021 PALTING v. SAN JOSE PETROLEUM INC.
(Presh) of all responsibility which they would otherwise incur by reason of any contract
December 17, 1996|Barrera, J. | Directors as Fiduciaries
PETITIONER: Pedri R. Palting
RESPONDENTS: San Jose Petroleum Incorporated
SUMMARY: In 1956, San Jose Petroleum, Inc. (SJP), a mining corporation or-
ganized under the laws of Panama, was allowed by the Securities and Exchange
Commission (SEC) to sell its shares of stocks in the Philippines. Apparently, the
proceeds of such sale shall be invested in San Jose Oil Company, Inc. (SJO), a
domestic mining corporation. Pedro Palting opposed the authorization granted
to SJP because said tie up between SJP and SJO is violative of the constitution;
that SJO is 90% owned by SJP; that the other 10% is owned by another foreign
corporation; that a mining corporation cannot be interested in another mining
corporation. SJP, on the other hand, invoked that under the parity rights agree-
ment (Laurel-Langley Agreement), SJP, a foreign corporation, is allowed to in-
vest in a domestic corporation.
The parity rights agreement is not applicable to SJP. The parity rights are only
granted to American business enterprises or enterprises directly or indirectly
controlled by US citizens. SJP is a Panamanian corporate citizen. The other
owners of SJO are Venezuelan corporations, not Americans. SJP was not able to
show contrary evidence. Further, the Supreme Court emphasized that the stocks
of these corporations are being traded in stocks exchanges abroad which renders
their foreign ownership subject to change from time to time. This fact renders a
practical impossibility to meet the requirements under the parity rights. Hence,
the tie up between SJP and SJO is illegal, SJP not being a domestic corporation
or an American business enterprise contemplated under the Laurel-Langley
Agreement.
WoN the sale of San Jose Petroleum’s securities is fraudulent, or would work or
tend to work fraud to purchasers of such securities in the Philippines. - YES.
The SC looked into the Articles of Incorporation of San Jose Petroleum (Ratio
#4). The SC held that these provisions are in direct opposition to our corpo-
ration law and corporate practices in this country. These provisions alone
would outlaw any corporation locally organized or doing business in this
jurisdiction. Consider the unique and unusual provision that no contract or
transaction between the company and any other association or corporation shall
be affected except in case of fraud, by the fact that any of the directors or offic-
ers of the company may be interested in or are directors or officers of such other
association or corporation; and that none of such contracts or transactions of this
company with any person or persons, firms, associations or corporations shall
be affected by the fact that any director or officer of this company is a party to
or has an interest in such contract or transaction or has any connection with such
person or persons, firms associations or corporations; and that any and all per-
sons who may become directors or officers of this company are hereby relieved
entered into which this company either for their own benefit, or for the benefit
of any person, firm, association or corporation in which they may be interested.
The directors and officers of the company can do anything, short of actual fraud,
with the affairs of the corporation even to benefit themselves directly or other
persons or entities in which they are interested, and with immunity because of
the advance condonation or relief from responsibility by reason of such acts.
This and the other provision which authorizes the election of non-stockholders
as directors, completely disassociate the stockholders from the government and
management of the business in which they have invested.
DOCTRINE: In the Philippine setting, by the nature of the fiduciary relation-
ship of directors, trustees and officers to the corporation and to the stockholders
or members, there arises in common law the three-fold duties: duty of obedi-
ence, duty of diligence, and the duty of loyalty. It is the breach of any of the
common law duties that is the basis by which directors or trustees, and officers,
become personally liable for the resulting damage caused to the corporation, its
stockholders or members, and members of the dealing public who are adversely
affected by such breach of duty.
FACTS:
1. On September 7, 1956, San Jose Petroleum (SJP) filed with the Philippine
Securities and Exchange Commission (SEC) a sworn registration statement,
for the registration and licensing for sale in the Philippines Voting Trust Cer-
tificates representing 2,000,000 shares of its capital stock of a par value of
$0.35 a share, at P1.00 per share.
2. It was alleged that the entire proceeds of the sale of said securities will be
devoted or used exclusively to finance the operations of San Jose Oil Com-
pany, Inc. (a domestic mining corporation) which has 14 petroleum explora-
tion concessions covering an area of a little less than 1,000,000 hectares, lo-
cated in the provinces of Pangasinan, Tarlac, Nueva Ecija, La Union, Iloilo,
Cotabato, Davao and Agusan.
3. It was the express condition of the sale that every purchaser of the securities
shall not receive a stock certificate, but a registered or bearer-voting-trust
certificate from the voting trustees named therein James L. Buckley and Aus-
tin G.E. Taylor, the first residing in Connecticut, U.S.A., and the second in
New York City.
4. While this application for registration was pending consideration by the SEC,
SJP filed an amended Statement for registration of the sale in the Philippines
of its shares of capital stock, which was increased from 2,000,000 to
5,000,000, at a reduced offering price of from P1.00 to P0.70 per share. At
this time the par value of the shares has also been reduced from $.35 to $.01
per share.
5. Pedro R. Palting and others, allegedly prospective investors in the shares of
 SJP, filed with the SEC an opposition to registration and licensing of the se-
curities on the grounds that (1) the tie-up between the issuer, San Jose Petro-
leum, a Panamanian corporation and San Jose Oil, a domestic corporation,
violates the Constitution of the Philippines, the Corporation Law and the Pe-
troleum Act of 1949; (2) the issuer has not been licensed to transact business
in the Philippines; (3) the sale of the shares of the issuer is fraudulent, and
works or tends to work a fraud upon Philippine purchasers; and (4) the issuer
as an enterprise, as well as its business, is based upon unsound business prin-
ciples.
6. San Jose Petroleum argued that it was a "business enterprise" enjoying parity
rights under the Ordinance appended to the Constitution, which parity right,
with respect to mineral resources in the Philippines, may be exercised, pur-
suant to the Laurel-Langley Agreement, only through the medium of a cor-
poration organized under the laws of the Philippines. Thus, registrant which
is allegedly qualified to exercise rights under the Parity Amendment, had to
do so through the medium of a domestic corporation, which is the San Jose
Oil.
7. It refused the contention that the Corporation Law was being violated, by
alleging that Section 13 thereof applies only to foreign corporations doing
business in the Philippines, and registrant was not doing business here. The
mere fact that it was a holding company of San Jose Oil and that registrant
undertook the financing of and giving technical assistance to said corporation
did not constitute transaction of business in the Philippines.
8. San Jose also denied that the offering for sale in the Philippines of its shares
of capital stock was fraudulent or would work or tend to work fraud on the
investors. SEC issued the orders object of the present appeal.
ISSUE/s:
1. WoN the sale of San Jose Petroleum’s securities is fraudulent, or would work
or tend to work fraud to purchasers of such securities in the Philippines. -
YES.
RULING: The motion of respondent to dismiss this appeal, is denied and the orders
of the Securities and Exchange Commissioner, allowing the registration of Respond-
ent's securities and licensing their sale in the Philippines are hereby set aside. The
case is remanded to the Securities and Exchange Commission for appropriate action
in consonance with this decision.
RATIO:
1. (Technical) Respondent SPJ, whose shares of stock were allowed registration for sale in the
Philippines, was incorporated under the laws of Panama. By virtue of a 3-party Agreement, re-
spondent was supposed to have oil investments of 8,000,000 shares of the capital stock of San
Jose Oil(at par value of $0.01 per share), plus a note for $250,000.00 due in 6 months, for which
respondent issued in favor of Oil Investments 16,000,000 shares of its capital stock, at $0.01 per
share or with a value of $160,000.00, plus a note for $230,297.97 maturing in 2 years at 6% per
annum interest,9 and the assumption of payment of the unpaid price of 7,500,000 (of the
8,000,000 shares of SAN JOSE OIL).
2. On June 27, 1956, the capitalization of SPJ was increased from $500,000.00 to $17,500,000.00
by increasing the par value of the same 50,000,000 shares, from $0.01 to $0.35.
3. As far as it appears from the records, for the 16,000,000 shares at $0.35 per share issued to Oil
Investments, respondent SJP received from Oil Investments only the note for $250,000.00 plus
the 8,000,000 shares of San Jose Oil, with par value of $0.10 per share or a total of $1,050,000.00
— the only assets of the corporation. In other words, respondent actually lost $4,550,000.00,
which was received by Oil Investments..
4. But this is not all. Some of the provisions of the Articles of Incorporation of
respondent San Jose Petroleum are noteworthy; viz:
a. the directors of the Company need not be shareholders;
b. that in the meetings of the board of directors, any director may be
represented and may vote through a proxy who also need not be a
director or stockholder; and
c. that no contract or transaction between the corporation and any other
association or partnership will be affected, except in case of fraud,
by the fact that any of the directors or officers of the corporation is
interested in, or is a director or officer of, such other association or
partnership, and that no such contract or transaction of the corpora-
tion with any other person or persons, firm, association or partner-
ship shall be affected by the fact that any director or officer of the
corporation is a party to or has an interest in, such contract or trans-
action, or has in anyway connected with such other person or per-
sons, firm, association or partnership; and finally, that all and any of
the persons who may become director or officer of the corporation
shall be relieved from all responsibility for which they may other-
wise be liable by reason of any contract entered into with the corpo-
ration, whether it be for his benefit or for the benefit of any other
person, firm, association or partnership in which he may be inter-
ested.
5. These provisions are in direct opposition to our corporation law and cor-
porate practices in this country. These provisions alone would outlaw
any corporation locally organized or doing business in this jurisdiction.
Consider the unique and unusual provision that no contract or transaction be-
tween the company and any other association or corporation shall be affected
except in case of fraud, by the fact that any of the directors or officers of the
company may be interested in or are directors or officers of such other asso-
ciation or corporation; and that none of such contracts or transactions of this
company with any person or persons, firms, associations or corporations shall
be affected by the fact that any director or officer of this company is a party
to or has an interest in such contract or transaction or has any connection with
such person or persons, firms associations or corporations; and that any and
all persons who may become directors or officers of this company are hereby
relieved of all responsibility which they would otherwise incur by reason of
any contract entered into which this company either for their own benefit, or
 for the benefit of any person, firm, association or corporation in which they
may be interested.
6. The impact of these provisions upon the traditional judiciary relationship be-
tween the directors and the stockholders of a corporation is too obvious to
escape notice by those who are called upon to protect the interest of investors.
7. The directors and officers of the company can do anything, short of actual
fraud, with the affairs of the corporation even to benefit themselves directly
or other persons or entities in which they are interested, and with immunity
because of the advance condonation or relief from responsibility by reason of
such acts. This and the other provision which authorizes the election of non-
stockholders as directors, completely disassociate the stockholders from the
government and management of the business in which they have invested.
8. To cap it all on April 17, 1957, admittedly to assure continuity of the man-
agement and stability of SJP, Oil Investments, as holder of the only sub-
scribed stock of the former corporation and acting "on behalf of all future
holders of voting trust certificates," entered into a voting trust agreement with
James L. Buckley and Austin E. Taylor, whereby said Trustees were given
authority to vote the shares represented by the outstanding trust certificates
(including those that may henceforth be issued) in the following manner:
(a) At all elections of directors, the Trustees will designate a suitable proxy
or proxies to vote for the election of directors designated by the Trustees in
their own discretion, having in mind the best interests of the holders of the
voting trust certificates, it being understood that any and all of the Trustees
shall be eligible for election as directors;

(b) On any proposition for removal of a director, the Trustees shall designate
a suitable proxy or proxies to vote for or against such proposition as the Trus-
tees in their own discretion may determine, having in mind the best interest
of the holders of the voting trust certificates;

(c) With respect to all other matters arising at any meeting of stockholders,
the Trustees will instruct such proxy or proxies attending such meetings to
vote the shares of stock held by the Trustees in accordance with the written
instructions of each holder of voting trust certificates.
It was also therein provided that the said Agreement shall be binding upon
the parties thereto, their successors, and upon all holders of voting trust cer-
tificates.

And these are the voting trust certificates that are offered to investors as au-
thorized by Security and Exchange Commissioner. It cannot be doubted that
the sale of respondent's securities would, to say the least, work or tend to
work fraud to Philippine investors.
022 Strategic Alliance Dev. Corp. v. Radstock Securities Ltd. (Castillo, I)
December 4, 2009 | Carpio, J. | Directors as fiduciaries

G.R. No. 178158

FACTS:
PETITIONER: Strategic Alliance Development Corporation
1. The Construction Development Corporation of the Philippines (CDCP) had
RESPONDENTS: Radstock Securities Limited, Philippine National
a 30-year franchise to construct, operate and maintain toll facilities in the
Construction Corporation (PNCC)
North and South Luzon Tollways. Basay Mining Corporation, an affiliate
INTERVENOR: Asiavest Merchant Bankers Berhad
of CDCP, obtained loans from Marubeni Corporation of Japan
G.R. No. 180428
amounting to P10 billion. A CDCP official issued letters of guarantee for
PETITIONER: Luis Sison
the loans, committing the CDCP to pay solidarily.
RESPONDENTS: Philippine National Construction Corporation, Radstock
2. Thereafter, CDCP changed its corporate name to PNCC to reflect the
Securities Limited
government’s shareholding in the corporation. The government owned
90.3% of the equity of PNCC. (CDCP at the time it obtained a debt from
SUMMARY: CDCP had a 30-year franchise to construct, operate, and maintain
Marubeni and it was also privately owned then. Afterwards, it became PNCC
toll facilities in the North and South Luzon Tollways. Basay Mining Corp, an
and government owned)
affiliate of CDCP, obtained loans from Marubeni Corp of Japan amounting to
3. The money owing to Marubeni remained unpaid. For so long, this loan, which
P10B. CDCP changed its corporate name to PNCC to reflect the government’s
was secured by CDCP later renamed PNCC, was not recognized by PNCC in
shareholding in the corporation. The money owing to Marubeni remained unpaid.
its accounting. But in October 2000, after 20 years, PNCC suddenly
For 20 years, the loan was not recognised by PNCC in its accounting, until PNCC
recognized this financial obligation to Marubeni amounting to P10 Billion.
suddenly recognised the financial obligation. Barely 3 months after PNCC
4. Barely 3 months after PNCC recognized their liability, Marubeni assigned
recognized their liability, Marubeni assigned its entire credit to Radstock
its entire credit to Radstock Corporation for less than P100 million.
Corporation for less than P100 million. Radstock immediately sought to collect
5. Radstock immediately sought to collect this 10 billion loan from PNCC. They
this 10 billion loan from PNCC. Eventually, Radstock and PNCC entered into the
filed an action for collection and damages against PNCC in the RTC of
compromise agreement which is the crux of the controversy. The most important
Mandaluyong. Eventually, Radstock and PNCC entered into the compromise
part of the agreement is “That PNCC shall assign to a third party assignee, to be
agreement which is the crux of the controversy. The compromise agreement
designated by Radstock, all its rights and interests in specified real properties
contained the following stipulations:
provided the assignee shall be duly qualified to own real properties in the
a. That the obligation of PNCC to Radstock would be reduced to P6
Philippines.” Note that Radstock is a foreign corporation who cannot own real
billion
prop in the Philippines. Issue is WoN the compromise agreement is valid. The
b. MOST IMPORTANT THING HERE: That PNCC shall assign to a
Court ruled in the negative because of the unconstitutionality of the stipulation in
third party assignee, to be designated by Radstock, all its rights and
the compromise agreement assigning real properties to a third party to be
interests in specified real properties provided the assignee shall be
designated by Radstock. The Court based its decision on Sec 7 in relation to Sec
duly qualified to own real properties in the Philippines. (Ang gusto
3 of Article XII of the 1987 Consti. Radstock cannot transfer the rights to
nila mangyari, iaassign ni PNCC yung real property kay yet
ownership of land in the Philippines if it cannot own the land itself because
unnamed third person. Pero si third person ay pipiliin ni Radstock
it is a circumvention of the Consti, which is void.
dahil si Radstock ay foreign corporation at hindi pwede sa kanya i-
assign yung real property dahil sa constitutional prohibition.)
DOCTRINE: [DOCTRINE IN THE OUTLINE] In Philippine jurisdiction, the
c. There are 19 pieces of real estate properties specified constituting
members of the Board of Directors have a three-fold duty: duty of obedience,
13 hectares of valuable property with an appraised value of P6
duty of diligence, and the duty of loyalty. Accordingly, the members of the board
billion.
of directors (1) shall direct the affairs of the corporation only in accordance with
d. Less importantly, PNCC shall also assign to Radstock 20% of the
the purpose for which it was organized; (2) shall not willfully and knowingly vote
outstanding capital stock of PNCC, and 6% share in the gross toll
for or assent to patently unlawful acts of the corporation or act in bad faith or with
revenue of the Manila North Tollways Corporation from 2008-2035.
gross negligence in directing the affairs of the corporation; and (3) shall not ac-
quire any personal or pecuniary interest in conflict with their duty as such direc-
tors or trustees.
ISSUES:
1. WoN the compromise agreement is valid – NO, it was not valid because of
the unconstitutionality of the stipulation in the compromise agreement
assigning real properties to a third party to be designated by Radstock.
RULING: IN VIEW OF ALL THE FOREGOING CONSIDERATIONS, I vote to
dismiss the petitions in G.R. No. 178158 and G.R. No. 180428; to disallow the
intervention of Asiavest Merchant Bankers Berhad; to affirm the decision dated
January 25, 2007, the resolution dated May 31, 2007 promulgated in C.A.-G.R. CV
No. 87971, and the resolution dated June 12, 2007 promulgated in C.A.-G.R. SP No.
97982.
RATIO:
1. There are many grounds for the invalidity of the compromise agreement but
the main focus for our topic would be the unconstitutionality of the stipulation
in the compromise agreement assigning real properties to a third party to be
designated by Radstock.
2. We will first discuss why Radstock, a foreign corporation cannot own real
property in the Philippines. Section 71, in relation with Section 32, Article
XII of the 1987 Constitution prohibits it.
3. While it is admitted that Radstock as a foreign corporation cannot own
real property by itself, it is contended that Radstock can own the rights
to ownership of real property. Those who argue for the validity of the
compromise agreement say that Radstock can be allowed to designate the
party to whom the real property is assigned instead of to itself. This
argument cannot be countenanced because it will be a circumvention of
the constitutional prohibition.
4. Radstock cannot transfer the rights to ownership of land in the
Philippines if it cannot own the land itself. It is basic that an assignor or
seller cannot assign or sell something he does not own at the time the
ownership, or the rights to the ownership, are to be transferred to the assignee
or buyer. (Sales concept, ingat ka.) The third party assignee under the
Compromise Agreement who will be designated by Radstock can only
acquire rights duplicating those which its assignor (Radstock) is entitled by
law to exercise.
5. Thus, the third party assignee can acquire ownership of the land only if its
assignor, Radstock, owns the land. Clearly, the assignment by PNCC of the
real properties to a nominee to be designated by Radstock is a circumvention
1
Section 7. Save in cases of hereditary succession, no private lands shall be transferred or con-
veyed except to individuals, corporations, or associations qualified to acquire or hold lands of
the public domain.
of the Constitutional prohibition against a private foreign corporation owning
lands in the Philippines. Such circumvention renders the Compromise
Agreement void.
6. In Philippine jurisdiction, the members of the Board of Directors have a
three-fold duty: duty of obedience, duty of diligence, and the duty of
loyalty.
7. Accordingly, the members of the board of directors (1) shall direct the affairs
of the corporation only in accordance with the purpose for which it was
organized; (2) shall not willfully and knowingly vote for or assent to patently
unlawful acts of the corporation or act in bad faith or with gross negligence
in directing the affairs of the corporation; and (3) shall not acquire any
personal or pecuniary interest in conflict with their duty as such directors or
trustees.
8. By entering into a compromise agreement contrary to the Constitution, the
Board of PNCC violated their duty of diligence, because they acted with bad
faith and gross negligence.
9. In case TVT/CLV asks, the other grounds for invalidity of the compromise
agreement are:
a. Remember the less important assignments of 6% of revenues from
toll payments, and 20% stock capital to Radstock in the compromise
agreement? This is also not allowed because the franchise of PNCC
has already expired and all its assets turned over to the government.
Therefore, the revenues and stock capital belong to the government.
There can be no disbursement of public funds without appropriation
by congress. The compromise agreement is not an appropriation by
congress
b. Public bidding is required to dispose of governmental property.
Mere assignments are prohibited.
c. PNCC must follow preference of credit. PNCC has other creditors,
among them the national government which should be paid first, and
other creditors who have final and executory judgements against
PNCC. The loan from Marubeni is unsecured and should be one of
the last to be paid. So the compromise agreement effectively
satisfying the unsecured loan to Marubeni before the preferred
creditors is invalid.
2
Section. 3. Private corporations or associations may not hold such lands of the public domain
except by lease, for a period not exceeding twenty-five years, renewable for not more than
twenty-five years, and not to exceed one hundred thousand hectares in area. Citizens of the
Philippines may lease not more than five hundred hectares, or acquire not more than twelve
hectares thereof by purchase, homestead, or grant.
 023 STEINBERG v. VELASCO (Callueng)
March 12, 1929 | Johns, J. | Duty of Diligence (Section 31)
PETITIONER: C.H. Steinberg, as Receiver of the Sibuguey Trading Company,
Incorporated
RESPONDENTS: Gregorio Velasco, et. al
SUMMARY: During the meeting of the Board of Directs of Sibuguey Trading
Company held on July 24, 1922, knowing very well of the face value of the
corporation, the defendants, Velasco, et. al passed a resolution authorizing the
purchase by the corporation of large portion of its own capital stock in the total
amount of P3,300 for 330 shares, par value of P10 each. At the time that the
purchase was made, the corporation was indebted in the sum of P13,807.50 and
that according to its books, it had accounts receivable in the sum of P19,126.02.
On September 11, 1923, when the petition for the dissolution of the corporation
was presented to the court, according to a statement made June 30, 1923, it has
accounts payable aggregating P9,241.19, and accounts receivable for P12,512.47.
The president and manager submitted to the Board of Directors his statement and
balance sheet for the first semester ending June 30, 1922 and recommended that
P3,000 — out of the surplus account be set aside for dividends payable. However,
the payment of such dividends be made in installments so as not to affect the
financial condition of the corporation. Now, Steinberg alleges that these acts
(diverting its funds) caused injury, damage and in fraud of the creditors of the
corporation. Steinberg prays for a judgement against Velasco et. al and seeks to
make them personally liable in their capacity as directors. ISSUE: WoN Velasco
et. al can be made personally liable in their capacity as directors. YES. SC held
that 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 buy its own stock, and will not declare dividends to stockholders
when the corporation is insolvent. In this case, it was found that the corporation
did not have an actual bona fide surplus from which dividends could be paid.
Moreover, the Court noted that the board of directors purchased the stock from
the corporation and declared the dividends on the stock at the same Board meeting,
and that the directors were permitted to resign so that they could sell their stock to
the corporation. Given all of this, it was apparent that the directors did not act in
good faith or were grossly ignorant of their duties. The rule is well stated in Ruling
Case Law, vol. 7, p. 473, section 454 where it is said: General Duty to Exercise
Reasonable Care. — The directors of a corporation are bound to care for its
property and manage its affairs in good faith, and for a violation of these duties
resulting in waste of its assets or injury to the property they are liable to account
the same as other trustees.
DOCTRINE: The directors shall be personally liable to reimburse the corporation
for the amounts of dividends wrongfully declared and paid to stockholders, when
they failed to consider that the recorded retained earnings in the books of the cor-
poration was illusory considering the various accounts receivables that had to be
written off as uncollectible.
FACTS:
NOTE: Please check the annex for the specific allegations in the complaint
1. Plaintiff, Steinberg, is the receiver of the Sibuguey Trading Company, a do-
mestic corporation. The Velasco et. al are residents of the Philippine Islands.
It is alleged that Gregorio Velasco, as president, Felix del Castillo, as vice-
president, Andres L. Navallo, as secretary-treasurer, and Rufino Manuel, as
director of Trading Company, at a meeting of the board of directors held on
July 24, 1922, approved and authorized various lawful purchases already
made of a large portion of the capital stock of the company from its various
stockholders, thereby diverting its funds to the injury, damage and in fraud
of the creditors of the corporation.
2. As a second cause of action, Steinberg alleges that the officers and directors
of the corporation approved a resolution for the payment of P3,000 as divi-
dends to its stockholders, which was wrongfully done and in bad faith, and
to the injury and fraud of its creditors. That at the time the petition for the
dissolution of the corporation was presented it had accounts payable in the
sum of P9,241.19, "and practically worthless accounts receivable."
3. Steinberg prays judgment for the sum of P3,300 from the Gregorio Velasco,
Felix del Castillo, Andres L. Navallo and Rufino Manuel, personally as mem-
bers of the Board of Directors, or for the recovery from the defendants S. R.
Ganzon, of the sum of P1,000, from the defendant Felix D. Mendaros,
P2,000, and from the defendant Dionisio Saavedra, P100, and under his se-
cond cause of action, he prays judgment for the sum of P3,000, with legal
interest against the board of directors, and costs.
4. For their answer, Felix del Castillo, Rufino Manuel, S. R. Ganzon, Dionisio
Saavedra and Valentin Matias made a general and specific denial.
5. In his amended answer, the Gregorio Velasco admits paragraphs, 1, 2 and 3
of each cause of action of the complaint, and that the shares mentioned in
paragraph 4 of the first cause of action were purchased, but alleges that they
were purchased by virtue of a resolution of the board of directors of the cor-
poration "when the business of the company was going on very well." That
the defendant is one of the principal shareholders, and that about the same
time, he purchased other shares for his own account, because he thought they
would bring profits. As to the second cause of action, he admits that the div-
idends described in paragraph 4 of the complaint were distributed, but alleges
that such distribution was authorized by the board of directors, "and that the
amount represented by said dividends really constitutes a surplus profit of the
 corporation," and as counterclaim, he asks for judgment against the receiver
for P12,512.47 for and on account of his negligence in failing to collect the
accounts.
6. The lower court ruled in favor of Velasco, et. al and dismissed Steinberg’s
complaint.
7. Hence, this petition
ISSUE/s:
1. WoN the Sibuguey Trading Company could legally purchase its own stock.
NO.
2. WoN the Board of Directors of the said Corporation could legally declare a
dividend of P3,000. NO.
EXPLANATION FOR THE FIRST AND SECOND ISSUE: NO, because the
action of the board in purchasing the stock from the corporation and in de-
claring the dividends on the stock was all done at the same meeting of the
board of directors. The directors were permitted to resign so that they
could sell their stock to the corporation. In other words, the directors did
not act in good faith or that they were grossly ignorant of their duties.
3. WoN Velasco et. al can be made personally liable in their capacity as direc-
tors (IMPT). YES, because directors of a corporation are bound to care
for its property and manage its affairs in good faith and for a violation
of these duties resulting in waste of its assets or injury to the property
they are liable to account the same as other trustees.
NOTE: The third issue is not the specific issue mentioned in the case but this is
the issue in the outline of sir.
RULING: The judgment of the lower court is reversed, and (a), as to the first
cause of action, one will be entered for the plaintiff and against the defendant S. R.
Ganzon for the sum of P1,000, with legal interest from the 10th of February, 1926,
and against the defendant Felix D. Medaros for P2,000, with like interests, and
against the defendant Dionisio Saavedra for P100, with like interest, and against each
of them for costs, each on their primary liability as purchasers of stock, and (b)
against the defendants Gregorio Velasco, Felix del Castillo and Rufino Manuel, per-
sonally, as members of the board of directors of the Sibuguey Trading Company, In-
corporated, as secondarily liable for the whole amount of such stock sold and pur-
chased as above stated, and on the second cause of action, judgment will be entered
(c) for the plaintiff and jointly and severally against the defendants Gregorio Ve-
lasco, Felix del Castillo and Rufino Manuel, personally, as members of the board of
directors of the Sibuguey Trading Company, Incorporated, for P3,000, with interest
thereon from February 10, 1926, at the rate of 6 per cent per annum, and costs. So or-
dered.
RATIO:
1. It is, indeed, peculiar that the action of the board in purchasing the stock
from the corporation and in declaring the dividends on the stock was all
done at the same meeting of the board of directors, and it appears in those
minutes that the both Ganzon and Mendaros were formerly directors and
resigned before the board approved the purchase and declared the divi-
dends, and that out of the whole 330 shares purchased, Ganzon, sold 100
and Mendaros 200, or a total of 300 shares out of the 330, which were pur-
chased by the corporation, and for which it paid P3,300. In other words, that
the directors were permitted to resign so that they could sell their stock
to the corporation. As stated, the authorized capital stock was P20,000 di-
vided into 2,000 shares of the par value of P10 each, which only P10,030 was
subscribed and paid. Deducting the P3,300 paid for the purchase of the stock,
there would be left P7,000 of paid up stock, from which deduct P3,000 paid
in dividends, there would be left P4,000 only. In this situation and upon this
state of facts, it is very apparent that the directors did not act in good
faith or that they were grossly ignorant of their duties.
2. Upon each of those points, the rule is well stated in Ruling Case Law, vol.
7, p. 473, section 454 where it is said:
a. General Duty to Exercise Reasonable Care. — The directors of a corpo-
ration are bound to care for its property and manage its affairs in good
faith, and for a violation of these duties resulting in waste of its assets
or injury to the property they are liable to account the same as other
trustees. Are there can be no doubt that if they do acts clearly beyond their
power, whereby loss ensues to the corporation, or dispose of its property or
pay away its money without authority, they will be required to make good
the loss out of their private estates. This is the rule where the disposition
made of money or property of the corporation is one either not within the
lawful power of the corporation, or, if within the authority of the particular
officer or officers.
3. And section 458 which says:
a. Want of Knowledge, Skill, or Competency. — It has been said that directors
are not liable for losses resulting to the corporation from want of knowledge
on their part; or for mistake of judgment, provided they were honest, and
provided they are fairly within the scope of the powers and discretion con-
fided to the managing body. But the acceptance of the office of a director
of a corporation implies a competent knowledge of the duties assumed, and
directors cannot excuse imprudence on the ground of their ignorance or in-
experience; and if they commit an error of judgment through mere reckless-
ness or want of ordinary prudence or skill, they may be held liable for the
consequences. Like a mandatory, to whom he has been likened, a director
is bound not only to exercise proper care and diligence, but ordinary skill
and judgment. As he is bound to exercise ordinary skill and judgment, he
 cannot set up that he did not possess them. for bad and doubtful accounts and depreciation of equipment, thereby leaving a bal-
4. Creditors of a corporation have the right to assume that so long as there ance of P3,314.72 of net surplus profit after paying this dividend.
are outstanding debts and liabilities, the board of directors will not use 7. It is also stipulated at a meeting of the board of directors held on July 24, 1922,
the assets of the corporation to purchase its own stock, and that it will as follows: 6. The president and manager submitted to the Board of Directors his
not declare dividends to stockholders when the corporation is insolvent. statement and balance sheet for the first semester ending June 30, 1922 and recom-
mended that P3,000 — out of the surplus account be set aside for dividends payable,
5. The amount involved in this case is not large, but the legal principles are
and that payments be made in installments so as not to effect the financial condition
important, and we have given them the consideration which they deserve. of the corporation. That stockholders having outstanding account with the corporation
should settle first their accounts before payments of their dividends could be made.
ANNEX: SPECIFICS OF THE COMPLAINT (in case sir asks): Mr. Castillo moved that the statement and balance sheet be approved as submitted,
1. It is stipulated that on July 24, 1922, the directors of the corporation approved and also the recommendations of the president. Seconded by Mr. Manuel. Approved.
the purchase of stocks as follows: 8. Paragraph 8 of the stipulation is as follows: That according to the balance sheet of
a. One hundred shares from S. R. Ganzon for P1,000; the corporation, dated June 30, 1923, it had accounts receivable in the sum of
b. One hundred shares from Felix D. Mendaros at the same price; which pur- P12,512.47, due from various contractor and laborers of the National Coal Company,
chase was made on June 29, 1922; another and also employees of the herein corporation, which the herein receiver, after his ap-
c. One hundred shares from Felix D. Mendaros at the same price on July 16, pointment on February 28, 1924, although he made due efforts by personally visiting
1922; the location of the corporation, and of National Coal Company, at its offices, at Ma-
d. Ten shares from Dionisio Saavedra at the same price on June 29, 1922. langas, Mindanao, and by writing numerous letters of demand to the debtors of the
2. That during such times, Gregorio Velasco purchased 13 shares for the corporation for corporation, in order to collect these accounts receivable, he was unable to do so as
P130; Felix del Castillo — 42 shares for P420; Andres Navallo — 15 shares for P150; most of them were without goods or property, and he could not file any suit against
and the defendant Mendaros — 10 shares for P100. That during the time these various them that might have any property, for the reason that he had no funds on hand with
purchases were made, the total amount of subscribed and paid up capital stock of the which to pay the filing and sheriff fees to Malangas, and other places of their resi-
corporation was P10,030, out of the authorized capital stock 2,000 shares of the par dences.
value of P10 each.
3. Paragraph 4 of the stipulation also recites: Be it also admitted as a fact that the time
of the said purchases there was a surplus profit of the corporation above-named of
P3,314.72.
4. Paragraph 5 is as follows: That at the time of the repeatedly mentioned various pur-
chases of the said capital stock were made, the said corporation had Accounts Payable
in the total amount of P13,807.50 as shown by the statement of the corporation, dated
June 30, 1922, and the Accounts Receivable in the sum of P19,126.02 according to
the books, and that the intention of the Board of Directors was to resell the stocks
purchased by the corporations at a sum above par for each stock, this expectation
being justified by the then satisfactory and sound financial condition of the business
of the corporation.
5. It is also stipulated that on September 11, 1923, when the petition for the dissolution
of the corporation was presented to the court, according to a statement made June 30,
1923, it has accounts payable aggregating P9,41.19, and accounts receivable for
P12,512.47.
6. Paragraph 7 of the stipulation recites: That the same defendants, mentioned in par-
agraph 2 of this stipulation of facts and in the same capacity, on the same date of July
24, 1922, and at the said meeting of the said Board of Directors, approved and author-
ized by resolution the payment of dividends to its stockholders, in the sum of three
thousand pesos (P3,000), Philippine currency, which payments were made at different
dates, between September 30, 1922, and May 12, 1923, both dates inclusive, at a time
when the corporation had accounts less in amount than the accounts receivable, which
resolution was based upon the balance sheet made as June 30, 1922, said balance sheet
showing that the corporation had a surplus of P1,069.41, and a profit on the same date
of P2,656.08, or a total surplus amount of P3,725.49, and a reserve fund of P2,889.23
 024 Gokongwei v. SEC (Buenaventura)
April 11, 1979 | Justice Antonio | Doctrine of Corporate Opportunity
PETITIONER: John Gokongwei Jr.
RESPONDENTS: Securities and Exchange Commission, Andres Soriano, Jose
Soriano, Enrique Zobel, Antonio Roxas, Emeterio Bunao, Walthrode Conde,
Miguel Ortigas, Antonio Prieto, San Miguel Corporation, Emigdio Tanjuatco, and
Eduardo Visaya
SUMMARY: Gokongwei, a stockholder of SMC, and the owner of a rival company
called URC, filed a petition for the “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 SMC and its board of directors.
This was because the Board of Directors of SMC made an amendment to the by-
laws that would restrict Gokongwei from being able to secure a seat in the Board of
Directors due to him being engaged in a competitive business. The SC could not
get the required vote to uphold the validity of the amended by-laws, however the
Court discussed the doctrine of corporate opportunity and the validity of such by-
laws creating such restrictions on the election of directors. This was because
directors have a fiduciary relationship to the corporation and its shareholders. The
Court noted that 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.
DOCTRINE: It is well established that corporate officers are not permitted to use
their position of trust and confidence to further their private interests. The doc-
trine of “corporate opportunity” 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 interest. The doctrine rest fundamentally on the
unfairness, in particular circumstances, of an officer or director taking advantage
of an opportunity for his personal profit when the interest of the corporation justly
calls for protection.
ISSUES:
FACTS:
1. John Gokongwei Jr. (Gokongwei), as stockholder of San Miguel Corporation
(SMC), filed a petition for the “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 Board of
Directors of SMC, and against SMC itself, with the Securities and Exchange
Commission (SEC),
2. The respondent shareholders denied the averments of Gokongwei and
claimed that the latter, as the owner of Universal Robina Corporation
(URC), which is a corporation engaged in competitive business with
SMC, acquired enough shares of SMC to be able to vote himself as a
Board of Director in SMC. (The areas of competition between SMC and
URC in 1977 represented, therefore, for SMC, product sales of more than
P849 million.)
3. One of the questioned amendments gave the Board of Directors the
prerogative of determining whether they or other persons are engaged
in competitive or antagonistic business; that the portion of the amended
by-laws 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, for the purpose of restricting certain
stockholders from being elected in to the Board of Directors.
4. In a stockholders meeting, the other shareholders rejected Gokongwei in
his bid to secure such a seat in the Board of Directors of SMC, on the
ground that he was engaged in a competitive business and his securing a
seat would have subjected respondent corporation to grave
disadvantages SEC ruled in favor of the respondent-counsel.
5. Hence the petition of Gokongwei to the SC with regard to the decision of the
SEC. Gokongwei 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.
6. Respondent shareholders claim that the exclusion of a competitor from the
Board is legitimate corporate purpose, considering that being a
competitor, Gokongwei 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
(1) WoN 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
– YES. Statutory right of stockholder to examine the records of the company
in good faith extends to the records wholly-owned subsidiary of the said
corporation.
(2) [SYLLABUS ISSUE] WoN the provisions of the amended by-laws of
SMC, disqualifying a competitor from nomination or election to the
Board of Directors of SMC. are valid and reasonable - YES. But there
 was an improper disqualification in this case.
RULING: WHEREFORE, Petition is granted with regard to the following:
1. Gokongwei the right to examine and secure copies of the books and records
of San Miguel International.
2. Until and after Gokongwei has been properly disqualified by the SEC and
final judgement of the court, he is deemed eligible for the legal purpose of
being nominated and voted to seat as a board member of SMC.
3. The Court's voting on the validity of respondent corporation's amendment of
the by-laws is inconclusive without the required majority of eight votes to
settle the issue one way or the other having been reached. [So the justices
couldn't get a majority decision; status quo remains until the BoD of
SMC make a new decision which could be appealed to the SEC, then to
the courts]
4. NOTE: In the 1980 decision of this case, the Court ruled in favor of the
respondent-shareholders and upheld the prohibition against Gokongwei
due to the doctrine of Corporate Opportunity
RATIO:
[Amended by-laws of SMC disqualifying a competitor from nomination or
election to the Board of Directors of SMC]
1. 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. "
2. 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.
A DIRECTOR STANDS IN A FIDUCIARY RELATION TO THE CORPORATION
AND ITS SHAREHOLDERS
3. 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."
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
4. It is also well established that corporate officers "are not permitted to use their
position of trust and confidence to further their private interests."
5. The DOCTRINE OF CORPORATE OPPORTUNITY 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.
6. 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.
7. 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.
8. 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.
(Not so important issue) [SEC gravely abused its discretion in denying
petitioner's request for an examination of the records]
9. 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."
10. 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.
11. 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.
 025 PRIME WHTE CEMENT v. IAC (BALISONG)
19 Mar. 1993 | Campos, Jr., J. | Disloyalty of Member of the Board of Directors
PETITIONER: Prime White Cement Corporation
RESPONDENTS: Intermmediate Appellate Court and Alejandro Te
SUMMARY: Prime White Cement entered into a dealership agreement with one
of its directors, Te, whereby the latter was to act as exclusive dealer of the
corporation in Mindanao. Te entered into supply agreements with third parties.
When Te placed his order, the corporation imposed conditions that are drastically
different from those in the dealership agreement, the most important being: (a) the
period of the agreement in the first contract was for a period of five years, while in
the second, the agreement was only for three months; and (b) in the first agreement,
the price was P9.70 per bag, in the second, it was raised to P13.30 per bag with a
reservation on the part of the corporation to increase the price. Te demanded
compliance, however, the corporation refused. The trial court adjudged the
corporation liable for damages, which was affirmed by the CA, on the thesis that
the corporation, though not authorizing its President and the Chairman is estopped
from disclaiming obligation under the contract. The issue is whether the dealership
agreement is valid. The Court held in the negative. It held that since Te is a director
of the corporation, the general rules on validity of contracts do not apply. Instead,
Sec. 32 of the Corporation Code on Director’s contracts should control. The Court
found that the contract was unfair and unreasonable for binding the corporation to
a fixed price of an extended period, without grant of right to re-adjust. As director,
specially since he was the other party in interest, respondent Te's bounden duty was
to act in such manner as not to unduly prejudice the corporation.
DOCTRINE: A director's contract with his corporation is not in all instances void
or voidable. If the contract is fair and reasonable under the circumstances, it may
be ratified by the stockholders provided a full disclosure of his adverse interest is
made.
FACTS:
1. Prime White Cement — through its President, Zosimo Falcon and Chairman
of the Board, Justo C. Trazo — entered into a dealership agreement with one
of the members of the Board of Directors, Alejandro Te, whereby Te was
obligated to act as exclusive dealer and/or distributor of the said the
corporation in the entire Mindanao area for a term of five years and providing
that Prime White shall sell to and supply to Te 20,000 bags of white cement
per month at a rate of P9.70 per bag.
2. Relying heavily on the dealership agreement, Te entered into written
agreement with hardware stores for the sale of his supply allocations. Te sent
a letter to the corporation making the necessary preparation for the opening
of the requisite letter of credit. The corporation replied imposing the
following conditions: (a) the delivery of white cement shall commence at the
end of November 1970; (b) only 8,000 bags per month will be delivered at
P13.30 per bag and only for a period of three months; (c) the place of delivery
shall be Austurias; (d) the L/C may be opened only with Prudental Bank,
Makati; (e) payment shall be made in advance; and (f) the price is subject to
change.
3. Te demanded compliance which was refused, and he was constrained to
cancel his agreement for the supply of white cement with third parties. Prime
White entered into an exclusing dealership agreement with Napoleon Co
instead. The trial court adjudged the corporation liable to Te for actual and
moral damages, as well as litigation expenses. The CA affirmed on the
ground that both the President and the Chairman of the Board entered into
the said agreement and signed the same for and in behalf of the corporation.
ISSUE/s:
1. Whether the dealership agreement is a valid and enforceable contract. NO
— The contract was neither fair nor reasonable, and cannot be validated for
being a fruit of Te’s disloyalty.
RULING: WHEREFORE, the petition is hereby GRANTED.
RATIO:
1. All corporate powers shall be exercised by the Board of Directors, except as
otherwise provided by law. The Board may expressly delegate specific
powers to its President or any of its officers. In the absence of such express
delegation, a contract entered into by its President, on behalf of the
corporation, may still bind the corporation if the board should ratify the same
expressly or impliedly. Implied ratification may take various forms — like
silence or acquiescence; by acts showing approval or adoption of the contract;
or by acceptance and retention of benefits flowing therefrom. Furthermore,
even in the absence of express or implied authority by ratification, the
President as such may, as a general rule, bind the corporation by a contract in
 the ordinary course of business, provided the same is reasonable under the
circumstances. These rules apply where the President or other officer,
purportedly acting for the corporations, is dealing with a third person.

2. A director of a corporation holds a position of trust and as such, he owes a

duty of loyalty to his corporation. In case his interests conflict with those of
the corporation, he cannot sacrifice the latter to his own advantage and
benefit. As corporate managers, directors are committed to seek the
maximum amount of profits for the corporation. However, a director's
contract with his corporation is not in all instances void or voidable. If the
contract is fair and reasonable under the circumstances, it may be ratified by
the stockholders provided a full disclosure of his adverse interest is made.

3. Here, the contract was neither fair nor reasonable. It bound the corporation to
a fixed price for an extended period at a time when white cement prices were
unstable. Te did not protect the corporation’s interest in the same manner he
protected his when he entered into supply agreements with third parties. As
director, specially since he was the other party in interest, respondent Te's
bounden duty was to act in such manner as not to unduly prejudice the
corporation. In the light of the circumstances of this case, Te was guilty of
disloyalty to the corporation; he was attempting in effect, to enrich himself at
the expense of the corporation.

4. As a result of this action which has been proven to be without legal basis,
petitioner corporation's reputation and goodwill have been prejudiced.
However, there can be no award for moral damages under Article 2217 and
succeeding articles on Section 1 of Chapter 3 of Title XVIII of the Civil Code
in favor of a corporation.
 026 Professional Services, Inc. v. Court of Appeals (Bacquel)
Jan. 31, 2007 | Sandoval-Gutierrez, J. | Corporate Negligence
PETITIONER: Professional Services, Inc.
RESPONDENTS: CA, Natividad Agana
SUMMARY: Agana was rushed to the hospital because of difficulty of bowel
movement. She was diagnosed with cancer. Dr. Ampil performed surgery on
her. She was then released. After a few weeks her vagina started to hurt despite
being cancer free. Upon diagnosis of a new doctor, it was found out that a gauze
was left inside her vaginal fault which caused extreme pain and foul smelling
odor, and infected her vagina. Agana filed a complaint before the RTC for dam-
ages arising from negligence. The issue before the SC is whether the hospital
(PSI) may be liable for Dr. Ampil’s negligence. Yes, under the doctrine of vi-
carious liability and corporate negligence. Jurisprudence has it that a corpora-
tion has constructive knowledge of the things that are done within the corpora-
tion. Since the surgery was done inside PSI’s premises, they are presumed to
know and contributed to the negligence. Also, PSI failed to adduce evidence
that they exercised diligence of a good father of a family which could have
saved them from being solidarily liable with Dr. Ampil.
DOCTRINE: A corporation is bound by the knowledge acquired by or notice
given to its agents or officers within the scope of their authority and in reference
to a matter to which their authority extends. However, the corporation may save
itself from liability if it can prove that it did not contribute to the negligence; i.e.
exercised diligence of a good father of a family.
FACTS:
1. Natividad Agana was rushed to the Medical City General Hospital (Medical
City Hospital) because of difficulty of bowel movement and bloody anal dis-
charge. After a series of medical examinations, Dr. Miguel Ampil, petitioner
in G.R. No. 127590, diagnosed her to be suffering from "cancer of the sig-
moid."
2. Dr. Ampil, assisted by the medical staff4 of the Medical City Hospital, per-
formed an anterior resection surgery on Natividad. He found that the malig-
nancy in her sigmoid area had spread on her left ovary, necessitating the re-
moval of certain portions of it. Thus, Dr. Ampil obtained the consent of Na-
tividad’s husband, Enrique Agana, to permit Dr. Juan Fuentes, respondent in
G.R. No. 126467, to perform hysterectomy on her.
3. Natividad was released from the hospital. Her hospital and medical bills, in-
cluding the doctors’ fees, amounted to P60,000.00.
4. After a couple of days, Natividad complained of excruciating pain in her anal
region. She consulted both Dr. Ampil and Dr. Fuentes about it. They told her
that the pain was the natural consequence of the surgery. Dr. Ampil then rec-
ommended that she consult an oncologist to examine the cancerous nodes
which were not removed during the operation.
5. Natividad, accompanied by her husband, went to the United States to seek
further treatment. After four months of consultations and laboratory exami-
nations, Natividad was told she was free of cancer. Hence, she was advised
to return to the Philippines.
6. Natividad flew back to the Philippines, still suffering from pains. Two weeks
thereafter, her daughter found a piece of gauze protruding from her vagina.
Upon being informed about it, Dr. Ampil proceeded to her house where he
managed to extract by hand a piece of gauze measuring 1.5 inches in width.
He then assured her that the pains would soon vanish.
7. Dr. Ampil’s assurance did not come true. Instead, the pains intensified,
prompting Natividad to seek treatment at the Polymedic General Hospital.
While confined there, Dr. Ramon Gutierrez detected the presence of another
foreign object in her vagina -- a foul-smelling gauze measuring 1.5 inches in
width which badly infected her vaginal vault.
8. Natividad and her husband filed with the RTC, Branch 96, Quezon City a
complaint for damages against the Professional Services, Inc. (PSI), owner
of the Medical City Hospital, Dr. Ampil, and Dr. Fuentes, docketed as Civil
Case No. Q-43322. They alleged that the latter are liable for negligence for
leaving two pieces of gauze inside Natividad’s body and malpractice for con-
cealing their acts of negligence.
9. The allegation in the complaint in Civil Case No. Q-43332 for negligence and
malpractice is that PSI as owner, operator and manager of Medical City Hos-
pital, "did not perform the necessary supervision nor exercise diligent efforts
in the supervision of Drs. Ampil and Fuentes and its nursing staff, resident
doctors, and medical interns who assisted Drs. Ampil and Fuentes in the per-
formance of their duties as surgeons."34 Premised on the doctrine of corpo-
rate negligence, the trial court held that PSI is directly liable for such breach
of duty.
ISSUE/s:
1. Whether Professional can be held liable for Ampil’s Negligence. Yes – PSI
failed to adduce evidence that it exercised the diligence of a good father of a
family.
RULING: Petition denied.
RATIO:
1. It was duly established that PSI operates the Medical City Hospital for the
purpose and under the concept of providing comprehensive medical services
to the public. Accordingly, it has the duty to exercise reasonable care to pro-
tect from harm all patients admitted into its facility for medical treatment.
 Unfortunately, PSI failed to perform such duty. The findings of the trial court PSI is also directly liable to the Aganas.
are convincing. 7. One final word. Once a physician undertakes the treatment and care of a pa-
2. PSI’s liability is traceable to its failure to conduct an investigation of the mat- tient, the law imposes on him certain obligations. In order to escape liability,
ter reported in the nota bene of the count nurse. Such failure established PSI’s he must possess that reasonable degree of learning, skill and experience re-
part in the dark conspiracy of silence and concealment about the gauzes. Eth- quired by his profession. At the same time, he must apply reasonable care and
ical considerations, if not also legal, dictated the holding of an immediate diligence in the exercise of his skill and the application of his knowledge, and
inquiry into the events, if not for the benefit of the patient to whom the duty exert his best judgment.
is primarily owed, then in the interest of arriving at the truth. The Court can-
not accept that the medical and the healing professions, through their mem-
bers like defendant surgeons, and their institutions like PSI’s hospital facility,
can callously turn their backs on and disregard even a mere probability of
mistake or negligence by refusing or failing to investigate a report of such
seriousness as the one in Natividad’s case.
3. It is worthy to note that Dr. Ampil and Dr. Fuentes operated on Natividad
with the assistance of the Medical City Hospital’s staff, composed of resident
doctors, nurses, and interns. As such, it is reasonable to conclude that PSI, as
the operator of the hospital, has actual or constructive knowledge of the pro-
cedures carried out, particularly the report of the attending nurses that the two
pieces of gauze were missing.
4. In Fridena v. Evans, it was held that a corporation is bound by the knowledge
acquired by or notice given to its agents or officers within the scope of their
authority and in reference to a matter to which their authority extends. This
means that the knowledge of any of the staff of Medical City Hospital con-
stitutes knowledge of PSI. Now, the failure of PSI, despite the attending
nurses’ report, to investigate and inform Natividad regarding the missing
gauzes amounts to callous negligence. Not only did PSI breach its duties to
oversee or supervise all persons who practice medicine within its walls, it
also failed to take an active step in fixing the negligence committed. This
renders PSI, not only vicariously liable for the negligence of Dr. Ampil under
Article 2180 of the Civil Code, but also directly liable for its own negligence
under Article 2176.
5. In the amended complaint, the plaintiffs did plead that the operation was per-
formed at the hospital with its knowledge, aid, and assistance, and that the
negligence of the defendants was the proximate cause of the patient’s injuries.
We find that such general allegations of negligence, along with the evidence
produced at the trial of this case, are sufficient to support the hospital’s lia-
bility based on the theory of negligent supervision."
6. Anent the corollary issue of whether PSI is solidarily liable with Dr. Ampil
for damages, let it be emphasized that PSI, apart from a general denial of its
responsibility, failed to adduce evidence showing that it exercised the dili-
gence of a good father of a family in the accreditation and supervision of the
latter. In neglecting to offer such proof, PSI failed to discharge its burden
under the last paragraph of Article 2180 cited earlier, and, therefore, must be
adjudged solidarily liable with Dr. Ampil. Moreover, as we have discussed,
 027 PEOPLES AIRCARGO v. CA (Arcenas)
October7, 1998 | Panganiban, J. | Corporate Officers: President
PETITIONERS: Peoples Aircargo and Warehousing Co. Inc.
RESPONDENTS: Court of Appeals and Stefani Sao
SUMMARY: Aircargo is a domestic corporation organized to operate a customs
bonded warehouse at the old Manila International airport, so it wanted to obtain a
license from the Bureau of Customs (BOC). Then, it hired Stefani Sao, thru the
president Antonio Punsalan, Jr., for the preparation of a feasibility study. Despite
board disapproval, Punsalan pushed through with soliciting the services of Sao
(First Contract) which was eventually paid. Later on, Punsalan requested another
feasibility study to which Sao submitted an operational manual and conducted
seminars for Aircargo employees for Php 400,000, but Aircargo never paid for it.
Andy Villaceren, vice president of Aircargo, received the operations manual
which they submitted to BOC in connection with their application to operate a
bonded warehouse. BOC issued to Aircargo a license to operate, enabling it to
become one of the three public customs bonded warehouses at the airport.
Punsalan sold his shares in Aircargo and resigned as president. Sao filed a
collection case against People Aircargo in the RTC of Pasay City which rendered
a decision ordering Aircargo to pay Sao only 60k so he went to the CA praying
for the payment of 400k for his work which was granted. Hence, Aircargo filed a
petition before the SC.
The issues are 1) whether the president of Aircargo had apparent authority to bind
Aircargo to the Second Contract and 2) whether the Second contract was valid and
not merely simulated.
On the first issue, the Court ruled that since Aircargo did not object to or repudiate
said contract, Aircargo had clothed Punsalan, as its president, apparent authority
to enter into the disputed agreement. The court found that it had also become the
practice of Aircargo to allow Punsalan, its president, to negotiate and execute
contracts necessary to secure its license as a customs bonded warehouse without
prior board approval. While the president is often given general supervision and
control over corporate operations, the strict rule is that the officer has no inherent
power, but in the absence of a charter or bylaw provision to the contrary, the
president is presumed to have limited powers in the transaction of the usual and
ordinary business.. On the second issue, the court held that the contract is valid
since Aircargo reaped the beneifts of Sao’s services under the Second Contract.
Punsalan’s conformity as well as receipt and use of the operations manual
submitted by Sao and even allowed Sao to conduct the seminar for Aircargo’s
employees, show Aircargo’s consent to or ratification of the contract. Therefore,
SC declared that the circumstances do not establish any intention to simulate the
contract.
DOCTRINE: 
In the absence of a charter or bylaw provision to the contrary,
the president is presumed to have the authority to act within the domain of the
general objectives of the corporation’s business and within the scope of his or
her usual duties. Hence, it has been ruled in other jurisdiction that the president
of the corporation possesses the power to enter into a contract for the corpora-
tion, when the “conduct on the part of both the president and the corporation
[shows] that he had been in the habit of acting in similar matters on behalf of the
company and that the company had authorized him so to act and had recognized,
approved and ratified his former and similar actions
FACTS:
1. Peoples Aircargo is a domestic corporation organized in the middle of 1986
to operate a customs bonded warehouse at the old Manila International
Airport in Pasay City.
2. To obtain a license for the corporation from the Bureau of Customs (BOC),
Antonio Punsan Jr., the president, solicited a proposal from Stefani Sao for
the preparation of a feasibility study (First Contract).
a. Sao submitted a letter-proposal: Feasibility study includes – market
study, technical study, financial feasibility study and preparation of
pertinent documentation requirements for the application for a fee
of Php 350,000 payable under a schedule as follows: 50% upon
confirmation of the agreement, 25% - 15 days after confirmation of
agreement, 25% upon submission of specified outputs (to be
completed within 30 days upon confirmation of agreement and
receipt of first 50% payment)
b. Cheng Yong (majority stockholder) objected Sao’s offer as another
company priced a similar proposal at only Php 15, 000. But
Punsalan preferred Sao because of his membership in the task force,
which supervises the transition of the BOC from the Marcos
government to Aquino administration.
3. October 17, 1986 – Punsalan sent Sao a confirmation letter.
a. Sao prepared the feasibility study which eventually paid him the
balance although not according to schedule. (Note: the first contract
was consummated without board approval but was eventually paid
with full knowledge of the board)
4. December 4, 1986 – Punsalan requested another study (Second Contract) to
which Sao sent a second letter-proposal with the following arrangements:
Operation manual, seminar/workship for Aircargo employees for a total of
Php 400,000. (Note: Second contract was also without board approval)
5. Andy Villaceren, vice president of Aircargo, received the operations manual
which they submitted to BOC in connection with their application to operate
 a bonded warehouse.
6. May 1987 – BOC issued to Aircargo a license to operate, enabling it to
become one of the three public customs bonded warehouses at the airport.
a. January 1987 - Sao conducted a training seminar for Aircargo
employees.
7. March 25 1987 – Sao joined the BOC as special assistant to Commissioner
Alex Padilla. Punsalan sold his shares in Aircargo and resigned as president.
8. February 9, 1988 - Sao filed a collection case against People Aircargo in
the RTC of Pasay City which rendered a decision ordering Aircargo to pay
Sao 60,000 pesos as payment of services in preparing the manual of
operations and in the conduct of a seminar for Aircargo.
9. Sao was aggrieved by what he considered as a miniscule award of 60k, so he
filed an appeal with CA which granted his prayer for 400,000.
a. Hence, this petition by Aircargo before the SC.
ISSUE/s:
2. Whether the president of Aircargo had apparent authority to bind Aircargo to
the Second Contract – Yes, Aircargo did not object to or repudiate said
contract which served to clothe Punsalan with the power to bind Aircargo
3. Whether the Second contract was valid and not merely simulated – Yes, the
contract is valid since Aircargo reaped the beneifts of Sao’s services under
the Second Contract.
RULING: WHEREFORE, the petition is hereby DENIED and the assailed Deci-
sion AFFIRMED against petitioner.
RATIO:
Apparent authority of a corporate president
1. Aircargo argues that the Second Contract is unenforceable because Punsalan
was not authorized by its Board of Directors (BOD) to enter into the contract.
2. General rule: in the absence of authority from the BOD, no person, not even
its officers, can validly bind a corporation.
a. HOWEVER, BOD may validly delegate some of its functions and
powers to officers committees or agents (which is generally derived
from law, corporate by-laws or authorization from the board, either
expressly or impliedly by habit, custom, or acquiescence in the
general course of business).
3. SC held that apparent authority is derived not merely from practice. Its
existence may be ascertained through:
a. The general manner in which the corporation holds out an officer or
agent as having the power to act or, in other words, the apparent
authority to act in general, with which it clothes him.
b. The acquiescence in his acts of a particular nature, with actual or
constructive knowledge, whether within or beyond the scope of his
ordinary powers.
4. APPLICATION: Aircargo, through its president, Punsalan, entered into the
First Contract without securing board approval. Despite this, Aircargo did
not object to or repudiate said contract which served to clothe Punsalan with
the power to bind Aircargo. Hence, the grant of apparent authority to
Punsalan is evident, as it had also become the practice of Aircargo to allow
Punsalan, its president) to negotiate and execute contracts necessary to secure
its license as a customs bonded warehouse without prior board approval.
a. As testified by Yong (senior vice president, treasurer and major
stockholder) that Punsalan “gets his way” like how Sao was chosen
because he was “very influential with the Collector of Customs”.
5. SC held that Sao should not be faulted for believing Punsalan’s conformity
to the contract in dispute was also binding on petitioner. For the Second
Contract, Aircargo already ratified and accepted the benefits making it
binding on the corporation
a. Further, “a corporation knowingly permits one of its officers, or any
other agent, to act within the scope of an apparent authority, it holds
him out to the public as possessing the power to do those acts and
thus the corporation will as against anyone who has in good faith
dealt with it through the agent, be estopped from denying the
agent’s authority.
b. Note: while the president is often given general supervision and
control over corporate operations, the strict rule is that the officer
has no inherent power. BUT, in the absence of a charter or bylaw
provision to the contrary, the president is presumed to have
limited powers in the transaction of the usual and ordinary
business.
c. Also, President possesses the power to enter into contracts for
the corporation, when the conduct of the president and
corporation show that they have the habit of acting in similar
matters on behalf of the company and that the company had
authorized him so to act and had recognized.
Alleged Simulation
1. Aircargo is seeking to diminish its liability from Php 400k to Php 60k
capitalizing on badges of fraud cited by the trialcourt in declaring the First
Contract as either simulated or unenforceable.
2. SC held that the issue on simulation as factual in nature, which prohibits
factual examination in a petition for review but the case at bar is an exception
since there is conflict between the factual findings of the lower and appellate
courts.
3. SC agrees with appellate court that the alleged badges of fraud does not affect
the perfection of the Second Contract based on the following:
a. Lack of payment impors only a defect in the performance of the
contract on the part of Aircargo.
b. Delay in the filing of action was not fatal to Sao’s cause. The lapse
 of one year after Sao completed his services or 8 months after
alleged last demand for payment, the action was still filed within the
allowable period, considering that an action based on a written
contract prescribes after 10 years.
c. Misspelling of contract does not establish vitiation of consent, cause
or object of the contract
d. Confirmation letter is not an essential element of a contract
e. Sao’s failure to implead Punsalan as president does not establish
collusion between them.
4. Punsalan’s conformity as well as receipt and use of the operations manual
submitted by Sao and even allowed Sao to conduct the seminar for Aircargo’s
employees, show Aircargo’s consent to or ratification of the contract.
Therefore, SC declared that the circumstances do not establish any intention
to simulate the contract.
 028 DE ROSSI v. NLRC (VARGAS)
Sept. 14, 1999 | Quisumbing, J. | Nature of Exercise of Power to Terminate Officers
PETITIONER: ARMANDO T. DE ROSSI
RESPONDENTS: NATIONAL LABOR RELATIONS COMMISSION (First
Division), MATLING INDUSTRIAL AND COMMERCIAL CORPORATION
AND RICHARD K. SPENCER.
SUMMARY: Italian De Rossi is the EVP and Gen. Manager of Matling
Industrial and Commercial Corporation (MICC) since 1985. In 1988, MICC
terminated his employment based on the ground that he failed to secure his
employment permit, grossly mismanaged the business affairs of the company,
and misused the corporate funds. De Rossi filed a complaint for illegal dismissal
with the NLRC. The LA ruled in favor of De Rossi and issued a writ of execution
for De Rossi’s reinstatement and MICC’s payment of backwages to De Rossi.
MICC filed a MR arguing that SEC has jurisdiction over the case; not NLRC.
MICC further argued that the position of EVP is an elective post specifically
provided by MICC’s by-laws. Thus, it is an intra-corporate matter within the
jurisdiction of SEC. NLRC dismissed the case and applied SC’s previous rulings
recognizing SEC’s jurisdiction over such a case. The issue in this case is WON
SEC has jurisdiction over the matter and SC ruled that it is within SEC’s
jurisdiction. PD 902-A provides that SEC has jurisdiction over intra-corporate
affairs regarding election or appointment of officers of a corporation. An office
is created by the charter of the corporation under which a corporation is
organized, and the officer is elected by the directors or stockholders. MICC’s by-
laws state that the EVP is an officer elected and/or appointed by the Board. The
by-laws being in force, clearly De Rossi is considered an officer of MICC, elected
and/or designated by its board of directors.
DOCTRINE: An officer’s removal is a corporate act, and if such removal
occasions an intra-corporate controversy, its nature is not altered by the reason or
wisdom, or lack thereof, with which the Board of Directors might have in taking
such action. Perforce, the matter would come within the area of corporate affairs
and management, and such a corporate controversy would call for SEC
adjudicative expertise [now RTC Special Commercial Courts], not that of NLRC.
FACTS:
1. Petitioner Armando De Rossi (De Rossi) is an Italian citizen and the
Executive Vice President and General Manager of Respondent Matling
Industrial and Commercial Corporation (MICC).
2. He started work on JULY 1, 1985. MICC terminated his employment on
AUGUST 10, 1988. Aggrieved, De Rossi filed with the NLRC a complaint
for illegal dismissal.
3. MICC based petitioner’s dismissal on the ground that De Rossi failed to
secure his employment permit, grossly mismanaged the business affairs of
the company, and misused corporate funds. De Rossi argued that it was
MICC’s duty to secure his work permit during the term of his office and that
his termination was illegal for lack of just cause.
4. The Labor Arbiter (LA) ruled in favor of De Rossi. MICC appealed said
decision of the NLRC on the ground that the LA committed grave abuse of
discretion amounting to lack of jurisdiction in reinstating De Rossi because
De Rossi’s termination was for a valid cause.
5. De Rossi filed a motion for issuance of a writ of execution but MICC
opposed. MICC filed a counter manifestation and motion contending that the
position of Executive Vice-President is an elective post, specifically provided
by the corporate’s by-laws. Thus, De Rossi’s dismissal was an intra-
corporate matter within the jurisdiction of the Securities and Exchange
Commission (SEC) and not with the LA nor the NLRC.
6. LA issued a writ of execution and directed the Sheriff to collect the
backwages of De Rossi. Further, LA gave MICC the option to reinstate De
Rossi or constructive through payroll reinstatement until the final resolution
of the case by the NLRC.
7. MICC filed a Motion for Reconsideration as regards the writ of execution
reiterating that SEC and not the NLRC which has jurisdiction over the subject
matter which involves the removal of a corporate officer.
8. NLRC dismissed the case even if it is in the belief that it has jurisdiction over
the case. The Commission stated that they must yield to the SC’s decisions
recognizing SEC’s jurisdiction over such a case.
9. Following the rule geared towards stability of jurisprudence, NLRC quoted:
If a judge of a lower court feels, in the fulfillment of his mission of deciding
cases, that the application of a doctrine promulgated by his superiority is
against his way of reasoning, or against his conscience, he may state his
opinion on the matter, but rather than disposing of the case in
accordance with his personal views, he must first think that it is his duty
to apply the law as interpreted by the highest court of the land, and that
any deviation from a principle laid down by the latter would unavoidably
cause, as a sequel, unnecessary inconveniences, delay and expenses to the
litigants.
10. De Rossi asserts the jurisdiction of NLRC and claims that he was neither
elected to the post nor is he a stockholder of MICC.
11. MICC argues that under the Corporation Code, there is no requirement that
an Executive Vice-President of a corporation should be a stockholder or a
member of the Board of Directors. Further, the jurisdiction of the SEC is not
limited to controversies in the election or appointment of directors and
trustees, but also included officers or managers of such corporations,
partnerships, or associations.
ISSUE/s:
 1. WoN SEC has jurisdiction over cases involving the removal of corporate heavy financial losses to the company, this matter would amount to fraud.
officers - YES. PD 902-A provides that SEC has jurisdiction over intra- Such fraud would be detrimental to the interest not only of the corporation
corporate affairs regarding election or appointment of officers of a but also of its members. This type of fraud encompasses controversies in
corporation. a relationship within the corporation covered by SEC jurisdiction.
RULING: WHEREFORE, the instant petition is hereby DENIED, and the respondent Perforce, the matter would come within the area of corporate affairs and
NLRCs dismissal of the complaint for lack of jurisdiction, is hereby AFFIRMED, with management, and such a corporate controversy would call for the
costs against petitioner. adjudicative expertise of the SEC, not the Labor Arbiter or the NLRC.
RATIO:
1. Sec. 5. 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:
(c) Controversies in the election or appointments of directors, trustees,
officers or managers of such corporation, partnership or association.
2. An office is created by the charter of the corporation under which a
corporation is organized, and the officer is elected by the directors or
stockholders. In the present case, private respondents aver that the officers
and their terms of office are prescribed by the corporations by-laws, which
provide as follows:
BY-LAW NO. III Directors and Officers
The officers of the corporation shall be the President, Executive Vice
President, Secretary and Treasurer, each of whom may hold his office until
his successor is elected and qualified, unless sooner removed by the Board
of Directors; Provided, That for the convenience of the corporation the office
of the Secretary and Treasurer may be held by one and the same person.
Officers shall be designated by the stockholders meeting at the time they elect
the members of the Board of Directors. Any vacancy occurring among the
officers of the Corporation on account of removal or resignation shall be
filled by a stockholders meeting. Stockholders holding one half, or more of
the subscribed capital stock of the corporation may demand and compel the
resignation of any officer at any time.
3. The by-laws being in force, clearly De Rossi is considered an officer of
MICC, elected and/or designated by its board of directors. Following Section
5(c) of P.D. No. 902-A, the SEC exercises exclusive jurisdiction over
controversies regarding the election and/or designation of directors, trustees,
officers or managers of a corporation, partnership or association. This
provision is indubitably applicable to the petitioners case. Jurisdiction here is
not with the Labor Arbiter nor the NLRC, but with the SEC.
4. A corporate officer’s removal from his office is a corporate act. If such
removal occasions an intra-corporate controversy, its nature is not altered by
the reason or wisdom, or lack thereof, with which the Board of Directors
might have in taking such action. When petitioner, as Executive Vice-
President allegedly diverted company funds for his personal use resulting in
 029 GURREA v. LEZAMA (Apasan)
April 30, 1958 | Bautista Angelo, J. | Who is a “corporate officer”
PETITIONER: Ricardo Gurrea
RESPONDENTS: Jose Manuel Lezama, Et al.
SUMMARY: Plaintiff instituted an action before the Court of First Instance to
declare as null and void the Board Resolution of the Board of Directors of the La
Paz Ice Plant and Cold Storage Co., Inc., removing him from his position of
manager of the said corporation. Subsequently, the parties had an agreement that
FACTS:
the case was submitted for judgment on the sole legal issue of whether or not
plaintiff could be legally removed as manager of the corporation by just a
resolution or by the 2/3 vote of the paid shares of stocks. RTC ruled that the
dismissal was valid. The plaintiff brought the case to the CA and the CA elevated
the case to the SC for involving only pure questions of law. Issue is WoN the
plaintiff may be legally removed from his position by a mere resolution of the
BOD or by the vote of the 2/3 of the paid shares of stocks. The court held that a
resolution would suffice. In determining the answer, the court first determined
whether the position of a manager is a corporate officer as provided under Sec. 33
of the Corporation Law. Such determination was necessary because as provided
by the by-laws of the corporation, an officer can only be dismissed by the vote of
the 2/3 of the paid shares of stocks. However, the perusal of the pertinent provision
of the Corporate Law shows that a manager is not an officer of the corporation.
Therefore, a resolution dismissing the manager is valid and within the authority
of the BOD.
DISSENTING OPINION OF JUSTICE BENGZON: The court also addressed the
dissenting opinion of Justice Bengzon, which primarily states that a manager
should be considered as a principal executive officer because there are several
statutes that have been enacted expressly making the "manager" criminally
responsible for violations by the corporation. The premise behind this argument
was that a corporation may not be criminally prosecuted for violations of the law
although their officials could be made liable therefor. Thus, if a manager could be
held liable for criminal violations of the corporations, then it could be considered
as an officer of such corporation. However, the court said that the fact that the
"manager" of the corporation in the several statutes enacted by Congress is held
ISSUE:
criminally liable for violation of any of the penal provisions therein prescribed
does not necessarily make him an "officer" of the corporation. This liability flows
from the nature of his duties which are delegated to him by the board of directors.
He is paid for them. Hence, he has to answer for them should he use it in violation
of law. Furthermore, the SC cited jurisprudence saying that Common justice and
common sense demand that, where those in charge and control of the management
of a corporation direct it along paths of wrongdoing, they should be held
accountable by law.
DOCTRINE: Under the Corporation Code, we can only regard as officers of a
corporation those who are given that character either by the Corporation Law or
by its by-laws. The rest can be considered merely as employees or subordinate
officials.
1. Plaintiff instituted this action in the Court of First Instance of Iloilo to have
Resolution No. 65 of the Board of Directors of the La Paz Ice Plant and Cold
Storage Co., Inc., removing him from his position of manager of said
corporation declared null and void and to recover damages incident thereto.
The action is predicated on the ground that said resolution was adopted in
contravention of the provisions of the by-laws of the corporation, of the
Corporation Law and of the understanding, intention and agreement reached
among its stockholders.
a. Defendant answered the complaint setting up as defense that
plaintiff had been removed by virtue of a valid resolution.
2. Plaintiff moved for the issuance of a writ of preliminary injunction to restrain
defendant Jose Manuel Lezama from managing the corporation pending the
determination of this case, but after hearing, the court denied the motion.
3. Thereafter, by agreement of the parties and without any trial on the merits,
the case was submitted for judgment on the sole legal question of whether
plaintiff could be legally removed as manager of the corporation merely by
resolution of the board of directors or whether the affirmative vote of 2/3 of
the paid shares of stocks was necessary for that purpose.
4. Trial Court: held that the removal of plaintiff was legal and dismissed the
complaint. Plaintiff appealed to the Court of Appeals but finding that the
question at issue is one of law, the latter certified the case to the SC for
decision.
1. WoN plaintiff could be legally removed as manager of the corporation merely
by resolution of the board of directors or whether the affirmative vote of 2/3
of the paid shares of stocks was necessary for that purpose – Only by the
resolution of the board of directors because under the by-laws of the
corporation, only officers of the corporation (with the exception of the
president) may be removed by the vote of 2/3 of the paid shares of stocks.
 Corollary, a manager is NOT an officer as envisioned by the Corporation
Law, which only recognizes the president, vice-president, secretary, and
treasurer as officers of the corporation.
RULING: Wherefore, the decision appealed from is affirmed.
RATIO:
1. Section 33 of the Corporation Law provides: "Immediately after the election,
the directors of a corporation must organize by the election of a president,
who must be one of their number, a secretary or clerk who shall be a resident
of the Philippines . . . and such other officers as may be provided for in the
by-laws." The by-laws of the instant corporation in turn provide that in
the board of directors there shall be a president, a vice-president, a
secretary and a treasurer. These are the only ones mentioned therein as
officers of the corporation. The manager is NOT included although the
latter is mentioned as the person in whom the administration of the
corporation is vested, and with the exception of the president, the by-laws
provide that the officers of the corporation may be removed or
suspended by the affirmative vote of 2/3 of the corporation.
2. From the above the following conclusion is clear: that we can only regard
as officers of a corporation those who are given that character either by
the Corporation Law or by its by-laws. The rest can be considered
merely as employees or subordinate officials. And considering that
plaintiff has been appointed manager by the board of directors and as such
does not have the character of an officer, the conclusion is inescapable that
he can be suspended or removed by said board of directors under such terms
as it may see fit and not as provided for in the by-laws. Evidently, the power
to appoint carries with it the power to remove, and it would be incongruous
to hold that having been appointed by the board of directors he could only be
removed by the stockholders.
3. The general manager of a corporation is not ordinarily classed as an officer,
but his powers and influence may be quite as great as those of any person in
the organization.
4. One distinction between officers and agents of a corporation lies in the
manner of their creation. An officer is created by the charter of the
corporation, and the officer is elected by the directors or the
stockholders. An agency is usually created by the officers, or one or more of
them, and the agent is appointed by the same authority. It is clear that the two
terms officers and agents are by no means interchangeable. One, deriving its
existence from the other, and being dependent upon that other for its
continuation, is necessarily restricted in its powers and duties, and such
powers and duties, are not necessarily the same as those pertaining to the
authority creating it.
ANSWER OF THE PONENTE TO THE DISSENTING OPINION OF JUSTICE
BENGZON (the SC re-write the decision after reading the dissent of Justice Bengzon)
5. The fact that the "manager" of the corporation in the several statutes
enacted by Congress is held criminally liable for violation of any of the
penal provisions therein prescribed does not make him an "officer" of
the corporation. This liability flows from the nature of his duties which
are delegated to him by the board of directors. He is paid for them.
Hence, he has to answer for them should he use it in violation of law.
6. The dissenting opinion quotes from Thompson and Fletcher to support the
theory that the general manager of a corporation may be considered as its
principal officer even though not so mentioned in its charter or bylaws. We
have examined the cast cited in support of that theory but we have found that
they are not in point. Thus, we have found:
a. that the parties involved are mostly outsiders who press their
transactions against the corporation
b. that the point raised is whether the acts of the manager bind the
corporation
c. that the tendency of the courts is to hold the corporation liable for
the acts of the manager so long as they are within the powers
granted, hence, the courts emphasized the importance of the position
of manager
d. the position of manager was discussed from the point of view of
an outsider and not from the internal organization of the
corporation, or in accordance with its charter or by-laws.
In the present case, however, the parties are the manager and the
corporation. And the solution of the problem hinges on the internal
government of the corporation where the charter and the by-laws are
necessarily involved in the determination of the rights of the parties.
Indeed, it has been held: "But it is urged that a corporation may have
officers not recognized by the charter and by-laws. It is possible this may
be as to matters arising between strangers and the corporation."
7. The cases on all fours with the present are those of State ex rel
Blackwood vs. Brast, et al., 127 S. E. 507 and Denton Milling Co. vs. Blewitt,
254 S. W. 236, 238, where the parties involved are the manager and the
corporation. The issue raised is the relation of the manager towards the
 corporation. The position of the manager is discussed from the point of view
of its internal government. And the holding of the court is that the manager
is the creation of the board of directors and the agent through whom the
corporate duties of the board are performed. Hence, the manager holds his
position at the pleasure of the board. This stipulation is well expressed in the
following words of Thompson:
The word "manager" implies agency, control, and presumptively sufficient
authority to bind a corporation in a case in which the corporation was an
actual party. It has been said that such agent must have the same general
supervision of the corporation as is associated with the office of cashier or
secretary. By whatever name he may be called, such, managing agent is a
mere employee of the board of directors and holds his position subject to
the particular contract of employment; and unless the contract of
employment fixes his term of office, it may be terminated at the pleasure
of the board. . . . The manager, like any other appointed agent, is subject to
removal when his term expires and on the request of the proper officer he
should turn over his business to the corporation and, where he refuses to
comply, he may be restrained from the further performance of work for the
corporation.
8. The dissenting opinion quotes the provision of the by laws relative to the
administration of the affairs of the instant corporation. It is there provided
that the affairs of the corporation shall be successively administered by (1)
the stockholders; (2) the board of directors; and(3) the manager. From this it
concludes that the manager should be considered an officer.
However, the above enumeration only emphasizes the different organs
through which the affairs of the corporation should be administered and
the order in which the powers should be exercised.
a. The stockholders are the entity, composing the whole corporation.
b. The board of directors is the entity elected by the stockholders to
manage the affairs of the corporation.
c. The manager is the individual appointed by the board of directors to
carry out the powers delegated to him.
In other words, the manager is the creation of the board of directors. He
is an alter ego of the board. As our law provides that only those enumerated
in the charter or in the by-laws are considered officers, the manager who has
not been so enumerated therein, but only incidentally mentioned in the order
of management, cannot be considered an officer of the corporation within
their purview.
9. The mere fact that the directors are not mentioned in the by-laws as
officers does not deprive them of their category as such for their
character as officer is secured in the charter. The same is not true with
the manager. Customs and corporate usages (for appointment of
managers) cannot prevail over the express provisions of the charter and
the by-laws (for appointment of the directors.
BENGZON, J., dissenting:
10. This was the dissent that was addressed by the SC. Futhermore, Justice
Bengzon said that there was no need to re-write his dissent to meet the
“altered decision.” Otherwise, the majority decision might again be reformed,
and the discussion will be prolonged or will never end.
LABRADOR, J., concurring and dissenting:
11. Justice Labrador just basically concurred with the dissent of Justice Bengzon.
REYES, A., J., dissenting:
12. Justice Reyes doesn’t think that it is correct to say that the president, the vice-
president, the secretary and the treasurer are the only ones mentioned in the
by-laws officers of the corporation. For in truth, the by-laws do not say
who shall be regarded as officers of the corporation.
13. Moreover, the above quoted portion of the majority opinion itself says that
'the manager . . . is mentioned as the person in whom the administration of
the corporation is vested. . . ." Therefore, administering a corporation
involves the exercise of both authority and trust, so that one invested with
such function should be classified as an officer.
14. There are, for sure in the by-laws several articles under the heading
"Funcionarios". One would expect from this heading that those articles would
enumerate the funcionaros or officers of the corporation. Actually, however
they do not, for they merely define the duties or functions of certain officers
the president, the vice-president, the secretary and the treasurer. If the duties
of the manager are not defined in those articles, it must be because it is
already stated elsewhere in the by-laws that the corporation is to be
administered by the general meeting of stockholders, the Board of
Directors and the manager. It is not, therefore, correct to say that the
manager is not an officer just because his duties are not defined in those
articles.
 030 MITA PARDO DE TAVERA v. TUBERCOLOSIS SOCIETY (Ram)
February 25, 1982 | Guerrero, J. | Who Is a “Corporate Officer”? (Sec. 25)
PLAINTIFF-APPELLANT: Mita Pardo De Tavera
DEFENDANTS-APPELLEES: Philippine Tuberculosis Society, Inc., Francisco
Ortigas, Jr., Miguel Canizares, Bernardo P. Pardo, Ralph Nubla, Midpantao Adil,
Enrique Garcis, Alberto G. Romulo, and The Present Board of Directors, Philippine
Tuberculosis Society, Inc.
SUMMARY: Mita Pardo de Tavera (Tavera) filed with the Court of Rizal a complaint
against the Philippine Tuberculosis Society Inc (Society) and that the past Board of
Directors removed her summarily from her position. The Society et al filed their
answer averring that under the Code of By-Laws of the Society, said position is held
at the pleasure of the Board of Directors and when the pleasure is exercised, it only
means that the incumbent has to vacate the same because her term has expired. The
trial court ruled that Tavera’s appointment in essence was temporary in nature,
terminable at a moment's notice without need to show that the termination was for
cause. The issue in this case is WoN the lower court erred in holding that Tavera was
not illegally removed or ousted from her position as Executive Secretary of the
Philippine Tuberculosis Society, Inc. The SC held the the lower court did not err in its
ruling. Although the minutes of the organizational meeting show that the Chairman
mentioned the need of appointing a "permanent" Executive Secretary, such statement
alone cannot characterize the appointment of petitioner without a contract of
employment definitely fixing her term because of the specific provision of Section
7.02 of the Code of By-Laws.
DOCTRINE: The position of Executive Secretary, which is provided for in the
Society’s by-laws, is an “officer” position. Since the appointment of the incumbent did
not contain a fixed term, the implication was that the appointee held the appointent at
the pleasure of the Board of Directors, such that when the Board opted to replace the
incumbent, technically there was no removal but only an expiration of the term
and there was no need of prior notice, due hearing or sufficient grounds before the
incumbent could be separated from office.
FACTS:
1. Plaintiff-appellant Mita Pardo de Tavera (Tavera) filed with the Court of Ri-
zal a complaint against the Philippine Tuberculosis Society Inc (Society),
Canizares, Nubla, Pardo, Garcia, Adil, Romulo, and the present Board of Di-
rectors of the Philippine Tuberculosis Society, Inc. 

