFORE, premises duly considered, the instant "Complaint" of the plaintiffs is hereby DISMISSED for
lack of merit.

The "Counterclaim" of defendant Rogelio Florete Sr. is hereby given DUE COURSE but only insofar as the
claims for moral and exemplary damages are concerned. Consequently, the plaintiffs herein are hereby
ordered to pay, jointly and severally, defendant Rogelio Florete Sr., the following sums, to wit:

1. TWENTY FIVE MILLION PESOS (P25,000,000.00) as and for MORAL DAMAGES; and,

2. FIVE MILLION PESOS (P5,000,000.00) as and for EXEMPLARY DAMAGES.

The "Counterclaim(s)" of the other defendants and the prayer for the recovery of attorney’s fees and
litigation expenses of defendant Rogelio Florete, Sr. are hereby DISMISSED likewise for lack of merit.
SO ORDERED.30

On August 15, 2005, Rogelio, Sr. filed a Motion for the immediate execution of the award of moral and
exemplary damages pursuant to Rule I, Section 431 of the Interim Rules of Procedure Governing Intra-
Corporate Controversies.32

On September 8, 2005, the Marcelino, Jr. Group filed before the Court of Appeals a Petition for
Review33 with a prayer for the issuance of a temporary restraining order and/or writ of preliminary
injunction to deter the immediate execution of the trial court Decision awarding damages to Rogelio,
Sr.34 The Court of Appeals issued a temporary restraining order and, subsequently, a writ of preliminary
injunction.35

In its Decision36 dated March 29, 2006, the Court of Appeals denied the Marcelino, Jr. Group’s Petition and
affirmed the trial court Decision.37 It also lifted the temporary restraining order and writ of preliminary
injunction.38

The Court of Appeals ruled that the Marcelino, Jr. Group did not have a cause of action against those
whom they have impleaded as defendants. It also noted that the principal obligors in or perpetrators of
the assailed transactions were persons other than those in the Rogelio, Sr. Group who have not been
impleaded as parties. Thus, the Court of Appeals emphasized that the following parties were
indispensable to the case: People’s Broadcasting; Marcelino, Sr.; Consolidated Broadcasting System, Inc.;
Salome; Divinagracia; Teresita; and "other stockholders of [People’s Broadcasting] to whom the shares
were transferred or the nominees of the stockholders."39

The Court of Appeals further emphasized that the estates of Marcelino, Sr. and Salome had long been
settled, with those in the Marcelino, Jr. Group participating (in their capacity as heirs). As the Marcelino,
Jr. Group failed to act to protect their supposed interests in shares originally accruing to Marcelino, Sr.
and Salome, the group is estopped from questioning the distribution of Marcelino, Sr.’s and Salome’s
assets.40 Furthering the conclusion that the Marcelino, Jr. Group was bound by estoppel, the Court of
Appeals noted that the Marcelino, Jr. Group was well aware of the matters stated in the report furnished
by Sycip Gorres Velayo and Co. but failed to act on any supposed error in the report. Instead, the
Marcelino, Jr. Group waited ten (10) years before filing their Complaint. In the interim, they even
participated in the affairs of People’s Broadcasting, voting their shares and electing members of the
Board of Directors.41

On April 26, 2006, the Marcelino, Jr. Group filed a Motion for Reconsideration dated April 24, 2006.42

Pending resolution of the Marcelino, Jr. Group’s Motion for Reconsideration, Rogelio, Sr. filed before the
Regional Trial Court a Motion to resolve his earlier motion for the immediate execution of the awards of
moral and exemplary damages, which was filed on August 15, 2005.43 The Regional Trial Court granted
the Motion in its Order dated May 18, 2006.44 On May 23, 2006, a Writ of Execution was issued to enforce
the award of moral and exemplary damages.45

The Marcelino, Jr. Group filed a Petition for Certiorari46 before the Court of Appeals questioning the
Regional Trial Court Order to immediately execute its Decision.47 On June 13, 2006, the Court of Appeals
issued a temporary restraining order and, subsequently, a writ of preliminary injunction. 48 The Court of
Appeals reversed the trial court Order of immediate execution in the Decision promulgated on November
28, 2006.49 It also annulled the writ of execution issued pursuant to the Order of immediate execution.
Rogelio, Sr. filed a Motion for Reconsideration,50 but it was denied on February 23, 2007.51

On September 15, 2006, the Court of Appeals denied the Marcelino, Jr. Group’s Motion for
Reconsideration dated April 24, 2006.52

Hence, on November 17, 2006, the Marcelino, Jr. Group filed the Petition53 docketed as G.R. No. 174909.

Since the Court of Appeals Decision disallowed the immediate execution of the Regional Trial Court
Decision, Rogelio, Sr. filed on May 7, 2007 the Petition54 docketed as G.R. No. 177275.

On March 16, 2009, this court ordered the consolidation of the Petitions docketed as G.R. No. 174909 and
G.R. No. 177275.

For resolution are the following issues:

First, whether it was proper for the Regional Trial Court to dismiss the Complaint filed by the Marcelino,
Jr. Group;

Second, assuming that it was error for the Regional Trial Court to dismiss the Complaint and that the case
may be decided on the merits, whether the transfers of shares assailed by the Marcelino, Jr. Group should
be nullified; and

Lastly, whether the Regional Trial Court’s award of moral and exemplary damages in favor of Rogelio, Sr.
may be executed at this juncture of the proceedings.

The Marcelino, Jr. Group insists that they have sufficiently established causes of action accruing to them
and against the Rogelio, Sr. Group.55 They add that they have impleaded all indispensable parties.56 Thus,
they claim that it was an error for the Regional Trial Court to dismiss their Complaint. They assert that a
resolution of the case on the merits must ensue.

The Marcelino, Jr. Group seeks to nullify the following transactions on the shares of stock of People’s
Broadcasting, as noted in the report of Sycip Gorres Velayo and Co.:

(a) Issuance of 1,240 shares to Consolidated Broadcasting System, Inc. on September 1, 1982,

(b) Transfer of 10 shares from Salome to Consolidated Broadcasting System, Inc. on September 1,
1982,

(c) Issuance of 610 shares to Newsounds Broadcasting Network, Inc. on November 17, 1967,

(d) Transfer of 610 shares from Newsounds Broadcasting Network, Inc. to Rogelio, Sr. on March 1,
1983,

(e) Transfer of 750 shares from Consolidated Broadcasting System, Inc. to Marcelino, Sr. on March
1, 1983,

(f) Transfer of 500 shares from Consolidated Broadcasting System, Inc. to Rogelio, Sr.,
 (g) Transfer of 680 shares from Marcelino, Sr. to the following: 370 shares to Rogelio, Sr., 270
shares to Divinagracia, 20 shares to Marcelino, Jr., and 20 shares to Teresita, and

(h) Increase in the authorized capital stock to ₱100,000,000.00 divided into 1,000,000 shares with
a par value of ₱100.00 per share on December 8, 1989, and the resulting subscriptions.57

For the issuance of 1,250 shares to Consolidated Broadcasting System, Inc., the Marcelino, Jr. Group
argues that Board Resolution No. 4 dated August 5, 1982, the basis for the issuance of the 1,250 shares in
favor of Consolidated Broadcasting System, Inc., was a forgery: it was simulated, unauthorized, and
issued without a quorum as required under Section 25 of the Corporation Code.58 They add that Salome,
who allegedly transferred her 10 shares to complete the 1,250 share transfer, was already dead at the
time of the alleged transfer on September 1, 1982.59 The Marcelino, Jr. Group claims that no member of
the Board attended the meeting referred to in Board Resolution No. 4.60 They further allege that the
signature of Marcelino, Sr. in Board Resolution No. 4 is a forgery.61 They argue that Marcelino, Sr. could
not have attended the meeting on August 5, 1982 because from July 12, 1982 to August 26, 1982, 62 he
was confined in Gov. B. Lopez Memorial Hospital for quadriparesis and motor aphasia.63 They also
supplied the trial court with specimen signatures of Marcelino, Sr. to prove that the signature appearing
on Board Resolution No. 4 was forged.64

The Marcelino, Jr. Group alleges that from the time Marcelino, Sr. suffered a stroke on July 12, 1982 until
his death on October 3, 1990, he was no longer capable of giving consent because of his quadriparesis
and motor aphasia.65As they emphasized, "[q]uadriparesis means weakness of the upper and lower
extremities with spasticity and tremors. Motor aphasia means that the patient could not communicate,
unable to talk, nor responds [sic] to question or simple commands."66 Thus, they conclude that all of the
issuances of shares in favor of Marcelino, Sr. and all of the transfers of shares to and from Marcelino, Sr.
from July 12, 1982 are void for lack of consent.

With respect to the issuance of 610 shares to Newsounds Broadcasting Network, Inc. and the subsequent
transfer of 610 shares to Rogelio, Sr., the Marcelino, Jr. Group argues that there is no deed of conveyance
to support the transfer and that the stock certificates representing the 610 shares are missing. They
conclude that because of the absence of the stock certificates, there is no valid delivery and endorsement
as required by Section 63 of the Corporation Code.67 Hence, the transfer is invalid.

Regarding the increase in the authorized capital stock of People’s Broadcasting, the Marcelino, Jr. Group
argues that the increase was procured by fraud because it was made "by the new Board of Directors who
were elected by stockholders who were transferees of the illegal, fraudulent and anomalous transfers,
and therefore have no power and authority to procure such increase."68 They also pray that the
subscriptions to the increase be nullified.69

After a declaration that the issuances and transfers are void, the Marcelino, Jr. Group prays that the
capital structure of People’s Broadcasting System be corrected to reflect the following:70

Beneficial Stockholder No. of Shares %

Marcelino Florete, Sr. 660 81.48
Salome Florete 100 12.35
Santiago Divinagracia 50 6.17
 Total 810 100.00

The Marcelino, Jr. Group further claims that the award of moral and exemplary damages is
erroneous.71 They add that the amounts of ₱25,000,000.00 as moral damages and ₱5,000,000.00 as
exemplary damages are excessive.72

The Rogelio, Sr. Group seeks the denial of the Petition filed by the Marcelino, Jr. Group, claiming that it
raises factual questions that may not be taken cognizance of in a petition for review on certiorari under
Rule 45.73

They further argue that the Marcelino, Jr. Group has no cause of action against them.74 They insist that
indispensable parties have not been impleaded75 and that the Marcelino Jr. Group’s claims should have
been raised during the settlement of the estates of deceased Spouses Marcelino, Sr. and Salome
Florete.76 They also argue that the Marcelino, Jr. Group is already estopped from questioning Sycip Gorres
Velayo and Co.’s report because they allowed 10 years to lapse before questioning the truthfulness of the
report. They add that the Marcelino, Jr. Group’s members have been voting their shares since 1963
without making any reservation.77

In G.R. No. 177275, Rogelio, Sr. argues that the Court of Appeals erred in disallowing the immediate
execution of the Regional Trial Court Decision. He argues that the Petition filed by the Marcelino, Jr.
Group before the Court of Appeals should not have been accepted because Rule 65 petitions require that
there no longer be any appeal nor any plain, speedy, and adequate remedy in the ordinary course of
law.78 He alleges that when the Petition was filed by the Marcelino, Jr. Group, there was still a pending
appeal before the Court of Appeals to resolve the main case.79Rogelio, Sr. adds that the filing of a new
petition despite the pendency of the main case is a violation of the rule against forum shopping.80

The sufficiency of the Marcelino, Jr. Group’s plea for relief, through their Complaint for Declaration of
Nullity of Issuances, Transfers and Sale of Shares in People’s Broadcasting Service, Inc. and All Posterior
Subscriptions and Increases thereto with Damages,81 hinges on a characterization of the suit or action
they initiated. This characterization requires a determination of the cause of action through which the
Marcelino, Jr. Group came to court for relief. It will, thus, clarify the parties who must be included in their
action and the procedural and substantive requirements they must satisfy if their action is to prosper.

A stockholder suing on account of wrongful or fraudulent corporate actions (undertaken through

directors, associates, officers, or other persons) may sue in any of three (3) capacities: as an individual; as
part of a group or specific class of stockholders; or as a representative of the corporation.

Villamor v. Umale82 distinguished individual suits from class or representative suits:

Individual suits are filed when the cause of action belongs to the individual stockholder personally, and
not to the stockholders as a group or to the corporation, e.g., denial of right to inspection and denial of
dividends to a stockholder. If the cause of action belongs to a group of stockholders, such as when the
rights violated belong to preferred stockholders, a class or representative suit may be filed to protect the
stockholders in the group.83
Villamor further explained that a derivative suit "is an action filed by stockholders to enforce a corporate
action."84 A derivative suit, therefore, concerns "a wrong to the corporation itself."85 The real party in
interest is the corporation, not the stockholders filing the suit. The stockholders are technically nominal
parties but are nonetheless the active persons who pursue the action for and on behalf of the corporation.