2. The complaint alleged that:
a. Tavera is a doctor by profession and a recognized specialist in the
treatment of tuberculosis, having been in the continuous practice of
her profession since 1945;
b. That she is a member of the Board of Directors of the Society
c. That the past Board of Directors removed her summarily from her
position
d. That immediately thereafter, defendant Romulo was appointed to
the position and that defendants Pardo, Nubla, Garcia and Adil, not
being members of defendant Society when they were elevated to the
position of members of the Board of Directors are not qualified to
be elected as such
e. Hence, all their acts in said meeting are null and void. 

3. The defendants filed their answer averring that under the Code of By-Laws
of the Society, said position is held at the pleasure of the Board of Directors
and when the pleasure is exercised, it only means that the incumbent has to
vacate the same because her term has expired; that defendants Pardo, Nubla,
Adil and Garcia were, at the time of their election, members of the defendant
Society and qualified to be elected as members of the Board. 

4. On the same date, defendant Adil filed a Motion to Dismiss on the ground
that the complaint states no cause of action, or if it does, the same has pre-
scribed and argued that the complaint is an action for quo warranto and
hence, the same should be commenced within one year from when the plain-
tiff Tavera was ousted from her position.

5. Plaintiff Tavera filed an Opposition to Motion to Dismiss stating that the
complaint is a suit for damages and her constitutional right to equal protection
of the law.

6. Adil filed a Reply to Tavera’s Opposition to Motion to Dismiss arguing that
since there is an averment of Tavera's right to office, and that defendant
Romulo is unlawfully in possession thereof, there it is indeed, a case for quo
warranto.
7. On September 3, 1976, the trial court a quo rendered a decision holding that
a. The present suit being one for quo warranto it should be filed within
one year from plaintiff Tavera’s ouster from office;
b. That Tavera was not illegally removed from her position as Execu-
tive Secretary in The Society since Tavera as holding an appoint-
ment had all the pleasure of the appointing power and
c. Hence, her appointment in essence was temporary in nature, termi-
nable at a moment's notice without need to show that the termination
was for cause.
8. Tavera filed a Motion for Reconsideration to which defendants filed an Op-
position.
9. The court a quo denied the motion for Reconsideration.

10. Tavera filed a Notice of Appeal and an Urgent Motion for Extension of Time
to File Record on Appeal, which was granted.

11. The court a quo issued an amended order where it qualified the action as
principally one for quo warranto and hence, dispensed with the filing of a
record on appeal as the original records of the case are required to be elevated
to the Court of Appeals.
 12. The Court of Appeals issued a resolution certifying this case to this Court
considering that the appeal raises no factual issues and involves only issues
of law.
ISSUE/s:
5. WoN the lower court erred in holding that Tavera was not illegally removed
or ousted from her position as Executive Secretary of the Philippine Tuber-
culosis Society, Inc. – NO because there was no removal in her case but
merely an expiration of term pursuant to Section 7.02 of the Code of By-
Laws.
RULING: WHEREFORE, premises considered, the decision of the lower court
holding that petitioner was not illegally removed or ousted from her position as Ex-
ecutive Secretary of the Philippine Tuberculosis Society, Inc., is hereby AF-
FIRMED. SO ORDERED.
RATIO:
1. Contrary to her claim, Tavera was not illegally removed or from her position
as Executive Secretary in violation of Code of By-laws of the Society, the
New Civil Code and the pertinent provisions of the Constitution.
2. It appears from the records, specifically the minutes of the special meeting of
the Society that Tavera was designated as Acting Executive Secretary with
an honorarium of P200.00 monthly in view of the application of Dr. Jose Y.
Buktaw for leave for 300 working days.
3. In the organizational meeting of the Society, the minutes of the meeting re-
veal that the Chairman mentioned the need of appointing a permanent Exec-
utive Secretary and stated that the former Executive Secretary, Dr. Jose Y.
Buktaw, tendered his application for optional retirement, and while on termi-
nal leave, Dr. Mita Pardo de Tavera was appointed Acting Executive Secre-
tary. In view thereof, Don Francisco Ortigas, Jr. moved, duly seconded, that
Dr. Mita Pardo de Tavera be appointed Executive Secretary of the Philippine
Tuberculosis Society, Inc. The motion was unanimously approved.
4. Tavera was informed in writing of the said appointment.
5. Although the minutes of the organizational meeting show that the Chair-
man mentioned the need of appointing a "permanent" Executive Secre-
tary, such statement alone cannot characterize the appointment of peti-
tioner without a contract of employment definitely fixing her term be-
cause of the specific provision of Section 7.02 of the Code of By-Laws
that:
a. "The Executive Secretary, the Auditor, and all other officers
and employees of the Society shall hold office at the pleasure of
the Board of Directors, unless their term of employment shall
have been fixed in their contract of employment."
b.Besides the word “permanent" could have been used to distin-
guish the appointment from acting capacity.
6. The absence of a fixed term in the letter addressed to Tavera informing
her of her appointment, as Executive Secretary is very significant. This
could have no other implication than that petitioner held an appointment
at the pleasure of the appointing power.
7. An appointment held at the pleasure of the appointing power is in es-
sence temporary in nature. It is co-extensive with the desire of the Board
of Directors. Hence, when the Board opts to replace the incumbent, tech-
nically, there is no removal but only an expiration of term and in an ex-
piration of term, there is no need of prior notice, due hearing or sufficient
grounds before the incumbent can be separated from office. The protec-
tion afforded by Section 7.04 of the Code of By- Laws on Removal of
Officers and Employees, therefore, cannot be claimed by Tavera.
8. Thus, in the case of Moji vs. Mariño, where the appointment contains the
following proviso: that it may be terminated at anytime without any proceed-
ings, at the pleasure of the President of the Philippines, this Court held: peti-
tioner's appointment in essence is temporary because of its character that it is
terminable at the pleasure of the appointing power. Being temporary in na-
ture, the appointment can be terminated at a moment's notice without need to
show cause as required in appointments that belong to the classified service."
9. In Paragas vs. Bernal 17 SCRA 150, this Court distinguished between re-
moval and expiration of term .
10. In the case at bar there has been, however, no removal from office. Pursuant
to the charter of Dagupan City, the Chief of Police thereof holds office at the
pleasure of the President. Consequently, the term of office of the Chief of
Police expires at any time that the President may so declare. This is not re-
moval, inasmuch as the latter entails the ouster of an incumbent before the
expiration of his term. In the present case, petitioner's term merely expired
upon receipt by him of the communication of respondent Assistant Executive
Secretary of the President.
11. There was no removal in her case but merely an expiration of term pursuant
to Section 7.02 of the Code of By-Laws.
RELEVANT PROVISION:
Sec. 25. Corporate officers, quorum. - Immediately after their election, the directors of a corporation must
formally organize by the election of a president, who shall be a director, a treasurer who may or may not
be a director, a secretary who shall be a resident and citizen of the Philippines, and such other officers as
may be provided for in the by-laws. Any two (2) or more positions may be held concurrently by the same
person, except that no one shall act as president and secretary or as president and treasurer at the same
time.
The directors or trustees and officers to be elected shall perform the duties enjoined on them by law and
the by-laws of the corporation. Unless the articles of incorporation or the by-laws provide for a greater
majority, a majority of the number of directors or trustees as fixed in the articles of incorporation shall
constitute a quorum for the transaction of corporate business, and every decision of at least a majority of
the directors or trustees present at a meeting at which there is a quorum shall be valid as a corporate act,
except for the election of officers which shall require the vote of a majority of all the members of the
board.

Directors or trustees cannot attend or vote by proxy at board meetings.

 031 MATLING INDUSTRIAL v. COROS (Yap)
October 13, 2010 | Bersamin, J. | Who is a “Corporate Officer”
PETITIONER: Matling Industrial and Commercial Corporation, Richard K.
Spencer, Catherine Spencer, and Alex Mancilla
RESPONDENTS: Ricardo R. Coros
SUMMARY: Coros (respondent) filed a complaint before the NLRC for illegal
dismissal against Matling Industries and its corporate officers (petitioners),
contesting his dismissal from the position of Vice President for Finance and
Administration. Matling filed a Motion to Dismiss on the ground that the
jurisdiction is with the SEC – for being an intra-corporate dispute. LA granted the
Motion to Dismiss on the ground that Coros was a “corporate officer,” being the
VPFA and director at the same time. NLRC reversed on the ground that the
position of Matling was not among those listed in the Corporation Code and the
By-Laws of Matling. CA affirmed.
The issue is whether the LA/NLRC or the RTC (Securities Regulation Code
transferred the jurisdiction from SEC to RTC) has jurisdiction over the
controversy.
The SC ruled that the LA/NLRC has jurisdiction because Coros was not a
“corporate officer.” First, the position was not listed in the Corporation Code
(President, secretary, treasurer or any other officer stated in the By-Laws) nor in
the By-Laws of Matling – it was merely a position created by the President of
Matling as an incident to his powers, and in order to assist him in office. Second,
although Coros was at the same time a director of Matling, he was dismissed from
the position of VPFA which did not affect his position as a director. Lastly, his
appointment to the position was because of his 33 years of work in the company,
not because of his position as a director. Hence, no intra-corporate dispute.
DOCTRINE: The criteria for distinguishing between corporate officers who may
be ousted from office at will, on one hand, and ordinary corporate employees who
may only be terminated for just cause, on the other hand, do not depend on the
nature of the services performed, but on the manner of creation of the office.
BOOK DOCTRINE: Although the by-laws provide expressly that the Board of
Directors “shall have full power to create new offices and to appoint the officers
thereto,” any office created, and any officer appointed pursuant to such clause
does not become a “corporate officer”, but is an employee and the determination
of the rights and liabilities relating to his removal are within the jurisdiction of the
NLRC.
A different interpretation can easily leave the way open for the Board of Directors
to circumvent the constitutionally guaranteed security of tenure of the employee
by the expedient inclusion in the By-Laws of an enabling clause on the creation
of just any corporate officer position.
The rulings in Tabang v. NLRC, and Nacpil v. International Broadcasting Corp.
“should no longer be controlling.”
FACTS:
1. Coros (respondent) was dismissed by Matling as its Vice President for
Finance and Administration (VPFA).
2. Coros filed a complaint for illegal suspension and illegal dismissal in the
National Labor Relations Commission (NLRC) of Iligan City.
3. Matling Industries, et. al. (petitioners) moved to dismiss the complaint on the
ground of lack of jurisdiction – arguing that it should be before the Securities
and Exchange Commission (SEC) for being an intra-corporate dispute.
4. Coros opposed on the ground that his status as a member of the Board of
Directors was doubtful, considering that he had not been formally elected as
such, that he did not own a sinlge share of stock because Matling retained the
certificate of stock in its custody, and that even conceding that he was a
director, he had been removed as Vice President for Finance and
Administration, not as a director.
5. Labor Arbiter (LA) granted the Motion to Dismiss on the ground that Coros
was a corporate officer because he was occupying the position of Vice
President for Finance and Administration and at the same time was a director.
6. NLRC reversed on the ground that Coros was not a corporate officer by virtue
of his position in Matling, although high ranking and managerial, was not
among the positions listed in Matling’s Constitution and By-Laws.
a. In the MR, it was shown in the Constitution and By-Laws that the
President of Matling was thereby granted full power to create new
offices and appoint the officers thereto. It likewise proved in its
Minutes of the Meeting that Coros is indeed a director. Despite such
fact, the MR was denied.
7. The CA affirmed the NLRC ruling, explaining that “for a position to be
considered as a corporate office, or for one to be considered a corporate
officer, the position must, if not listed in the by-laws, have been created by
the board of directors, and the occupant thereof appointed/elected by the same
board of directors or stockholders.
8. Matling Industries, et. al. now argue that the position of Vice President for
Finance and Administration was a corporate office, having been created by
Matling’s President pursuant to By-Law No. V., as amended. They rely on:
a. Tabang v. NLRC – other offices are sometimes created by the charter
 or by-laws of a corporation, or the board of directors may be
empowered under the by-laws of a corporation to create additional
officers as may be necessary.
9. Coros counters that the corporate officers contemplated in the phrase “and
such other officers as may be provided for in the by-laws” should be learly
and expressly stated in the By-Laws – there being classifications, either (1)
ordinary or non-corporate officers, or (2) corporate officers which are elected
by the Board of Directors or Stockholders. The President could only appoint
an employee to a position pursuant to By-Law No. V.
ISSUE/s:
1. Whether the complaint herein is cognizable by the LA or by the RTC – LA,
Coros is not a “corporate officer.”
RULING: Petition DENIED. CA decision AFFIRMED.
RATIO:
1. JURISDICTION:
a. The illegal dismissal of an officer or other employee of a private
employer is cognizable by the LA. (Art. 217 (a) 2 of the Labor Code,
as amended)
b. Whether the complaint for illegal dismissal cncerns a corporate
officer, however, the controversy falls under the jurisdiction of the
SEC because the controversy arises out of intra-corporate disputes
or partnership relations:
i. Between and among stockholders, members, or associates;
ii. Between any or all of them and the corporation,
partnership, or association;
iii. Between such corporation, partnership, or association and
the State insofar as the controversy concerns their
individual franchise or right to exist as such entity; or
iv. Because it involves the election or appointment of a
director, trustee, officer, or manager of such corporation,
partnership, or association.
c. By virtue of the Securities Regulation Code (RA 8799), the SEC’s
jurisdiction over all intra-corporate disputes was transferred to the
RTC – covers the complaint filed herein, were it granted to be an
intra-corporate dipsute.
2. §25, Corporation Code – corporate officers are: (1) president, who shall be a
director; (2) treasurer, who may or may not be a director; (3) secretary, who
shall be a resident and citizen of the Philippines, and (4) such other officers
as may be provided for in the by-laws.
a. Conformably with Section 25, a position must be expressly
mentioned in the ByLaws in order to be considered as a corporate
office. Thus, the creation of an office pursuant to or under a By-Law
enabling provision is not enough to make a position a corporate
office.
b. A different interpretation can easily leave the way open for the
Board of Directors to circumvent the constitutionally guaranteed
security of tenure of the employee by the expedient inclusion in the
ByLaws of an enabling clause on the creation of just any corporate
officer position.
3. To emphasize, the power to create new offices and the power to appoint the
officers to occupy them vested by By-Law No. V merely allowed Matlings
President to create noncorporate offices to be occupied by ordinary
employees of Matling. Such powers were incidental to the Presidents duties
as the executive head of Matling to assist him in the daily operations of the
business.
4. The statement in Tabang, that offices not expressly mentioned in the By-
Laws but were created pursuant to a B-Law enabling provision were also
considered corporate offices , was plainly obiter dictum due to the position
subject of the controversy being mentioned in the By-Laws.
a. In Nacpil v. Intercontinental Broadcasting Corp., the Court held
there that the position was a corporate office, relying on the obiter
dictum in Tabang.
b. Considering that the observations earlier made herein show that the
soundness of their dicta is not unassailable.
5. The criteria for distinguishing between corporate officers who may be ousted
from office at will, on one hand, and ordinary corporate employees who may
only be terminated for just cause, on the other hand, do not depend on the
nature of the services performed, but on the manner of creation of the office.
a. Obviously enough, the respondent was not appointed as Vice
President for Finance and Administration because of his being a
stockholder or Director of Matling. He had started working for
Matling on September 8, 1966, and had been employed
continuously for 33 years until his termination on April 17, 2000,
first as a bookkeeper, and his climb in 1987 to his last position as
Vice President for Finance and Administration had been gradual but
steady.
b. Even though he might have become a stockholder of Matling in
1992, his promotion to the position of Vice President for Finance
and Administration in 1987 was by virtue of the length of
quality service he had rendered as an employee of Matling. His
subsequent acquisition of the status of Director/stockholder had no
relation to his promotion. Besides, his status of Director/stockholder
was unaffected by his dismissal from employment as Vice President
for Finance and Administration.
 032 TRAMAT MERCANTILE INC. v. CA (Villavicencio)
November 7, 1994 | Vitug, J. | Rundown on Corporate Liability
PETITIONER: Tramat Mercantile, Inc. and David Ong
RESPONDENTS: Court of Appeals and Melchor de la Cuesta
SUMMARY: de la Cuesta sold to Tramat 1 Hinomoto Tractor. Tramat sold this
with an attached lawn mower fabricated by it to NAWASA. David Ong stopped
the payment of the check he issued to Tramat after discovering the defects of the
engine sold by de la Cuesta as it was found out to be a reconditioned unit only
instead of a brand new unit. de la Cuesta filed an action for the recovery of
P33,500.00, as well as attorney's fees of P10,000.00, and the costs of suit. trial
court rendered a decision Ordering the Tramat and Ong, jointly and severally, to
pay the de la Cuesta. CA affirmed RTC’s decision. WoN David Ong is jointly and
severally liable with Tramat to De la Cuesta– NO, because Ong acted not in his
personal capacity but as an officer of the corporation.
DOCTRINE: Personal liability of a corporate director, trustee or officer along
(although not necessarily) only when -
1. He assents (a) to a patently unlawful act of the corporation, or (b) for bad
faith, or gross negligence in directing its affairs, or (c) for conflict of interest, re-
sulting in damages to the corporation, its stockholders or other persons
2. He consents to the issuance of watered stocks or who, having knowledge
thereof, does not forthwith file with the corporate secretary his written objection
thereto;
3. He agrees to hold himself personally and solidarily liable with the corpora-
tion;
or
4. He is made, by a specific provision of law, to personally answer for his corpo-
rate action.
FACTS:
1. Melchor de la Cuesta, doing business under the name and style of "Farmers
Machineries," sold to Tramat Mercantile, Inc. ("Tramat"), one (1) unit HI-
NOMOTO TRACTOR Model MB 1100D powered by a 13 H.P. diesel en-
gine.
2. In payment, David Ong, Tramat's president and manager, issued a check for
P33,500.00
3. Tramat, in turn, sold the tractor, together with an attached lawn mower fabri-
cated by it, to the Metropolitan Waterworks and Sewerage System
("NAWASA") for P67,000.00.
4. David Ong caused a "stop payment" of the check when NAWASA refused to
pay the tractor and lawn mower after discovering that, aside from some stated
defects of the attached lawn mower, the engine (sold by de la Cuesta) was a
reconditioned unit.
5. de la Cuesta filed an action for the recovery of P33,500.00, as well as attor-
ney's fees of P10,000.00, and the costs of suit.
6. Ong, in his answer, averred, among other things, that de la Cuesta had no
cause of action; that the questioned transaction was between de la Cuesta and
Tramat Mercantile, Inc., and not with Ong in his personal capacity
7. the payment of the check was stopped because the subject tractor had been
priced as a brand new, not as a reconditioned unit.
8. trial court rendered a decision Ordering the Tramat and Ong, jointly and sev-
erally, to pay the de la Cuesta
9. CA affirmed RTC’s decision
ISSUE/s:
1. WoN David Ong is jointly and severally liable with Tramat to De la Cuesta–
NO, because Ong acted not in his personal capacity but as an officer of the
corporation.
RULING: WHEREFORE, the petition is given DUE COURSE and the decision of
the trial court, affirmed by the appellate court, is MODIFIED insofar as it holds peti-
tioner David Ong jointly and severally liable with Tramat Mercantile, Inc., which
portion of the questioned judgment is SET ASIDE. In all other respects, the decision
appealed from is AFFIRMED. No costs.
RATIO:
1. It was, nevertheless, an error to hold David Ong jointly and severally liable with
TRAMAT to de la Cuesta under the questioned transaction. Ong had there so
acted, not in his personal capacity, but as an officer of a corporation, TRAMAT,
with a distinct and separate personality.
2. As such, it should only be the corporation, not the person acting for and on its
behalf, that properly could be made liable thereon.
3. Personal liability of a corporate director, trustee or officer along (although not
necessarily) only when -
4. 1. He assents (a) to a patently unlawful act of the corporation, or (b) for bad faith,
or gross negligence in directing its affairs, or (c) for conflict of interest, resulting
in damages to the corporation, its stockholders or other persons
5. 2. He consents to the issuance of watered stocks or who, having knowledge
thereof, does not forthwith file with the corporate secretary his written objection
thereto;
6. 3. He agrees to hold himself personally and solidarily liable with the corpora-
tion;
or
7. 4. He is made, by a specific provision of law, to personally answer for his corpo-
rate action.
8. In the case at bench, there is no indication that petitioner David Ong could be held
personally
9. Others:
10. We could find no reason to reverse the factual findings of both the trial court and
the appellate court, particularly in holding that the contract between de la Cuesta
and TRAMAT was one of absolute, not conditional, sale of the tractor and that de
la Cuesta did not violate any warranty on the sale of the tractor to TRAMAT.
11. There were payments made even before the defects were found. These payments
argue against the claim now made by the defendants that the sale was conditional.
12. at the time of the purchase, Tramat and Ong did not reveal to the de la Cuesta the
true purpose for which the tractor would be used.
13. We do not agree that the appellee should have been held liable for the tractor's
alleged hidden defects
14. There is no showing that the Tramat had any previous experience in the fabrica-
tion of this lawn mower. In fact, as aforesaid, they had to borrow one from the
MWSS which they could copy.
15. But although they made a copy with the same specifications and design, there was
no assurance that the copy would function as well as with the model.
16. The engine malfunctioned not necessarily because the engine, as alleged by the
Tramat, had been a reconditioned, and not a brand new, one. It malfunctioned
because it was made to do what it simply could not. (aw bb L)
 033 A.C. RANSOM LABOR UNION v. NLRC (VICENCIO)
June 10, 1986 | Melencio-Herrera, J. | Special Provisions in Labor Laws
PETITIONER: A.C. Ransom Labor Union-CCLU
RESPONDENTS: National Labor Relations Commission, A.C. Ransom (Phils.)
Corporation, Ruben Hernandez, et al.
SUMMARY: RANSOM was family corporation engaged in the manufacture of
ink and ink products. After its employees, members of petitioner UNION, went
on a strike, RANSOM refused to reinstate 22 strikers. The latter then filed a case
against the corporation wherein the Labor Arbiter ruled that the strikers be
reinstated with back wages. RANSOM then decided to cease operations, and the
Hernandez family, the major stockholders of RANSOM, organized another
corporation, ROSARIO. Logically then, the writ of executions against the old
corporation, RANSOM, could not be implemented for lack of lebviable assets.
The UNION then filed for a writ of execution against the officers and agents of
RANSOM to be liable instead. The Labor Arbiter affirmed. The NLRC however
qualified that general rule of corporations officers not being liable for official acts
must prevail unless it be proven they exceeded authority.
The SC ruled that according to the Labor Code an “employer” includes any person
acting in its interest. This is applicable moreso if the employer is an artificial
person not capable of being held criminally liable like RANSOM herein.
According further to other pertinent laws, it will be the officers or managers of a
corporation that shall be liable for liabilities, like payment of backwages herein.
Hence, the SC held that in the absence of a definite identification of who the
officer liable is, RANSOM’s current President is solidarily liable with those who
succeed his position for the backwages. (See Doctrine). If otherwise, the
corporation can evade liability by ceasing its operations and make another
company, like the creation of ROSARIO in this case.
DOCTRINE: Since a corporate employer is an artificial person, it must have an
officer who can be presumed to be the employer, being the “person acting in the
interest of (the) employer” as defined in Art. 283 of the Labor Code (from
syllabus).
FACTS:
1. Respondent A. C. Ransom Corporation (RANSOM) was established by
Maximo C. Hernandez, Sr. It was a "family" corporation, the stockholders
were members of the Hernandez family.
2. It has a compound in Las Pinas Rizal, where it has been engaged in the
manufacture mainly of ink and articles associated with ink.
3. Employees of RANSOM, most of them being members of petitioner Labor
UNION, went on strike and established a picket line (Note: Cause of strike
not stated).
4. This picket line however, was lifted with most of the strikers returning and
being allowed to resume their work by RANSOM.
5. 22 strikers were refused reinstatement by the Company.
6. During 1969, the same Hernandez family organized another corporation,
Rosario Industrial Corporation (ROSARIO) which also engaged, in the
RANSOM Compound, in the business of likewise ink and ink products.
7. The previous strike became the subject of two cases where the Court of
Industrial Relations ordered RANSOM to reinstate the 22 strikers with back
wages.
8. RANSOM then filed an application for clearance to close or cease operations,
which was granted by the Ministry of Labor and Employment, without
prejudice to the right of employees to seek redress of grievance.
9. Although it has stopped operations, RANSOM has continued its personality
as a corporation.
10. Back wages of the 22 strikers were subsequently computed at P164,984.00.
11. Petitioner UNION had filed about 10 motions for execution against
RANSOM; but all of them could not be implemented, presumably for failure
to find leviable assets of RANSOM; although it appears that, in 1975,
RANSOM had sold machineries and equipment for P28million to
Revelations Manufacturing Corporation.
12. Directly related to this case is the last Motion for Execution, filed by
petitioner UNION wherein it asked that officers and agents of RANSOM be
held personally liable for payment of the back wages. That Motion was
granted by Labor Arbiter.
13. A Writ of Execution was issued against RANSOM and seven officers and
directors of the Company who are the named individual respondents herein.
14. RANSOM took an appeal to NLRC.
15. The NLRC held that: the general rule prevails that officers of the corporation
are liable personally for official acts, unless they have exceeded their
authority; that in the absence of evidence showing that the officers mentioned
in the Order of the Labor have exceeded their authority, the writ of execution
can not be enforced against them, especially so since they were not given a
chance to be heard.
ISSUE/s:
1. WoNthe judgment against a corporation to reinstate its dismissed employees
with backwages, enforceable against its officers and agents in their private
capacities who were not parties in the case where the judgment was rendered
– YES, because an “employer” (RANSOM) includes anyone acting in behalf
of it (its President).
RULING: The questioned Decision of the National Labor Relations Commission is
SET ASIDE, and the Order of Labor Arbiter Tito F. Genilo of March 11, 1980 is
reinstated with the modification that personal liability for the back wages due the 22 12. The record does not clearly Identify "the officer or officers" of RANSOM
strikers shall be limited to Ruben Hernandez, who was President of RANSOM in 1974, directly responsible for failure to pay the back wages of the 22 strikers.
jointly and severally with other Presidents of the same corporation who had been 13. In the absence of definite proof in that regard, the SC believes it should
elected as such after 1972 or up to the time the corporate life was terminated be presumed that the responsible officer is the President of the
corporation who can be deemed the chief operation officer thereof.
RATIO: 14. Thus, in RA 602, criminal responsibility is with the “Manager” or in his
1. Article 265 of the labor Code expressly provides: Any worker whose default, the person acting as such. In RANSOM, the President appears to be
employment has been terminated as a consequence of an unlawful lockout the Manager.
shall be entitled to reinstatement with fill back wages. 15. Considering that non-payment of the back wages of the 22 strikers has been
2. Article 273 of the Code provides that: Any person violating any of the a continuing situation, it is the SC’s opinion that the personal liability of the
provisions of Article 265 of this Code shall be punished by a fine of not RANSOM President, at the time the back wages were ordered to be paid
exceeding five hundred pesos and/or imprisonment for not less than one (1) should also be a continuing joint and several personal liabilities of all who
day nor more than six (6) months. have thereafter succeeded to the office of president; otherwise, the 22 strikers
3. How can the foregoing provisions be implemented when the employer is a may be deprived of their rights by the election of a president without leviable
corporation? The answer is found in Article 212 (c) of the Labor Code which assets.
provides: “Employer” includes any person acting in the interest of an
employer directly or indirectly. The term shall not include any labor
organization or any of its officers or agents except when acting as
employer.
4. The foregoing was culled from Section 2 of RA 602, the Minimum Wage
Law.
5. Since RANSOM is an artificial person, it must have an officer who can
be presumed to be the employer, being the "person acting in the interest
of (the) employer" RANSOM.
6. The corporation, only in the technical sense, is the employer.
7. The responsible officer of an employer corporation can be held personally,
not to say even criminally, liable for non-payment of back wages. That is the
policy of the law.
8. In the Minimum Wage Law, Section 15(b) provided: “If any violation of his
Act is committed by a corporation, trust, partnership or association, the
manager or in his default, the person acting as such when the violation took
place, shall be responsible. In the case of a government corporation, the
managing head shall be made responsible, except when shown that the
violation was due to an act or commission of some other person, over whom
he has no control, in which case the latter shall be held responsible.”
9. If the policy of the law were otherwise, the corporation employer can
have devious ways for evading payment of back wages.
10. In the instant case, it would appear that RANSOM, in 1969, foreseeing
the possibility or probability of payment of back wages to the 22 strikers,
organized ROSARIO to replace RANSOM, with the latter to be
eventually phased out if the 22 strikers win their case.
11. RANSOM actually ceased operation on May 1, 1973, after the December 19,
1972 Decision of the Court of Industrial Relations was promulgated against
RANSOM.
 SECTION 10
001 STOCKHOLDERS OF F. GUANSON AND SONS, INC. v. REGISTER OF
DEEDS OF MANILA (Marcos)
October 30, 1962 | Bautista Angelo, J. | What Does a “Share” Represent?
PETITIONER: Stockholders of F. Guanson and Sons, Inc.
RESPONDENTS: Register of Deeds of Manila
SUMMARY: The 5 stockholders of F. Guanzon and Sons, Inc. executed a
certificate of liquidation, and have distributed among themselves in proportion to
their shareholdings, the assets of the corporation. However, the Register of Deeds
in Manila denied registration on 7 grounds and the following 4 grounds are
disputed by the stockholders: (1) the number of parcels not certified, (2) non
payment of registration fees, (3) wrong amount for the documentary stamps that
need to be attached, and (4) the judgment of the court approving dissolution
should be presented. The issue was elevated with the Commissioner of Land
Regsitration and overruled the last ground but sustained the first 3. The
stockholders appealed to the Supreme Court contending that the certificate of
liquidation is not a conveyance or transfer but merely a distribution of the assets
of the corporation, hence the given requirements are not necessary (see FACT #7
for the reasons). The issue is WoN that certificate merely involves a distribution
of the corporation's assets or should be considered a transfer or conveyance. The
Court ruled that the certificate of liquidation is in the nature of a transfer or
conveyance. The certificate of liquidation represents a transfer of said assets
from the corporation to the stockholders, hence, in substance it is a transfer
or conveyance A corporation is a juridical person distinct from the members
composing it. Properties registered in the name of the corporation are owned
by it as an entity separate and distinct from its members.
DOCTRINE: While shares of stock constitute personal property, they do not
represent property of the corporation [i.e., they are properties of the
stockholders who own them]. A share of stock only typifies an aliquot part of
the corporation’s property, or the right to share in its proceeds to that extent
when distributed according to law and equity, but the holder is not the owner of
any part of the capital [properties] of the corporation, nor is he entitled to the
possession of any definite portion of its assets. The stockholder is not a co-owner
of corporate property.
FACTS:
1. The five stockholders of F. Guanzon and Sons, Inc. executed a certificate of
liquidation of the assets of the corporation.
2. By virtue of said resolution, the stockholders dissolved the corporation and
adopted that they have distributed among themselves in proportion to their
shareholdings, the assets of said corporation, including real properties locates
in Manila.
3. The Register of Deeds in Manila denied registration on 7 grounds and the
following 4 grounds are disputed by the stockholders: (the case didn’t really
state the other grounds, eto lang)
- 3. The number of parcels not certified to in the acknowledgment;
- 5. P430.50 Reg. fees need be paid;
- 6. P940.45 documentary stamps need be attached to the document;
- 7. The judgment of the Court approving the dissolution and directing the
disposition of the assets of the corporation need be presented
4. They elevated the issue with the Commissioner of Land Registration and the
latter, deciding in consulta, overruled ground 7 and sustained 3,5, and 6.
5. The stockholders appealed to the Supreme Court.
6. The stockholders contend that the certificate of liquidation is not a
conveyance or transfer but merely a distribution of the assets of the
corporation which has ceased to exist for having been dissolved.
7. Not being a conveyance, the certificate need not contain a statement of the
number of parcel of land involved in the distribution in the acknowledgment
appearing therein. Hence the amount of documentary stamps to be affixed
thereon should only be P0.30 and not P940.45, as required by the register of
deeds. Neither is it correct to require them to pay the amount of P430.50 as
registration fee. (reasons why they think the 3 grounds do not apply in this
case)
ISSUE/s: WoN that certificate merely involves a distribution of the corporation's
assets or should be considered a transfer or conveyance. – CONVEYANCE because
the properties registered in the name of the corporation are owned by it as an entity
separate and distinct from its members.
RULING: WHEREFORE, we affirm the resolution appealed from, with costs against
appellants.
RATIO:
1. The certificate of liquidation in question, though it involves a distribution of
the corporation's assets, in the last analysis represents a transfer of said
assets from the corporation to the stockholders. Hence, in substance it is
a transfer or conveyance
2. A corporation is a juridical person distinct from the members composing it.
Properties registered in the name of the corporation are owned by it as
an entity separate and distinct from its members.
3. While shares of stock constitute personal property they do not represent
property of the corporation. The corporation has property of its own which
consists chiefly of real estate.
4. A share of stock only typifies an aliquot part of the corporation's
property, or the right to share in its proceeds to that extent when distributed
according to law and equity
5. Its holder is not the owner of any part of the capital of the corporation, nor is
he entitled to the possession of any definite portion of its property or assets
6. The stockholder is not a co-owner or tenant in common of the corporate
property.
7. Since the purpose of the liquidation, as well as the distribution of the assets
of the corporation, is to transfer their title from the corporation to the
stockholders in proportion to their shareholdings, that transfer cannot be
effected without the corresponding deed of conveyance from the
corporation to the stockholders.
8. It is, therefore, fair and logical to consider the certificate of liquidation as
one in the nature of a transfer or conveyance
002 MAJORITY STOCKHOLDERS OF RUBY INDUSTRIAL CORP v. LIM
(CHIQUI)
June 6, 2011 | Villarama, Jr., J. | Pre-emptive Rights
PETITIONER: Majority Stockholders of Ruby Industrial Corporation
RESPONDENTS: 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
PETITIONER: China Banking Corporation
RESPONDENTS: 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
SUMMARY: RUBY is a domestic corporation suffering from severe liquidity
problems. It filed a petition for suspension of payments in the SEC which the lat-
ter approved. SEC created MANCOM to undertake the management of RUBY.
Two rehabilitation plas were submitted to the SEC: BENHAR/RUBY Rehabili-
tation Plan of the majority stockholders and the Alternative Plan of the minority
stockholders. Both plans were endorsed by the SEC to the MANCOM for evalu-
ation. BENHAR/RUBY Plan was initially approved but it was enjoined. Mean-
while, BENHAR paid off FEBTC, one of RUBY's secured creditors. 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 TRO and injunction and even before the SEC Hearing Panel ap-
proved the BENHAR/RUBY Plan (again the implementation of this plan was en-
joined). The deed of assignment was subsequently declared null and void by the
SC. After the implementation of BENHAR/RUBY Plan was enjoined, 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 BEN-
HAR/RUBY Plan). It was first approved but it was later ruled that the revised
plan circumvented its earlier decision nullifying the deeds of assignment exe-
cuted by RUBY's creditors in favor of BENHAR. There was a capital infusion
taken up by RUBY's board of directors in a special meeting following the issu-
ance by the SEC of its Order approving the Revised BENHAR/RUBY Plan and
creating a new management committee to oversee its implementation. The new
management committee issued out the unissued portion of the stocks so that the
majority can buy it. Then since the proportion was around 75%-25%, the 75%
majority voted to extend the corporate life of RUBY. The new board declared
that the resolution was approved by 2/3 of RUBY’s outstanding capital stock so
it has become binding. Lim argued that the implementation of the new percent-
age 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 de-
cisions of the CA and the SC, and without compliance with the legal require-
ments under the Corporation Code. There being no valid extension of corporate
term, RUBY's corporate life had legally ceased. SEC denied the petition of Lim.
However, this was set aside by the CA. W/N CA was correct in finding that the
increase in shareholdings by the majority is illegal and is violative of the pre-
emptive rights of the minority – YES, 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 stock-
holder must be given a reasonable time within which to exercise their preemp-
tive rights. 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 per-
petuate or shift control of the corporation, or to "freeze out" the minority
interest. Stockholders are given a right to intervene during ciriticial periods in
the life of the corporation, 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.
DOCTRINE: Pre-emptive right under Section 39 refers to the right of a stock-
holder of a stock corporation to subscribe to all issues or disposition of shares of
any class, in proportion to their respective shareholdings. Although it can validly
be withdrawn, it cannot be done in breach of fiduciary duties such as to perpetu-
ate control over the corporation.
FACTS: (Hard case because a lot happened and the events overlap. Sorry in advance.)
1. Ruby Industrial Corporation (RUBY) is a domestic corporation engaged in
glass manufacturing. Reeling from severe liquidity problems beginning in
1980, RUBY led on December 13, 1983 a petition for suspension of payments
with the Securities and Exchange Commission (SEC).
2. SEC ordered suspension of payments except insofar as necessary in its ordi-
nary operations, and making payments outside of the necessary or legitimate
expenses of its business.
3. The SEC Hearing Panel created the management committee (MANCOM) for
 RUBY, composed of representatives from Allied Leasing and Finance Cor-
poration (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.
a. 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 RU-
BY's existing assets and liabilities, earnings and operations; (4) de-
termine the best way to salvage and protect the interest of its inves-
tors and creditors; and (5) study, review and evaluate the proposed
rehabilitation plan for RUBY.
4. Two rehabilitation plas were submitted to the SEC: BENHAR/RUBY Reha-
bilitation Plan of the majority stockholders and the Alternative Plan of the
minority stockholders. Both plans were endorsed by the SEC to the MAN-
COM for evaluation.
a. Initially, the SEC approved the BENHAR/RUBY Plan but through
a series of appeals, it was denied by the SC. SC upheld the injunction
against the implementation of the BENHAR/RUBY Plan
5. Meanwhile, BENHAR paid off Far East Bank & Trust Company (FEBTC),
one of RUBY's secured creditors. 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. (Plan was denied by the SC Fact #4a).
a. Again, through a series of appeals, the CA ruled to nullify the deeds
of assignment by FEBTC. SC sustained this.
6. After the implementation of BENHAR/RUBY Plan was enjoined, 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 BEN-
HAR/RUBY Plan). The SEC En Banc directed RUBY to submit its revised
rehabilitation plan to its creditors for comment and approval while the peti-
tion for the creation of a new management committee was remanded for fur-
ther proceedings to the SEC Hearing Panel.
7. 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.
8. Notwithstanding the objections of 90% of RUBY's creditors and three mem-
bers of the MANCOM, the SEC Hearing Panel 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.
a. When this reached the CA, it ruled that the revised plan circum-
vented its earlier decision nullifying the deeds of assignment exe-
cuted by RUBY's creditors in favor of BENHAR. SC sided with the
CA.
9. In 1996, Lim received a Notice of Stockholders' Meeting stating the matters
to be taken up in said meeting, which include the extension of RUBY's cor-
porate term for another twenty-five (25) years and election of Directors. At
the scheduled stockholders' meeting, Lim together with other minority stock-
holders, appeared in order to put on record their objections on the validity of
holding thereof and the matters to be taken therein. Specifically, they ques-
tioned the percentage of stockholders present in the meeting which the ma-
jority claimed stood at 74.75% of the outstanding capital stock of RUBY.
a. The aforementioned capital infusion was taken up by RUBY's board
of directors in a special meeting following the issuance by the SEC
of its Order approving the Revised BENHAR/RUBY Plan and cre-
ating a new management committee to oversee its implementation.
(This was denied in Fact #8a). 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.
b. The board here said that the corporation authorized to issue out the
unissued portion of the authorized capital stocks in the form of com-
mon stocks. These were to be paid in full by the present stockhold-
ers. Failure to exercise their rights to buy will allow the other stock-
holders interested to buy it.
c. Note: From what I understand, the new management committee is-
sued out the unissued portion of the stocks so that the majority can
buy it. Then since the proportion was around 75%-25%, the 75%
voted to extend the corporate life of RUBY. The new board even
said that the resolution was approved by 2/3 of RUBY’s outstanding
capital stock.
10. Lim argued that 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.
11. MANCOM concurred with Lim since it was neves informed of the supposed
capital infusion and that it still recognizes the 60%-40% ratio of the share-
holdings.
12. SEC Ruling: denied the petition of Lim and MANCOM.
a. 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.
 b. It also overruled the objections raised by the minority stockholders
regarding the questionable issuance of shares of stock by the major-
ity 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.
c. The SEC found that notwithstanding his allegations of fraud, Lim
never proved the illegality of the additional infusion of the capitali-
zation by RUBY so as to warrant a finding that there was indeed an
unlawful act.
13. CA Ruling: the SEC erred in not finding that the 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.
a. 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. Nec-
essarily then, such capital infusion is covered by the final injunction
against the implementation of the revised plan.
b. 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 pre-
sumption such as there was no written waivers of the minority stock-
holders' 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
c. With the expiration of the RUBY's corporate term, the CA ruled that
it was error for the SEC in not commencing liquidation proceedings
14. Summary of the overlapping events:
a. Before the BENHAR/RUBY Plan could be approved by the SEC
Hearing Panel, FEBTC had already executed a deed of assignment
of credit and mortgage rights in favor of BENHAR. The deed of
assignment was declared to be null and void.
b. After the implementation of the BENHAR/RUBY plan was en-
joined, RUBY filed a petition for the creation of the new manage-
ment committee. This was denied.
c. However, when the petition was pending during appeal, the new
management, which was initially approved but subsequently denied,
increased the shareholdings of the majority.
ISSUE/s:
1. W/N CA was correct in finding that the increase in shareholdings by the ma-
jority is illegal and is violative of the pre-emptive rights of the minority –
YES, equity cannot deprive the minority of a remedy against the abuses of
the majority, and the present action has been instituted precisely for the pur-
pose of protecting the true and legitimate interests of Ruby against the Ma-
jority Stockholders.
RULING: 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 MODIFICA-
TION in that the Securities and Exchange Commission is hereby ordered to TRANS-
FER SEC Case No. 2556 to the appropriate Regional Trial Court which is hereby DI-
RECTED to supervise the liquidation of Ruby Industrial Corporation under the pro-
visions of R.A. No. 10142. With costs against the petitioners.
SO ORDERED.

RATIO:
1. 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 share-
holdings. The right may be restricted or denied under the articles of incorpo-
ration, and subject to certain exceptions and limitations. The stockholder
must be given a reasonable time within which to exercise their preemp-
tive rights. Upon the expiration of said period, any stockholder who has not
exercised such right will be deemed to have waived it.
2. 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 incorpo-
ration, 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.
a. In this case, relevant observations should have signaled greater cir-
cumspection on the part of the SEC to demand transparency and ac-
countability from the majority stockholders, in view of the illegal
assignments and objectionable features of the Revised BEN-
HAR/RUBY Plan, as found by the CA and as affirmed by this Court.
Stockholders are given a right to intervene during ciriticial periods
in the life of the corporation, 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.
b. 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 ac-
tion has been instituted precisely for the purpose of protecting
the true and legitimate interests of Ruby against the Majority
Stockholders.
i. "Generally speaking, the voice of the majority of the stock-
holders is the law of the corporation, but there are excep-
tions 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."
3. The SEC remained indifferent to the reliefs sought by the minority stockhold-
ers, 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 infu-
sion 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%.
4. Extension of corporate term requires the vote of 2/3 of the outstanding capital
stock in a stockholders' meeting called for the purpose. 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 in-
sufficient and doubtful.
5. Under the circumstances, liquidation was the only hope of the minority stock-
holders for effecting an orderly and equitable settlement of RUBY's obliga-
tions, and compelling the majority stockholders to account for all funds, prop-
erties and documents in their possession, and make full disclosure on the nulli
ed credit assignments.
6. At any rate, the CA decision nullifying the Revised BENHAR/RUBY Plan
was affirmed by this Court. Hence, the legitimate concerns of the minority
stockholders and MANCOM who objected to the capital infusion which re-
sulted in the dilution of their shareholdings, the expiration of RUBY's corpo-
rate 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.
7. In fine, no error was committed by the CA when it set aside the Order of the
SEC and declared the nullity of the acts of majority stockholders in imple-
menting 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 RU-
BY's creditors in favor of third parties and/or conduits of the controlling
stockholders. The CA likewise correctly ordered the delivery of all docu-
ments relative to the said assignment of credits to the MANCOM or the Liq-
uidator, the unwinding of these void deeds of assignment, and their full ac-
counting by the majority stockholders.
There was no forum shopping.
1. In the case at bar, private respondents represent different groups with differ-
ent interests — the minority stockholders' group, represented by private re-
spondent Lim; the unsecured creditors group, Allied Leasing & Finance Cor-
poration; and the old management group. Each group has distinct rights to
protect. In line with our ruling in Ramos, the cases led by private respondents
should be consolidated. In fact, BENHAR and RUBY did just that — in their
urgent motions led on December 1, 1993 and December 6, 1993, respectively,
they prayed for the consolidation of the cases before the Court of Appeals.HD
The petition for suspension of payment will not be dismissed despite the lapse of
180 days (maximum period of the suspension order)
2. 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 reha-
bilitation 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 implemen-
tation 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 de-
cision declaring it void was affirmed by this Court. Given this factual milieu,
the automatic application of the lifting of the suspension order as interpreted
by the SEC in its Order would be unfair and highly prejudicial to the finan-
cially distressed corporation.
 003 FOREST HILLS v. VERTEX SALES (TIMBOL)
March 6, 2013 | Brion, J. | Right to Transfer or Dispose of Shareholdings
PETITIONER: Sarah P. Ampong
RESPONDENTS: Civil Service Commission
SUMMARY: FEGDI sold one Class “C” Common Share to RSACC, who then
transferred its interests to Vertex. FEGDI requested Forest Hills to recognize Ver-
tex as a shareholder, to which Forest Hills acceded, thus Vertex was able to enjoy
membership privileges. However, no issuance of stock certificate was given to
Vertex. Thus, prompting Vertex to file for a complaint rescission. The RTC de-
nied the complaint because the sale was consummated, and non-issuance is
merely a casual breach. But the CA reversed the ruling of the CA, holding that
there is substantial breach because issuance of certificate is necessary to transfer
ownership, thus, holding Forest Hills liable. Hence this petition.
According to Forest Hills, it was not a party to the sale, therefore, it should not
be held liable for any amount. Furthermore, rescission should not apply because
there was no substantial breach.
The SC held that rescission will apply. First and foremost, Forest Hills is not a
party to the transaction, thus, it cannot appeal the order of the CA with regard to
the rescission because only the aggrieved party may do so, which was FEGDI in
the present case. The SC explained that the corporation need not be a party to the
transaction of shares of stock as the subject matter in order to be valid. But to bind
the corporation and third parties, it is necessary that the transfer is recorded in the
books of the corporation. As a result of the rescission, however, is mutual resti-
tution, meaning the parties must be brought back to their original situation prior
to the inception. But again, Forest Hills not being a party to the rescinded sale, is
not obliged to return anything. Much more is that there was no evidence to show
that Forest Hills received any consideration of the purchase price. Although For-
est Hills received P150,000 as membership fees from Vertex, it is not required to
return such because in the span of three years prior to rescission, Vertex was able
to enjoy the privileges of the golf and country club.
DOCTRINE: Shares of stock of a corporation are not owned or are the assets of
the corporation – they are owed by the stockholders of record. The corporation
whose shares of stock are the subject of transfer transaction (through sale, assign-
ment, donation, or any other mode of conveyance) need not be a part to transac-
tion to be valid; however, to bind the corporation as well as third parties, it is
necessary that the transfer is recorded in the books of the corporation.
FACTS:
1. Forest Hills Golf & Country Club is a domestic non-profit stock corporation
that operates and maintains a golf and country club facility in Antipolo City.
Forest Hills was created as a result of a joint venture agreement between
Kings Properties Corporation (holding 40% of stocks) and Fil-Estate Golf
and Development, Inc. [FEGDI] (holding 60% of stocks).
2. FEGDI sold to RS Asuncion Construction Corporation (RSACC) one Class
“C” common share of Forest Hilss for P1.1 M. Prior to the full payment of
the purchase price, RSACC transferred its interests over FEGDI’s Class “C”
common share to Vertex Sales and Trading, Inc.
3. RSACC advised FEGDI of the transfer and FEGDI, in turn, requested Forest
Hills to recognize Vertex as a shareholder. Forest Hills acceded to the request,
and Vertex was able to enjoy membership privileges in the golf and country
club.
4. Despite the sale to Vertex, the share remained in the name of FEGDI, prompt-
ing Vertex to demand for the issuance of a stock certificate in its name. As it
demand went unheeded, Vertex filed a complaint for rescission with damages
against Forest Hills, FEGDI.
a. Vertex claims that FEGDI defaulted in their obligation as sellers
when they failed and refused to issue the stock certificate covering
the common share.
5. The RTC dismissed Vertex’s complaint after finding that the failure to issue
a stock certificate did not constitute a violation of the essential terms of the
contract of sale that would warrant its rescission. The RTC ruled that the sale
was already consummated notwithstanding the non-issuance of the stock cer-
tificate, and such is a mere casual breach.
6. The CA reversed the RTC declaring that in the sale of shares of stock, phys-
ical delivery of a stock certificate is one of the essential requisites for the
transfer of ownership of the stocks purchases.
a. SEC. 63 Valid transfer of stock
i. The delivery of the stock certificate
ii. The endorsement of the stock certificate by the owner
or his attorney-in-fact or other persons legally author-
ized to make the transfer; and
iii. To be valid against third parties, the transfer must be
recorded in the books of the corporation
b. Without the issuance of the stock certificate and despite Vertex’s
full payment of the purchase price, the share cannot be considered
as having been validly transferred. Hence, the CA rescinded the sale
of the share and ordered Forest Hills and FEGDI to return the
amount paid by reason of the sale.
7. FOREST HILL: Claimed that rescission is allowed only for substantial
breaches. Moreover, not a party to the contract of sale; hence it did not
receive any amount from Vertex which it would be obliged to return on
account of the rescission of the contract.
 8. VERTEX: Claimed that it was compliant with its obligation, but because of
the delay in the issuance of stock certificate, there is substantial breach. And
that mutual restitution should take plac. Also, Forest Hills should be solidar-
ily liable with FEGDI, since the delay was caused by Forest Hills’ refusal to
issue the share of FEGDI, from whom Vertex acquired its share.
ISSUES:
1. WoN Forest Hills is liable to pay for any amount to Vertex – NO, because
Forest Hills is not a party to the sale.
RULING: WHEREFORE, in view of the foregoing, the Court PARTIALLY
GRANTS the petition for review on certiorari. The decision dated February 22, 2012
and the resolution dated May 31, 2012 of the Court of Appeals in CA-G.R. CV No.
89296 are hereby MODIFIED. Petitioner Forest Hills Golf & Country Club is AB-
SOLVED from liability for any amount paid by Vertex Sales and Trading, Inc. by
reason of the rescinded sale of one (1) Class "C" common share of Forest Hills Golf
& Country Club.
to the inception of the contract; hence they must return what they re-
ceived pursuant to the contract.
7. Not being a party to the rescinded contract, however, Forest Hills is un-
der no obligation to return the amount paid by Vertex by reason of the
sale. Indeed, Vertex failed to present sufficient evidence showing that
Forest Hills received the purchase price for the share or any other fee
paid on account of the sale to make Forest Hills jointly or solidarily liable
with FEGDI for restitution.
8. Although Forest Hills received P150,000 from Vertex as membership fee,
it should be allowed to retain this amount. For three years prior to the
rescission of the sale, the nominees of Vertex enjoyed membership priv-
ileges and used the golf course and the amenities of Forest Hills. We con-
sider the amount paid as sufficient consideration for the privileges en-
joyed by Vertex’s nominees as members of Forest Hills.

RATIO:
1. The corporation whose shares of stock are the subject of a transfer trans-
action (through sale, assignment, donation, or any other mode of convey-
ance) need not be a party to the transaction, as may be inferred from the
terms of Section 63 of the Corporation Code. However, to bind the cor-
poration as well as third parties, it is necessary that the transfer is rec-
orded in the books of the corporation.
2. In the present case, the parties to the sale of the share were FEGDI as
the seller and Vertex as the buyer (after it succeeded RSACC). As party
tot eh sale, FEGDI is the one who may appeal the ruling rescinding the
sale.
3. The remedy of appeal is available to a party who has “a present interest in the
subject matter of the litigation and is aggrieved or prejudiced by the judg-
ment.
4. A party, in turn, is deemed aggrieved or prejudiced when his interest, recog-
nized by law in the subject matter of the lawsuit, is injuriously affected by
the judgment, order or decree.
5. The rescission of the sale does not in any way prejudice Forest Hills in such
a manner that its interest in the subject matter – the share of stock – injuri-
ously affected. Thus, Forest Hills is in no position to appeal the ruling re-
scinding the sale of the share. Since, FEGDI, as party to the sale, filed no
appeal against its rescission, we consider as final the CA’s ruling on this mat-
ter.
6. A necessary consequence of rescission is restitution: the parties to a re-
scinded contract must be brought back to their original situation prior
 004 INTERPORT v. SSI (TAN)
Jun. 6, 2016 | Bersamin, J. | Right to Transfer Shareholdings
PETITIONERS: Interport Resources Corp.
RESPONDENS: Securities Specialist, Inc. and R.C. Lee Securities, Inc.
SUMMARY: In 1977, Oceanic Oil and R.C. Lee entered into a subscrip-
tion agreement for 5M shares wherein the latter first paid for 25%. Be-
cause of this payment, Oceanic issued subscription agrements in the name
of R.C. Lee. Oceanic then merged with Interport (the latter was the surviv-
ing corp). In 1979, SSI received the aforementioned subscription agree-
ments through stock assignments indorsed in blank by R.C. Lee. R.C. Lee
then requested for a list of subscription agreements and Interport provided
these. The former did not find any record of any encumbrance or transfer
so R.C. Lee paid for the remaining 75%. SSI then tendered payment for
the same 75% (remember, it was assigned the subscription agreements)
but Interport rejected it. After repeated cycles of SSI tendering and Inter-
port rejecting, the former filed a case in the SEC to make Interport and
R.C. Lee liable for the shares. The SEC ruled in favor of SSI. In the SC,
the respondents were arguing that since there was a novation here by a
change of debtor – R.C. Lee to SSI, there was a need for the creditor Inter-
port to agree to if first. In accordance to this, they also argue that Sec. 63
of the Corp Code says that a transfer of shares is only binding if it is regis-
tered in the corporate books. The issue is whether or not Interport is liable
to deliver the shares to SSI. The SC held that yes, Interport is liable. Here,
the SEC held that indeed, there was a valid novation done. Upon the as-
signment of R.C. Lee to SSI, Interport became bound to accept SSI’s pay-
ment, and not R.C. Lee’s. Also, in the case of the corporation issuing
shares, such assignment is valid upon notice of the transferee coupled with
a tender of the balance. Here, Interport was notified via SSI’s tender of
payment for the 75%.
DOCTRINE: (From the syllabus) When the subscriber under a Subscrip-
tion Agreement assigns the shares to another party, the same partakes of
the nature of a novation through the substitution of the person of the
debtor, which is effective only with the consent of the creditor; but that
in the case of the corporation issuing the shares, such assignment would
be valid and binding upon notice by the transferee of the transfer of
the shares coupled with a tender of the balance of the unpaid subscrip-
tion pursuant to the call made by the corporation. The provisions of Sec-
tion 63 of the Corporation Code to the effect that a transfer of shares does
not bind the corporation unless it is registered in the corporate books can-
not apply in this case since formal notice of the transfer was given to
the corporation.
FACTS:
1. In 1977, Oceanic Oil and Mineral Resources entered into a subscription
agreement with R.C. Lee, a corporation engaged in the trading of stocks, cov-
ering 5M of its shares at Php 0.01/share for Php 50,000.
2. With this, R.C. Lee paid 25% of subscription, and 75% unpaid.
3. Oceanic then issued subscription agreements to R.C. Lee (Nos. 1805, 1808 –
1811).
4. Oceanic then merged with Interport where the latter was the surviving corp,
and here, each share of Oceanic was exchanged for a share in Interport.
5. In 1979, SSI received all the subscription agreements in fact no. 3 (aka the
ones outstanding in the name of R.C. Lee), and the official receipts from
Oceanic showing that 25% of the shares have been paid.
6. These were delivered to SSI through stock assignments indorsed in blank
by R.C. Lee.
7. R.C. Lee requested Interport for a list of subscription agreement and the stock
certificates issued in its name and other people named in the request.
8. Atty. Morales, Interport’s Corp. Secretary, provided the list of all subscrip-
tion agreements and stock certificates of Interport and Oceanic.
9. R.C. did not find any record which shows any transfer or assignment of
these agreements and certificates, so it paid for unpaid subscriptions and was
issued stock certificates thereto.
10. Interport then issued a call for the full payment of subscription agreements,
so SSI tendered payment. However, the stockbrokers informed SSI that In-
terport didn’t honor the Oceanic subscriptions.
11. However, SSI still directly tendered payment to Interport for the balance of
the 5M shares which were in the name of R.C. Lee.
12. Again, Interport rejected this saying that the Oceanic subscription agreements
should have been previously converted to shares in Interport.
13. SSI then required Interport to furnish a copy of any notice for the requirement
of this conversion, the latter was not able to do so.
14. SSI then asked the SEC for a copy of Interport’s board resolution for the
conversion, but again, the SEC said that it did not have any record of such.
15. With this discovery, Villaroman, the president of SSI met with Roman, the
President of Interport to ask again for the copy of the resolution. Again, no
such resolution was given.
16. Again, SSI tried to tender payment, but Interport still rejected it.
17. A few days after, SSI learned that Interport had already issued the 5M shares
to R.C. Lee, because the latter was the registered owner of the shares in the
books of Interport and because it didn’t find any transfer or encumbrance
(see: fact no. 9).
18. Thus, SSI went now to R.C. Lee demanding the delivery of the shares because
of the purported assignment of the subscription agreement covering the
shares (see: fact no. 5).
 19. R.C. Lee said that it cannot do that anymore because they have already sold
the shares to different parties.
20. SSI now did the following:
a. Demanded from R.C. Lee to pay the 25% for what it had already
paid as well as the whole of the 5M shares.
b. Demanded that Interport and R.C. Lee both cancel the shares issued
to the latter.
21. SSI’s demands were not met so it filed a case in the SEC with the same de-
mands plus damages. It alleged fraud and collusion
22. The SEC ruled in favor of SSI and ordered Interport to deliver the 5M shares,
and if it is not possible, to deliver the value thereof at the current market price,
plus temperate, exemplary damages and atty’s fees.
23. Interport and SEC appealed to the SEC En Banc and the latter still ruled in
favor of SSI but only partially.
24. The SEC En Banc noted that SSI paid only 25% but RC Lee had already paid
for the remaining 75% so Interport only has to deliver the 25% of the shares.
The tribunal also upheld the damages.
25. Interport appealed to the CA, but it affirmed the SEC’s decision. MR denied.
ISSUE/s:
1. W/N Interport was liable to deliver to SSI or the value thereof under the
disputed subscription agreements? YES because the novation was valid,
and Interport was actually notified of such.
2. W/N SSI was entitled to exemplary damages and atty’s fees? NO, there was
no basis for this.
RULING: WHEREFORE, the Court PARTIALLY GRANTS the petition for
review on certiorari; and AFFIRMS the decision promulgated on February 11, 2002
subject to the following MODIFICATIONS, namely:
1. ORDERING Interport Resources Corporation: (a) To accept the tender of
payment of Securities Specialist, Inc. corresponding to the 75% unpaid
balance of the total subscription price under Subscription Agreements Nos.
1805, 1808, 1809, 1810 and 1811; (b) To deliver 5,000,000 shares of stock
and to issue the corresponding stock certificates to Securities Specialist, Inc.
upon receipt of the payment of the latter under Item No. (a); (c) To cancel the
stock certificates issued to R.C. Lee Securities, Inc. corresponding to the
5,000,000 shares of stock covered by Subscription Agreements Nos. 1805,
1808, 1809, 1810 and 1811; (d) To reimburse R.C. Lee Securities, Inc. the
amounts it paid representing the 75% unpaid balance of the total subscription
price of Subscription Agreements Nos. 1805, 1808, 1809, 1810 and 1811;
3
Art. 1293. Novation which consists in substituting a new debtor in the place of the original
one may be made even without the knowledge or against the will of the latter but not without
the consent of the creditor.
and (e) In the alternative, if the foregoing is no longer possible, Interport
Resources Corporation shall pay Securities Specialist, Inc. the market value
of the 5,000,000 shares of stock covered by Subscription Agreements Nos.
1805, 1808, 1809, 1810 and 1811 at the time of the promulgation of this
decision; and
2. DELETING the award for exemplary damages and attorney’s fees for lack
of merit.
RATIO:
THERE WAS A VALID NOVATION HERE (IMPT) (To fully understand this
aka with less details, read the summary box!)
1. Interport argues that R.C. Lee should be liable to deliver the 25% of the shares
because the latter already had all of the shares. It also argues that R.C. Lee
would be unjustly enriched if it retained the 5M shares and the payment of
the 25% of the subscription made by SSI. Lastly, Interport also argues that it
merely relied on its records when it issued the stock certificates to R.C. Lee
upon its full payment.
2. The SC held that, as the SEC explained, Interport is liable because the sub-
scription agreements delivered were supported by the stock assignments of
R.C. Lee and by official receipts showing that 25% of the subscription had
already been paid.
3. R.C. Lee didn’t deny subscribing to and delivering the stock assignments to
Oceanic.
4. Therefore, having negotiated these agreements, and allowing them to be in
the certificates, R.C. Lee cannot now claim further interests over the sub-
scriptions or the shares they represent.
5. R.C. Lee and Interport want to be absolved of their liability for what they did
by invoking the doctrine of novation3 without the creditor’s consent, as
well as the Corp Code rule on non-registration of transfers in the corpo-
ration’s stock and transfer book. The SC denied the application of these.
a. Aka, they were saying kasi na Interport, as the creditor, was not no-
tified daw that R.C. Lee assigned the shares to SSI.
6. Also, R.C. Lee tried to argue that since an assignment will involve the sub-
stitution of debtor or novation, the consent of the creditor must be obtained.
7. However, the SEC, as cited by the SC, that when SSI tendered the balance
of the unpaid subscription on the 5M shares because of the existing subscrip-
tion agreements covering the same, Interport was bound to accept pay-
ment even as the same were being tendered in the name of the registered
subscriber, R.C. Lee.
8. Once payment is accepted in the name of R.C. Lee, Interport was bound
to recognize the stock assignment also tendered, duly executed by R.C. Lee
in favor of SSI.
9. The SEC correctly categorized the assignment of the subscription agreements
as a form of novation by substitution of a new debtor and requires con-
sent or notice to the creditor.
10. This type of novation may be made without the knowledge or even against
the will of the former debtor, but not without the consent of the creditor.
11. Here, the change of debtor took place when R.C. Lee assigned the Oce-
anic shares to SSI so that the latter became obliged to settle the 75% on
the subscription.
12. (IMPT) Also, Interport was DULY NOTIFIED of the assignment when
SSI tendered its payment for the 75% of the unpaid balance.
13. However, Interport claims that SSI waived its rights over the 5M shares due
to failure to register the assignment in the books of Interport, and that
R.C. Lee had already transferred the shares to third parties.
14. The SC said that their claim cannot be upheld because novation extinguishes
an obligation between 2 parties.
a. #TB to ObliCon as said by SC: Novation may be extinctive or mod-
ificatory.
b. Extinctive: never presumed! There must be an express intention to
novate, and if ever it is implied, the acts of the parties must clearly
demonstrate their intent to dissolve the old obligation with their new
one. Test: TOTAL INCOMPATIBILITY between the old and
new obligations on every point. Here, the novation has 2 effects: a)
the old obligation is extinguished; and b) a new one is created. Ele-
ments of this type of novation: a) previous valid obligation, b) agree-
ment of all parties to a new contract, c) extinguishment of the old
obligation; d) birth of a new obligation.
c. Modificatory: Change brought is merely incidental to the main ob-
ligation.
15. (IMPT) Clearly, the assignment of the subscriptions to SS extinguished
the obligation of R.C. Lee to pay for the remaining 75% of the shares.
16. Therefore, Interport was also no longer obliged to accept the payment from
R.C. Lee because the latter was not anymore privy to the subscriptions.
17. As an effect, Interport was legally bound to accept the payment of SSI for
the 75% balance because the latter was the new debtor.
18. Therefore, the issuance of stock certificates in the name of R.C. Lee had
no legal basis.
19. (IMPT) Sec. 63 of the Corp. Code states that no transfer of shares of stock
shall be valid except as between the parties, until the transfer is recorded
in the books of the corporation as to show the names of parties, etc.
20. The SC held that this rule cannot be applied in this case because Interport
unduly refused to recognize the assignment of shares between R.C. Lee
and SSI.
21. As stated by the SEC, the SC agreed that just because 10 years have lapsed,
does not mean that SSI is already deemed to have abandoned its rights under
the subscription agremeents.
22. The right to transfer exists from the time of such transfers however, the law
does not prescribe any period within which registration should be effected.
23. Therefore, the right does not accrue until there has been a demand and a
refusal to record the transfer.
24. SSI was denied recognition of the subscription agreement and the complaint
was filed in the same year it happened – 1989. This was the period for pre-
scription, not 1979 – 1989.
25. R.C. Lee claimed that it was in good faith, however, an examination Ramon
Lee’s (President of R.C. Lee) affidavit shows otherwise.
a. It stated that R.C. Lee has delivered to Interport subscription
agremeents for 25M shares of Oceanic for conversion however, as
of that date, only 20M shares have been duly covered by the Inter-
port Subscription Agreements. No explanation was given for the
failure of Interport to convert the 5M shares.
b. Aka, that failure is due to the fact that the 5M shares which purport-
edly belong to R.C. are not covered by any properly identified sub-
scription agreements.
c. On the other hand, Interport refuses to recognize SSI’s claim to an-
other 5M shares which was supported by proper assignments and
receipts.
INTERPORT AND R.C. LEE NOT LIABLE TO PAY EXEMPLARY DAM-
AGES AND ATTY’S FEES
1. Exemplary damages are imposed to set an example for the public good.
2. Plaintiff must show that he is entitled to these but here, SSI failed to do so.
3. Here, SSI’s alleged pecuniary loss was merely speculative in nature, and that
Interport’s refusal to accept the tender of payment was not done fraudulently.
4. Interport merely relied on its records, but such records didn’t show that there
was a valid assignment as early as 1979.
5. At the same time, R.C. Lee even paid for the 75% balance on the basis of
Interport’s representation that no transfer had yet been made.
 005 LAMBERT vs FOX (STA.MARIA)
January 29, 1914 | Moreland, J. | Restrictions on Transfer – In General
PLAINTIFF-APPELLANT: Leon J. Lambert
DEFENDANT-APPELLEE: T.J. Fox
SUMMARY: Early in 1911, John R. Edgar & Co., engaged in the retail book and
stationery business found itself in such condition financially that its creditors, in-
cluding the Lambert and T.J Fox, together with many others, agreed to take over
the business, incorporate it and accept stock therein in payment of their respective
credits. Lambert and Fox became the 2 largest stockholders in the new corporation
called John R. Edgar & Co., Incorporated. Lambert and Fox entered into an agree-
ment wherein they mutually and reciprocally agree not to sell, transfer, or other-
wise dispose of an part of the stock until after 1 year from the agreement date
unless consented in writing. If either party violated the agreement, he shall pay to
the other the sum of P1,000 as liquidated damages, unless previous consent in
writing to such sale, transfer, or other disposition be obtained. Notwithstanding
the agreement, Fox sold his stock E. C. McCullough & Co. of Manila, a strong
competitor of the company. This sale was made by the defendant against the pro-
test. In fact, Fox offered to sell his shares of stock to Lambert for the same sum
that McCullough was paying them less P1,000, the penalty specified in the con-
tract. The trial court decided the case in favor of Fox upon the ground that the
intention of the parties as it appeared from the contract in question was to the
effect that the agreement should be good and continue only until the corporation
reached a sound financial basis and that that event having occurred some time
before the expiration of the year mentioned in the contract, the purpose for which
the contract was made and had been fulfilled and Fox accordingly discharged of
his obligation thereunder. The issue are 1)WON the court erred in the construction
of the contract? – YES. The parties expressly stipulated that the contract should
last one year regardless of the objective it should be applied parties who are com-
petent to contract may make such agreements within the limitations of the law and
public policy as they desire, and that the courts will enforce them according to
their terms. (Relevant issue) 2) WON the suspension of the power to sell the stock
is valid? – Yes. The suspension of the power to sell has a beneficial purpose, re-
sults in the protection of the corporation as well as of the individual parties to the
contract, and is reasonable as to the length of time of the suspension. The SC said
“We do not here undertake to discuss the limitations to the power to suspend the
right of alienation of stock, limiting ourselves to the statement that the suspension
in this particular case is legal and valid.”
DOCTRINE: A contractual undertaking on restriction of transfer of shares that
has a reasonable business purpose and limited in coverage is valid and binding.
FACTS:
1. This is an action brought to recover a penalty prescribed on a contract as
punishment for the breach thereof.
2. Early in 1911 the firm known as John R. Edgar & Co., engaged in the retail
book and stationery business, found itself in such condition financially that
its creditors, including the Lambert and T.J Fox, together with many others,
agreed to take over the business, incorporate it and accept stock therein in
payment of their respective credits.
3. Lambert and Fox became the two largest stockholders in the new corporation
called John R. Edgar & Co., Incorporated. A few days after the incorporation
was completed Lambert and Fox entered into the following agreement:
- Whereas the undersigned are, respectively, owners of large amounts of
stock in John R. Edgar and Co, Inc; and,
- Whereas it is recognized that the success of said corporation depends,
now and for at least one year next following, in the larger stockholders
retaining their respective interests in the business of said corporation:
Therefore, the undersigned mutually and reciprocally agree not to sell,
transfer, or otherwise dispose of any part of their present holdings of
stock in said John R. Edgar & Co. Inc., till after one year from the date
hereof.
- Either party violating this agreement shall pay to the other the sum of
one thousand (P1,000) pesos as liquidated damages, unless previous con-
sent in writing to such sale, transfer, or other disposition be obtained.
4. Notwithstanding this contract, Fox on October 19, 1911, sold his stock in the
said corporation to E. C. McCullough of the firm of E. C. McCullough & Co.
of Manila, a strong competitor of the said John R. Edgar & Co., Inc.
5. This sale was made by Fox against the protest of Lambert and with the warn-
ing that he would be held liable under the contract.
6. In fact, Fox offered to sell his shares of stock to Lambert for the same sum
that McCullough was paying them less P1,000, the penalty specified in the
contract.
7. The trial court decided the case in favor of Fox upon the ground that the in-
tention of the parties as it appeared from the contract in question was to the
effect that the agreement should be good and continue only until the corpo-
ration reached a sound financial basis, and that that event having occurred
some time before the expiration of the year mentioned in the contract, the
purpose for which the contract was made and had been fulfilled and Fox ac-
cordingly discharged of his obligation thereunder. The complaint was dis-
missed upon the merits.
ISSUE:
1) WON the court erred in the construction of the contract? – YES. The parties
expressly stipulated that the contract should last one year regardless of the
 objective it should be applied parties who are competent to contract may
make such agreements within the limitations of the law and public policy as
they desire, and that the courts will enforce them according to their terms.
Relevant issue
2) WON the suspension of the power to sell the stock is valid? – Yes. The sus-
pension of the power to sell has a beneficial purpose, results in the protection
of the corporation as well as of the individual parties to the contract, and is
reasonable as to the length of time of the suspension.
RULING: The judgment is reversed, the case remanded with instructions to enter a
judgment in favor of the plaintiff and against the defendant for P1,000, with interest;
without costs in this instance.
RATIO:
1. The intention of parties to a contract must be determined, in the first instance,
from the words of the contract itself. It is to be presumed that persons mean
what they say when they speak plain English. Interpretation and construction
should by the instruments last resorted to by a court in determining what the
parties agreed to. Where the language used by the parties is plain, then con-
struction and interpretation are unnecessary and, if used, result in making a
contract for the parties.
2. In the case cited the court said with reference to the construction and inter-
pretation of statutes: "As for us, we do not construe or interpret this law. It
does not need it. We apply it. By applying the law, we conserve both provi-
sions for the benefit of litigants. The first and fundamental duty of courts, in
our judgment, is to apply the law. Construction and interpretation come only
after it has been demonstrated that application is impossible or inadequate
without them. They are the very last functions which a court should exercise.
The majority of the law need no interpretation or construction. They require
only application, and if there were more application and less construction,
there would be more stability in the law, and more people would know what
the law is."
3. What we said in that case is equally applicable to contracts between persons.
4. In the case at bar, the parties expressly stipulated that the contract should
last one year. No reason is shown for saying that it shall last only nine
months. Whatever the object was in specifying the year, it was their agree-
ment that the contract should last a year and it was their judgment and con-
viction that their purposes would not be subversed in any less time. What
reason can give for refusing to follow the plain words of the men who made
the contract? We see none.
5. Fox urges that Lambert cannot recover for the reason that he did not prove
damages, and cites numerous American authorities to the effect that because
stipulations for liquidated damages are generally in excess of actual damages
and so work a hardship upon the party in default, courts are strongly inclined
to treat all such agreements as imposing a penalty and to allow a recovery for
actual damages only. He also cites authorities holding that a penalty, as such,
will not be enforced and that the party suing, in spite of the penalty assigned,
will be put to his proof to demonstrate the damages actually suffered by rea-
son of defendants wrongful act or omission.
- In this jurisdiction penalties provided in contracts of this character are
enforced. It is the rule that parties who are competent to contract may
make such agreements within the limitations of the law and public policy
as they desire, and that the courts will enforce them according to their
terms.
- The only case recognized by the Civil Code in which the court is author-
ized to intervene for the purpose of reducing a penalty stipulated in the
contract is when the principal obligation has been partly or irregularly
fulfilled and the court can see that the person demanding the penalty has
received the benefit of such or irregular performance. In such case the
court is authorized to reduce the penalty to the extent of the benefits re-
ceived by the party enforcing the penalty.
- In this jurisdiction, there is no difference between a penalty and liqui-
dated damages, so far as legal results are concerned. Whatever differ-
ences exists between them as a matter of language, they are treated the
same legally.
(MOST RELEVANT PART)
6. It is also urged by Fox that the stipulation in the contract suspending the
power to sell the stock referred to therein is an illegal stipulation, is in re-
straint of trade and, therefore, offends public policy.
- We do not so regard it. The suspension of the power to sell has a ben-
eficial purpose, results in the protection of the corporation as well as
of the individual parties to the contract, and is reasonable as to the
length of time of the suspension.
- We do not here undertake to discuss the limitations to the power to
suspend the right of alienation of stock, limiting ourselves to the
statement that the suspension in this particular case is legal and
valid.
Separate Opinions CARSON, J., dissenting: I concur.
- I think it proper to observe, however that the doctrine touching the con-
struction and interpretation of penalties prescribed in ordinary civil con-
tracts as set forth in the opinion is carried to is extreme limits and that its
statement in this form is not necessary to sustain the decision upon the
facts in this case.
- It is sufficient for my purposes to cite the opinion of the supreme court
of Spain, dated June 13, 1906, construing the provisions of article 6 of
Book 4, Title 1 of the Civil Code which treats of "contracts with a penal
clause." In that case the court held: The rules and prescriptions governing
penal matters are fundamentally applicable to the penal sanctions of civil
character.
 006 FLEISCHER V BOTICA NOLASCO (Soriano)
14 March 1925 | Johnson, J. | Right of First Refusal
PETITIONER: Henry Fleischer (Plaintiff-appellee)
RESPONDENTS: Botica Nolasco (Defendant-appellant)
SUMMARY: Gonzales, owner of 5 shares of stock of Botica Nolasco. He
assigned and delivered the shares to Fleischer in consideration of a sum of money.
Sec-Gen of Botica offered to buy the shares of stock by virtue of Art. 12 of its by-
laws stating that the corporation hasa preferential right to buy from Gonzalez the
said shares. Gonzalez wrote a letter requesting that the shares of stock not be
transferred to Fleischers’s name. He wrote a subsequent letter withdrawing and
canceling his statements in the first letter. Botica Nolasco Inc. answered that the
2nd letter has no effect and that the shares were transferred in the name of Botica
Nolasco. Fleischer filed with the CFI an action against the board of directors of
Botica, which was amended and included the corporation in the complaint.
Fleischer prayed that said board of directors be ordered to register in the books of
the corporation 5 shares of its stock in his name. Botica Nolasco inc. denied the
allegations of the amended complaint and stated that pursuant to article 12 of its
by-laws, it had preferential right to buy from the petitioner said shares. 11. Trial
court held that article 12 of the by-laws of the corporation giving it the preferential
right to buy its shares from retiring stockholders is in conflict with the Corporation
law. Thus, TC ordered the corporation, through its board of directors to register in
the booms if corporation the said 5 shares of stock in the name of Fleischer as the
shareholder. The corporation appealed.
Issue:Whether article 12 of the by-laws of the corporation is in conflict with the
provisions of the Corporation Law (Act No. 1459) [Yes]
The only restraint imposed by the Corporation Law upon transfer of shares is
found in section 35 of the Corp Code:"No transfer, however, shall be valid, except
as between the parties, until the transfer is entered and noted upon the books of
the corporation, the to show the names of the parties to the transaction, the date of
transfer, the number of the certificate, and the number of shares transferred." This
restriction is necessary in order that the officers of the corporation may know who
are the stockholders, which is essential in conducting elections of officers, in
calling meetings of stockholders, and for other purposes. But any restriction of the
nature of that imposed in the by-law now in question, is ultra vires, violative of
the property rights of shareholders, and in restraint of trade. Botica Nolasco’s by-
law now cannot have any effect on Fleischer. He had no knowledge of such by-
law when the shares were assigned to him. He obtained them in good faith and for
a valuable consideration. He was not a privy to the contract created by said by-
law between the shareholder Manuel Gonzalez and Botica Nolasco, Inc. Said by-
law cannot operate to defeat his rights as a purchaser.
DOCTRINE: A stock corporation in adopting by-laws governing the transfer of
shares of stock should take into consideration the specific provisions of the
Corporation Law. The by-laws of corporations should be made to harmonize with
the provisions of the Corporation Law. By-laws must not be inconsistent with the
provisions of the Corporation Law. By-laws of a corporation are valid if they are
reasonable and calculated to carry into effect the objects of the corporations
provided they are not contradictory to the general policy of the laws of the land.
Under a statute authorizing by-laws for the transfer of stock of a corporation, it
can do more than prescribe a general mode of transfer on the corporate books and
cannot justify an unreasonable restriction upon the right to sell. The shares of stock
of a corporation are personal property and the holder thereof may transfer the same
without unreasonable restrictions.
[Doctrine in the syllabus]
Section 63 contemplates no restriction as to whom the stocks may be transferred.
It does not suggest that any discrimination may be created by the corporation in
favor of, or against a certain purchaser. The owner of shares, as owner of personal
property, is at liberty, under said section to dispose them in favor of whomever he
pleases, without limitation in this respect, than the general provisions of law.
FACTS:
1. Manuel Gonzalez was the original owner of the 5 shares of stock of Botica
Nolasco, Inc. He assigned and delivered said five shares to the plaintiff,
Henry Fleischer, by accomplishing the form of endorsement provided in the
back together with other credits, in consideration of a large sum of money
owed by Gonzalez to Fleischer.
2. The Secretary-treasurer of said corporation, offered to buy from Henry
Fleischer, on behalf of the corporation, said shares of stock, at their par value
of P100 a share, for P500; that by virtue of article 12 of the by-laws of Botica
Nolasco, Inc., said corporation had the preferential right to buy from Manuel
Gonzalez said shares.
3. 2 days after the assignment of the shares to the Fleischer, Gonzalez made a
written statement to Botica Nolasco, Inc., requesting that the 5 shares of stock
sold by him to Henry Fleischer be not transferred to Fleischer's name. He also
acknowledged in said written statement the preferential right of the
corporation to buy said 5 shares.
4. Gonzalez wrote a letter to Botica Nolasco, withdrawing and cancelling his
written statement to which letter Botica Nolasco answered that the
subsequent letter was of no effect, and that the shares in question had been
registered in the name of Botica Nolasco, Inc.
5. Action was filed with CFI against the board of directors of Botica Nolasco
Inc., a corporation duly organized and existing under the laws of the
Philippine Islands
 6. Fleischer prayed that said board of directors be ordered to register in the
books of the corporation 5 shares of its stock in his name (Henry Fleischer)
and to pay him the sum of P500 for damages sustained by him resulting from
the refusal of Botica Nolasco to register the share of stock
7. Botica Nolasco file a demurer to evidence stating that the facts alleged did
not constitute a sufficient cause of action and that the action was not brought
against the proper party, Botica Nolasco Inc. Demurer was sustained and the
plaintiff was given five days to amend his complaint.
8. The corporation filed a demurer again to on the ground that the facts in the
amended complaint did not constitute cause of action, and that the complaint
was ambiguous, unintelligence, uncertain. Such was overruled by the court.
9. Botica Nolasco inc. denied the allegations of the amended complaint and
stated that pursuant to article 12 of its by-laws, it had preferential right to buy
from the petitioner said shares at the par value of P100 a share, plus P90 as
dividends corresponding to the year 1922, and that said offer was refused by
the Fleischer.
10. Botica Nolasco Inc. prayed for a judgment absolving it from all liability under
the complaint and directing Fleischer to deliver to the corporation the 5shares
of stock in question, and to pay damages.
11. Trial court held that article 12 of the by-laws of the corporation giving it the
preferential right to buy its shares from retiring stockholders is in conflict
with the Corporation law. Thus, TC ordered the corporation, through its board
of directors to register in the booms if corporation the said 5 shares of stock
in the name of Fleischer as the shareholder.
12. The corporation appealed
ISSUE: Whether article 12 of the by-laws of the corporation is in conflict with the
provisions of the Corporation Law (Act No. 1459) [Yes]
RULING: In view of all the foregoing, we are of the opinion, and so hold, that the
decision of the lower court is in accordance with law and should be and is hereby
affirmed, with costs. So ordered.
RATIO:
1. There is no controversy as to the facts of the present case.
2. Provisions of the Corporation Law regarding the transfer of stocks
a. "Sec 35. The capital stock corporations shall be divided into shares
for which certificate signed by the president or the vice-president,
countersigned by the secretary or clerk and sealed of the
corporation, shall be issued in accordance with the by-laws. Share
of stock so issued are personal property and may be transferred by
delivery of the certificate indorsed by the owner or his attorney in
fact or other person legally authorized to make transfer. No transfer,
however, shall be valid, except as between the parties, until the
transfer is entered and noted upon 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, and the number of shares
transferred.
b. "No share of stock against which the corporation holds any unpaid
claim shall be transferable on the books of the corporation."
3. Section 13, paragraph 7, above-quoted, empowers a corporation to make by-
laws, not inconsistent with any existing law, for the transferring of its stock.
It follows from said provision, that a by-law adopted by a corporation relating
to transfer of stock should be in harmony with the law in the subject of
transfer of stock. The law on this subject is found in section 35 of Act No.
1459 above quoted. Said section 35 specifically provides that the shares of
stock "are personal property and may be transferred by delivery of the
certificate indorsed by the owner, etc. Said section 35 defines the nature,
character and transferability of shares of stock. Under said section they are
personal property and may be transferred as therein provided. Said section
contemplates no restriction as to whom they may be transferred or sold.
It does not suggest that any discrimination may be created by the
corporation in favor or against a certain purchaser. The holder of shares,
as owner of personal property, is at liberty, under said section, to dispose of
them in favor of whomsoever he pleases, without any other limitation in this
respect, than the general provisions of law. Therefore, a stock corporation
in adopting a by-law governing transfer of shares of stock should take
into consideration the specific provisions of section 35 of Act No. 1459,
and said by-law should be made to harmonize with said provisions. It
should not be inconsistent therewith.
4. The by-law now in question was adopted under the power conferred upon the
corporation by section 13, paragraph 7 but in adopting said by-law the
corporation has transcended the limits fixed by law in the same section, and
has not taken into consideration the provisions of section 35 of the
Corporation Code.
5. As general rule, the by-laws of a corporation are valid if they are reasonable
and calculated to carry into effect the objects of the corporation, and are not
contradictory to the general policy of the laws of the land.
6. The only restraint imposed by the Corporation Law upon transfer of shares is
found in section 35 of Act No. 1459, quoted above, as follows: "No transfer,
however, shall be valid, except as between the parties, until the transfer is
entered and noted upon the books of the corporation, the to show the names
of the parties to the transaction, the date of transfer, the number of the
certificate, and the number of shares transferred." This restriction is necessary
in order that the officers of the corporation may know who are the
stockholders, which is essential in conducting elections of officers, in calling
meetings of stockholders, and for other purposes. But any restriction of the
nature of that imposed in the by-law now in question, is ultra vires, violative
 of the property rights of shareholders, and in restraint of trade.
7. Botica Nolasco’s by-law now cannot have any effect on Fleischer. He had no
knowledge of such by-law when the shares were assigned to him. He obtained
them in good faith and for a valuable consideration. He was not a privy to the
contract created by said by-law between the shareholder Manuel Gonzalez
and Botica Nolasco, Inc. Said by-law cannot operate to defeat his rights as a
purchaser.
8. The power to enact by-laws restraining the sale and transfer of stock must be
found in the governing statute or charter. Restrictions upon the traffic in stock
must have their source in legislative enactments, as the corporation itself
cannot create such impediments. By-laws of a corporations are intended
merely for the protection of the corporation, and prescribe regulations and
not restrictions; they are always subject to the charter of the corporation. The
corporation, in the absence of such a power, cannot ordinarily inquire into or
pass upon the legality of the transaction by which its stock passes from one
person to another, nor can it question the consideration upon which a sale is
based. A by-law of a corporation cannot take away or abridge the substantial
rights of stockholders. Courts will carefully scrutinize any attempt in the on
a part of a corporation to impose restrictions or limitations upon the right of
stockholders to sell and assign their stock. Restrictions cannot be imposed
upon a stockholder by a by-law without statutory or charter authority. The
owner of a corporate stock has the same uncontrollable right to sell or
alienate, which attaches to the ownership of any other species of property.
Note: [Case doctrines cited in the case]
9. An unauthorized by-law forbidding a shareholder to sell his shares without
first offering them to the corporation for a period of thirty days is not binding
upon an assignee of the stock as a personal contract, although his assignor
knew of the by-law and took part in its adoption." (10 Cyc., 579; Ireland vs.
Globe Milling Co., 21 R. I., 9.)
10. "When no restriction is placed by public law on the transfer of corporate
stock, a purchaser is not affected by any contractual restriction of which he
had no notice." (Brinkerhoff-Farris Trust & Savings Co. vs. Home Lumber
Co., 118 Mo., 447.)
11. "The assignment of shares of stock in a corporation by one who has assented
to an unauthorized by-law has only the effect of a contract by, and
enforceable against, that assignor; the assignee is not bound by such by-law
by virtue of the assignment alone." (Ireland vs. Globe Milling Co., 21 R.I.,
9.)
12. "A by-law of a corporation which provides that transfers of stock shall not be
valid unless approved by the board of directors, while it may be enforced as
a reasonable regulation for the protection of the corporation against worthless
stockholders, cannot be made available to defeat the rights of third persons."
(Farmers' & Merchants' Bank of Lineville vs. Wasson, 48 Iowa, 336.)
 007 Padgett v. Babcock & Templeton Inc. (Siapno)
December 21, 1933 | Imperial, J. | Right of First Refusal
PLAINTIFF-APPELLEE: Cyrus Padgett
DEFENDANT APPELLANT: Babcock & Templeton Inc. and W.R. Babcock
SUMMARY: Padgett was an employee of the Babcock & Templeton Corp.
During his employment he bought 35 shares at P 100 per share, and received by
way of bonus, 9 shares, for w/c 12 Certificates of Stock were issued to him – all
bearing the words “non-transferable.” Before severing his relations w/ the cor-
poration, he proposed to sell the shares to the latter, but the corporation refused
to buy the shares unless for P 80 per share. Padgett also alleges that the “non-
transferable” provision in the Certificates is void. The restriction imposed re-
garding the disposition of the shares is null and void for being in restraint of
trade and for constituting an unreasonable limitation to the right of ownership.
Shares are personal property and may be disposed of by the stockholder unless
the corporation is dissolved, or his right is restricted due to his own action. Any
such restriction must be strictly construed. However, there is no existing agree-
ment or law that would compel the corporation to buy the shares at their par
value of P 100.
1st Issue: WON the restriction imposed upon the certificate of shares that they
are “non-transferable” is null and void – YES. It is null and void on the ground
that it constitutes an unreasonable limitation of the right of ownership and is in
restraint of trade. In Fleischer v. Botica Nolasco Co., Court held that the validity
of a clause in the by-laws of the defendant corporation, which provided that, the
owner of a share of stock could not sell it to another person except to the defend-
ant corporation is ultra vires, violative of the property rights of shareholders, and
in restraint of trade.
2nd Issue: WON the Babcock & Templeton Inc. may be compelled to buy the
shares in question at par value. SC held that the indication on the face of the
stock certificate that it is “Non-transferable” alone does no compel the corpora-
tion to buy back the shares from the stockholder .
DOCTRINE: In the absence of a similar contractual obligation and of a legal
provision applicable thereto, it is logical to conclude that it would be unjust and
unreasonable to compel the corporation to comply with a non-existent or imagi-
nary obligation.
FACTS:
1. Padgett was an employee of the Babcock & Templeton Inc. From January 1,
1923, to April 15, 1929, he bought 35 shares at P100 a share at the suggestion
of the president of said corporation. He was also the recipient of 9 shares by
way of bonus during Christmas seasons.
2. In this way the said Padgett became the owner of 44 shares for which the 12
certificates, were issued in his favor. The word ’nontransferable’ appears
on each and every one of these certificates. Before severing his connections
with the said corporation, the appellee proposed to the president that the said
corporation buy his 44 shares at par value plus the interest thereon, or that he
be authorized to sell them to other persons.
3. The Babcock & Templeton Inc. bought similar shares belonging to other em-
ployees, at par value. Sometime later, the corporation’s president offered to
buy the Padgett’s shares first at P85 each and then at P80. Padgett did not
agree thereto.
4. Babcock & Templeton Inc. and W.R. Babock admit that the 44 shares in
question have become the property of Padgett. They likewise grant that under
the law Padgett has the right to have the restriction “nontransferable” appear-
ing on the 12 certificates eliminated therefrom.
5. However, they vigorously contend that there is no existing law nor
authority in support of the proposition that they are bound to redeem or
buy said shares at par value. Their admission is only limited to the
proposition that after the restriction appearing thereon is eliminated, the
plaintiff may sell the said shares to anybody, at their market value or at any
price he sees fit.
ISSUES:
1. WON the restriction imposed upon the certificate of shares that they are “non-
transferable” is null and void – YES. It is null and void on the ground that it
constitutes an unreasonable limitation of the right of ownership and is in
restraint of trade
2. WON the Babcock & Templeton Inc. may be compelled to buy the shares in
question at par value – NO. The indication on the face of the stock certificate
that it is “non-transferable” alone does no compel the corporation to buy back
the shares from the stockholder at par value.
RULING: Wherefore, the judgment appealed from is hereby reversed, and the re-
striction consisting in the word "non-transferable" appearing on the 12 certificates of
shares of stock, is declared null and void. The defendants herein are hereby ordered
to cancel the certificates in question and to issue in lieu thereof new ones without any
restriction whatsoever, with the costs of both instances against the said defendants-
appellants.
RATIO:
Restriction imposed is null and void
1. Shares of corporate stock being regarded as property, the owner of such shares obligation and of a legal provision applicable thereto, it is logical to conclude
may, as a general rule, dispose of them as he sees fit, unless the corporation that it would be unjust and unreasonable to compel the said defendants to
has been dissolved, or unless the right to do so is properly restricted, or the comply with a non-existent or imaginary obligation. Whereupon, we are like-
owner’s privilege of disposing of his shares has been hampered by his own ac- wise compelled to conclude that the judgment originally rendered to that effect
tion. is untenable and should be set aside.
2. Any restriction on a stockholder’s right to dispose of his shares must be con-
strued strictly; and any attempt to restrain a transfer of shares is regarded as
being in restraint of trade, in the absence of a valid lien upon its shares, and except
to the extent that valid restrictive regulations and agreements exist and are appli-
cable. Subject only to such restrictions, a stockholder cannot be controlled in
or restrained from exercising his right to transfer by the corporation or its
officers or by other stockholders, even though the sale is to a competitor of the
company, or to an insolvent person, or even though a controlling interest is sold
to one purchaser.
3. Fleischer v. Botica Nolasco Co. (No mention of right of first refusal in the
case but this is the closest I could find): Court discussed the validity of a clause
in the by-laws of the defendant corporation, which provided that, under the
same conditions, the owner of a share of stock could not sell it to another per-
son except to the defendant corporation. In deciding the legality and validity
of said restriction, Court held that the only restraint imposed by the Corporation
Law upon transfer of shares is found in section 35 of Act No. 1459 stating that
“No transfer, however, shall be valid, except as between the parties, until the
transfer is entered and noted upon 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, and the number of shares transferred.’ This restriction is necessary in
order that the officers of the corporation may know who are the stockholders,
which is essential in conducting elections of officers, in calling meetings of stock-
holders, and for other purposes. But any restriction of the nature of that im-
posed in the by-law now in question, is ultra vires, violative of the property
rights of shareholders, and in restraint of trade.
4. It is obvious, therefore, that the restriction consisting in the word "nontransfera-
ble," appearing on the 12 certificates is illegal and should be eliminated.

Babcock cannot be compelled to buy the shares at par value

1. As we have hereinbefore stated, there is no existing law nor authority in support
of the plaintiff’s claim to the effect that the defendants are obliged to buy his
shares of stock at par value, plus the interest demanded thereon. In this respect,
we hold that there has been no such contract, either express or implied, be-
tween the plaintiff and the defendants. In the absence of a similar contractual
 008 HAGER v. BRYAN (See)
March 21, 1911 | Carson, J. | Remedy if registration refused
PETITIONER: A.R. Hager
RESPONDENTS: Albert J. Bryan
SUMMARY: Hager wants filed a case for mandamus to compel the secretary of
the Visayan Electric Company to transfer upon the books of the company certain
shares of stock mentioned in the petition. The issue in this case is WoN Hager can
compel the corporate secretary to register the transfer of shares in the corporate
books. The SC ruled that he cannot because he isn’t the registered owner of the
shares of stock and the alleged “indorsement” done by the Bryan-Landon
Company in his favor was without any power of attorney given in his favor.
DOCTRINE: Mandamus will not lie to compel the corporate secretary to register
the transfer of shares in the corporate books when the petitioner is not the
registered stockholder nor does he hold a power of attorney from the latter. This
is under the general rule that as between the corporation and its shareholders, the
corporation looks only to its books for the purpose of determining who its share-
holders are, so that a mere indorsee of a certificate of stock, claiming to be the
owner, will not necessarily be recognized as such by the corporation and its
officers, in absence of express instructions of the registered owner to make such
transfer to the indorsee, or a power of attorney authorizing such transfer.
FACTS:
1. This is an original action to compel Albert Bryan, as secretary of Visayan
Electric Company, to transfer upon the books of the company certain shares
of stock mentioned in the petition.
2. The original facts of this case are found in a decision filed in the court on
January 18, 19114 which sustained a demurrer to the original petition on the
ground that it does not state facts constituting a cause of action.
3. Hager now submits an amended petition wherein he definitely and specifi-
cally alleges in addition to the allegations of the original petition, "that the
Visayan Electric Company holds no unpaid claims against the shares of stock
the subject of this action, and that he, is not indebted in any manner to said
Visayan Electric Company."
4
The case cannot be found since it wasn’t filed. Even the SC in this case couldn't find it.
5
g. Transfer of shares. — By the weight of authority mandamus will not lie in ordinary cases to compel a
corporation or its officers to transfer stock on its books and issue new certificates of the transferee, since
the right is a purely private one, and there is generally an adequate remedy by an action against the corpo-
ration for damages or by a suit in equity to secure a decree ordering the transfer. Some courts, however,
have held that mandamus will lie, as the remedy by action for refusal to permit a transfer is too doubtful
and uncertain in its character to supersede the specific and speedier remedy by mandamus. The writ will
4. To this amended petition Bryan demurs, on the ground that as amended it still
does not state facts which constitute a cause of action.
ISSUE/s:
4. WoN Hager can compel the corporate secretary to register the transfer of
shares in the corporate books. – NO, because he is not the owner of the
shares.
RULING: Demurrer is sustained and petition is dismissed.
RATIO:
1. If Hager, himself, was the registered owner of the stock which he seeks to
have transferred to Mr. Levering, to whom he alleges he agreed to sell it on
February 25, 1910, he would be entitled to his remedy by mandamus upon
his amended petition, and that under all the circumstances of this case
the mandamus would issue from this court.
2. If Hager was the registered owner or the stock, the Court thinks that the ad-
ditional allegations contained in the amended petition, taken together with
the allegations in the original petition, would undoubtedly take his case out
of the class of "ordinary cases" in which Judge Sanborn, in his article 5
on Mandamus in the Cyclopedia of Law and Procedure (26 Cyc., 347),
says mandamus, by the weight of authority, will not lie; because as it appears
and is clearly alleged in the amended petition,
a. first, an ordinary action against the corporation for damages would
in this case be wholly inadequate;
b. second, an action of the nature of a suit in equity to secure a decree
ordering the transfer would also be inadequate, in view of the delay
involved in the trial and possible appeal of such action, which under
the allegations of the amended petition would defeat the principal
purpose for which this action is brought, that is to say, to secure to
the purchaser the right to vote this stock at the regular and special
meetings of the stockholders; and
c. third, because we think that the statute if not expressly, at least im-
pliedly, imposes the duty upon a corporation, organized under Act
No. 1459, and the officer in charge of the books of such corporation,
to provide for the entry and noting upon the books of the corporation
lie if it authorized by statute or, it seems, if the duty to register transfers is expressly imposed by statute, or
if there are special circumstances in any case rendering the remedy by action for damages inade-
quate. Mandamus will lie, where the right is clear, to compel a transfer of stock to the purchaser of the
same at a judicial sale, as required by statute. In no case will the writ be granted if the title to the stock is
disputed and the right to the relief asked for is not clear, or where the relator's claim rests on a mere equi-
table right, or equitable issues are involved.
 of lawful transfers of stock when the entry of such transfer is law-
fully demanded.
3. However, Hager is not the registered owner of the shares of stock he wishes
the secretary to transfer.
4. He does allege that the shares were indorsed to him by the Bryan-Landon
Company, in whose name the stocks are registered, but there is no allegation
that he holds any power of attorney from the company authorizing him
to make a demand on the secretary of the Visayan Electric Company to
make the transfer.
5. In a case such as that at bar, a mandamus should not issue to compel the
secretary of a corporation to make a transfer of the stock on the books
of the company, unless it affirmatively appears that he has failed or
refused so to do, upon the demand either of the person in whose name
the stock is registered, or of some person holding a power of attorney for
that purpose from the registered owner of the stock.
6. There is no allegation in the petition that the Hager or anyone else holds a
power of attorney from the Bryan-Landon Company authorizing a demand
for the transfer of the stock, or that the Bryan-Landon Company has ever
itself made such demand upon the Visayan Electric Company, and in the
absence of such allegation we are not able to say that there was such a clear
indisputable duty, such a clear legal obligation upon the Bryan, as to justify
the issuance of the writ to compel him to perform it.
7. Under the provisions of statute touching the transfer of stock (secs. 35 and 36
of Act No. 1459), the mere indorsement of stock certificates does not in itself
give to the indorsee such a right to have a transfer of the shares of stock on
the books of the company as will entitle him to the writ of mandamus to com-
pel the company and its officers to make such transfer at his demand, because,
under such circumstances the duty, the legal obligation, is not so clear and
indisputable as to justify the issuance of the writ.
8. As a general rule and especially under the above-cited statute, as between the
corporation on the one hand, and its shareholders are, so that a mere indorsee
of a stock certificate, claiming to be the owner, will not necessarily be recog-
nized as such by the corporation and its officers, in the absence of express
instructions of the registered owner to make such transfer to the indorsee, or
a power of attorney authorizing such transfer.
 009 Andaya v. Rural Bank of Cabadbaran (Sarmiento)
August 3, 2016 | Sereno,C.J. | Registration of sale of shares of stock
PETITIONER: Joseph Omar Andaya
RESPONDENTS: Rural Bank of Cabadbaran
SUMMARY: Andaya bought shares from Chute shares of stock in the Rural Bank
of Cabadbaran. However, the bank refused to register the transfer and as such new
stock certificates cannot be issued in favor of Andaya. The bank reasoned that
there is a conflict of interest because Anadaya is the president and CEO of a
competitor bank, as such there was bad faith. This led to the institution of an action
for mandamus against Rural Bank of Cabadbaran to compel them to record the
transfer in the bank’s stock and transfer book and to issue new certificates of stock
in his name. The SC ruled that the case has to be remanded to the trial court. It is
undisputable that registration of shares of stock is a ministerial duty; and a
corporation can be compelled by mandamus to do so. Respondent’s argue that as
Andaya is in bad faith, the bank can validly restrict the transfer of shares according
to Seciton 98 of the Corporation Code Validity of restrictions on transfer of
shares. — Restrictions on the right to transfer shares must appear in the
articles of incorporation and in the by-laws as well as in the certificate of
stock; otherwise, the same shall not be binding on any purchaser thereof
in good faith. However, this provision is only applicable to a close corporation.
As such the case to be remanded to the court for determination on whether or not
Rural bank of Cabadbaran is a close corporation.
DOCTRINE: It is already settled jurisprudence that the registration of a transfer
of shares of stock is a ministerial duty on the part of the corporation. Aggrieved
parties may then resort to the remedy of mandamus to compel corporations that
wrongfully or unjustifiably refuse to record the transfer or to issue new certificates
of stock. This remedy is available even upon the instance of a bona fide transferee
who is able to establish a clear legal right to the registration of the transfer.
FACTS:
1. Andaya bought from Chute 2,200 shares of stock in the Rural Bank of Cabad-
baran for P220,000.
a. Chute duly endorsed and delivered the certificates of stock to An-
daya and, subsequently, requested the bank to register the transfer
and issue new stock certificates in favor of the latter.
2. Andaya also separately communicated with the bank's corporate secretary,
respondent Oraiz, reiterating Chute's request for the issuance of new stock
certificates in petitioner's favor.
3. A few days later, the bank's corporate secretary wrote Chute to inform her
that he could not register the transfer.
a. He explained that under a previous stockholders' Resolution, exist-
ing stockholders were given priority to buy the shares of others in
the event that the latter offered those shares for sale (i.e., a right of
first refusal).
b. He then asked Chute if she, instead, wished to have her shares of-
fered to existing stockholders. He told her that if no other stock-
holder would buy them, she could then proceed to sell her shares to
outsiders.
4. Meanwhile, the bank's legal counsel, respondent Gonzalez, informed Andaya
that the latter's request had been referred to the bank's board of directors for
evaluation.
5. Andaya responded by reiterating his earlier request for the registration of the
transfer and the issuance of new certificates of stock in his favor.
a. Citing Section 98 of the Corporation Code, he claimed that the
purported restriction on the transfer of shares of stock agreed
upon during the 2001 stockholders' meeting could not deprive
him of his right as a transferee. He pointed out that the re-
striction did not appear in the bank's articles of incorporation,
bylaws, or certificates of stock.
6. The bank eventually denied the request of Andaya. It reasoned that he had a
conflict of interest, as he was then president and chief executive officer of the
Green Bank of Caraga, a competitor bank.
a. Respondent bank concluded that the purchase of shares was not in
good faith, and that the purchase "could be the beginning of a hostile
bid to take-over control of the [Rural Bank of Cabadbaran]."
b. Citing Gokongwei v. Securities and Exchange Commission, re-
spondent insisted that it may refuse to accept a competitor as one of
its stockholders.
c. It also maintained that Chute should have first offered her shares to
the other stockholders, as agreed upon during the 2001 stockholders'
meeting.
7. Consequently, Andaya instituted an action for mandamus and damages
against the Rural Bank of Cabadbaran; its corporate secretary, Oraiz; and its
legal counsel, Gonzalez.
a. Petitioner sought to compel them to record the transfer in the bank's
stock and transfer book and to issue new certificates of stock in his
name.
8. RTC: dismissed the complaint.
a. Citing Porice v. Alsons Cement Corporation the trial court ruled
that Andaya had no standing to compel the bank to register the trans-
fer and issue stock certificates in his name.
b. It explained that he had failed "[to show] that the transfer of subject
shares of stock [was] recorded in the stock and transfer book of [the]
bank or that [he was] authorized by [Chute] to make the transfer."
 c. It ruled that "[w]ithout the sale first registered or an authority from
the transferor, it [was] therefore unmistakably clear that [Andaya
had] no cause of action for mandamus against [the] bank."
9. Consequently, Andaya directly filed with this Court a Rule 45 petition for
review on certiorari assailing the RTC Decision on pure questions of law.
ISSUE/s:
1. WoN the Rural Bank of Cabadbaran be commpeled by mandamus to
register the transfer of shares of stock—Case to be remanded to trial court.
RULING:
WHEREFORE, premises considered, the instant petition I ii. a Documentary Stamp Tax Declaration/Return
is GRANTED. The Decision dated 17 April 2009 and the Order dated 15 July 2009
of the Regional Trial Court, Branch 34, Cabadbaran City, which dismissed petitioner's
action for mandamus, are SET ASIDE. The action is hereby REINSTATED and the
case REMANDED to the court of origin for further proceedings. The trial court is
further enjoined to proceed with.
RATIO:
1. The petition is partly meritorious.
2. It is already settled jurisprudence that the registration of a transfer of
shares of stock is a ministerial duty on the part of the corporation.
a. Aggrieved parties may then resort to the remedy of mandamus to
compel corporations that wrongfully or unjustifiably refuse to rec-
ord the transfer or to issue new certificates of stock.
b. This remedy is available even upon the instance of a bona fide trans-
feree who is able to establish a clear legal right to the registration of
the transfer. This legal right inherently flows from the transferee's
established ownership of the stocks.
3. A person who has purchased stock, and who desires to be recognized as a
stockholder, for the purpose of voting, must secure a standing by having
the transfer recorded upon the books. If the transfer is not duly made upon
request, he has, as his remedy, to compel it to be made.
a. Thus, in Pacific Basin Securities Co., Inc., v. Oriental Petroleum
and Minerals Corp., this Court stressed that the registration of a
transfer of shares is ministerial on the part of the corporation.
4. Clearly, the right of a transferee/assignee to have stocks transferred to
his name is an inherent right flowing from his ownership of the stocks.
a. The Court had ruled in Rural Bank of Salinas, Inc. v. Court of Ap-
peals that the corporation's obligation to register is ministerial
and if it refuses to make such transaction without good cause, it may
be compelled to do so by mandamus.
5. The Court further held in Rural Bank of Salinas that the only limitation im-
posed by Section 63 of the Corporation Code is when the corporation
holds any unpaid claim against the shares intended to be transferred.
a. Consequently, transferees of shares of stock are real parties in inter-
est having a cause of action for mandamus to compel the registration
of the transfer and the corresponding issuance of stock certificates.
6. We also rule that Andaya has been able to establish that he is a bona
fide transferee of the shares of stock of Chute.
a. In proving this fact, he presented to the RTC the following docu-
ments evidencing the sale:
i. a notarized Sale of Shares of Stocks showing Chute's sale
of 2,200 shares of stock to petitioner;
iii. Capital Gains Tax Return; and
iv. stock certificates covering the subject shares duly en-
dorsed by Chute.
b. There is no doubt that Andaya had the standing to initiate an action
for mandamus to compel the Rural Bank of Cabadbaran to record
the transfer of shares in its stock and transfer book and to issue new
stock certificates in his name.
c. As the transferee of the shares, petitioner stands to be benefited or
injured by the judgment in the instant petition, a judgment that will
either order the bank to recognize the legitimacy of the transfer and
petitioner's status as stockholder or to deny the legitimacy thereof.
7. By the import of Section 63 of the Corporation Code, the stock and trans-
fer book would be the main reference book in ascertaining a person's
entitlement to the rights of a stockholder. Consequently, without the reg-
istration of the transfer, the alleged transferee could not yet be recog-
nized as a stockholder who is entitled to be given a stock certificate.
8. In contrast, at the crux of this petition are the registration of the trans-
fer and the issuance of the corresponding stock certificates.
a. Requiring petitioner to register the transaction before he could insti-
tute a mandamus suit in supposed abidance by the ruling in Ponce
was a palpable error.
b. It led to an absurd, circuitous situation in which Andaya was pre-
vented from causing the registration of the transfer, ironically be-
cause the shares had not been registered.
c. With the logic resorted to by the RTC, transferees of shares of stock
would never be able to compel the registration of the transfer and
the issuance of new stock certificates in their favor. They would first
be required to show the registration of the transfer in their names
— the ministerial act that is the subject of the mandamus suit in the
first place. The trial court confuses the application of the dicta in
 Ponce, which is pertinent only to the issuance of new stock cer-
tificates, and not to the registration of a transfer of shares. As
Ponce itself provides, these two are entirely different events. The
RTC's anomalous reasoning cannot be given legal imprimatur by
this Court
9. With regard to the requisite authorization from the transferor, the Court
stresses that the concern in Ponce was rooted in whether or not the alleged
right of the petitioner therein to compel the issuance of new stock certificates
was clearly established.
a. Reiterating the ruling in Rivera v. FIorendo and Eager v. Bryan, the
Court therein maintained that a mere endorsement of stock certifi-
cates by the supposed owners of the stock could not be the basis of
an action for mandamus in the absence of express instructions from
them. According to the Court, the reason behind this ruling was that
the corporation's duty and legal obligation therein were not so clear
and indisputable as to justify the issuance of the writ.
b. The ambiguity of the alleged transferee's deed of undertaking with
endorsement led the Court in Ponce to rule that mandamus would
have issued had the registered owner himself requested the registra-
tion of the transfer, or had the person requesting the registration se-
cured a special power of attorney from the registered owner.
10. In the instant case, however, the submitted documents did not merely consist
of an endorsement.
a. Rather, petitioner presented several undisputed documents, among
which was respondent Oraiz's letter to Chute denying her request to
transfer the stock standing in her name in favor of Andaya.
b. This letter clearly indicated that the registered owner herself had re-
quested the registration of the transfer of shares of stock. There was
therefore no sensible reason for the RTC to perfunctorily extract the
pronouncement in Ponce and then disregard it in the face of admitted
facts in addition to the duly endorsed stock certificates.
11. On whether the writ of mandamus should issue, Section 3, Rule 65 of the
Rules of Court, provides for the rules governing a petition for manda-
mus, viz:
a. SECTION 3. Petition for mandamus. — When any tribunal, cor-
poration, board, officer or person unlawfully neglects the perfor-
mance of an act which the law specifically enjoins as a duty resulting
from an office, trust, or station, or unlawfully excludes another
from the use and enjoyment of a right or office to which such other
is entitled, and there is no other plain, speedy and adequate remedy
in the ordinary course of law, the person aggrieved thereby may file
a verified petition in the proper court, alleging the facts with cer-
tainty and praying that judgment be rendered commanding the re-
spondent, immediately or at some other time to be specified by the
court, to do the act required to be done to protect the rights of the
petitioner, and to pay the damages sustained by the petitioner by
reason of the wrongful acts of the respondent.
The petition shall also contain a sworn certification of non-forum
shopping as provided in the third paragraph of Section 3, Rule 46.
12. Accordingly, a writ of mandamus to enforce a ministerial act may issue only
when petitioner is able to establish the presence of the following:
a. right clearly founded in law and is not doubtful;
b. a legal duty to perform the act;
c. unlawful neglect in performing the duty enjoined by law;
d. the ministerial nature of the act to be performed; and
e. the absence of other plain, speedy, and adequate remedy in the ordi-
nary course of law.
13. Respondents primarily challenge the mandamus suit on the grounds that the
transfer violated the bank stockholders' right of first refusal and that petitioner
was a buyer in bad faith. Both parties refer to Section 98 of the Corporation
Code to support their arguments, which reads as follows:
a. SECTION 98. Validity of restrictions on transfer of shares. — Re-
strictions on the right to transfer shares must appear in the ar-
ticles of incorporation and in the by-laws as well as in the certif-
icate of stock; otherwise, the same shall not be binding on any
purchaser thereof in good faith. Said restrictions shall not be more
than onerous than granting the existing stockholders or the corpo-
ration the option to purchase the shares of the transferring stock-
holder with such reasonable terms, conditions or period stated
therein. If upon the expiration of said period, the existing stockhold-
ers or the corporation fails to exercise the option to purchase, the
transferring stockholder may sell his shares to any third person.
14. It must be noted that Section 98 applies only to close corporations.
Hence, before the Court can allow the operation of this section in the case
at bar, there must first be a factual determination that respondent Rural
Bank of Cabadbaran is indeed a close corporation.
a. There needs to be a presentation of evidence on the relevant re-
strictions in the articles of incorporation and bylaws of the said bank.
From the records or the RTC Decision, there is apparently no such
determination or even allegation that would assist this Court in rul-
ing on these two major factual matters.
 b. With the foregoing, the validity of the transfer cannot yet be tested
using that provision. These are the factual matters that the parties
must first thresh out before the RTC.