Remedies through derivative suits are not expressly provided for in our statutes—more specifically, in
the Corporation Code and the Securities Regulation Code—but they are "impliedly recognized when the
said laws make corporate directors or officers liable for damages suffered by the corporation and its
stockholders for violation of their fiduciary duties."86 They are intended to afford reliefs to stockholders
in instances where those responsible for running the affairs of a corporation would not otherwise act:

However, in cases of mismanagement where the wrongful acts are committed by the directors or trustees
themselves, a stockholder or member may find that he has no redress because the former are vested by
law with the right to decide whether or not the corporation should sue, and they will never be willing to
sue themselves. The corporation would thus be helpless to seek remedy. Because of the frequent
occurrence of such a situation, the common law gradually recognized the right of a stockholder to sue on
behalf of a corporation in what eventually became known as a "derivative suit." It has been proven to be
an effective remedy of the minority against the abuses of management. Thus, an individual stockholder is
permitted to institute a derivative suit on behalf of the corporation wherein he holds stock in order to
protect or vindicate corporate rights, whenever officials of the corporation refuse to sue or are the ones
to be sued or hold the control of the corporation. In such actions, the suing stockholder is regarded as the
nominal party, with the corporation as the party in interest.87

The distinction between individual and class/representative suits on one hand and derivative suits on the
other is crucial. These are not discretionary alternatives. The fact that stockholders suffer from a wrong
done to or involving a corporation does not vest in them a sweeping license to sue in their own capacity. The
recognition of derivative suits as a vehicle for redress distinct from individual and representative suits is
an acknowledgment that certain wrongs may be addressed only through acts brought for the
corporation:

Although in most every case of wrong to the corporation, each stockholder is necessarily affected because
the value of his interest therein would be impaired, this fact of itself is not sufficient to give him an
individual cause of action since the corporation is a person distinct and separate from him, and can and
should itself sue the wrongdoer.88

In Asset Privatization Trust v. Court of Appeals,89 the reasons for disallowing a direct individual suit were
further explained:

The reasons given for not allowing direct individual suit are:

(1) . . . "the universally recognized doctrine that a stockholder in a corporation has no title legal or
equitable to the corporate property; that both of these are in the corporation itself for the benefit
of the stockholders." In other words, to allow shareholders to sue separately would conflict with
the separate corporate entity principle;

(2) . . . that the prior rights of the creditors may be prejudiced. Thus, our Supreme Court held in
the case of Evangelista v. Santos, that ‘the stockholders may not directly claim those damages for
themselves for that would result in the appropriation by, and the distribution among them of part
 of the corporate assets before the dissolution of the corporation and the liquidation of its debts
and liabilities, something which cannot be legally done in view of Section 16 of the Corporation
Law. . .";

(3) the filing of such suits would conflict with the duty of the management to sue for the
protection of all concerned;

(4) it would produce wasteful multiplicity of suits; and

(5) it would involve confusion in ascertaining the effect of partial recovery by an individual on the
damages recoverable by the corporation for the same act.90

The avenues for relief are, thus, mutually exclusive. The determination of the appropriate remedy hinges
on the object of the wrong done. When the object is a specific stockholder or a definite class of
stockholders, an individual suit or class/representative suit must be resorted to. When the object of the
wrong done is the corporation itself or "the whole body of its stock and property without any severance
or distribution among individual holders,"91 it is a derivative suit that a stockholder must resort to.
In Cua, Jr. v. Tan:92

Indeed, the Court notes American jurisprudence to the effect that a derivative suit, on one hand, and
individual and class suits, on the other, are mutually exclusive, viz.:

As the Supreme Court has explained: "A shareholder's derivative suit seeks to recover for the benefit of
the corporation and its whole body of shareholders when injury is caused to the corporation that may not
otherwise be redressed because of failure of the corporation to act. Thus, ‘the action is derivative, i.e., in
the corporate right, if the gravamen of the complaint is injury to the corporation, or to the whole body of its
stock and property without any severance or distribution among individual holders, or it seeks to recover
assets for the corporation or to prevent the dissipation of its assets.’" In contrast, "a direct action [is one]
filed by the shareholder individually (or on behalf of a class of shareholders to which he or she belongs)
for injury to his or her interest as a shareholder. . . . [T]he two actions are mutually exclusive: i.e., the right
of action and recovery belongs to either the shareholders (direct action) or the corporation (derivative
action)."

Thus, in Nelson v. Anderson, the minority shareholder alleged that the other shareholder of the
corporation negligently managed the business, resulting in its total failure. The appellate court concluded
that the plaintiff could not maintain the suit as a direct action: "Because the gravamen of the complaint is
injury to the whole body of its stockholders, it was for the corporation to institute and maintain a remedial
action. A derivative action would have been appropriate if its responsible officials had refused or failed to
act." The court went on to note that the damages shown at trial were the loss of corporate profits. Since
"[s]hareholders own neither the property nor the earnings of the corporation," any damages that the
plaintiff alleged that resulted from such loss of corporate profits "were incidental to the injury to the
corporation."93 (Emphasis supplied, citations omitted)

Villamor recalls the requisites for filing derivative suits:

Rule 8, Section 1 of the Interim Rules of Procedure for Intra Corporate Controversies (Interim Rules)
provides the five (5) requisites for filing derivative suits:
SECTION 1. Derivative action.—A stockholder or member may bring an action in the name of a
corporation or association, as the case may be, provided, that:

(1) He was a stockholder or member at the time the acts or transactions subject of the
action occurred and at the time the action was filed;

(2) He exerted all reasonable efforts, and alleges the same with particularity in the
complaint, to exhaust all remedies available under the articles of incorporation, by-laws,
laws or rules governing the corporation or partnership to obtain the relief he desires;

(3) No appraisal rights are available for the act or acts complained of; and

(4) The suit is not a nuisance or harassment suit.

In case of nuisance or harassment suit, the court shall forthwith dismiss the case.

The fifth requisite for filing derivative suits, while not included in the enumeration, is implied in the first
paragraph of Rule 8, Section 1 of the Interim Rules: The action brought by the stockholder or member
must be "in the name of [the] corporation or association. . . ." This requirement has already been settled
in jurisprudence.

Thus, in Western Institute of Technology, Inc., et al. v. Salas, et al., this court said that "[a]mong the basic
requirements for a derivative suit to prosper is that the minority shareholder who is suing for and on
behalf of the corporation must allege in his complaint before the proper forum that he is suing on a
derivative cause of action on behalf of the corporation and all other shareholders similarly situated who
wish to join [him]." . . .

Moreover, it is important that the corporation be made a party to the case.94 (Citations omitted)

II

The greater number of cases that sustained stockholders’ recourse to derivative suits involved corporate
acts amounting to mismanagement by either the corporation’s directors or officers in relations to third
persons. Several cases serve as examples.

Hi-Yield Realty v. Court of Appeals95 affirmed the Regional Trial Court’s and Court of Appeals’
characterization of a Petition for Annulment of Real Estate Mortgage and Foreclosure Sale96 as a
derivative suit. The Petition was initiated by private respondent Roberto H. Torres, a stockholder, on
behalf of the corporation Honorio Torres & Sons, Inc. Petitioner Hi-Yield Realty, Inc. was among the
defendants to the Petition, along with the related parties, Leonora, Ma. Theresa, Glenn, and Stephanie, all
surnamed Torres, as well as the Registers of Deeds of Marikina and of Quezon City. Against Hi-Yield
Realty, Inc.’s claims, this court sustained the respondent’s position that the Petition was "primarily a
derivative suit to redress the alleged unauthorized acts of its corporate officers and major stockholders in
connection with the lands."97

Cua, Jr. considered two corporate acts to be valid objects of a derivative suit. The first was a resolution of
the Board of Directors of the corporation Philippine Racing Club, Inc. to acquire up to 100% of the
common shares of another corporation, JTH Davies Holdings, Inc., as well as to appoint Santiago Cua, Jr.
"to act as attorney-in-fact and proxy who could vote all the shares of [Philippine Racing Club, Inc.] in [JTH
Davies Holdings, Inc.], as well as nominate, appoint, and vote into office directors and/or officers during
regular and special stockholders meetings of [JTH Davies Holdings, Inc.]."98 The second was another
resolution of Philippine Racing Club, Inc.’s Board of Directors "approving the property-for-shares
exchange between P[hilippine] R[acing] C[lub], I[nc]. and [JTH Davies Holdings, Inc.]."99

In Cua, Jr., the derivative suit grounded on the first was dismissed by this court for being moot and
academic.100 The suit grounded on the second was similarly dismissed for failure to comply with one of
the requisites for instituting a derivative suit. The plaintiffs "made no mention at all of appraisal rights,
which could or could not have been available to them[,]" thereby violating Rule 8, Section 1 of the Interim
Rules of Procedure for Intra-Corporate Controversies.101

As with Hi-Yield Realty and Cua, Go v. Distinction Properties Development and Construction,
Inc.102 concerned a corporate action taken in relation to a third person.

Petitioners Philip L. Go, Pacifico Q. Lim and Andrew Q. Lim filed before the Housing and Land Use
Regulatory Board a Complaint, which they claimed was one for specific performance intended to compel
the developer of Phoenix Heights Condominium, Distinction Properties Development and Construction,
Inc. (Distinction Properties), to fulfill its contractual obligations. The Complaint was filed in the wake of
an agreement entered into by Distinction Properties with the condominium corporation Phoenix Heights
Condominium Corporation (PHCC). PHCC "approved a settlement offer from [Distinction Properties] for
the set-off of the latter’s association dues arrears with the assignment [from Distinction Properties] of
title over [two saleable commercial units/spaces originally held by Distinction Properties] and their
conversion into common areas."103

This court clarified that the true purpose of the petitioners’ action was not to compel Distinction
Properties to fulfill its contractual obligations. Instead, "petitioners [we]re actually seeking to nullify and
invalidate the duly constituted acts of PHCC - the April 29, 2005 Agreement entered into by PHCC with
DPDCI and its Board Resolution which authorized the acceptance of the proposed offsetting/settlement
of DPDCI’s indebtedness and approval of the conversion of certain units from saleable to common areas."
This court thereby concluded that "the cause of action rightfully pertains to PHCC [and that] [p]etitioners
cannot exercise the same except through a derivative suit."104

The prevalence of derivative suits arising from corporate actions taken in relation to third persons is to
be expected. After all, it is easier to perceive the wrong done to a corporation when third persons unduly
gain an advantage. However, this does not mean that derivative suits cannot arise with respect to
conflicts among a corporation’s directors, officers, and stockholders.

Ching and Wellington v. Subic Bay Golf and Country Club105 sustained the Regional Trial Court’s and Court
of Appeals’ characterization of the Complaint filed by stockholders against officers of the corporation as a
derivative suit. Nestor Ching and Andrew Wellington filed a Complaint in their own names and in their
right as individual stockholders assailing an amendment introduced into Subic Bay Golf and Country
Club’s articles of incorporation, which supposedly "takes away the right of the shareholders to participate
in the pro-rata distribution of the assets of the corporation after its dissolution."106 They anchored their
action on Section 5(a) of Presidential Decree No. 902-A.107 They claimed that this statutory provision
"allows any stockholder to file a complaint against the Board of Directors for employing devices or
schemes amounting to fraud and misrepresentation which is detrimental to the interest of the public
and/or the stockholders."108
This court did not sustain Nestor Ching’s and Andrew Wellington’s claim of a right to sue in their own
capacity. Concluding that the petitioners’ action was a derivative suit, this court explained:

The reliefs sought in the Complaint, namely that of enjoining defendants from acting as officers and Board
of Directors of the corporation, the appointment of a receiver, and the prayer for damages in the amount
of the decrease in the value of the shares of stock, clearly show that the Complaint was filed to curb the
alleged mismanagement of [Subic Bay Gold and Country Club]. The causes of action pleaded by petitioners
do not accrue to a single shareholder or a class of shareholders but to the corporation itself.109 (Emphasis
supplied)

We are mindful that in 1979, in Gamboa v. Victoriano,110 this court characterized an action to nullify the
sale of 823 unissued shares on the ground of violating the plaintiffs’ pre-emptive rights and in violation of
the voting requirement for the Board of Directors as not a derivative suit. This court characterized the
action as one in which "the plaintiffs are alleging and vindicating their own individual interests or
prejudice, and not that of the corporation."111

This pronouncement cannot be considered as a binding precedent for holding actions of the sort filed by
the plaintiffs therein to not be derivative suit. This point in Gamboa was mere obiter dictum. The main
issue in Gamboa was the validity of the trial court’s denial of the Motion to Dismiss filed by four of the
seven defendants after the plaintiffs entered into a compromise agreement with the three other
defendants. The resolution of this issue was contingent on the determination of whether the compromise
amounted to the plaintiff’s waiver and estoppel for having conceded the validity of the sale. Besides, this
court itself acknowledged that the statement it made characterizing the action brought by the plaintiffs
was premature. Immediately after saying that "the plaintiffs are alleging and vindicating their own
individual interests or prejudice, and not that of the corporation[,]"112 this court stated: "At any rate, it is
yet too early in the proceedings since the issues have not been joined."113

III

In this case, the Marcelino, Jr. Group anchored their Complaint on violations of and liabilities arising from
the Corporation Code, specifically: Section 23114 (on corporate decision-making being vested in the board
of directors), Section 25115 (quorum requirement for the transaction of corporate business), Sections
39116 and 102117 (both on stockholders’ pre-emptive rights), Section 62118 (stipulating the consideration
for which stocks must be issued), Section 63119 (stipulating that no transfer of shares "shall be valid,
except as between the parties, until the transfer is recorded in the books of the corporation"), and Section
65120 (on liabilities of directors and officers "to the corporation and its creditors" for the issuance of
watered stocks) in relation to provisions in People’s Broadcasting’s Articles of Incorporation and By-
Laws as regards conditions for issuances of and subscription to shares. The Marcelino, Jr. Group
ultimately prays that People’s Broadcasting’s entire capital structure be reconfigured to reflect a status
quo ante.121

As with Ching and Wellington, the actions being assailed by the Marcelino, Jr. Group pertain to parties that
are not extraneous to People’s Broadcasting. They assail and seek to nullify acts taken by various
iterations of People’s Broadcasting’s Board of Directors. All these acts and incidents concern the capital
structure of People’s Broadcasting. These acts reconfigured, through redistribution and enlargement, the
structure of People’s Broadcasting’s equity ownership. These acts also admitted into People’s
Broadcasting new equity holders such as Consolidated Broadcasting System, Inc. and Newsounds
Broadcasting Network, Inc.
As Ching and Wellington exemplifies, the action should be a proper derivative suit even if the assailed acts
do not pertain to a corporation’s transactions with third persons. Cua, Jr. established that the pivotal
consideration is whether the wrong done as well as the cause of action arising from it accrues to the
corporation itself or to the whole body of its stockholders. Ching and Wellington states that if "[t]he
causes of action pleaded . . . do not accrue to a single shareholder or a class of shareholders but to the
corporation itself,"122 the action should be deemed a derivative suit. Also, in Go, an action "seeking to
nullify and invalidate the duly constituted acts [of a corporation]" entails a cause of action that "rightfully
pertains to [the corporation itself and which stockholders] cannot exercise . . . except through a derivative
suit."123

These are the same conditions in this case. What the Marcelino, Jr. Group asks is the complete reversal of
a number of corporate acts undertaken by People’ Broadcasting’s different boards of directors. These
boards supposedly engaged in outright fraud or, at the very least, acted in such a manner that amounts to
wanton mismanagement of People’s Broadcasting’s affairs. The ultimate effect of the remedy they seek is
the reconfiguration of People’s Broadcasting’s capital structure.