15. After finding that petitioner has legal standing to initiate an action for man-
damus, the Court now reinstates the action he filed and remands the case to
the RTC to resolve the propriety of issuing a writ of mandamus. The resolu-
tion of the case must include the determination of all relevant factual matters
in connection with the issues at bar. The RTC must also resolve petitioner's
prayer for the payment of attorney's fees, litigation expenses, moral damages,
and exemplary damages.
 010 Lee v. CA (Santos)
February 4, 1992 | Gutierrez, Jr., J. | Voting Trust Agreements (VTA)6
PETITIONER: RAMON C. LEE and ANTONIO DM. LACDAO
RESPONDENTS: CA, SACOBA MANUFACTURING CORP., PABLO
GONZALES, JR. and THOMAS GONZALES
SUMMARY: Int’l Corp. Bank filed a complaint for a sum of money against
Sacoba and Gonzaleses. Sacoba and Gonzaleses filed a 3rd party complaint against
Alfa, Lee and Lacdao. The service of summons were effected on Lee and Lacdao
who claim that that they ceased to be president and executive vice president of
Alfa by virtue of the VTA and therefore, they could no longer receive summons
for Alfa. The issue in this case is WON the service of summons to Lee and Lacdao
are proper and the SC held that no because under S13, R14, RoC, if the defendant
is a corporation . . . service may be made on the president, manager, secretary,
cashier, agent or any of its directors. Lee and Lacdao in this case do not fall under
any of the enumerated officers by virtue of the VTA which has allowed the DBP
to take over full control and management of Alfa which, resulted to Lee and
Lacdao’s disposal of all their shares through assignment and delivery in favor of
the DBP as trustee. This disposal made them unqualified under Sec. 23 to be
directors which requires them to own at least 1 share of capital stock. Furthermore,
it is in the stipulation between Alfa and DBP that DBP, as trustee, may cause to
be transferred to any person 1 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. In the absence of a showing
that the DBP had caused to be transferred in Lee and Lacdao’s names 1 share of
stock for the purpose of qualifying as directors, Lee and Lacdao can no longer be
deemed to have retained their status as officers which was the case before the
VTA. DBP has taken over full control and management of the firm. The service
of summons upon Alfa, through Lee and Lacdao, therefore, is not valid. To rule
otherwise 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.
DOCTRINE: A VTA separates the voting rights and other rights covered of the
stock from other attributes of ownership, intended to be irrevocable for a definite
period of time and the purpose of which is to give to the trustee to acquire voting
control of the corporation.
FACTS:
1. 1985: Int’l Corp. Bank filed a complaint for a sum of money against Sacoba
6
Sec. 59. Voting Trusts — 1 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 5y at any 1 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 5y but shall automatically expire upon full payment of the loan. A VTA must be in
writing and notarized, and shall specify the terms and conditions thereof. A certified copy of such agree-
ment 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
Manufacturing Corp., (Sacoba) Pablo and Thomas Gonzales (Gonzaleses)
2. Sacoba and Gonzaleses filed a 3rd party complaint against Alfa Integrated
Textile Mills (Alfa), Ramon Lee and Antonio Lacdao
3. Lee and Lacdao filed a motion to dismiss the 3rd party complaint which was
denied, so they filed their answer to the 3rd party complaint.
4. TC issued an ordered the issuance of an alias summons upon Alfa thru the
DBP as a consequence of Lee and Lacdao’s letter stating that the summons
for Alfa was erroneously served upon them considering that the Alfa’s
management had been transferred to the DBP.
5. DBP claimed that it’s NOT AUTHORIZED to receive summons on Alfa’s
behalf since the DBP had NOT TAKEN OVER the company.
6. TC advised Sacoba and Gonzaleses to take steps to serve summons to Alfa.
7. Sacoba and Gonzaleses filed a Manifestation and Motion for the Declaration
of Proper Service of Summons which the TC granted.
8. Lee and Lacdao filed an MR submitting that R14, sec. 13, RoC 7 is NOT
APPLICABLE since they were NO LONGER OFFICERS of Alfa and that
the Sacoba and Gonzaleses should have availed of another mode of service
under R14, Sec16, RoC 8 i.e., through publication to effect proper service
upon Alfa.
9. Sacoba and the Gonzaleses argue that service of summons upon ALFA
through the petitioners as corporate officers was proper since the VTA DID
NOT divest Lee and Lacdao of their positions as PRESIDENT and
EXECUTIVE VICE-PRESIDENT of Alfa.
10. TC upheld the validity of the service of summons on ALFA through the Lee
and Lacdao; denying their MR and requiring Alfa to file an answer.
11. A 2nd MR was filed by the Lee and Lacdao reiterating their stand that by
virtue of the VTA they ceased to be Alfa’s officers and directors, hence,
they could no longer receive summons or any court processes for Alfa. Lee
and Lacdao attached a copy of the VTA between the Alfa stockholders and
the DBP whereby management and control of ALFA became vested upon
the DBP.
12. TC reversed itself and declared that service upon Lee and Lacdao who were
no longer corporate officers of Alfa CANNOT be considered as proper
service of summons.
13. Sacoba and Gonzaleses’ MR was denied.
14. A petition for certiorari was belatedly submitted by Sacoba and Gonzaleses
VTA 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 VTA.
7
Sec. 13. Service upon public corporations. — When defendant is the Republic, service may be effected
on the SolGen; in case of a province, city or municipality, or like public corporations, service may be
effected on its executive head, or on such other officer or officers as the law or the court may direct.
 before the CA which, nonetheless, resolved to give due course thereto
15. TC, not notified of the pending petition for certiorari with CA, declared as
final its previous judgment wherein Sacoba and Gonzaleses were required to
take steps in prosecuting the 3rd party complaint in order that the court would
not be constrained to dismiss the same for failure to prosecute.
16. Sacoba and Gonzaleses filed an MR on which the TC took no further action.
17. After Lee and Lacdao filed their answer to the Sacoba and Gonzaleses’
petition for certiorari, the CA rendered its decision setting aside the orders
of the TC and Alfa was ordered to file its answer.
18. Lee and Lacdao filed an MR of the CA decision which was denied.
19. Hence, Lee and Lacdao filed this certiorari petition imputing grave abuse of
discretion amounting to lack of jurisdiction on the part of the CA in reversing
the questioned Orders holding that there was proper service of summons on
Alfa through Lee and Lacdao.
20. CA made a judgment erroneously applying the rule that the period during
which a MR has been pending was deducted from the 15d period to appeal.
21. The CA set aside the aforestated entry of judgment after further considering
that the rule it relied on applies to appeals from decisions of the RTC-CA, not
to appeals from CA-SC pursuant to Refractories Corp. of the PH v. IAC.
22. Lee and Lacdao’s Arguments:
a. VTA execution transferred all the stockholder’s shares to the
corporation to the trustee; depriving the stockholders of his position
as director of the corporation; to rule otherwise, as the CA did,
would be violative of sec. 23, Corp Code
b. Lee and Lacdao were NO LONGER acting or holding any of the
positions provided under R14, S13, RoC 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 Lee and Lacdao is not valid and ineffective; to maintain the CA’s
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.
ISSUES:
1. WON the service of summons to Lee and Lacdao are proper – NO because
by virtue of the VTA which has allowed the DBP to take over full control and
management of Alfa, Lee and Lacdao do not fall under any of the enumerated
officers allowed to receive summons. To rule otherwise 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.
2. WON the change in status deprives the stockholder of the right to qualify as
a director under sec. 23, Corp. Code – Yes because the omission of the phrase
"in his own right" from the old Corp. Code is an 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.
3. WON CA committed a reversible error when it ruled that “. . . while [Lee and
Lacdao] may have ceased to be president and VP, of the corporation at the
time of service of summons, they were at least up to that time, still directors
. . .” – YES because 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.
RULING: The petition is GRANTED. The appealed CA decision and resolution are
SET ASIDE and the Makati RTC Orders are REINSTATED.
RATIO:
1. Voting trust is “(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 (Ballentine's Law Dictionary)
2. A VTA results in the separation of the voting rights of a stockholder from
his other rights (i.e. right to receive dividends, inspect books of the corp, the
sell interests in the assets of the corp and other rights to which a stockholder
may be entitled until the liquidation of the corporation. In order to distinguish
a VTA from other agreements, it must pass three tests:
a. voting rights of the stock are separated from the other attributes of
ownership;
b. voting rights granted are intended to be irrevocable for a definite
period of time; and
c. that the principal purpose of the grant of voting rights is to acquire
voting control of the corp
3. A VTA may confer upon a trustee not only the stockholder's voting rights but
also other rights pertaining to his shares as long as the VTA 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." (Sec. 59,
para. 5, Corp. Code)
4. The traditional concept of a VTA 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 VTA.
5. VTA execution may create a dichotomy between stockholders’:
a. equitable/beneficial ownership of the corporate shares; and
 b. legal title thereto.
6. VTA is an agreement in writing whereby 1 or more stockholders of a corp
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 5
years upon the fulfillment of statutory conditions and such other terms and
conditions specified in the agreement. The 5y-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.
7. The point of controversy arises from the effects of the creation of the VTA.
8. The Lee and Lacdao maintain that with the execution of the VTA between
stockholders of Alfa and the DBP, the former assigned and transferred all
their shares in ALFA to DBP, as trustee.
a. By virtue of the VTA, Lee and Lacdao can no longer be considered
Alfa’s directors.
b. Sec. 23, Corp Code: Every director must own at least 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 1 share of the capital
stock of the corporation of which he is a director shall thereby cease
to be director . . .
9. CA, Sacoba and Gonzaleses, on the contrary, insist that the VTA had
safeguarded the Lee and Lacdao’s continuance as directors of Alfa because
the general object of VTA is to insure permanency of the tenure of the
directors, citing commentaries9 by Prof. Agbayani on the right and status of
the transferring stockholders.
10. The most immediate effect of a VTA on the status of a stockholder who is a
party to its execution is that it transforms the status from a legal
titleholder/owner of the shares to an equitable/beneficial owner.
11. On whether the change in his status deprives the stockholder of the right to
qualify as a director under sec. 23, Corp Code which deletes the phrase "in
his own right" from Sec. 30 of the OLD Code, the Court said that the omission
of the phrase "in his own right" is an 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.
12. The facts of this case show that Lee and Lacdao, by virtue of the VTA
executed in 1981, disposed of all their shares through assignment and
delivery in favor of the DBP, as trustee.
13. Lee and Lacdao ceased to
a. own at least 1 share standing in their names on the Alfa’s books as
required under Sec. 23;
9
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
b. have anything to do with the management of the enterprise; and
c. be directors.
14. Transfer of the Lee and Lacdao’s shares to the DBP created vacancies in their
positions as Alfa’s directors.
15. The transfer of shares from the stockholder of ALFA to the DBP is the
essence of the VTA as evident from the following stipulations:
a. TRUSTORS 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 shares to the TRUSTEE
on the books of Alfa.
b. The TRUSTEE shall issue to each of the TRUSTORS a trust
certificate for the of shares transferred;
c. 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;
d. The TRUSTEE may cause to be transferred to any person 1
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;
e. 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.
16. Because the VTA between ALFA and the DBP transferred legal ownership
of the stock covered by the agreement to the DBP as trustee, DBP became
the stockholder of record with respect to the said shares of stocks.
17. In the absence of a showing that the DBP had caused to be transferred
in Lee and Lacdao’s names 1 share of stock for the purpose of qualifying
as directors, Lee and Lacdao can no longer be deemed to have retained
their status as officers which was the case before the VTA. DBP has taken
over full control and management of the firm.
18. In the Certification issued by the DBP through its VP of its Special Accounts
Department II, Remedial Management Group, the Lee and Lacdao were no
longer included in the list of officers of Alfa.
19. Sec. 13, R14, ROC: If the defendant is a corporation (…) service may be
made on the president, manager, secretary, cashier, agent or any directors.
20. A corporation has a personality separate and distinct from the officers or
members who compose it. Thus, the above rule on service of processes of a
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.
 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.
21. 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.
22. Lee and Lacdao in this case do not fall under any of the enumerated officers.
The service of summons upon Alfa, through the Lee and Lacdao, therefore,
is not valid. To rule otherwise 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.
 011 GOKONGWEI v. SEC (Sabaupan)
April 11, 1979 | Antonio, J. | Basis of the Right to Inspect and Copy Corporate
Records
PETITIONER: John Gokongwei, Jr.
RESPONDENTS: 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
SUMMARY: Petitioner seeks the nullification of amended by-laws and
cancellation of certificate of filing the amended by-laws on the ground that the
BOD acted without authority and in usurpation of the power of the stockholders
because the 2/3 affirmative vote of the stockholders should have been computed
on the basis of the capitalization at the time of the amendment. In connection with
this case, Gokongwei filed with the SEC a Motion for Production and
Inspection of Documents and alleged that SMC had been attempting to suppress
information from its stockholders. The documents requested to be copied include
the minutes of stockholders’ meeting and the latest balance sheet of San Miguel
International, a foreign subsidiary wholly owned and controlled by San Miguel
Corporation, among others. This was opposed by respondents on the ground that
the demand has no legal basis and was not based on good faith. The motion is
premature because the materiality or relevance of the evidence sought cannot be
determined until the issues are joined and that that some of the information sought
are not part of the records of the corporation and, therefore, privileged. SEC
allowed the production and inspection of the minutes of the stockholder’s
meeting but denied the petition to produce and inspect the balance sheet of
SMI as well as the list of salaries, allowances, bonuses, and compensation and/or
remuneration received by Sorianos from SMI and/or its successors-in-interest
since Gokongwei is not a stockholder of SMI and has, therefore, no inherent right
to produce and inspect said documents. The issue is whether Gokongwei has the
right to inspect the balance sheet of SMI. The Court ruled in the affirmative.
Section 51 of the Corporation Law provides the 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. This right is predicated upon the necessity of self-protection.
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 the case at
bar, considering that the foreign subsidiary is wholly owned by SMC 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 owned subsidiary which are in respondent corporation's possession and
control.
DOCTRINE: 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.
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. 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. 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. The corporation has the burden of proving
impropriety of purpose or motive."
FACTS:
1. Petitioner Gokongwei, stockholder of respondent San Miguel Corporation,
filed with the SEC a petition for declaration of nullity of amended by-laws,
cancellation of certificate of filing of amended by-laws, injunction and
damages against the majority of the members of the Board of Directors and
San Miguel Corporation (SMC) as an unwilling petitioner.
2. Petitioner alleged that:
a. In 1976, individual respondents amended the by-laws of the
corporation, basing their authority to do so on a resolution of the
stockholders adopted in 1961 (the outstanding and paid up shares
during this time was fewer). 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.
b. The authority granted in 1961 had already been exercised in 1962
and 1963, after which the authority of the Board ceased to exist.
c. The membership of the BOD had changed since the authority was
given in 1961, there being six new directors.
 d. Prior to the questioned amendment, petitioner had all the
qualifications to be a director of respondent corporation, being a
substantial stockholder thereof. By amending the by-laws,
respondent purposely provided for petitioner’s disqualification and
deprived him of his vested right to vote and be voted upon in the
election of directors, hence the amended by-laws are null and void.
e. 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. The portion of the amended by-laws 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.
3. It was prayed that the amended by-laws be declared null and void and the
certificate of fling thereof be cancelled, and that individual respondents be
made to pay damages, in specified amounts to petitioner.
4. In connection with the same case, Gokongwei filed with the SEC an Urgent
Motion for Production and Inspection of Documents alleging that the
Secretary of SMC refused to allow him to inspect its records despite request
made by petitioner for production of certain documents enumerated in the
request, and that SMC had been attempting to suppress information from its
stockholders despite a negative reply by the SEC to its query reading their
authority to do so. The documents requested to be copied were:
a. Minutes of the stockholder’s meeting held on March 1961
b. Copy of the management contract between SMC and A. Soriano
Corporation (ANSCOR)
c. Latest balance sheet of San Miguel International, Inc. (SMI)
d. Authority of the stockholders to invest the funds of SMC in SMI
e. Lists of salaries, allowances, bonuses, and other compensation, if
any, received by Andres M. Soriano, Jr. and/or its successor-in-
interest
5. 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 harassment; and that some of the information sought
are not part of the records of the corporation and, therefore, privileged.
6. During the pendency of the motion for production, respondents SMC,
Enrique Conde Miguel Ortigas and Antonio Prieto filed their answer to the
petition, denying the substantial allegations and by way of affirmative
defenses, contended that:
a. The action taken by the BOD in 1976 resulting in the amendments
is valid and legal because the power to amend, modify, repeal, or
adopt by-laws delegated to the Board in 1961 and long prior thereto
have never been revoked, withdrawn, or otherwise nullified by the
stockholders of SMC.
b. 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 of the delegation of said power
is made, not when the Board opts to exercise said delegated power.
c. Petition is premature because petitioner has not availed of his intra-
corporate remedy for the nullification of the amendment.
d. Power of the corporation to amend its by-laws is broad, subject only
to the condition that the by-laws adopted should not be inconsistent
with any existing law
e. 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 that of the
corporation.
f. The questioned amended by-laws is a matter of internal policy and
the judgment of the board should not be interfered with.
g. 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.
7. Respondents Andres Soriano and Jose Soriano also filed their opposition to
the petition, denying the material averments thereof, and contended that:
a. Universal Robina Corporation (URC), a corporation engaged in
business competitive to that of SMC, and Consolidated Foods
Corporation (CFC), acquired shares in SMC.
b. Gokongwei, who is president and controlling stockholder of URC
and CFC (both closed corporations) purchased 5,000 shares of stock
of SMC, and thereafter, in behalf of himself, CFC and URC,
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 URC and CFC interests, a seat
in the BOD of SMC.
c. In 1976, Gokongwei was rejected by the stockholders in his bid to
secure a seat in the BOD in the basis issue that petitioner was
engaged in competitive business and his securing a seat would have
subjected SMC to grave disadvantages.
d. Gokongwei nevertheless vowed to secure a seat in the BOD at the
next annual meeting. Thereafter, the BOD amended the by-laws.
8. SEC resolved the motion for production and inspection of documents as
follows:
a. Respondents produce and permit the inspection, copying and
photographing of the minutes of the stockholder’s meeting of the
SMC held in March 1961.
 b. The petition to produce and inspect the balance sheet of SMI as well
as the list of salaries, allowances, bonuses, and compensation and/or
remuneration received by Sorianos from SMI and/or its successors-
in-interest is denied since Gokongwei is not a stockholder of SMI
and has, therefore, no inherent right to produce and inspect said
documents.
c. 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.
9. While the petition was yet to be heard, SMC issued a notice of stockholders’
meeting for the purpose of ratification and confirmation of the amendment of
the by-laws. This prompted petitioner to ask SEC for a summary judgment
insofar as the first cause of action (Fact 2a) is concerned for the reason that
by calling a special stockholders’ meeting for the said purpose, respondents
admitted the invalidity of the amendments.
10. SEC denied this petition and after receiving the order of denial, respondents
conducted the special stockholders’ meeting wherein the amendments to the
by-laws were ratified.
11. Petitioner alleged that there appears a deliberate and concerted inability on
the part of the SEC to act, hence, petitioner came to the Supreme Court.
12. In another case filed with the SEC, 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 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.
13. 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.
ISSUE/s:
1. Whether SEC gravely abused its discretion in denying Gokongwei’s
request for an examination of the records of SMI, a fully owned
subsidiary of SMC. YES because the foreign subsidiary is wholly owned by
SMC and therefore, under its control.
2. Whether the amended by-laws disqualifying a competitor from nomination
or election to the BOD of SMC is valid and reasonable. YES because the
director stands in a fiduciary relation to the corporation and its shareholders
and an amendment to the corporate 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.
RULING: 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. x x x In resume, subject to the qualifications afore-stated,
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.
RATIO:
Issue 1: Examination of the records of SMI, a subsidiary of SMC (relevant issue)
1. In SMC’s memorandum, it stated that petitioner’s claim that he was denied
inspection rights as stockholder is not true because over a specific period,
petitioner had been furnished numerous documents and information. It was
also averred that upon request, petitioner was informed in writing about SMI:
a. SMI handles SMC’s foreign investments and SMI is wholly owned
by SMC.
b. The estimated value of SMI would amount to almost 400 million.
c. The total cash dividends received by SMC from SMI since 1953 is
9.4 million US dollars.
d. 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.
2. Section 51 of the Corporation Law provides the 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.
3. 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.
4. 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.
5. In Grey v. Insular Lumber, the 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 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. 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."
6. 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."
7. 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.
8. 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.
a. 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, and
that a writ of mandamus may be granted, as the records of the
subsidiary were, to all intents and purposes, the records of the parent
even though the subsidiary was not named as a party. 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.
b. 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. Likewise, inspection of the books of an allied
corporation by a 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."
9. In his "Urgent Motion for Production and Inspection of Documents" before
SEC, petitioner contended that respondent corporation "had been attempting
to suppress information from 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." 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.
10. In the case at bar, considering that the foreign subsidiary is wholly owned by
SMC 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 owned subsidiary which are in
respondent corporation's possession and control.
Issue 2: Disqualification of a competitor from nomination and election to the BOD
(this issue was already tackled under fiduciary duties)
9. The validity or reasonableness of a by-law of a corporation is purely a
question of law. 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. 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.
10. 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.
11. Respondents, on the other hand, contend that the exclusion 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 SMC of reasonable protection 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 SMC, or the promotion of
both the interests of petitioner and respondent SMC 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.
12. It is recognized by all 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.'"
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.”
14. 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 dissenting 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.
15. 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. 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.
16. It is a settled law in the US 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. An 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." This 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."
17. 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."
18. It is also well established that corporate officers "are not permitted to use their
position of trust and confidence to further their private interests."
19. The doctrine of "corporate opportunity" 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.
20. It is not denied that a member of the BOD of the SMC has access to sensitive
and highly confidential information. It is obviously to prevent the creation of
an opportunity for an officer or director of SMC, 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 SMC 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.
Separate opinions:
De Castro J., concurring
1. If a person became a stockholder of a corporation and gets himself elected as
a director, and while he is such a director, he forms his own corporation
competitive or antagonistic to the corporation of which he is a director, and
becomes Chairman of the Board and President of his own corporation, he
may be removed from his position as director, admittedly one of trust and
confidence. If this is so, a person controlling, and also the Chairman of the
Board and President of, a corporation, may be barred form becoming a
member of the BOD of a competitive corporation
 012 GONZALES v. PNB (Rosales)
May 30, 1983 | Vasquez, J. |
PETITIONER: Ramon A. Gonzales
RESPONDENTS: Philippine National Bank
SUMMARY: Gonzales instituted a suit, as a taxpayer, against Sec. of Public
Works and Communications, Commissioner of Public Highways, and PNB for
alleged anomalies committed regarding the bank’s extension of credit to import
public works equipment intended for the massive development program.
Gonzales’ standing was questioned because he did not own any share in PNB.
Hence, he bought 1 share of PNB stocks in order to gain standing as stockholder.
Gonzales sought to inquire and ordered PNB to produce its books and records
which PNB refused, invoking the provisions from its charter created by Congress.
Gonzales filed a petition for mandamus to compel PNB to produce its books and
records. RTC dismissed the petition saying the right to examine and inspect
corporate books is not absolute, but is limited to pruposes reasonably related to
the interest of the stockholder; that it must be asked for in good faith for a specific
and honest prupose and not to gratify curiosity or speculative pruposes; that such
examination would violate confidentiality of the records of PNB as provided in
Section 16 of its charter, RA 1300; and that Gonzales has not exhausted his
administrative remedies. Issue is WoN Gonzales may compel PNB to produce its
books and records. SC held NO. As may be noted from Sec 74 of BP Blg. 68,
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.”
Although Gonzales has claimed that he has justifiable motives in seeking the
inspection of the books of PNB, 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 PNB and to
inquire into their validity.
DOCTRINE: As contrasted from the old Corporation Law, the law now provides
for (a) express limitations on the right to inspect, and (b) now requires as a
condition for such examination that one requesting it must not have been guilty of
using improperly any information secured through a prior examination, and (c)
that the person asking for such examination must be acting in good faith and for a
legitimate purpose in making his demand. The exercising stockholder must set
forth the reasons and the purposes for which he desires such inspection.
FACTS:
1. Ramon Gonzales 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 Gonzales as a taxpayer vs
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 Gonzales 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.
2. Subsequent to his aforementioned acquisition of one share of stock of the
Bank, Gonzales, 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:
a. On October 18,1967, Civil Case No. 71044 vs the Board of
Directors of the Bank; the National Investment and Development
Corp., Marubeni Iida Co., Ltd., and Agro-Inc. Dev. Co. or Saravia;
b. On May 11, 1968, Civil Case No. 72936 vs 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.;
c. On May 8, 1969, Civil Case No. 76427 versus Alfredo Montelibano
 and the Directors of both the PNB and DBP
3. On January 11, 1969, however, Gonzales addressed a letter to the President
of the Bank, 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.
4. On January 23, 1969, the Asst. Vice-President and Legal Counsel of the Bank
answered Gonzales’ 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.
5. Gonzales alleged that his written request for such examination was denied by
PNB. Hence, he filed a special civil action for mandamus against PNB. The
trial court dismissed the request of Gonzales on the grounds that:
a. 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;
b. 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;
c. Gonzales has not exhausted his administrative remedies.
6. The trial court having dismissed the petition for mandamus, the instant appeal
to review the said dismissal was filed.
7. Gonzales 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 PNB 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:
a. 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.
8. Gonzales 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.
ISSUE/s:
1. WoN Gonzales may compel PNB to produce its books and records – NO,
because the right to examine and inspect corporate books is not absolute.
RULING: WHEREFORE, the petition is hereby DISMISSED, without costs.
RATIO:
1. Gonzales 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."
2. The right of inspection granted to a stockholder under Section 51 of Act No.
1459 has been retained, but with some modifications. 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.
3. 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.”
4. The unqualified provision on the right of inspection previously contained in
Section 51, Act No. 1459 no longer holds true under the provisions of the
present law. The argument of Gonzales 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 PNB 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.
5. Although Gonzales has claimed that he has justifiable motives in seeking the
inspection of the books of PNB, 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
 PNB and to inquire into their validity.
6. The circumstances under which he acquired one share of stock in PNB
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 PNB 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.
7. There is also no 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.) 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:
a. 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.
8. 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 PNB.
Pertinent provisions mentioned in the case:
1. The second and third paragraphs of Section 74 of Batas Pambansa Blg. 68
provide the following:
a. 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.
b. 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.
2. Sections 15, 16 and 30 of the said charter provide respectively as follows:
a. 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'
b. 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,'
c. 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.
 013 PASAR v. Lim (Cristelle)
October 5, 2016 | Leonen, J. | Remedies if right denied: Mandamus
PETITIONER: PHILIPPINE ASSOCIATED SMELTING AND REFINING COR-
PORATION
RESPONDENTS: PABLITO O. LIM, MANUEL A. AGCAOILI, AND CON-
SUELO M. PADILLA
SUMMARY: PASAR filed a petition for injunction to restrain Lim et. Al. from de-
manding inspection of its confidential and inexistent records. RTC granted the peti-
tion. However, CA revered it and stated that Lim et.al has the right to inspect confi-
dential records. Hence PASAR filed a petition for review on certiorari to assail the
CA decision. Issue: W/N the injunction filed by PASAR should prevail? NO. Alt-
hough a corporation may deny a stockholder's request to inspect corporate records,
the corporation must show that the purpose of the shareholder is improper by way of
defense: 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. In this case
PASAR failed to prove by way of defense that the purpose of the shareholders are im-
proper.
DOCTRINE: In general officers and directors have no legal authority to close the of-
fice 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 gain-
ing information which the law has provided, on mere doubt or suspicion as to the mo-
tives of the shareholder. While there is some conflict of authority, when an inspec-
tion by a shareholder is contested, the burden is usually held to be upon the cor-
poration to establish a probability that the applicant is attempting to gain inspec-
tion for a purpose not connected with his interests as a shareholder, or that his
purpose is otherwise improper.
FACTS:
1. Philippine Associated Smelting and Refining Corporation (PASAR) is a cor-
poration duly organized and existing under the laws of the Philippines and is
engaged in copper smelting and refining.
2. On the other hand, Pablito Lim, Manuel Agcaoili and Consuelo Padilla were
former senior officers and presently shareholders of PASAR holding 500
shares each.
3. An Amended Petition for Injunction and Damages with prayer for Prelimi-
nary Injunction and/or Temporary Restraining Order, dated February 4, 2004
was filed by PASAR seeking to restrain Lim et al. from demanding in-
spection of its confidential and inexistent records.
4. Pablito lim moved for the dismissal of the petition on the following grounds:
1) the petition states no cause of action; 2) the petition should be dismissed
on account of litis pendentia; 3) the petition is a nuisance or harassment suit;
and 4) the petition should be dismissed on account of improper venue.
5. RTC issued an Order granting PASAR's prayer for a writ of preliminary in-
junction. RTC held that the right to inspect book should not be denied to the
stockholders, however, the same may be restricted. The right to inspect
should be limited to the ordinary records as identified and classified by
PASAR. Thus, pending the determination of which records are confidential
or inexistent, the petitioners should be enjoined from inspecting the books.
6. Pablito lim filed a Motion for Dissolution of the Writ of Preliminary Injunc-
tion on the ground that the petition is insufficient. They claim that the en-
forcement of the right to inspect book should be on the stockholders and not
on PASAR. Another claim is that no irreparable injury is caused to PASAR
which justifies the issuance of the writ of preliminary injunction.
7. The Motion for Dissolution of the Writ of Preliminary Injunction was like-
wise denied on the ground that the writ does not completely result in unjust
denial of petitioners' right to inspect the books of the corporation. The RTC
further stated that if no preliminary injunction is issued, Pablito liim may,
before final judgment, do the act which PASAR is seeking the Court to re-
strain which will make ineffectual the final judgment that it may afterward
render.
8. Aggrieved, Lim, Agcaoili, and Padilla filed before the CA a Petition for Cer-
tiorari questioning the propriety of the writ of preliminary injunction. The
Court of Appeals held that there was no basis to issue an injunctive writ,
thus: We agree. The act of PASAR in filing a petition for injunction with
prayer for writ of preliminary injunction is uncalled for. The petition is a pre-
emptive action unjustly intended to impede and restrain the stockholders'
rights. If a stockholder demands the inspection of corporate books, the cor-
poration could refuse to heed to such demand. When the corporation, through
its officers, denies the stockholders of such right, the latter could then go to
court and enforce their rights. It is then that the corporation could set up its
defenses and the reasons for the denial of such right. Thus, the proper rem-
edy available for the enforcement of the right of inspection is undoubt-
edly the writ of mandamus to be filed by the stockholders and not a pe-
tition for injunction filed by the corporation.
9. PASAR failed to present sufficient evidence to show that Lim’s demand to
inspect the corporate records was not made in good faith nor for a lawful
purpose. PASAR is reminded that it is its burden to prove that respondents'
action in seeking examination of the corporate records was moved by unlaw-
ful or ill-motivated designs which could appropriately call for a judicial pro-
tection against the exercise of such right.
10. Hence, PASAR filed this Petition praying that SC should render judgement.
11. PASAR’s arguments:
 a. the right of a stockholder to inspect corporate books and records is
limited in that any demand must be made in good faith or for a le-
gitimate purpose. Respondents (LIM), however, have no legitimate
purpose in this case. If they gain access to petitioner's confidential
records, petitioner's trade secrets and other confidential information
will be used by its former officers to give undue commercial ad-
vantage to third parties. Petitioner insists that to hold that objections
to the right of inspection can only be raised in an action for manda-
mus brought by the stockholder, would leave a corporation helpless
and without an adequate legal remedy.To leave the corporation help-
less negates the doctrine that where there is a right, there is a remedy
for its violation.
b. it has the right to protect itself against all forms of embarrassment
or harassment against its officers, including the filing of criminal
cases against them. Moreover, respondents' request for inspection of
confidential corporate records and documents violates and breaches
petitioner's right to peaceful and continuous possession of its confi-
dential records and documents.
c. The Motion for Dissolution before the CA did not comply with Rule
58, Section 6 of the Rules of Court. Therefore, the Motion should
not have been granted. Likewise, Lim's Motion to Dismiss is a pro-
hibited pleading under Rule 1, Section 8 of the Interim Rules of Pro-
cedure Governing Intra-Corporate Controversies and should not
have been granted.
ISSUES: Whether or not injunction properly lies to prevent respondents (LIM et.al)
from invoking their right to inspect? No, injunction cannot be used in this case be-
cause PASAR failed to satisfy the requisites a) the invasion of the right sought to be
protected is material and substantial; (b) the right of the plaintiff is clear and unmis-
takable; and (c) there is an urgent and paramount necessity for the writ to prevent se-
rious damage. The Court of Appeals did not commit an error of law in disregarding
the procedure on dissolution of injunctive writs. It lifted and cancelled the injunction
via a petition for certiorari under Rule 65 of the Rules of Court based on the grave
abuse of discretion on the part of the Regional Trial Court in issuing the writ of pre-
liminary injunction.
RULING: WHEREFORE, the Petition is DENIED.
RATIO:
1. Petitioner claims that respondents are materially and substantially invading
its right to protect itself by demanding to inspect petitioner's purportedly con-
fidential records. Respondents wrote petitioner and demanded to inspect its
corporate books and records.
2. PASAR cannot ask for an injunction because it didn’t prove any ill motive or
bad faith of the stockholders/respondents (Lim et.al).
3. Requisites for Rule 58 preliminary injunction:
a. That the applicant is entitled to the relief demanded, and the whole
or part of such relief consists in restraining the commission or con-
tinuance of the act or acts complained of, or in requiring the perfor-
mance of an act or acts either for a limited period or perpetually;
b. That the commission, continuance or non- performance of the act or
acts complained of during the litigation would probably work injus-
tice to the applicant; or
c. That a party, court, agency or a person is doing, threatening, or is
attempting to do, or is procuring or suffering to be done some act or
acts probably in violation of the rights of the applicant respecting
the subject of the action or proceeding, and tending to render the
judgment ineffectual.
4. Doctrine for injunctive remedy to apply:
a. May be issued only upon clear showing of an actual existing right
to be protected during the pendency of the principal action.
b. The twin requirements of a valid injunction are the existence of a
right and its actual or threatened violation. Thus, to be entitled to an
injunctive writ, the right to be protected and the violation against
that right must be shown.
c. May only be resorted to when there is a pressing necessity to avoid
injurious consequences which cannot be remedied under any stand-
ard compensation. The possibility of irreparable damage without
proof of an actual existing right would not justify injunctive relief in
his favor.
d. In the absence of a clear legal right, the issuance of the injunctive
writ constitutes grave abuse of discretion. Thus, an injunction must
fail where there is no clear showing of both an actual right to be
protected and its threatened violation, which calls for the issuance
of an injunction.
5. Stockholder’s rights:Corporation Code provides that a stockholder has
the right to inspect the records of all business transactions of the corpo-
ration and the minutes of any meeting at reasonable hours on business
days. The stockholder may demand in writing for a copy of excerpts
from these records or minutes, at his or her expense. (SECTION 74) Sec-
tion 74 is subject to certain limitations. However, these limitations are ex-
pressly provided as defenses in actions filed under Section 74. Thus, this
Court has held that a corporation's objections to the right to inspect must be
raised as a defense:
a. the person demanding to examine and copy excerpts from the cor-
poration's records and minutes has not improperly used any infor-
mation secured through any previous examination of the records of
such corporation;
 b. 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.
c. In the absence of evidence, a corporation cannot unilaterally
deny a stockholder from exercising his statutory right of inspec-
tion 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.
6. (REASON why stockholder has the right to inspect) 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. The weight of judicial opinion appears to be, that on appli-
cation 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 hi seeking inspection. 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."
It appears to be the "general rule that stockholders are entitled to full infor-
mation as to the management of the corporation and the manner of expendi-
ture 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."
7. 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 mis-
management; (4) in anticipation of shareholders' meetings to obtain a mailing
list of shareholders to solicit proxies or influence voting; (5) to obtain infor-
mation in aid of litigation with the corporation or its officers as to corporate
transactions.
8. 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.
9. In this case, petitioner invokes its right to raise the limitations provided under
Section 74 of the Corporation Code. However, petitioner provides scant legal
basis to claim this right because it does not raise the limitations as a matter of
defense. As properly appreciated by the Court of Appeals.
10. The Supreme court agrees that the act of PASAR in filing a petition for in-
junction with prayer for writ of preliminary injunction is uncalled for. The
petition is a pre-emptive action unjustly intended to impede and restrain the
stockholders' rights. If a stockholder demands the inspection of corporate
books, the corporation could refuse to heed to such demand. When the cor-
poration, through its officers, denies the stockholders of such right, the latter
could then go to court and enforce their rights. It is then that the corporation
could set up its defenses and the reasons for the denial of such right. Thus,
the proper remedy available for the enforcement of the right of inspec-
tion is undoubtedly the writ of mandamus to be filed by the stockholders
and not a petition for injunction filed by the corporation.
11. PASAR insists that CA erred in relying on Section 74 of the Corporation
Code. It claims that jurisprudence allows the corporation to prevent a stock-
holder from inspecting records containing confidential information. W.G
Philpotts case example: where a corporation engaged in the business of
manufacture, has acquired a formula or process, not generally known,
which has proved of utility to it in the manufacture of its products. It is
not our intention to declare that the authorities of the corporation, and
more particularly the Board of Directors, might not adopt measures for
the protection of such process from publicity.
12. However, W.G Philpotts cannot support petitioner's contention since it in-
volved a petition for mandamus where the stockholder prayed to be allowed
to exercise its right to inspect, and the respondent's objections were raised as
a defense. Nothing in W.G. Philpotts grants a corporation a cause of action
to enjoin the exercise of the right of inspection by a stockholder.
13. The clear provision in Section 74 of the Corporation Code is sufficient au-
thority to conclude that an action for injunction and, consequently, a writ
of preliminary injunction filed by a corporation is generally unavailable to
prevent stockholders from exercising their right to inspection. Specifically,
stockholders cannot be prevented from gaining access to the (a) records of
all business transactions of the corporation; and (b) minutes of any meeting
of stockholders or the board of directors, including their various commit-
tees and subcommittees.
14. Generally, each individual stockholder should be given reasonable access
so that he or she can assess or share his or her assessment of the manage-
ment of the corporation with other stockholders. The separate legal per-
sonality of a corporation is not so absolutely separate that it divorces it-
self from its responsibility to its constituent owners. The presumption is
that the corporation should provide access. If it has basis for denial, then
the corporation shoulders the risks of being sued and of successfully rais-
ing the proper defenses. The corporation cannot immediately deploy its
resources—part of which is owned by the requesting stockholder—to put
the owner on the defensive.
15. Specifically, corporations may raise their objections to the right of inspection
through affirmative defense in an ordinary civil action for specific perfor-
mance or damages, or through a comment (if one is required) in a petition for
 mandamus. The corporation or defendant or respondent still carries the bur-
den of proving (a) that the stockholder has improperly used information be-
fore; (b) lack of good faith; or (c) lack of legitimate purpose.
16. Good faith and a legitimate purpose are presumed. It is the duty of the corpo-
ration to allege and prove with sufficient evidence the facts that give rise to a
claim of bad faith as to the existence of an illegitimate purpose.
 014 Ang Abaya v. Ang (Punsalan)
Dec. 4, 2008 | Ynares-Santiago, J. | Sec 144 Criminal Sanction; Justifying
Circumstance
PETITIONER: MA. BELEN FLORDELIZA C. ANG-ABAYA, FRANCIS
JASON A. ANG, HANNAH ZORAYDA A. ANG, and VICENTE G. GENATO
RESPONDENTS: EDUARDO G. ANG
FACTS:
SUMMARY: VMC and Genato are family-owned corporations where Flordeliza
Ang-Abaya et al and Eduardo Ang are shareholders, officers and members of the
board of directors. There’s a prior case for damages involving VMC, Genato, and
Oriana Corp against Eduardo Ang and other persons for conniving to fraudulently
wrest control/management of the corporations. Eduardo allegedly borrowed
substantial amounts of money, repeatedly demanded for allowance increases as
well as cash advances to live a lavish lifestyle to the demise of the corporations
(sabotaged sila sa kanya). During the pendency of the civil case, Eduardo sought
permission to inspect the corporate books of VMC and Genato on account of Ang-
Abaya’s failure and refusal to update him on the financial and business activities
of the corporations. Because of this, Eduardo filed a case charging Ang-Abaya et
al. with a violation of Sec 74 (in which case, the penalty clause for violation of the
Corp Code is Sec 144).
Issue: WoN Eduardo Ang can inspect the corporate books of the corporation – NO
WoN Flordeliza Ang-Abaya et al violated Sec 74 of the Corp Code – NO
The stockholders right to inspect corporate books has limitations. While it was
enlarged under the Corporation Code, 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. There are elements for Sec 144 to
apply (check Ratio #4(a-d), medj mahaba). Thus in a crim complaint for violation
of Sec 74, the defense of improper use or motive is in the nature of a justifying
circumstance and this was proven through evidence submitted by Ang-Abaya et
al on the true intentions of Eduardo in inspecting the records of the corporations.
So the refusal justified the withdrawal of the information for violation of Sec 74
by Ang-Abaya et al.
NOTE: pertinent provisions (Sec 74 and 144) are at the end of the digest
DOCTRINE: The defense of improper use or motive is in the nature of a
justifying circumstance. 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.
1. Vibelle Manufacturing Corporation (VMC) and Genato Investments, Inc.
(Genato) (herein after 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.
2. There’s a prior case for damages and TRO involving VMC, Genato and
Oriana Manufacturing Corp. (Oriana) against Eduardo Ang and Michael Chi
Ang and other persons for allegedly conniving to fraudulently wrest
control/management of the corporations. Eduardo allegedly:
a. borrowed substantial amounts of money from the corporations
without any intention to repay
b. he repeatedly demanded for increases in his allowances and also
more cash advances contrary to corporate policies
c. harassed Flordeliza Ang-Abaya to transfer and/or sell certain
corporate and personal properties in order to pay off his personal
obligations
d. he attempted to forcibly evict Jason from his offices and claim it as
his own
e. he interfered with and disrupted the daily business operations of the
corporations
3. Michael, on the other hand, was placed on preventive suspension due to
a. prolonged absence without leave
b. commission of acts of disloyalty such as carrying out orders of
Eduardo which were detrimental to their business
c. using privileged information and confidential documents/data
obtained in his capacity as Vice President of the corporations
d. admitting to have sabotaged their distribution system and
operations.
4. During the pendency of the civil case above, Eduardo sought permission to
inspect the corporate books of VMC and Genato on account of Ang-Abaya’s
failure and/or refusal to update him on the financial and business activities of
the corporations.
5. Ang-Abaya denied the request claiming that Eduardo would be using the info
obtained for purposes inimical to the corporations’ interests
a. He is harassing and bullying the corp into writing off P165M worth
 of personal advances which he unlawfully obtained previously
b. He is unjustly demanding to have the office of Jason (he is VP for
Finance and Corporate Secretary)
c. He is usurping rights belonging exclusively to the Corp.
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.
6. Because of the refusal, Eduardo filed a case charging the Corporations with
the violation of Sec 74, i.r. to Sec 144, of the Corporation Code of the PH.
Belinda Sandejas, Vincent, and Hanna were subsequently impleaded for also
denying Eduardo’s request to inspect the corporate books.
7. The civil case was resolved with a decision granting the permanent injunction
applied for by the corporations. However, the CA annulled it, stating that
Eduardo and other persons were imprudently declared in default by the trial
court thus it was remanded for further proceedings.
8. The Corporations filed a petition for review on certiorari before the SC but
was denied for failure to show any reversible error in the CA Decision. MR
also denied.
9. The information filed against Ang-Abaya et al was withdrawn due to the
DOJ’s reversal of the City Prosecutor’s Resolution with regard to violation
of Sec 74 of the Corp. Code.
a. However, on appeal to CA, it ruled that the Sec of Justice committed
GADALEJ in reversing the City Prosecutor’s Resolution and in
finding that Eduardo did not act in good faith when he demanded for
the examination of VMC and Genato’s corporate books.
b. 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 the refusal to allow inspection created probable
cause to believe that they have committed a violation of Section 74
of the Corporation Code.
c. MR was denied
10. Hence this petition.
ISSUE/s:
1. WoN Eduardo Ang can inspect the corporate books of the corporation – NO,
because his intentions for doing so will be inimical to the corporation plus he
is in bad faith in doing it.
2. WoN Flordeliza Ang-Abaya et al violated Sec 74 of the Corp Code – NO,
their refusal to allow Eduardo Ang to inspect the corp books are considered
a justifying circumstance which they were able to prove with evidence
(documents)
RULING: Petition for review on certiorari granted. CA decision and resolution
reversed and set aside. Resolution of Sec of Justice directing the withdrawal of the
information filed against petitioners Ang-Abaya is reinstated and affirmed.
RATIO:
1. Jurisprudence (Gokongwei, Jr. v. SEC) explained the rationale behind a
stockholder’s right to inspect corporate books:
a. 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.
b. 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.
c. 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.
d. 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.
2. Other jurisprudence (Republic v. Sandiganbayan) declared that the right to
inspect and/or examine the records of a corporation under Sec 74 of the Corp.
Code is circumscribed by the express limitation contained in the succeeding
proviso:
a. 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.
3. Thus, contrary to Eduardo’s insistence, the stockholders right to inspect
corporate books has limitations. While it was enlarged under the
Corporation Code, 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.
4. For Sec 144 (penal provision) of the Corp. Code to apply in case of violation
of right to inspect the corp books/records under Sec 74, the ff. elements must
be present:
a. A director, trustee, stockholder or member has made a prior demand
in writing for a copy of excerpts from the corporations records or
 minutes
b. 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;
c. 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
d. Where the officer or agent of the corporation sets up the defense that
the person demanding to examine and copy excerpts from the
corporations 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.
5. Thus in a crim complaint for violation of Sec 74, the defense of improper
use or motive is in the nature of a justifying circumstance.
a. 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.
b. With this, the CA erred in declaring that Sec of Justice exceeded
his authority when he conducted an inquiry on Ang-Abaya’s
defense of improper use and motive on Eduardo’s part. It was
incumbent upon him to determine that all the elements which
constitute said offense are present, in line with jurisprudence.
c. Ang-Abaya argues that Eduardo’s demand is based on attempt in
bad faith at Fact# 5 (write off, getting the office of Jason, usurping
rights, etc).
6. These serious allegations are supported by official and other documents,
such as board resolutions, treasurers affidavits and written
communication from Eduardo himself, who appears to have withheld his
objections to these charges. His silence virtually amounts to an acquiescence
and that he was not acting in good faith and for a legitimate purpose in aking
his demand for inspection of the corporate books.
PERTINENT PROVISIONS:
(CITED BECAUSE THIS IS WHERE THE PENALTY WILL BE BASED) Sec.
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, 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. (51a and 32a; B. P. No. 268.)

(PENAL PROVISION; OUTLINE) Sec. 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 (P1,000.00)
pesos but not more than ten thousand (P10,000.00) 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 1/2 a)
015 CHUA v. PEOPLE OF THE PHILIPPINES (Pleyto)
August 24, 2016 | Reyes, J. | Basis of Right to Inspect and Copy Corporate Records
FACTS:
PETITIONERS: Alfredo L. Chua, Tomas L. Chua and Mercedes P. Diaz
RESPONDENT: People of the Philippines
SUMMARY: On or about Aug. 24, 2000, Joselyn invoked her right as a
stockholder pursuant to Sec. 74 of the Corporation Code to inspect the (a) records
of the books of the business transactions, (b) the minutes of the meetings of the
board of directors and stockholders, (c) as well as the financial statements. She
hired a lawyer to send demand letters and Velayo, an accountant, to assist her. The
books were not presented to them. Joselyn filed an Information indicting the
petitioners for alleged violation of Sec. 74 (a stockholder’s right to inspect
corporate records), in relation to Sec. 144, of the Corp. Code was filed. The
argument of CTCM was that it CTCM ceased to exist as a corporate entity since
May 26, 1990. So when the acts complained of by Joselyn were allegedly
committed in Aug 2000, petitioners cannot be considered anymore as responsible
officers of CTCM. MeTC and RTC ruled in favor of Joselyn. CA also ruled in her
favor. The issue in this case is WoN the petitioners are guilty of violating Sec. 74.
Court held yes. Sec. 122 and 145 of Corp Code explicitly provide for the
continuation of the body corporate for 3 years after dissolution. The rights and
remedies against, or liaibilitiues of, the officers shall not be removed or impaired
by reason of the dissolution. A stockholder’s right to inspect corporate records
subsists during the period of liquidation. Hence, Joselyn had the right to demand
for the inspection of records.
DOCTRINE: The right to inspect remains valid and enforceable during the 3-
year liquidation period provided under Sections 122 and 145 of the Corporation
Code.
1. Joselyn was a stockholder of Chua Tee Corporation of Manila (CTCM)
2. Alfredo was the president and chairman of the board
3. Tomas was the corporate secretary and also a member of the board
4. Mercedes was the accountant/bookkeeper tasked with the physical custody
of the corporate records
5. On or about Aug. 24, 2000, Joselyn invoked her right as a stockholder
pursuant to Sec. 74 of the Corporation Code to inspect the (a) records of the
books of the business transactions, (b) the minutes of the meetings of the
board of directors and stockholders, (c) as well as the financial statements
6. 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.
7. Joselyn likewise hired the services of Mr. Abednego Velayo (Velayo) from
the accounting firm of Guzman Bocaling and Company to assist her in
examining the books of the corporation
a. Armed with a letter request, together with the list of schedules of
audit materials, Velayo and his group visited the corporation’s
premises for the supposed examination of the accounts
b. However, the books were not presented to them and there was no
list of schedules
c. Velayo testified that they failed to complete their objective
8. Complaint-affidavit: filed before the QC Prosecutor’s Office
a. Joselyn alleged that despite written demands, petitioners conspired
in refusing without valid cause the exercise of her right to inspect
9. Counter Affidavits: petitioners denied liability
a. They argued that custody of the records did not pertain to them.
b. Besides, the physical records were merely kept inside the cabinets
 in the corporate office
c. They also did not prevent Joselyn from inspecting the records
d. What happened was that Mercedes was severely occupied with
winding up the affairs of the corp after it ceased operations
e. Then Joselyn and her lawyers failed to set up an appointment with
Mercedes. She then sent demand letters and not long after, filed two
cases (one civil and one criminal)
10. July 4, 2001: an Information indicting the petitioners for alleged violation of
Sec. 74, in relation to Sec. 144, of the Corp. Code was filed
11. Jan. 30, 2002, MeTC: motion to quash was filed by petitioners. Arguments:
a. CTCM ceased to exist as a corporate entity since May 26, 1990
b. So when the acts complained of by Joselyn were allegedly
committed in Aug 2000, petitioners cannot be considered anymore
as responsible officers of CTCM
c. Thus, assuming arguendo that petitioners actually refused to let
Joselyn inspect the records, no criminal liability can attach to an
omission to perform a duty, which no longer existed
d. Denied the motion to quash
12. Arraignment, pre-trial and trial ensued. Testimonies of Joselyn and Velayo
were offered. Petitioners did not present witnesses nor filed any documentary
evidence
13. MeTC: convicted the petitioners. Cited Ang-Abaya, et. al. v. Ang to stress
that in the case, the prosecution had ampy established the presence of the
elements of the offense under Sec. 74:
a. A stockholder’s prior demand in writing for the inspection of
corporate records
b. Refusal by corporate officers to allow the inspection
c. Proofs adduced by the corporate officers of the stockholder’s prior
improper and malicious use of the records in the event that the same
is raised as a defense for the refusal to allow the inspection
14. Gokongwei, Jr. v. SEC was also invoked: MeTC explained that a
stockholder’s right to inspect corporate records is based upon the necessity
of self-protection. Thus, the exercise of the right at reasonable hours during
business days should be allowed
15. MR denied by MeTC. RTC agreed with the MeTC, saying that petitioners
should have presented evidence to contradict or rebut. MR denied.
16. CA: a petition for review was filed. Outrightly dismissed for failure to
summit (a) true copies or duplicate originals of the MeTC’s judgment, and
(b) a SPA authorizing Alfredo to file the petition and sign the verification and
certification of non-forum shopping in behalf of Tomas and Mercedes
17. MR to which compliance was appended pending this, Rosario Sui Lian Chua,
mother of the deceseased Joselyn, filed an Affidavit of Desisance
a. Considering that Alfredo and Tomas are both uncles of Joselyn and
are brothers of the husband of Rosario, they decided to condone the
possible criminal wrongdoings and to absolve him of both civil and
criminal liabilities
b. Case was merely a result of serious misunderstanding anent the
management and operation of CTCM, which had long ceased
c. CA: denied Petitioner’s MR
18. Petition for review on certiorari was filed
a. Reiterated that since CTCM had ceased business operations prior to
Joselyn’s filing of her complaint, there was no longer any duty
pertaining to corporate officers to allow a stockholder to inspect
b. Prosecution failed to prove that they had actually prevented Joselyn
from exercising her right of inspection
c. It was pointed out that when Joselyn was cross-examined, she
admitted that she was allowed to see the records
d. However, since she designated an accountant, she was not able to
physically view the records. Thus, she had no personal knowledge
as to whether or not the inspection was allowed or denied
e. Furthermore, Velayo stated during the trial that the demand letters
were addressed to CTCM and not to petitioners; and that he had no
personal dealings with the petitioners
f. Affidavit of Desistance shows the frivolous nature of the complaint
19. OSG’s Comment:
a. Sec. 122 of the Corp. Code: a corporate entity, whose charter
expires by its own limitation shall continue as a body corporate
for 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
b. Thus, CTCM continued as a body corporate until May 2002
c. BOD is not rendered functus officio by reason of the dissolution
d. Liabilities incurred by officers shall not be removed or impaired by
the subsequent dissolution of the corporation
e. Thus, right to inspect corporate records subsists during the
period of liquidation
ISSUE/s:
1. WoN the petitioners should be convicted for alleged violation of Sec. 74, in
relation to Sec. 144, of the Corp. Code – YES, because corporate body
continues for 3 years after dissolution..
RULING: Judgment in question is affirmed (but directs payment of fine, in lieu of the
penalty of imprisonment)
RATIO:
Procedural matters:
CA’s outright dismissal of the petition for review under Rule 42
 1. Petitioners filed a belated compliance after being outrightly dismissed to
correct the procedural flaws referred to by the CA
2. Explained that their failure to submit the requisite SPA was because Tomas
and Mercedes were out of the country when the petition was filed.
3. Wrt to the non-submission of the MeTC judgment and order: they admit
negligence and prayed for the court’s indulgence
4. Fuji Television Network, Inc. v. Espiritu summarized the rules on verification
10
and certification against forum shopping
5. Petitioners complied belatedly, defectively, or substantially. This case calls
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
1. This is not a round for the dismissal of an action, once instituted in court
2. Thus, did not perceive intentional disregard of procedures
3. In a criminal action already filed in court, the private complainant loses the
right or absolute privilege to decide whether the charge should proceed
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
1. Yu, et al. v. Yukayguan, et al.: The corporation continues to be a body corporate for 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…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 or those of its owners and creditors
2. Sec. 122 and 145 of Corp Code explicitly provide for the continuation of the
body corporate for 3 years after dissolution.
3. The rights and remedies against, or liaibilitiues of, the officers shall not be
removed or impaired by reason of the dissolution
4. A stockholder’s right to inspect corporate records subsists during the period
of liquidation. Hence, Joselyn had the right to demand for the inspection of
records. Lodged upon the corporation is the corresponding duty to allow the
inspection
It is beyond the ambit of a petition filed under Rule 45 of the ROC to recalibrate the
evidence considered in the proceedings below. However, the Court notes
10
1) A distinction must be made between non[-]compliance with the requirement on or submission of defective veri cat-
ion, and non[-] compliance with the requirement on or submission of defective certification against forum shopping.DE-
TACa
2.) As to verification, non[-]compliance therewith or a defect therein does not necessarily render the pleading fatally de-
fective. 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 veri cation, and when matters alleged in the petition have been made in
good faith or are true and correct.
circumstances justifying the modification of the assailed resolutions.
1. A re-examination of factual findings is outside the province of a petition for
review on certiorari, especially where the MeTC, RTC and CA concurred
2. However, SC takes exception of 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
records was addressed to the Accounting Department, and he and
his colleagues did not have personal dealings with the petitioners
3. 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
4. However, from Joselyn and Velayo’s testimonies, it can be inferred that
permission to view the records was granted, albeit not fully effected
5. Petitioners explained in the Counter-Affidavit that they never prevented her
from exercising her right of inspection, but when the latter made her request,
Mercedes was too occupied in winding up the affairs of CTCM
6. There’s doubt upon the existence of mens rea but this is not needed in
offenses punishable by special laws, which are mala prohibita
7. Sec. 74, in relation Sec. 144 is a special law. Thus, since Joselyn was deprived
of her right, an offense had been committed, regardless of the petitioner’s
intent
8. The Corp Code provides for penalties relative to the commission of offenses
9. No execptional grounds exist justifying the reversal of the convicntion
previously rendered.
10. However. In lieu of the penalty of 30 days of imprisonment, the Court
imposed a fine of 10k.
a. Malicious intent was seemingly wanting. Permission to check was
granted, albeit not effected
b. Joselyn had predeceased Alfredo and Tomas, her uncles, who are in
their twilight years
c. Rosaio had executed an Affidavit of Desistance stating that the filing
4.) As to certi cation against forum shopping, non-compliance therewith or a defect therein, unlike in veri cation, is gener-
ally 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 justi able 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 certi cation against forum shopping substantially complies with the Rule.
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
 016 CHUA v. CA (PERRAL)
Nov, 19, 2004 | Quisumbing, J. | Derivative Suit
PETITIONER: Francis Chua, et al.
RESPONDENTS: Court of Appeals and Lydia Hao.
SUMMARY: Respondent Lydia Hao, treasurer of Siena Realty Corporation, filed a
complaint charging Francis and Elsa Chua, of four counts of falsification of public
documents. (falsified the Minutes of the Annual Stockholders meeting of the Board
of Directors of Siena Realty causing it to appear that Lydia Hao Chua was present
and has participated in said proceedings when the accused knew that Lydia was
never present) The City Prosecutor filed the Information for falsification of public
document against Francis Chua but dismissed the accusation against Elsa Chua.
Francis Chua, was arraigned and trial ensued thereafter. During the trial, private
prosecutors Atty. Sua-Kho and Atty. Rivera appeared as private prosecutors and
presented Hao as their first witness. After Hao’s testimony, Chua moved to exclude
complainant’s counsels as private prosecutors in the case on the ground that Hao
failed to allege and prove any civil liability in the case. The MeTC granted Chua’s
motion. Hao moved for reconsideration but it was denied. Hence, Hao filed a peti-
tion for certiorari, entitled Lydia C. Hao, in her own behalf and for the benefit of Si-
ena Realty Corporation v. Francis Chua, and the Honorable Hipolito dela Vega,
Presiding Judge, Branch 22, Metropolitan Trial Court of Manila, before the RTC.
The RTC gave due course to the petition and reversed the MeTC Order. Chua
moved for reconsideration which was denied. Chua filed before the Court of Ap-
peals a petition for certiorari. The appellate court denied the petition. Petitioner had
argued before the Court of Appeals that respondent had no authority whatsoever to
bring a suit in behalf of the Corporation since there was no Board Resolution au-
thorizing her to file the suit. Respondent Hao claimed that the suit was brought un-
der the concept of a derivative suit. Respondent maintained that when the directors
or trustees refused to file a suit even when there was a demand from stockholders, a
derivative suit was allowed. The Court of Appeals held that the action was indeed a
derivative suit, for it alleged that petitioner falsified documents pertaining to pro-
jects of the corporation and made it appear that the petitioner was a stockholder and
a director of the corporation. According to the appellate court, the corporation was
a necessary party to the petition filed with the RTC and even if private respondent
filed the criminal case, her act should not divest the Corporation of its right to be a
party and present its own claim for damages. Petitioner moved for reconsideration
but it was denied. Hence, this petition. Issue in this case are:(1) Is the criminal com-
plaint in the nature of a derivative suit;(2) WoN Siena Realty Corp a proper peti-
tioner in SCA no. 99-94846; (3) WoN should private prosecutors be allowed to ac-
tively participate in the Trial of Criminal case 285721.
SC held that not every suit filed in behalf of the corporation is 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 deriv-
ative cause of action on behalf of the corporation and all other stockholders simi-
larly 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 pro-
cess.
In the criminal complaint filed by herein respondent, nowhere is it stated that she is
filing the same in behalf and for the benefit of the corporation. Thus, the criminal
complaint including the civil aspect thereof could not be deemed in the nature of a
derivative suit. SC further held that Siena Realty Corp is a proper petitioner in SCA
no. 99-94846, Corporation is a proper party in the petition for certiorari because the
proceedings in the criminal case directly and adversely affected the corporation.
Lastly, it was held that the private prosecutors be allowed to actively participate in
the Trial of Criminal case 285721, prosecutors be allowed to actively participate in
the Trial of Criminal case 285721
DOCTRINE: In the absence of a special authority from the Board of Directors to
institute a derivative suit for and in behalf of the corporation, the president or
managing director is disqualified by law to sue in her own name or for the
corporation. The power to sue and be sued is lodged in the Board. The suing
stockholder is regarded as a nominal party, with the corporation as the real party in
interest.
FACTS:
1. Feb. 28, 1996, private respondent Lydia Hao, treasurer of Siena Realty Cor-
poration, filed a complaint-affidavit with the City Prosecutor of Manila of 4
counts of falsification of public documents pursuant to Article 172 in relation
to Article 171 of the RPC which states:
“That on or about May 13, 1994, in the City of Manila,
Philippines, the said accused, being then a private individual, did
then and there willfully, unlawfully and feloniously commit acts of
falsification upon a public document, to wit: the said accused
prepared, certified, and falsified the Minutes of the Annual
Stockholders meeting of the Board of Directors of the Siena Realty
Corporation, duly notarized before a Notary Public, Atty. Juanito
G. Garcia and entered in his Notarial Registry as Doc No. 109,
Page 22, Book No. IV and Series of 1994, and therefore, a public
document, by making or causing it to appear in said Minutes of the
Annual Stockholders Meeting that one LYDIA HAO CHUA was
present and has participated in said proceedings, when in truth and
in fact, as the said accused fully well knew that said Lydia C. Hao
was never present during the Annual Stockholders Meeting held on
April 30, 1994 and neither has participated in the proceedings
 thereof to the prejudice of public interest and in violation of public
faith and destruction of truth as therein proclaimed.”
2. Thereafter, the City Prosecutor filed the information docketed as Criminal
Cases no 285721 for falsification of public document, before the MeTC of
Manila against Francis Chua but dismissed the accusation against Elsa Chua.
3. During the trial in the MeTC, private prosecutors atty. Sua-Kho and atty.
Rivera appeared as private prosecutors and presented Hao as their first
witness. After Hao’s testimony, Chua moves to exclude complainant’s
counsels as private prosecutors in the case on the ground that Hao failed to
allege and prove any civil liability in the case. MeTC granted this motion.
Hao moved for reconsideration but this was denied. Hao filed a certiorari and
this was given due course of to the petition and ordered the reversed the
MeTC Order. Chua moved for reconsideration which was denied.
4. Dissatisfied, Chua filed before the CA a petition for certiorari. Chua alleged
that lower court acted with grave abuse of discretion in:
1. Refusing to consider material facts
2. Allowing siena Realty corporation to be impleaded as co-petitioner
in SCA no. 99-94846 although it was not a party to the criminal
complaint in Criminal case.
3. Effectively amending the information against the accused in vialtion
of his consti rights.
5. Petitioner had argued before the CA that respondent Hao had no authority
whatsoever to bring suit in behalf had no authority whatsoever to bring a suit
in behalf of the Corporation since there was no Board Resolution authorizing
her to file the suit.
6. Respondent Hao claimed that the suit was brought under the concept a
derivative suit. Hao maintained that when the directors or trustees refused to
file a suit even when there was a demand from stockholders, a derivative suit
was allowed.
7. CA held that the action was indeed a derivative suit, for it allged that
petitioner Chua falsified documents pertaining to projects of the corporation
and made it appear that petitioner Chua was a stockholder and a director of
the corporation.
a. According the CA, the corporation was a necessary party
to the petition filed with the RTC and even if private
respondent Hao filed the criminal case, her act should not
divest the Corporation of its right to be a party and present
its own claim for damages.
8. Petitoner Chua moved for reconsideration but was denied hence this appeal.
ISSUE/s:
1. (related)WoN the criminal complaint in the nature of a derivative suit -
NO. Chua failed to state that she is filing the same in behalf and for the
benefit of the corp which is a condition sin qua non in filing derivative
suit.
2. WoN Siena Realty Corp a proper petitioner in SCA no. 99-94846 – YES.
Corporation is a proper party in the petition for certiorari because the
proceedings in the criminal case directly and adversely affected the
corporation.
3. WoN should private prosecutors be allowed to actively participate in the Trial
of Criminal case 285721 -YES. there was neither a waiver nor a reservation
made; nor did the offended party institute a separate civil action. It follows
that evidence should be allowed in the criminal proceedings to establish the
civil liability arising from the offense committed, and the private offended
party has the right to intervene through the private prosecutors.

RULING: Petiton DENIED
RATIO:
4. First issue
- Petitoner Chua avers that a derivative suit is by nature peculiar only
to intra- corporate proceedings and cannot be made part of a crimi-
nal action. Citing Western Institute of Technology case where the
court said: “that an appeal on the civil aspect of a criminal case can-
not be treated as a derivative suit.”
a. Petitioner asserts that in this case, the civil aspect of a crim-
inal case cannot be treated as a derivative suit, considering
that Siena Realty Corp was not the private complainant.
- SC said that Chua misapprehends our ruling in Western institute
case. Ruling in that case said: “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. . . .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 since the trial court’s judgment of acquittal
failed to impose civil liability against the private respondents. By no
amount of equity considerations, if at all deserved, can a mere appeal
 on the 12 civil aspect of a criminal case be treated as a derivative
suit.”
- Moreover, in Western Institute, SC said that a mere appeal in the
civil aspect cannot be treated as a derivative suit because the appeal
lacked the basic requirement that it must be alleged in the complaint
that the shareholder is suing on a derivative cause of action for and
in behalf of the corp and other shareholders who wish to join.
- Under section 36 of the Corp Code, read in realtion to section 23,
where a corporation is an injured party, its power to sue is
lodged with its board of directors or trustees.
- 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 corp. 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 corp Is the a necessary party to the suit. And
the relief which is granted is a judgment against a 3rd person in favor
of the corp. Similarly, if a corp has a defense to an action against
it and is not asserting it, a stockholder may intervene and defend
on behalf of the corp.
- In the instant case, the criminal complaint was instituted by
respondent Hao againstChua for falsifying corporate documents
whose subject concers corporate projects of Siena Realty
Corporation. Clearly, Siena Realty is an offended party. Hence
SienaRealty corporate cause of action. And the civil case for the
corporate cause of action is deemed instituted in the criminal action.
(remember RPC rule: When a criminal action is instituted, the civil
action for the recovery of civil liability arising from the offense
charged shall be deemed instituted with the criminal action)
- However, the board of directors of the corporation in this case did
not institute the action against petitioner Chua. Private respondent
Hao was the one who instituted the action. Hao asserted that she
filed a derivative suit in behalf of the corp. This assertion is
inaccurate.
• Not every suit filed in behalf of the corporation is 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.
• It is a condition sin qua non that the corporation be
impleaded as a party because not only is the corporation an
indespensable party, but it is also the present rule that it must
be served with process.
• 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 corp must be joined as a
pary because it is its cause of action that is being litigated
and because judgment must be a res judicata agains it.
1. In this case the criminal complaint filed by
respondent Hao, nowhere is it stated that she is
filing the same in behalf and for the benefit of
the corp. Thus, a criminal complaint including
the civil aspect thereof could not be deemed in
the nature of a derivative suit.
5. 2nd issue.
1. SC find that the recourse of the complainant to the
respondent CA was proper. The petition was
brought in her own name and in behalf of the
corporation. Although, the corporation was not a
complainant in the criminal action, the subject of
the falsification was the corporation’s project and
the falsified documents were corporate
documents. Therefore, the corporation is a proper
party in the petition for certiorari because the
proceedings in the criminal case directly and
adversely affected the corporation.
• SC consistently held that only a party in interest or those
aggrieved may file certiorari cases. It is settled that the offended
parties in criminal cases have sufficient interest and personality
as “persons aggrieved” to file a special civil action of
prohibition and certiorari.
• Cited cases: Ciudad Real cases cited by petitioner: SC held in
this case that the appellate court committed grave abuse of
discretion when it sanctioned the standing of a corporation to
join said petition for certiorari, despite the finality of the trial
court’s denial of its Motion for Intervention and the subsequent
Motion to Substitute and/or join as party/plaintiff.
• Pastor Jr. v CA: we held that if aggrieved, even a non-party may
institute a petitioner for certiorari.
 • In that case, petitioner was the holder in her own right of 3
mining claims and could file a petition for certitorari, the fastest
and most feasible remedy since she could not intervene in the
provbate of he father in law’s estate.
6. 3rd issue.
- Rule 111 (a) of the Rules of Criminal Procedure provides that, when
a criminal action is instituted, the civil action arising from the
offense charged shall be deemed instituted with the criminal action
unless the offended party waives the civil action, reserves the right
to institute it separately, or institutes the civil action prior to the
criminal action.
- Private respondent Hao did not waive the civil action, nor did she
reserve the right to institute it separately, nor institute the civil action
for damages arising from the offense charged. Thus, we find that the
private prosecutors can intervene in the trial of the criminal action.
- Petitioner Chua avers, however, that respondent’s testimony in the
inferior court didnot establish nor prove any damages personally
sustained by her as a result of petitioner’s alleged acts of
falsification. Petitioner adds that since no personaldamages were
proven therein, then the participation of her counsel as private
prosecutors, who were supposed to pursue the civil aspect of a
criminal case, is not necessary and is without basis.
- When the civil action is instituted with the criminal action, evidence
should be taken of thedamages claimed and the court should
determine who are the persons entitlted to such indemnity. The civil
liability arising from the crime may be determined in the criminal
proceedings if the offended party does not waive to have it adjudged
or does not reserve the right to institute a separate civil action against
the defendant. Accordingly, if there is no waiver or reservation of
civil liability, evidence should be allowed to establish the extent of
injuries suffered.
- In the instant case, there was neither a waiver nor a reservation
made; nor did the offended party institute a separate civil action. It
follows that evidence should be allowed in the criminal proceedings
to establish the civil liability arising from the offense committed,
and the private offended party has the right to intervene through the
private prosecutors.

 017 LOPEZ REALTY v. SPOUSES TANJANGCO (Peliño)
November 12, 2014 | Reyes, J. | Right to file Derivative Suits: Condition
Precedent—derivative suit can be effective only when board cannot properly
exercise business judgment
PETITIONERS: Lopez Realty, Inc. and Asuncion Lopez-Gonzales
RESPONDENTS: Spouses Reynaldo Tanjangco and Maria Luisa Arguelles-Tanjangco
SUMMARY: LRI owned ½ of the share in certain properties and they wanted to sell it to
Tanjangcos. They initially had an agreed selling price to sell to the Tanjangcos but some of
the members of the BOD offered to Asuncion to equal the price given by the Tanjangcos
and to exercise that offer within 10 days, but Asuncion was not able to do so. While
Asuncion was out of the country, the remaining BOD passed the A17 Resolution
authorizing Arturo to negotiate with the Tanjangcos regarding the purchase of ½ of the
building and that he was given full power and authority to carry out complete termination
of the sale terms and conditions. Pursuant to this, Arturo executed a DOS in favor of Jose
(but eventually they were able to change the name to the Tanjangcos). Asuncion found out
about this and sent cablegrams telling them not to proceed with the sale. So the BOD issued
S1 and S16 Resolutions, in essence saying to postpone the sale to the Tanjangcos in order
to enlighten Asuncion regarding the events that transpired. Asuncion sought the repeal or
amendment of the A17 Resolution. Properties were already transferred and registered in
the name of the Tanjangcos. So Asuncion filed a complaint for annulment, cancellation,
reconveyance with damages. Subsequently, the stockholders had a meeting wherein they
voted to ratify and confirm the sale (J30 Resolution) but then the minutes of the meeting
was not recorded by Asuncion, the corporate secretary, because she didn’t want to.
Eventually Asuncion and Arturo moved to dismiss the cases that they filed agains each
other. Tanjangcos and Asuncion and LRI also had a settlement wherein Tanjangcos would
sell back the property to LRI on the condition that LRI would return the money that
Tanjangcos already paid. But the Tanjangcos didn’t want to sign the agreement, which
prompted Asuncion to file for a supplemental complaint for damages. RTC ruled in favor
of LRI and Asuncion, saying that Arturo didn’t have the authority to sell and that the sale
wasn’t validly ratified since they weren’t able to get the required number of votes, but RTC
denied Asuncion’s claim for damages. Both appealed to the CA and the CA reversed,
recognizing Arturo’s authority to sell the interest since whatever infirmity attended the A17
Resolution, it was cured by the ratification of the majority of the directors in the joint
stockholder and directors meeting. Hence, this petition. The issues in this case are whether
or not the A17 Resolution granted authority to Arturo to act as LRI’s representative and
whether or not the A17 Resolution was ratified by the BOD. As to the first issue, the SC
held in the affirmative, since based on Sec. 53 of the Corp. Code and the general rule is that
a corporation, through its BOD, should act in the manner and within the formalities, if any,
prescribed by its charter or by general law. Directors must act as a body in a meeting called
pursuant to the law or the corporation’s by laws, otherwise, any action taken therein may
be questioned by any objecting director or shareholder. As to the second issue, the SC also
held that the A17 Resolution has already been ratified by the J30 Resolution when the
11
Stockholders of record were as follows: Asuncion 7831 shares; Arturo 7830 shares; Rosendo 5 shares;
Benjamin 1 share; Augusto 1 share; and Leo 1 share; all except for Arturo and Teresita were members of
the BOD.
stockholders ratified the sale. The ratification was expressed through the J30 Board
Resolution. Majority of the BOD except for Asuncion already approved of the sale to
Tanjangco prior to the meeting. Whatever defect there was on the sale pursuant through the
A17 Resolution, it was cured through the ratification in the J30 Resolution. It is of no
moment whether Arturo was authorized to merely negotiate or to enter into a contract of
sale on behalf of LRI as all his actions in connection to the sale were expressly ratified by
the stockholders holding 67% of the outstanding capital stock. In Cua v. Tan, the Court
held that by virtue of ratification, the acts of the BOD become the acts of the stockholders
themselves, even if those acts were, at the outset, unauthorized.
DOCTRINE: In Cua v. Tan, the Court said that by virtue of ratification, the acts of the
BOD become the acts of the stockholders themselves, even if those acts were, at the outset,
unauthorized. By ratification, even an unauthorized act of an agent becomes the authorized
act of the principal. To declare the Board resolution null and void will serve no practical
use or value, or affect any of the rights of the parties, because the subsequent stockholders’
resolution approving and ratifying the said acquisition and the manner in which PRCI shall
constitute the JTH BOD will still remain valid and binding.
FACTS: **All resolutions are abbreviated based on the month and day stated in the
case
11
1. Lopez Realty, Inc. (LRI) and Dr. Jose Tanjangco (Jose) were co-owners of
3 parcels of land and a building erected in the land known as the Trade Center
Building.
a. Jose transferred his share to his son and daughter-in-law (Tanjangcos).
b. In a special meeting of the stockholders on July 27 (J27 Resolution), the sale of
the ½ share of LRI was discussed, wherein they pegged the price at 4 million
pesos and that the Tanjangcos are offering to buy it for 3.6 million pesos + 50%
of the receivables or 3.8 million subject to conditions regarding payment and
taxes to be paid.
c. But Asuncion countered for the selling price of 5 million and Teresita and
Benjamin offered to Asuncion to equal the price given by the Tanjangcos and
that she has within 10 days to act on the offer, otherwise it will be deemed
accepted; subsequently Teresita died.
2. Asuncion failed to exercise her option to purchase. The remaining BOD
(Rosendo, Benjamin, and Leo) on August 17, 1981 (A17 Resolution)
convened in a special meeting and passed and approved a reso:
a. Authorized Arturo to immediately negotiate with the Tanjangcos on the
matter of their offer to purchase ½ of the building
b. Arturo is given full power and authority by the BOD to carry out the
complete termination of the sale terms and conditions based on the 1st
Resolution and to sign for an in behalf of LRI.
3. On August 25, 1981, Arturo executed a Deed of Sale selling LRI’s ½
interest in the subject property to Jose who was represented by his other
 son Manuel. The price was pegged at 3.6 million with stipulations on a. They were also able to arrive at a negotiation with the Tanjangcos saying
succeeding payments. that the Tanjangcos would sell back the property for 6 million on the
4. Asuncion found out about this and sent cablegrams to Rosendo and Jose condition that LRI would return the money they already paid.
requesting not to proceed with the sale. Consequently, the BOD had a special b. But during the formal signing of the agreement, the Tanjangcos didn’t
meeting where they passed September Resolutions (S1 and S16 Resolutions) want to sign, so Asuncion filed a supplemental complaint compelling
saying that the BOD decided to postpone the final action of the sale to the Tanjangcos to indemnify her for the damages she incurred.
Tanjangcos to enlighten her on the proceedings. 9. During trial, LRI attempted to establish that the sale had not been validly
5. When Asuncion arrived, the Board had a meeting where she moved to repeal ratified since they were not able to meet the required number of votes.
12 a. Asuncion testified that Juanito wasn’t qualified to sit as director since
or amend the A17 and A24 Resolution.
6. Jose’s ½ interest had already been transferred to the Tanjangcos and they there was no proof that he owned shares and that Leo actually voted
requested that LRI execute another DOS, this time naming Tanjangcos as the against the ratification, which was why they didn’t sign.
buyers, which they did. 10. RTC issued a decision finding the sale null and void, that Arturo lacked
a. Tanjangcos paid LRI the amount and they were issued a receipt and they authority to sell LRI’s interest on the properties, and that the sale was not
registered it and the Reg. of Deeds cancelled the TCTs in favor of LRI and issued validly ratified because it failed to get the required number of votes. But they
new ones in favor of the Tanjangcos. also denied Asuncion’s claim for damages since the compromise agreement
7. Asuncion filed a complaint for annulment, cancellation, reconveyance with was not perfected.
damages against Tanjangcos, Arturo, and the Register of Deeds. 11. Both appealed to the CA and the CA reversed, recognizing Arturo’s authority
a. Asuncion claimed that the sale wasn’t binding on LRI because the A17 and A24 to sell the interest and that whatever infirmity that attended the A17
Resolutions authorizing Arturo were invalid because of lack of notice to Resolution was cured by the ratification of the majority of the directors in the
Asuncion and that those resos were already revoked by the BOD because of the joint stockholder and directors meeting.
S1 and S16 Resolutions.
a. Even if Juanito’s vote was disregarded, the ratification was approved by
b. RTC issued a TRO enjoining Tanjangcos from paying.
c. Manuel wrote LRI and enclosed a manager’s check, but Rosendo didn’t accept a majority of the board.
the payment because of the cases that were filed and there was also an order from b. They also upheld the trial court’s jurisdiction over the complaint and
the SEC restraining them to act on LRI matters. Asuncion’s right to bring an action on LRI’s behalf.
d. Tanjangcos filed a motion for the production of the reso authorizing Asuncion to c. And the fact that the parties never arrived at a perfected compromise
file a complaint on behalf of LRI but Asuncion said that the case filed was a agreement.
derivative suit. 12. Hence, this petition.
e. Arturo moved to dismiss the case based on lack of jurisdiction and litis pendentia,
that the case was an intra-corporate dispute so SEC has jurisdiction. LRI’s ARGUMENTS TANJANGCO’s ARGUMENTS
f. The stockholders of LRI had a meeting (J30 Resolution) wherein they voted A17 Resolution authorizing Arturo to negotiate Sale was perfected when Asuncion failed to match
on whether they would ratify and confirm the sale to the Tanjangcos.13 was illegal for lack of notice to Asuncion. the offer of Tanjangcos within the period given.
i. The minutes stated that after the ratification and confirmation, Fontecha case is not res jusdicata insofar as the Arturo’s mandate was to implement the J27 Board
Asuncion (since she was the Secretary) said that she won’t be validity of A17 meeting and all resolutions passed Reso and his authority was not limited to
preparing the minutes and that she was reminded that if she refuses are concerned. negotiating only.
to do so, it would still be prepared and that if she refsues to sign, it’s In Fontecha, what was ruled as ratified was the LRI did not dispute the validity of the J27 Board
up to her. reso granting gratuity pay to retiring employees. Reso and Asuncion’s failure to match the offer.
Can’t be rightfully claimed that the A17 Tanjangcos are buyers in good faith.
ii. That the sale was duly ratified and confirmed by the stockholders.
Resolution has been ratified since Asuncion
g. Recalling that Teresita died, Juanito was the executor of the estate and he moved immediately objected.
to intervene saying that the case was an intra-corporate contest. A17 Reso merely authorized Arturo to negotiate, Provisions of the DOS are in accordance with the
h. RTC issued an order denying Tanjangcos, Juanito’s and Arturo’s motions. and it didn’t mean that he has authority to J27 Board Reso.
8. Asuncion and Arturo filed a Joint Motion to Dismiss, in essence saying that conclude a sale.
they waive and renounce filing cases against each other because they were Arturo acted beyond the authority granted to him Based on apparent authority, LRI is barred frm
able to settle. when he entered into a sale. questioning the consent to the sale and Arturo’s

12 13
The case mentioned an August 24 Resolution but walang nakalagay saan siya so I’m presuming it has Voting was as follows: Leo yes; Rosendo yes; Juanito yes; Benjamin yes.
something to do with the authority pa rin of Arturo to negotiate in favor of LRI.
 authority to represent. 1. Actions taken in such a meeting may be ratified expressly or impliedly.
Not enough votes to ratify the subject sale since Tanjangcos have the right to rely on the minutes 2. Ratification – principal voluntarily adopts, confirms, and gives sanction to
Juanito isn’t qualified and Leo actually voted which appear to be regular on its face.
against it. some unauthorized act of its agent on its behalf.
There was a perfected compromise agreement The case filed by Asuncion was dismissed on joint a. It can be expressly or impliedly done.
with the Tanjangcos motion. b. Implied Ratification: silence or acquiescence, acts showing approval or
Assuming there was none, Tanjangcos abused A17 Board Reso had not been revoked. adoption of the act, or acceptance and retention of benefits.
their right to back out without reason.
3. In Fontecha, it dealt with an implied ratification, but in this case, it was
Sale had been ratified during the J30 meeting of
the stockholders and LRI’s acceptance of express because there was a board resolution which passed.
payment. 4. The ratification was expressed through the J30 Board Resolution.
As to compromise agreement, they never went 5. Majority of the BOD except for Asuncion already approved of the sale to
beyond the negotiation stage. Tanjangco prior to the meeting.
a. The power to ratify the previous resolutions and actions of the BOD in
ISSUE/s: this case lies not in the BOD but in the stockholders.
5. WON the A17 Resolution gave Arturo the authority to act as LRI’s b. Absurd to require the BOD to ratify their acts.
representative in the sale. – NO, because the general rule is that a corp, 6. With regard to Leo voting agains the ratification of the sale:
through its BOD, should act in the manner and within the formalities a. Only Juanito, Benjamin, and Rosendo signed the minutes.
prescribed by its charter or by the general law. b. But, it wasn’t stated who prepared the minutes since Asuncion, the
6. WON the A17 Resolution was ratified– YES, because of the ratification of Corporate Secretary, refused to record it.
the majority of the directors in the joint stockholders and directors meeintg c. Leo also didn’t explain why he didn’t sign if he really ratified it and he
held on July 30, 1982. wasn’t presented as a witness to testify.
d. It couldn’t even be established who recorded the minutes since Asuncion
RULING: WHEREFORE, the instant petition is DENIED. The Decision of the CA didn’t want to do it.
is hereby AFFIRMED. e. In the case of People v. Dumlao, it was stated that although not all didn’t
sign the minutes, the corp. sec. recorded, prepared, and certified the
RATIO: correctness of the minutes. So without the certification of the corp. sec.,
On whether the A17 Resolution gave Arturo the authority to act as LRI’s it is incumbent upon the stockholders to submit proof that the minutes of
representative in the sale the meeting is accurate and reflective of what transpired during the
1. The SC said that Sec. 53 of the Corporation Code provides that notice of meeting.
regular or special meetings stating the date, time and place of the meeting f. In the absence of Asuncion’s certification, only those who have signed
must be sent to every director or trustee at least 1 day prior to the scheduled could be considered as to have ratified the sale.
meeting, unless otherwise provided by the by-laws. g. But even with the lack of Leo’s signature, Asuncion and Leo are clearly
2. In Fontecha, it was held that a meeting of the BOD is legally infirm if there 14
outvoted.
is failure to comply with the requirements or formalities of the law or the
7. Whatever defect there was on the sale pursuant through the A17 Resolution,
corporation’s by laws and any action taken on such meeting may be
it was cured through the ratification in the J30 Resolution. It is of no moment
challenged as a consequence.
whether Arturo was authorized to merely negotiate or to enter into a contract
3. GR: Corporation, through its BOD, should act in the manner and within the
of sale on behalf of LRI as all his actions in connection to the sale were
formalities, if any, prescribed by its charter or by general law. Directors must
expressly ratified by the stockholders holding 67% of the outstanding capital
act as a body in a meeting called pursuant to the law or the corporation’s by
stock.
laws, otherwise, any action taken therein may be questioned by any objecting
8. In Cua v. Tan, the Court said that by virtue of ratification, the acts of the BOD
director or shareholder.
become the acts of the stockholders themselves, even if those acts were, at
the outset, unauthorized. By ratification, even an unauthorized act of an agent
On whether the A17 Resolutions were ratified by the BOD
becomes the authorized act of the principal. To declare the Board resolution

14
Asuncion 7831; Benjamin 1; Arturo 7831, Juanito for Teresita 7830; Leo 1; Rosendo 5.
null and void will serve no practical use or value, or affect any of the rights
of the parties, because the subsequent stockholders’ resolution approving and
ratifying the said acquisition and the manner in which PRCI shall constitute
the JTH BOD will still remain valid and binding.
 018 CHING v. SUBIC BAY (MERILLES) liable for damages suffered by the corporation and its stockholders for violation
September 10, 2014| Leonardo-De Castro, J. | Derivative Suit of their fiduciary duties

PETITIONER: Nestor Ching and Andrew Wellington

RESPONDENTS: Subic Bay Golf and Country Club, Inc., Hu Ho Hsiu Lien
(Susan Hu), Hu Tsung Chieh (Jack Hu) Hu Tsung Hui, Hu Tsung Tzu, (LOL HU
KAÜ?) and Reynald Suarez

SUMMARY: Ching and Wellington are minority stockholders in Subic Bay

Country Club. The Board of Directors, governed by the HU family, made several
amendments to the Articles of Incorporation without prior notice to its
stockholders. Ching and Wellington filed a complaint for fraudulent acts and
mismanagement against Subic Bay and its Board.

The RTC dismissed the complaint on the ground that it is a derivative suit and
that for such to prosper it must comply with Rule 8 of the Interim Rules:
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.

Ching and Wellington failed to comply with the 2nd and 4th requisites. The CA
affirmed the RTC Decision.

The issue before the SC is whether the complaint filed is a derivative suit and
whether Ching and Wellington have legal standing to file such suit.

The SC affirmed the RTC ruling that the complaint failed to meet the
requirements for a derivative suit. The SC declared that Ching and Wellington do
have standing clarifying that 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.

DOCTRINE: Minority stockholders do not have any statutory right to override

the business judgments of the officers and Boards of Directors. It is settled 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
FACTS:
1. Nestor Ching and Andrew Wellington filed a Complaint with the RTC of
Olongapo City on behalf of the members of Subic Bay Golf and Country
Club, Inc. (SBGCCI) [hereinafter referred to as SUBIC BAY] 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.
2. The complaint alleged that the Subic Bay sold shares to Ching and
Wellington at US$22,000.00 per share, presenting to them the Articles of
Incorporation which contained the following provision:
a. 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.
3. 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
a. 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 course and clubhouse
component thereof was assigned to the Club, the shareholders shall
not have proprietary rights or interests over the properties of the
Club.
4. Ching and Wellington claim that Subic Bay did not disclose to them the
amendment which 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.
5. According to Ching and Wellington, 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.
6. Furthermore, it is 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.
a. Neither did the defendant directors and officers (The HUs) 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.
7. Ching and Wellington also claim that on August 15, 1997, Subic Bay
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.
8. Subic Bay denies all allegations and prays for the dismissal of the Complaint.
It further claimed by way of defense 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.
9. RTC issued an Order dismissing the Complaint. The RTC held that the action
is a derivative suit.
a. 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.
b. The RTC held that China and Wellington failed to exhaust their
remedies within the respondent corporation itself.
c. The RTC further observed that petitioners Ching and Wellington
were not authorized by Subic Bay Golfers and Shareholders Inc. to
file the Complaint, and therefore had no personality to file the same
on behalf ofthe said shareholders’ corporation.
10. On appeal to the CA, the RTC ruling was affirmed.
11. Hence, this petition for review before the SC. Ching and Wellington argue
that the Complaint they filed with the RTC was not a derivative suit.
a. They claim that they filed the suit in their own right as stockholders
against the officers and Board of Directors of the corporation
12. In the alternative, Ching and Wellington 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.
a. In Republic Bank v Cuaderno: 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.
ISSUE/s:
1. WON the Complaint filed is a derivative suit - NO, it failed to meet all the
 requirements for a derivative suit (Check Ratio 7 for requisites)
2. WON Ching and Wellington have standing to file the Complaint against
Subic Bay - YES, minority stockholders, through equity, are given the
remedy of filing a derivative suit in cases of fraud or mismanagement
RULING: 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.
RATIO:
1. On the issue of whether the Complaint is indeed a derivative suit, the SC is
mindful of the doctrine that 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.
2. In Cua Jr v Tan, the Court distinguished a derivative suit an individual suit,
and a representative or class suit:
a. 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.
b. 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.
c. 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.”
i. 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.
3. At this point, it should be taken 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 seek to avail of their appraisal rights.
4. Instead, they ask that Subic Bay and the HUs be enjoined from managing the
corporation and to pay damages for their mismanagement.
5. Ching and Wellington’s 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.
6. 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.
7. However, a derivative suit cannot prosper without first complying with
the legal requisites for its institution.
a. 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;
b. 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;
c. No appraisal rights are available for the act or acts complained of;
and
d. The suit is not a nuisance or harassment suit.
8. The RTC dismissed the Complaint for failure to comply with the second and
fourth requisites above.
9. Upon a careful examination of the Complaint, the SC finds that the same
should not have been dismissed on the ground that it is a nuisance or
harassment suit.
10. With regard, however, to the second requisite, SC finds that Ching and
Wellington 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.
a. The Complaint contained no allegation whatsoever of any effort to
avail of intra-corporate remedies.
b. Even if Ching and Wellington 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.
 019 YU v. YUKAYGUAN (ARMAND)
June 18, 2009 | Chico-Nazario, J. | Derivative Suit
PETITIONER: Anthony S. Yu, Rosita Yum, Jason Yu
RESPONDENTS: Joseph S. Yukayguan et al.
SUMMARY: This is a petition of Anthony Yu et al against his younger half-
brother Joseph Yukayguan et al, who were all shareholders of Winchester Industrial
Supply Inc., a company engaged in hardware and industrial equipment business.
Accusing his older brother’s family of misappropriating funds and assets of the
company, Yukayguan filed a derivative suit. After trial, the Cebu Regional Trial
Court dismissed the case, saying Yukayguan failed to follow and observe the essen-
tials for filing of a derivative suit or action. The ruling was upheld but later re-
versed by the Court of Appeals, prompting Yu to elevate the matter to the SC. The
issue is WoN the derivative suit filed by Yukayguan is meritorious? –No. The mere
allegation of the stockholder that he had made repeated attempts to talk with the di-
rectors and officers is not enough; there should be a reference in the complaint to
ALL other remedies provided under a corporation’s Articles or by-laws. For a de-
rivative suit to prosper, it’s not only necessary that it be brought in the name of the
corporation and that you are a stockholder at the time of transaction and filing of
the suit, it is also necessary that you exhausted administrative remedies.
DOCTRINE: Section 1, Rule 8 of the Interim Rules lays down the following re-
quirements which a stockholder must comply with in filing a derivative suit: A
stockholder or member may bring an action in the name of a corporation or associa-
tion, 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 particu-
larity in the complaint, to exhaust all remedies available under the articles of incor-
poration, 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 com-
plained of; and (4) The suit is not a nuisance or harassment suit.
FACTS:
1. Petitioners and the respondents were all stockholders of Winchester Indus-
trial Supply, Inc. (Winchester, Inc.), a domestic corporation engaged in the
operation of a general hardware and industrial supply and equipment busi-
ness. Petitioner Anthony Yu is the older half brother of respondent Joseph
Yukayguan.
2. Respondents filed against petitioners a verified Complaint forAccounting, In-
spection of Corporate Books and Damages through Embezzlement and Fal-
sification of Corporate Records and Accounts in 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.
3. 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 P100,000.00. Petitioner Anthony paid for the said shares of stock
with respondent Josephs money, thus, making the former a mere trustee of
the shares for the latter.
4. 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. 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.
5. Respondents further averred that although respondent Joseph appeared as the
Secretary and Treasurer in the corporate records of Winchester, Inc., petition-
ers actually controlled and ran the said corporation as if it were their own
family business. Petitioners were accused of 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 receipts 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 Anthonys name.
6. 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 Anthonys name. For the incorporation of Winchester, Inc.,
petitioner Anthony contributed P25,000.00 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 Anthonys personal savings and petitioners An-
thony and Rositas conjugal funds. Winchester, Inc. was being co-managed
by petitioners and respondents, and the attached receipts, allegedly evidenc-
ing petitioners use of corporate funds for personal and family expenses, were
in fact signed and approved by respondent Joseph. They also alleged that the
respondent’s complaint was merely for harassment and that it should be dis-
missed pursuant to Rule 16 of the ROC, for failure to comply with the condi-
tions precedent before its filing. Afterwards, hearing on the application for
appointment of a Management Committee was commenced.
7. In amicable settlement of their dispute, the petitioners and respondents agreed
to a division of the stocks in trade, the 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 Resolution dissolving the corpora-
tion as of said date.
8. RTC dismissed the complaint by the herein respondents, and the counter-
claim of the herein petitioners because there was no showing of bad faith and
malice. The RTC declared that the respondents failed to show that they had
complied with the requisites for filing a derivative suit as set forth in Rule 8
of the Interim Rules of the Procedure Governing Intra-Corporate Con-
troversies:
(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.
9. RTC further adjudged that respondents failed to comply with the requisites
entitling them to the same. Sec 2, Rule 7 of the Interim Rules of the Proce-
dure Governing Intra-Corporate Controversies requires that the com-
plaint for inspection of corporate books or record 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.
10. 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 inspec-
tion of the same was no longer necessary. The RTC similarly denied respond-
ents 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 cor-
rect.
11. CA affirmed the RTC ruling. Respondents filed an MR and was granted by
the CA and the case was remanded to the lower court to take the necessary
proceedings in resolving all corporate concerns towards final settlement.
12. Petitioners filed an MR but was denied, hence the case at bar.
ISSUE/s:
WoN the derivative suit filed by Yukayguan is meritorious – NO. For a derivative
suit to prosper, it’s not only necessary that it be brought in the name of the corpora-
tion and that you are a stockholder at the time of transaction and filing of the suit, it
is also necessary that you exhausted administrative remedies.
RULING: WHEREFORE, premises considered, the Petition for Review under
Rule 45 of the Rules of Court is hereby GRANTED. The latter CA decision was
REVERSED AND SET ASIDE while the earlier CA decision was AFFIRMED.
RATIO:
1. To recapitulate,
2. 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 require-
ments for a derivative suit, nor were they able to prove their case by a pre-
ponderance of evidence. Respondents filed a Motion for Reconsidera-
tion 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 re-
spondents Motion for Reconsideration, the Court of Appeals urged the parties
to again strive to reach an amicable settlement of their dispute, but the par-
ties 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.
3. In accordance with respondents allegation in their Position Paper that the par-
ties subsequently filed with the SEC, and the SEC already approved, a peti-
tion for dissolution of Winchester, Inc., the Court of Appeals remanded the
case to the RTC so that all the corporate concerns between the parties regard-
ing Winchester, Inc. could be resolved towards final settlement.
4. In one stroke, with the use of sweeping language, which utterly lacked sup-
port, the Court of Appeals converted the derivative suit between the par-
ties into liquidation proceedings.
5. 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 individ-
ual stockholder is permitted to institute a derivative suit on behalf of the cor-
poration 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. By virtue of RA 8799, otherwise known as the Se-
curities Regulation Code, jurisdiction over intra-corporate disputes, including
derivative suits, is now vested in the Regional Trial Courts. In contrast, liq-
uidation is a necessary consequence of the dissolution of a corporation. It
is specifically governed by Section 122 of the Corporation Code
6. 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.
7. 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 insti-
tuted by respondents, on their own behalf and on behalf of Winchester,
Inc. against petitioners, to a proceeding for the liquidation of Winches-
ter, Inc.
8. 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.
9. 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 re-
spondents 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 rec-
ord to prove said allegation. Respondents failed to submit copies of such pe-
tition 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 affirm-
ative allegation. Since it was respondents who alleged the voluntary dissolu-
tion of Winchester, Inc., respondents must, therefore, prove it. The respond-
ents failed to do such.
10. Even assuming arguendo that the parties did submit a petition for the disso-
lution 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 as-
sets 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 respondent’s 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. Despite the foregoing, the Court still deems it
appropriate to already look into the merits of respondents MR.
11. 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.
12. Respondents Complaint before the RTC would reveal that the same did not
allege with particularity that respondents exerted all reasonable efforts to ex-
haust all remedies available under the articles of incorporation, by-laws, laws
or rules governing Winchester, Inc. to obtain the relief they desire. 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.There is nothing in the pertinent laws or rules supporting the
distinction between, and the difference in the requirements for, family
corporations visavis other types of corporations, in the institution by a
stockholder of a derivative suit.
13. With respect to the third and fourth requirements, 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 categor-
ical statement that the suit was not a nuisance or a harassment suit.
14. As to respondents second ground in their MR, the Court agrees with the ruling
of the Court of Appeals, that respondent Joseph’s Supplemental Affidavit and
 additional evidence were inadmissible since they were only appended by re-
spondents to their Memorandum before the RTC. Section 8, Rule 2 of the
Interim Rules of Procedure Governing Intra-Corporate Controversies is
crystal clear that: “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”
15. In the instant case, therefore, respondent Josephs Supplemental Affidavit and
the additional documentary evidence, appended by respondents only to their
Memorandum submitted to the RTC, were correctly adjudged as inadmissi-
ble 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 require-
ment that affidavits and documentary evidence should be attached to the ap-
propriate pleading or pre-trial brief of the party, which is particularly recog-
nized under Section 8, Rule 2 of the Interim Rules of Procedure Governing
Intra-Corporate Controversies.
 020 PASCUAL v. OROZCO (MATSUMURA)
March 17, 1911 | Trent, J. | Who May Bring a Derivative Suit
PLAINTIFF AND APPELLANT: Candido Pascual
DEFENDANTS AND APPELEES: Eugenio Del Saz Orozco, et. al.
SUMMARY:Banco Español-Filipino is a banking corporation. One of its stockholders,
Pascual, filed a petition against Orozco, et al, majority of the members of the board of
directors of the bank. Pascual alleges three causes of actions. First, that in 1903-1907,
Orozco, et. al deducted their respective compensation from the gross income instead of
from the net profits of the bank, thereby defrauding the bank and its stockholders of
P20,000 per annum. Second, that Orozco, et al’s predecessors in office during 1899-
1902 committed the same illegality as to their compensation. (The third was not stated
by the case). The lower court issued a demurrer as to the first tow causes of action.
Hence, this case. The issue is W/N the demurrer should be sustained.
The SC ruled that YES it should be sustained for the first cause of action. Pascual be-
come a stockholder in September 1903 when he bought the shares from a vendor. All
who are stockholders and have a right to vote must clearly have a right to vote upon all
the business proceedings of the year, irrespective of the date upon which they may have
become stockholders. They are entitled to all the dividends that have been earned by
their stock during the year which has not been already declared and paid, regardless of
the precise period of the year in which It may have accrued. In the case of this bank,
dividends were declared every 6 months. Since Pascual became a stockholder in Sep-
tember of that year, he would have been entitled to the dividends on his stock for the
second period, or semestre. Therefore, him being a stockholder during all the time for
which he seeks recovery in his first cause of action (except the first six months of the
year 1903) he has the right to file this cause of action.
However, the SC ruled that NO, the demurrer shouldn’t be sustained for the second
cause of action because Pascual was not yet a stockholder at the time of the alleged il-
legal actions of Orozco’s predecessors. A stockholder in a corporation who was not
such at the time of the transactions complained of, or whose shares had not devolved
upon him since by operation of law, can not maintain suits of this character, unless
such transactions continue and are injurious to the stockholder, or affect him especially
and specifically in some other way. In this case, no such injury can be seen to have
been experienced by Pascual. The person who would have had the right to file such ac-
tion would have been his vendor at the time that he was the stockholder. However, he
did not, and such right to file an action does NOT transfer to the vendee.
It must also be noted that in this case, the SC mentioned that back in the day, stock-
holders were NOT allowed to file a case for himself or in behalf of the corporation or
co-stockholders. It was only the board of directors. However, it is now allowed. Where
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 rem-
edy 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.
DOCTRINE: The relators must be stockholders both at time of occurrence of the
events constituting the cause of action and at the time of the filing of the derivative suit.
FACTS:
1. The Banco Español-Filipino is a banking corporation constituted by royal de-
cree of the Crown of Spain in 1854 which has been modified by Act No. 1790
of the Philippine commission.
2. From the time it has been a bank, it was regarded as quasi-public institution.
3. The Captain General of the Philippine Islands was its protector and supreme
head. To him belonged the power to appoint its directors and other managing
officers, remove them from office for cause, fix the rate of interest demand-
able by the bank, resolve all doubts and controversies relating to its manage-
ment, "and finally, exercise, as representative of Her Majesty's Government,
the powers that the laws give him respecting public establishments protected
and privileged.
4. A complaint was filed against Orozco, et. al (Orozco) by Pascual, a stock-
holder of the bank. He filed this case:
a. In his own right as a stockholder of the bank, and
b. For the benefit of the bank, and all the other stockholders thereof.
5. Pascual is suing on behalf of the corporation, which, even though nominally
Orozco, et al, is to all intents and purposes the real plaintiff in this case.
6. Pascual alleges that the only compensation contemplated or provided for the
managing officers of the bank was a certain percent of the net profits resulting
from the bank's operations, as set forth in article 80 of its reformed charter or
statutes, which article is as follows:
"Of the profits or gains which may result from the bank’s operations, after
deducting all the expenses of its administration and the part, if any, which
corresponds to the legal reserve fund, there shall be set apart ten per cent for
the directors and five per cent for the board of government, the distribution
of which shall be made as provided in the regulations. The eighty-five per
cent remaining shall belong integrally to the shareholders pro rata the num-
ber of shares owned by each.”
7. Pascual had 3 causes of action.
8. First cause of action
a. Orozco, et. al (Orozco) constitute majority of the board of directors
of the bank.
b. During the years 1903-1907, Orozco, without the knowledge, con-
sent, or acquiescence of the stockholders, deducted their respective
compensation from the gross income instead of from the net profits
of the bank, thereby defrauding the bank and its stockholders of
P20,000 per annum.
c. Due demand was made to Orozco, but they refused to refund to the
bank the sums misappropriated by them.
d. Since Orozco constitute a majority of the present board of directors
of the bank, they alone can authorize an action against them in the
name of the corporation, and that prior to the filing of the present
suit Pascual exhausted every remedy in the premises within this
banking corporation.
9. Second cause of action
a. Orozco’s immediate predecessors in office in this bank during the
years 1899-1902, committed the same illegality as to their compen-
sation as is charged against Orozcos themselves.
b. Orozco were the only officials or representatives of the bank who
could and should investigate and take action in regard to the sums
of money thus fraudulently appropriated by their predecessors.
c. They were the only persons interested in the bank who knew of the
fraudulent appropriation by their predecessors, and that they wholly
neglected to take any action in the premises or inform the stockhold-
ers thereof.
d. Due demand has been made upon Orozco to reimburse the bank for
this loss, and the bank itself can not bring an action in its own name
against Orozco, for the reason stated in the first cause of action, and
that there remains no remedy within the corporation itself.
10. The third cause of action was not stated by the case because the cause of
action was overruled.
11. The lower court sustained a demurrer as to the first two causes of actions on
the ground that in actions of this character the plaintiff (in this case Pascual)
must aver in his complaint that he was the owner of stock in the corporation
at the time of the occurrences complained of, or else that the stock has since
devolved upon him by operation of law.
12. Hence, this petition.
ISSUE/s:
1. WoN the demurrer should be sustained – YES for the first cause of action
because a stockholder has a right to maintain a suit for and on behalf of the
bank for the years 1903-1907 because he was already a stockholder at that
time. NO for the second cause of action because he was not yet a stockholder
at that time and the alleged illegality done in 1899-1902 its not uinjurious to
him ro affects him especially and specifically in some other way. If any, it
should have been his vendor who should have filed an action set forth in his
second cause of action.
RULING: We are, therefore of the opinion, and so hold, that the judgment appealed
from, sustaining the demurrer to the first cause of action should be, and the same is
hereby reversed
RATIO:
HISTORY
1. Before proceeding to determine the case, the SC stated the brief origin and
history of the right of a stockholder in a. Corporation to maintain a suit of this
kind.
2. A corporation is an artificial being, invisible, intangible, and existing only in
contemplation of law.
3. "The word 'corporation' is but a collective name for the corporators or mem-
bers who compose an incorporated association; and where it is said that a
corporation is itself a person, or being, or creature, this must be understood
in a figurative sense only." (Morawetz on Private Corporations, 2d ed., sec.
1.)
4. "A corporation is 'an artificial person created by the sovereign from natural
persons and in which artificial person the natural persons of which it is com-
posed become merged and nonexistent/ " (Quoted with approval in case of
The People, ex rel. Winchester, etc., respondent, vs. Coleman, et al., commis-
sioners of taxes etc., appellants, 133 N. Y. Appls., 279.)
5. In suits of this character the corporation itself and not the plaintiff stockholder
is the real party in interest. The rights of the individual stockholder are
merged into that of the corporation. It is a universally recognized doctrine
that a stockholder in a corporation has no title legal or equitable to the corpo-
rate property; that both of these are in the corporation itself for the benefit of
all the stockholders.
 6. Text writers illustrate this rule by the familiar example of one person or entity
owning all the stock and still having no greater or essentially different title
than if he owned but one single share.
7. Since, therefore, the stockholder has no title, it is evident that what he does
have, with respect to the corporation and his fellow stockholders, are certain
rights sui generis. These rights are generally enumerated as being
a. first, to have a certificate or other evidence of his status as stock-
holder issued to him;
b. second, to vote at meetings of the corporation; third, to receive his
proportionate share of the profits of the corporation; and
c. third, to participate proportionately in the distribution of the corpo-
rate assets upon the dissolution or winding up.
8. Before, the right of individual stockholders to maintain suits for and on behalf
of the corporation was denied.
9. Now, a single stockholder may institute a case on behalf of himself and other
stockholders and behalf of the corporation because of two leading cases: At-
wol v. Merriwether (UK case) and Dodge v. Woolsey (US case).
10. These two great and leading cases have firmly established the law for Eng-
land and America, that where 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 stock-
holder may institute that suit, suing on behalf of himself and other stockhold-
ers 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.
FIRST CAUSE OF ACTION
1. In this case, Pascual, by reason of the fact that he is a stockholder in the bank
(corporation) has a right to maintain a suit for and on behalf of the bank, but
the extent of such a right must depend upon when, how, and for what purpose
he acquired the shares which he now owns.
1. In the determination of these questions we can not see how, if it be true that
the bank is a quasi-public institution, it can affect in any way the final result.
2. Based on the allegation, Pascual became a stockholder on the November, 13,
1903, while Orozco et al, as members of the board of directors and board of
government, respectively, during each and all the years from 1903-1907, did
fraudulently, and to the great prejudice of the bank and its stockholders, ap-
propriate to their own use from the profits of the bank sums of money
amounting approximately to P20,000 per annum.
3. Article 31 of the bank's charter provides that dividends shall be declared each
semestre.
4. The stockholders meet once a year, in February, to receive and consider the
report of the bank's operations 'contained in the annual balance and memorial
beyond this they have no direct voice in the affairs of the bank, but all who
are then stockholders and have a right to vote must clearly have a right to
vote upon all the business proceedings of the year, irrespective of the date
upon which they may have become stockholders. They are entitled to all the
dividends that have been earned by their stock during the year which has not
been already declared and paid, regardless of the precise period of the year in
which it may have accrued.
5. So, in the general meeting of the stockholders on February 3, 1904, Pascual
had a right to participate.
6. Neither the charter, the by-laws, nor the regulations prescribe when, within
the semestre, the dividends shall be declared; but it may be presumed that
such dividendsare declared at the end of the semestre and that the first semes-
tre begins with the first day of January of each year.
7. On this basis. the owner of stock from whom Pascual purchased his ten shares
might have received the dividends corresponding to these ten shares for the
first semestre (six months) of the year 1903.
8. The dividends were declared twice a year, every six months. The times for
declaring the dividends are specifically and distinctly pointed out—one pe-
riod is separated from the other. Every six months forms a period. So if Pas-
cual was not entitled to the dividends for the first period (from January to
July, 1903), he having become a stockholder in September of that year, he
would have been entitled to the dividends on his stock for the second period,
or semestre.
9. Pascua was, therefore, a stockholder during all the time for which he seeks
recovery in his first cause of action, except the first six months of the year
1903.
10. Then, again, as a matter of fact (which we do not now decide), if Orozco had
taken their salaries for the year 1903 at the close of that year or at any time
after September 13, Pascual would then have had an interest and, on the the-
ory that he was a stockholder, could have questioned the legality of the Oroz-
co' right to take such salary, inasmuch as his dividends would be directly
affected, in that, if the defendants took 10 per cent of the gross instead of the
net earnings of the bank, his dividend on his ten shares for the second period
(from July to December, 1903) would be less.
 11. Conceding that this cause of action is demurrable on the grounds that Pascual character, unless such transactions continue and are injurious to the stock-
was not a stockholder during the first six months of the year 1903, should the holder, or affect him especially and specifically in some other way.
demurrer have been sustained as to the whole cause of action when the time 2. In this case, it is self-evident that Pascual was not, before he acquired in Sep-
for which recovery is sought is clearly divisible? tember, 1903, the shares which he now owns, injured or affected in any man-
12. Section 90 of the Code of Civil Procedure in force in the Philippine Islands ner by the transactions set forth in the second cause of action.
provides, in part, as follows: 3. His vendor could have complained of these transactions, but he did not
choose to do so. The discretion whether to sue to set them aside, or to acqui-
2. * * * If the complaint contains more than one cause of action, each dis- esce in and agree to them, is, in our opinion, incapable of transfer. If the
tinct cause of action must be set forth in a separate paragraph containing all plaintiff himself had been injured by the acts of defendants' predecessors that
the facts constituting the particular cause of action.
is another matter. He ought to take things as he found them when he volun-
13. "Where the matter in a single count is divisible in its nature, the demurrer tarily acquired his ten shares. If he was defrauded in the purchase of these
should be confined to those parts which are defective, as the same general shares he should sue his vendor.
rule which applies to different counts applies also to divisible matter in the 4. If the party himself, who is the victim of fraud or usury, chooses to waive his
same count constituting different causes of action; and where one count, con- remedy and release the party, it does not belong to a subsequent purchaser
taining distinct averments, discloses a good cause of action in one of such under him to recall and assume the remedy for him.
averments, as when several breaches are assigned, some well and others ill,
a general demurrer will be overruled." (6 Ency. Plead. & Prac., 303, 304.)
14. The complaint contains three causes of action, each set forth in a separate
paragraph. The matter in the first cause is, as we have said, divisible in its
nature. The rule above quoted is, therefore, perfectly applicable.
15. The most important question to be decided is, did the lower court err in sus-
taining the demurrer to the second cause of action? If this question be decided
in the negative, then it will not be necessary to determine whether or not the
allegations in this part of the complaint are sufficient to hold the defendants
liable for the acts of their predecessors.
16. It affirmatively appears from the complaint that Pascual was not a stock-
holder during any of the time in question in this second cause of action.

SECOND CAUSE OF ACTION

1. Upon the question whether or not a stockholder can maintain a suit of this
character upon a cause of action pertaining to the corporation when it appears
that he was not a stockholder at the time of the occurrence of the acts com-
plained of and upon which the action is based, the authorities do not agree.
1. So it seems to be settled by the Supreme Court of the United States, as a
matter of substantive law, that a stockholder in a corporation who was not
such at the time of the transactions complained of, or whose shares had not
devolved upon him since by operation of law, can not maintain suits of this
 SECTION 11
001 Republic Planters Bank v. Agana (LOYOLA)
March 3, 1997 | Hermosisima, Jr., J. | HRET jurisdiction
PETITIONER: Republic Planters Bank
RESPONDENT: Hon. Enrique A. Agana, as Presiding Judge, Court of First In-
stance of Rizal, Branch XXVIII, Pasay City, Robes-Francisco Realty & Develop-
ment Corporation and Adalia F. Robes
SUMMARY: RFRGC secured a loan from Republic Planters Bank and the Bank
lent such amount partially in the form of money and partially in the form of stock
certificates. The stock certificates were preferred shares with the following limita-
tions and rights:
1. Of the right to receive a quarterly dividend of 1%, cumulative and par-
ticipating.
2. That such preferred shares may be redeemed, by the system of drawing
lots, at any time after 2 years from the date of issue at the option of the
Corporation.
RFRDC and Robes filed a complaint against the Bank on their alleged rights to col-
lect dividends under the preferred shares in question and to have the bank redeem
the same under the terms and conditions of the stock certificates.
The issues in this case is WoN the Bank can be compelled to redeem the preferred
shares issued to RFRDC and Robes – NO, redemption is clearly the type known as
"optional" and WoN RFRDC and Robes are entitled to the payment of certain rate
of interest on the stocks as a matter of right without necessity of a prior declaration
of dividend – NO, Corporation Code prohibit the issuance of any stock dividend
without the approval of 2/3 of the stockholders.
Except as otherwise provided in the stock certificate, the redemption rests entirely
with the corporation and the stockholder is without right to either compel or refuse
the redemption of its stock. Furthermore, the terms and conditions set forth therein
use the word "may,” denoting discretion. The declaration of dividends is dependent
upon the availability of unrestricted retained earnings. Dividends are payable only
when there are profits earned by the corporation and as a general rule, even if there
are existing profits, the board of directors has the discretion to determine whether
or not dividends are to be declared. Both Sec. 16 of the Corporation Law and Sec.
43 of the present Corporation Code prohibit the issuance of any stock dividend
without the approval of stockholders, representing not less than two-thirds (2/3) of
the outstanding capital stock at a regular or special meeting duly called for the pur-
pose. Furthermore, "interest bearing stocks", on which the corporation agrees abso-
lutely to pay interest before dividends are paid to common stockholders, is legal
only when construed as requiring payment of interest as dividends from net earn-
ings or surplus only.
DOCTRINE: Even for preferred shares issued with a 1% dividend rate, the stock-
holders do not become entitled to the payment thereof as a matter of right without
the necessity of a prior declaration of dividends which can only come from existing
retained earnings
FACTS:
1. In 1961, Robes-Francisco Realty & Development Corporation (RFRDC)
secured a loan from the Republic Planters Bank in the amount of
P120,000.00. As part of the proceeds of the loan, preferred shares of stocks
were issued to RFRDC through its officers then, Adalia F. Robes and one
Carlos F. Robes.
2. In other words, instead of giving the legal tender totaling to the full amount
of the loan, which is P120,000.00, the Bank lent such amount partially in
the form of money and partially in the form of stock certificates numbered
3204 and 3205, each for 400 shares with a par value of P10.00 per share,
or for P4,000.00 each, for a total of P8,000.00.
3. Said certificates of stock bear the following terms and conditions: "The
Preferred Stock shall have the following rights, preferences, qualifications
and limitations, to wit:
a. 1. Of the right to receive a quarterly dividend of 1%, cumulative
and participating. xxx
b. 2. That such preferred shares may be redeemed, by the system of
drawing lots, at any time after 2 years from the date of issue at the
option of the Corporation.
4. On January 1979, RFRDC and Robes proceeded against the Bank and filed
a complaint anchored on their alleged rights to collect dividends under the
preferred shares in question and to have the bank redeem the same under
the terms and conditions of the stock certificates.
5. On 7 September 1979, Judge Agana of the trial court rendered the decision
in favor of RFRDC and Robes; ordering the bank to pay RFRDC and
 Robes the face value of the stock certificates as redemption price, plus 1%
quarterly interest thereon until full payment. The bank filed the petition
for certiorari with the Supreme Court, essentially on pure questions of law.
ISSUE/s:
1. WoN the Bank can be compelled to redeem the preferred shares issued
to RFRDC and Robes – NO, redemption is clearly the type known as
"optional"
2. WoN RFRDC and Robes are entitled to the payment of certain rate of
interest on the stocks as a matter of right without necessity of a prior
declaration of dividend – NO, Corporation Code prohibit the issuance
of any stock dividend without the approval of 2/3 of the stockholders
RULING: WHEREFORE, the Court DISMISSES the consolidated petitions and
AFFIRMS the Order dated July 16, 2009 and Resolution 09-183 dated September
17, 2009 in HRET Case 07-041 of the House of Representatives Electoral Tribunal
as well as its Order dated July 23, 2009 and Resolution 09-178 dated September 10,
2009 in HRET Case 07-040.
RATIO:
First Issue
1. A preferred share of stock is one which entitles the holder thereof to
certain preferences over the holders of common stock. The most com-
mon forms may be classified into two: (1) preferred shares as to as-
sets; and (2) preferred shares as to dividends. The former is a share
which gives the holder thereof preference in the distribution of the as-
sets of the corporation in case of liquidation; the latter is a share the
holder of which is entitled to receive dividends on said share to the
extent agreed upon before any dividends at all are paid to the holders
of common stock.
2. There is no guaranty that the share will receive any dividends. The
declaration of dividends is dependent upon the availability of unre-
stricted retained earnings. Dividends are payable only when there are
profits earned by the corporation and as a general rule, even if there
are existing profits, the board of directors has the discretion to deter-
mine whether or not dividends are to be declared.
3. Preferences granted to preferred stockholders do not give them a lien
upon the property of the corporation nor make them creditors of the
corporation, the right of the former being always subordinate to the
latter.
4. Redeemable shares are shares usually preferred, which by their terms
are redeemable at a fixed date, or at the option of either issuing corpo-
ration, or the stockholder, or both at a certain redemption price.
5. Redemption by the corporation of its stock is, in a sense, a repurchase
of it for cancellation.
6. Corporation Code allows redemption of shares even if there are no
unrestricted retained earnings on the books of the corporation – an ex-
ception to the general rule that the corporation cannot purchase its own
shares except out of current retained earnings. However, while re-
deemable shares may be redeemed regardless of the existence of un-
restricted retained earnings, this is subject to the condition that the cor-
poration has, after such redemption, assets in its books to cover debts
and liabilities inclusive of capital stock. Redemption, therefore, may
not be made where the corporation is insolvent or if such redemp-
tion will cause insolvency or inability of the corporation to meet
its debts as they mature.
7. The bank cannot be compelled to redeem shares. While the stock
certificate does allow redemption, the option to do so was clearly
vested in the bank. The redemption therefore is clearly the type known
as "optional".
8. Thus, except as otherwise provided in the stock certificate, the re-
demption rests entirely with the corporation and the stockholder is
without right to either compel or refuse the redemption of its stock.
Furthermore, the terms and conditions set forth therein use the word
"may,” denoting discretion.
9. Also, the redemption of said shares cannot be allowed because the
Central Bank made a finding that the Bank has been suffering from
chronic reserve deficiency and has prohibited the redemption of pre-
ferred shares. The directive was obviously meant to preserve the status
quo, and to prevent the financial ruin of a banking institution that
would have resulted in adverse repercussions, not only to its deposi-
tors and creditors, but also to the banking industry as a whole. The
directive, in limiting the exercise of a right granted by law to a corpo-
rate entity, may thus be considered as an exercise of police power.
Second Issue
10. RFRDC and Robes are not entitled to the payment of certain rate
of interest on the stocks as a matter of right without necessity of a
prior declaration of dividend
11. The respondent judge stated that since the stock certificate granted the
private respondents the right to receive a quarterly dividend of one Per
Centum (1%), cumulative and participating, it "clearly and unequivo-
cably (sic) indicates that the same are 'interest bearing stocks' or stocks
issued by a corporation under an agreement to pay a certain rate of
interest thereon. As such, private respondents become entitled to the
payment thereof as a matter of right without necessity of a prior dec-
laration of dividend."
12. There is no legal basis for this observation. Both Sec. 16 of the Cor-
poration Law and Sec. 43 of the present Corporation Code prohibit the
issuance of any stock dividend without the approval of stockholders,
representing not less than two-thirds (2/3) of the outstanding capital
stock at a regular or special meeting duly called for the purpose. These
provisions underscore the fact that payment of dividends to a stock-
holder is not a matter of right but a matter of consensus. Furthermore,
"interest bearing stocks", on which the corporation agrees absolutely
to pay interest before dividends are paid to common stockholders, is
legal only when construed as requiring payment of interest as divi-
dends from net earnings or surplus only.
 002 GOVERNMENT VS. PHIL. SUGAR ESTATES (ARIELLE)
April 2, 1918 | Johnson, J. | Hybrid Securities
PETITIONER: The Diocese of Bacolod
RESPONDENTS: COMELEC
SUMMARY: The complaint alleged that Phil. Sugar Estates assumed privi-
leges and franchises not granted when it entered into a contract with Tayabas
Land Company for the purpose of engaging in the business of purchasing lands.
The Government alleged that by this act, the corporation had forfeited its corpo-
rate rights, privileges, powers and franchises, which should entail its dissolution
as a corporation. Phil. Sugar claims that the contract entered into with Tayaya-
bas Land was merely a loan, and not an investment. The issue is WoN the con-
tract between Phil. Sugar and Tayabas Land is a loan.
The Court held that it is NOT a loan. It is difficult to understand how this con-
tract can be considered a loan. There was no date fixed for the return of the
money and there was no fixed return to be made for the use of the money. The
return was dependent solely upon the profits of the business. Whether the rela-
tion is of a co-partnership or one of “cuentas en participation” is of little im-
portance if under such relation Phil. Sugar, as a party to such relation, actually
engaged in the business of “holding and owing” real estate which was unneces-
sary to carry out the purposes for which it was created. The purpose of the inter-
vention of Phil. Sugar in the transactions in question was to enrich itself at the
expense of the taxpayers, who had, by a franchise, permitted Phil. Sugar to exist
and do business as a corporation.
DOCTRINE: This case was a showing of equity securities, not debt securities.
These both are hybrid securities, a different form of arrangement with the cor-
poration (What TVT said in Kat Gaw’s annotated outline).
FACTS:
3. This is an action in the nature of quo warranto brought by the Attor-
ney-General for and on behalf of the Government of the Philippines
for the purpose of having the charter of the Philippine Sugar Estates
Development Co. (LTD.) declared forfeited.
4. The complaint alleged that the Philippine Sugar Estates Estates was a
corporation duly organized under Philippine laws and that for a period
of 18 months before the filing of the complaint, it had continuously
offended the laws of the Philippines and misused its corporate author-
ity, franchises, and privileges.
5. It also allegedly assumed privileges and franchises not granted; that it
had engaged in the business of buying and selling real estate and that
it entered into a contract with the Tayabas Land Company for the pur-
pose of engaging in the business of purchasing lands along the right
of way of Manila Railroad Company with a view of reselling the same
to the Manila Railroad Company for profit.
6. The Government alleged that by these acts and omissions, the corpo-
ration had forfeited its corporate rights, privileges, powers, and fran-
chises, dissolving it as a corporation.
7. Phil. Sugar Estates demurred to the complaint on the ground that it
failed to state a cause of action. The court overruled the demurrer. Phil.
Sugar answered the complaint and admitted the first paragraph and
denied generally the allegations of the second and third paragraphs
with the exception that it admitted having entered into the contract set
out in par. 3.
8. Phil. Sugar also claimed that the Tayabas Land Company was an or-
dinary partnership and not a corporation. Phil. Sugar prayed that the
complaint be dismissed.
9. The parties then filed a stipulation of facts:
a. It was agreed that the corporation was duly organized;
b. that Tayabas Land Company was a partnership;
c. that a contract was entered into between the corporation and Tayabas;
d. that the money received was devoted to the purchase of the real estate in
Tayabas
e. that the purpose of these purchases was for resale to Manila Railroad or any
other person
10. The court rendered judgment ordering Phil. Sugar to abstain in the fu-
ture from engaging in the business of buying and selling lands.
ISSUE/s:
1. WoN the contract between Phil. Sugar and Tayabas Land is
merely a loan or an investment – It is an INVESTMENT, because
the alleged loan had no fixed date for the return of the money
loaned, the return was dependent solely upon the profits of the
business.
RULING: It is hereby ordered and decreed that the franchise heretofore granted to
the defendant by which it was permitted to exist and do business as a corporation in
the Philippine Islands, be withdrawn and annulled and that it be disallowed to do and
to continue doing business in the Philippine Islands, unless it shall within a period of
six months after final decision, liquidate, dissolve and separate absolutely in every
respect and in all of its relations, complained of in the petition, with The Tayabas
Land Company, without any findings to costs.

RATIO:
Disclaimer: Hybrid security was not mentioned in the case. No doctrine provided in
the outline as well.
1. Phil. Sugar by its charter was authorized to buy shares of the Com-
pañia de Navegacion and in this manner or otherwise, to engage in any
mercantile or industrial enterprise.
2. It was also allowed to place funds of the corporation in hypothecary
or pignoritive loans, in public securities of the US, in stocks or shares
issued by firms, corporations, or companies legally organized and op-
erated. It may also contract and guarantee all kinds of obligations.
3. The abovementioned powers are limited by Sec. 75 of the Act of Con-
gress and by Sec. 13 Act of 1459, the latter being a reproduction of the
former, which is as follows:
a. No corporation shall be authorized to conduct the business of buying and
selling real estate or be permitted to hold or own real estate except as may
be reasonably necessary to carry out the puruposes for which it is created.
Corporations, however, may loan funds upon real estate, security, and pur-
chase real estate when necessary for the collection of loans.
4. The provisions of the contract between Phil. Sugar and Tayabas Land
provide that:
a. that Phil. Sugar shall take part in the business of Tayabas Land and bring
in the sum of P400,000, placed at the disposal of the latter;
b. that Phil. Sugar shall have a share of 25% of the net profits of Tayabas
Land;
c. necessary expenses will be paid by them both (except for loss, which will
be shouldered by Tayabas);
d. all lands bought which the Phil. Sugar brings to Tayabas shall be held as
security for such credit;
e. that when Tayabas is to sell lands lower than P0.50 per meter, it shall first
obtain the consent of Phil. Sugar
5. The foregoing contract was made in pursuance of a meeting of the
board of directors of Phil. Sugar. The minutes set out the authorization
which provided that the board resolved by a majority vote to grant the
Tayabas Land the credit applied for. It also opened a credit with secu-
rity and in co-partnership with Tayabas Land with security (all lands
bought) and in co-partnership because the loan applied for shares in
the gross profit to the extent of 25%.
6. There were also conditions like the share of 25% in profits, reimburse-
ment of all losses which Phil. Sugar may suffer, etc.
7. The money was turned over to Tayabas and land was purchased by it.
It must be presumed that the relation between the corporation and Tay-
abas was governed by the contract mentioned above.
8. Phil. Sugar contends that the contract was within its powers and that
the contract was in reality merely a loan. It is argued that the board of
directors did not authorize Suarez (this name just appeared out of no-
where) to enter into a partnership agreement, but only to negotiate a
loan and 25% of the profits in lieu of the interest.
9. It is difficult to understand how this contract can be considered a
loan. There was no date fixed for the return of the money and
there was no fixed return to be made for the use of the money. The
return was dependent solely upon the profits of the business.
10. Phil. Sugar was not to receive anything for the use of the sum until
after the capital had been fully repaid, which is not consistent with the
idea of a loan. It is not impossible to provide that the capital be repaid
first but the usual method is to pay the interest first.
11. In this case, after the capital is returned, the land remaining, if any, is
profit. It can be nothing else and belongs to both parties in the propor-
tion of 25 to 75. Phil. Sugar has at least an equitable title to 25% of all
the remaining land.
12. If these lands were to be registered, Phil. Sugar could demand that its
interest be noted to be registered. This being so, can it be denied that
Phil. Sugar is, at least indirectly, conducting the business of buying
and selling real estate? When an individual or a corporation becomes
the owner of land by purchase he or it must be a purchases.
13. The lower court found that the relation between Phil. Sugar and Tay-
abas Land was that or “cuentas en participation.” Whether the relation
is of a co-partnership or one of “cuentas en participation” is of little
importance if under such relation Phil. Sugar, as a party to such rela-
tion, actually engaged in the business of “holding and owing” real es-
tate which was unnecessary to carry out the purposes for which it was
created.
14. The Government appealed upon the ground that the lower court erred
in not declaring that Phil. Sugar forfeited its charter. Sec. 198 of Act
No. 190 provides that an action may be maintained by the Government
against the corporation when:
a. it has offended against the provision for its creation;
b. when it has forfeited its privileges and franchise;
c. when it has misused its franchise.
15. Sec. 212 of Act No. 190 provides that when in such action, it is
found that the corporation has forfeited its corporate rights and
franchise, judgment shall be entered that it be ousted and dis-
solved.
16. While it is true that the courts are given a wide discretion in ordering
the dissolution of corporations for violations of its franchises, never-
theless, when such abuses and violations constitute or threaten a sub-
stantial injury to the public, then the power of the courts should be
exercised for the protection of the people.
17. The purpose of the intervention of Phil. Sugar in the transactions in
question was to enrich itself at the expense of the taxpayers, who had,
by a franchise, permitted Phil. Sugar to exist and do business as a cor-
poration.
 003 BAYLA V. SILANG TRAFFIC CO. INC. (HIRANG)
MAY 1, 1942|J. Ozaeta | No “Sale of Unissued Shares”
PETITIONER: SOFRONIO T. BAYLA, ET AL
RESPONDENTS: SILANG TRAFFIC CO., INC
SUMMARY: Petitioners bought shares from Silang Traffic Co. Inc. under the
“AGREEMENT FOR INSTALLMENT SALE OF SHARES IN THE "SILANG
TRAFFIC COMPANY, INC” (See fact 1 for terms – IMPORTANT). However,
they defaulted in their payment and as per the terms of the agreement, the shares
shall be reverted back to Silang and the money paid by the petitioners shall be for-
feited in favor of Silang. However, the board issued a resolution on August 1,
1937, which provided that the shares be reverted back to the corporation and
that the money paid by the petitioners are to be refunded back to them. How-
ever, despite the resolution, the petitioners weren’t able to get their money back
thus they filed a petition for the recovery of the money paid by them. Silang con-
tends that first, when the petitioners defaulted in July 31, 1937 payment, the
shares ware automatically forfeited in favor of Silang including the payments
made by the petitioners. Second, the resolution of August 1, 1937, was revoked
and cancelled by a subsequent resolution of the board of directors of the de-
fendant corporation dated August 22, 1937. CFI ruled in favor of Silang stating
that resolution of August 1, 1937 void because a corporation has no legal capacity
to release an original subscriber to its capital stock from the obligation to pay for
shares; and any agreement to this effect is invalid. (Please see fact 6) CA affirmed
the decision stating that the said agreement is a contract of subscription to the
capital stock of Silang, thus, Silang has no power to release the subscriber
from its obligation to pay for the shares. The issue in this case is WoN the agree-
ment is a subscription agreement. The court held in the negative. SC said that the
agreement was not a subscription agreement but is a contract of sale (see ratio 1 for
reasons). The court held that a subscription to stock in an existing corporation is,
as between the subscriber and the corporation, simply a contract of purchase
and sale. The rules governing subscriptions and sales of shares are different. For
instance, the provisions of our Corporation Law regarding calls for unpaid
subscription and assessment of stock do not apply to a purchase of stock. Like-
wise, the rule that corporation has no legal capacity to release an original sub-
scriber to its capital stock from the obligation to pay for his shares, is inappli-
cable to a contract of purchase of shares
DOCTRINE: Whether a particular contract is a subscription, or a sale of stock is a
matter of construction and depends upon its terms and the intention of the parties.
"A subscription, properly speaking, is the mutual agreement of the subscrib-
ers to take and pay for the stock of a corporation, while a purchase is an inde-
pendent agreement between the individual and the corporation to buy shares
of stock from it at stipulated price
FACTS:
1. The petitioners here instituted an action to recover certain sums of
money which they had paid severally to the corporation on account of
shares of stock they individually agreed to take and pay for under the
“AGREEMENT FOR INSTALLMENT SALE OF SHARES IN THE
"SILANG TRAFFIC COMPANY, INC”
a. TERMS:
i. Remainder of the amount due shall be paid in install-
ments, payable within the first month of each and
every quarter thereafter, commencing on the 1st day
of July 1935. Interest of 6% per annum of deferred
payments.
ii. In case of default, then the said shares are to revert
to the seller and the payments already made are to
be forfeited in favor of said seller, and the latter
may then take possession, without resorting to
court proceedings
iii. The said seller upon receiving full payment, at the
time and manner hereinbefore specified, agrees to ex-
ecute and deliver to said subscriber, or to his heirs and
assigns, the certificate of title of said shares, free and
clear of all encumbrances
6.
2. The petitioners agreed to purchase the following number of shares
and, up to April 30, 1937, had paid the following sums on account
thereof:
a. Sofronio Bayla – 8 shares – P360
b. Venancio Toledo – 8 shares – P375
c. Josefa Naval – 15 shares – P675
d. Paz Toledo – 15 shares – P675
3. Petitioners' action for the recovery of the sums above mentioned is
based on a resolution (This resolution was made by the board to ter-
minate the then pending civil case involving the validity of the sale of
the shares in question among others) by the board of directors of
Silang on August 1, 1937. The resolution provided that: (THE
 WHOLE RESOLUTION WAS IN SPANISH, I JUST USED
GOOGLE TRANSLATE FOR THIS)
a. The shares be reverted back to the corporation and that
the money paid by the petitioners are to be refunded back
to them.
4. However, despite the resolution, the petitioners did not get the re-
fund of the sums of money they paid and as such they instituted
this action.
5. Silang’s defense are as follows:
a. That the above-quoted resolution is not applicable to the pe-
titioners Sofronio T. Bayla, Josefa Naval, and Paz Toledo be-
cause on the date thereof "their subscribed shares of stock
had already automatically reverted to the defendant, and
the installments paid by them had already been forfeited.
(When the petitioners defaulted in July 31, 1937 payment,
the shares ware automatically forfeited in favor of Silang
including the payments made by the petitioners)
b. That said resolution of August 1, 1937, was revoked and can-
celled by a subsequent resolution of the board of directors
of the defendant corporation dated August 22, 1937.
6. The CFI ruled in favor of Silang Traffic Corporation stating that the
resolution of August 1, 1937 void because a corporation has no legal
capacity to release an original subscriber to its capital stock from the
obligation to pay for shares; and any agreement to this effect is invalid
(Basically since the corporation has no power to release the sub-
scriber from its obligation to pay for the shares, then the corpora-
tion has no obligation to return petitioner’s money).
7. CA affirmed the decision of the CFI stating that the said agreement
is a contract of subscription to the capital stock of Silang. CA also
ruled that petitioners should pay for the arrears in their subscription.
Hence, this petition
ISSUE/s: WoN the agreement is a contract of subscription – NO, SC held that the
contract was of a sale and not a subscription agreement therefore the rule that a
corporation has no legal capacity to release an original subscriber to its capital stock
from the obligation to pay for shares; and any agreement to this effect is invalid does
not apply.
WoN the failure of the petitioners to pay the installments automatically give rise to
the forfeiture of the amount paid – NO. SC held that the intention of the parties was
not to have an automatic forfeiture of the payment made because of the insertion of
the interest rates. Moreover, the agreement did not provide for a forfeiture with-
out demand from Silang.
RULING: Wherefore, the judgment of the court of appeals is hereby reversed and
another judgment will be entered against the defendant Silang Traffic Co., Inc., or-
dering it to pay to the plaintiffs Sofronio T. Bayla, Venancio Toledo, Josefa Naval,
and Paz Toledo, the sums of P360, P375, P675, and P675, respectively, with legal in-
terest on each of said sums from May 28, 1938, the date of the filing of the com-
plaint, until the date of payment, and with costs in the three instances.
RATIO:
1st Issue:
1. Reasons why it is a contract of sale:
a. Agreement is entitled “Agreement for Installment Sale of Shares in
the Silang Traffic Company, Inc”
b. While the petitioners were designated as “subscriber," the Silang is
described as "seller”
c. The agreement was entered into on March 30, 1935, long after the
incorporation and organization of the corporation, which took place
in 1927
d. The price of the stock was payable in quarterly installments spread
over a period of five years
2. Whether a particular contract is a subscription, or a sale of stock is a matter
of construction and depends upon its terms and the intention of the parties
3. The Court held in a previous case (Salmon, Dexter & Co. vs Unson)
held that a subscription to stock in an existing corporation is, as be-
tween the subscriber and the corporation, simply a contract of
purchase and sale.
4. It seems clear from the terms of the contracts in question that they are con-
tracts of sale and not of subscription. The lower courts erred in overlooking
the distinction between subscription and purchase "A subscription,
properly speaking, is the mutual agreement of the subscribers to take
and pay for the stock of a corporation, while a purchase is an independ-
ent agreement between the individual and the corporation to buy shares
of stock from it at stipulated price
5. The rules governing subscriptions and sales of shares are different. For
instance, the provisions of our Corporation Law regarding calls
for unpaid subscription and assessment of stock do not apply to a
purchase of stock. Likewise, the rule that corporation has no legal
capacity to release an original subscriber to its capital stock from
 the obligation to pay for his shares, is inapplicable to a contract of
purchase of shares.
6. Since the contract is of sale, Court sees no legal impediment to its re-
scission by agreement of the parties.
2nd Issue:
1. The provision regarding interest on deferred payments would not have
been inserted if it had been the intention of the parties to provide for
automatic forfeiture and cancelation of the contract.
2. the contract did not expressly provide that the failure of the purchaser
to pay any installment would give rise to forfeiture and cancelation
without the necessity of any demand from the seller; and under article
1100 of the Civil Code persons obliged to deliver or do something are
not in default until the moment the creditor demands of them judicially
or extrajudicially the fulfillment of their obligation, unless (1) the ob-
ligation or the law expressly provides that demand shall not be neces-
sary in order that default may arise, (2) by reason of the nature and
circumstances of the obligation it shall appear that the designation of
the time at which that thing was to be delivered or the service rendered
was the principal inducement to the creation of the obligation.
FACTS:
004 Lingayen Gulf Electric Power Company v. Baltazar (Hilario)
June 30, 1953 | Montemayor, J. | Unpaid Subcription
PETITIONER: Lingayen Gulf Electric Power Company
RESPONDENTS: Irineo Baltazar
SUMMARY: Irineo Baltazar subscribed for 600 shares and paid the Lingayen
Guld Electric Power Company the sum of P15,000 and continued paying, leaving
a balance of P18,500 unpaid. In a stockholder’s meeting, majority of stockholders
came up with a resolution, providing for a payment schedule of unpaid subscribed
capital stock (they set deadlines for 50% unpaid stocks and the other 50% unpaid
stocks), and after the expiry of the grace period all subscribed stocks remaining
unpaid would revert to the corporation. Baltazar offered to withdraw completely
from the corporation by selling out to the corporation all his shares of stock in the
total amount of P23,000. Lingayen Gulf Electric did not heed this offer and also
declared the resolution of the stockholders in their meeting null and void. Instead,
it demanded payment from Baltazar on account of his unpaid capital stock through
letters. Baltazar claims that the corporation’s demand is premature, and that he
was released from liability because of the stockholder’s resolution.
SC ruled that the resolution is invalid and ineffectual because of a lack of
unanimous vote. A contract of subscription is, at least in the sense which creates
as estoppel, a contract among the several subscribers.
DOCTRINE: A valid and binding subscription for shares cannot be cancelled so
as to release the subscriber from liability thereon without the consent of all the
stockholders.
8. Lingayen Gulf Electric Power Company is a domestic corporation with an
authorized capital stock of P300,000 divided into 3,000 shares with a par
value of P100 per share.
9. Irineo Baltazar subscribed for 600 shares and paid the corporation the sum of
P15,000 and continued paying, leaving a balance of P18,500 unpaid. This
amount Lingayen now claims in this action.
10. In a stockholder’s meeting, majority of stockholders came up with a
resolution, providing for a payment schedule of unpaid subscribed capital
stock (they set deadlines for 50% unpaid stocks and the other 50% unpaid
stocks), and after the expiry of the grace period all subscribed stocks
remaining unpaid would revert to the corporation.
11. Baltazar offered to withdraw completely from the corporation by selling out
to the corporation all his shares of stock in the total amount of P23,000.
12. Lingayen Gulf Electric did not heed this offer and also declared the resolution
of the stockholders in their meeting null and void. Instead, it demanded
payment from Baltazar on account of his unpaid capital stock through letters.
13. Baltazar claims that the corporation’s demand is premature, and that he was
 released from liability because of the stockholder’s resolution.

ISSUE/s:
7. WoN the stockholder’s resolution released him from liability– NO, because
in order to effect the release, there must be unanimous consent of the
stockholders of the corporation.

RULING: Judgment in question is affirmed.

RATIO:
21. General rule is that a valid and binding subscription for stock of a
corporation cannot be cancelled so as to release the subscriber from
liability thereon without the consent of all the stockholders or
subscribers. Furthermore, a subscription cannot be cancelled by the
company, even under a secret or collateral agreement for cancellation made
with the subscriber at the time of the subscription, as against persons who
subsequently subscribed or purchased without notice of such agreement.
a. Exception to general rule (so u can cancel subscription for stock
without consent of al stockholders): In particular circumstances, as
where it is given pursuant to a bona fide compromise, or to set off
a debt due from the corporation, a release, supported by
consideration, will be effectual as against dissenting stockholders
and subsequent and existing creditors. A release which might
originally have been held invalid may be sustained after a
considerable lapse of time.
22. Resolution of stockholders in this case is ineffectual because of a lack of a
unanimous vote.
23. A contract of subscription is, at least in the sense which creates as
estoppel, a contract among the several subscribers.
 005 Tan v Sycip (Gustilo)
August 17, 2006 | Panganiban, CJ. | Unpaid subscription
PETITIONER: Paul Lee Tan, et al
RESPONDENTS: Paul Sycip & Merritto Lim
SUMMARY: Grace Christian High School (GCHS) is a nonstock, non-profit
educational corporation with 15 regular members, who also constitute the board
of trustees. During the annual members meeting, there were only 11
living member-trustees, as 4 had already died. Out of the 11, 7 attended the
meeting through their respective proxies. The meeting was convened and chaired
by Atty. Sabino Padilla Jr. over the objection of Atty. Antonio Pacis, who argued
that there was no quorum. When the controversy reached the Securities and
Exchange Commission (SEC), petitioners maintained that the deceased member-
trustees should not be counted in the computation of the quorum because, upon
their death, members automatically lost all their rights (including the right to vote)
and interests in the corporation. SEC Hearing Officer Malthie G. Militar declared
the April 6, 1998 meeting null and void for lack of quorum. She held that the basis
for determining the quorum in a meeting of members should be their number as
specified in the articles of incorporation, not simply the number
of living members. She explained that the qualifying phrase entitled to vote in
Section 24 of the Corporation Code, which provided the basis for determining a
quorum for the election of directors or trustees, should be read together with
Section 89. The CA dismissed the appeal of petitioners, because the Verification
and Certification of Non-Forum Shopping had been signed only by Atty. Sabino
Padilla Jr. No Special Power of Attorney had been attached to show his authority
to sign for the rest of the petitioners.
The issue is WoN in non-stock corporations, dead members should still be counted
in determination of quorum for purpose of conducting the Annual Members
Meeting?- No. The Court held membership in and all rights arising from a
nonstock corporation are personal and non-transferable, unless the articles of
incorporation or the bylaws of the corporation provide otherwise. In other words,
the determination of whether or not dead members are entitled to exercise their
voting rights (through their executor or administrator), depends on those articles
of incorporation or bylaws. Thus, under the By-Laws of GCHS, membership in
the corporation shall, among others, be terminated by the death of the member.
Section 91 of the Corporation Code further provides that termination extinguishes
all the rights of a member of the corporation, unless otherwise provided in the
articles of incorporation or the bylaws. Applying Section 91 to the present case,
we hold that dead members who are dropped from the membership roster in the
manner and for the cause provided for in the By-Laws of GCHS are not to be
counted in determining the requisite vote in corporate matters or the requisite
quorum for the annual members meeting. With 11 remaining members, the
quorum in the present case should be 6. Therefore, there being a quorum, the
annual members meeting, conducted with 6 members present, was valid.
DOCTRINE: Based on syllabus: A valid & binding subscription for shares cannot
be cancelled so as to release the subscriber from liability thereon without the
consent of all the stockholders.
FACTS:
14. Grace Christian High School (GCHS) is a nonstock, non-profit educational
corporation with 15 regular members, who also constitute the board of
trustees. During the annual members meeting, there were only 11
living member-trustees, as 4 had already died. Out of the 11, 7 attended the
meeting through their respective proxies. The meeting was convened and
chaired by Atty. Sabino Padilla Jr. over the objection of Atty. Antonio Pacis,
who argued that there was no quorum. In the meeting, Petitioners Ernesto
Tanchi, Edwin Ngo, Virginia Khoo, and Judith Tan were voted to replace the
four deceased member-trustees.
15. When the controversy reached the Securities and Exchange Commission
(SEC), petitioners maintained that the deceased member-trustees should not
be counted in the computation of the quorum because, upon their death,
members automatically lost all their rights (including the right to vote) and
interests in the corporation.
16. SEC Hearing Officer Malthie G. Militar declared the April 6, 1998 meeting
null and void for lack of quorum. She held that the basis for determining the
quorum in a meeting of members should be their number as specified in the
articles of incorporation, not simply the number of living members. She
explained that the qualifying phrase entitled to vote in Section 24 of the
Corporation Code, which provided the basis for determining a quorum for the
election of directors or trustees, should be read together with Section 89.
17. The hearing officer also opined that Article 3 (2) of the By-Laws of GCHS,
insofar as it prescribed the mode of filling vacancies in the board of trustees,
must be interpreted in conjunction with Section 29 of the Corporation Code.
The SEC en banc denied the appeal of petitioners and affirmed the Decision
of the hearing officer in toto.
18. The CA dismissed the appeal of petitioners, because the Verification and
Certification of Non-Forum Shopping had been signed only by Atty. Sabino
Padilla Jr. No Special Power of Attorney had been attached to show his
authority to sign for the rest of the petitioners.
ISSUE/s:
8. WoN in non-stock corporations, dead members should still be counted in
determination of quorum for purpose of conducting the Annual Members
Meeting?- No because under the By-Laws of GCHS, membership in the
corporation shall, among others, be terminated by the death of the
 member. Section 91 of the Corporation Code further provides that
termination extinguishes all the rights of a member of the corporation,
unless otherwise provided in the articles of incorporation or the bylaws
9. WoN the CA erred in denying the petition below, on the basis of a defective
verification & certification?- Yes because there was no intention to
circumvent the need for proper verification and certification, which are
aimed at assuring the truthfulness and correctness of the allegations in
the Petition for Review and at discouraging forum shopping
RULING: WHEREFORE, the petition is partly granted. The assailed Resolutions of
the CA are hereby reversed & set aside. The remaining members of the Board of
Trustees of GCHS may convene & fill up the vacancies in the board, in accordance
with this Decision.
RATIO:
Procedural Issue: Verification & Certification of Non-Forum Shopping
24. The Petition before the CA was initially flawed, because the Verification and
Certification of Non-Forum Shopping were signed by only one, not
by all, of the petitioners; further, it failed to show proof that the signatory was
authorized to sign on behalf of all of them.Subsequently, however, petitioners
submitted a Special Power of Attorney, attesting that Atty. Padilla was
authorized to file the action on their behalf.
25. In the interest of substantial justice, this initial procedural lapse may be
excused. There appears to be no intention to circumvent the need for proper
verification and certification, which are aimed at assuring the truthfulness and
correctness of the allegations in the Petition for Review and at discouraging
forum shopping.
26. More important, the substantial merits of petitioners case and the purely legal
question involved in the Petition should be considered special circumstances
or compelling reasons that justify an exception to the strict requirements of
the verification and the certification of non-forum shopping.
Basis for Quorum
27. Under the Corporation Code, stockholders or members periodically elect the
board of directors or trustees, who are charged with the management of the
corporation. The board, in turn, periodically elects officers to carry out
management functions on a day-to-day basis. As owners, though, the
stockholders or members have residual powers over fundamental and major
corporate changes.
28. In other words, acts of management pertain to the board; and those of
ownership, to the stockholders or members. In the latter case, the board
cannot act alone, but must seek approval of the stockholders or members. One
of the most important rights of a qualified shareholder or member is the
right to vote, either personally or by proxy, for the directors or trustees who
are to manage the corporate affairs. The right to choose the persons who will
direct, manage and operate the corporation is significant, because it is the
main way in which a stockholder can have a voice in the management of
corporate affairs, or in which a member in a nonstock corporation can have a
say on how the purposes and goals of the corporation may be achieved.
29. Section 52 of the Corporation Code states: Section 52. Quorum in Meetings.
Unless otherwise provided for in this Code or in the by-laws, a quorum shall
consist of the stockholders representing a majority of the outstanding capital
stock or a majority of the members in the case of non-stock corporations.
The right to vote in Stock Corporations
30. The right to vote is inherent in and incidental to the ownership of corporate
stocks. It is settled that unissued stocks may not be voted or considered in
determining whether a quorum is present in a stockholders meeting, or
whether a requisite proportion of the stock of the corporation is voted to adopt
a certain measure or act. Only stock actually issued and outstanding may be
voted.
31. Neither the stockholders nor the corporation can vote or represent shares that
have never passed to the ownership of stockholders; or, having so passed,
have again been purchased by the corporation. These shares are not to be
taken into consideration in determining majorities. When the law speaks of
a
given proportion of the stock, it must be construed to mean the shares that
have passed from the corporation, and that may be voted.
32. Section 6 of the Corporation Code, in part, provides: Section 6. Classification
of shares. The shares of stock of stock corporations may be divided into
classes or series of shares, or both, any of which classes or series of shares
may have such rights, privileges or restrictions as may be stated in the articles
of incorporation:Provided, That no share may be deprived of voting rights
except those classified and issued as preferred or redeemable shares, unless
otherwise provided in this Code:Provided, further, that there shall always be
a class or series of shares which have complete voting rights……Except as
provided in the immediately preceding paragraph, the vote necessary to
approve a particular corporate act as provided in this Code shall be deemed
to refer only to stocks with voting rights.
33. Taken in conjunction with Section 137, the last paragraph of Section 6 shows
that the intention of the lawmakers was to base the quorum mentioned in
Section 52 on the number of outstanding voting stocks.
The Right to Vote in Nonstock Corporations
34. In nonstock corporations, the voting rights attach to membership.
Members vote as persons, in accordance with the law and the bylaws of
the corporation. Each member shall be entitled to one vote unless so
 limited, broadened, or denied in the articles of incorporation or bylaws. 41. Undoubtedly, trustees may fill vacancies in the board, provided that those
35. Section 25 of the Code specifically provides that a majority of the directors remaining still constitute a quorum. The phrase may be filled in Section 29
or trustees, as fixed in the articles of incorporation, shall constitute a shows that the filling of vacancies in the board by the remaining directors or
quorum for the transaction of corporate business (unless the articles of trustees constituting a quorum is merely permissive, not mandatory.
incorporation or the bylaws provide for a greater majority). If the Corporations, therefore, may choose how vacancies in their respective boards
intention of the lawmakers was to base the quorum in the meetings of may be filled up-either by the remaining directors constituting a quorum, or
stockholders or members on their absolute number as fixed in the articles of by the stockholders or members in a regular or special meeting called for the
incorporation, it would have expressly specified so. purpose.
42. The By-Laws of GCHS prescribed the specific mode of filling up existing
Effect of the death of a Member or Stockholder vacancies in its board of directors; that is, by a majority vote of the remaining
36. In stock corporations, shareholders may generally transfer their shares. Thus, members of the board.
on the death of a shareholder, the executor or administrator duly appointed 43. While a majority of the remaining corporate members were present, however,
by the Court is vested with the legal title to the stock and entitled to vote the election of the four trustees cannot be legally upheld for the obvious
it. Until a settlement and division of the estate is effected, the stocks of the reason that it was held in an annual meeting of the members, not of the board
decedent are held by the administrator or executor. of trustees. We are not unmindful of the fact that the members of GCHS
37. On the other hand, membership in and all rights arising from a nonstock themselves also constitute the trustees, but we cannot ignore the GCHS bylaw
corporation are personal and non-transferable, unless the articles of provision, which specifically prescribes that vacancies in the board must be
incorporation or the bylaws of the corporation provide otherwise. In filled up by the remaining trustees. In other words, these remaining member-
other words, the determination of whether or not dead members are trustees must sit as a board in order to validly elect the new ones.
entitled to exercise their voting rights (through their executor or 44. Indeed, there is a well-defined distinction between a corporate act to be done
administrator), depends on those articles of incorporation or bylaws. by the board and that by the constituent members of the corporation. The
38. Under the By-Laws of GCHS, membership in the corporation shall, board of trustees must act, not individually or separately, but as a body in a
among others, be terminated by the death of the member. Section 91 of lawful meeting. On the other hand, in their annual meeting, the members may
the Corporation Code further provides that termination extinguishes all be represented by their respective proxies, as in the contested annual
the rights of a member of the corporation, unless otherwise provided in members meeting of GCHS.
the articles of incorporation or the bylaws.
39. Applying Section 91 to the present case, we hold that dead members who
are dropped from the membership roster in the manner and for the
cause provided for in the By-Laws of GCHS are not to be counted in
determining the requisite vote in corporate matters or the requisite
quorum for the annual members meeting. With 11 remaining members,
the quorum in the present case should be 6. Therefore, there being a
quorum, the annual members meeting, conducted with 6 members
present, was valid.
Vacancy in the Board of Trustees
40. As regards the filling of vacancies in the board of trustees, Section 29 of the
Corporation Code provides: SECTION 29. Vacancies in the office of director
or trustee. -- Any vacancy occurring in the board of directors or trustees other
than by removal by the stockholders or members or by expiration of term,
may be filled by the vote of at least a majority of the remaining directors or
trustees, if still constituting a quorum; otherwise, said vacancies must be
filled by the stockholders in a regular or special meeting called for that
purpose. A director or trustee so elected to fill a vacancy shall be elected only
for the unexpired term of his predecessor in office.
 06 Tan vs. SEC (Gueco)
March 3, 1992 | Paras, J. | Stocks
PETITIONER: Alfonso S. Tan
FACTS:
RESPONDENTS: SEC, Visayan Educational Supply Corp, Tan Su Ching, Al-
fredo Uy, Angel Tan, and Patricia Aguilar
SUMMARY:
Tan is one of the incorporators of Visayan Educational Supply Corporation. As
an incorporator, Tan had 400 shares, as evidenced by Stock Certificate No. 2.
While Tan was still the president of Visayan, two other incorporators, Young
and Ong assigned to the corporation their shares. Tan then sold his 50 shares to
his brother Angel S. Tan, and another incorporator, Alfredo Uy, sold 50 shares
to Teodora S. Tan in order to complete the membership requirement of the
Board of Directors. As a result of such transaction, Stock Certificate No. 2 was
cancelled, and the corresponding stock certificates 6 and 8 were issued, with
certificate 6 representing 50 shares sold to Angel, and certificate 8 representing
the 350 shares for Tan. Later on, Tan withdrew from the corporation because he
was dislodged by Tan Su Ching as president. Due to the withdrawal, the
cancellation of Stock Certificate 2 and 8 was effected and recorded in the stock
and transfer book. Alfonso then filed a case with Cebu SEC, questioning the
cancellation of his Stock Certificates 2 and 8. He claims that he was deprived of
his shares despite the non-endorsement or surrender of Stock Certificates 2 and
8 which is contrary to Section 63 of the Corporation Code which requires that
no transfer shall be valid until the transfer is recorded to the books of the
corporation so as to show the names of the parties to the transaction, the date of
the transfer, and the number of the certificates and the number of shares
transferred. ISSUE: Alfonso then filed a case with Cebu SEC, questioning the
cancellation of his Stock Certificates 2 and 8. He claims that he was deprived of
his shares despite the non-endorsement or surrender of Stock Certificates 2 and
8 which is contrary to Section 63 of the Corporation Code which requires that
no transfer shall be valid until the transfer is recorded to the books of the
corporation so as to show the names of the parties to the transaction, the date of
the transfer, and the number of the certificates and the number of shares
transferred. RULING: All the acts required for the transferee to exercise its
rights over the acquired stocks were present in this case. Even the corporation
was protected from other parties because the said transfer was earlier rec-
orded or registered in the corporate stock and transfer book.
DOCTRINE:
A stock certificate is not necessary to render one a stockholder in a corporation;
nevertheless, it is the paper representative or tangible evidence of the stock itself
and the various interests therein. The stock certificate expresses the contract be-
tween the corporation and the stockholder, but it is not essential to the existence
of a share i or the creation of the relationship with the shareholder
1. Visayan Educational Supply Corporation was incorporated on October 1,
1979.
2. As incorporator, Alfonso Tan (“Tan”) had 400 shares of the capital stock in
his name, with a par value of P100 per share. This was evidenced by Stock
Certificate No. 2.
3. Tan was then elected as President and subsequently reelected, holding
the position as such until 1982 but remained in the Board of Directors
until April 19, 1983 as director.
4. While Tan was still the president, two other incorporators, Young and
Ong assigned to the corporation their shares. Meanwhile, Tan sold 50
shares to his brother Angel S. Tan, and another incorporator, Alfredo
Uy, sold 50 shares to Teodora S. Tan. The above sale was necessary
in order to complete the membership requirement of the Board of
Directors. As a result of such transaction, Stock Certificate No. 2 was
cancelled, and the corresponding stock certificates 6 and 8 were
issued, with certificate 6 representing 50 shares sold to Angel, and
certificate 8 representing the 350 shares for Tan.
5. Subsequently, a certain Mr. Buzon, was requested by Mr. Tan Su
Ching to ask Tan to endorse the cancelled Stock Certificate No. 2.
However, Alfonso did not sign Stock Certificate No. 2 and only
returned Stock Certificate No. 8.
6. Later on, Tan withdrew from the corporation because he was
dislodged by Tan Su Ching as president. Part of the condition of his
withdrawal was that he be paid (in lieu of the stock value of his shares
in the amount of P35,000.00) with stocks-in-trade equivalent to 33%.
Due to the withdrawal, the cancellation of Stock Certificate 2 and 8
was effected and recorded in the stock and transfer book.
7. Alfonso then filed a case with Cebu SEC, questioning the cancellation
of his Stock Certificates 2 and 8. He claims that he was deprived of
his shares despite the non-endorsement or surrender of Stock
Certificates 2 and 8 which is contrary to Section 63 of the Corporation
Code which requires that no transfer shall be valid until the transfer is
recorded to the books of the corporation so as to show the names of
the parties to the transaction, the date of the transfer, and the number
of the certificates and the number of shares transferred.
 thereof.
ISSUES:
1. WoN the cancellation of Stock Certificate 2 and the subsequent issuance of
Stock Certificate Number 8 was null and void because of the non-
endorsement of Stock Certificate Number 2 by Alfonso Tan—VALID
BECAUSE THERE WAS ALREADY DELIVERY OF STOCK
CERTIFICATE NO. 2, WHICH MADE THE ISSUANCE OF STOCK
CERTIFICATE NOS. 6 AND 8 VALID.

RULING: WHEREFORE, in view of the foregoing, the Order of the Commission

under SEC-AC No. 263 dated October 10, 1990 is hereby AFFIRMED but modified
with respect to the "nullity of the sale of 350 shares represented under stock certifica-
tion No. 8, pursuant to the "in pari delicto" doctrine. The court holds that the conver-
sion of the 350 shares with a par value of only P35,000.00 at P100.00 per share into
treasury stocks after petitioner exchanged them with P2,000,000.00 worth of stocks-
in-trade of the corporation, is valid and lawful. With regard to the damages being
claimed by the petitioner, the respondent Commission is not empowered to award
such, other than the imposition of fine and imprisonment under Section 56 of the
Corporation Code of the Philippines, as amended.

RATIO:
1. All the acts required for the transferee to exercise its rights over the
acquired stocks were present in this case. Even the corporation was
protected from other parties because the said transfer was earlier
recorded or registered in the corporate stock and transfer book.
2. The Court found it necessary to differentiate the function of the stock
itself from the actual delivery or endorsement of the certificate of
stock because a certificate of stock is not necessary to render one a
stockholder in a corporation. The certificate is not stock in the cor-
poration but is merely evidence of the holder’s interest and status
in the corporation, his ownership of the share represented
thereby, but is not in law the equivalent of such ownership. It ex-
presses the contract between the corporation and the stockholder, but
is not essential to the existence of a share in stock or the nation of the
relation of the shareholder to the corporation.
3. What matters is that Angel Tan has already exercised his rights and
prerogatives as stockholder and was even elected as member of the
board of directors in the respondent corporation with the full
knowledge and acquiescence of petitioner. Due to the transfer of 50
shares, Angel S. Tan was clothed with rights and responsibilities in
the board of the respondent corporation when he was elected as officer
 of Absolute Share dated December 15, 1995, notwithstanding the fact that the stock
certificate was issued only on January 5, 1996.

DOCTRINE: A stock certificate is not the stock itself – it merely is a tangible

evidence of ownership of shares of stock. Even without the covering certificate of
stock having been issued, yet, the registered subscriber to the shares may validly
and legally transact with the shares, and sell and dispose of them to any interest
buyer thereof provided he complies with the right of refusal provided for in the by-
laws.