The remedies that the Marcelino, Jr. Group seeks are for People’s Broadcasting itself to avail. Ordinarily,
these reliefs may be unavailing because objecting stockholders such as those in the Marcelino, Jr. Group
do not hold the controlling interest in People’s Broadcasting. This is precisely the situation that the rule
permitting derivative suits contemplates: minority shareholders having no other recourse "whenever the
directors or officers of the corporation refuse to sue to vindicate the rights of the corporation or are the
ones to be sued and are in control of the corporation."124

The Marcelino, Jr. Group points to violations of specific provisions of the Corporation Code that
supposedly attest to how their rights as stockholders have been besmirched. However, this is not enough
to sustain a claim that the Marcelino, Jr. Group initiated a valid individual or class suit. To reiterate,
whether stockholders suffer from a wrong done to or involving a corporation does not readily vest in
them a sweeping license to sue in their own capacity.

The specific provisions adverted to by the Marcelino, Jr. Group signify alleged wrongdoing committed
against the corporation itself and not uniquely to those stockholders who now comprise the Marcelino, Jr.
Group. A violation of Sections 23 and 25 of the Corporation Code—on how decision-making is vested in
the board of directors and on the board’s quorum requirement—implies that a decision was wrongly
made for the entire corporation, not just with respect to a handful of stockholders. Section 65 specifically
mentions that a director’s or officer’s liability for the issuance of watered stocks in violation of Section 62
is solidary "to the corporation and its creditors," not to any specific stockholder. Transfers of shares made
in violation of the registration requirement in Section 63 are invalid and, thus, enable the corporation to
impugn the transfer. Notably, those in the Marcelino, Jr. Group have not shown any specific interest in, or
unique entitlement or right to, the shares supposedly transferred in violation of Section 63.

Also, the damage inflicted upon People’s Broadcasting’s individual stockholders, if any, was
indiscriminate. It was not unique to those in the Marcelino, Jr. Group. It pertained to "the whole body of
[People’s Broadcasting’s] stock."125 Accordingly, it was upon People’s Broadcasting itself that the causes
of action now claimed by the Marcelino Jr. Group accrued. While stockholders in the Marcelino, Jr. Group
were permitted to seek relief, they should have done so not in their unique capacity as individuals or as a
group of stockholders but in place of the corporation itself through a derivative suit. As they, instead,
sought relief in their individual capacity, they did so bereft of a cause of action. Likewise, they did so
without even the slightest averment that the requisites for the filing of a derivative suit, as spelled out in
Rule 8, Section 1 of the Interim Rules of Procedure for Intra-Corporate Controversies, have been satisfied.
Since the Complaint lacked a cause of action and failed to comply with the requirements of the Marcelino,
Jr. Group’s vehicle for relief, it was only proper for the Complaint to have been dismissed.

IV

Erroneously pursuing a derivative suit as a class suit not only meant that the Marcelino, Jr. Group lacked a
cause of action; it also meant that they failed to implead an indispensable party.

In derivative suits, the corporation concerned must be impleaded as a party. As explained in Asset
Privatization Trust:

Not only is the corporation an indispensible party, but it is also the present rule that it must be served
with process. The reason given is that the judgment must be made binding upon the corporation in order
that the corporation may get the benefit of the suit and may not bring a subsequent suit against the same
defendants for the same cause of action. In other words the corporation must be joined as party because
it is its cause of action that is being litigated and because judgment must be a res ajudicata [sic] against
it.126

We have already discussed Go where this court concluded that an action brought by three individual
stockholders was, in truth, a derivative suit. There, this court further explained that a case cannot prosper
when the proper party is not impleaded:

As it is clear that the acts being assailed are those of PHHC, this case cannot prosper for failure to implead
the proper party, PHCC.

An indispensable party is defined as one who has such an interest in the controversy or subject matter
that a final adjudication cannot be made, in his absence, without injuring or affecting that interest. In the
recent case of Nagkakaisang Lakas ng Manggagawa sa Keihin (NLMK-OLALIA-KMU) v. Keihin Philippines
Corporation, the Court had the occasion to state that:

Under Section 7, Rule 3 of the Rules of Court, "parties in interest without whom no final determination
can be had of an action shall be joined as plaintiffs or defendants." If there is a failure to implead an
indispensable party, any judgment rendered would have no effectiveness. It is "precisely ‘when an
indispensable party is not before the court (that) an action should be dismissed.’ The absence of an
indispensable party renders all subsequent actions of the court null and void for want of authority to act,
not only as to the absent parties but even to those present." The purpose of the rules on joinder of
indispensable parties is a complete determination of all issues not only between the parties themselves,
but also as regards other persons who may be affected by the judgment. A decision valid on its face
cannot attain real finality where there is want of indispensable parties.

Similarly, in the case of Plasabas v. Court of Appeals, the Court held that a final decree would necessarily
affect the rights of indispensable parties so that the Court could not proceed without their presence. In
support thereof, the Court in Plasabas cited the following authorities, thus:

The general rule with reference to the making of parties in a civil action requires the joinder of all
indispensable parties under any and all conditions, their presence being a sine qua non of the exercise of
judicial power. For this reason, our Supreme Court has held that when it appears of record that there are
other persons interested in the subject matter of the litigation, who are not made parties to the action, it
is the duty of the court to suspend the trial until such parties are made either plaintiffs or defendants. x x
x Where the petition failed to join as party defendant the person interested in sustaining the proceeding
in the court, the same should be dismissed. x x x When an indispensable party is not before the court, the
action should be dismissed.

Parties in interest without whom no final determination can be had of an action shall be joined either as
plaintiffs or defendants. The burden of procuring the presence of all indispensable parties is on the
plaintiff. The evident purpose of the rule is to prevent the multiplicity of suits by requiring the person
arresting a right against the defendant to include with him, either as co-plaintiffs or as co-defendants, all
persons standing in the same position, so that the whole matter in dispute may be determined once and
for all in one litigation.

From all indications, PHCC is an indispensable party and should have been impleaded, either as a plaintiff
or as a defendant, in the complaint filed before the HLURB as it would be directly and adversely affected
by any determination therein. To belabor the point, the causes of action, or the acts complained of, were
the acts of PHCC as a corporate body[.]127 (Citations omitted)

There are two consequences of a finding on appeal that indispensable parties have not been joined. First,
all subsequent actions of the lower courts are null and void for lack of jurisdiction.128 Second, the case
should be remanded to the trial court for the inclusion of indispensable parties. It is only upon the
plaintiff’s refusal to comply with an order to join indispensable parties that the case may be dismissed.129

All subsequent actions of lower courts are void as to both the absent and present parties.130 To reiterate,
the inclusion of an indispensable party is a jurisdictional requirement:

While the failure to implead an indispensable party is not per se a ground for the dismissal of an action,
considering that said party may still be added by order of the court, on motion of the party or on its own
initiative at any stage of the action and/or such times as are just, it remains essential — as it is
jurisdictional — that any indispensable party be impleaded in the proceedings before the court renders
judgment. This is because the absence of such indispensable party renders all subsequent actions of the
court null and void for want of authority to act, not only as to the absent parties but even as to those
present.131 (Emphasis supplied, citation omitted)

In Metropolitan Bank and Trust Co. v. Alejo132 and Arcelona v. Court of Appeals,133 this court clarified that
the courts must first acquire jurisdiction over the person of an indispensable party. Any decision rendered
by a court without first obtaining the required jurisdiction over indispensable parties is null and void for
want of jurisdiction: "the presence of indispensable parties is necessary to vest the court with
jurisdiction, which is ‘the authority to hear and determine a cause, the right to act in a case.’"134

In Divinagracia v. Parilla,135 Macawadib v. Philippine National Police Directorate for Personnel and Records
Management,136 People v. Go,137 and Valdez-Tallorin v. Heirs of Tarona,138 among others, this court
annulled judgments rendered by lower courts in the absence of indispensible parties.
The second consequence is unavailing in this case. While "[n]either misjoinder nor non-joinder of parties
is ground for dismissal of an action"139 and is, thus, not fatal to the Marcelino, Jr. Group’s action, we have
shown that they lack a cause of action. This warrants the dismissal of their Complaint.

The first consequence, however, is crucial. It determines the validity of the Regional Trial Court’s award
of damages to Rogelio, Sr.

Since the Regional Trial Court did not have jurisdiction, the decision awarding damages in favor of
Rogelio, Sr. is void.1âwphi1

Apart from this, there is no basis in jurisprudence for awarding moral and exemplary damages in cases
where individual suits that were erroneously filed were dismissed. In the analogous cases that we
previously discussed—Hi-Yield Realty, Cua, Jr., Go, and Ching and Wellington—the dismissal alone of the
erroneously filed complaints sufficed. This court never saw the need to award moral and exemplary
damages. This is in keeping with the Civil Code provisions that stipulate when the award of such damages
is proper. We find no reason to conclude that the Marcelino, Jr. Group acted in so malevolent, oppressive,
or reckless a manner that moral and exemplary damages must be awarded in such huge amounts as the
Regional Trial Court did.

From the conclusion that the Decision awarding damages is void and unwarranted, it necessarily follows
that the Order of the Regional Trial Court to immediately execute its Decision is likewise null and void.
In Arcelona, the Decision sought to be annulled was already being executed. However, this court found
that the assailed Decision was promulgated without indispensable parties being impleaded. Hence, the
Decision was ruled to have been made without jurisdiction. This court nullified the judgment and
declared:

A void judgment for want of jurisdiction is no judgment at all. It cannot be the source of any right nor the
creator of any obligation. All acts performed pursuant to it and all claims emanating from it have no
legal effect. Hence, it can never become final and any writ of execution based on it is void: x x x it may be
said to be a lawless thing which can be treated as an outlaw and slain at sight, or ignored wherever and
whenever it exhibits its head.140(Emphasis supplied)

Accordingly, the subsequent Order of the Decision’s immediate execution is also void for lack of
jurisdiction. Contrary to Rogelio Sr.’s claim in its Petition, execution cannot ensue. For this reason, the
Petition docketed as G.R. No. 177275 must be denied.

WHEREFORE, the Petition docketed as G.R. No. 174909 is PARTLY GRANTED and the Petition docketed
as G.R. No. 177275 is DENIED.

The Complaint filed by Marcelino M. Florete, Jr., Maria Elena F. Muyco, and Raul A. Muyco for Declaration
of Nullity of Issuances, Transfers and Sale of Shares in People's Broadcasting Service, Inc. and All
Posterior Subscriptions and Increases thereto with Damages is dismissed as the complainants have no
cause of action. The award of P25,000,000.00 as moral damages and PS,000,000.00 as exemplary
damages in favor of Rogelio Florete, Sr. is deleted. The Regional Trial Court Order dated May 18, 2006
ordering the immediate execution of its Decision dated August 2, 2005 is set aside.

SO ORDERED.
 THIRD DIVISION

February 17, 2016

G.R. No. 203678

CONCORDE CONDOMINIUM, INC., by itself and comprising the Unit Owners of Concorde
Condominium Building, Petitioner,
vs.
AUGUSTO H. BACULIO; NEW PPI CORPORATION; ASIAN SECURITY and INVESTIGATION AGENCY
and its security guards; ENGR. NELSON B. MORALES, in his capacity as Building Official of the
Makati City Engineering Department; SUPT. RICARDO C. PERDIGON, in his capacity as City Fire
Marshal of the Makati City Fire Station; F/C SUPT. SANTIAGO E. LAGUNA, in his capacity as
Regionaf Director of the Bureau of Fire Protection-NCR, and any and all persons acting with or
under them, Respondents.