FACTS:
1. MSCI BOD adopted a resolution authorizing the sale of 19 unissued shares
007 Makati Sports Club v. Cheng (Gonzales)
June 16, 2010 | Nachura, J. | Nature of Certificate of Stock
PETITIONER: Makati Sports Club, Inc. (MSCI)
RESPONDENT: Cecile Cheng; MC Foods, Inc.; Ramon Sabarrer
SUMMARY: Hodreal expressed his interest to a buy a share in MSCI by sending a
letter and requesting that his name be included in the waiting list. McFoods bought
a share of MSCI for P1.8 million. A certificate of stock was then issued to
McFoods. McFoods sent a letter to MSCI giving advise of its offer to resell the
share. While the sale between MSCI and McFoods were still under negotiations,
there were negotiations between McFoods and Hodreal for the purchase by the lat-
ter of share of MCSI. Hodreal paid P2.8 million to McFoods. MSCI then issued a
new stock certificate. An investigation was conducted and it was found out that
Cheng, the Treasurer, profited from the transaction because of her knowledge.
MSCI filed a complaint for damages. RTC dismissed the complaint. CA affirmed.
MSCI now argues that McFoods violated Section 30 (e) of MSCI's Amended By-
Laws on its pre-emptive rights.
The issue is WoN McFoods violated MSCI’s By-Laws on its pre-emptive rights.
NO. When Mc Foods offered for sale one Class "A" share of stock to MSCI for the
price of P2,800,000.00 for the latter to exercise its pre-emptive right as required by
Section 30 (e) of MSCI's Amended By-Laws, it legally had the right to do so since
it was already an owner of a Class "A" share by virtue of its payment, and the Deed
at a floor price of P400,000 and P450,000 per share for Class A and B,
respectively.
2. Cheng was a Treasurer and Director of MSCI.
3. Hodreal expressed his interest to buy a share. He sent the letter,
requesting that his name be included in the waiting list.
4. McFoods expressed interest in acquiring a share of the MSCI, and one
was acquired with the payment to the MSCI by McFoods of
P1,800,000. The Deed of Absolute Sale was executed by the MSCI
and McFoods. Stock Certificate No. A 2243 was issued to McFoods.
5. McFoods sent a letter to the MSCI giving advise of its offer to resell
the share.
6. While the sale between MSCI and McFoods was still under
negotiations, there were negotiations between McFoods and Hodreal
for the purchase by the latter of a share of MSCI.
7. Hodreal paid McFoods P1,400,000. Another payment of P1,400,000
was made by Hodreal to McFoods to complete the purchase price of
P2,800,000.
8. MSCI was advised of the sale by McFoods to Hodreal of the share
evidenced by Certificate No. 2243 for P2.8 Million. Upon request, a
new certificate was issued.
9. An investigation was conducted and the committee held that there
is prima facie evidence to show that Cheng profited from the
transaction because of her knowledge.
10. MSCI’s evidence of fraud are — [a] letter of Hodreal where he
expressed interest in buying 1 share from MSCI with the request that
he be included in the waiting list of buyers; [b] declaration of Lolita
(wife of Hodreal) in her Affidavit that, she talked to Cheng who
assured her that there was one available share at the price of
 P2,800,000. The purchase to be validated by paying 50% immediately
and the balance after thirty (30) days; [c] Marian Punzalan, Head of
MCSI’s Membership Section declared that she informed Cheng of the
intention of Hodreal to purchase one share and she gave to Cheng the
contact telephone number of Hodreal; and [d] the authorization from
Sabarre to claim the stock certificate.
11. MSCI thus filed a complaint and sought judgment that would order
respondents to pay the sum of P1,000,000.00, representing the
amount allegedly defrauded, together with interest and damages.
12. RTC dismissed the complaint.
13. MSCI appealed to the CA.
14. CA affirmed the RTC decision.
15. Hence, this petition.
16. MSCI argues that Mc Foods violated Section 30 (e) of MSCI's
Amended By-Laws on its pre-emptive rights. (See Ratio #5)
7.
ISSUE:
1. WoN McFoods violated MSCI’s By-Laws on its pre-emptive rights –
NO. When Mc Foods offered for sale one Class "A" share of stock to
MSCI for the price of P2,800,000.00 for the latter to exercise its pre-
emptive right as required by Section 30 (e) of MSCI's Amended By-
Laws, it legally had the right to do so since it was already an owner of
a Class "A" share by virtue of its payment, and the Deed of Absolute
Share dated December 15, 1995, notwithstanding the fact that the
stock certificate was issued only on January 5, 1996.
RULING: Petition DENIED.
RATIO:
1. MSCI asserts that Mc Foods never intended to become a legitimate
holder of its purchased Class "A" share but did so only for the purpose
of realizing a profit in the amount of P1,000,000.00 at the expense of
the former. Cheng confabulated with Mc Foods by providing it with
an insider's information as to the status of the shares of stock of MSCI.
2. The Court is not convinced.
3. Hodreal already expressed to the MSCI Membership Committee his
intent to purchase one Class "A" share and even requested if he could
be included in the waiting list of buyers. However, there is no
evidence on record that the Membership Committee acted on this
letter by replying to Hodreal if there still were original, unissued
shares then or if he would indeed be included in the waiting list of
buyers. All that Punzalan did was to inform Cheng of Hodreal's intent
and nothing more, even as Cheng asked for Hodreal's contact number.
4. Further, considering that Mc Foods tendered its payment of
P1,800,000.00 to MSCI, even assuming arguendo that it was driven
solely by the intent to speculate on the price of the share of stock, it
had all the right to negotiate and transact, at least on the anticipated
and expected ownership of the share, with Hodreal. The right of a
transferee to have stocks transferred to its name is an inherent right
flowing from its ownership of the stocks.
IMPORTANT
5. MSCI argues that Mc Foods violated Section 30 (e) of MSCI's
Amended By-Laws on its pre-emptive rights, which provides
a. Sale of Shares of Stockholder. Where the registered owner of
share of stock desires to sell his share of stock, he shall first
offer the same in writing to the Club at fair market value and
the club shall have thirty (30) days from receipt of written
offer within which to purchase such share, and only if the club
has excess revenues over expenses (unrestricted retained
earning) and with the approval of two-thirds (2/3) vote of the
Board of Directors. If the Club fails to purchase the share, the
stockholder may dispose of the same to other persons who are
qualified to own and hold shares in the club. If the share is
not purchased at the price quoted by the stockholder and he
reduces said price, then the Club shall have the same pre-
emptive right subject to the same conditions for the same
period of thirty (30) days. Any transfer of share, except by
hereditary succession, made in violation of these conditions
shall be null and void and shall not be recorded in the books
of the Club.
8.
9. The share of stock so acquired shall be offered and sold by
the Club to those in the Waiting List in the order that their
names appear in such list, or in the absence of a Waiting
List, to any applicant.
6. We disagree.
7. Undeniably, when Mc Foods offered for sale one Class "A" share of
stock to MSCI for the price of P2,800,000.00 for the latter to exercise
its pre-emptive right as required by Section 30 (e) of MSCI's
 Amended By-Laws, it legally had the right to do so since it was
already an owner of a Class "A" share by virtue of its payment, and
the Deed of Absolute Share dated December 15, 1995,
notwithstanding the fact that the stock certificate was issued only on
January 5, 1996.
8. A certificate of stock is the paper representative or tangible
evidence of the stock itself and of the various interests therein.
The certificate is not a stock in the corporation but is merely
evidence of the holder's interest and status in the corporation, his
ownership of the share represented thereby. It is not in law the
equivalent of such ownership. It expresses the contract between the
corporation and the stockholder, but is not essential to the existence
of a share of stock or the nature of the relation of shareholder to the
corporation.
9. Therefore, Mc Foods properly complied with the requirement of
Section 30 (e) of the Amended By-Laws on MSCI's pre-emptive
rights.
10. MSCI failed to repurchase Mc Foods' Class "A" share within the thirty
(30) day pre-emptive period as provided by the Amended By-Laws.
11. It was only on January 29, 1996, or 32 days after December 28, 1995,
when MSCI received Mc Foods' letter of offer to sell the share, that
Mc Foods and Hodreal executed the Deed of Absolute Sale over the
said share of stock.
12. While Hodreal had the right to demand the immediate execution of
the Deed of Absolute Sale after his full payment of Mc Foods' Class
"A" share, he did not do so. Perhaps, he wanted to wait for Mc Foods
to first comply with the pre-emptive requirement as set forth in the
Amended By-Laws.
13. Neither can MSCI argue that Mc Foods was not yet a registered owner
of the share of stock when the latter offered it for resale, in order to
void the transfer from Mc Foods to Hodreal.
14. The corporation's obligation to register is ministerial upon the buyer's
acquisition of ownership of the share of stock. The corporation, either
by its board, its by-laws, or the act of its officers, cannot create
restrictions in stock transfers.
10.
15. MSCI's ardent position that Cheng was in cahoots with Mc Foods in
depriving it of selling an original, unissued Class "A" share of stock
for P2,800,000.00 is not supported by the evidence on record.
16. The mere fact that she performed acts upon authority of Mc
Foods, i.e., receiving the payments of Hodreal in her office and
claiming the stock certificate on behalf of Mc Foods, do not by
themselves, individually or taken together, show badges of fraud,
since Mc Foods did acts well within its rights and there is no proof
that Cheng personally profited from the assailed transaction.
17. Fraud is deemed to comprise anything calculated to deceive, including
all acts, omissions, and concealment involving a breach of legal or
equitable duty, trust or confidence justly reposed, resulting in the
damage to another or by which an undue and unconscionable
advantage is taken of another. It is a question of fact that must be
alleged and proved.
008 BITONG v. CA (GALINDEZ)
13 July 1998 | Bellosillo, J. | Certificate of Stock
PETITIONER: Nora A. Bitong
RESPONDENTS: Court of Appeals, The Apostols, Mr & Ms Publishing. Co.
SUMMARY: Nora filed a derivative suit for the corporation Mr. & Ms.
Publishing alleging that the Apostols, who were officers of Mr. & Ms. were liable
for fraud and mismanagement of the corporation. The Apostols moved to dismiss
alleging that Nora is not a real-party-in-interest since she does not own stocks in
the corporation hence there was no cause of action.
The issue is WoN Nora is the true holder of stock certificates, and hence, has
personality to file the derivative suit.
Nora alleged that the shares of JAKA in the company, through Senator Enrile were
transferred to her through her purchase. [See Fact 8] On the other hand, the
Apostols claimed 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 Nora could have legally transferred or assigned on 25 July
1983 the shares of stock in favor of Nora 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.
In fine, the records are unclear on how Nora allegedly acquired the shares of stock
of JAKA. Nora being the chief executive officer of JAKA and the sole person in
charge of all business and financial transactions and affairs of JAKA 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 Nora’s statuts is
 being questioned, 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.
DOCTRINE: From the outline: 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. But to be valid against third parties, the transfer must be recorded
in the books of the corporation.
From the case: 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.
FACTS:
19. The two cases originated from a derivative suit filed by petitioner Nora
Bitong before the SEC for the benefit of respondent Mr. & Ms. Publishing
Co. (Mr. & Ms.) to hold respondent Spouses Apostol 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 Nora Bitong.
20. Nora alleges she was the Treasurer and member of the BOD of Mr. & Ms.
From the time it was incorporated. She was the registered owner of 1,000
shares of stock out of the total 4,088 outstanding shares.
21. Nora complained of irregularities committed by Eugenia Apostol, President
and Chairperson of the BOD.
22. Nora claimed that except for the sale of the name Philippine Inquirer to
Philippine Daily Inquirer, all other transactions entered into by Mr. & Ms.
With PDI were not supported by any bond and/or stockholders resolution.
23. Mr. & Ms. Also made advances to PDI under Eugenia’s instructions. Such
was done without a board/stockholders resolution.
24. Nora also alleges that the Apostols were stockholders, directors and officers
of both Mr. & Ms. And PDI.
25. The respondents (Apostol et al.) refuted the allegations.
26. They also averred that Nora had no standing to file the derivative suit because
she had no legal standing. Nora was only holding the stock certificates in trust
in favor of JAKA (Jaka Investments Corporation). The stocks were originally
Juan Ponce Enrile’s and his wife’s. The corporation started as a close
corporation where JPE and his wife were stockholders through the shares of
JAKA.
27. Nora testified in trial that she became the registered and beneficial owner of
the 997 shares of stock 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.
28. Nora pointed out that Senator Enrile decided that JAKA should completely
divest itself of holdingsi in the corporation, which resulted in the sale to her
of JAKA’s interest and holdings in that publishing firm.
29. Respondents Apostol et al. claim that Nora was not a stockholder since 25
July 1983 because it was only on 17 March 1989 when Eugenia signed
Certificate of Stock No. 008.
30. The SEC’s Hearing Panel then dismissed the derivative suit. It ruled that there
was no serious mismanagement of Mr. & Ms. and gave credence to Eugenia’s
assertion that Mr. & Ms. was operated like a close corporation.
31. Hearing Panel also concluded that while the evidence presentend 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, and allowed Nora 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.
32. On 19 August 1993, the Apostol spouses sold the PDI shares registered in the
name of their holding company, JAED Management, to Edgardo Espiritu.
Nora appealed then to the SEC.
33. The SEC en banc reversed the decision of the Hearing Panel and ordered the
Apostols 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.
34. It also declared the sale of the PDI shares of JAED to Edgardo to be tainted
with fraud hence, null and void.
35. The Apostols et al. filed a petition for review with the CA. It reversed the
SEC en banc’s decision and held that the records show that Nora wasn’t 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 the
Apostols et al.
36. Accordingly, Nora 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, Nora’s
complaint did not state a cause of action, a defense which was never waived;
 hence, her petition should have been dismissed.
ISSUE/s:
10. WoN Nora is the true holder of stock certificates, and hence, has personality
to file the derivative suit – NO, because aside from Nora’s own admissions,
several corporate documents disclose that the true party-in-interest is not
Nora but JAKA.
RULING: 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 B. Espiritu as well as annulling the 5 November 1993, 24
January 1994 and 18 February 1994 Orders of the SEC En Banc in CA-G.R. No. SP
33873, is AFFIRMED. Costs against petitioner.
RATIO:
45. Sec. 63 of the Corporation Code provides:
a. 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
xxxx
46. This envisions a formal certificate of stock which can be issued only upon
compliance with certain requisites:
a. 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.
b. The 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.
c. The par value, as to par value shares, or the full subscription as to no par
value shares, must first be fully paid.
d. The original certificate must be surrendered where the person requesting the
issuance of a certificate is a transferee from a stockholder.
47. 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. This, however, can be rebutted.
48. 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 ones status as a stockholder. They are ordinarily
the best evidence of corporate acts and proceedings.
49. However, such are not conclusive even against the corporation but are prima
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.
50. 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.
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 estoppel cannot operate to create stock which
under the law cannot have existence.
51. There is overwhelming evidence that despite what appears on the certificate
of stock and stock and transfer book, Nora 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 stockholders derivative suit.
52. Aside from Nora’s own admissions, several corporate documents disclose
that the true party-in-interest is not petitioner but JAKA.
53. While Nora asserts that Certificate of Stock No. 008 dated 25 July 1983 was
issued in her name, Apostols et al. argue that this certificate was signed by
respondent Eugenia as President only in 1989 and was fraudulently antedated
by Nora who had possession of the Certificate Book and the Stock and
Transfer Book.
54. Nora now claims that a few days after JAKAs shares were transferred to
respondent Eugenia, Senator Enrile sold to Nora 997 shares of JAKA. For
this purpose, a deed of sale was executed and antedated to 10 May 1983.
55. However this is ocntradicted 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 Nora.
56. A careful persual 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 Nora could have legally
transferred or assigned on 25 July 1983 the shares of stock in favor of Nora
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.
57. 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.
58. 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.
59. Nora was aware of this trust. 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.
 009 LINGAYEN GULF ELECTRIC POWER v. BALTAZAR (Fordan)
June 30, 1953 | Montemayor, J. | Unpaid subscription
PLAINTIFF-APPELLANT: Lingayen Gulf Electric Power Company, Inc.
DEFENDANT-APPELLEE: Irineo Baltazar
(Consolidated petitions)
SUMMARY: Lingayen Gulf Electric Power Company, Inc. (the Corporation) is a
domestic corporation with an authorized capital stock of 3,000 shares with a par
value of P100/share. Baltazar subscribed for 600 shares and paid a total of P41,500.
A stockholder’s meeting was held, which was attended by majority stockholders,
and they adopted Resolution No. 17 wherein it calls for the payment of unpaid sub-
scriptions, the terms of payment and the failure to pay will lead to the reversion of
the subscribed shares back to the Corporation. However, a BOD meeting was held
wherein they adopted a new Resolution No. 17 which declared the previous stock-
holder’s resolution null and void. The said resolution also calls for the payment of
the unpaid ssubscriptions but the same was not published in a newspaper of general
circulation as required by Sec. 40 of the Corporation Law. There was another
stockholder’s meeting where all the stockholders are present and they adopted Res-
olution No. 4 for the overall revaluation of the Corporation in order to attract more
investors. Thereafter, a demand was made to Baltazar to pay the balance of his un-
paid subscriptions but he still ignored the same. Thus, the Corporation filed an ac-
tion in the trial court. The trial court ruled that the call for payment embodied in
Resolution No. 17 was null and void for lack of publication; consequently, it dis-
missed the complaint as premature and the said resolution was null and void in so
far as it tried to relieve Baltazar from liability on his unpaid subscription, on the
ground that the resolution was not approved by all the stockholders of the Corpora-
tion. Both the Corporation (directly to SC) and Baltazar (to the CA) appealed. Both
cases were consolidated in the SC.
The issue in this case is Whether or not Baltazar is released from the obligation of
the unpaid balance of his subscription by virtue of the stockholder’s resolution nos.
17 and 4, respectively. NO. The SC held that in order to effect the release, there
must be unanimous consent of the stockholders of the corporation. The general rule
is that a valid and binding subscription for stock of a corporation cannot be can-
celled so as to release the subscriber from liability thereon without the consent of
all the stockholders or subscribers. Furthermore, a subscription cannot be cancelled
by the company, even under a secret or collateral agreement for cancellation made
with the subscriber at the time of the subscription, as against persons who subse-
quently subscribed or purchased without notice of such agreement. The exception
stated is that: In particular circumstances, as where it is given pursuant to a bona
fide compromise, or to set off a debt due from the corporation, a release, supported
by consideration, will be effectual as against dissenting stockholders and subse-
quent and existing creditors. A release which might originally have been held inva-
lid may be sustained after a considerable lapse of time. In this case, the release
claimed by Baltazar does not fall under the exception above referred to, because it
was not given pursuant to a bona fide compromise, or to set off a debt due from the
corporation, and there was no consideration for it.
DOCTRINE: A valid and binding subscription for shares cannot be cancelled so as
to release the subscriber from liability thereon without the consent of all the stock-
holders. (as stated in the syllabus)
FACTS:
9. Lingayen Gulf Electric Power Company, Inc. (the Corporation) is a domestic
corporation with an authorized capital stock of 3,000 shares with a par value
of P100/share (total value = P300,000).
10. Irineo Baltazar (Baltazar) appears to have subscribed for 600 shares and
wherein he had paid a total amount of P41,500 (pertains to 415 shares).
11. The balance of P18,500 (for 185 shares) was being claimed by the Corpora-
tion.
12. On July 23, 1946, majority of the stockholders, which included Baltazar, held
a meeting and adopted a Resolution No. 17. The resolution provided for the
following:
a. to call the balance of all unpaid subscribed capital stock as of July
23, 1946 wherein the 1st 50% of the unpaid subscription is paya-
ble within 60 days beginnning Aug. 1, 1946, and the remaining
50% is payable within 60 days beginning Oct. 1, 1946;
b. all unpaid subscription after the due dates would be subjected to
12% interest per annum.
c. after the expiration of 60 days’ grace period which would be on
Dec. 1, 1946, for the first call, and on Feb. 1, 1947, for the second
call, all subscribed stocks remaining unpaid would revert to the
Corporation.
13. On Sept. 22, 1946, the Corporation wrote a letter to Baltazar reminding him
that the 1st 50% of his unpaid subscription would be due on Oct. 1, 1946. It
requested Baltazar to advise them his decision regarding the matter.
14. Baltazar answered, on Sept. 25, 1946, asking the Corporation that he be al-
lowed to pay his unpaid subscription by Feb. 1, 1947. He also stated that if
he could not pay the balance by the said date, his unpaid subscription would
be reverted to the Corporation.
 15. However, on Dec. 19, 1947, Baltazar wrote a letter to the members of the
Board of Directors (BOD) offering to withdraw completely from the Corpo-
ration by selling out to them all his shares of stock of P23,000. Unfortunately,
this offer was left unacted upon by the Corporation.
16. Thereafter, on Apr. 17, 1948, the BOD held a meeting and adopted Resolu-
tion No. 17. This resolution in effect set aside the previous stockholder’s res-
olution on the ground that the latter was null and void and because the Cor-
poration was not in a financial position to absorb the unpaid balance of the
subscribed capital stock.
17. At the said meeting, the BOD also decided to call 50% of the unpaid sub-
scription within 30 days from said date which will be then payable within 60
days from receipt of notice from the Secretary-Treasurer.
18. The said resolution also authorized legal counsel of the Corporation to take
all the necessary legal steps for the collection of the payment of the call.
19. However, the said call of the BOD was not published in a newspaper of gen-
eral circulation as required by Sec. 4015 of the Corporation Law (this is the
old Corporation Code).
20. On June 10, 1949, a stockholder’s meeting was held wherein the stockholders
adopted Resolution No. 4. The resolution was agreed to revalue the stocks
and assets of the Corporation so as to attract outside investors to put in money
for its rehabilitation. The President was authorized to make all arrangement
for such appraisal and the Secretary to call a meeting upon completion of the
reassessment.
21. On Sept. 28, 1949, the legal counsel of the Corporation wrote a letter to
Baltazar demanding the payment of the unpaid balance of his subscription of
P18,500. Baltazar still ignored the said demand.
22. Thus, the Corporation filed an action in the trial court.
23. Baltazar, in his answer, disclaims liability to the Corporation alleging that:
a. That the Corporation's action is premature because there was no
valid call; and
b. That granting that there was a valid call, he was released from the
obligation of the balance of his subscription by stockholders' Res-
olution Nos. 17 and 4, respectively.
24. By way of counterclaim, Baltazar also claims a reasonable compensation at
the rate of P700 per month as its President.
25. Thereafter, the trial court rendered a decision and ruled that:
15
SEC. 40. Notice of call for unpaid subscriptions must be either personally served upon each stockholder
or deposited in the post office, postage prepaid, addressed to him at his place of residence, if known, and if
not known, addressed to the place where the principal office of the corporation is situated. The notice must
also be published once a week for four successive weeks in some newspaper of general circulation de-
voted to the publication of general news published at the place where the principal office of the corpora-
tion is established or located, and posted in some prominent place at the works of the corporation if any
a. the call for payment embodied in Resolution No. 17 was null and
void for lack of publication; consequently, it dismissed the com-
plaint as premature.
b. the said resolution was null and void in so far as it tried to relieve
Baltazar from liability on his unpaid subscription, on the ground
that the resolution was not approved by all the stockholders of the
Corporation
c. the dismissal of Baltazar's counterclaim for compensation as
President.
26. The Corporation directly appealed to SC while Baltazar appealed with the
CA. However, pursuant to Sec. 17 (5) and (6) of the Judiciary Act of 1948,
the 2 cases were consolidated in this current petition.
ISSUE: Whether or not Baltazar is released from the obligation of the unpaid bal-
ance of his subscription by virtue of the stockholder’s resolution nos. 17 and 4, re-
spectively. – NO, the release claimed by Baltazar does not fall under the excep-
tion because it was not given pursuant to a bona fide compromise, or to set off a
debt due from the corporation, and there was no consideration for it.
RULING: In view of the foregoing and finding no reversible error in the decision
appealed, the same is hereby affirmed.
RATIO:
On the obligation of unpaid subscription
16. On the claim of Baltazar that Resolution No. 17 released him from the obli-
gation to pay for his unpaid subscription, the authorities are generally agreed
that in order to effect the release, there must be unanimous consent of the
stockholders of the corporation.
17. The SC quoted some authorities: Subject to certain exceptions, considered in
subdivision (3) of this section, the general rule is that a valid and binding
subscription for stock of a corporation cannot be cancelled so as to release
the subscriber from liability thereon without the consent of all the stock-
holders or subscribers. Furthermore, a subscription cannot be cancelled by
the company, even under a secret or collateral agreement for cancellation
made with the subscriber at the time of the subscription, as against persons
who subsequently subscribed or purchased without notice of such agree-
ment.
such there be. If there be no newspaper published at the place where the principal office of the corporation
is established or located, then such notice may be published in any newspaper of general news in the Phil-
ippines.
 18. The exception stated is that: In particular circumstances, as where it is given
pursuant to a bona fide compromise, or to set off a debt due from the corpo-
ration, a release, supported by consideration, will be effectual as against dis-
senting stockholders and subsequent and existing creditors. A release which
might originally have been held invalid may be sustained after a considerable
lapse of time.
19. In this case, the release claimed by Baltazar does not fall under the ex-
ception above referred to, because it was not given pursuant to a bona
fide compromise, or to set off a debt due from the corporation, and there
was no consideration for it.
20. The SC quoted another authority:
SEC. 850. Unanimous consent of stockholders necessary to release
subscriber. — It may be asserted as the first rule under this proposi-
tion that, after a valid subscription to the capital stock of a corpora-
tion has been made and accepted, there can be no cancellation or re-
lease from the obligation without the consent of the corporation and
all the stockholders; ....
The reason for this rule is:
SEC. 855. Right to withdraw as against subscribers. — A contract
of subscription is, at least in the sense which creates as estoppel, a
contract among the several subscribers. For this reason no one of the
subscribers can withdraw from the contract without the consent of
all the others, and thereby diminish, without the universal consent,
the common fund in which all have acquired an interest....
21. As already found by the trial court, the release attempted in Reso-
lution No. 17 was not valid for lack of a unanimous vote. It found
that at least 7 stockholders were absent from the meeting when said
resolution was approved.
On the validity of the notice of call
22. The SC agree with the lower court that the law requires that notice of any call
for the payment of unpaid subscription should be made not only personally
but also by publication. This is clear from the provisions of Sec. 40 of the
Corporation Law, Act No. 1459, as amended.
16
SEC. 3744. Provisions requiring notice of calls. — The governing statute, charter or by-laws usually
require that notice of calls be given the subscriber or stockholder. If any particular notice or demand is re-
quired by either of these, or by the contract of subscription, then such notice or demand must be given,
and must be alleged and proved in order to maintain an action for the call.
xxx xxx xxx
SEC. 3745. Notice. — Compliance with requirements-From what has preceded it is clear that where any
particular form or kind of notice is required, such form or kind must be given-the requirement must be
complied with. Thus, where the charter expressly required notice to be given in certain newspapers for a
23. It will be noted that Sec. 40 is mandatory as regards publication, using the
word "must". As correctly stated by the trial court, the reason for the manda-
tory provision is not only to assure notice to all subscribers, but also to assure
equality and uniformity in the assessment on stockholders.
24. This rule finds support in authorities on corporation law, such as Thompson
on Corporations16 and also shared by Justice Fisher where in his book "The
Philippine Law on Stock Corporations" he says: "Not only must personal no-
tice be given in one of these manners, but the notice must also be published
once a week, for four consecutive weeks, in some newspaper."
25. Furthermore, in the case of Velasco vs. Poizat, the corporation involved was
insolvent, in which case all unpaid stock subscriptions become payable on
demand and are immediately recoverable in an action instituted by the as-
signee. Said the court in that case:
.... it is now quite well settled that when the corporation becomes in-
solvent, with proceedings instituted by creditors to wind up and dis-
tribute its assets, no call or assessment is necessary before the insti-
tution of suits to collect unpaid balance on subscription.
But when the corporation is a solvent concern, the rule is:
It is again insisted that plaintiffs cannot recover because the suit
was not proceeded by a call or assessment against the defendant as
a subscriber, and that until this is done no right of action accrues. In
a suit by a solvent going corporation to collect a subscription, and
in certain suits provided by statute this would be true; .....
In conclusion, under the Corporation Law, notice of call for payment for unpaid sub-
scribed stock must be published, except when the corporation is insolvent, in which
case, payment is immediately demandable and that release from such payment must
be made by all the stockholders.
certain number of days, the corporation must show compliance with the conditions before recovery on the
call. An action is ordinarily made effective by notice thereof to the subscribers, in accordance with the by-
laws or general regulations of the corporation in that regard. So, where there are statutory or other regula-
tions as to the form and sufficiency of the notice, these must be followed. Thus, where such a notice was
required to be signed by the directors, a notice with the names of the directors signed by a clerk, was held
insufficient. These cases and others proceed on the theory that where the manner of giving notice is pre-
scribed by law every condition precedent must be strictly and literally complied with.
010 J. SANTAMARIA v. HONGKONG AND SHANGHAI BANKING
CORP (Escalona)
August 31, 1951 | Bautista Angelo, J. | Forged and unauthorized transfers
PETITIONER: Josefa Santamaria
RESPONDENTS: Hongkong and Shanghai Banking Corporation and R.W. Ta-
plin
SUMMARY: Santamaria bought 10,000 shares of Batangas Minerals, Inc.
through Woo, Uy-Tioco, and Naftaly firm. Santamaria was given a stock certifi-
cate as proof of the transaction. She subsequently purchased 10,000 shares of
Crown Mines Inc., through R.J. Campos Company. This purchase was secured
by the first stock certificate she purchased. R.J. Campos Company delivered
Certificate No. 517 to the latter as security therefor with the understanding that
said certificate would be returned to her upon payment of the 10,000 shares. Her
name was later written in lead pencil on the upper right hand corner of the certif-
icate. Two days later, when Mrs. Santamaria went to pay for her order, she was
informed that R.J. Campos was no longer allowed to transact business due to a
prohibition order from Securities and Exchange Commission and that her Stock
certificate was in the possession of the Hongkong and Shanghai Banking Corpo-
ration. It came into the possession of the Hongkong because R.J. Campos had
opened an overdraft account with this bank and had executed a document of hy-
pothecation. As per request of Hongkong, Batangas issued Certificate No. 715 in
lieu of Certificate No. 517, in the name of Robert W. Taplin as trustee. CFI or-
dered Hongkong to pay the plaintiff the sum of P8,041.20 plus the costs of suit.
The case was then raised to the SC. The first issue is WoN Santamaria is liable
for negligence. For this issue, the SC held that she was liable because she failed
to take steps to show that the stock certificate was owned by her, such as chang-
ing it to her name. The second issue is WoN the bank is obligated to find out
who the real owner of the stock certificate was. The SC held that the bank is not
liable. This is because the stock certificate was endorsed to HSBC in blank by
R.J. Campos Company, thus giving HSBC the impression that it belonged to R.J.
Campos Company. By the act of endorsing it in blank, the stock certificate be-
comes a “street certificate”, granting HSBC the right to rename it under its own-
ership.
DOCTRINE: (From the CLV Outline)
A bona fide pledgee or transferee of a stock from the apparent owner is not
chargeable with knowledge of the limitations laced on said certificates by the
real owner, or of any secret agreement relating to the use, which might be made
of the stock by the holder. When a stock certificate has been endorsed in blank
by the owner thereof, it becomes a “street certificate” so that upon its face the
holder is entitled to demand its transfer into his name from the issuing corpora-
tion. As such the certificate is quasi-negotiable and the transferee thereof is justi-
fied in believing that it belongs to the older and transferor.
In this case, HSBC is the transferee of the stock certificate and this certificate
was endorsed to HSBC in blank by R.J. Campos Company. Therefore, the stock
certificate became a street certificate, granting the right to transfer the name of
the certificate to the holder from the issuing corporation, which was the Woo,
Uy-Tioco, and Naftaly Firm. Even assuming that the certificate was named un-
der Santamaria, if the certificate was endorsed in blank, it is considered as quasi-
negotiable and HSBC is justified in believing that it actually belonged to R.J.
Campos Company.
FACTS:
1. In February 1937, Mrs. Josefa Santamaria bought 10,000 shares of Batangas
Minerals, Inc. through the offices of Woo, Uy-Tioco, and Naftaly, a stock
brokerage firm and paid a sum of P8,041.20 as shown by receipt. Santamaria
received a stock certificate issued in the name of Woo, Uy-Tioco, and Naftaly
and indorsed in bank by their firm.
2. Santamaria then placed an order for the purchase of 10,000 shares of Crown
Mines Inc. with R.J. Campos & Co., a brokerage firm, and delivered the stock
certificate she received previously. It was used as security with the
understanding that the certificate would be returned upon payment of the
10,000 shares. Exh. D. is the receipt of the certificate in question signed by
one Mr. Cosculluela, Manager of the R.J. Campos & Co., Inc. According to
certificate Exh. E, R. J. Campos & Co., Inc. bought for Mrs. Josefa
Santamaria 10,000 shares of the Crown Mines, Inc. at P0.225 a share, or the
total amount of P2,250.
3. At the time of the delivery of a stock Certificate No. 517 to R.J. Campos &
Co., Inc. this certificate was in the same condition as that when Mrs.
Santamaria received from Woo, Uy-Tioco & Naftaly, with the sole difference
that her name was later written in lead pencil on the upper right hand corner
thereof.
4. Two days later, Mrs. Santamaria went to R.J. Campos & Co., Inc. to pay for
her order of 10,000 Crown Mines shares and to get back Certificate No. 517.
Cosculluela then informed her that R.J. Campos & Co., Inc. was no longer
allowed to transact business due to a prohibition order from Securities and
Exchange Commission. She was also informed that her Stock certificate was
in the possession of the Hongkong and Shanghai Banking Corporation.
5. Certificate No. 517 came into possession of the Hongkong and Shanghai
Banking Corporation because R.J. Campos & Co., Inc. had opened an
overdraft account with this bank and to this effect it had executed a document
of hypothecation, by the term of which R.J. Campos & Co., pledged to the
 said bank "all stocks, shares and securities which I/we may hereafter come
into their possession of my/our account and whether originally deposited for
safe custody only or for any other purpose whatever or which may hereinafter
be deposited by me/us in lieu of or in addition to the Stocks Shares and
Securities now deposited or for any other purposes whatsoever."
6. Certificate No. 517, already indorsed by R.J. Campos Co. Inc. to the
Hongkong & Shanghai Banking Corporation, was sent by the latter to the
office of the Batangas Minerals, Inc. with the request that the same be
cancelled and a new certificate be issued in the name of R.W. Taplin as
trustee and nominee of the banking corporation. Robert W. Taplin was an
officer of this institution in charge of the securities belonging to or
claimed by the bank. As per this request the Batangas Minerals, Inc. on
March 12, 1937, issued Certificate No. 715 in lieu of Certificate No. 517,
in the name of Robert W. Taplin as trustee and nominee of the Hongkong
& Shanghai Banking Corporation.
7. According to Santamaria, she made the claim to the bank for her certificate,
though she did not remember the exact date, but it was most likely on the
following day of that when she went to Cosculluela for the purpose of paying
her order for 10,000 shares of the Crown Mines, Inc. In her interview with
Taplin, the bank's representative, she informed him that the certificate
belonged to her, and she demanded that it be returned to her. Taplin then
replied that the bank did not know anything about the transaction had
between her and R.J. Campos & Co., Inc., and that he could not do
anything until the case of the bank with Campos shall have been
terminated.
8. "In Civil Case No. 51224, R.J. Campos & Co., Inc. was declared insolvent,
and on July 12, 1937, the Hongkong & Shanghai Banking Corporation
asked permission in the insolvency court to sell the R.J. Campos & Co.,
Inc., securities listed in its motion by virtue of the document of
hypothecation. In an order dated July 15, 1937, the insolvency court granted
this motion.
9. "On June 3, 1938, to 10,000 shares of Batangas Minerals, Inc. represented
by Certificate No. 715, were sold to the same bank by the Sheriff for P300
at the foreclosure sale authorized by said order.
10. R.J. Campos, the president of R.J. Campos & Co., Inc., was prosecuted
for estafa and found guilty of this crime and was sentenced by the Manila
Court of First Instance in Criminal Case No. 54428, to an imprisonment
and to indemnify the offended party, Mrs. Josefa Santamaria, in the
amount of P8,041.20 representing the value of the 10,000 shares of
Batangas Minerals, Inc. The decision was later confirmed by the Court of
Appeals. The offended party and R. W. Taplin were among the witnesses for
the prosecution in this criminal case No. 54428.
11. When Mrs. Santamaria failed in her efforts to force the civil judgment
rendered in her favor in the criminal case because the accused became
insolvent, she filed her complaint in this case on October 11, 1940. At the
trial both parties agreed that the 10,000 Batangas Minerals shares formerly
represented by Certificate No. 517 and thereafter by Certificate No. 715, have
no actual market value.
ISSUES:
1. WoN the trial court erred in finding that Santamaria was not chargeable with
negligence in the transaction that gave rise to this case – YES. She is liable
because she was negligent through her failure to request a change in the stock
certificate to clearly indicate her ownership.
2. WoN the trial court erred in holding that it was the obligation of the bank to
have inquired into the ownership of the certificate when it received it from
R.J. Campos & Co. and in concluding that the bank was negligent for not
having done so – NO. HSBC is not under such obligation because
RULING: The decision of the lower court is modified, ordering the defendant to
deliver to the plaintiff stock certificate No. 715
RATIO:
1. On the first issue:
2. HSBC argued that the trial court erred in finding that the plaintiff-ap-
pellee was not chargeable with negligence in the transaction that
gave rise to this case.
3. A careful analysis of the facts seems to justify this contention. Certif-
icate of stock No. 517 was made out in the name of Wo, Uy-Tioco &
Naftaly, brokers, and was duly indorsed in bank by said brokers.
This certificate of stock was delivered by plaintiff to R.J. Campos &
Co., Inc. to comply with a requirement that she had to deposit some-
thing on account if she wanted to buy 10,000 shares of Crown Mines
Inc. In making said deposit, Santamaria did not take any precau-
tion to protect herself against the possible misuse of the shares
represented by the certificate of stock. She could have asked the
corporation that had issued said certificate to cancel it and issue
another in lieu thereof in her name to apprise the holder that she
was the owner of said certificate. This she failed to do, and in-
stead she delivered said certificate, as it was, to R.J. Campos &
Co., thereby clothing the latter with apparent title to the shares
represented by said certificate including apparent authority to
negotiate it by delivering it to said company while it was in-
dorsed in blank by the person or firm appearing on its face as
the owner thereof. The defendant Bank had no knowledge of the
 circumstances under which the certificate of stock was delivered to
R.J. Campos & Co., Inc., and had a perfect right to assume that
R.J. Campos & Co., Inc. was lawfully in possession of the certifi-
cate in view of the fact that it was a street certificate, and was in
such form as would entitle any possessor thereof to a transfer of
the stock on the books of the corporation concerned. There is no
question that, in this case, plaintiff made the negotiation of the cer-
tificate of stock to other parties possible and the confidence she
placed in R.J. Campos & Co., Inc. made the wrong done possi-
ble. This was the proximate cause of the damage suffered by her.
She is, therefore, estopped from claiming further title to or inter-
est therein as against a bona fide pledgee or transferee thereof, for
it is a well-known rule that a bona fide pledgee or transferee of a
stock from the apparent owner is not chargeable with knowledge
of the limitations placed on it by the real owner, or of any secret
agreement relating to the use which might be made of the stock
by the holder.
4. On the other hand, it appears that this certificate of stock, indorsed as
it was in blank by Woo, Uy-Tioco & Naftaly, stock brokers, was de-
livered to The Hongkong and Shanghai Banking Corporation by R.J.
Campos & Co., Inc., duly indorsed by the latter, pursuant to a letter
of hypothecation executed by R.J. Campos & Co., Inc., in favor of
said Bank. The said certificate was delivered to the Bank in the ordi-
nary course of business, together with many other securities, and at
the time it was delivered, the Bank had no knowledge that the shares
represented by the certificate belonged to the plaintiff for, as already
said, it was in the form of street certificate which was transferable by
mere delivery. The rule is "where one of two innocent parties
must suffer by reason of a wrongful or unauthorized act, the loss
must fall on the one who first trusted the wrong doer and put in
his hands the means of inflicting such loss".
5. It is therefore clear that plaintiff, in failing to take the necessary pre-
cautions upon delivering the certificate of stock to her broker, was
chargeable with negligence in the transaction which resulted to her
own prejudice, and as such, she is estopped from asserting title to it
as against the defendant Bank.
6. On the second issue:
7. The next contention of the defendant is that the trial court erred in
holding that it was the obligation of the defendant Bank to have in-
quired into the ownership of the certificate when it received it from
R.J. Campos & Co., Inc. and in concluding that the Bank was negli-
gent for not having done so, contrary to the claim of the plaintiff that
defendant Bank acted negligently, if not in bad faith, in accepting de-
livery of said certificate from RJ. Campos & Co., Inc.
8. Let us now see the material facts on this point. Certificate No. 517
came into the possession of the defendant Bank because R.J. Campos
& Co., Inc. had opened an overdraft account with said Bank and to
this effect it had executed on April 16, 1946, a letter of hypotheca-
tion by the terms of which R.J. Campos & Co., Inc. pledged to the
said Bank "all Stocks, Shares and Securities which I/we may hereaf-
ter come into their possession on my/our account and whether origi-
nally deposited for safe custody only or for any other purpose what-
ever or which may hereafter be deposited by me/us in lieu of or in
addition to the Stocks, Shares, and Securities now deposited or for
any other purpose whatsoever." On March 13, 1937, plaintiff went to
the office of the Bank to claim for her certificate. In her interview
with one Robert W. Taplin, the officer in charge of the securities of
that institution, she informed him that the certificate belonged to her
and she demanded that it be returned to her. Taplin then replied that
the Bank did not know anything about the transaction had between
her and that he could not do anything until the case of the Bank with
R.J. Campos & Co., Inc. had been terminated. It further appears that
when the certificate of stock was delivered by plaintiff to R.J. Cam-
pos & Co., Inc., the manager thereof, Sebastian Cosculluela, wrote in
pencil on the right margin the name of Josefa T. Santamaria, pursu-
ant to the practice followed by said firm to write on that part of the
certificate the name of the owner for purposes of identification. Upon
the facts thus stated, the question that asserts itself is: was the de-
fendants Bank obligated to inquire who was the real owner of the
shares represented by the certificate of stock, and could it be
charged with negligence for having failed to do so?
9. It should be noted that the certificate of stock in question was issued
in the name of the brokerage firm-Woo, Uy-Tioco & Naftaly and
that it was duly indorsed in blank by said firm, and that said indorse-
ment was guaranteed by R.J. Campos & Co., Inc., which in turn in-
dorsed it in blank. This certificate is what it is known as street cer-
tificate. Upon its face, the holder was entitled to demand its
 transfer into his name from the issuing corporation. The Bank 11. The Court has noticed that the defendant Bank was willing from the
was not obligated to look beyond the certificate to ascertain the very beginning to compromise this case by delivering to the plaintiff
ownership of the stock at the time it received the same from R.J. certificate of stock No. 715 that was issued to said Bank by the issuer
Campos & Co., Inc., for it was given to the Bank pursuant to corporation in lieu of the original as alleged and prayed for in its
their letter of hypothecation. Even if said certificate had been in amended answer to the complaint dated April 2, 1941. Considering
the name of the plaintiff but indorsed in blank, the Bank would that in the light of the law and precedents applicable in this case, the
still have been justified in believing that R.J. Campos & Co., Inc. most that plaintiff could claim is the return to her of the said certifi-
had title thereto for the reason that it is a well-known practice cate of stock. The Court, regardless of the conclusions arrived at as
that a certificate of stock, indorsed in blank, is deemed quasi ne- above stated, is inclined to grant the formal tender made by the de-
gotiable, and as such the transferee thereof is justified in believ- fendant to the plaintiff of said certificate.
ing that it belongs to the holder and transferor.
10. The only evidence in the record to show that the certificate of
stock in question may not have belonged to R.J. Campos & Co.,
Inc. is the testimony of the plaintiff to the effect that she had ap-
proached Robert W. Taplin and informed him that she was the
true owner of said certificate and demanded the return thereof,
or its value. But even assuming for the sake of argument that what
plaintiff has stated is true, such an incident would merely show
that plaintiff has an adverse claim to the ownership of said certif-
icate of stock, but that would not necessarily place the Bank in
the position to inquire as to the real basis of her claim, nor would
it place the Bank in the obligation to recognize her claim and re-
turn to her the certificate outright. A mere claim and of owner-
ship does not establish the fact of ownership. The right of the
plaintiff in such a case would be against the transferor. In fact, this is
the attitude plaintiff has adopted when she filed a charge for estafa
against Rafael J. Campos, which culminated in his prosecution and
conviction, and it is only when she found him to be insolvent that she
decided to go against the Bank. The fact that on the right margin
of the said certificate the name of the plaintiff appeared written,
granting it to be true, can not be considered sufficient reason to
indicate that its owner was the plaintiff considering that said cer-
tificate was indorsed in blank by her brokers Woo, Uy-Tioco &
Naftaly, was guaranteed by indorsement in blank by R.J. Cam-
pos & Co., Inc., and was transferred in due course by the latter
to the Bank under their letter of hypothecation. Said indi-
cium could at best give the impression that the plaintiff was the
original holder of the certificate, but not necessarily the owner at
that point in time.
 11 DE LOS SANTOS v. MCGRATH (Eleazar)
February 28, 1955 | Concepcion, J. | Forged and Unauthorized Transfers
PETITIONERS: APOLINARIO G. DE LOS SANTOS and ISABELO
ASTRAQUILLO
RESPONDENTS: J. HOWARD MCGRATH ATTORNEY GENERAL OF THE
UNITED STATES, SUCCESSOR TO THE PHILIPPINE ALIEN PROPERTY
ADMINISTRATION OF THE UNITED STATES, defendant-appellant.
REPUBLIC OF THE PHILIPPINES, intervenor-appellant.
SUMMARY: De Los Santos contends that he acquired 1.6 million shares ofthe
Lepanto Consolidated Mining Co., Inc. from two people; namely, Juan Campos
and Carl Hess, sometime in 1942. The shares are registered in the name of Vicente
Madrigal in the books of the corporation. After the war, the property was
sequestered by the appropriate state agency since it was classified as Japanese
property. As lawyer for the state, the Attorney General argues that the said shares
were bought by Madrigal, in trust for, and for the benefit of the Mitsuis, a Japanese
corporation, who is the true owner thereof. After such purchase, Madrigal
delivered such shares to the Manila office of the Mitsuis with his blank
indorsement on it. It was just kept there. The said shares were never sold and were
most probably lost or stolen during liberation. The issue in this case is Whether or
not the contested certificates of stock could be transferred to De Los Santos. The
SC said no. It cannot be transferred to De Los Santos. It was established that
Madrigal never disposed of the said shares in any manner whatsoever, except by
turning over the corresponding stock certificates to the Mitsuis. The managers of
Mitsui during the concerned period attest that the Mitsuis neither sold, conveyed,
or alienated the said shares of stock, nor delivered the aforementioned stock
certificates, to anybody during the said period. Even one of the evidence of a
receipt of the alleged purchase by De Los Santos from Campos and Hess, who
were not the registered owners, was lost though a fire. If the owner of the
certificate has indorsed it in blank, and it is stolen from him, no title is acquired
by an innocent purchaser for value. According to the Corporation Law, a share of
stock may be transferred by endorsement of the corresponding stock certificate,
coupled with its delivery. The transfer shall not be valid, except as between the
parties, until it is entered and noted upon the books of the corporation. Therefore,
the alleged sale by Campos and Hess is not valid except as valid as between them
and de los Santos and Astraquillo. It does not bind Madrigal and Mitsui.
DOCTRINE: Since certificates of stock are only quasi-negotiable instruments, a
transferee in good faith under a forged assignment acquires no title which can be
asserted against the true owner, unless the true owner’s own negligence has been
such as to create an estoppel against him.
FACTS:
1. This action involves the title to 1,600,000 shares of stock of the Lepanto
Consolidated Mining Co., Inc., a corporation duly organized and existing
under the laws of the Philippines, hereinafter referred to as the Lepanto.
2. Originally, one-half of said shares of stock were claimed by plaintiff,
Apolinario de los Santos, and the other half, by his co-plaintiff Isabelo
Astraquillo. During the pendency of this case, the latter has allegedly
conveyed and assigned his interest in and to said half claimed by him to the
former.
3. The shares of stock in question are covered by several stock certificates
issued in favor of Vicente Madrigal, who is registered in the books of the
Lepanto as owner of said stocks and whose indorsement in blank appears on
the back of said certificates, all of which, except certificates No. 2279 —
marked Exhibit 2 — covering 55,000 shares, are in plaintiffs' possession. So
was said Exhibit 2, up to sometime in 1945 or 1946 when said possession
was lost under the conditions set forth in subsequent pages.
4. Briefly stated, De los Santos bought 55,000 shares from Juan Campos, in
Manila; that he bought 300,000 shares from Carl Hess several days later; and
that he bought 800,000 shares from Carl Hess, this time for the account and
benefit of Astraquillo. By virtue of vesting P-12, title to the 1,600,000 shares
of stock in dispute was, however, vested in the Alien Property Custodian of
the U. S. as Japanese property. Hence, de los Santos and Astrquillo filed their
respective claims with the Property Custodian.
5. In due course, the Vested Property Claims Committee of the Philippine Alien
Property Administration made a "determination," allowing said claims,
which were considered and heard jointly as Claim No. 535, but, upon
personal review, the Philippine Alien Property Administration made by said
Committee and decreed that "title to the shares in question shall remain in the
name of the Philippine Alien Property Administrator."
6. Consequently, de los Santos and Atraquillo instituted the present action to
establish title to the aforementioned shares of stock. In their complaint, they
pray that judgment be rendered declaring them lawful owners of said shares
of stock, with such dividends, profits and rights as may have accrued thereto;
requiring the state to render accounts and to transfer said shares of stock to
their names; and sentencing the former to pay the costs.
7. The defendant herein is the Attorney General of the U. S., successor to the
"Administrator". He contends, substantially, that, prior to the outbreak of the
war in the Pacific, said shares of stock were bought by Vicente Madrigal, in
trust for, and for the benefit of, the Mitsui Bussan Kaisha, a corporation
organized in accordance with the laws of Japan, the true owner thereof, with
branch office in the Philippines; that Madrigal delivered the corresponding
stock certificates, with his blank indorsement thereon, to the Mitsuis, which
kept said certificates, in the files of its office in Manila, until the liberation of
the latter by the American forces early in 1945; that the Mitsuis had never
 sold, or otherwise disposed of, said shares of stock; and that the stock
certificates aforementioned must have been stolen or looted, therefore, during
the emergency resulting from said liberation.
8. Inasmuch as, pursuant to the Philippine Property Act, all property vested in
the United States, or any of its officials, under the Trading with the Enemy
Act, as amended, located in the Philippines at the time of such vesting, or the
proceeds thereof, shall be transferred to the Republic of the Philippines, the
latter sought permission, and was allowed, to intervene in this case and filed
an answer adopting in substance the theory of the defendant.
9. CFI rendered in favor of de los Santos and Astraquillo. The transfer of said
shares of stock in favor of the Alien Property Custodian of the U. S. of
America, now Philippine Alien Property Administration, is hereby declared
null and void and of no effect.
ISSUE/s
WON de los Santos and Astraquillo had purchased the shares of stock in question. –
NO, neither Madrigal nor the Mitsuis (registered owners of the shares) had alienated
shares of stock in question. It is not even claimed that either had, through negligence,
given — occasion for an improper or irregular disposition of the corresponding stock
certificates. De los Santos and Astraquillo merely argue without any evidence
whatsoever thereon — that Kitajima might have, or must have, assigned the
certificates
RULING: In conclusion, when the Property Custodian issued the Vesting Order
complained of, the shares of stock in question belonged to the Mitsuis, admittedly an
enemy corporation, so that Vesting Order is in conformity with law and should be
upheld. Wherefore, the decision appealed from is hereby reversed, and the complaint,
accordingly, dismissed, with costs against the plaintiffs-appellees. It is so ordered.
RATIO:
1. Even, however, if Juan Campos and Carl Hess had sold the shares of stock in
question, as testified to by De los Santos, the result, insofar as plaintiffs are
concerned, would be the same. It is not disputed that said shares of stock were
registered, in the records of the Lepanto, in the name of Vicente Madrigal.
2. Neither it is denied that the latter was, as regards said shares of stock, a mere
trustee for the benefit of the Mitsuis.
3. The record shows — and there is no evidence to the contrary — that Madrigal
had never disposed of said shares of stock in any manner whatsoever, except
by turning over the corresponding stock certificates, late in 1941, to the
Mitsuis, the beneficial and true owners thereof.
4. It has, moreover, been established, by the uncontradicted testimony of
Kitajima and Miwa, the managers of the Mitsuis in the Philippines, from 1941
to 1945, that the Mitsuis had neither sold, conveyed, or alienated said shares
of stock, nor delivered the aforementioned stock certificates, to anybody
during said period.
5. Pursuant to the provision of Corporation Law, a share of stock may be
transferred by endorsement of the corresponding stock certificate, coupled
with its delivery.
6. However, the transfer shall "not be valid, except as between the parties," until
it is "entered and noted upon the books of the corporation."
7. No such entry in the name of the plaintiffs herein having been made, it
follows that the transfer allegedly effected by Juan Campos and Carl Hess in
their favor is "not valid, except as between" themselves. It does not bind
either Madrigal or the Mitsuis, who are not parties to said alleged transaction.
8. What is more, the same is "not valid," or, in the words of the Supreme Court
of Wisconsin "absolutely void" and, hence, as good as non-existent, insofar
as Madrigal and the Mitsuis are concerned.
9. For this reason, although a stock certificate is sometimes regarded as quasi-
negotiable, in the sense that it may be transferred by endorsement, coupled
with delivery, it is well settled that the instrument is non-negotiable, because
the holder thereof takes it without prejudice to such rights or defenses as the
registered owner or creditor may have under the law, except insofar as such
rights or defenses are subject to the limitations imposed by the principles
governing estoppel.
10. Certificates of stock are not negotiable instruments, consequently, a
transferee under a forged assignment acquires no title which can be asserted
against the true owner, unless his own negligence has been such.
11. If the owner of the certificate has endorsed it in blank, and it is stolen from
him, no title is acquired by an innocent purchaser for value as to create an
estoppel against him
12. The status of quasi-negotiability generally accorded to, and at present enjoyed
by, certificates of stock, under the Philippine law, is in itself a recognition of
the fact that the certificates are non-negotiable. Instead of sustaining
appellees' claim, section 5 of the uniform Stock Transfer Act, which "gives
full negotiability to certificates of stock,"refutes said claim and confirms the
non-negotiable character of stock certificates in the absence of said Unifrom
Act, for, obviously, the same could not have given, negotiability to an
instrument already possessing this attribute prior thereto.
13. Again, apart from being distinct from the general Corporation Law, the
aforementioned Uniform Act is not in force in the Philippines. In this
connection, it should be noted that this special piece of legislation was
adopted in some states of the union as early as the year 1910.
14. The failure of the Philippine government to incorporate its provisions in our
statute books, for a period of almost 45 years, is, to our mind, clear proof of
the unwillingness of our department to change the policy set forth in section
35 of Act No. 1459. Needless to say, this fact negates our authority — which
is limited to the interpretation of the law, and its application, with all its
imperfections — to abandon what the dissenting opinion characterizes as the
 "civil law standpoint," and substitute, in lieu thereof, the commercial
viewpoint, by applying said section 5 of the Uniform Stock Transfer Act,
although not a part of the law of the land.
15. Indeed, even in matters generally considered as falling within "commercial
territory", the Roman Law concept has not given way in the Philippines to
the Common Law approach, except when there isexplicit statutory provision
to the contrary.
16. In the case at bar, neither Madrigal nor the Mitsuis had alienated shares of
stock in question. It is not even claimed that either had, through negligence,
given — occasion for an improper or irregular disposition of the
corresponding stock certificates. De los Santos and Astraquillo merely argue
without any evidence whatsoever thereon — that Kitajima might have, or
must have, assigned the certificates on or before December 1942, although,
as above stated, this is, not only, improbable, under the conditions, then
obtaining, but, also., impossible, considering that, in April 1943, Kitajima
delivered the instruments to Miwa, who kept them in its possession until
1945.
17. At any rate, such assignment by Miwa — granting for the sake of argument
the accuracy of the surmise of plaintiffs herein — was unauthorized by the
mitsuis, who, in the light of the precedents cited above, are not chargeable
with negligence.
18. In other words, assuming that Kitajima had been guilty of embezzlement, by
negotiating the stock certificates in question for his personal benefit, as
claimed by the de los Santos and Astraquillo, the title of his assignees and
successors in interest would still be subject to the rights of the registered
owner, namely, Madrigal, and consequently, of the party for whose benefit
and account the latter held the corresponding shares of stock, that is to say,
the Mitsuis.
19. At any rate, at the time of the alleged sales in their favor, de los Santos
and Astraquillo were aware of sufficient facts to put them on notice of
the need of inquiring into the regularity of the transactions and the title
of the supposed vendors. Indeed, the certificates of stock in question were
in the name of madrigal. Obviously, therefore, the alleged sellers
(Campos and Hess) were not registered owners of the corresponding
shares of stock. Being presumed to know the law — particularly the
provisions of section 35 of Act No. 1459 — and, as experienced traders in
shares of stock, de los Santos and Astraquillo must have, accordingly, been
conscious of the consequent infirmities in the title of the supposed vendors,
or of the handicaps thereof.
20. Moreover, the aforementioned sales were admittedly it and de los Santos and
Astraquillo had actual knowledge of these facts and of the risks attendant to
the alleged transaction.
21. In other words, de los Santos’ and Astraquillo’s hostile to the Japanese, who
had prohibited advisedly assumed those risks and, hence, they can not validly
claim, against the registered stockholder, the status of purchasers in
good faith.
22. Madrigal and the Mitsuis are not privies to the alleged sales by Campos and
Hess to the plaintiff’s de los Santos and Astraquillo, contrary to the latter's
pretense.
23. Hence, as the undisputed principal or beneficiary of the registered owner
(Madrigal), the Mitsuis may claim his rights, which cannot be exercised by
the plaintiffs, not only because their alleged title is not derived either from
madrigal or from the Mitsuis, but, also, because it is in derogation, of said
rights.
Bengzon, J. Dissenting Opinion:
That the shares were disposed of by officers of the Mitsui in 1942, is not improbable,
considering: (a) the shares were purposely kept endorsed in blank before and during
the war; (b) the Mitsui did not report the shares to the American High Commissioner,
violating the latter's order of July 1941; (c) the shares were valueless during the war
because the Japanese government had seized the corporate property; (d) the officers
of Mitsui possibly foresaw the final result of the Pacific War, and made the most of
their belongings before the oncoming disaster; and (e) the only other alternative that
may explain how the shares reached the hands of Hess and Campos in 1942 — theft
or loss before 1945 — is not asserted nor proven.
Against this probability — which must be accepted, because the shares were
subsequently found in the possession of Hess and Campos, who cannot be declared to
have stolen them — the defendants countered with a possibility that those shares had
been looted after the arrival of the Americans in Manila in 1945.
Even on grounds of equity, plaintiffs should win. Who caused these shares to be
endorsed in blank? Who kept them thus even knowing the dangers of loss or
confusion? Who allowed its officers to have access to those shares? Who appointed
those officers?
Incidentally, these shares, I understand, are now worth much more than the amount
invested by plaintiffs. I find no reluctance to validate their good fortune. For I have
always maintained that in contracts involving speculation, the resultant profit to the
purchaser, however sizable, can never of itself serve to becloud the genuineness of the
transaction.
Overshadowing the deliberative process of the majority opinion, I perceive the guiding
principle in civilian affairs that, the purchaser of goods acquires no better title than his
seller had. It examined the problem from a civil law standpoint. Again, perspective,
less than perfect, inasmuch as the issue arises on Commercial territory, wherein the
need of promoting exchange of goods in business have often allowed purchasers for
value in good faith to obtain a better title than their seller had, for instance, (1)
purchasers of goods from stores open to the public (Art. 85 Code of Commerce, Art.
1505 New Civil Code) (2) purchasers for value in good faith of negotiable bearer
instruments, see supra, and (3) purchasers in good faith for value of shares endorsed
in blank, under the Uniform Stock Transfer Act.
 012 Neugene Marketing v. CA (Dim) violation of the trust relationship and after their having been stolen, would be void,
Feb. 18, 1999 | Purisima J. | Blank Certificates of Stock even when such transfers have been registered in the stock and transfer book.
PETITIONERS: Neugene Marketing Inc., Leoncio Tan, Nicanor Martin, Sonny
Moreno, Johnson Lee, and the Securities and Exchange Commission
RESPONDENTS: Court of Appeals, Arsenio Yang, Jr., Charles Sy, Lok Chun Suen,
Ban Hua Flores, Ban Ha Chua, and Roger Reyes

SUMMARY: The Uy family were the beneficial owners of Neugene Marketing Inc.
Their arrangement with the corporation was that the stock certificates of the nominee-
shareholders (both the petitioners and the respondents) would be endorsed in blank and
kept with them in their confidential vault for safekeeping. (So essentially the stock cer-
tificates were on paper owned by the petitioners and the respondents, but endorsed in
blank for easier transferability because the Uy family retained beneficial interest). The
respondents (Charles Sy, Arsenio Yang, Jr., and Lok Chun Suen), representing 2/3 of
the outstanding capital stock (5250 shares out of 7000 shares), arranged for a meeting
for the dissolution of NEUGENE which was voted for and approved through a resolu-
tion. The SEC issued a Certificate of Dissolution. The petitioners (a member of the Uy FACTS
family, the Corporate Secretary, and other shareholders) brought an action to annul the 7. The authorized capital stock of NEUGENE is THREE MILLION PESOS
issuance, claiming that they owned 80% of the outstanding capital stock, and that the (P3,000,000.00) divided into THIRTY THOUSAND (30,000) shares with a
Uy family, in order to settle their family squabbles, assigned the shares to the petition- par value of ONE HUNDRED PESOS (P100.00) each. Out of this authorized
ers. They presented the Stock and Transfer Book which indicated the recorded assign- capital stock, SIX HUNDRED THOUSAND PESOS (P600,000.00) had been
ments and transfers of stock that proves that the respondents only had 20% of the out- subscribed by the following subscribers, namely:
standing capital stock and that they could not validly vote for the dissolution as the a. NAME & NO. OF SHARES
meetings were held without quorum, hence null and void. The respondents argue that
the alleged assignment of shares of stock were simulated and fraudulently affected be- 1. Johnson Lee: 600 shares.
cause the stock certificates were stolen from the vault of the Uy family. The SEC nulli-
fied the Certificate of dissolution, but the CA reversed the decision, agreeing with the 2. Lok Chun Suen: 1,200 shares
respondents that the petitioners were not transferees in good faith. The issue before the
3. Charles O. Sy: 1,800 shares
SC was WoN the transfers of stock were valid and whether the respondents had suffi-
cient shareholdings to validly vote for the dissolution of NEUGENE. The SC affirmed 4. Eugenio Flores, Jr.: 2,100 shares
the CA decision and agreed that to constitute a valid transfer, a stock certificate
must be delivered and its delivery must be coupled with an intention of constitut- 5. Arsenio Yang, Jr.: 300 shares
ing the person to whom the stock is delivered the transferee. In this case, there was
no proof of consideration or document evidencing receipt of payment for the shares 5. TOTAL 6,000
transferred to the petitioners. It was also shown that the transfer of stocks required the 8. On May 15, 1986, Eugenio Flores, Jr., assigned, transferred, and conveyed
approval of the respondents which was not shown or indicated in the Stock and Trans- his entire shareholdings in NEUGENE to Sonny Moreno (petitioner), Arsenio
fer Book. Thus, it was concluded that the blank certificates (in the name of the respond- Yang, Jr. (respondent), and Charles Sy (respondent).
ents and kept by the Uy family) were stolen by the petitioners and illegaly transferred 9. Then after a series of stock dividends and other transactions, the number of
to the name of the petitioners. Hence, the dissolution of NEUGENE was valid as the re- outstanding shares of NEUGENE were divided into the following:
spondents had at least 2/3 of the outstanding capital stock as required by the Corpora- a. NAME & NO. OF SHARES
tion Code for a valid dissolution.
◦ Johnson Lee 700
DOCTRINE: When the stock certificates have been endorsed in blank for purposes of
showing the nominee relations, the eventual delivery and registration of the shares in ◦ Lok Chun Suen 1,400
 ◦ Sonny Moreno 1,050
◦ Charles O. Sy 2,800
◦ Arsenio Yang, Jr. 1,050
• TOTAL 7,000
10. On Oct. 24, 1987, the respondents, Charles Sy, Arsenio Yang, Jr., and Lok
Chun Suen, the directors and stockholders then present, and holders of 5,250
shares of NEUGENE (representing at least 2/3 of the outstanding capital
stock of 7000 shares) sent notice to the board and the stockholders for a
meeting for the dissolution of NEUGENE.
11. At the meeting, there was a vote and approval of a resolution for the
dissolution of the corporation. Acting upon the petition for dissolution, the
SEC issued a Certificate of Dissolution.
12. The petitioners then brought an action to annul or set aside the
Certificate of Dissolution, claiming that they are the majority
stockholders, owning 80% of the outstanding capital stock. They claimed
that the Uy family, the beneficial owners of NEUGENE, in order to settle
family squabbles, assigned their shareholdings to the petitioners.
13. They presented the Stock and Transfer Book of NEUGENE, which
indicated that the respondents had already assigned and transferred
their shareholdings to the petitioners and at the time they called the
meeting, they only had 20% of the outstanding capital stock. Therefore,
they could not validly vote for the dissolution, and that the meetings held
were without quorum, hence null and void.
14. On the other hand, the respondents (Sy, Yang, Jr., and Chun Suen) argue
that the alleged assignment of shares of stock in favor of the petitioners
were simulated and fraudulently affected. They claim that the Uy family
had the stock certificates endorsed in blank and kept in their confidential
vault, but were stolen by Johnny Uy who assigned it to the petitioners. (they
basically claimed that they were the nominees of the blankly endorsed
certificates of stock and that the petitioners fabricated the transactions
divesting them of their shareholdings)
15. The SEC Panel of Hearing Officers nullified the Certification of Dissolution.
The SEC en banc affirmed such decision. The Court of Appeals reversed the
decision. The CA held that
◦ To 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 transferee.
◦ Valid transfer requires that the endorsee must also must be a transferee
for value.
◦ The petitioners were not shown to be bona fide transferees for value
and in good faith. No consideration was shown, and no document
was presented evidencing the transaction or receipt showing
payment for the stocks.
◦ CA ruled that the supposed document evidencing the partition and
division of the properties of the Uy Family wass 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.
ISSUE/s:
(3) WoN private respondents (Sy, Yang,Jr., and Suen) lacked the
requisite number of shares of stock or had divested themselves of
their stockholdings when they voted for the resolution dissolving
NEUGENE. - NO. The Entries in the Stock and Transfer Book
support the findings of the CA that the respondents had a sufficient
number of shares to vote for the dissolution.
RULING: WHEREFORE the PETITION is DISMISSED, and the ruling of the
Court of Appeals is AFFIRMED.
RATIO:
12. The findings of the CA were correct in stating 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.
13. 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 for safekeeping. Such beneficial ownership of
the Uy family is admitted not only in the testimonies of private respondents
but also of the petitioners,
14. Both the petitioners, (one a member of the Uy family), and the corporate
secretary, were aware of the real import or significance of the indorsements
in blank on the stock certificates of the private respondents. Obviously, then,
they acted in bad faith in assigning subject certificates of stock to the
petitioners, and in recording the said transfers in dispute in the Stock
and Transfer Book of NEUGENE.
15. 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.
16. 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.
17. Thus, 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.
 013 TENG v. SEC (CRUZ)
February 17, 2016 | Reyes, J. | sec 63
PETITIONER:Anna Teng
RESPONDENTS: Securities and Exchange Commission and Ting Ping Lay
SUMMARY: Ting Ping purchased 480 shares of TCL from Chiu; 1,400 shares
from his brother Teng Ching, who was also the president and operations manager
of TCL; and 1,440 shares from Maluto. Upon Teng Ching's death in 1989, Ting
Ping requested TCL's Corporate Secretary, Anna Teng, to enter the transfer in the
Stock and Transfer Book of TCL for the proper recording of his acquisition to pro-
tect his shareholdings with TCL He also demanded the issuance of new certificates
of stock in his favor. TCL and Teng, however, refused despite repeated demands.
The issue in this case is WoN the surrender of the certificates of stock is a requisite
before registration of the transfer may be made in the corporate books and for the
issuance of new certificates in its stead. The SC ruled in the negative. Section 63 of
the Corporation Code prescribes the manner by which a share of stock may be
transferred. It sets out the minimum requisites must be complied with for there to
be a valid transfer of stocks: 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. The delivery or surrender
adverted to by Teng, is not a requisite before the conveyance may be recorded in its
books. To compel Ting Ping to deliver to the corporation the certificates as a condi-
tion for the registration of the transfer would amount to a restriction on the right of
Ting Ping to have the stocks transferred to his name, which is not sanctioned by
law. The only limitation imposed by Section 63 is when the corporation holds any
unpaid claim against the shares intended to be transferred.c
DOCTRINE: Section 63 of the Corporation Code prescribes the manner by which
a share of stock may be transferred. Said provision is essentially the same as Sec-
tion 35 of the old Corporation Law, which, as held in Fleisher v. Botica Nolasco
Co., defines the nature, character and transferability of shares of stock. Fleisher also
stated that the provision on the transfer of shares of stocks contemplates no re-
striction as to whom they may be transferred or sold. As owner of personal prop-
erty, a shareholder is at liberty to dispose of them in favor of whomsoever he
pleases, without any other limitation in this respect, than the general provisions of
law.
FACTS:
1. Ting Ping purchased 480 shares of TCL Sales Corporation (TCL) from Peter
Chiu (Chiu) on February 2, 1979; 1,400 shares on September 22, 1985 from
his brother Teng Ching Lay (Teng Ching), who was also the president and
operations manager of TCL; and 1,440 shares from Ismaelita Maluto (Ma-
luto).
2. Upon Teng Ching's death in 1989, his son Henry Teng (Henry) took over the
management of TCL.
3. To protect his shareholdings with TCL, Ting Ping requested TCL's Corporate
Secretary, Anna Teng, to enter the transfer in the Stock and Transfer Book of
TCL for the proper recording of his acquisition.
4. He also demanded the issuance of new certificates of stock in his favor.
a. TCL and Teng, however, refused despite repeated demands.
5. Because of their refusal, Ting Ping filed a petition for mandamus with the
SEC against TCL and Teng.
6. The SEC granted Ting Ping's petition
7. TCL and Teng appealed to the SEC en banc, which affirmed the SEC decision
with modification, in that Teng was held solely liable for the payment of
moral damages and attorney's fees.
8. Not contented, TCL and Teng filed a petition for review with the CA, which
dismissed the petition for having been filed out of time and for finding no
cogent and justifiable grounds to disturb the findings of the SEC en banc.
9. This prompted TCL and Teng to come to the Court via a petition for review
on certiorari under Rule 45. the Court denied the petition.
10. After the finality of the Court's decision, the SEC issued a writ of execution
addressed to the Sheriff of the Regional Trial Court (RTC) of Manila.
11. Teng, however, filed a complaint for interpleader with the RTC of Manila,
where Teng sought to compel Henry and Ting Ping to interplead and settle
the issue of ownership over the 1,400 shares, which were previously owned
by Teng Ching. Thus, the deputized sheriff held in abeyance the further im-
plementation of the writ of execution.
12. The RTC of Manila found Henry to have a better right to the shares of stock
formerly owned by Teng Ching, except as to those covered by Stock Certifi-
cate No. 011 covering 262.5 shares, among others.
13. Thereafter, an Ex Parte Motion for the Issuance of Alias Writ of Execution
was filed by Ting Ping where he sought the partial satisfaction of SEC en
banc decision granting the Mandamus petition of Ting Ping, ordering TCL
and Teng to record the 480 shares he acquired from Chiu and the 1,440 shares
he acquired from Maluto, and for Teng's payment of the damages awarded in
his favor.
14. SEC granted the motion. At the same time, the SEC issued an alias writ of
execution.
15. Teng and TCL filed their respective motions to quash the alias writ of execu-
tion, which was opposed by Ting Ping, who also expressed his willingness to
surrender the original stock certificates of Chiu and Maluto to facilitate and
expedite the transfer of the shares in his favor.
 16. Teng pointed out, however, that the annexes in Ting Ping's opposition did not
include the subject certificates of stock, surmising that they could have been
lost or destroyed.
. Ting Ping belied this, claiming that his counsel Atty. Simon V. Lao already
communicated with TCL's counsel regarding the surrender of the said certificates of
stock.
17. Teng then filed a counter manifestation where she pointed out a discrepancy
between the total shares of Maluto based on the annexes, which is only 1305
shares, as against the 1440 shares acquired by Ting Ping .
18. The SEC denied the motions to quash filed by Teng and TCL
19. Unperturbed, Teng filed a petition for certiorari and prohibition under Rule
65 of the Rules of Court.
20. The SEC, through the Office of the Solicitor General (OSG), filed a Comment
which, subsequently, Teng moved to expunge.cralawred
21. the CA promulgated the assailed decision dismissing the petition and deny-
ing the motion to expunge the SEC's comment.
22. Hence, Teng filed the present petition
23. Teng argues:
. that the CA erred when it held that the surrender of Maluto's stock certificates
is not necessary before their registration in the corporate books and before the issuance
of new stock certificates.
a. She contends that prior to registration of stocks in the corporate books, it is
mandatory that the stock certificates are first surrendered because a corporation will
be liable to a bona fide holder of the old certificate if, without demanding the said
certificate, it issues a new one.
b. She also claims that the CA's reliance on Tan v. SEC is misplaced since
therein subject stock certificate was allegedly surrendered.
24. Ting Ping contends:
. that Section 63 of the Corporation Code does not require the surrender of the
stock certificate to the corporation, nor make such surrender an indispensable condi-
tion before any transfer of shares can be registered in the books of the corporation.
a. Ting Ping considers Section 63 as a permissive mode of transferring shares
in the corporation.
i. Citing Rural Bank of Salinas, Inc. v. CA, he claims that the only limitation
32
imposed by Section 63 is when the corporation holds any unpaid claim against the
shares intended to be transferred.
b. Thus, for as long as the shares of stock are validly transferred, the corporate
secretary has the ministerial duty to register the transfer of such shares in the books of
the corporation, especially in this case because no less than this Court has affirmed the
validity of the transfer of the shares in favor of Ting Ping.
ISSUE/s:
1. WoN the surrender of the certificates of stock is a requisite before registration of
the transfer may be made in the corporate books and for the issuance of new cer-
tificates in its stead - No. sec 63 provides the minimum requisites must be com-
plied with for there to be a valid transfer of stocks. Such is not one of it .
RULING: WHEREFORE, the petition is DENIED. The Decision dated April 29,
2008 and Resolution dated August 28, 2008 of the Court of Appeals in CA-G.R. SP
No. 99836 are AFFIRMED.
Respondent Ting Ping Lay is hereby ordered to surrender the certificates of stock
covering the shares respectively transferred by Ismaelita Maluto and Peter Chiu. Pe-
titioner Anna Teng or the incumbent corporate secretary of TCL Sales Corporation,
on the other hand, is hereby ordered, under pain of contempt, to immediately cancel
Ismaelita Maluto's and Peter Chiu's certificates of stock and to issue new ones in the
name of Ting Ping Lay, which shall include Ismaelita Maluto's shares not covered by
any existing certificate of stock but otherwise validly transferred to Ting Ping Lay.
Costs against petitioner Anna Teng.
SO ORDERED.
RATIO:
1. A certificate of stock is a written instrument signed by the proper officer of a
corporation stating or acknowledging that the person named in the document is
the owner of a designated number of shares of its stock. It is prima facie evidence
that the holder is a shareholder of a corporation.
2. A certificate, however, is merely a tangible evidence of ownership of shares of
stock. It is not a stock in the corporation and merely expresses the contract be-
tween the corporation and the stockholder.
3. The shares of stock evidenced by said certificates, meanwhile, are regarded as
property and the owner of such shares may, as a general rule, dispose of them as
he sees fit, unless the corporation has been dissolved, or unless the right to do so
is properly restricted, or the owner's privilege of disposing of his shares has been
hampered by his own action.
4. Section 63 of the Corporation Code prescribes the manner by which a share of
stock may be transferred. Said provision is essentially the same as Section 35 of
the old Corporation Law, which, as held in Fleisher v. Botica Nolasco Co., defines
the nature, character and transferability of shares of stock.
5. Fleisher also stated that the provision on the transfer of shares of stocks contem-
plates no restriction as to whom they may be transferred or sold. As owner of
personal property, a shareholder is at liberty to dispose of them in favor of whom-
soever he pleases, without any other limitation in this respect, than the general
provisions of law.
6. Under the provision, certain minimum requisites must be complied with for there
to be a valid transfer of stocks:
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.cd
7. It is the delivery of the certificate, coupled with the endorsement by the owner or
his duly authorized representative that is the operative act of transfer of shares
from the original owner to the transferee.
8. The delivery contemplated in Section 63, however, pertains to the delivery of the
certificate of shares by the transferor to the transferee, that is, from the origi-
nal stockholder named in the certificate to the person or entity the stockholder was
transferring the shares to, whether by sale or some other valid form of absolute
conveyance of ownership. "[S]hares of stock may be transferred by delivery to
the transferee of the certificate properly indorsed. Title may be vested in the
transferee by the delivery of the duly indorsed certificate of stock.
9. Teng’s position - that Ting Ping must first surrender Chiu's and Maluto's respec-
tive certificates of stock before the transfer to Ting Ping may be registered in the
books of the corporation -does not have legal basis.
10. The delivery or surrender adverted to by Teng, is not a requisite before the con-
veyance may be recorded in its books.
11. To compel Ting Ping to deliver to the corporation the certificates as a condition
for the registration of the transfer would amount to a restriction on the right of
Ting Ping to have the stocks transferred to his name, which is not sanctioned by
law. The only limitation imposed by Section 63 is when the corporation holds any
unpaid claim against the shares intended to be transferred.
12. In Rural Bank of Salinas, the Court stressed that a corporation, either by its
board, its by-laws, or the act of its officers, cannot create restrictions in stock
transfers. In transferring stock, the secretary of a corporation acts in purely min-
isterial capacity, and does not try to decide the question of ownership. If a corpo-
ration refuses to make such transfer without good cause, it may, in fact, even be
compelled to do so by mandamus.
13. Ting Ping Lay was able to establish prima facie ownership over the shares of
stocks in question, through deeds of transfer of shares of stock of TCL Corpora-
tion. Petitioners could not repudiate these documents. Hence, the transfer of
shares to him must be recorded on the corporation's stock and transfer book.
14. Thus Teng cannot refuse registration of the transfer on the pretext that the photo-
copies of Maluto's certificates of stock submitted by Ting Ping covered only 1,305
shares and not 1,440. As earlier stated, the respective duties of the corporation and
its secretary to transfer stock are purely ministerial.
15. Nevertheless, to be valid against third parties and the corporation, the transfer
must be recorded or registered in the books of corporation.
16. There are several reasons why registration of the transfer is necessary:
. to enable the transferee to exercise all the rights of a stockholder;
a. to inform the corporation of any change in share ownership so that it can
ascertain the persons entitled to the rights and subject to the liabilities of a stockholder;
and
b. to avoid fictitious or fraudulent transfers, among others.
17. In this case, given Ting Ping Lay was able to establish prima facie ownership over
the shares of stocks, registration of the transfer of Chiu's and Maluto's shares in
Ting Ping's favor is a mere formality in confirming the latter's status as a stock-
holder of TCL.
18. Upon registration of the transfer in the books of the corporation, the transferee
may now then exercise all the rights of a stockholder, which include the right to
have stocks transferred to his name.
19. The manner of issuance of certificates of stock is generally regulated by the cor-
poration's by-laws.
20. Section 47 of the Corporation Code states: "a private corporation may provide in
its by-laws for x x x the manner of issuing stock certificates." Section 63, mean-
while, provides that "[t]he capital stock of stock corporations shall be divided into
shares for which certificates signed by the president or vice president, counter-
signed by the secretary or assistant secretary, and sealed with the seal of the cor-
poration shall be issued in accordance with the by-laws."
21. The surrender of the original certificate of stock is necessary before the issuance
of a new one so that the old certificate may be cancelled. A corporation is not
bound and cannot be required to issue a new certificate unless the original certif-
icate is produced and surrendered. Surrender and cancellation of the old certifi-
cates serve to protect not only the corporation but the legitimate shareholder and
the public as well, as it ensures that there is only one document covering a partic-
ular share of stock.
22. In this case, Ting Ping manifested from the start his intention to surrender the
subject certificates of stock to facilitate the registration of the transfer and for the
issuance of new certificates in his name. It would be sacrificing substantial justice
if the Court were to grant the petition simply because Ting Ping is yet to surrender
the subject certificates for cancellation instead of ordering in this case such sur-
render and cancellation, and the issuance of new ones in his name.chanro
 014 LANUZA v. CA (Coscolluela)
March 28, 2005 | Tinga, J. | Nature of STB
PETITIONER: Jesus V. Lanuza, Magadya Reyes, Bayani Reyes, and Ariel Reyes
RESPONDENTS: Court of Appeals, Securities and Exchange Commission,
Dolores Onrubia, Elenita Nolasco, Juan O. Nolasco III, Estate of Faustian M. Onru-
bia, Philippine Merchant Marine School, Inc.
SUMMARY: In 1952, Philippine Merchant Marine Schools, Inc. was incorporated
and in its AOI, there were 700 founders’ shares and 76 common shares as its initial
capital stock subscription. But it was only in 1978 that the stocks and transfer book
(STB) was registered. In the STB there were only 33 common shares issued and
outstanding shares. So, in a 1979 stockholders’ meeting, based on the STB, there
was a quorum of 27 shares, representing more than 2/3 of the issued and outstand-
ing shares. In 1982, the heirs of Acayan (one of the original incorporators) filed
with the SEC a petition for the registration of their property rights over 120 found-
ers’ shares and 12 common shares, making the total issued and outstanding shares
in the STB 165. In 1992 another stockholders’ meeting was called and the quorum
was based on the 165 shares. The Onrubias and Nolascos filed a petition in SEC ar-
guing that the basis of the quorum should be the shares reflected in the AOI and not
the STB. The SEC denied the petition, but SEC En Banc granted the Appeal. Other
stockholders filed an appeal with the CA. They argued that the reliance on the 1952
AOI as basis for determining quorum negates the existence and validty of the STB
which the Onrubias and Nolascos themselves prepared. The CA held that for the
purposes of transacting business, the quorum should be based on the outstanding
capital stock as found in the AOI. The issue in this case is WoN the basis for the
quorum should be the 1952 AOI or the STB. The Supreme Court held that the basis
should be the 1952 AOI. . It is the AOI which indicates that at the time of incorpo-
ration, the incorporators were bona fide stockholders of 700 founders’ shares and
76 common shares. An STB is necessary as a measure of precaution, expediency,
and convenience since it provides the only certain and accurate method of estab-
lishing the various corporate acts and transactions and of showing the ownership of
stock and like matters. However, *see doctrine*. It is generally held that the records
and minutes of a corporation are not conclusive even against the corp but merely
prima facie evidence and may be impeached or even contradicted by other evi-
dence. quorum is based on the totality of the shares which have been subscribed
and issued. To base the the quorum on the STB would work injustice to the owners
and/or successors in interest of the said shares. This case is one instance where re-
sort to documents other than the STB is necessary.
11.
DOCTRINE: An STB is the book which records the names and addresses of all
stockholders arranged alphabetically, the installments paid and unpaid on all stock
for which subscription has been made, and the date of payment thereof; 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 may be prescribed by law. An STB, like
other corporation books and records, is not in any sense a public record, and
thus is not exclusive evidence of the matters and things which ordinarily are or
should be written therein.
FACTS:
1. In 1952, Philippine Merchant Marine School, Inc. (PMMSI) was incorporated
with 700 founders’ shares and 76 common shares as its initial capital stock sub-
scription reflected on its AOI.
2. However, Dolores Onrubia, Elelnita Nolasco, Juan Nolasco III, Estate of
Faustina M. Onrubia (the Onrubias and Nolascos) who were in control of
PMMSI registered the company’s stock and transfer book (STB) for the first
time in 1978.
a. The records show that there were only 33 common shares issued and
outstanding shares of PMMSI.
3. In 1979, a special stockholders’ meeting was called and held on the basis of
what was considered as a quorum of 27 common shares, representing more
than 2/3 of the common shares issued and outstanding.
4. In 1982, the heirs of Acayan (one of the original incorporators) filed with the
SEC a petition for the registration of their property rights over 120 founders’
shares and 12 common shares.
a. It was held by the SEC that they were entitled to the claimed shares
and called for a special stockholders’ meeting to elect a new set of
officers.
b. The shares of the heirs of Acayan was recorded in the STB
5. In 1992, a special stockholders’ meeting was called to elect a new set of di-
rectors. The Onrubias and Nolascos filed a petition with the SEC questioning
the validity of the 1992 stockholders’meeting.
a. The alleged that the quorum for the said meeting should not be based
on the 165 issues and outstanding shares as per the STB but on the
initial subscribed capital stock of 776 shares as found in the 1952
AOI.
6. SEC dismissed the petition, but SEC En Banc granted Onrubias and Nolas-
cos’ appeal holding that the shares of the deceased incorporators should still
be duly represented by the heirs. SEC then ordered the parties to call for a
stockholders’ meeting for the purpose of electing new officers on the basis of
the stockholdings found in the AOI.
7. Jesus Lanuza, Magadya Reyes, Bayani Reyes and Ariel Reyes (stockholders)
filed a petition for review with the CA. Other stockholders also filed another
petition for review of the SEC En banc orders. The petitions were consoli-
dated.
 8. The stockholders argue that the reliance on the 1952 AOI as basis for deter- a. Total shares of stock issued to subscribers or stockholders whether
mining quorum negates the existence and validty of the STB which the Onru- or not fully or partially paid (as long as there is binding subscrip-
bias and Nolascos themselves prepared. tion agreement) except treasury shares.
9. The CA held that for the purposes of transacting business, the quorum should 8. Therefore, quorum is based on the totality of the shares which have been
be based on the outstanding capital stock as found in the AOI.
subscribed and issued. To base the the quorum on the STB would work
10. Hence, this petition
injustice to the owners and/or successors in interest of the said shares. This
ISSUE/s: case is one instance where resort to documents other than the STB is nec-
7. WoN it is the company’s STB which provides the basis for computing the essary.
quorum – NO, the STB does not reflect the totality of the shares which have 9. The STB does not reflect the totality of the shares which have been sub-
been subscribed scribed, more so when the AOI show significantly larger amount of shares.
The Supreme Court quoted in approval the SEC:
RULING: WHEREFORE, the petition is DENIED and the assailed Decision is AF- a. “If at the onset the AOI has 771 shares, the STB should like-
FIRMED. Costs against petitioners. SO ORDERED. wise reflect the 771 shares. Any sale, disposition or even reac-
quisition of the company of its own shares, in which it becomes
RATIO:
a treasury shares, would not affect the total number of shares
1. The contents of the AOI are binding, not only on the corporation but also
in the STB. All that will change are the entries as to the owners
on its shareholders. It is the AOI which indicates that at the time of incor-
of the sahres but not as to the amount of shares already sub-
poration, the incorporators were bona fide stockholders of 700 founders’
scribed.
shares and 76 common shares.
b. This is why the STB was not given probative value.”
2. On the other hand, an STB is the book which records the names and ad-
10. One who is actually a stockholder cannot be denied his right to vote by the
dresses of all stockholders arranged alphabetically, the installments paid
corporation merely because the corporate officers failed to keep its records
and unpaid on all stock for which subscription has been made, and the date
accurately.
of payment thereof; a statement of every alienation, sale or transfer of
11. To disregard the contents of the articles of incorporation would be to pre-
stock made, the date thereof and by and to whom made; and such other
tend that the basic document which legally triggered the creation of
entries as may be prescribed by law.
the corporation does not exist and accordingly to allow great injustice
3. An STB is necessary as a measure of precaution, expediency, and conven-
to be caused to the incorporators and their heirs.
ience since it provides the only certain and accurate method of establishing
the various corporate acts and transactions and of showing the ownership
of stock and like matters.
4. HOWEVER, an STB, like other corporation books and records, is not
in any sense a public record, and thus is not exclusive evidence of the
matters and things which ordinarily are or should be written therein.
5. It is generally held that the records and minutes of a corporation are not
conclusive even against the corp but merely prima facie evidence and may
be impeached or even contradicted by other evidence.
6. The Corp Code provides that quorum in meetings is:
a. Consist of the stockholders representing a majority of the out-
standing capital stock or majority of the members in the case of
non-stock corp
7. Outstanding capital stock on the other hand means:
 015 Uson v. Disomito (CELAJE)
G.R. No. L-42135 | June 17, 1935 | Butte, J. | Unregistered transfer of shares is void
PETITIONER: TORIBIA USON
RESPONDENTS: VICENTE DIOSOMITO, EMETERIO BARCELON,
H.P.L. JOLLYE and NORTH ELECTRIC COMPANY, INC
SUMMARY: Petitioner Toribia Uson filed a civil action for debt in the CIF of
Cavite, No. 2525, against respondent Vicente Diosomito and that upon
institution of said action an attachment was duly issued and levied upon the
property of the defendant Diosomito, including 75 shares of the North Electric
Co., Inc., which stood in his name on the books of the company when the
attachment was levied on January 18, 1932. Uson eventually obtained the 75
shares of North Electric in a public auction. However, respondent Jollye claims
that he is the rightful owner of the shares. What occurred was that Diosomito
sold the shares to respondent Barcelon, then Barcelon sold the shares to Jollye.
Disomito's transfer to Barcelon was only registered in the books of the
corporation only 9 months after the shares were levied upon on.
Issue: W/N a transfer of shares not registered in the books of the corporation is
valid as against a subsequent lawful attachment of said shares? No.
Section 35 of the OLD Corporation Code (which is now Sec. 63 or the NEW
Corporate Code) states: "No transfer, however, shall be valid, except as between
the parties, until the transfer is entered and noted upon 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, and the number of shares transferred."
Therefore, the transfer of the 75 shares in the North Electric Company, Inc.,
made by the defendant Diosomito to the defendant Barcelon was not valid as to
the plaintiff-appellee, Toribia Uson, on January 18, 1932, the date on which
Uson obtained her attachment lien on said shares of stock, which still stood in
the name of Diosomito on the books of the corporation.
In other words, because the transfer of share from Diosomito to Barcelon was
unregistered, at the time of the attachment and levy of the shares by Uson, the
transfer to Barcelon was void as to petitioner Uson. Thus, petitioner Uson wins.
The attachment and levy by Uson on Diosomito's shares takes precedence over
the transfers to Barcelon and to Jollye.
DOCTRINE: All transfers of shares should be entered on the books of the
corporation. And it is equally clear that all transfers of shares not so entered
are invalid as to attaching or execution creditors of the assignors, as well as
to the corporation and to subsequent purchasers in good faith, and indeed,
as to all persons interested, except the parties to such transfers. All transfers
not so entered on the books of the corporation are absolutely void.
FACTS:
1. It appears that Toribia Uson had filed a civil action for debt in the CIF of
Cavite, No. 2525, against Vicente Diosomito and that upon institution of said
action an attachment was duly issued and levied upon the property of the
defendant Diosomito, including seventy-five (75) shares of the North Electric
Co., Inc., which stood in his name on the books of the company when the
attachment was levied on January 18, 1932.
2. Subsequently, on June 23, 1932, in said civil case No. 2525, Toribia Uson
obtained judgment against the defendant Diosomito for the sum of P2,300
with interest and costs. To satisfy said judgment, the sheriff sold said shares
at public auction in accordance with law on March 20, 1933. The plaintiff
Toribia Uson was the highest bidder and said shares were adjudicated to her
for the sum of P2,617.18.
3. In the present action, respondent-appellant H.P.L. Jollye claims to be the
owner of said 75 shares of the North Electric Co., Inc., and presents a
certificate of stock issued to him by the company on February 13, 1933.
4. Defendant Vicente Diosomito was the original owner of said shares of stock,
and on February 3, 1931, he sold said shares to respondent Emeterio Barcelon
and delivered to the latter the corresponding certificates Nos. 2 and 19.
5. But Barcelon did not present these certificates to the corporation for
registration until the 16th of September, 1932, when they were cancelled and
a new certificate, No. 29, was issued in favor of Barcelon, who later
transferred the same of the defendant H.P.L. Jollye to whom a new certificate
No. 25 was issued on February 13, 1933.
6. It will be seen, therefore, that the transfer of said shares by Vicente
Diosomito, the judgment debtor in suit No. 2525, to Barcelon was not
registered and noted on the books of the corporation until September 16,
1932, which was some nine months after the attachment had been levied on
said shares in civil case No. 2525 as above stated.
7. Thus arises in this case one of the most vexing questions in the law of
corporations, namely….
ISSUES:
1. whether a bona fide transfer of the shares of a corporation, not registered or
noted on the books of the corporation, is valid as against a subsequent lawful
attachment of said shares, regardless of whether the attaching creditor had
actual notice of said transfer or not. No.

RULING: We have considered the remaining assignments of error of the appellants
and finding no merit in them in results that the judgment must be affirmed with costs
against the appellants.
RATIO:
1. In Section 35 of the Corporation Law is as follows:
a. SEC. 35. …. Shares of stock so issued are personal property and may be transferred
by delivery of the certificate 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 entered and noted upon 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, and the number of shares
transferred…
2. The (bolded) sentence of the foregoing section immediately applicable in the
present case.
3. The appellants cites decision from a number of states of the American Union
which hold that an unregistered transfer is valid as against the lien of a
subsequent attachment sued out by a creditor of the assignor, whether such
creditor has notice of the transfer or not.
4. These decisions are founded upon the theory that the attachment reaches only
such title or interest as the defendant may have in the property at the time of
the levy; and if all title and interest had previously passed by assignment from
the debtor to a third person, the attaching creditor obtains nothing by the levy;
that the owner of shares of stock has the common law right to dispose of the
same as personal property.
5. But …, none of the decisions cited by the appellants construed statues
identical with ours.
6. Much of the confusion which is to be found in the decision has arisen because
the courts have failed to note the difference in the various statutes of the
American Union on the question considered here.
7. The statutes on this point may be put roughly in three groups: First, those that
provide, in substance, that no transfer of shares is valid for any purpose unless
registered on the books of the corporation.
8. Second, that group which, like our own Act No. 1459, holds to the rule that
no transfer shall be valid except as between the parties until the transfer is
duly registered. This group, according to the best information available here,
includes or has included the State of Arizona, California, the Territory of
Hawaii, Idaho, Iowa, Wisconsin (but Wisconsin later amended its laws so
now it falls under the 3rd group), etc.
9. The thirds group which includes the remaining jurisdictions follows the rule
and the doctrine invoked by the appellant in this case (the doctrine that an
unregistered transfer is valid as against the lien of a subsequent attachment),
which, by amendment of the statutes, is becoming the prevailing rule in the
United States.
10. We prefer to adopt the line followed by the Supreme Courts of Massachusetts
and of Wisconsin (The 3rd Group of Statutes). (See Clews vs. Friedman, 182
Mass., 555; 66 N.E. 201, and In re Murphy, 51 Wis., 519; 8 N.W., 419.)
11. In the latter case (In re Murphy) the court had under consideration a statute
identical with our own section 35, supra, and the court said:
a. We think the true meaning of the language is, and the obvious intention of the
legislature in using it was, that all transfers of shares should be entered, as here
required, on the books of the corporation.
b. And it is equally clear to us that all transfers of shares not so entered
are invalid as to attaching or execution creditors of the assignors, as well as to
the corporation and to subsequent purchasers in good faith, and indeed, as to all
persons interested, except the parties to such transfers.
c. All transfers not so entered on the books of the corporation are absolutely void; not
because they are without notice or fraudulent in law or fact, but because they are
made so void by statute.
12. Note: The State of Wisconsin amended its laws after the case of In re
Murphy, so as to fall in line with the more liberal and rational doctrine of
the third group referred to above, but the court in this case still adhered to a
case decided by the Wisconsin SC before the amendment, and thus In re
Murphy falls under the second group of statutes, a group that our very own
Philippines Corporate Code falls under.
13. To us the language of the legislature is plain to the effect that the right of the
owner of the shares of stock of a Philippine corporation to transfer the same
by delivery of the certificate, whether it be regarded as statutory on common
law right, is limited and restricted by the express provision that "no transfer,
however, shall be valid, except as between the parties, until the transfer is
entered and noted upon the books of the corporation."
14. Therefore, the transfer of the 75 shares in the North Electric Company, Inc.,
made by the defendant Diosomito to the defendant Barcelon was not valid as
to the plaintiff-appellee, Toribia Uson, on January 18, 1932, the date on
which she obtained her attachment lien on said shares of stock which still
stood in the name of Diosomito on the books of the corporation.
 016 BATANGAS BUS COMPANY v. BITANGA (CASTRO)
August 10, 2001 | Ynares-Santiago, J. | Nature of Stock Transfer Book and the effect
of non-registration of STB
PETITIONER: Batangas Laguna Tayabas Bus Company, Inc. et.al
RESPONDENTS: Benjamin Bitanga, et.al
SUMMARY: The Potencianos in this case who are stockholders of Batangas La-
guna Tayabas Bus Company (BLTB) entered into a sale and purchase agreement
with Benjamin Bitanga, president of BMB Property holdings. In the said agree-
ment, the Potencianos will sell their shares of stock in BLTB to Bitanga subject to
the presentation of following documents. Despite the sale being made there was no
registration of the said sale or transger of stock in the Stock Transfer book. Then
the Potencianos resigned from the Board of directors and were replaced by Bitanga
and his group in the said board. A stockholder’s meeting was then organized by the
Bitanga group but the Potencianos were seeking for a postponement. Despite the
notice of postponement the meeting pushed through and 87% of the stockholder’s
voted to re-elect the Potencianos in the said Board. Bitanga group refused to relin-
quish the position.
The SEC hearing panel ruled in favor of Bitanga group saying that it was Michael
Potenciano was the one who requested for the postponement and that the meeting
was void. SEC En Banc reversed the decision and said the stockholder’s meeting
was valid. CA again reversed the decision reinstating the hearing panel’s decision.
The issue now relevant to our topic is WoN the SEC en Banc correctly ruled that
the stockholder’s meeting is valid and that it is the Potencianos who are entitled to
attend the said meeting - Yes, the stockholder’s meeting is valid and it is still the
Potenciano’s who are entitled to the attend because the shares of stock sold were
not yet registered in the books. Hence, no valid transfer yet to Bitanga to entitle his
group to vote and be voted.
DOCTRINE:
According to CLV’s outline:
As to the nature:
Sales and other dispositions of shares of stock must under Sec.63 be registered in
the stock and transfer book: (a) to enable the corporation to know at all times who
are the actual stockholders, and who have standing to exercise the rights pertaining
to the shares; (b) to afford the corporation an opportunity to object or refuse its con-
sent to such transfer when it has claims against such shares; and (c) to avoid ficti-
tious or fraudulent transfers. (as cited in Escano v. Filipinas Mining)
As to the effect of non-registration of transfer in STB:
Until challenged in a proper proceeding, a stockholder of record has a right to par-
ticipate in any meeting; his vote can be properly counted to determine whether a
stockholders’ resolution was approved, despite the claim of the alleged transferee.
On the other hand, a person who has purchased stock, and who desires to be recog-
nized as a stockholder for the purpose of voting, must secure such a standing by
having the transfer recorded on the corporate books. Until the transfer is registered,
the transferee is not a stockholder but an outsider
As to my personal take-away:
The purpose of registration, is two-fold:
a. to enable the transferee to exercise all the rights of a stock-
holder, including the right to vote and to be voted for, and
b. to inform thecorporation of any change in share ownership so
that it can ascertain the persons entitled to the rights and sub-
ject to the liabilities of a stockholder
FACTS:
1. On October 1997, Dolores Potenciano, Max Potenciano, and others
(The Potencianos), Delfin Yorro, and Maya Industries, entered into a
Sale and Purchase agreement whereby they sold to BMB Property
holdings, represented by its President Benjamin Bitanga their shares
of stock in Batangas Laguna Tayabas Bus Company (BLTB) the said
shares represented the 47.98% of the total outstanding capital stock of
BLTB
2. The purchase price for the shares of stock was P72,076,425.00, the
downpayment of which, in the sum of P44,354,723.00, was made pay-
able upon signing of Agreement, while the balance of P27,721,702.00
was payable on November 26, 1997.
3. The contracting parties stipulated that the downpayment was condi-
tioned upon receipt by the buyer of certain documents upon sign-
ing of the Agreement, namely, the
a. Secretary’s Certificate stating that the Board of Directors of
Maya Industries, Inc. authorized the sale of its shares in BLTB
and the
b. Execution of the Agreement, and designating Dolores A. Po-
tenciano as its Attorney-in-Fact; the Special Power of Attor-
ney executed by each of the sellers in favor of Dolores A. Po-
tenciano for purposes of the Agreement.
c. Revocable proxy to vote the subject shares made by the sellers
in favor of the buyer;
 d. Declaration of trust made by the sellers in favor of the buyer
acknowledging that the subject shares shall be held in trust by
the sellers for the buyer pending their transfer to the buyer’s
name; and
e. Duly executed capital gains tax return forms covering the sale,
indicating no taxable gain on the same.
4. Furthermore, the buyer guaranteed that it shall take over the manage-
ment and operations of BLTB but shall immediately surrender the
same to the sellers in case it fails to pay the balance of the purchase
price on November 26, 1997.
5. Barely a month after the Agreement was executed, on November 21,
1997, at a meeting of the stockholders of BLTB, Benjamin Bitanga
and Monina Grace Lim were elected as directors of the corpora-
tion, replacing Dolores and Max Joseph Potenciano.
6. Subsequently, on November 28, 1997, another stockholders meeting
was
7. held, wherein Laureano A. Siy and Renato L. Leveriza were
elected as directors, replacing Candido Potenciano and Delfin
Yorro who had both resigned as such.
8. At the same meeting, the Board of Directors of BLTB elected the fol-
lowing officers:
a. Benjamin Bitanga as Chairman of the Board, President and
Chief Executive Officer;
b. Monina Grace Lim as Vice President for Finance and Supply
and Treasurer;
c. James Olayvar as Vice President for Operations and Mainte-
nance; Eduardo Azucena as Vice President for Administra-
tion;
d. Evelio Custodia as Corporate Secretary; and
e. Gemma Santos as Assistant Corporate Secretary
9. During a meeting of the Board of Director, the newly elected directors
of BLTB scheduled the annual stockholders meeting on May 19, 1998,
to be held at the principal office of BLTB in San Pablo, Laguna.
10. Before the scheduled meeting, Michael Potenciano wrote Benjamin
Bitanga, requesting for a postponement of the stockholders meeting
due to the absence of a thirty-day advance notice. However, there was
no response from Bitanga on whether or not the request for postpone-
ment was favorablyacted upon.
11. On the scheduled date of the meeting, May 19, 1998, a notice of post-
ponement of the stockholders meeting was published in the Manila
Bulletin. Inasmuch as there was no notice of postponement prior
to that, a total of two hundred eighty six stockholders, represent-
ing 87% of the shares of stock of BLTB, arrived and attended the
meeting. The majority of the stockholders present rejected the post-
ponement and voted to proceed with the meeting. The Potenciano
group was re-elected to the Board of Directors
12. However, the Bitanga group refused to relinquish their positions and
continued to act as directors and officers of BLTB.
13. The conflict between the Potencianos and the Bitanga group escalated
to levels of unrest and even violence among laborers and employees
of the bus company.
14. On May 21, 1998, the Bitanga group filed with the Securities and
Exchange Commission a Complaint for Damages and Injunction.
Their prayer for the issuance of a temporary restraining order was,
however, denied at the ex-parte summary hearing conducted by SEC
Chairman Perfecto Yasay, Jr.
15. Likewise, the Potenciano group filed on May 25, 1998, a Complaint
for Injunction and Damages with Preliminary Injunction and
Temporary Restraining Order with the SEC. The said complaint
was granted.
16. The Bitanga group then again filed another complaint with application
for writ of preliminary injunction and prayer for TRO seeking to annul
the stockholder’s meeting
17. The SEC Hearing Panel granted the Bitanga groups application
for a writ of preliminary injunction upon the posting of a bond in
the amount of P20,000,000.00.
18. It declared that the May 19, 1998 stockholders meeting was void on
the grounds that,
a. Michael Potenciano had himself asked for its postponement
due to improper notice; and,
b. There was no quorum, since BMB Holdings, Inc., represented
by the Bitanga group, which then owned 50.26% of BLTBs
shares having purchased the same from the Potenciano group,
was not present at the said meeting.
19. The Hearing Panel further held that the Bitanga Board remains the
legitimate Board in a hold-over capacity
20. The Potenciano group filed a petition for certiorari before the SEC En
Banc seeking an injunction to restrain the implementation of the Hear-
ing Panel’s assailed order
 21. SEC EN BANC RULING: The SEC en banc set aside the order of
the panel and issued a writ of preliminary injunction.
22. The Bitanga group immediately filed a petition for certiorari before
the CA.
23. CA RULING: CA reversed the assailed orders of the SEC En Banc
and reinstated the order of the hearing panel.
ISSUE/s:
1. WoN the Bitanga group was deprived of due process by the SEC en
banc – No, they were given the opportunity to be heard and to pre-
sent evidence
12.
2. WoN SEC committed error in jurisdiction in order for CA to en-
title the Bitanga the extraordinary remedy of certiorari – No, for
there is no reversible error in the findings of the SEC en banc. More-
oer, ther is no patent or gross mistake committed by SEC En Banc
• Other way to paraphrase the issue to conform with CLV’s syl-
labus would be: WoN the SEC en Banc correctly ruled that
the stockholder’s meeting is valid and that it is the Poten-
cianos who are entitled to attend the said meeting - Yes,
the stockholder’s meeting is valid and it is still the Poten-
ciano’s who are entitled to the attend because the shares of
stock sold were not yet registered in the books. Hence, no
valid transfer yet to Bitanga
RULING: WHEREFORE, in view of all the foregoing, the instant petitions for
review are GRANTED. The Decision of the Court of Appeals dated November
23, 1998 in CA-G.R. SP No. 48374 and its resolution dated March 25 1999 are
SET ASIDE. The Orders of the SEC En Banc dated July 21, 1998 and July 27,
1998 in SEC Case No. EB 611 are ordered REINSTATED.
RATIO:
A. BITANGA GROUP WAS NOT DEPRIVED OF DUE PROCESS
1. Due process, in essence, is simply an opportunity to be heard.
2. It cannot be denied that in the case at bar, a hearing on the prayer for
injunction was held on July 9, 1998.
3. Both parties were represented at the said hearing, and the Bitanga
group presented its arguments in opposition to the injunctive relief.
This alone negates any proposition that the Bitanga group was denied
due process.
B. POTENCIANO GROUP ARE STILL THE STOCKHOLDERS ENTITLED
TO ATTEND THE STOCKHOLDER’S MEETING BECAUSE OF FAILURE
TO REGISTER THE SALE OF SHARES IN THE STB
2. It is not disputed that the transfer of the shares of the group of
Dolores Potenciano to the Bitanga group has not yet been rec-
orded in the books of the corporation. Hence, the group of Dolores
Potenciano, in whose names those shares still stand, were the ones
entitled to attend and vote at the stockholders meeting of the BLTB
on 19 May 1998.
3. This being the case, the Hearing Panel committed grave abuse of dis-
cretion in holding otherwise and in concluding that there was no
quorum in said meeting
4. Based on the foregoing premises, the SEC En Banc issued a writ of
preliminary injunction against the Bitanga group. In so ruling, the SEC
En Banc merely exercised its wisdom and competence as a specialized
administrative agency specifically tasked to deal with corporate law
issues.
5. We are in full accord with the SEC En Banc on this matter. Indeed,
until registration is accomplished, the transfer, though valid be-
tween the parties, cannot be effective as against the corporation.
6. Thus, the unrecorded transferee, the Bitanga group in this case, cannot
vote nor be voted for.
7. The purpose of registration, therefore, is two-fold:
a. to enable the transferee to exercise all the rights of a stock-
holder, including the right to vote and to be voted for, and
b. to inform thecorporation of any change in share owner-
ship so that it can ascertain the persons entitled to the
rights and subject to the liabilities of a stockholder
8. Until challenged in a proper proceeding, a stockholder of record has a
right to participate in any meeting. His vote can be properly counted
to determine whether a stockholder resolution was approved, despite
the claim of the alleged transgeree.
9. On the other hand, a person who has purchased stock, and who de-
sires to be recognized as a stockholder for the purpose of voting,
must secure such a standingby having the transfer recorded on
the corporate books. Until the transfer is registered, the transferee is
not a stockholder but an outsider.
10. Indeed, nowhere in the Bitanga groups petition for certiorari before
the Court of Appeals was it shown that the SEC En Banc committed
such patent, gross and prejudicial errors of law or fact, or a capricious
disregard of settled law and jurisprudence, as to amount to a grave
abuse of discretion or lack of jurisdiction on its part. Absent such
showing, neither the Court of Appeals nor this Court should engage in
a review of the facts found nor even of the law as interpreted or applied
by the SEC En Banc, for the writ of certiorari is an extraordinary rem-
edy, and certiorari jurisdiction is not to be equated with appellate ju-
risdiction.
 017 FUA CUN v. SUMMERS(Presh)
March 27, 1923 | Ostrand, J. | Pledge, Mortgages, and Other Encumbrances on
Shares
PETITIONER: Fua Cun (alias Tua Cun)
RESPONDENTS: Ricardo Summers, in his capacity as Sherrif ex-oficio of the
City ofManila, and the China Banking Corporation
SUMMARY: Chua Soco subscribed for 500 shares of stock of China Bank at
P100 per share. He paid 25,000 representing half of the subscription for which a
receipt was issued. Subsequently, Chua Soco issued a promissory note in favor
of the plaintiff, Fua Cun and secured the note with a chattel mortgage on the said
shares of stock.
Chua Soco became indebted to China Bank and failed to pay such which led to
the attachment of the same shares of stock in favor of the bank. Fua Cun con-
tested this and claims that he acquired the right to the 250 fully paid shares and
he must be given priority over the ownership plus damages. The TC ruled in fa-
vor of Fua Cun, declaring that Chua Soco, through the payment of P25,000, ac-
quired the right to 250 fully paid shares.
Issue: WoN Fua Cun has a better right to the shares? Yes. Fua Cun has a better
right to the shares. It is subscription, and not payment of subscription, that grants
to the stockholder the statutory and common rights granted to stockholders.
The SC held that the TC erred in holding that in holding that Chua Soco, by pay-
ing one-half of the subscription price of five hundred shares, in effect became
the owner of 250 shares. Chattel mortgages on shares of stock and other choses
in action are valid as between the parties and that the recording of the mortgage
will furnish constructive notice to third parties. A bank can have no lien on its
own stock for the indebtedness of the stockholders even when the by-laws pro-
vide that the shares shall be transferable only on the books of the corporation and
that no such transfer shall be made if the holder of the shares is indebted to the
corporation. It’s upon the recording in the transfer book that solidifies the fact of
ownership.
As against the rights of Fua Cun, China Banking had no lien unless by virtue of
the attachment. But the attachment was levied after the bank had received notice
of the assignment of Chua Soco's interests to Fua Cun and was therefore subject
to the rights of the latter.
DOCTRINE:
Chattel mortgages on shares of stock and other choses in action are valid as be-
tween the parties and that the recording of the mortgage will furnish constructive
notice to third parties.
Outline: Sec 72. of the Corporation Code provides expressly that "[h]olders of
subscribed shares not fully paid which are not delinquent shall have all the rights
of a stockholders." Clearly therefore, it is subscription to shares of stock that cre-
ates the legal relationship between the stockholder and the corporation; it is sub-
scription, and not the payment of such subscription, that grants to the stock-
holder the statutory and common rights granted to stockholders.
FACTS:
1. On May 18, 1921, Chua Soco executed a promissory note in favor of
the plaintiff, Fua Cun for the sum of P25,000, securing the note with
a chattel mortgage on the shares of stock subscribed for by Chua Soco,
who also endorsed the receipt above mentioned and delivered it to the
mortgagee.
2. Fua Cun took the receipt to the manager of China Bankings and in-
formed him of the transaction with Chua Soco, but was told to await
action upon the matter by the Board of Directors.
3. Chua Soco appears to have become indebted to the China Banking
Corporation in the sum of P37,731.68 for dishonored acceptances of
commercial paper and in an action brought against him to recover this
amount, Chua Soco's interest in the 500 shares subscribed for was at-
tached and the receipt seized by the sheriff. The attachment was levied
after the defendant bank had received notice of the facts that the re-
ceipt had been endorsed over to the plaintiff.
4. Fua Cun thereupon brought the present action maintaining that by vir-
tue of the payment of the one-half of the subscription price of five
hundred shares Chua Soco in effect became the owner of two hundred
and fifty shares and praying that his, the plaintiff's, lien on said shares,
by virtue of the chattel mortgage, be declared to hold priority over the
claim of the defendant Banking Corporation; that the defendants be
ordered to deliver the receipt in question to him; and that he be
awarded the sum of P5,000 in damages for wrongful attachment.
5. The trial court ruled in favor of Fua Cun declaring that Chua Soco,
through the payment of the P25,000, acquired the right to two hundred
and fifty shares fully paid up, upon which shares Fua Cun holds a lien
superior to that of China Banking and ordering that the receipt be re-
turned to said plaintiff. From this judgment the defendants appeal.
ISSUE/s:
1. WoN Fua Cun has a better right to the shares? Yes. Fua Cun has a
 better right to the shares. It is subscription, and not payment of sub-
scription, that grants to the stockholder the statutory and common
rights granted to stockholders.
RULING:
1. The judgment appealed from is modified accordingly, and in all other
respects it is affirmed, with the costs against the appellants Banking
Corporation. So ordered.
RATIO:
2. The TC erred in holding that Chua Soco, by paying one-half of the
subscription price of five hundred shares, in effect became the owner
of 250 shares, the judgment appealed from is in the main correct.
3. The claim of China Banking Corporation was for the non-payment of
drafts accepted by Chua Soco and had no direct connection with the
shares of stock in question.
4. At common law, a corporation has no lien upon the shares of
stockholders for any indebtedness to the corporation (Jones on
Liens, 3d ed., sec. 375) and our attention has not been called to
any statute creating such lien here. On the contrary, section 120
of the Corporation Act provides that "no bank organized under
this Act shall make any loan or discount on the security of the
shares of its own capital stock, nor be the purchaser or holder of
any such shares, unless such security or purchase shall be neces-
sary to prevent loss upon a debt previously contracted in good
faith, and stock so purchased or acquired shall, within six
months from the time of its purchase, be sold or disposed of at
public or private sale, or, in default thereof, a receiver may be
appointed to close up the business of the bank in accordance with
law."
5. Section 35 of the United States National Banking Act of 1864
contains a similar provision and it has been held in various decisions
of the United States Supreme Court that a bank organized under
that Act can have no lien on its own stock for the indebtedness of
the stockholders even when the by-laws provide that the shares
shall be transferable only on the books of the corporation and
that no such transfer shall be made if the holder of the shares is
indebted to the corporation. (Jones on Liens, 3d ed., sec. 384; First
National Bank of South Bend vs. Lanier and Handy, 11 Wall., 369;
Bullard vs. National Eagle Bank, 18 Wall., 589; First National Bank
of Xenia vs. Stewart and McMillan, 107 U.S., 676.) The reasons for
this doctrine are obvious; if banking corporations were given a
lien on their own stock for the indebtedness of the stockholders,
the prohibition against granting loans or discounts upon the se-
curity of the stock would become largely ineffective.
6. With regards to the rights of Fua Cun in the stock in question, it is
argued that the interest held by Chua Soco was merely an equity
which could not be made the subject of a chattel mortgage. Though
the courts have uniformly held that chattel mortgages on shares
of stock and other choses in action are valid as between the par-
ties, there is still much to be said in favor of the defendants' conten-
tion that the chattel mortgage here in question would not prevail over
liens of third parties without notice; an equity in shares of stock is
of such an intangible character that it is somewhat difficult to see
how it can be treated as a chattel and mortgaged in such a man-
ner that the recording of the mortgage will furnish constructive
notice to third parties.
7. As said by the court in the case of Spalding vs. Paine's Adm'r. (81
Ky., 416), in regard to a chattel mortgage of shares of stock:
13. These certificates of stock are in the pockets
of the owner, and go with him where he may happen to lo-
cate, as choses in action, or evidence of his right, without
any means on the part of those with whom he proposes to
deal on the faith of such a security of ascertaining whether or
not this stock is in pledge or mortgaged to others. He finds
the name of the owner on the books of the company as a sub-
scriber of paid-up stock, amounting to 180 shares, with the
certificates in his possession, pays for these certificates their
full value, and has the transfer to him made on the books of
the company, thereby obtaining a perfect title. What other in-
quiry is he to make, so as to make his investment certain and
secure? Where is he to look, in order to ascertain whether or
not this stock has been mortgaged? The chief office of the
company may be at one place to-day and at another tomor-
row. The owner may have no fixed or permanent abode, and
with his notes in one pocket and his certificates of stock in
the other — the one evidencing the extent of his interest in
 the stock of the corporation, the other his right to money ow-
ing him by his debtor, we are asked to say that the mortgage
is effectual as to the one and inoperative as to the other.
8. An equity in shares of stock may be assigned and that the assignment
is valid as between the parties and as to persons to whom notice is
brought home. Such an assignment exists here, though it was made for
the purpose of securing a debt.
9. The endorsement to Fua Cun was accompanied by the delivery of the
receipt to Fua Cun and further strengthened by the execution of the
chattel mortgage, which mortgage, at least, operated as a conditional
equitable assignment.
10. As against the rights of Fua Cun, China Banking had no lien unless by
virtue of the attachment. But the attachment was levied after the bank
had received notice of the assignment of Chua Soco's interests to Fua
Cun and was therefore subject to the rights of the latter. It follows that
as against these rights the defendant bank holds no lien whatever.
11. As we have already stated, the court erred in holding the plaintiff as
the owner of two hundred and fifty shares of stock; "the plaintiff's
rights consist in an equity in five hundred shares and upon payment of
the unpaid portion of the subscription price he becomes entitled to the
issuance of certificate for said five hundred shares in his favor."
 018 Monserrat v. Ceran (Castillo, I)
September 27, 1933 | Villareal, J. | Pledge, Mortgage, and other Encumbrances on
Shares
PLAINTIFF & APPELLEE: Enrique Monserrat
DEFENDANTS: Carlos G. Ceron et. al.
APPELLANTS: Erma, Inc., and Sheriff of Manila
SUMMARY: Monserrat was the president and manager of Manila Yellow
Taxicab Co., Inc., and the owner of P1,200 common shares of stock thereof.
Monserrat assigned to Ceron a usufruct of half of the common shares of stock.
Certificate of Stock No. 7 was then issued in the name of Ceron. It was also
recorded on the Stock and Transfer Book of the company. However, such
assignment only gave Ceron the right to enjoy, during his lifetime, the profits
which might be derived from the shares assigned him, prohibiting him from
selling, mortgaging encumbering or otherwise exercising any act implying
absolute ownership of all the shares. Monserrat had reserved for himself and his
heirs the right to vote derived from said shares of stock and to recover the
ownership thereof at the termination of the usufruct. Ceron mortgaged to Matute
600 common shares of stock. Ceron also endorsed to Matute the Certificate of
Stock. Ceron showed Matute the Stock and Transfer Book of the company.
Matute saw that the stocks were in the name of Ceron, free from any lien or
encumbrance. When Ceron mortgaged the stocks, he did not inform Matute of
Monserrat’s reservation. Issue is WoN it is necessary to enter upon the books of
the corporation a mortgage constituted on common shares of stock in order for
the mortgage to be valid? Court ruled in the negative stating that Section 35 of
the (old) corporation law does not require an entry except of transfers of shares
of stock in order that such transfers may be valid against third persons. Transfer
means an act by which property of one person is vested in another and transfer of
shares implies any means whereby one may be divested of and another acquire
ownership of stock. A chattel mortgage refers to personal property given as
security for payment of a debt. Such personal property has to be delivered. But
the transfer is not absolute, being a mere security. A chattel mortgage is not a
transfer because there is no intent of passing the rights the transferor has to the
transferee. A chattel mortgage is not the transfer referred to in the (old)
corporation law. Hence, inasmuch as a chattel mortgage is not a complete and
absolute alienation of the dominion and ownership thereof, its entry and notation
upon the books of the corporation is not a necessary requisite to its validity.
DOCTRINE (from outline): When the shares are covered by a stock certificate
issued in the name of the usufructuary by the original owner with the agreement
between them that they should not be disposed or sold, but the registered owner
had pledged the shares by endorsement and delivery of the certificate to one who
took them in good faith and for value, the latter shall be preferred since registra-
tion of a security arrangement covering shares of stock does not require, for its
validity and binding effect on the world, to be registered in the stock and transfer
book.
FACTS:
1. The plaintiff herein, Enrique Monserrat, was the president and manager of
the Manila Yellow Taxicab' Co., Inc., and the owner of 1,200 common shares
of stock thereof.
2. On March 25, 1930, in consideration of the interest shown and the financial
aid extended him in the organization of the corporation by Carlos G. Ceron,
one of the defendants herein, Enrique Monserrat assigned to the former the
usufruct of half of the aforesaid common shares of stock, the corresponding
certificate of stock No. 7, having been issued in the name of said Carlos G.
Ceron to that effect on March 24, 1930 (Exhibit 1).
3. Said assignment or transfer only gave the transferee the right to enjoy, during
his lifetime, the profits which might be derived from the shares assigned him,
prohibiting him from selling, mortgaging, encumbering, alienating or
otherwise exercising any act implying absolute ownership of all or any of the
shares in question, the transferor having reserved for himself and his heirs the
right to vote derived f rom said shares of stock and to recover the ownership
thereof at the termination of the usufruct (Exhibit A).
4. Stock certificate No. 7 was recorded in the name of Carlos G. Ceron and the
aforesaid deed of transfer Exhibit A, was noted by himself as secretary, on
page 22 of the Stock and Transfer Book of the Manila Yellow Taxicab Co.,
Inc.
5. By way of defense, the defendants herein alleged that on February 20, 1931,
Eduardo R. Matute, president of the defendant corporation, Erma, Inc., and
the defendant Carlos G. Ceron, appeared at the plaintiff's office on Mabini
Street, Manila, and there Ceron, at a distance of about three meters from the
plaintiff, showed Matute the stock book of the Manila Yellow Taxicab Co.,
Inc.
6. Matute did not see the annotation on page 22 thereof regarding Exhibit A
which, according to Ceron, was -executed two months after March 25, 1930,
the date on which it appears to have been executed. Ceron alleges that, upon
instructions of the plaintiff, he did not make any notation of said document
in the stock book until May 5, 1931, the date on which the shares of stock in
question were to be sold at public' auction to satisfy his debt to Matute.
7. On February 26, 1931, Carlos G. Ceron mortgaged to Eduardo R. Matute
some shares of stock of the Manila Yellow Taxicab Co., Inc., among which
were the 600 common shares of stock in question, for the sum of P30,000,
Ceron endorsed to Matute the certificate of stock Exhibit 1, of which Matute
 has been in possession ever since.
8. When Ceron mortgaged the shares in question to Matute, he did not inform
Matute of the existence of the document, Exhibit A, and the latter never had
any knowledge thereof. When he was asked by the plaintiff whether he
succeeded in carrying out his transaction with Matute, Carlos G. Ceron
informed him of the aforesaid mortgage at the beginning of March 1931.
Ceron continued as secretary of the Manila Yellow Taxicab Co., Inc., until
May 5, 1931.
ISSUES:
1. WoN it is necessary to enter upon the books of the corporation a mortgage
constituted on common shares of stock in order for the mortgage to be valid
– NO, Section 35 of the (old) corporation law does not require an entry except
of transfers of shares of stock in order that such transfers may be valid against
third persons.
RULING: Wherefore, the judgment appealed from is hereby reversed and the
defendants are absolved from the complaint herein which is dismissed with costs
against the appellee. So ordered.
RATIO:
1. Section 35 of the (old) Corporation Code17 does not require any entry except
of transfers of shares of stock in order that such transfers may be valid as
against third persons. Now, what did the Legislature mean in using the word
"transfer"?
2. Inasmuch as it does not appear from the text of the Corporation Law that an
attempt was made to give a special signification to the word "transfer", we
shall construe it according to its accepted meaning in ordinary parlance.
3. The word "transferencia" (transfer) is defined by the "Diccionario de la
Academia de la Lengua Castellana" as "acción y efecto de transferir" (the act
and effect of transferring) ; and the verb "transferir", as "ceder o renunciar en
otro el derecho o dominio que se tiene sobre una cosa, haciéndole dueño de
ella" (to assign or waive the right in, or absolute ownership of, a thing in favor
of another, making him the owner thereof).
4. "Transfer' means any act by which property of one person is vested in another,
17
SEC. 35. The capital stock of stock corporations shall be divided into shares for which cer-
tificates signed by the president or the vice-president, countersigned by the secretary or clerk
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 cer-
tificate 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 trans-
fer is entered and noted upon the books of the corporation so as to show the names of the par-
ties to the transaction, the date of the transfer, the number of the certificate, and the number of
shares transferred.
and 'transfer of shares', as used in Uniform Stock Transfer Act, implies any
means whereby one may be divested of and another acquire ownership of
stock.
5. Although a chattel mortgage, accompanied by delivery of the mortgaged
thing, transfers the title and ownership thereof to the mortgage creditor, such
transfer is not absolute but constitutes a mere security for the payment of the
mortgage debt, the transfer in question becoming null and void from the time
the mortgage debtor complies with his obligation to pay his debt.18
6. Noble v Ft. Smith Wholesale Grocery Co.: A 'transfer' is the act by which the
owner of a thing delivers it to another with the intent of passing the rights
which he has in it to the latter, and a chattel mortgage is not within the
meaning of such term.
7. The chattel mortgage is not the transfer referred to in section 35 of Act No.
1459 commonly known as the Corporation Law, which transfer should be
entered and noted upon the books of a corporation in order to be valid, and
which, as has already been said, means the absolute and unconditional
conveyance of the title and ownership of a share of stock.
8. In accordance with said section 35 of the Corporation Law, only the transfer
or absolute conveyance of the ownership of the title to a share need be entered
and noted upon the books of the corporation in order that such transfer may
be valid, therefore, inasmuch as a chattel mortgage of the aforesaid title is not
a complete and absolute alienation of the dominion and ownership thereof,
its entry and notation upon the books of the corporation is not a necessary
requisite to its validity.
9. Furthermore, when Matute, as president of Erma, Inc. went to the office of
Manila Yellow Taxicab Co., Inc to examine the Stock and Transfer Book of
said corporation, Matute found nothing but that the shares in question were
recorded therein in the name of said Carlos G. Ceron, free from all liens and
encumbrances and no reference made to the deed Exhibit A.
10. The defendant, Carlos G. Ceron himself, testified that when he mortgaged his
shares, he said nothing to Erma, Inc., about the existence of the deed, Exhibit
A, he might not succeed in obtaining the loan he applied for, with the said
shares as security, and that the notation of Exhibit A in question appearing in
the books of the corporation was placed there only on May 5, 1931, the same
date on which the 600 common shares were to have been sold at public
No share of stock against which the corporation holds any unpaid claim shall be transferable
on the books of the corporation.
18
SEC. 3. A chattel mortgage is a conditional sale of personal property as security for the pay-
ment of a debt, or the performance of some other obligation specified therein, the condition
being that the sale shall be void upon the seller paying to the purchaser a sum of money or do-
ing some other act named. If the condition is performed according to its terms the mortgage
and sale immediately become void, and the mortgagee is thereby divested of his title (Act No.
1508, as amended by Act No. 2496).
 auction, together with the preferred shares, which were delivered to the
sheriff for that purpose by Erma, Inc., in view of Carlos G. Ceron's default in
the payment of the loan secured by them. From the time said shares of stock
in question were mortgaged by Carlos G. Ceron on February 26, 1931, the
corresponding certificate has been in possession of the defendant entity,
Erma, Inc., without any notation thereon relative to the deed Exhibit A.
11. It is obvious that the defendant entity Erma, Inc., as a conditional purchaser
of the shares of stock in question given as security for the payment of his
credit, acquired in good faith Carlos G. Ceron's right and title to the 600
common shares of stock evidenced by certificate No. 7 of the Manila Yellow
Taxicab Co., Inc., and as such conditional purchaser in good faith, it is
entitled to the protection of the law.

Note: CLV's outline says Ceran but it’s Ceron in the case.
 019 CHUA GUAN v. SAMAHANG MAGSASAKA, INC. (Callueng)
November 2, 1935 | Butte, J. | Pledge, Mortgage and Other Encumbrances on Shares
PETITIONER: Gonzalo Chua Guan
RESPONDENTS: Samahang Magsasaka, Inc. And Simplicio Ocampo, Adriano
G. Sotto, And Emilio Vergara, As President, Secretary and Treasurer Respec-
tively of The Same
SUMMARY: Gonzalo H. Co Toco was the owner of 5,894 shares of the capital
stock of the corporation, Samahang Magsasaka, Inc represented by nine certifi-
cates having a par value of P5 per share. He mortgaged said 5,894 shares to
Chua Chiu to guarantee the payment of a debt of P20,000. The said certificates
of stock were delivered to Chua Chiu. The said mortgage was duly registered in
the office of the registered of deeds of Manila and in the office of the said corpo-
ration. Chua Chiu assigned all his right and interest in said mortgage to Chua
Guan and the assignment in the office of the register of deeds in the City of Ma-
nila and in the office of the said corporation. Gonzalo H. Co Toco, having de-
faulted in the payment of said debt at maturity, Chua Guan foreclosed said mort-
gage and delivered the certificates of stock and copies of the mortgage and as-
signment to the sheriff of the City of Manila. The sheriff auctioned said 5,894
shares of stock on and Chua Guan having been the highest bidder for the sum of
P14,390, the sheriff executed in his favor a certificate of sale of said shares.
Chua Guan tendered the certificates of stock standing in the name of Gonzalo H.
Co to the proper officers of the corporation for cancellation and demanded that
they issue new certificates in his name. The said officers refused and still refuse
to issue said new shares in the name of Chua Guan. The officers argued that
prior to the date when Chua Guan made his demand, nine attachments had been
issued and served and noted on the books of the corporation against the shares of
Gonzalo H. Co Toco and Chua Guan objected to having these attachments noted
on the new certificates which he demanded. ISSUES: (1) WoN the registration
of the chattel mortgage in the registry of chattel mortgages in the office of the
register of deeds of Manila give constructive notice to attaching creditors. NO,
because the registration of the chattel mortgage in the office of the corporation
was not necessary and had no legal effect (2) WoN the mortgage took priority
over the writs of attachment. NO, because Chua Guan failed to registered the
chattel mortgage in the register of deeds of the principal place of business of the
corporation. It is a general rule that for purposes of execution, attachment and
garnishment, it is not the domicile of the owner of a certificate but the domicile
of the corporation which is decisive. It seems to us a reasonable construction of
Section 4 of Act No. 1508 to hold that the property in the shares may be deemed
to be situated in the province in which the corporation has its principal office or
place of business. If this province is also the province of the owner's domicile, a
single registration is sufficient. If not, the chattel mortgage should be registered
both at the owner's domicile and in the province where the corporation has its
principal office or place of business. In this sense the property mortgaged is not
the certificate but the participation and share of the owner in the assets of the
corporation.
DOCTRINE: In order for the chattel mortgage on shares of stock to be valid and
binding on third parties, registration thereof in the stock and transfer book is not
required and not legally effective. What is necessary is that the chattel mortgage
over the shares be registered in the Registry of Deeds of the principal place of
business of the corporation, as well as in the Registery of Deeds of the
stockholders’ domicile.
FACTS:
1. The complaint alleges that the defendant Samahang Magsasaka, Inc.
is a corporation duly organized under the laws of the Philippine Is-
lands with principal office in Cabanatuan, Nueva Ecija, and that the
individual defendants are the president, secretary and treasurer respec-
tively of the same
2. Gonzalo H. Co Toco was the owner of 5,894 shares of the capital stock
of the said corporation represented by nine certificates having a par
value of P5 per share. Gonzalo H. Co Toco, a resident of Manila, mort-
gaged said 5,894 shares to Chua Chiu to guarantee the payment of a
debt of P20,000 due on or before June 19, 1932. The said certificates
of stock were delivered with the mortgage to the mortgagee, Chua
Chiu. The said mortgage was duly registered in the office of the reg-
istered of deeds of Manila and in the office of the said corporation.
3. Chua Chiu assigned all his right and interest in said mortgage to the
plaintiff, Chua Guan and the assignment in the office of the register of
deeds in the City of Manila and in the office of the said corporation.
4. The debtor, Gonzalo H. Co Toco, having defaulted in the payment of
said debt at maturity, the Chua Guan foreclosed said mortgage and
delivered the certificates of stock and copies of the mortgage and as-
signment to the sheriff of the City of Manila in order to sell the said
shares at public auction. The sheriff auctioned said 5,894 shares of
stock on and Chua Guan having been the highest bidder for the sum
of P14,390, the sheriff executed in his favor a certificate of sale of said
shares.
5. Chua Guan tendered the certificates of stock standing in the name of
Gonzalo H. Co to the proper officers of the corporation for cancella-
tion and demanded that they issue new certificates in his. The said
 officers (the individual defendants) refused and still refuse to issue
said new shares in the name of Chua Guan
6. The prayer is that a writ of mandamus be issued requiring the defend-
ants to transfer the said 5,894 shares of stock to the Chua Guan by
cancelling the old certificates and issuing new ones in their stead.
7. The special defenses set up in the answer are as follows, that the de-
fendants refuse to cancel said certificates standing in the name of Gon-
zalo H. Co Toco on the books of the corporation and to issue new ones
in the name of the plaintiff because prior to the date when Chua Guan
made his demand, to wit, February 4, 1933, nine attachments had been
issued and served and noted on the books of the corporation against
the shares of Gonzalo H. Co Toco and Chua Guan objected to having
these attachments noted on the new certificates which he demanded.
There are nine attachments noted on the books of the corporation
against the shares of Gonzalo H. Co Toco.
8. It will be noted that the first eight of the said writs of attachments were
served on the corporation and noted on its records before the corpora-
tion received from the mortgagee Chua Chiu of the mortgage of said
shares dated June 18, 1931.
ISSUE/s:
1. WoN the registration of the chattel mortgage in the registry of chattel
mortgages in the office of the register of deeds of Manila give con-
structive notice to attaching creditors. NO, because the registration
of the chattel mortgage in the office of the corporation was not
necessary and had no legal effect
2. WoN the mortgage took priority over the writs of attachment. NO,
because Chua Guan failed to registered the chattel mortgage in
the register of deeds of the principal place of business of the cor-
poration.
RULING: In view of the premises, the attaching creditors are entitled to priority
over the defectively registered mortgage of the appellant and the judgment appealed
from must be affirmed special pronouncement as to costs in this instance.
RATIO:
1. Let it be noted that the registration of the said chattel mortgage in the
office of the corporation was not necessary and had no legal effect.
(Monserrat vs. Ceron 58 Phil., 469.)
2. The Chattel Mortgage Law, Act No. 1508, as amended by Act No.
2496, contains the following provisions:
a. Sec. 4. A chattel mortgage shall not be valid against any person except the
mortgagor, his executors or administrators, unless the possession of the
property is delivered to and retained by the mortgagee or unless the mort-
gage is recorded in the office of the register of deeds of the province in
which the mortgagor resides at the time of making the same, or, if he resides
without the Philippine Islands in the province in which the property is situ-
ated: Provided, however, That if the property is situated in a different prov-
ince from that in which the mortgagor resides, the mortgage shall be rec-
orded in the office of the register of deeds of both the province in which the
mortgagor resides and that in which the property is situated, and for the
purposes of this Act the City of Manila shall be deemed to be a province.
3. The practical application of the Chattel Mortgage Law to shares of
stock of a corporation presents considerable difficulty and we have
obtained little aid from the decisions of other jurisdictions because that
form of mortgage is ill suited to the hypothecation of shares of stock
and has been rarely used elsewhere.
4. In fact, it has been doubted whether shares of stock in a corporation
are chattels in the sense in which that word is used in chattel mortgage
statutes. This doubt is reflected in our own decision in the case of Fua
Cun vs. Summers and China Banking Corporation (44 Phil., 705), in
which we said:
a. ". . . an equity in shares of stock is of such an intangible character that it is
somewhat difficult to see how it can be treated as a chattel and mortgaged
in such a manner that the recording of the mortgagee will furnish construc-
tive notice to third parties…" And we held that the chattel mortgage there
involved: "at least operated as a conditional equitable assignment.
5. In that case we quoted the following from Spalding vs. Paine's Adm'r.
(81 Ky., 416), with regard to a chattel mortgage of shares of stock:
a. "'These certificates of stock are in the pockets of the owner, and go with
him where he may happen to locate, as choses in action, or evidence of his
right, without any means on the part of those with whom he proposes to deal
on the faith of such a security of ascertaining whether or not this stock is in
pledge or mortgaged to others. He finds the name of the owner on the books
of the company as a subscriber of paid- up stock, amounting to 180 shares,
with the certificates in his possession, pays for these certificates their full
value, and has the transfer to him made on the books of the company,
thereby obtaining a perfect title. What other inquiry is he to make, so as to
make his investment certain and secure? Where is he to look, in order to
ascertain whether or not this stock has been mortgaged? The chief office of
the company may be at one place today and at another tomorrow. The owner
may have no fixed or permanent abode, and with his notes in one pocket
and his certificates of stock in the other — the one evidencing the extent of
his interest in the stock of the corporation, the other his right to money ow-
ing him by his debtor, we are asked to say that the mortgage is effectual as
to the one and inoperative as to the other.'"
6. But the case of Fua Cun vs. Summers and China Banking Corporation
did not decide the question here presented and gave no light as to the
registration of a chattel mortgage of shares of stock of a corporation
under the provisions of section 4 of the Chattel Mortgage Law, supra.
7. Section 4 of Act No. 1508 provides two ways for executing a valid
chattel mortgage which shall be effective against third persons. First,
the possession of the property mortgaged must be delivered to and re-
tained by the mortgagee; and, second, without such delivery the mort-
gage must be recorded in the proper office or offices of the register or
registers of deeds. If a chattel mortgage of shares of stock of a cor-
poration may validly be made without the delivery of possession
of the property to the mortgagee and the mere registration of the
mortgage is sufficient to give constructive notice to third parties,
we are confronted with the question as to the proper place of reg-
istration of such a mortgage. Section 4 provides that in such a case
the mortgage shall be registered in the province in which the mort-
gagor resides at the time of making the same or, if he is a non-resident,
in the province in which the property is situated; and it also provides
that if the property is situated in a different province from that in which
the mortgagor resides the mortgage shall be recorded both in the prov-
ince of the mortgagor's residence and in the province where the prop-
erty is situated.
8. If with respect to a chattel mortgage of shares of stock of a corpo-
ration, registration in the province of the owner's domicile should
be sufficient, those who lend on such security would be confronted
with the practical diffculty of being compelled not only to search
the records of every province in which the mortgagor might have
been domiciled but also every province in which a chattel mort-
gage by any former owner of such shares might be registered. We
cannot think that it was the intention of the legislature to put this al-
most prohibitive impediment upon the hypothecation of shares of
stock in view of the great volume of business that is done on the faith
of the pledge of shares of stock as collateral.
9. It is a common but not accurate generalization that the situs of shares
of stock is at the domicile of the owner. The term situs is not one of
fixed or invariable meaning or usage. Nor should we lose sight of the
difference between the situs of the shares and the situs of the certificate
of shares. The situs of shares of stock for some purposes may be at the
domicile of the owner and for others at the domicile of the corporation;
and even elsewhere. (Cf. Vidal vs. South American Securities Co., 276
Fed., 855; Black Eagle Min. Co. vs. Conroy, 94 Okla., 199; 221 Pac.,
425; Norrie vs. Kansas City Southern Ry. Co., 7 Fed. [2d].158.) It is
a general rule that for purposes of execution, attachment and gar-
nishment, it is not the domicile of the owner of a certificate but the
domicile of the corporation which is decisive. (Fletcher, Cyclopedia
of the Law of Private Corporations, vol. 11, paragraph 5106. Cf. sec-
tions 430 and 450, Code of Civil Procedure.)
10. By analogy with the foregoing and considering the ownership of
shares in a corporation as property distinct from the certificates which
are merely the evidence of such ownership, it seems to us a reasona-
ble construction of Section 4 of Act No. 1508 to hold that the prop-
erty in the shares may be deemed to be situated in the province in
which the corporation has its principal office or place of business.
If this province is also the province of the owner's domicile, a sin-
gle registration is sufficient. If not, the chattel mortgage should be
registered both at the owner's domicile and in the province where
the corporation has its principal office or place of business. In this
sense the property mortgaged is not the certificate but the partic-
ipation and share of the owner in the assets of the corporation.
11. Apart from the cumbersome and unusual method of hypothecating
shares of stock by chattel mortgage, it appears that in the present state
of our law, the only safe way to accomplish the hypothecation of share
of stock of a Philippine corporation is for the creditor to insist on the
assignment and delivery of the certificate and to obtain the transfer of
the legal title to him on the books of the corporation by the cancella-
tion of the certificate and the issuance of a new one to him.
12. From the standpoint of the debtor this may be unsatisfactory because
it leaves the creditor as the ostensible owner of the shares and the
debtor is forced to rely upon the honesty and solvency of the creditor.
Of course, the mere possession and retention of the debtor's certifcate
by the creditor gives some security to the creditor against an attempted
voluntary transfer by the debtor, provided by- laws of the corporation
expressly enact that transfers may be made only upon the surrender of
the certificate.
13. It is to be noted, however, that Section 35 of the Corporation Law (Act
No. 1459) enacts that shares of stock "may be transferred by delivery
of the certifcate endorsed by the owner or his attorney in fact or other
person legally authorized to make the transfer." The use of the verb
"may" does not exclude the possibility that a transfer may be made in
a different manner, thus leaving the creditor in an insecure position
 even though he has the certificate in his possession. Moreover, the
shares still standing in the name of the debtor on the books of the cor-
poration will be liable to seizure by attachment or levy on execution
at the instance of other creditors. (Cf. Uy Piaoco vs. McMicking, 10
Phil., 286, and Uson vs. Diosomito, 61 Phil., 535.)
14. This unsatisfactory state of our law is well known to the bench and
bar. (Cf. Fisher, The Philippine Law of Stock Corporations, pages
163-168.) Loans upon stock securities should be facilitated in order to
foster economic development. The transfer by endorsement and deliv-
ery of a certificate with intention to pledge the shares covered thereby
should be sufficient to give legal effect to that intention and to con-
summate the juristic act without necessity for registration.
 020 BACHRACH MOTOR CO v. LEDESMA (Buenaventura)
August 31, 1937 | Imperial, J. | Pledge, Mortgage and other encumbrances on shares
PETITIONER: The Bachrach Motor Co., Inc.
RESPONDENTS: Mariano Lacson Ledesma, Talisay-Silay Miling Co., Inc., and
The Philippine National Bank
SUMMARY:
Ledesma mortgaged to the Philippine National Bank (PNB) Talisay-Silay Milling
Co., Inc its shares. PNB brought an action against Ledesma and his wife Concep-
cion Diaz for the recovery of a mortgage credit . PNB amended its complaint by
including the Bachrach Motor Co., Inc., as party defendant because they claim to
have rights to some of the subject matters of this complaint CFI ruled in favor of
PNB. Bachrach brought an action in the CFI against the Talisay-Silay Milling Co.,
Inc., to recover P13,850 against the bonus or dividend. Bachrach contends that
pledge could not exist because the certificate was not the shares themselves.
The issue is wether or not shares of stock are personal property and therefore can
be subject to pledge or chattel mortgage.
SC held that it can be subject to pledge or chattel mortgage.
A mortgage or pledge is also governed by the principle in the Civil Code that in
order to be effective as against third persons, it need not appear in a public instru-
ment. This is provided that the thing pledged is in the possession of the creditor. A
pledge of shares is valid & binds third parties when certificates of stock have been
endorsed and delivered to the creditor, even if such does not appear in a public
instrument.
DOCTRINE:
The pledge of shares of stock covered by a certificate is valid and binding on third
parties, when the certificate of stock has been endorsed and delivered to the creditor,
notwithstanding the fact that the contract does not appear in a public instrument.
“Certificates of stock … are quasi-negotiable instruments in the sense that they may
be given in pledge or mortgage to secure an obligation.”
FACTS:
1. Bachrach obtained judgment against Ledesma in the sum of 3K.
2. The special sheriff, in compliance with the writ of execution attached
all right, title to and interest w/c Ledesma may have in any bonus,
dividend, share of stock, money or property w/c Ledesma is entitled
to receive from Talisay Milling.
3. This is by virtue of the fact that Ledesma mortgaged his land in favor
of PNB to guarantee the indebtedness of Talisay Milling or w/c de-
fendant is entitled to receive from Talisay on account of being a stock-
holder.
4. The notice of attachment was served to both Ledesma and Talisay.
Talisay even received a copy of the notice of attachment.
5. On Oct 3, 1927, Bachrach obtained judgment against Ledesma writ of
execution caused attachment of Ledesma’s right of redemption over
parcels of land.
6. On the day of issuance of the execution, real properties were mort-
gaged to PNB to secure payment to said bank by Ledesma of the sum
of P624K
7. In the same instrument of mortgage, Ledesma mortgaged in favor of
PNB shares owned by him in Talisay Millng.
8. Certificate covering 6,300 stock dividends were delivered as security
to Atty. Roman as representative of bank PNB.
9. Talisay Milling granted a bonus or compensation to the owners of the
real properties mortgaged to answer the debts contracted by it with
PNB.
10. Pursuant to this, Ledesma was allotted P19K.
11. PNB brought an action against Ledesma and his wife for the recovery
of mortgage credit.
12. PNB amended its complaint to include Bachrach Motor as a party be-
cause it claims to have some right to certain properties which PNB
was also claiming.
13. CFI Bacolod rendered judgment in favor of PNB.
14. Bachrach brought an action against Talisay to recover the bonus or
dividends declared by the corporation against Mariano Ledesma as
one of the owners of the hacienda w/c had been mortgaged to PNB to
secure obligation of Talisay.
15. Petitioner Bachrach contends that pledge couldn't legally exist be-
cause the certificate was not the shares themselves and that the stock
certificate cannot be the subject matter of a contract of pledge or chat-
tel mortgage.
ISSUE:
1. Whether or not shares of stock are personal property and therefore can
be subject to pledge or chattel mortgage – YES Certificates of stock
or of stock dividends, under the Corporation Law, are quasi negotiable
instruments in the sense that they may be given in pledge or mortgage
to secure an obligation
RULING: For the foregoing consideration the appealed judgment is affirmed, with
the costs of this instance to the plaintiff-appellant. So ordered.