DECISION

PERALTA, J.:

This resolves the Petition for Review on Certiorari under Rule 45 of the Rules of Court, seeking to reverse
and set aside the Order dated June 28, 2012 and Resolution dated September 20, 2012 of the Regional
Trial Court (RTC) of Makati City, Branch 149,1 which dismissed Civil Case No. 12-309 for Injunction with
Damages for lack of jurisdiction.

The antecedent facts are as follows:

On April 16, 2012, petitioner Concorde Condominium, Inc., by itself and comprising the Unit Owners of
Concorde Condominium Building, (petitioner) filed with the Regional Trial Court (RTC) of Makati City a
Petition for Injunction [with Damages with prayer for the issuance of a Temporary Restraining
Order (TRO), Writ of Preliminary (Prohibitory) Injunction, and Writ of Preliminary Mandatory
Injunction] against respondents New PPI Corporation and its President Augusto H. Baculio; Asian
Security and Investigation Agency and its security guards, Engr. Nelson B. Morales in his capacity as
Building Official of the Makati City Engineering Department; Supt. Ricardo C. Perdigon in his capacity as
City Fire Marshal of the Makati City Fire Station; F/C Supt. Santiago E. Laguna, in his capacity as Regional
Director of the Bureau of Fire Protection - NCR, and any and all persons acting with or under
them (respondents).

Petitioner seeks (1) to enjoin respondents Baculio and New PPI Corporation from misrepresenting to the
public, as well as to private and government offices/agencies, that they are the owners of the disputed
lots and Concorde Condominium Building, and from pushing for the demolition of the building which
they do not even own; (2) to prevent respondent Asian Security and Investigation Agency from deploying
its security guards within the perimeter of the said building; and (3) to restrain respondents Engr.
Morales, Supt. Perdigon and F/C Supt. Laguna from responding to and acting upon the letters being sent
by Baculio, who is a mere impostor and has no legal personality with regard to matters concerning the
revocation or building and occupancy permits, and the fire safety issues of the same building. It also
prays to hold respondents solidarily liable for actual damages, moral damages, exemplary damages,
attorney's fees, litigation expenses and costs of suit.
The case was docketed as Civil Case No. No. 12-309 and raffled to the Makati RTC, Branch 149, which was
designated as a Special Commercial Court.2

On April 24, 2012, the RTC called the case for hearing to determine the propriety of issuing a TRO, during
which one Mary Jane Prieto testified and identified some documents. While she was undergoing
crossexamination by a counsel from the Office of the Solicitor General (OSG) relative to the fire
deficiencies of petitioner's building, the RTC interrupted her testimony to find a better solution to the
problem, and issued an Order which reads:

Wherefore, this court ordered Supt. Ricardo C. Perdigon, Fire Marshal of Makati City, to conduct an
inspection of Concorde Condominium Building. He is hereby ordered to submit a report on his
investigation not later than 5:00 o'clock in the afternoon tomorrow.

In the same manner, the Building Official of Makati City, being represented by Atty. Fabio is also hereby
ordered to conduct an investigation on the status of the said building to ascertain whether it [isl still
structurally sound to stand. Such report shall be submitted to this court not later than 5:00 o'clock in the
afternoon tomorrow.

If the report of the Building Official is negative, the unit owners of the condominium will be given the
opportunity to be heard on whether to condemn the building or not.

In the same manner, the alleged owner of the land, who should have transferred it to the condominium
corporation once the latter was created, and it appears that it was not complied with, they are also given
the opportunity to get their own structural engineer to ascertain the structural soundness of the building.
Afterwhich, the court will issue the necessary order whether to condemn or not the building and the
President of the condominium corporation has acceded to such undertaking because that's the only way
how to give them fair play and be heard on their right as condominium owner of Concorde Building
located at 200 Benavidez corner Salcedo Streets, Legaspi Village, Makati City.

The President of the condominium corporation is hereby given, if there is still a chance to repair, four (4)
months from April 30, 2012 or up to August 30, 2012 to r.emedy all those problems and/or deficiencies
of the building.

The other parties are hereby enjoined not to threaten, interfere or molest the condominium unit owners
of said building. Any other party, including the herein parties, who will obstruct the smooth
implementation of this Order, is already considered to have committed a direct contempt of the order of
the court.

Let the continuation of the testimony of Ms. Mary Jane Prieto be set on September 17, 2012 at 8:30 in the
morning.

SO ORDERED.3

Meanwhile, respondents Bactllio and New PPI Corporation filed an Urgent Motion to Re-Raffle dated
April 25, 2012, claiming that it is a regular court, not a Special Commercial Court, which has jurisdiction
over the case.
In an Order dated April 26, 2012, the RTC denied the motion to rcraffle on the ground of failure to comply
with Sections 44 and 55 of Rule 15 of the Rules of Court.

In their Motion to Vacate Order and Motion to Dismiss dated May 8, 2012, respondents Baculio and New
PPI Corporation assailed the RTC Order dated April 24, 2012, stating that the case is beyond its
jurisdiction as a Special Commercial Court. Respondents claimed that the petition seeks to restrain or
compel certain individuals and government officials to stop doing or performing patiicular acts, and that
there is no showing that the case involves a matter embraced in Section 5 of Presidential
Decree (P.D.) No. 902-A, which enumerates the cases over which the SEC [now the RTC acting as Special
Commercial Court pursuant to Republic Act (R.A.) No. 8799] exercises exclusive jurisdiction. They added
that petitioner failed to exhaust administrative remedies, which is a condition precedent before filing the
said petition.

In an Order dated June 28, 2012, the RTC dismissed the case for lack of jurisdiction. It noted that by
petitioner's own allegations and admissions, respondents Bactllio and New PPI Corporation are not
owners of the two subject lots and the building. Due to the absence of intra-corporate relations between
the parties, it ruled that the case docs not involve an intra-corporate controversy cognizable by it sitting
as a Special Commercial Court. It also held that there is no more necessity to discuss the other issues
raised in the motion to dismiss, as well as the motion to vacate order, for lack or jurisdiction over the
case.

Petitioner filed a motion for reconsideration of the Order dated June 28, 2012, which the RTC denied for
lack of merit.6 Hence, this petition for review on certiorari.

Petitioner raises a sole question of law in support of its petition:

A.

THE REGIONAL TRIAL COURT COMMITTED A MANIFEST ERROR OF LAW AND ACTED IN A MANNER
CONTRARY TO LAW AND ESTABLISHED JURISPRUDENCE IN DISMISSING THE PETITION ON THE
GROUND OF LACK OF JURISDICTION.7

Petitioner contends that its petition for injunction with damages is an ordinary civil case correctly filed
with the RTC which has jurisdiction over actions where the subject matter is incapable of pecuniary
estimation. However, petitioner claims that through no fault on its part, the petition was raffled to Branch
149 of the Makati RTC, a designated Special Commercial Court tasked to hear intra-corporate disputes.

Petitioner notes that R.A. 8799 merely transferred the Securities and Exchange Commission's jurisdiction
over cases enumerated under Section 5 of P.D. No. 902-A to the courts of general jurisdiction or the
appropriate Regional Trial Court, and that there is nothing in R.A. 8799 or in A.M. No. 00-11-03-SC which
would limit or diminish the jurisdiction of those RTCs designated as Special Commercial Comis.
Petitioner stresses that such courts shall continue to participate in the raffle of other cases, pursuant to
OCA Circular No. 82-2003 on Consolidation of Intellectual Property Courts with Commercial Court. It
insists that for purposes of determining the jurisdiction of the RTC, the different branches thereof (in case
of a multiple sala court) should not be taken as a separate or compartmentalized unit. It, thus, concludes
that the designation by the Supreme Court of Branch 149 as a Special Commercial Court did not divest it
of its power as a court of general jurisdiction.
Petitioner also submits that prior to the issuance of the Order setting the case for hearing on April 24,
2012, the Presiding Judge of Branch 149 had already determined from the averments in the petition that
it is an ordinary civil action and not an intra-corporate matter; thus, he should have referred it back to
the Executive Judge or the Office of the Clerk of Court for re-raffle to other branches of the RTC, instead of
calendaring it for hearing or dismissing it.

For public respondents Superintendent Ricardo C. Pedrigon and Fire Chief Superintendent Santiago E.
Laguna, the OSG avers that the petition for review on certiorari should be denied for lack of merit. It
points out that petitioner failed to exhaust administrative remedies, i.e., appeal the revocation of the
building and occupancy permits with the Department of Public Works and Highways (DPWfI) Secretary,
pursuant to Section 307 of the National Building Code (Presidential Decree No. 1096); hence, the filing of a
petition for injunction with damages is premature and immediately dismissible for lack of cause of action.

The OSG further argues that even if the case is remanded back to the RTC, the same will not prosper due
to procedural and substantive defects, and will only further clog the trial court's dockets, for the
following reasons: (1) petitioner failed to imp lead an indispensable party, namely, the DPWH Secretary
to whom the power to reinstate the building permit and the occupancy permit is lodged; (2) with regard
to the occupancy permit and the "water sprinkler" clearance, they cannot be issued without a building
permit; and (3) the said clearance cannot also be issued due to lack of certification from either the
Building Official or Tandem, the structural engineers personally hired by petition, that the structural
integrity of Concorde Condominium Building can withstand the necessary damage and load that would be
caused by the installation of the water sprinkler system.

For their part, respondents Baculio and New PPI Corporation aver that the petition filed before the RTC
should be dismissed for lack of proper verification. They likewise assert that Branch 149 has no
jurisdiction over the same petition because (l) such case is not an intra-corporate controversy; (2)
petitioner failed to exhaust administrative remedies which is a condition precedent before filing such
case; (3) the subject building is a threat to the safety of members of petitioner themselves and of the
public in general; (4) the two lots allegedly owned by petitioner are both registered in the name of New
PPI Corporation; and (5) the engineering firm hired by petitioner could not even guarantee the building's
structural capacity.

Meanwhile, respondent Asian Security & Investigation Agency claims that petitioner's allegations against
it are already moot and academic because it had already terminated its security contract with
respondents New PPI Corporation and Baculio, and pulled out its guards from petitioner's premises. At
any rate, it manifests that it is adopting as part of its Comment the said respondents'
Comment/Opposition to the petition for review on certiorari.

Respondent Office of the Building Official of Makati City, represented by Engineer Mario V. Badillo,
likewise contends that the petition for review on certiorari should be dismissed for these reasons: (1)
that petitioner failed to exhaust administrative remedies which is a mandatory requirement before filing
the case with the RTC of Makati City; (2) that Branch l 49, as a Special Commercial Court, has jurisdiction
over the said case because it is not an intra-corporate controversy; and (3) petitioner's building is old and
dilapidated, and ocular inspections conducted show that several violations of the National Building Code
were not corrected, despite several demands and extensions made by the Building Official.

The petition is impressed with merit.

In resolving the issue of whether Branch 149 of the Makati RTC, a designated Special Commercial Court,
erred in dismissing the petition for injunction with damages for lack of jurisdiction over the subject
matter, the CoUii is guided by the rule "that jurisdiction over the subject matter of a case is conferred by
law and determined by the allegations in the complaint which comprise a concise statement of the
ultimate facts constituting the plaintiff's cause of action. The nature of an action, as well as which court or
body has jurisdiction over it, is determined based on the allegations contained in the complaint of the
plaintiff, irrespective of whether or not the plaintiff is entitled to recover upon all or some of the claims
asserted therein. The averments in the complaint and the character of the relief sought are the ones to be
consulted. Once vested by the allegations in the complaint, jurisdiction also remains vested irrespective
of whether or not the plaintiff is entitled to recover upon all or some of the claims asserted therein."8

As a rule, actions for injunction and damages lie within the jurisdiction of the RTC, pursuant to Section 19
of Batas Pambansa Blg. 129, otherwise known as the Judiciary Reorganization Act of 1980, as amended
by R.A. 7691:9

Sec. 19 . .Jurisdiction in civil cases. Regional Trial Courts shall exercise exclusive original jurisdiction:

(1) In all civil actions in which the subject of the litigations is incapable of pecuniary estimation;

xxxx

(6) In all cases not within the exclusive jurisdiction of any court, tribunal, person or body exercising x x x
judicial or quasi-judicial functions;

xxxx

(8) In all other cases in which the demand, exclusive of interest, damages of whatever kind, attorney's
fees, litigation expenses, and costs or the value of the property in controversy exceeds Three hundred
thousand pesos (P300,000.00) or, in such other cases in Metro Manila, where the demand exclusive of the
above-mentioned items exceeds Four hundred thousand pesos (P400,000.00).

Meanwhile, Section 6 (a) of P.D. No. 902-A empowered the SEC to issue preliminary or permanent
injunctions, whether prohibitory or mandatory, in all cases in which it exercises original and exclusive
jurisdiction,10 to wit :

(a) Devices or schemes employed by or any acts, of the board of directors, business associates, its officers
or partnership, amounting to fraud and misrepresentation which may be detrimental to the interest of
the public and/or of the stockholder, partners, members of associations or organizations registered with
the Commission;

(b) Controversies arising out of intra-corporate or partnership relations, between and among
stockholders, members or associates; between any or all of them and the corporation, partnership or
association of which they are stockholders, members or associates, respectively; and between such
corporation, partnership or association and the state insofar as it concerns their individual franchise or
right to exist as such entity; and

(c) Controversies in the election or appointments of directors, trustees, officers or managers of such
corporations, partnerships or associations.11
However, jurisdiction of the SEC over intra-corporate cases was transferred to Courts of general
jurisdiction or the appropriate Regional Trial Court when R.A. No. 8799 took effect on August 8, 2000.
Section 5.2 of R.A. No. 8799 provides:

SEC. 5.2 The Commission's jurisdiction over all cases enumerated under Section 5 of Presidential Decree
No. 902-A is hereby transferred to the Courts of general jurisdiction or the appropriate Regional Trial
Court: Provided, that the Supreme Court in the exercise of its authority may designate the Regional Trial
Court branches that shall exercise jurisdiction over these cases. The Commission shall retain jurisdiction
over pending cases involving intra-corporate disputes submitted for final resolution which should be
resolved within one (1) year from the enactment of this Code. The Commission shall retain jurisdiction
over pending suspension of payments/rehabilitation cases filed as of 30 June 2000 until rinally disposed.

In GD Express rVorldwide N. V, et al. v. Court of Appeals (4th Div.) et al.,12 the Comi stressed that Special
Commercial Courts are still considered courts of general jurisdiction which have the power to hear and
decide cases of all nature, whether civil, criminal or special proceedings, thus:

x x x Section 5.2 of R.A. No. 8799 directs merely the Supreme Court's designation of RTC branches that
shall exercise jurisdiction over intra-corporate disputes. Nothing in the language of the law suggests the
diminution of jurisdiction of those R TCs to be designated as SCCs. The assignment of intra-corporate
disputes to secs is only for the purpose of streamlining the workload of the R TCs so that certain branches
thereof like the secs can focus only on a particular subject matter.

The designation of certain RTC branches to handle specific cases is nothing new. For instance, pursuant
to the provisions of R.A. No. 6657 or the Comprehensive Agrarian Reform Law, the Supreme Court has
assigned certain RTC branches to hear and decide cases under Sections 56 and 57 of R.A. No. 6657.

The RTC exercising jurisdiction over an intra-corporate dispute can be likened to an RTC exercising its
probate jurisdiction or sitting as a special agrarian court. The designation of the SCCs as such has not in
any way limited their jurisdiction to hear and decide cases of all nature, whether civil, criminal or special
proceedings.13

In Manuel Luis C. Gonzales and Francis Alfartin D. Gonzales v. GJH Land, Inc. (formerly known as SJ Land
Inc.), Chang Hwan Jang a.k.a. Steve Jang, Sang Rak Kim, Mariechu N. Yap and Atty. Roberto P. Mallari
II,14 the Court en bane, voting 12-1, 15 explained why transfer of jurisdiction over cases enumerated in
Section 5 of P.D. 902-A was made to the RTCs in general, and not only in favor of particular RTC
branches (Special Commercial Courts), to wit:

As a basic premise, let it be emphasized that a court's acquisition of jurisdiction over a particular case's
subject matter is different from incidents pertaining to the exercise of its jurisdiction. Jurisdiction over
the subject matter of a case is conferred by law, whereas a court's exercise of jurisdiction, unless
provided by the law itself is governed by the Rules of Court or by the orders issued from time to time by
the Court. In Lozada v. Bracewell, it was recently held that the matter of whether the RTC resolves an
issue in the exercise of its general jurisdiction or of its limited jurisdiction as a special court
is only a matter of procedure and has nothing to do with the question of jurisdiction.

Pertinent to this case is RA 8799 which took effect on August 8, 2000. By virtue of said Jaw, jurisdiction
over cases enumerated in Section 5 of Presidential Decree No. 902-A was transferred from the Securities
and Exchange Commission (SEC) to the RTCs, being courts of general jurisdiction. Item 5.2, Section 5
of RA 8799 provides:

SEC. 5. Powers and Functions <~lthe Commission. -

xxxx

5.2 The Commission's jurisdiction over all cases enumerated under Section 5 of Presidential
Decree No. 902-A is hereby transferred to the Courts of general jurisdiction or the appropriate
Regional Trial Court: Provided, that the Supreme Court in the exercise of its authority may
designate the Regional Trial Court branches that shall exercise ,jurisdiction over the cases. The
Commission shall retain jurisdiction over pending cases involving intra-corporate disputes submitted for
final resolution which should be resolved within one (1) year from the enactment of this code. The
Commission shall retain jurisdiction over pending suspension of payment/rehabilitation cases filed as of
30 June 2000 until finally disposed. (Emphasis supplied)

The legal attribution of Regional Trial Court as courts of general Jurisdiction sterns from Section 19
(6) Chapter II or Batas Pambansa Bilang (BP) 129, known as "The Judiciary Reorganization Act of 1980:"

Section 19. Jurisdiction in civil cases. ~ Regional Trial Courts shall exercise exclusive original jurisdiction:

xxxx

(6) In all cases not within the exclusive jurisdiction of any court, tribunal, person or body exercising
judicial or quasijudicial functions: ....

As enunciated in Durisol Philippines, Inc. v. CA:

The regional trial court, formerly the court of first instance, is a court of general jurisdiction. All cases, the
jurisdiction over which is not specifically provided for by law to be within the jurisdiction of any other
court, fall under the jurisdiction of the regional trial court.

To clarify, the word "or" in Item 5.2, Section 5 of RA 8799 was intentionally used by the legislature to
particularize the fact that the phrase "the Courts of general jurisdiction" is equivalent to the phrase "the
appropriate Regional Trial Court." In other words, the jurisdiction of the SEC over the cases enumerated
under Section 5 PD 902-A was transferred to the courts of general jurisdiction, that is to say (or,
otherwise known as), the proper Regional Trial Courts. This interpretation is supported by San Miguel
Corp. v. Municipal Council, wherein the Court held that:

[T]he word "or" may be used as the equivalent of "that is to say" and gives that which precedes it the
same significance as that which follows it. It is not always disjunctive and is sometimes interpretative or
expository of the preceding word.

Further, as may be gleaned from the following excerpt of the Congressional deliberations:

Senator [Raul S.] Roco:

 x x x x The first major departure is as regards the Securities and Exchange Commission. The Securities
and Exchange Commission has been authorized under this proposal to reorganize itself. As an
administrative agency, we strengthened it and at the same time we take away the quasi-judicial
functions. The quasi-judicial functions are not given back to the court of general jurisdiction – The
Regional Trial Court, except for two categories of cases.

In the case of corporate disputes, only those that are now submitted for final determination of the SEC
will remain with the SEC. So, all those cases, both memos of the plaintiff and the defendant, that have
been submitted for resolution will continue. At the same time cases involving rehabilitation, bankruptcy,
suspension of payments and receiverships that were filed before June 30, 2000 will continue with the
SEC. In other words, we are avoiding the possibility, upon approval of this bill, of people filing cases with
the SEC, in manner of speaking, to select their court.

x x x (Emphasis supplied)

Therefore, one must be disabused of the notion that the transfer of jurisdiction was made only in favor of
particular RTC branches, and not the RTCs in general.

Having clearly settled that as courts of general jurisdiction, the designated Special Commercial Courts
and the regular RTCs are both conferred by law the power to hear and decide civil cases in which the
subject of the litigation is incapable of pecuniary estimation, such as an action for injunction, the Court
will now examine the material allegations in the petition for injunction with damages, in order to
determine whether Branch 149 of the Makati RTC has jurisdiction over the subject matter of the case.

In its petition for injunction with damages, Concorde Condominium, Inc. (CCI), by itself and comprising
the unit owners of Concorde Condominium Building, alleged that:

8. CCI is the duly constituted Corporation or Association which owns the common areas in the
project that comprises: (a) Lot 1 where the condominium stands and Lot 2 which serves as the
parking lot for the benefit of the unit owners; and (b) Concorde Condominium Building ("the
building") that was developed by Pulp and Paper Distributors, Inc. (now, allegedly [as claimed by
respondent Baculio], the "New PPI Corp.").

8.1 Petitioner's ownership of both the two (2) lots and the building (except only the units specifically
owned by unit owners) is undisputable, as can be clearly gleaned in the following provisions of the
Master Deed with Declaration of Restrictions ("Master Deed"), as well as the Amended By-laws of
petitioner Concorde Condominium, Inc.

xxxx

8.4 At any rate, considering that the condominium corporation (herein petitioner) had already been
established or incorporated many years ago, and that the Developer (or any subsequent transferor) had
already sold the units in the building to the present unit owners/members, it therefore follows that
Developer had thereby lost its beneficial ownership over Lots 1 and 2 in favor of herein petitioner.

9. Unfortunately, PPI, as developer and engaging in unsound real estate business practice, altered
the condominium plan to segregate a lot (Lot 2) from the common areas and fraudulently cause
the issuance of a separate title thereof in the name of PPI.
10. CCI has questioned said fraudulent act of PPI in Housing and Land Use Regulatory Board (HLURB)
Case No. REM-050500-10982 entitled "Concorde Condominium, [ncorporated vs. Pulp and Paper, Inc. ct
al." The same case was elevated on appeal to the HLURB Board of Commissioners in a case entitled
"Concorde Condominium, Incorporated, complainant vs. Pulp and Paper, Inc., ct al., respondents, vs.
Landmark Philippines Incorporated, et al., Intervenors." In both cases, the HLURB ruled in favor of CCI.

11. PPI did not anymore appeal the aforementioned decision of the HLURB Board of Commissioners to
the Office of the President, hence. the decision as against PPI is already final and executory.

xxxx

12. Although HLURB has already decided that CCI or all the unit owners have vested rights over the
subject lots, recent events have compelled petitioner to urgently seek from this Honorable Court the
reliefs prayed for in the instant case, such as the immediate issuance of a temporary restraining order
(TRO) and/or writ of preliminary injunction against respondents.

xxxx

14. At present, a certain Augusto H. Baculio (respondent herein}, by himself and on behalf of New
PPI Corp., deliberately, actively and with patent bad faith misrepresents and misleads the public
and certain government offices/agencies that the lot where the building stands and the lot which
serves as parking area arc owned by New PPI Corp.

xxxx

14.1 In a letter dated 31 January 2011, respondent Augusto Baculio, on behalf of New PPI Corp.,
representing themselves as owners of the above-mentioned lots, requested from the Makati Fire Station
that the building be subjected to ocular inspection, x x x.

xxxx

14.3 On 12 August 2011, respondent Augusto H. Baculio, with the same misrepresentation, sent another
letter to respondent Supt. Ricardo C. Perdigon, City Fire Marshal of Makati requesting for verification or
inspection of Concorde, x x x.

xxxx

14.4 Worth noting in the aforementioned letter of respondent Baculio dated 12 August 2011 x x x is that,
not only did he misrepresent that he or New PPI Corp. owns the two lots, but he likewise openly
misrepresented that he owns the building, x x x and even requested "xxx to address its 'demolition' as the
Concorde is already 40 years old."

xxxx

14.7 In a letter dated 07 September 2011, respondent Supt. Ricardo C. Perdigon forwarded or elevated to
respondent F/C Supt. Santiago E. Laguna, Regional Director of the Bureau of Fire Protection – NCR the
matter about Concorde Condominium Building.
 xxxx

14.8 On 21 October 2011, CCI sent a letter to respondent F/C Supt. Santiago E. Laguna, informing the
latter of the misrepresentations of respondents Augusto Baculio and New PPI Corp.

xxxx

14.9 The misrepresentation of respondents Baculio and New PPJ Corp. did not stop there. On 17
November 2011, Mr. Baculio requested from Meralco for the cutting off of electricity in Concorde
Condominium Building, apparently with the misrepresentation that he

owns the building.

xxxx

14.14 Moreover, on 7 March 2012, one of the unit owners in the building, Sister Lioba Tiamson, OSB,
sought the assistance and intervention of Honorable Mayor Jejomar Erwin S. Binay, Jr. when Concorde
received a letter dated 17 February 2012 from respondent Engr. Nelson B. Morales informing Concorde
of the revocation of the building and occupancy permits even if the period of sixty (60) days to comply
has not yet lapsed.

xxxx

16. Moreover, sometime in November 2011, petitioner and its unit owners noted that security
guards from Asian Security and Investigation Agency have stationed themselves on rotation basis
7 days a week/24 hours a day, within the perimeter of the building. Upon inquiry of one of the
administration personnel, it was discovered that they were hired by respondent August H.
Baculio/New PPl Corp.

xxxx

16.5 The presence of respondent security agency and its security guards within the perimeter of the
building poses threat to and sows serious fear and anxiety to the unit owners. Thus, they should be
ordered to leave the premises.

17. Respondent Baculio and New PPI Corp.'s misleading, false, baseless and unauthorized acts of
claiming ownership over the subject lots and building arc clear violation of the rights of petitioner
and its unit owners to maintain their undisturbed ownership, possession and peaceful enjoyment
of their property. Hence, should be immediately estopped, restrained and permanently en.joined.

18. Moreover, respondents Baculio and New PPI Corp., by deceit and misrepresentation, are
surreptitiously attempting to dispossess petitioner of Concorde building to the extent of using the
instrumentality of the government to achieve this purpose.

19. Worse, respondent Baculio and New PPI Corp. by writing letters to Makati City Engineering
Department, are pushing for the demolition of the building which they do not even own.
20. Surprisingly, respondent Engr. Nelson B. Morales has been responding to and acting upon the
above-mentioned letters being sent by respondent Baculio despite the latter being a mere
impostor and has no legal personality whatsoever with regard to the matters concerning the lots
and Concorde Condominium Building.

xxxx

20.9 It is therefore necessary that respondent Engr. Nelson Morales be enjoined frorr1
entertaining and acting upon the letters of respondent Baculio.1âwphi1

20.10 Respondent En gr. Morales should he immediately restrained from implementing the
revocation of petitioner's building and occupancy permit.

20.11 Respondent Engr. Morales should also be immediately restrained from ordering the
possible demolition of the building, as the building is structurally sound and stable, and docs not
pose any safety risks to occupants and passers-by.

xxxx

21. Respondents Supt. Ricardo C. Perdigon and F/C Supt. Santiago E. Laguna have likewise been
responding to and acting upon the above-mentioned letters being sent by respondent Baculio
despite the latter being a mere impostor and has no legal personality whatsoever with regard to
matters concerning the building.

22. Moreover, respondents Supt. Ricardo C. Pcnligon and F/C Supt. Santiago E. Laguna
unjustifiably refused, and continuously refuses to issue the necessary permit for the contractor
xxx engaged by petitioner to be able to commence with the installation of a fire sprinkler system
and to correct other fire safety deficiencies in the building.

22. l Thus, it is certainly ironic that the Bureau of Fire Protection headed by said respondents x x x issued
compliance order on petitioner to correct fire safety deficiencies, and yet, they refused to issue the
necessary work permit to the contractor hired by petitioner.

22.2 Hence, respondents Supt. Perdigon and F/C Supt. Laguna should be directed to issue the
necessary permit to the contractor engaged by petitioner.16

The concept of an action for injunction, as an ordinary civil action, was discussed in BPI v. Hong, et al.7as
follows:

An action for injunction is a suit which has for its purpose the enjoinment of the defendant, perpetually or
for a particular time, from the commission or continuance of a specific act, or his compulsion to continue
performance of a particular act. It has an independent existence, and is distinct from the ancillary remedy
of preliminary injunction which cannot exist except only as a part or an incident of an independent action
or proceeding. In an action for injunction, the auxiliary remedy of preliminary iajunction, prohibitory or
mandatory, may issue.

There is no doubt that the petition filed before the RTC is an action for injunction, as can be gleaned from
the allegations made and reliefs sought by petitioner, namely: (1) to enjoin respondents Baculio and New
PPI Corporation from misrepresenting to the public, as well as to private and government
offices/agencies, that they are the owners of the disputed lots and Concorde Condominium Building, and
from pushing for the demolition of the building which they do not even own; (2) to prevent respondent
Asian Security and Investigation Agency from deploying its security guards within the perimeter of the
said building; and (3) to restrain respondents Engr. Morales, Supt. Perdigon and F/C Supt. Laguna from
responding to and acting upon the letters being sent by Bactllio, who is a mere impostor and has no legal
personality with regard to matters concerning the revocation of building and occupancy permits, and the
fire safety issues of the same building.

Applying the relationship test18and the nature of the controversy test19in determining whether a dispute
constitutes an intra-corporate controversy, as enunciated in Medical Plaza Makati Condominium
Corporation v. Cullen,20the Court agrees with Branch 149 that Civil Case No. 12-309 for injunction with
damages is an ordinary civil case, and not an intra-corporate controversy.

A careful review of the allegations in the petition for injunction with damages indicates no intra-
corporate relations exists between the opposing parties, namely (1) petitioner condominium
corporation, by itself and comprising all its unit owners, on the one hand, and (2) respondent New PPI
Corporation which BaCLllio claims to be the owner of the subject properties, together with the
respondents Building Official and City Fire Marshal of Makati City, the Regional Director of the Bureau of
Fire Protection, and the private security agency, on the other hand. Moreover, the petition deals with the
conflicting claims of ownership over the lots where Concorde Condominium Building stands and the
parking lot for unit owners, which were developed by Pulp and Paper Distributors, Inc. (now claimed by
respondent Baculio as the New PPI Corporation), as well as the purported violations of the National
Building Code which resulted in the revocation or the building and occupancy permits by the Building
Official of Makati City. Clearly, as the suit between petitioner and respondents neither arises from an
intra-corporate relationship nor does it pertain to the enforcement of their correlative rights and
obligations under the Corporation Code, and the internal and intra-corporate regulatory rules of the
corporation, Branch 149 correctly found that the subject matter of the petition is in the nature or an
ordinary civil action.

The Court is mindful of the recent guideline laid down in the recent case of Manuel Luis C. Gonzales and
Francis Martin D. Gonzales v. GJH Land, Inc. (formerly known as SJ land Inc.), Chang flwan Jang a.k.a. Steve
Jang, Sang Rak Kim, Mariechu N Yap and Atty. Roberto P. Mallari II,21 to wit:

For further guidance, the Court finds it apt to point out that the same principles apply to the inverse
situation of ordinary civil cases filed before the proper RTCs but wrongly rafiled to its branches
designated as Special Commercial Courts. In such a scenario, the ordinary civil case should then be
referred to the Executive Judge for re-docketing as an ordinary civil case; thereafter, the Executive Judge
should then order the raffling of the case to all branches of the same RTC, subject to limitations under
existing internal rules, and the payment of the correct docket fees in case of any difference. Unlike the
limited assignment/raffling of a commercial case only to branches designated as Special Commercial
Courts in the scenarios stated above, the re-raffling of an ordinary civil case in this instance to all courts is
permissible due to the fact that a particular branch which has been designated as a Special Commercial
Court does not shed the RTC's general jurisdiction over ordinary civil cases under the imprimatur of
statutory law, i.e., Batas Pambansa Bilang (BP 129). To restate, the designation of Special Commercial
Court was merely intended as a procedural tool to expedite the resolution of commercial cases in line
with the court's exercise of jurisdiction. This designation was not made by statute but only by an internal
Supreme Court rule under its authority to promulgate rules governing matters of procedure and its
constitutional mandate to supervise the administration of all courts and the personnel thereof Certainly,
an internal rule promulgated by the Court cannot go beyond the commanding statute. But as a more
fundamental reason, the designation of Special Commercial Courts is, to stress, merely an incident related
to the court's exercise of jurisdiction, which, as first discussed, is distinct from the concept of jurisdiction
over the subject matter. The RTC's general jurisdiction over ordinary civil cases is therefore not
abdicated by an internal rule streamlining court procedure.22

It is apt to note, however, that the foregoing guideline applies only in a situation where the ordinary civil
case filed before the proper RTCs was "wrongly raffled" to its branches designated as Special Commercial
Courts, which situation does not obtain in this case. Here, no clear and convincing evidence is shown to
overturn the legal presumption that official duty has been regularly performed when the Clerk of Court of
the Makati RTC docketed the petition for injunction with damages as an ordinary civil case - not as a
commercial case - and, consequently, raffled it among all branches of the same RTC, and eventually
assigned it to Branch 149. To recall, the designation of the said branch as a Special Commercial Court by
no means diminished its power as a court of general jurisdiction to hear and decide cases of all nature,
whether civil, criminal or special proceedings. There is no question, therefore, that the Makati RTC,
Branch 149 erred in dismissing the petition for injunction with damages, which is clearly an ordinary
civil case. As a court of general jurisdiction, it still has jurisdiction over the subject matter thereof.

In view of the above discussion, the Court finds no necessity to delve into the other contentions raised by
the parties, as they should be properly addressed by the Makati RTC, Branch 149 which has jurisdiction
over the subject matter of the petition for injunction with damages.

WHEREFORE, the petition for review on certiorari is GRANTED. The Order dated June 28, 2012 and
Resolution dated September 20, 2012 issued by the Regional Trial Court ofMakati City, Branch 149, in
Civil Case No. 12-309, are hereby REVERSED and SET ASIDE. Civil Case No. l 2-309 is REINSTATED in
the docket of the same branch which is further ORDERED to resolve the case with reasonable dispatch.

This Decision is immediately executory.

SO ORDERED.

Republic of the Philippines

SUPREME COURT
Manila

SECOND DIVISION

G.R. No. L-68097 January 16, 1986

EDWARD A. KELLER & CO., LTD., petitioner-appellant,

vs.
COB GROUP MARKETING, INC., JOSE E. BAX, FRANCISCO C. DE CASTRO, JOHNNY DE LA FUENTE,
SERGIO C. ORDOÑEZ, TRINIDAD C. ORDOÑEZ, MAGNO C. ORDOÑEZ, ADORACION C. ORDOÑEZ,
TOMAS C. LORENZO, JR., LUIZ M. AGUILA-ADAO, MOISES P. ADAO, ASUNCION MANAHAN and
INTERMEDIATE APPELLATE COURT, respondents-appellees.

Sycip, Salazar, Feliciano & Hernandez Law Office for petitioner.

Vicente G. Gregorio for private respondents.

Roberto P. Vega for respondent Asuncion Manahan.

AQUINO, C.J.:

This case is about the liability of a marketing distributor under its sales agreements with the owner of the
products. The petitioner presented its evidence before Judges Castro Bartolome and Benipayo.
Respondents presented their evidence before Judge Tamayo who decided the case.

A review of the record shows that Judge Tamayo acted under a misapprehension of facts and his findings
are contradicted by the evidence. The Appellate Court adopted the findings of Judge Tamayo. This is a
case where this Court is not bound by the factual findings of the Appellate Court. (See Director of Lands
vs. Zartiga, L-46068-69, September 30, 1982, 117 SCRA 346, 355).

Edward A. Keller & Co., Ltd. appointed COB Group Marketing, Inc. as exclusive distributor of its household
products, Brite and Nuvan in Panay and Negros, as shown in the sales agreement dated March 14, 1970
(32-33 RA). Under that agreement Keller sold on credit its products to COB Group Marketing.

As security for COB Group Marketing's credit purchases up to the amount of P35,000, one Asuncion
Manahan mortgaged her land to Keller. Manahan assumed solidarily with COB Group Marketing the
faithful performance of all the terms and conditions of the sales agreement (Exh. D).

In July, 1970 the parties executed a second sales agreement whereby COB Group Marketing's territory
was extended to Northern and Southern Luzon. As security for the credit purchases up to P25,000 of COB
Group Marketing for that area, Tomas C. Lorenzo, Jr. and his father Tomas, Sr. (now deceased) executed a
mortgage on their land in Nueva Ecija. Like Manahan, the Lorenzos were solidarily liable with COB Group
Marketing for its obligations under the sales agreement (Exh. E).

The credit purchases of COB Group Marketing, which started on October 15, 1969, limited up to January
22, 1971. On May 8, the board of directors of COB Group Marketing were apprised by Jose E. Bax the
firm's president and general manager, that the firm owed Keller about P179,000. Bax was authorized to
negotiate with Keller for the settlement of his firm's liability (Exh. 1, minutes of the meeting).

On the same day, May 8, Bax and R. Oefeli of Keller signed the conditions for the settlement of COB Group
Marketing's liability, Exhibit J, reproduced as follows:

This formalizes our conditions for the settlement of C.O.B.'s account with Edward Keller Ltd.

1. Increase of mortgaged collaterals to the full market value (estimated by Edak at

P90,000.00).

2. Turn-over of receivables (estimated outstandings P70,000.00 to P80,000.00).

 3. Turn-over of 4 (four) trucks for outright sale to Edak, to be credited against C.0.B.'s
account.

4. Remaining 8 (eight) trucks to be assigned to Edak, C.O.B will continue operation with
these 8 trucks. They win be returned to COB after settlement of full account.

5. C.O.B has to put up securities totalling P200,000.00. P100,000.00 has to be liquidated

within one year. The remaining P100,000.00 has to be settled within the second year.

6. Edak wig agree to allow C.O.B. to buy goods to the value of the difference between
P200,000.00 and their outstandings, provided C.O.B. is in a position to put up securities
amounting to P200,000.00.

Discussion held on May 8, 1971.

Twelve days later, or on May 20, COB Group Marketing, through Bax executed two second chattel
mortgages over its 12 trucks (already mortgaged to Northern Motors, Inc.) as security for its obligation to
Keller amounting to P179,185.16 as of April 30, 1971 (Exh. PP and QQ). However, the second mortgages
did not become effective because the first mortgagee, Northern Motors, did not give its consent. But the
second mortgages served the purpose of being admissions of the liability COB Group Marketing to Keller.

The stockholders of COB Group Marketing, Moises P. Adao and Tomas C. Lorenzo, Jr., in a letter dated July
24, 1971 to Keller's counsel, proposed to pay Keller P5,000 on November 30, 1971 and thereafter every
thirtieth day of the month for three years until COB Group Marketing's mortgage obligation had been
fully satisfied. They also proposed to substitute the Manahan mortgage with a mortgage on Adao's lot at
72 7th Avenue, Cubao, Quezon City (Exh. L).

These pieces of documentary evidence are sufficient to prove the liability of COB Group Marketing and to
justify the foreclosure of the two mortgages executed by Manahan and Lorenzo (Exh. D and E).

Section 22, Rule 130 of the Rules of Court provides that the act, declaration or omission of a party as to a
relevant fact may be given in evidence against him "as admissions of a party".

The admissions of Bax are supported by the documentary evidence. It is noteworthy that all the invoices,
with delivery receipts, were presented in evidence by Keller, Exhibits KK-1 to KK-277-a and N to N-149-a,
together with a tabulation thereof, Exhibit KK, covering the period from October 15, 1969 to January 22,
1971. Victor A. Mayo, Keller's finance manager, submitted a statement of account showing that COB
Group Marketing owed Keller P184,509.60 as of July 31, 1971 (Exh. JJ). That amount is reflected in the
customer's ledger, Exhibit M.

On the other hand, Bax although not an accountant, presented his own reconciliation statements wherein
he showed that COB Group Marketing overpaid Keller P100,596.72 (Exh. 7 and 8). He claimed
overpayment although in his answer he did not allege at all that there was an overpayment to Keller.

The statement of the Appellate Court that COB Group Marketing alleged in its answer that it overpaid
Keller P100,596.72 is manifestly erroneous first, because COB Group Marketing did not file any answer,
having been declared in default, and second, because Bax and the other stockholders, who filed an
answer, did not allege any overpayment. As already stated, even before they filed their answer, Bax
admitted that COB Group Marketing owed Keller around P179,000 (Exh. 1).

Keller sued on September 16, 1971 COB Group Marketing, its stockholders and the mortgagors, Manahan
and Lorenzo.

COB Group Marketing, Trinidad C. Ordonez and Johnny de la Fuente were declared in default (290 Record
on Appeal).

After trial, the lower court (1) dismissed the complaint; (2) ordered Keller to pay COB Group Marketing
the sum of P100,596.72 with 6% interest a year from August 1, 1971 until the amount is fully paid: (3)
ordered Keller to pay P100,000 as moral damages to be allocated among the stockholders of COB Group
Marketing in proportion to their unpaid capital subscriptions; (4) ordered the petitioner to pay Manahan
P20,000 as moral damages; (5) ordered the petitioner to pay P20,000 as attomey's fees to be divided
among the lawyers of all the answering defendants and to pay the costs of the suit; (6) declared void the
mortgages executed by Manahan and Lorenzo and the cancellation of the annotation of said mortgages on
the Torrens titles thereof, and (7) dismissed Manahan's cross-claim for lack of merit.

The petitioner appealed. The Appellate Court affirmed said judgment except the award of P20,000 as
moral damages which it eliminated. The petitioner appealed to this Court.

Bax and the other respondents quoted the six assignments of error made by the petitioner in the
Appellate Court, not the four assignments of error in its brief herein. Manahan did not file any appellee's
brief.

We find that the lower courts erred in nullifying the admissions of liability made in 1971 by Bax as
president and general manager of COB Group Marketing and in giving credence to the alleged
overpayment computed by Bax .

The lower courts not only allowed Bax to nullify his admissions as to the liability of COB Group Marketing
but they also erroneously rendered judgment in its favor in the amount of its supposed overpayment in
the sum of P100,596.72 (Exh. 8-A), in spite of the fact that COB Group Marketing was declared in
default and did not file any counterclaim for the supposed overpayment.

The lower courts harped on Keller's alleged failure to thresh out with representatives of COB Group
Marketing their "diverse statements of credits and payments". This contention has no factual basis. In
Exhibit J, quoted above, it is stated by Bax and Keller's Oefeli that "discussion (was) held on May 8, 1971."

That means that there was a conference on the COB Group Marketing's liability. Bax in that discussion did
not present his reconciliation statements to show overpayment. His Exhibits 7 and 8 were an
afterthought. He presented them long after the case was filed. The petitioner regards them as "fabricated"
(p. 28, Appellant's Brief).

Bax admitted that Keller sent his company monthly statements of accounts (20-21 tsn, September 2,
1976) but he could not produce any formal protest against the supposed inaccuracy of the said
statements (22). He lamely explained that he would have to dig up his company's records for the formal
protest (23-24). He did not make any written demand for reconciliation of accounts (27-28).
As to the liability of the stockholders, it is settled that a stockholder is personally liable for the financial
obligations of a corporation to the extent of his unpaid subscription (Vda. de Salvatierra vs. Garlitos 103
Phil. 757, 763; 18 CJs 1311-2).

While the evidence shows that the amount due from COB Group Marketing is P184,509.60 as of July 31,
1971 or P186,354.70 as of August 31, 1971 (Exh. JJ), the amount prayed for in Keller's complaint
is P182,994.60 as of July 31, 1971 (18-19 Record on Appeal). This latter amount should be the one
awarded to Keller because a judgment entered against a party in default cannot exceed the amount
prayed for (Sec. 5, Rule 18, Rules of Court).

WHEREFORE, the decisions of the trial court and the Appellate Court are reversed and set aside.

COB Group marketing, Inc. is ordered to pay Edward A. Keller & Co., Ltd. the sum of P182,994.60 with
12% interest per annum from August 1, 1971 up to the date of payment plus P20,000 as attorney's fees.

Asuncion Manahan and Tomas C. Lorenzo, Jr. are ordered to pay solidarity with COB Group Marketing the
sums of P35,000 and P25,000, respectively.

The following respondents are solidarity liable with COB Group Marketing up to the amounts of their
unpaid subscription to be applied to the company's liability herein: Jose E. Bax P36,000; Francisco C. de
Castro, P36,000; Johnny de la Fuente, P12,000; Sergio C. Ordonez, P12,000; Trinidad C. Ordonez, P3,000;
Magno C. Ordonez, P3,000; Adoracion C. Ordonez P3,000; Tomas C. Lorenzo, Jr., P3,000 and Luz M.
Aguilar-Adao, P6,000.

If after ninety (90) days from notice of the finality of the judgment in this case the judgment against COB
Group Marketing has not been satisfied fully, then the mortgages executed by Manahan and Lorenzo
should be foreclosed and the proceeds of the sales applied to the obligation of COB Group Marketing. Said
mortgage obligations should bear six percent legal interest per annum after the expiration of the said 90-
day period. Costs against the private respondents.

SO ORDERED.

Republic of the Philippines

SUPREME COURT
Manila

THIRD DIVISION

G.R. No. 112941 February 18, 1999

NEUGENE MARKETING INC., LEONCIO TAN, NICANOR MARTIN, SONNY MORENO, JOHNSON LEE and
SECURITIES AND EXCHANGE COMMISSION, petitioners,
vs.
COURT OF APPEALS, ARSENIO YANG, JR., CHARLES O. SY, LOK CHUN SUEN, BAN HUA U. FLORES,
BAN HA U. CHUA and ROGER REYES, respondents.
PURISIMA, J.:

At bar is a petition for review of the decision1 of the Special Fifth Division of the Court of Appeals which
reversed the decision of the Securities and Exchange Commission (SEC) annulling the dissolution of
Neugene Marketing, Inc. (NEUGENE, for short).

The SEC Hearing Panel gathered the facts, as follows:

On January 27, 1978, NEUGENE was duly registered with this Commission to engage in
trading business for a term of fifty (50) years with the following as
incorporators/directors, namely:

1. Johnson Lee (one of the petitioners);

2. Lok Chun Suen (one of the respondents);

3. Charles O. Sy (one of the respondents);

4. Eugenio Flores, Jr. (husband of respondent Ban Hua U.

Flores)

5. Arsenio Yang, Jr. (one of the respondents)

The authorized capital stock of NEUGENE is THREE MILLION PESOS (P3,000.000.00)

divided into THIRTY THOUSAND (P30,000) shares with a par value of ONE HUNDRED
PESOS (P100.00) each. Out of this authorized capital stock, SIX HUNDRED THOUSAND
PESOS (P600.000.00) had been subscribed by the following subscribers, namely:

NAME NO. OF AMOUNT

———

SHARES SUBSCRIBED

————— ———————

Johnson Lee 600 P 60,000.00

Lok Chun Suen 1,200 120,000.00

Charles O. Sy 1,800 180,000.00

Eugenio Flores, Jr. 2,100 210,000.00

Arsenio Yang, Jr. 300 30,000.00

 ——————————————

TOTAL 6,000.00 P600,000.00

====== ==========

Out of the aforesaid subscription, ONE HUNDRED FIFTY THOUSAND PESOS (P150,000.00)
had been paid by the following subscribers as follows:

NAME AMOUNT PAID UP

——— ——————————

Johnson Lee P15,000.00

Lok Chun Suen 30,000.00

Charles O. Sy 45,000.00

Eugenio Flores, Jr. 52,500.00

Arsenio Yang, Jr. 7,500.00

——————

TOTAL P150,000.00

===========

The original shareholdings of the incorporators/stockholders of NEUGENE were increased

by ten percent (10%) each by virtue of stock dividend declaration in the amount of SIXTY
THOUSAND PESOS (P60,000.00) made by its board of directors in a special meeting held on
June 7, 1980. . . .

Again, on May 2, 1981, the Board of directors of NEUGENE declared a stock dividend in the
amount of FORTY THOUSAND PESOS (P40,000.00) in proportion to the shareholdings of
the stockholders of record of NEUGENE as of April 30, 1981. . . .

xxx xxx xxx

The outstanding capital stock of NEUGENE became, SEVEN HUNDRED THOUSAND PESOS
(P700,000.00) represented by SEVEN THOUSAND (7,000) shares.

On May 15, 1986, Eugenio Flores, Jr. assigned transferred and conveyed his entire
shareholdings of TWO THOUSAND FOUR HUNDRED FIFTY (2,450) shares in NEUGENE to
the following, to wit.

Pet. Sonny Moreno 1,050 shares (Exh. "B")

 Resp. Arsenio Yang, Jr., 700 shares (Exh. "C")

Resp. Charles O. Sy 700 shares (Exh. "D")

—————————

TOTAL 2,450

====

Thus, immediately after the assignment of the entire shareholdings of Egenio Flores, Jr, to
petitioner Sonny Moreno and respondents Arsenio Yang, Jr., and Charles O. Sy, the
stockholders of record of NEUGENE, as appearing in the Stock and Transfer Book (Exhibit,
"A"), particularly Exhihits "A-8 " to "A-12 " thereof were as follows:

NAME NO. OF SHARES

——— ————————

Johnson Lee. 700

Lok Chun Suen 1,400

Sonny Moreno 1,050

Charles O. Sy 2,800

Arsenio Yang, Jr. 1,050

————

TOTAL 7,000 2

======

On October 24, 1987, the private respondents, Charles O. Sy, Arsenio Yang, Jr. and Lok Chun Suen, holders
of 5,250 shares of NEUGENE (representing at least two-thirds (2/3) of the outstanding capital stock of
7,000 shares) sent notice to the directors of NEUGENE for a board meeting to be held on November 30,
1987. They also sent notice for a special stockholders' meeting on the same day, November 30, 1987, to
consider the dissolution of NEUGENE.

At the said meetings held on November 30, 1987, the private respondents, Charles O. Sy, Arsenio Yang, Jr.
and Lok Chun Suen, the directors and stockholders then present, voted for and approved a resolution
dissolving NEUGENE.

On March 1, 1988, acting upon private respondents's Petition for Dissolution, SEC issued a Certificate of
Dissolution of NEUGENE.
On March 22, 1988, the petitioners brought an action to annul or set aside the said SEC Certification on
the Dissolution of Neugene. In their Amended Petition, petitioners stated, among others, that they are the
majority stockholders of NEUGENE, owning eighty percent (80%) of its outstanding capital stock, at the
time of the adoption and approval of the Resolution for the Dissolution of NEUGENE, on November 30,
1987; that prior thereto or on July 1, 1987, to be precise, the private respondents had divested
themselves of their stockholdings when they endorsed their stock certificates in blank and delivered the
same to the Uy Family, the beneficial owners of NEUGENE; that at the meetings held on February 11, 12
and 13, 1987, in order to settle family squabbles, the Uy family agreed to award NEUGENE's stock
certificates to Johnny K. H. Uy, who, in turn, authorized Johnson Lee to dispose of the same; and that
Johnson Lee sold the said shares of stock to the petitioners, Leoncio Tan and Nicanor Martin, such that, as
reflected in the Stock and Transfer Book of NEUGENE, respondent Lok Chun Suen had assigned all of his
1,400 shares of stock to petitioner Nicanor Martin, respondent Charles O. SY assigned 2,100 shares out of
his 2,800 shares of stock to petitioner Leoncio Tan, and respondent Arsenio Yang, Jr. assigned 350 shares
of his 1,050 shares of stock to petitioner Leoncio Tan; that in view of the said transfers of shares of stock,
private respondents Arsenio Yang, Jr., and Charles O. Sy (each the holder of only 700 shares or 10% each
of the outstanding capital stock of NEUGENE) and Lok Chun Suen (who had ceased to be a stockholder as
July 1, 1987) could no longer validly vote for the dissolution of EUGENE on November 30, 1987, under
Section 118 of the Corporation Code, and all the proceedings of the meetings held on November 30, 1987,
which were improperly called and held without a quorum, are null void.3

On the other hand, the private respondents, Charles O. Sy, Arsenio Yang, Jr. and Lok Chun Suen, theorized
that the alleged assignments of shares of stock in favor of petitioners were simulated and fraudulently
effected, as there never was any agreement entered into by the Uy family to award NEUGENE'S stock
certificates to Johnny K. H. Uy, because subject stock certificates of the private respondents covering their
shares of stock were endorsed in blank by them and delivered to the Uy family, who were the beneficial
owners of NEUGENE, for safe keeping and the said certificates of stock were kept inside the confidential
vault of the Uy family at 225 D. Tuazon St., Quezon City, but the same were stolen by the spouses, Johnny
K. H. Uy and Magdalena Go-Uy, without the knowledge and authority of the Uy family; that petitioner
Sonny Moreno, a co-conspirator in such fraudulent transfer of stocks in question, recorded the Simulated
and fraudulent assignments in the Stock and Transfer Book of the corporation, which book he obtained
from Johnny K. H. Uy and Magdalena Go-Uy, together with other corporate records of NEUGENE,
including the stock certificates endorsed in blank by petitioner Johnson Lee and respondents Arsenio
Yang, Jr., Charles O. Sy and Lok Chun Suen; that the petitioners, Nicanor Martin and Leoncio Tan, are co-
conspirators of Johnson Lee and Sonny Moreno in effecting the said simulated and fraudulent transfers of
shares of stock; that the private respondents never sold their shares of stock in NEUGENE to any of the
petitioners or other stockholders of record, prior to the dissolution of the corporation, so that they
(private respondents) represented at least two-thirds (2/3) of the outstanding capital stock of NEUGENE
when they voted to dissolve NEUGENE, on November 30, 1987.4

In its decision of June 19, 1990, the SEC Panel of Hearing Officers nullified the Certification on the
Dissolution of NEUGENE issued by SEC, holding that the private respondents were no longer holders of at
least two-thirds (2/3) of the outstanding capital stock of NEUGENE at the time they presented the
petition for dissolution, as required under Section 118 of the Corporation Code. (Annex "O"). The said
decision of the SEC Panel of Hearing Officers was affirmed in toto by the SEC En Banc in a Decision
promulgated on January 14, 1993.5 Portions of the decision of the SEC Hearing Panel read:

The resolution to dissolve NEUGENE was adopted by only two (2) of its incumbent
directors, namely: respondent Charles O. Sy and Arsenio Yang, Jr. Respondent Lok Chun
 Suen had already ceased to be a stockholder of NEUGENE as of July 1, 1987, by the
endorsement and delivery and cancellation of his stock certificates (Exhs. "E", "F", and "G")
and the entries in the Stock and Transfer Book (Exhs. "A", "A-1" to "A-24"). Hence, there
was no quorum at said board of directors' meeting on November 30, 1987. There was no
quorum also at the November 30, 1987 meeting of the stockholders of NEUGENE since only
the following stockholders, namely: respondent Charles O. Sy and Arsenio Yang, Jr., who
own 10% each of the stockholding of NEUGENE, could be considered officially present at
said meeting. On this score alone, the case for the petitioners should be upheld.

xxx xxx xxx

WHEREFORE, judgement is hereby rendered:

1. Declaring as null and void the Certificate of Filing of Resolution of Voluntary Dissolution
of NEUGENE MARKETING, INC. issued by this Commission on March 1, 1988 for violation of
Section 118 of the Corporate Code of the Philippines;

2. Ordering the respondents, particularly respondent Roger Z. Reyes or any other persons
acting as trustees of NEUGENE from representing himself/themeselves from acting as such;

3. Directing the respondents, particularly respondents Ban Ha U. Chua, Ban Hua U. Flores,
Charles O. Sy and Arsenio Yang, Jr., or whoever is in possession of the corporate books and
records of NEUGENE, to turn over the same to its Secretary, petitioner Sonny Moreno,
within ten (10) days from the finality of this Decision; and to revert back NEUGENE the
Cash on Hand appearing in the Balance Sheet as of November 30, 1987 in the amount of
P860,591.98;

4. Ordering the respondents to pay attorney's fees to the petitioners in the amount of FOUR
HUNDRED THOUSAND PESOS (P400,000.00).6

xxx xxx xxx

On June 10, 1993, the aforesaid judgment of SEC was reversed by the Court of Appeals. Upholding the
validity of NEUGENE's dissolution, the Court of Appeals found that at the time of dissolution of NEUGENE
on November 30, 1987, the private respondents owned at least two-thirds (2/3) of NEUGENE's stocks, it
appearing that the certificates of stock of private respondents, which were endorsed in blank, as earlier
mentioned, were not validly transferred to petitioners herein.

The Court of Appeals ratiocinated and concluded:

xxx xxx xxx

The constitute a valid transfer, a stock certificate must be delivered and its delivery must
be coupled with an intention of constituting the person to whom the stock is delivered the
transferred (sic) thereof. (Fetcher Cyc Corp., Sec. 5484)

Furthermore, in order that there is a valid transfer, the person to whom the stock
certificates are endrosed (sic) must be a bona fide transferee and for value.
 In the case at bar, Nicanor Martin and Leoncio Tan were not bona fide trasferees for value
and in good faith. Private respondent alleged that petitioners Sy, Lok and Yang, Jr. indorsed
and delivered their stock certificates to Nicanor Martin and Leoncio Tan. However, private
respondent Johnson Lee testified that he acquired his shares of stock from Johnny Uy, who
in turn sold them to Nocanor Martin and Leoncio Tan (tsn, pp., 49-50, July 18, 1989).
Likewise, evidence shows that no consideration was paid by Leoncio Tan and Nicanor
Martin when they allegedly acquired the stock certificates from the Uy Family. Johnson Lee
failed to produce any document evidencing the transaction or a receipt showing his
payment for the stocks. Therefore, it is clear that they were not bona fide transferees for
value and in good faith. Consequently, they cannot be considered stockholders for the
purpose of determining the 2/3 votes of the outstanding capital stock required to dissolve
Neugene, in accordance with Sec. 118 of the Corporate Code.

xxx xxx xxx

After a careful examination of the documentary evidence, We find that the supposed
document evidencing the partition and division of the properties of the Uy Family (Exh.
"A"), is a mere xerox copy whose original copy was never produced before the hearing
panel. Moreover, it contained erasures and/or insertions, and it is written in the Chinese
Language, with no official translation submitted. Consequently, We find no basis for the
respondent Commission's finding that Neugene belongs to Johnny K. H. Uy.

Considering the above findings, there is likewise no basis for the Commission's ruling that
the amount of P60,591.98 should be returned by the petitioners to Neugene. Lastly, the
award of attorney's fees has no basis, considering Our findings that private respondent
have no cause of action against the petitioners, hence, they are not entitled to attorney's
fees.

WHEREFORE, the decision dated January 14, 1992 of the respondent Commission is hereby
REVERSED and SET ASIDE. No
costs. 7

In Its Resolution dated December 9, 1993, the Court of Appeals denied petitioners' motion for
reconsideration, and further ruled that the transfers of stock in question could not be valid and effective
for the simple reason that there is a complete absence of proof that the alleged transfers were recorded in
the books of the corporation. It relied on Section 63 of the Corporation Code of the Philippines which
provides that no transfer shall be valid except as between the parties, until the transfer is recorded in the
books of the corporation.8

In the Petition under scrutiny, petitioners contend that the Court of Appeals: "(1) misapprehended the
facts of the case and (2) failed to consider the evidence on record showing that the private respondents
were no longer holders of the necessary number of shares of stock at the time of the dissolution of
NEUGENE.9

The pivot of inquiry here is whether or not the private respondents lacked the requisite number of shares
of stock or had divested themselves of their stockholdings as of November 30, 1987 when they voted for
the resolution dissolving NEUGENE.
After a careful study, a finding in favor of private respondents is indicated. In short, the Petition is barren
of merit.

Entries in the Stock and Transfer Book of NEUGENE, particularly on the right hand portion of Exhibits "A-
9", "A-10" and "A-12", support the disquisition and conclusion arrived at by the Court of Appeals that at
the time of dissolution of NEUGENE on November 30, 1987, the private respondents, Lok Chun Suen,
Charles O. Sy and Arsenio Yang, Jr., owned at least two-thirds (2/3) of NEUGENE's outstanding capital
stock, in sufficient compliance with the germane provision of Section 118 of the Corporation Code of the
Philippines.

As shown in the Stock and Transfer Book of NEUGENE, the right hand portion of Exhibit "A-9", under the
column "Certificates Issued", private respondent Lok Chun Suen is the holder of a total of 1,400 shares of
stock, issued on February 23, 1979, October 1, 1980 and May 2, 1981, respectively. (Records, p. 662)
Exhibit "A-10", on its right hand portion and under the column "Certificates Issued" reflects private
respondent Charles O. Sy as the holder of a total of 2,800 shares of stock, issued on the abovementioned
dates except those acquired from Eugenio Flores, Jr. which were issued on May 15, 1986. (Records, p.
663) While the right hand portion of Exhibit "A-12", under the column "Certificates Issued", shows that
private respondent Arsenio Yang, Jr. is the holder of 1,050 shares, issued on the abovementioned dates,
except those acquired from Eugenio Flores, Jr. which were issued on May 15, 1986. (Records, p. 665)

Therefore, the entries on the right hand portion of NEUGENE'S Stock and Transfer Book, under the
column "Certificates Issued", indubitably record the private respondents as the holders of 5,250 shares,
constituting at least two-thirds (2/3) of NEUGENE's outstanding capital stock of 7,000 shares.

Petitioners introduced in evidence the very same exhibits pertaining to the Stock and Transfer Book of
NEUGENE (more specifically Exhibits "A-9", "A-10", and "A-12") to prove that the private respondents
were no longer the majority stockholders at the time of the dissolution of NEUGENE. It should be noted,
however, that on the left hand portion of the said exhibits, under the colum "Certificates Cancelled",
entries on July 1, 1987 disclose that all of Lok Chun Suen's 1,400 certificates of stock were cancelled,
Charles O. Sy's 2, 100 shares out of 2,800 shares were cancelled, and Arsenio Yang, Jr.'s 350 shares out of
his 1,050 shares were likewise cancelled, thereby leaving Arsenio Yang, Jr. and Charles O. Sy the holders
of only 700 shares each or 10 % of the outstanding capital stock of NEUGENE when its dissolution was
approved and voted for.

In light of the foregoing and after a careful examination of the evidence on record, and a judicious study
of the provisions of law and jurisprudence in point, we are with the Court of Appeals on the finding and
conclusion that the certificates of stock of the private respondents were stolen and therefore not validly
transferred, and the transfers of stock relied upon by petitioners were fraudulently recorded in the Stock
and Transfer Book of NEUGENE under the column "Certificates Cancelled".

Although well-established is the rule that the appellate court will not generally disturb the factual
findings by the trial court for the reason that the trial court heard the testimonies of the witnesses and
observed their deportment and manner of testifying during the trial and was afforded the singular chance
to assess the probative value of the evidence. The rule does not apply where, as in this case, the SEC
overlooked certain facts of substance and value which if considered would affect the result of the case.
(Tomas vs. CA, 185 SCRA 627 [1990]; People vs. Alforte, 219 SCRA 458 [1993])
In the case under consideration, records reveal that the SEC En Banc and its Panel Of Hearing Officers
misappreciated the true nature of the relationship between the stockholders of NEUGENE and the Uy
family, who had the understanding that the beneficial ownership of NEUGENE would remain with the Uy
family, such that subject shares of stock were, immediately upon issuance, endorsed in blank by the
shareholders and entrusted to the Uy family, through Ban Ha Chua, for safekeeping. Such beneficial
ownership of the Uy family is admitted not only in the testimonies of private respondents but also of the
petitioners, Sonny Moreno and Johnson Lee.10

Both the petitioners Johnson Lee (a member of the Uy family himself), and Sony Moreno, the corporate
secretary, were aware of the real import or significance of the indorsements in blank on the stock
certificates of the private respondent. Obviously, then, they (Lee and Moreno) acted in bad faith in
assigning subject certificates of stock to the petitioners, Nicanor Martin and Leoncio Tan, and in
recording the said transfers in dispute in the Stock and Transfer book of NEUGENE.

Then, too, as nominees of the Uy family, the approval by the private respondents, Charles O. Sy, Lok Chun
Suen and Arsenio Yang, Jr., Jr., was necessary for the validity and effectivity of the transfer of the stock
certificates registered under their (private respondents) names. In the case under consideration, not only
did the transfers of stock in question lack the requisite approval, the private respondents categorically
declared under oath that subject certificates of stock of theirs were stolen from the confidential vault of
the Uy family and illegally transferred to the names of petitioners in the Stock and Transfer Book of
NEUGENE.

As stressed by the Court of Appeals, there is no reliable showing of any valuable consideration for the
supposed transfer of subject stocks to petitioners. Fundamental and crucial is the rule that if a contract
has no cause, it does not produce any effect whatsoever and is inexistent or void from the beginning. The
complete absence of a cause or consideration renders the contract absolutely void and inexistent.
(Robleza vs. Court of Appeals, 174 SCRA 362 [1989]), citing Arts. 1352 and 1409 of the New Civil Code)

All things studiedly evaluated in proper perspective, we are of the irresistible conclusion that the private
respondents herein are the legitimate holders and owners of at least-two-thirds (2/3) of the outstanding
capital stock of NEUGENE, with the corresponding right to vote for its dissolution, in accordance with
Section 118 of the Corporation Code of the Philippines.

WHEREFORE, the Petition is DISMISSED for lack of merit and the Decision of the Court of Appeals
AFFIRMED, in its entirety, No pronouncement as to costs.

SO ORDERED.