RATIO:

1. Civ. Code provides that: no pledge shall be effective against a 3rd per-
son unless evidence of its date appears in a public instrument.
2. Section 4 of the Chattel Mortgage Law, in so far as it provides that a
chattel mortgage shall not be valid against any person except the mort-
gagor, his executors or administrators, unless the possession of the
property is delivered to and retained by the mortgagee or unless the
mortgage is recorded in the office of the register of deeds of the prov-
ince in which the mortgagor resides.
3. Pledge of the 6,300 stock dividends is valid against the Bachrach be-
cause the certificate was delivered to the creditor bank, notwithstand-
ing the fact that the contract does not appear in a public instrument
4. Certificates of stock or of stock dividends, under the Corporation
Law, are quasi negotiable instruments in the sense that they may
be given in pledge or mortgage to secure an obligation
5. Certificates of stock, while not negotiable in the sense of the law mer-
chant, like bills and notes, are so framed and dealt with as to be trans-
ferable, when property endorsed, by mere delivery, and as they fre-
quently convey, by estoppel against the corporation or against prior
holders, as good a title to the transferee as if they were negotiable, and
inasmuch as a large commercial use is made of such certificates as
collateral security, and it is to the public interest that such use should
be simplify and facilitated by placing them as nearly as possible on the
plane of commercial paper, they are often spoken of and treated as
quasi negotiable, that is as having some of the attributes and par-
taking of the character of negotiable instruments, in passing from
hand to hand, especially where they are accompanied by an as-
signment and power of attorney, executed in blank, to transfer them
to anyone who may obtain possession as holders, even though such
assignment and power are under seal.
 021 Nava v. Peers Marketing Corporation (Daguman)
November 25, 1976 | Aquino, J. | Unpaid Shares
PETITIONER: Ricardo A. Nava
RESPONDENTS: Peers Marketing Corporation
SUMMARY: Teofilo Po as an incorporator subscribed to 80 shares of Peers
Marketing Corporation at P100 a share or a total par value of P8,000. Po paid
P2, 000 or 25% of the amount of his subscription. No certificate of stock was is-
sued to him or, for that matter, to any incorporator, subscriber or stockholder.
Then, Po sold to Nava for P2,000 for 20 shares of his 80 shares. In the deed of
sale Po represented that he was "the absolute and registered owner of twenty
shares" of Peers Marketing Corp. Nava requested the officers of the corporation
to register the sale in the books of the corporation. The request was denied be-
cause Po has not paid fully the amount of his subscription. Nava was informed
that Po was delinquent in the payment of the balance due on his subscription
and that the corporation had a claim on his entire subscription of 80 shares
which included the 20 shares that had been sold to Nava. Nava filed a manda-
mus action in the Court of First Instance of Negros Occidental, Bacolod City
Branch to compel the corporation and its executive vice-president and secretary,
to register the said 20 shares in Nava's name in the corporation's transfer book.
The corporation pleaded the defense that no shares of stock against which the
corporation holds an unpaid claim are transferable in the books of the corpora-
tion. After hearing, the trial court dismissed the petition. Nava appealed. ISSUE:
WoN PMC and its officers can be compelled by mandamus? NO. SC held that
the transfer made by Po to Nava is not the “alienation, sale or transfer of stock”
that is supposed to be recorded in the stock and transfer of book. Pursuant to
sec. 63 of the Corporation Code “No share of stock against which the corpora-
tion holds any unpaid claim shall be transferable on the books of the corpora-
tion.”
DOCTRINE: Only fully paid shares for which certificates of stock have been
issued are subject to the registration requirement in the stock and transfer of book
in cases dealing with their sales and absolute disposition.
FACTS:
1. Teofilo Po, an incorporator of Peers Marketing Corporation (PMC), sub-
scribed 80 shares for a total par value of 8,000 pesos.
2. Po only paid 2,000 pesos or 25% of the amount of his subscription.
3. No certificate of stock was issued to him, for that matterm to any incorpora-
tor, subscriber of stockholder.
4. Sometime thereafter, Po sold his 20 of 80 shares to Ricardo Nava for 2,000
pesos. In the deed of sale, Po represented that he was the absolute and regis-
tered owner of 20 shares of Peers Marketing Corporation.
5. Nava requested the officers of PMC to register the sale in the books of the
corporation. The request was denied because Po has not paid fully the amount
of his subscription. Nava was informed that Po was a delinquent in the pay-
ment of the balance due on his subscription and that the corporation had a
claim on his entire subscription of 80 shares which includes the 20 shares that
has been sold to Nava.
6. Aggrieved, Nava filed a mandamus to the CFI to compel the executive vice-
president and secretary to register the said 20 shares in Nava’s name in the
corporation’s transfer of book.
7. The Corporation answered pleaded the defense that no shares of stock against
which the corporation holds and unpaid claim are transferrable in the books
of the corporation.
8. CFI dismissed the case and applied the ruling of Fua Cun v. Summers and
China Bank Corp. which states, “payment of ½ of the subscription does not
entitle the subscriber to a certificate of stock for ½ of the number of shares
subscribed.
ISSUES:
2. WoN the officers of Peer Marketing Corporation can be compelled by man-
damus to enter in its stock and transfer the book of sale made by Po to Nava?
NO. SC held that the transfer made by Po to Nava is not the “alienation, sale
or transfer of stock” that is supposed to be recorded in the stock and transfer
of book.
RULING: WHEREFORE, petition is dismissed.
RATIO:
1. As a rule, the shares which may be alienated are those which are cov-
ered by certificates of stock, as shown in the following provisions of
the Corporation Law:
2. SEC. 35 (now Sec. 63) The capital stock of stock corporations
shall be divided into shares for which certificates signed by
the president or the vice-president, countersigned by the sec-
retary or clerk 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 deliv-
ery of the certificate 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 entered and noted upon 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 certifi-
cate, and the number of shares transferred.
1. No share of stock against which the corporation holds any un-
paid claim shall be transferable on the books of the corporation.
3. SEC. 36. (re voting trust agreement) The certificates of stock
so transferred shall be surrendered and cancelled, and new
certificates therefor issued to such person or persons, or cor-
poration, as such trustee or trustees, in which new certificates
it shall appear that they are issued pursuant to said agreement.
4. As prescribed in Sec. 35, shares of stock may be transferred by deliv-
ery to the transferee of the certificate properly indorsed. Title may be
vested in the transferee by delivery of the certificate with a written
assignment or indorsement thereof. There should be compliance with
the mode of transfer prescribed by law.
5. The usual practice is for the stockholder to sign the form on the back
of the stock certificate. The certificate may thereafter be transferred
from one person to another. If the holder of the certificate desires to
assume the legal rights of a shareholder to enable him to vote at cor-
porate elections and to receive dividends, he fills up the blanks in the
form by inserting his own name as transferee. Then he delivers the
certificate to the secretary of the corporation so that the transfer may
be entered in the corporation's books. The certificate is then surren-
dered and a new one issued to the transferee.
6. That procedure cannot be followed in the instant case because the 20
shares are not covered by any certificate of stock in Po's name. More-
over, the corporation has a claim on the said shares for the unpaid bal-
ance of Po's subscription. A stock subscription is a subsisting liability
from the time the subscription is made. The subscriber is as much
bound to pay his subscription as he would be to pay any other debt.
The right of the corporation to demand payment is no less incontesta-
ble.
7. No stock certificate was issued to Po. Without stock certificate, which
is the evidence of ownership of corporate stock, the assignment of cor-
porate shares is effective only between the parties to the transaction.
8. The delivery of the stock certificate, which represents the shares to be
alienated, is essential for the protection of both the corporation and its
stockholders
9. A corporation cannot release an original subscriber from paying for
his shares without a valuable consideration or without the unanimous
consent of the stockholders.
10. TAKE NOTE OF THE DIFFERENCE ON NAVA’s ARGU-
MENT BELOW AND WHY IT IS NOT APPLICABLE HERE
2.
11. Nava argues that under Sec. 37, a certificate of stock may be issued
for shares the par value of which have already been paid for although
the entire subscription has not been fully paid. Nava relies on Baltazar
v Lingayen Gulf Electric Power Co., Inc. where it was held that Sec.
37 "requires as a condition before a shareholder can vote his shares
that his full subscription be paid in the case of no par value stock; and
in case of stock corporation with par value, the stockholder can vote
the shares fully paid by him only, irrespective of the unpaid delinquent
shares".
12. There is no parallelism between this case and the Baltazar case. In
Baltazar, the stockholder, an incorporator, was the holder of a certifi-
cate of stock for the shares the par value of which had been paid by
him. The issue was whether the said shares had voting rights although
the incorporator had not paid fully the total amount of his subscription.
That is not the issue in this case.
13. In the Baltazar case, it was held that where a stockholder subscribed
to a certain number of shares with par value and he made a partial
payment and was issued a certificate for the shares covered by his par-
tial payment, he is entitled to vote the said shares, although he has not
paid the balance of his subscription and a call or demand had been
made for the payment of the par value of the delinquent shares.
3.

022 MR Holdings v. Bajar (Daguman)
November 25, 1976 | Villarama Jr., J. | Lis pendens of corporate shares
PETITIONER: MR Holdings Limited
RESPONDENTS: Sheriff Carlos Bajar, Citadel Holdings Inc. Vercigetorix Cor-
porqtion, Manila Golf Country Club and Marcopper Mining Corp.
SUMMARY: Marcopper and Asian Development Bank (ADB) executed a
Principal Loan Agreement and a Complementary Loan agreement whereby ADB
will extend a loan to finance Marcopper’s open pit copper ore mining project.
Marcopper executed a security for ADB a Deed and Real Estate and Chattel Mort-
gage covering real and personal properties including Manila and Golf Country
Club Membership Certificates. Marcopper stopped mining because of the leakage
from the drainage tunnel in Mt. Tapoan and spilled into the waters of Boac rivers.
Due to this, the Pollution Adjudication Board ordered a cease and desist opera-
tions. Marcopper defaulted its loan to ADB. MR Holdlings assumed the obliga-
tion of the former. Subsequently, a Deed of Assignment was assigned by ADB to
MR Holdings all its rights and interests under the principal and complementary
loan agreements. Marcopper also executed a Deed of Assignment whereby it
ceded its interest of its properties, mining equipment and facilities. Marcopper
was also sued by Solidbank on the foreign currency loans granted by the latter.
Civil Case 96-80083. A writ of preliminary attachment was issued by the court
which Sheriff Bajar levied upon the properties of Marcopper including the club
membership shares of the Manila Golf Club. Bajar issued a notice of sale on the
execution pending appeal covering several club membership shares. Marcopper
filed a TRO enjoining the implementation of the writ of execution issued by the
Manila RTC. MR Holdings filed a Manifestation and Notice of Prior Lien, in-
volving its rights as assignee of the club shares of Marcopper which had been
mortgaged and conveyed to ADB, in order to warn future bidders or buyers of the
said mortgage presently subject to execution and proceedings, of the existence of
MR Holding’s prior lien or encumbrance. Bajar issued a notice of sale on execu-
tion pending appeal which set the auction of the levied membership shares of
Marcopper in various clubs. ISSUE WoN the Lis Pendens Rule can apply in ac-
tions affecting title or possession of personal properties? NO. A notice of lis pen-
dens does not apply to actions involving title to or any right or interest in, personal
property, such as the subject membership shares in a private non-stock corpora-
tion. The denial by the RTC and CA of petitioner’s motion to annotate lis pendens
on the subject club membership certificates was rather based on the absence of
law and rules to govern the application of the remedy over personal properties.
No grave abuse of discretion can therefore arise from such adverse ruling predi-
cated on the lack of statutory basis for grant of relief to a party.
DOCTRINE: The process of registering lis pendens is inapplicable to shares of
stock which are personal properties, however, formal notice given to the Corpo-
rate Secretary of claims to the shares of stock shall be deemed equivalent of reg-
istration of encumbrance or assignment of shares on the corporate books, and by
virtue of such registration through notice to the corporation, pending litigation,
3rd parties, or potential transferees pendent lite, may therefore be charged with
constructive notice of claimants title over the subject shares and the pending liti-
gation involving the same
FACTS:
1. MR Holdings is a non-resident foreign corporation. It is a subsidiary cor-
poration of Placer Dome, a foreign corporation which owns 40% of Mar-
copper Mining.
2. Marcopper and Asian Development Bank (ADB) exected a Principal
Loan Agreement and a Complementary Loan agreement whereby ADB
will extend a loan to finance Marcopper’s open pit copper ore mining
project. ADB and Placer Dome executed a Support and Standby Credit
Agreement whereby PD agreed to provide Marcopper with cash flow
support for the payment of its obligations to ADB.
3. Marcopper executed a security for ADB a Deed and Real Estate and
Chattel Mortgage covering real and personal properties including Manila
and Golf Country Club Membership Certificates.
4. Marcopper stopped mining because of the leakage from the drainage tun-
nerl in Mt. Tapoan and spilled into the waters of Boac rivers.
 5. Due to this, the Pollution Adjudication Board ordered a cease and desist
operations.
6. Marcopper defaulted its loan to ADB. MR Hodlings assumed the obli-
gation of the former. Subsequently, a Deed of Assignment was assigned
by ADB to MR Holdings all its rights and interests under the principal
and complementary loan agreements. Marcopper also executed a Deed
of Assignment whereby it ceded its interest of its properties, mining
equipment and facilities.
7. Marcopper was also sued by Solidbank on the foreign currency loans
granted by the latter. Civil Case 96-80083. A writ of preliminary attach-
ment was issued by the court which Sheriff Bajar levied upon the prop-
erties of Marcopper including the club membership shares of the Manila
Golf Club.
8. Bajar issued a notice of sale on the execution pending appeal covering
several club membership shares.
9. Marcopper filed a TRO enjoining the impelementation of the writ of
execution issued by the Manila RTC.
10. In the meantime, MR Holdings pursued other remedies to protect its
rights over the levied properties, it formally notified the Corporate Sec-
retary of Manila Golf Club of the assignment of mortgage under instru-
ments duly registered, and requested the Corporate Secretary “ to record
and reflect the said mortgage and encumbrance upon the described
shares so as to put 3rd parties and the public on notice of the fact of said
mortgage.
11. MR Holdings filed a Manifestation and Notice of Prior Lien, involving
its rights as assignee of the club shares of Marcopper which had been
mortgaged and conveyed to ADB, in order to warn future bidders or buy-
ers of the said mortgage presently subject to execution and proceedings,
of the existence of MR Holding’s prior lien or encumbrance.
12. Bajar issued a notice of sale on execution pending appeal which set the
auction of the levied membership shares of Marcopper in various
clubs.MR Holdings served an Affidavit of 3rd party claim asserting such
legal and beneficial ownership it acquired over the subject club member-
ship shares by virtue of the foreclosure sale.
13. RTC denied the 3rd party claim. Citadel Holdings and Vercingetorix Cor-
poration were the highest bidders of Manila Golf Club Membership Cer-
tificates during the public auction.
Acting on the two identical ex-parte motions filed by movants CITADEL HOLD-
INGS, INC. and VERCINGETORIX CORPORATION, which were declared award-
ees of MANILA GOLF AND COUNTRY CLUB CERTIFICATE NOS. 1412 and
1444, respectively, for having posted the highest bids during the Sheriff’s Auction
Sale on January 19, 1999, and finding both motions to be impressed with merit, the
Court orders the corporate secretary and/or authorized officer of MANILA GOLF
AND COUNTRY CLUB, INC. to register and transfer MANILA GOLF MEMBER-
SHIP CERTIFICATE NO. 1412 to CITADEL HOLDINGS, INC. and MANILA
GOLF MEMBERSHIP CERTIFICATE NO. 1444 to VERCINGETORIX CORPO-
RATION which were levied by virtue of the Writ of Attachment issued in the above-
captioned case as early as September 20, 1996, to the movants and highest bidders
CITADEL HOLDINGS, INC. and VERCINGETORIX CORPORATION, in place
and in lieu of the old membership certificates registered in the name of the judgment-
debtor, defendant MARCOPPER MINING CORPORATION, which said old mem-
bership certificates are hereby declared void and cancelled. SO ORDERED.
14. Manila Golf Club’s Corporate Secretary wrote HR Holding’s
counsel informing the latter that they could not comply with peti-
tioner’s earlier request not to register any transfer of Membership
Certificate Nos. 1412 and 1444 in view of the above court order
"absent any further revision or amendment of that Order by the
said court or by higher courts.
15. In a Manifestation dated September 16, 1999, Manila Golf Club
stated that it is constrained to comply with the January 26, 1999
Order of the Manila RTC, Branch 26 in Civil Case No. 96-80083
by registering and transferring the subject membership certificates
in the names of Citadel and Vercingetorix. It nevertheless reiter-
ated its undertaking to abide in whatever Judgment/Decision will
be rendered by the Makati City RTC in the case (Civil Case No.
99- 605).
16. This prompted petitioner to file a motion for the court "to order
defendant Manila Golf & Country Club to annotate the pendency
of the instant case on Manila Golf Membership Certificate Nos.
1412 and 1444 and to keep the annotation until final judgment has
been rendered in the instant case." Petitioner stated that such an-
notation is necessary to protect its interest pending the final judg-
ment or decision to be rendered in Civil Case No. 99-605.
17. In the Order dated March 20, 2000, Judge Diokno denied peti-
tioner’s motion for lack of basis in law. Petitioner’s motion for
reconsideration was likewise denied under the Order dated May
10, 2000 stating that the notice of lis pendens provided in Section
76 of Presidential Decree (P.D.) No. 1529 pertains to real proper-
ties and not shares of stock which are considered chattels, and that
granting the motion would constitute an undue restraint on the
ownership of Citadel and Vercingetorix of the Manila Golf mem-
bership certificates

ISSUES:
3. WoN the Lis Pendens Rule can apply in actions affecting title or possession
of personal properties? NO. A notice of lis pendens does not apply to actions
involving title to or any right or interest in, personal property, such as the
subject membership shares in a private non-stock corporation.
RULING: WHEREFORE, petition is denied.
RATIO:
1. Lis pendens, which literally means pending suit, refers to the jurisdiction, power
or control which a court acquires over property involved in a suit, pending the con-
tinuance of the action, and until final judgment. Founded upon public policy and ne-
cessity,lis pendensis intended (1) to keep the properties in litigation within the power
of the court until the litigation is terminated and to prevent the defeat of the judgment
or decree by subsequent alienation; and (2) to announce to the whole world that a
particular property is in litigation and serves as a warning that one who acquires an
interest over said property does so at his own risk, or that he gambles on the result of
the litigation over said property.
2. A notice of lis pendens is governed by Rule 13, Section 14 of the 1997 Rules of
Civil Procedure, as amended, which states: SEC. 14. Notice of lis pendens. - In an
action affecting the title or the right of possession of real property, the plaintiff and
the defendant, when affirmative relief is claimed in his answer, may record in the of-
fice of the registry of deeds of the province in which the property is situated a notice
of the pendency of the action. Said notice shall contain the names of the parties and
the object of the action or defense, and a description of the property in that province
affected thereby. Only from the time of filing such notice for record shall a pur-
chaser, or encumbrancer of the property affected thereby, be deemed to have con-
structive notice of the pendency of the action, and only of its pendency against the
parties designated by their real names.
3 .It is evident that a notice of lis pendens is availed of mainly in real actions. As a
general rule, these actions are: (a) an action to recover possession of real estate; (b)
an action for partition; and (c) any other court proceedings that directly affect the ti-
tle to the land or the building thereon or the use or the occupation thereof.
4. Additionally, this Court has held that the annotation of lis pendens also applies to
suits seeking to establish a right to, or an equitable estate or interest in, a specific real
property, or to enforce a lien, a charge or an encumbrance against it. Clearly, in this
jurisdiction, a notice of lis pendens does not apply to actions involving title to or any
right or interest in, personal property, such as the subject membership shares in a pri-
vate non-stock corporation.
5. The denial by the RTC and CA of petitioner’s motion to annotate lis pendens on
the subject club membership certificates was rather based on the absence of law and
rules to govern the application of the remedy over personal properties. No grave
abuse of discretion can therefore arise from such adverse ruling predicated on the
lack of statutory basis for grant of relief to a party.
6. It has been declared in a case decided by the US Supreme Court that the doctrine
of lis pendens has no application to commercial securities. In some other cases the
doctrine has been applied to personal properties such as corporate stock, non-nego-
tiable bond, and non-negotiable notes. Statutes may also expressly provide for the
filing of a formal notice of lis pendens even in actions involving only personal prop-
erty. However, there seems to be no uniformity of rulings with respect to the applica-
tion of the doctrine of lis pendens to corporate stock. In this case, the notice of lis
pendens was sought to be annotated on membership certificates representing a pro-
prietary interest in the assets of a private non-stock corporation.
7. Clearly, Manila Golf Club had actual notice of petitioner’s lien/title as assignee of
the recorded chattel mortgage and as purchaser in the foreclosure sale, as well as the
pendency of Civil Case No. 96-80083 before the Manila RTC which ordered the sale
on execution pending appeal. Such actual knowledge, on the part of Manila Golf
Club, of petitioner's interest and Civil Case No. 96-80083 involving the subject
membership shares is deemed equivalent to registration of an encumbrance or as-
signment in its corporate books. By virtue of such registration of petitioner's lien/title
and the pending litigation, third pa1ties, or potential transferees pendente lite, may
therefore be charged with constructive notice of petitioner's lien/title over the subject
shares and the pending litigation involving the same, as of the time Manila Golf Club
was formally notified by petitioner even prior to Manila Golf Club's receipt of the
January 26, 1999 Order of the Manila RTC in Civil Case No. 96-80083.
 023 Nemesio Garcia v Nicolas Jomouad and Sps Atinon (Daguman)
January 26, 2000 | Kapunan, J. |Transfer of Shares of Stockholders
PETITIONER: Nemesio Garcia
RESPONDENTS: Nicolas Jomouad, Ex-Officio Sheriff of Cebu and Sps. Jose
Atinon and Sally Atinon
SUMMARY: Jaime Dico, was a former employee as the manager of Young
Auto Supply, which was owned by Nemesio Garcia. In order to assist Dico in
entertaining the clients, Garcia “lent” his Proprietary Ownership Certificate
(POC) in Cebu Country Club so that Dico could enjoy the “signing privileges”
of its members. Thereafter, Dico resigned from the Company and returned the
POC. He then executed a Deed of Transfer covering the POC in favor of Gar-
cia. The Club was furnished with a copy of the said deed but the transfer was
not recorded in the books of the Club because Garcia failed to present
proof of payment of the requisite capital gains tax. The Spouses Atinon, filed
a collection case against Jaime Dico for the amount of 900k. After the judgment
became final and executory, Sheriff Jomouad proceeded with its execution and
levied on the POC share of Dico in the Cebu Country Club, and scheduled it for
public auction. Claiming ownership over the POC, Garcia filed an action for in-
junction to enjoin respondents from proceeding with the auction. The RTC dis-
missed the complaint of Garcia for injunction for lack of merit, and on appeal,
such was likewise affirmed by the CA. Garcia claimed the POC although in the
name of Dico cannot be levied upon on execution to satisfy the judgment debt
because even prior to the institution of the case. Refer to fact 9 for the reasons.
The issue before the SC is WoN the transfer of shares not recorded in the books
of the corporation is valid as against a lawful attachment of said shares? NO.
The lawful attachment prevails over the non-registration in the books of the cor-
poration pursuant to sec. 63 of the Corporation Code.
DOCTRINE: All transfers not so entered on the books of the corporation are
absolutely void; not because they are without notice or fraudulent in law or fact,
but because they are made so void by statute.
FACTS:
9. Spouses Atinon filed a collection case against Jaime Dico. The trial court
rendered a judgment ordering Dico to pay the spouses a sum of 900k plus
interests.
10. When the judgment became final and executory, Sherriff Nicolas Jomuad
proceeded with the execution.
11. In the course thereof, the Proprietary Ownership Certificate (POC) No. 0668
in the Cebu Country Club, which was in the name of Dico, was levied on and
scheduled for public auction.
12. Nemesio Garcia (petitioner), filed for an injunction with the prayer for pre-
liminary injunction to enjoin respondents from proceeding with the auction.
He is claiming ownership of the subject POC.
13. RTC dismissed the complaint for injunction for lack of merit. On appeal, CA
in toto the decision of the RTC saying it did not commit no reversible error.
14. Garcia claims that Dico was their employee as manager of a Young Auto
Supply. In order to assist Garcia, he lent his POC from the Cebu Country
Club to Dico so that the latter could enjoy signing the privileges of its mem-
bers.
15. Dico then, resigned as manager. Garcia demanded the return of the POC to
him. Dico executed a Deed of Transfer, covering the subject POC to Garcia.
16. The Club was given a copy of the transfer but was not recorded in the books
of the Club because Garcia failed to present proof of payment of the requisite
capital gains tax.
17. Garcia assails that the court erroneously relied on sec. 63 of the Corporation
Code and that the subject stock certificate (POC), cannot be levied upon on
the execution to satisfy Dico’s judgment debt because even prior to the insti-
tution of the collection for money case:
1. The spouses Atinon had knowledge that Dico already conveyed back the
ownership of the subject certificate to petitioner;
2. Dico executed a deed of transfer, dated 18 November 1992, covering the
subject certificate in favor of petitioner and the Club was furnished with a
copy thereof; and
3. Dico resigned as a proprietary member of the Club and his resignation
was accepted by the board of directors at their meeting on 4 May 1993.
ISSUES:
Whether a bona fide transfer of the shares of a corporation, not registered or noted in
the books of the corporation, is valid as against a subsequent lawful attachment of
said shares, regardless of whether the attaching creditor had actual notice of said
transfer or not? NO. It is not valid pursuant to sec. 63 of the Corporation Code. It is
because all transfers not so entered on the books of the corporation are absolutely
void; not because they are without notice or fraudulent in law or fact, but because
they are made so void by statute.
RULING: WHEREFORE, petition is denied.
RATIO:
1. Sec. 63 of the Corporation Code reads:
Sec. 63 Certificate of stock and transfer of shares. — The capital stock of corpora-
tions 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 cer-
tificate 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, ex-
cept 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.
No shares of stock against which the corporation holds any unpaid claim shall be
transferable in the books of the corporation.

2. In this case, the transfer of the subject certificate made by Dico to petitioner was
not valid as to the spouses Atinon, the judgment creditors, as the same still stood in
the name of Dico, the judgment debtor, at the time of the levy on execution. In addi-
tion, as correctly ruled by the CA, the entry in the minutes of the meeting of the
Club's board of directors noting the resignation of Dico as proprietary member
thereof does not constitute compliance with Section 63 of the Corporation Code.
Said provision of law strictly requires the recording of the transfer in the books of the
corporation, and not elsewhere, to be valid as against third parties. Accordingly, the
CA committed no reversible error in rendering the assailed decision.
 SECTION 12
001 EDWARD J. NELL COMPANY v. PACIFIC FARMS, INC.
(BALISONG)
29 Nov. 1965 | Concepcion, J. | Sale of assets; Merger
PETITIONER: Edwaard J. Nell Company
RESPONDENTS: Pacific Farms, Inc.
SUMMARY: Insular Farms defaulted on a loan from a bank. The bank foreclosed on
the pledged shares of stock. Pacific Farms was the highest bidder at the auction sale.
Six months after the sale, EJN filed a collection case against EJN. A judgment in EJN’s
favor was rendered, became final, and a writ of execution issued therefor. The writ
was returned unsatisfied on the ground that Insular Farms had no leviable property.
EJN sued Pacific Farms arguing that it is an alter ego of Insular Farms and that the
sale was fraudulent. The Court disagreed. Generally where one corporation sells or
otherwise transfers all of its assets to another corporation, the latter is not liable for the
debts and liabilities of the transferor, except: (1) where the purchaser expressly or
impliedly agrees to assume such debts; (2) where the transaction amounts to a
consolidation or merger of the corporations; (3) where the purchasing corporation is
merely a continuation of the selling corporation; and (4) where the transaction is
entered into fraudulently in order to escape liability for such debts. Appellee purchased
the shares of stock of Insular Farms as the highest bidder at an auction sale held at the
instance of a bank to which said shares had been pledged as security for an obligation
of Insular Farms in favor of said bank. It has also been established that the appellee
had paid P285,126.99 for said shares of stock, apart from the sum of P10,000.00 it,
likewise, paid for other assets of Insular Farms. Neither is it claimed that these
transactions have resulted in the consolidation or merger of the Insular Farms and
appellee herein. On the contrary, appellant's theory to the effect that appellee is an alter
ego of the Insular Farms, negates such consolidation or merger, for a corporation
cannot be its own alter ego. The sale was submitted to and approved by the Securities
and Exchange Commission. It must be presumed, therefore, that the price paid was
fair and reasonable.
DOCTRINE: Theory to the effect that a corporation is an alter ego of another, negates
such consolidation or merger, for a corporation cannot be its own alter ego.
FACTS:
Transaction 1 (EJN and Insular Famrs)
37. Edward J. Nell (EJN) sued Insular Farms for collection of sum of money
representing the balance of the price of a pump sold by EJN to Insular Farms.
The case was decided in favor of EJN, and became final and executory.
38. A writ of execution was issued, but was returned unsatisfied on the ground
that Insular Farms had no leviable property.
Transaction 2 (Insular Farms and Pacific Farms)
39. Insular Farms was indebted to a bank. It pledged its shares of stock and assets
to secure the loan. Upon default, the pledged was foreclosed and Pacific
Farms bought the shares of stock and assets of Insular Farms during the
auction sale.
40. The foreclosure sale happened six months before the judgment in the
collection case was rendered. In fact, EJN had not yet filed the collection case
against Insular Farms when Pacific Farms bought its assets.
Case
41. EJN filed an action against Pacific Farms to collect on the judgment, alleging
that Pacific Farms is the alter ego of Insular Farms because Pacific Farms had
purchased all or substantially all of the shares of stock, as well as the real and
personal properties of Insular Farms, including the pumping equipment sold
by EJN to Insular Farms.
42. EJN also alleges that the price paid by Pacific Farms is grossly inadequate as
to constitute fraud of creditors.
ISSUE/s:
11. Whether Pacific Farms is an alter ego of Insular Famrs, and thus, liable to
EJN for the judgment award. NO — The sale or transfer of a corporation’s
assets does not make the buyer corporation liable for the debts and liabilities
of the seller corporation.
RULING: Petition is DENIED. CA and MTC Decisions are AFFIRMED.
RATIO:
60. Generally where one corporation sells or otherwise transfers all of its assets
to another corporation, the latter is not liable for the debts and liabilities of
the transferor, EXCEPT:
a. where the purchaser expressly or impliedly agrees to assume such
debts;
b. where the transaction amounts to a consolidation or merger of the
corporations;
 c. where the purchasing corporation is merely a continuation of the
selling corporation; and

d. where the transaction is entered into fraudulently in order to escape

liability for such debts.

61. None of the exceptions obtain herein. The judgment was rendered six months
AFTER the sale to Pacific Farms, hence no fraud could have been
contemplated by the seller and buyer. The sale was submitted to and approved
by the SEC. Hence, it is presumed that the sale was fair and reasonable.

62. Neither is it claimed that these transactions have resulted in the consolidation
or merger of the Insular Farms and appellee herein. On the contrary,
appellant's theory to the effect that appellee is an alter ego of the Insular
Farms, negates such consolidation or merger, for a corporation cannot be its
own alter ego.
 002 Caltex v. PNOC (Bacquel)
Aug. 10, 2006 | Carpio, J. | Acquisition and Transfers
PETITIONER: Caltex
RESPONDENTS: PNOC
SUMMARY: PSTC and Luzon Stevedoring (Luzon) entered into an agreement.
The agreement provides, inter alia, that PSTC shall assume all the obligations of
Luzon (see Fact 2-5 for full agreement). Part of their agreement was that PSTC
was an agent in collection of any claim from suits, and that PTSC will handle
litigation of pending suits of Luzon. The CA case between Luzon and Caltex
became final, ordering the latter to pay a certain sum to Caltex. Caltex moved to
execute the judgment against PSTC, but the latter argued that it was not a party to
the case, judgment cannot be executed against it. Hence, this petition. The issue
before the Court is whether Caltex may collect from PSTC. Yes. The Agreement
transferred all obligations, assets, and liabilities from Luzon to PSTC. Even sans
agreement, Caltex may still collect by virtue of Sec. 40 BP 68, allowing such
transfer with the caveat that such assignment should not prejudice creditors of the
assignor. The acquisition by the assignee of all or substantially all of the assets
of the assignor necessarily includes the assumption of the assignor’s
liabilities, unless the creditors who did not consent to the transfer choose to
rescind the transfer on the ground of fraud. Caltex is also a real party in interest
because Caltex will stand to suffer from the non-execution of judgment in its
favor.
DOCTRINE: The disposition of the assets of a corporation shall be deemed to
cover substantially all the corporate property and assets, if thereby the corporation
would be rendered incapable of continuing the business or accomplishing the
purposes for which it was incorporated. Such a sale or disposition must be
understood as valid only if it does not prejudice the creditors of the assignor,
which necessarily implies that the assignee assumes the debts of the assignor.
Even under the provisions of the Civil Code, a creditor has a real interest to go
after any person to whom the debtor fraudulently transferred its assets.
FACTS:
1. PSTC and Luzon Stevedoring Corporation ("LUSTEVECO") entered into an
Agreement of Assumption of Obligations ("Agreement").
2. The Agreement provides that PSTC shall assume all the obligations of
LUSTEVECO with respect to the claims enumerated in the annexes of the
agreement.
3. The Agreement also provides that PSTC shall control the conduct of any
litigation pending or which may be filed with respect to the claims in the
Annexes.
4. The Agreement further provides that LUSTEVECO shall deliver to PSTC all
papers and records of the claims in the Annexes.
5. The Agreement provides that LUSTEVECO appoints and constitutes PSTC
as its attorney-in-fact to demand and receive any claim out of the countersuits
and counterclaims arising from the claims in the Annexes.
6. Among the actions enumerated in the Annexes is Caltex (Phils.), Inc. v.
Luzon Stevedoring Corporation docketed as AC-G.R. CV No. 62613 which
at that time was pending before the then Intermediate Appellate Court (IAC).
7. The case was an appeal from the Decision by the then Court of First Instance
of Manila (CFI) directing LUSTEVECO to pay Caltex P103,659.44 with
legal interest from the filing of the action until full payment. In its 12
November 1985 Decision,5 the IAC affirmed with modification the Decision
of the CFI.
8. The Regional Trial Court of Manila, Branch 12, issued a writ of execution in
favor of Caltex. However, the judgment was not satisfied because of the prior
foreclosure of LUSTEVECO’s properties. The Manila Bank Intramuros
Branch and the Traders Royal Bank Aduana Branch did not respond to the
notices of garnishment.
9. Caltex subsequently learned of the Agreement between PSTC and
LUSTEVECO. Caltex sent successive demands to PSTC asking for the
satisfaction of the judgment rendered by the CFI.
10. PSTC requested for the copy of the records of AC-G.R. CV No. 62613. Later,
PSTC informed Caltex that it was not a party to AC-G.R. CV No. 62613 and
thus, PSTC would not pay LUSTEVECO’s judgment debt.
11. PSTC advised Caltex to demand satisfaction of the judgment directly from
LUSTEVECO.
12. Caltex continued to send several demand letters to PSTC. On 5 February
1992, Caltex filed a complaint for sum of money against PSTC.
ISSUE/s:
1. Whether PSTC is bound by the Agreement when it assumed all the
obligations of LUSTEVECO. YES - Agreement provides that PSTC shall
assume all the obligations of LUSTEVECO.
2. Whether Caltex is a real party in interest. YES – Caltext will suffer detriment
from the CA decision.
RULING: WHEREFORE, we REVERSE and SET ASIDE the 31 May 2001 Decision
and 9 November 2001 Resolution of the Court of Appeals in CA-G.R. CV No. 46097.
We AFFIRM the 1 June 1994 Decision of the Regional Trial Court of Manila, Branch
51, in Civil Case No. 91-59512. Costs against respondent.
RATIO:
1. LUSTEVECO transferred, conveyed and assigned to PSTC all of
LUSTEVECO’s business, properties and assets pertaining to its tanker and
bulk business "together with all the obligations relating to the said business,
properties and assets."
2. Even without the Agreement, PSTC is still liable to Caltex. The
disposition of all or substantially all of the assets of a corporation is allowed
under Section 40 of Batas Pambansa Blg. 68, otherwise known as The
Corporation Code of the Philippines ("Corporation Code").
3. Sec. 40 provides: Sale or other disposition of assets. ─ Subject to the
provisions of existing laws on illegal combinations and monopolies, a
corporation may, by a majority vote of its board of directors, or trustees, sell,
lease, exchange, mortgage, pledge or otherwise dispose of all or substantially
all of its property and assets, including its goodwill, upon such terms and
conditions and for such consideration, which may be money, stocks, bonds
or other instruments for the payment of money or other property or
consideration, as its board of directors or trustees may deem expedient, when
authorized by the vote of the stockholders representing at least two-thirds
(2/3) of the outstanding capital stock; or in case of non-stock corporation, by
the vote of at least two-thirds (2/3) of the members, in a stockholders’ or
members’ meeting duly called for the purpose. Written notice of the proposed
action and of 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 may
exercise his appraisal right under the conditions provided in this Code. A sale
or other disposition shall be deemed to cover substantially all the corporate
property and assets, if thereby the corporation would be rendered incapable
of continuing the business or accomplishing the purposes for which it was
incorporated.
4. While the Corporation Code allows the transfer of all or substantially all
the properties and assets of a corporation, the transfer should not
prejudice the creditors of the assignor. The only way the transfer can
proceed without prejudice to the creditors is to hold the assignee liable for
the obligations of the assignor. The acquisition by the assignee of all or
substantially all of the assets of the assignor necessarily includes the
assumption of the assignor’s liabilities, unless the creditors who did not
consent to the transfer choose to rescind the transfer on the ground of fraud.
To allow an assignor to transfer all its business, properties and assets without
the consent of its creditors and without requiring the assignee to assume the
assignor’s obligations will defraud the creditors. The assignment will place
the assignor’s assets beyond the reach of its creditors.
5. Here, Caltex could not enforce the judgment debt against LUSTEVECO. The
writ of execution could not be satisfied because LUSTEVECO’s remaining
properties had been foreclosed by lienholders. In addition, all of
LUSTEVECO’s business, properties and assets pertaining to its tanker and
bulk business had been assigned to PSTC without the knowledge of its
creditors. Caltex now has no other means of enforcing the judgment debt
except against PSTC.
6. PSTC was aware of the pendency of the case between Caltex and
LUSTEVECO. PSTC assumed LUSTEVECO’s obligations, including
specifically any obligation that might arise from Caltex’s suit against
LUSTEVECO. The Agreement transferred the unencumbered assets of
LUSTEVECO to PSTC, making any money judgment in favor of Caltex
unenforceable against LUSTEVECO. To allow PSTC to renege on its
obligation under the Agreement will allow PSTC to defraud Caltex. This
militates against the statutory policy of protecting creditors from fraudulent
contracts.
7. Article 1313 of the Civil Code provides that "[c]reditors are protected in cases
of contracts intended to defraud them." Further, Article 1381 of the Civil
Code provides that contracts entered into in fraud of creditors may be
rescinded when the creditors cannot in any manner collect the claims due
them. Article 1381 applies to contracts where the creditors are not parties, for
such contracts are usually made without their knowledge. Thus, a creditor
who is not a party to a contract can sue to rescind the contract to prevent fraud
upon him. Or, the same creditor can instead choose to enforce the contract if
a specific provision in the contract allows him to collect his claim, and thus
protect him from fraud.
8. If PSTC does not assume the obligations of LUSTEVECO as PSTC had
committed under the Agreement, the creditors of LUSTEVECO could no
longer collect the debts of LUSTEVECO. The assignment becomes a fraud
on the part of PSTC, because PSTC would then have inveigled LUSTEVECO
to transfer the assets on the promise to pay LUSTEVECO’s creditors.
However, after taking over the assets, PSTC would now turn around and
renege on its promise.
9. The Agreement, under Article 1291 of the Civil Code, is also a novation of
LUSTEVECO’s obligations by substituting the person of the debtor. Under
Article 1293 of the Civil Code, a novation which consists in substituting a
new debtor in place of the original debtor cannot be made without the consent
of the creditor.18 Here, since the Agreement novated the debt without the
knowledge and consent of Caltex, the Agreement cannot prejudice Caltex.
Thus, the assets that LUSTEVECO transferred to PSTC in consideration,
among others, of the novation, or the value of such assets, remain even in the
 hands of PSTC subject to execution to satisfy the judgment claim of Caltex. 7. The failure of the vendee to take exclusive possession of all the property

As regards Caltex being a real party in interest (civ pro pogi points)

1. The parties to a contract are the real parties in interest in an action upon it, as
consistently held by the Court. Only the contracting parties are bound by the
stipulation in the contract; they are the ones who would benefit from and
could violate it. Thus, one who is not a party to a contract, and for whose
benefit it was not expressly made, cannot maintain an action on it. One cannot
do so, even if the contract performed by the contracting parties would
incidentally inure to one’s benefit.

2. As an exception, parties who have not taken part in a contract may show
that they have a real interest affected by its performance or annulment.
In other words, those who are not principally or subsidiarily obligated
in a contract, in which they had no intervention, may show their
detriment that could result from it.

3. Even if PSTC did not expressly assume to pay the creditors of LUSTEVECO,
PSTC would still be liable to Caltex up to the value of the assets transferred.
The transfer of all or substantially all of the unencumbered assets of
LUSTEVECO to PSTC cannot work to defraud the creditors of
LUSTEVECO. A creditor has a real interest to go after any person to whom
the debtor fraudulently transferred its assets.

N.B. Supreme Court mentioned the badges of fraud present in this case as dictated by
jurisprudence (bold) :

1. The fact that the consideration of the conveyance is fictitious or is inadequate.

2. A transfer made by a debtor after suit has been begun and while it is pending
against him.

3. A sale upon credit by an insolvent debtor.

4. Evidence of large indebtedness or complete insolvency.

5. The transfer of all or nearly all of his property by a debtor, especially when
he is insolvent or greatly embarrassed financially.

6. The fact that the transfer is made between father and son, when there are present
other of the above circumstances.
 003 Y-I LEISURE PHILS v YU (Arcenas)
September 8, 2015 | Mendoza, J. | Business Enterprise Transfers
PETITIONERS: Y-I Leisure Philippines, Inc., Yats International Ltd. And Y-I
Clubs and Resorts
RESPONDENT: James Yu
SUMMARY: (long version) Mt. Arayat Development Co. Inc. (MADCI) sold 500
golf and 150 country club shares for a total price of P650,000.00 to James Yu
which he paid by installment with fourteen (14) Far East Bank and Trust Company
(FEBTC) checks, which was eventually fully paid. Yu visited the supposed site of
the golf and country club but discovered it was non-existent. So, Yu sent MADCI
a demand letter for his payment be returned to him. MADCI merely recognized
that Yu had invested P650, 000 and that the same was not returned, but did not
actually refund Yu. Then, a complaint for sum of money and damages against
MADCI and its president, Rogelio Sangil (Sangil) were filed by Yu. MADCI
invoked as a defense a Memorandum of Agreement (MOA) [see footnote 1 for
details of MOA] that it no longer had its assets since it entered into the said MOA
with Yats International Ltd (YIL) where MADCI substantially sold all their asets
to YIL, YILPI and YICRI (YIL Group). Note that the assets here is the 120 ha of
land for golf course development. Furthermore, YIL subscribed to the 40% of the
capital stock of MADCI because it was interested in its golf course development
project in Pampanga, that as a condition for YIL's subscription, MADCI and
Sangil were obligated to obtain several government permits, such as an
environmental compliance certificate and land conversion permit. Yu amended
his complaint to implead YIL, Y-I Leisure (YILPI) and Y-I Club and Resorts, Inc
(YICRI) thereafter. RTC ruled that MADCI was liable and should pay Yu, Sangil
was also held to be solidarily liable with MADCI, but YIL, YILPI and YICRI
were exonerated. On two separate appeals to the CA, it ruled partly granting the
appeal and modified RTC’s ruling by holding YIL, YILPI and YICRI jointly and
severally liable as well because the provision in the MOA that Sangil undertook
the responsibility of paying all the creditors' claims for refund was, in effect, a
novation, specifically the substitution of debtors. Considering that Yu, as creditor
of MADCI, had no knowledge of the "change of debtors," the MOA could not
validly take effect against him. Accordingly, MADCI remained to be a debtor of
Yu. Consequently, as the CA further held, the transfer of the entire assets of
MADCI to YICRI should not prejudice the transferor's creditors; hence, the sale
by MADCI of all its corporate assets to YIL and its companies necessarily
included the assumption of the its liabilities. So, the YIL Group’s liability was
determined by the fact that they bought the entire assets of MADCI, not by their
participation in the sale of the shares. MR was denied by CA; hence this petition.
Short version: Yu bought several golf and country club shares from MADCI.
Regrettably, the latter did not develop the supposed project. Yu then demanded
the return of his payment, but MADCI could not return it anymore because all its
assets had been transferred. Through the acts of YIL, MADCI sold all its lands
to YILPI and, subsequently to YICRI. Thus, Yu now claims that the YIL Group
inherited the obligations of MADCI. On the other hand, the YIL Group counter
that they did not assume such liabilities because the transfer of assets was not
committed in fraud of the MADCI's creditors.
The issue before the SC is W/N the CA erred in ruling that YIL Group should be
held jointly and severally liable to Yu despite the absence of fraud in the sale of
assets and bad faith on the part of YIL Group. The Court held in the negative.
Indeed, the YIL Group have consequently inherited the liabilities of MADCI
because they acquired all the assets of MADCI and the only way for Yu to recover
his money would be to assert his claim against the YIL Group as transferees of the
assets
It has been held in jurisprudence that fraud is not an essential element for the
application of the business-enterprise transfer that transferee corporation assumes
the debts and liabilities of the transferor corporation despite lack of fraud because
it is merely a continuation of the latter's business. SC held that MADCI indeed
had assets consisting of 120 hectares of landholdings in Magalang, Pampanga, to
be developed into a golf course, pursuant to its primary purpose as stated in their
AOI. Because of its alleged violation of the MOA, however, MADCI was made
to transfer all its assets to the YIL Group (who were aware of the business of
MADCI). No evidence existed that MADCI subsequently acquired other lands for
its development projects. Thus, MADCI, as a real estate development corporation,
was left without any property to develop eventually rendering it incapable of
continuing the business or accomplishing the purpose for which it was
incorporated. Ergo, the said sale was a sale of substantially all of its assets, falling
within the exception (business enterprise transfer). The SC held that the MOA
cannot serve to prejudice YU since his consent was not procured. Thus, insofar as
the YU was concerned, the debtor remained to be MADCI. And given that the
assets and business of MADCI have been transferred to YIL Group, then the latter
shall be liable.
DOCTRINE: Nelle Doctrine - Generally, where one corporation sells or
otherwise transfers all of its assets to another corporation, the transferee is not
liable for the debts and liabilities of the transferor, EXCEPT:
1. Where the purchaser expressly or impliedly agrees to assume such debts;
2. Where the transaction amounts to a consolidation or merger of the
corporations;
3. Where the transaction is entered into fraudulently in order to escape
 liability for such debts.
4. Where the purchasing corporation is merely a continuation of the
selling corporation (aka business enterprise transfer)
SYLLABUS DOCTRINE: An evaluation of our contract and corporation laws
validates that the Nell Doctrine is fully supported by Philippine statutes. The
general rule expressed by the doctrine reflects the principle of relativity under
Article 1311 to 34 of the Civil Code. Contracts, including the rights and obliga-
tions arising therefrom, are valid and binding only between the contracting par-
ties and their successors-in-interest. Thus, despite the sale of all corporate assets,
the transferee corporation cannot be prejudiced as it is not in privity with the
contracts between the transferor corporation and its creditors. x x x Jurispru-
dence has held that in a business-enterprise transfer, the transferee is liable for
the debts and liabilities of his transferor arising from the business enterprise con-
veyed. Many of the application of the business-enterprise transfer have been re-
lated by the Court to the application of the piercing doctrine
FACTS:
1. Mt. Arayat Development Co. Inc. (MADCI) was a real estate development
corporation, which was registered on February 7, 1996 before the Security
and Exchange Commission (SEC).
2. James Yu (Yu) was a businessman, interested in purchasing golf and country
club shares.
3. MADCI offered to sell shares of a golf and country club located in Mt. Arayat
in Arayat, Pampanga, for the price of P550.00 per share.
a. Relying on the representation of MADCI's brokers and sales agents,
Yu bought 500 golf and 150 country club shares for a total price of
P650,000.00 which he paid by installment with fourteen (14) Far
East Bank and Trust Company (FEBTC) checks.rednad
b. Upon full payment of the shares to MADCI, Yu visited the
supposed site of the golf and country club and discovered that it was
non-existent.
4. DEMAND LETTER: Yu sent a demand letter to MADCI for it to return his
payment. MADCI recognized that Yu had an investment of P650,000.00, but
the latter had not yet received any refund.lawrednad
5. ACTION: Yu filed with the RTC a complaint for collection of sum of money
and damages against MADCI and its president, Rogelio Sangil (Sangil), to
recover his payment for the purchase of golf and country club shares. Yu
alleged that he dealt with Sangil, who allegedly used MADCI's corporate
personality to defraud him.
Sangil controlled 60% of the capital stock of MADCI, while the MADCI owned 120 hectares of
19
P31,000,000.00; that YIL also gave P500,000.00 to acquire the shares of minority stockholders; that as a
agricultural land in Magalang, Pampanga, the property intended for the development of a golf course; that
YIL was to subscribe to the remaining 40% of the capital stock of MADCI for a consideration of
6. SANGIL’S ANSWER: alleged that Yu dealt with MADCI as a juridical
person and that he did not benefit from the sale of shares and that the return
of Yu's money was no longer possible because its approval had been blocked
by the new set of officers of MADCI, which controlled the majority of its
board of directors
7. MADCI’S ANSWER: claimed that it was Sangil who defrauded Yu.
a. It invoked the Memorandum of Agreement (MOA) entered into by
MADCI, Sangil and Yats International Ltd. (YIL), which stated that
Sangil undertook to redeem MADCI proprietary shares sold to
third persons or settle in full all their claims for refund of
payments. Thus, it was MADCI's position that Sangil should be
ultimately liable to refund the payment for shares purchased.
8. AFTER THE PRE-TRIAL, Yu filed an Amended Complaint, wherein he also
impleaded YIL, Y-I Leisure Phils., Inc. (YILPI) and Y-I Club & Resorts, Inc.
(YICRI) [YIL Group for brevity].
a. Yu testified that he verified the landholdings of MADCI with the
Register of Deeds in Pamapanga and discovered that all its lands
were transferred to YICRI
b. Yu discovered that, substantially, all the assets of MADCI which
consists of one hundred twenty (120) hectares of land located in
Magalang, Pampanga, were sold to YIL Group.
c. The transfer was done in fraud of MADCI's creditors, and without
the required approval of its stockholders and board of directors
under Section 40 of the Corporation Code.
d. Yu also alleged that Sangil even filed a case in Pampanga which
assailed the said irregular transfers of lands. -- this was however
dismissed by the trial court of Pampanga.
9. YIL Group’s ANSWER: alleged that they only had an interest in MADCI in
1999 when YIL bought some of its corporate shares pursuant to the MOA,
which was 2 years after Yu bought his golf and country club shares from
MADCI.
a. That YIL Group are mere stockholders of MADCI so they could not
be held responsible for the liabilities of the corporation.
b. As to the transfer of properties from MADCI to YILPI and
subsequently to YICRI, they averred that it was not undertaken to
defraud MADCI's creditors and it was done in accordance with the
MOA since it was stipulated in the MOA that Sangil undertook to
settle all claims for refund of third parties.
10. DURING TRIAL:
19
a. the MOA was presented
 b. SANGIL TESTIFIED: that MADCI failed to develop the golf
course because its properties were taken over by YIL after he
allegedly violated the MOA, which were eventually sold to
YICRI for a consideration of P9.3 million, which was definitely
lower than their market price.
c. YILPI PRESIDENT TESTIFIED: the president and chief executive
officer of YILPI and YICRI, and managing director of YIL, Denny
On Yat Wang (Wang), explained that YIL subscribed because it was
interested in its golf course development project in Pampanga and
signed the MOA subject to the fulfilment of Sangil's obligations.
i. Due to Sangil's subsequent default, a deed of absolute sale
over the lands of MADCI was eventually executed in favor
of YICRI, its designated company.
ii. Wang also stated that, aside from its lands, MADCI had
other assets in the form of loan advances of its directors.
11. RTC RULING: MADCI is liable to return the payments made by Yu since it
admitted its contractual obligation and that Sangil should be solidarily liable
with MADCI because he used MADCI as a mere alter ego or business conduit
because Sangil had absolute control over the corporation and he started
selling golf and country club shares under the guise of MADCI even without
clearance from SEC.
a. BUT RTC exonerated YIL, YILPI and YICRI from liability because
they were not part of the transactions between MADCI and Sangil
and Yu and that YIL, YILPI and YICRI even had the foresight of
protecting the creditors of MADCI when they made Sangil
responsible for settling the claims of refunds of thirds persons in the
proprietary shares.
12. CA RULING: partly granted the appeals and modified the RTC decision by
holding YIL and its companies, YILPI and YICRI, jointly and severally,
liable for the satisfaction of Yu's claim.
a. PROVISION THAT SANGIL SHALL PAY CREDITORS IS A
NOVATION - The provision in the MOA that Sangil undertook
the responsibility of paying all the creditors' claims for refund
was, in effect, a novation under Article 1293 of the Civil Code,
specifically the substitution of debtors. Considering that Yu, as
creditor of MADCI, had no knowledge of the "change of debtors,"
the MOA could not validly take effect against him. Accordingly,
MADCI remained to be a debtor of Yu.
b. TRANSFER OF ENTIRE ASSETS SHOULD NOT PREJUDIC
CREDTORS - Consequently, as the CA further held, the transfer of
condition for YIL's subscription, MADCI and Sangil were obligated to obtain several government
permits, such as an environmental compliance certificate and land conversion permit; that should MADCI
and Sangil fail in their obligations, they must return the amounts paid by YIL with interests; that if they
the entire assets of MADCI to YICRI should not prejudice the
transferor's creditors.
i. CA cited the case of Caltex Philippines, Inc. v, PNOC
Shipping and Transport Corporation27 (Caltex) where it
ruled that the sale by MADCI of all its corporate assets to
YIL and its companies necessarily included the
assumption of the its liabilities.
ii. Otherwise, the assets were put beyond the reach of the
creditors, like Yu. So, the YIL Group’s liability was
determined by the fact that they bought the entire assets of
MADCI, not by their participation in the sale of the shares.
iii. Sangil is also liable since he could not use the separate
corporate personality of MADCI as a tool to evade his
existing personal obligations under the MOA.
13. YIL and its companies, YILPI and YICRI moved for reconsideration which
was denied. Hence, this petition.
ISSUE/s
1. W/N the CA erred in ruling that YIL Group should be held jointly and
severally liable to Yu despite the absence of fraud in the sale of assets
and bad faith on the part of YIL Group – NO. The YIL Group have
consequently inherited the liabilities of MADCI because they acquired all the
assets of MADCI and the only way for Yu to recover his money would be to
assert his claim against the YIL Group as transferees of the assets.
2. (concept issue) whether the transfer of all or substantially all the assets
of a corporation under Section 40 of the Corporation Code carries with
it the assumption of corporate liabilities – GENERALLY NO, except in
the cases enumerated thereof (see ratio)
3. (additional issue) whether fraud must exist in the transfer of all the corporate
assets in order for the transferee to assume the liabilities of the transferor –
NO. It has been held in jurisprudence that fraud is not an essential element
for the application of the business-enterprise transfer that transferee
corporation assumes the debts and liabilities of the transferor corporation
despite lack of fraud because it is merely a continuation of the latter's
business.
RULING: WHEREFORE, the petition is DENIED. The January 30, 2012
Decision and the April 29, 2013 Resolution of the Court of Appeals in CA-G.R. CV
No. 96036 are hereby AFFIRMED in toto. SO ORDERED.
RATIO:
would still fail to return the same, YIL would be authorized to sell the 120 hectare land to satisfy their
obligation; and that, as an additional security, Sangil undertook to redeem all the MADCI proprietary
shares sold to third parties or to settle in full all their claims for refund.
NELL DOCTRINE – rule regarding transfer of all assets of one corp to another
1. To resolve this issue of liability of the transferee , a review of the laws and
jurisprudence concerning corporate assumption of liabilities must be
undertaken. So, in the 1965 case of Nell v. Pacific Farms, Inc., the Court first
pronounced the rule regarding the transfer of all the assets of one corporation
to another
a. Generally, where one corporation sells or otherwise transfers all
of its assets to another corporation, the transferee is not liable
for the debts and liabilities of the transferor, EXCEPT:
i. Where the purchaser expressly or impliedly agrees to
assume such debts;
ii. Where the transaction amounts to a consolidation or
merger of the corporations;
iii. Where the transaction is entered into fraudulently in order
to escape liability for such debts.
iv. Where the purchasing corporation is merely a
continuation of the selling corporation;
Legal bases of the Nell Doctrine found in PH statute: PRINCIPLE OF
RELATIVITY
2. The general rule expressed by the doctrine reflects the principle of relativity
under Article 1311 of the Civil Code.
a. GENERAL RULE: Contracts, including the rights and obligations
arising therefrom, are valid and binding only between the
contracting parties and their successors-in-interest.
i. Applying it: Thus, despite the sale of all corporate assets,
the transferee corporation cannot be prejudiced as it is
not in privity with the contracts between the transferor
corporation and its creditors.
b. 1st exception: where the transferee corporation expressly or
impliedly agrees to assume the transferor's debts, is provided
under Article 2047 of the Civil Code.
20
Sec. 40. Sale or other disposition of assets. - Subject to the provisions of existing laws on illegal
combinations and monopolies, a corporation may, by a majority vote of its board of directors or
trustees, sell, lease, exchange, mortgage, pledge or otherwise dispose of all or substantially all of its
property and assets, including its goodwill, upon such terms and conditions and for such consideration,
which may be money, stocks, bonds or other instruments for the payment of money or other property or
consideration, as its board of directors or trustees may deem expedient, when authorized by the vote of the
stockholders representing at least two-thirds (2/3) of the outstanding capital stock, or in case of non-stock
corporation, by the vote of at least two-thirds (2/3) of the members, in a stockholder's or member's
meeting duly called for the purpose. Written notice of the proposed action and of 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 may exercise his appraisal right under the
conditions provided in this Code.
i. When a person binds himself solidarity with the principal
debtor, then a contract of suretyship is produced.
Necessarily, the corporation which expressly or impliedly
agrees to assume the transferor's debts shall be liable to the
same.
c. 2nd exception: as to the merger and consolidation of corporations, is
well-established under Sections 76 to 80, Title X of the Corporation
Code.
i. If the transfer of assets of one corporation to another
amounts to a merger or consolidation, then the transferee
corporation must take over the liabilities of the transferor.
d. 3rd exception: where the sale of all corporate assets is entered into
fraudulently to escape liability for transferor's debts, can be found
under Article 1388 of the Civil Code.
i. It provides that whoever acquires in bad faith the things
alienated in fraud of creditors, shall indemnify the latter for
damages suffered. Thus, if there is fraud in the transfer of
all the assets of the transferor corporation, its creditors can
hold the transferee liable.
e. 4th exception: where the purchasing corporation is merely a
continuation of the selling corporation
i. In his book, Philippine Corporate Law, Dean Cesar
Villanueva explained that this exception contemplates
the "business-enterprise transfer." In such transfer, the
transferee corporation's interest goes beyond the assets
of the transferor's assets and its desires to acquire the
latter's business enterprise, including its goodwill.
(wow, sir)
3. In other words, in this last exception, the transferee purchases not only the
assets of the transferor, but also its business. The proper provision of law
that is contemplated by this exception is Section 40 of the Corporation
20
Code which refers to the sale, lease, exchange or disposition of all or
A sale or other disposition shall be deemed to cover substantially all the corporate property and assets if
thereby the corporation would be rendered incapable of continuing the business or accomplishing the
purpose for which it was incorporated.
After such authorization or approval by the stockholders or members, the board of directors or trustees
may, nevertheless, in its discretion, abandon such sale, lease, exchange, mortgage, pledge or other
disposition of property and assets, subject to the rights of third parties under any contract relating thereto,
without further action or approval by the stockholders or members.
Nothing in this section is intended to restrict the power of any corporation, without the authorization by
the stockholders or members, to sell, lease, exchange, mortgage, pledge or otherwise dispose of any of its
property and assets if the same is necessary in the usual and regular course of business of said corporation
or if the proceeds of the sale or other disposition of such property and assets be appropriated for the
conduct of its remaining business.
 substantially all of the corporation's assets, including its goodwill
a. NOTE: The sale under this provision does not contemplate an
ordinary sale of all corporate assets; the transfer must be of such
degree that the transferor corporation is rendered incapable of
continuing its business or its corporate purpose.
b. It does not apply (1) if the sale of the entire property and assets is
necessary in the usual and regular course of business of corporation,
or (2) if the proceeds of the sale or other disposition of such property
and assets will be appropriated for the conduct of its remaining
business.
Jurisprudential recognition of the business-enterprise transfer
1. Jurisprudence has held that in a business-enterprise transfer, the transferee
is liable for the debts and liabilities of his transferor arising from the
business enterprise conveyed. Many of the application of the business-
enterprise transfer have been related by the Court to the application of the
piercing doctrine.
2. Perhaps the most telling jurisprudence which recognized the business-
enterprise transfer would be the assailed case of Caltex.
a. In that case, under an agreement of assumption of obligations,
LUSTEVECO transferred, conveyed and assigned to respondent
PSTC all of its business, properties and assets pertaining to its tanker
and bulk business together with all the obligations, properties and
assets.
b. Meanwhile, Caltex, Inc. obtained a judgment debt against
LUSTEVECO, and it sought to enforce the same against PSTC. The
Court ruled that PSTC was bound by its agreement with
LUSTEVECO and the former assumed all of the latter's obligations
pertaining to such business.
c. More importantly, the Court held that, even without the
agreement, PSTC was still liable to Caltex, Inc. based on Section
40.
3. The Caltex case, thus, affirmed that the transfer of all or substantially all
the proper from one corporation to another under Section 40 necessarily
entails the assumption of the assignor's liabilities, notwithstanding the
absence of any agreement on the assumption of obligations.
a. The transfer of all its business, properties and assets WITHOUT
THE CONSENT OF ITS CREDITORS must certainly include
the liabilities; or else, the assignment will place the assignor's assets
In non-stock corporations where there are no members with voting rights, the vote of at least a majority of
the trustees in office will be sufficient authorization for the corporation to enter into any transaction
authorized by this section.
beyond the reach of its creditors and to protect the creditors against
unscrupulous conveyance of the entire corporate assets.
Fraud is not an essential consideration in a business-enterprise transfer
1. Notably, an evaluation of the relevant jurisprudence reveals that fraud is not
an essential element for the application of the business-enterprise transfer.
2. The exception of the Nell doctrine, which finds its legal basis under Section
40, provides that the transferee corporation assumes the debts and
liabilities of the transferor corporation because it is merely a
continuation of the latter's business.
3. The purpose of the business-enterprise transfer is to protect the creditors
of the business by allowing them a remedy against the new owner of the
assets and business enterprise.
a. Otherwise, creditors would be left "holding the bag," because they
may not be able to recover from the transferor who has "disappeared
with the loot," or against the transferee who can claim that he is a
purchaser in good faith and for value
4. The Court also agrees with the CA, that there was no finding of fraud in
the Caltex case.
Applicability of the business-enterprise transfer in the present case
1. SC held that YIL indeed became a continuation of MADCI's business since
it fulfilled the two requisites to apply the business-enterprise transfer rule:
a. the transferor corporation sells all or substantially all of its assets to
another entity; and
b. the transferee corporation continues the business of the transferor
corporation. Both requisites are present in this case.
2. SC held that MADCI indeed had assets consisting of 120 hectares of
landholdings in Magalang, Pampanga, to be developed into a golf course,
pursuant to its primary purpose as stated in their AOI. Because of its alleged
violation of the MOA, however, MADCI was made to transfer all its assets
to the YIL Group (who were aware of the business of MADCI). No evidence
existed that MADCI subsequently acquired other lands for its development
projects.
3. Thus, MADCI, as a real estate development corporation, was left without
any property to develop eventually rendering it incapable of continuing
the business or accomplishing the purpose for which it was incorporated.
Ergo, the said sale was a sale of substantially all of its assets, falling within
the exception (business enterprise transfer)
YIL Group is held solidarily liable to YU
4. While the Corporation Code allows the transfer of all or substantially all of
the assets of a corporation, the transfer should not prejudice the creditors of
the assignor corporation.
5. Under the business-enterprise transfer, the YIL Group have consequently
inherited the liabilities of MADCI because they acquired all the assets of
the latter corporation.
a. The continuity of MADCI's land developments is now in the hands
of YIL Group, with all its assets and liabilities.
b. Thus, the only way for Yu to recover his money would be to assert
his claim against the YIL Group as transferees of the assets.

The MOA cannot prejudice YU

1. The MOA, which contains a provision that Sangil undertook to redeem
MADCI proprietary shares sold to third persons or settle in full all their
claims for refund of payments, should not prejudice Yu.
a. The CA correctly ruled that such provision constituted novation
under Article 129370 of the Civil Code. When there is a substitution
of debtors, the creditor must consent to the same; otherwise, it shall
not in any way affect the creditor.
2. In this case, it was established that Yu's consent was not secured in the
execution of the MOA. Thus, insofar as the YU was concerned, the debtor
remained to be MADCI. And given that the assets and business of MADCI
have been transferred to YIL Group, then the latter shall be liable.

YIL Group’s remedy: Free and Harmless Clause

1. YIL Group, however, are not left without recourse as they can invoke the free
and harmless clause under the MOA.
a. In business-enterprise transfer, it is possible that the transferor and
the transferee may enter into a contractual stipulation stating that the
transferee shall not be liable for any or all debts arising from the
business which were contracted prior to the time of transfer.
b. Such stipulations are valid, but only as to the transferor and the
transferee.
c. NOTE: These stipulations, though, are not binding on the creditors
of the business enterprise who can still go after the transferee for the
enforcement of the liabilities.
2. In the present case, the MOA stated that Sangil undertook to redeem MADCI
proprietary shares sold to third persons or settle in full all their claims for
refund of payments. While this free and harmless clause cannot affect YU
as a creditor, the YIL Group may resort to this provision to recover
damages in a third-party complaint, but this is up to YIL Group.
 004 PHIVIDEC v. Court of Appeals (Apasan)
Januart 30, 1990 | Cruz, J. | Equity transfers
PETITIONER: Philippine Veterans Investment Development Corporation
RESPONDENTS: Cout of Appeals and Violeta Montelibano Borres
SUMMARY: Philippine Veterans Investment Development Corporation
(PHIVIDEC) sold all its rights and interest in the Phividec Railways Inc. (Phividec
Railways), PHIVIDEC’s wholly-owned subsidiary, to Philippine Sugar
Commission (PHILSUCOM). Thereafter, PHILSUCOM caused the creation of
Panay Railways Inc., (Panay Railways), PHILSUCOM’s wholly-owned
subsidiary, to operate the railways. Borres filed a complaint for damages against
Phividec Railways and Panay Railways for the alleged negligence of Phividec
Railways. Panay Railways filed a third party complaint against PHIVIDEC and as
a defense, Panay Railways invoked the Free and Harmless Clause that was stated
in PHIVIDEC and PHILSUCOM’s agreement, which basically provides that
PHIVIDEC shall assume the liability for any claim against Phividec Railways
prior to the turnover to PHILSUCOM. The RTC and CA ruled in favor of Borres
and held PHIVIDEC as solely liable, hinging the decision on the said clause.
Furthermore, the CA also pierced the corporate fiction of Phividec Railways and
held that PHIVIDEC should be liable for the acts of its wholly-owned subsidiary.
Issue now is whether or not the Court of Appeals was correct in finding Phividec
Railways liable by applying the piercing of the veil of corporate fiction. The court
held in the affirmative. First, by virtue of the Free and Harmless Clause,
PHIVIDEC expressly binds itself to assume any liability for any claim against
Phividec Railways prior to the turnover. In the present case, since the accident
happened before the turnover, then PHIVIDEC should be held liable.
Furthermore, Phividec Railways ceased to exist when the railways operation was
taken over by PHILSUCOM thru the Panay Railways. Second, (copied from the
syllabus) the disposition by the controlling shareholder of all of its equity in the
corporation warrants the application of the alter ego piercing doctrine since it
shows that the transferor had complete control of the corporation. In this case, the
Court considers that PHIVIDEC'S act of selling Phividec Railways to
PHILSUCOM shows that PHIVIDEC had complete control of Phividec Railways’
business.
DOCTRINE: The disposition by the controlling shareholder of all of its equity in
the corporation warrants the application of the alter ego piercing doctrine since it
shows that the transferor had complete control of the corporation. Therefore, if a
parent-holding company (PHIVIDEC in the present case) assumes complete
control of the operations of its subsidiary's business (Phividec Railways in the
present case), the separate corporate existence of the subsidiary must be
disregarded, such that the holding company will be responsible for the negligence
of the employees of the subsidiary as if it were the holding company's own
employees.
FACTS:
PHIVIDEC – transferor
PHILSUCOM – transferee
Phividec Railways Inc. – wholly-owned subsidiary of PHIVIDEC
Panay Railways Inc. – wholly-owned subsidiary of PHILSUCOM
Borres – plaintiff who sued Phividec and Panay Railways; Panay Railways filed
a 3rd party complaint against PHIVIDEC
1. This case arose when Violeta M. Borres (Borres), private respondent, was
injured in an accident that was later held by the trial and Court of Appeals to
be due to the negligence (specific act was not mentioned in the case) of
Phividec Railways, Inc. (Phividec Railways).
2. In 1979, petitioner Philippine Veterans Investment Development Corporation
(PHIVIDEC) sold all its rights and interests in the Phividec Railways to the
Philippine Sugar Commission (PHILSUCOM). Two days later,
PHILSUCOM caused the creation of a wholly-owned subsidiary, the Panay
Railways, Inc., (Panay Railways) to operate the railway assets acquired from
PHIVIDEC.
3. In 1980, Borres filed a complaint for damages against Phividec Railways and
Panay Railways, whereupon the latter filed a third-party complaint against
PHIVIDEC.
4. Borres alleged that upon the sale to PHILSUCOM of Phividec Railways, the
corporate name of the latter was changed to Panay Railways, Inc. Panay
Railways disclaimed liability on the ground that in the Agreement concluded
between PHIVIDEC and PHILSUCOM, it was provided that:
a. (Free and Harmless Clause) D. With the exception of the Liabilities
 and Contracts specified in Annexes 4 and 5 of the preceding Second, (copied from the syllabus) the disposition by the controlling
paragraph, PHIVIDEC hereby holds PHILSUCOM harmless shareholder of all of its equity in the corporation warrants the application of
from and against any action, claim or liability that may arise out the alter ego piercing doctrine since it shows that the transferor had complete
control of the corporation (note: In Kat Gaw, CLV said that this case is
of or result from acts or omissions, contracts or transactions
baloney because the transfer between PHIVIDEC and PHILSUCOM was an
prior to the turn-over. equity transfer, and therefore there is NO disrespect of corporate entity which
5. The Regional Trial Court of Iloilo held Phividec Railways, Inc. negligent and warrants the application of the piercing)
so liable to Borres for damages (Panay was not held liable). It also held that
as Phividec Railways was a wholly-owned subsidiary of PHIVIDEC, the RULING: WHEREFORE, the challenged decision is AFFIRMED and the petition is
latter should answer for Phividec Railway’s liability. DENIED.
6. The decision was affirmed on appeal by the Court of Appeals, and held that:
a. Thus, the piercing of the veil of corporate fiction is called for in the
RATIO:
case at bar. When Phividec Railways was sold by PHIVIDEC to
1. In Koppel v. Yatco, the Court declared that the veil of corporate fiction may
PHILSUCOM, the legal fiction of Phividec Railways as a
be pierced when it is used to defeat public convenience, justify wrong, protect
separate corporate entity from PHIVIDEC disappeared
fraud, or defend crime. It added that when the corporation is the mere alter
pursuant to and in view of the representations and warranties
ego or business conduit of a person it may be disregarded, "to prevent
contained in the agreement of sale between PHIVIDEC and
injustice, or the distortion or hiding of the truth, or to let in a just
PHILSUCOM, particularly the stipulation by virtue of which
defense."
PHIVIDEC held PHILSUCOM harmless from any claim or
2. In Yutivo Sons Hardware Co. v. Court of Tax Appeals, the Supreme Court
liability arising out of any act or transaction "prior to the turn-
held:
over."
a. It is an elementary and fundamental principle of corporation law that
b. By virtue of this provision, PHIVIDEC had expressly assumed
a corporation is an entity separate and distinct from its stockholders
liability for any claim arising before the turn-over of PRI to
and from other corporations to which it may be connected. However,
PHILSUCOM.
"when the notion of legal entity is used to defeat public convenience,
c. And since the accident in question took place before said turn-over
justify wrong, protect fraud or defend crime," the law will regard the
and since after said turn-over, Phividec Railways ceased to exist (in
corporation as an association of persons, or in the case of two
the sense that its railways operations were taken over by
corporations merge them into one. ... Another rule is that, when the
PHILSUCOM thru the Panay Railways) the only logical conclusion
corporation is the "mere alter ego or business conduit of a person, it
is that PHIVIDEC should be solely liable for the damages to Borres
may be disregarded."
in the case at bar.
3. In Commissioner of Internal Revenue v. Norton and Harrison Co., the
d. Indeed, applying the Koppel precedent (see Ratio No. 1) PHIVIDEC
Supreme Court likewise ruled that where a corporation is merely an adjunct,
cannot hide behind the veil of corporate fiction in order to evade this
business conduit or alter ego of another corporation the fiction of separate
liability, nor could the veil of corporate fiction be made a shield to
and distinct corporate entities should be disregarded.
confuse claimants such as Borres.
4. Contrary to the allegation in the current petition, the Supreme Court held in
ISSUE: the Nell Cas :
3. WoN the Court of Appeals was correct in finding PHIVIDEC solely liable a. Generally where one corporation sells or otherwise transfers all of
by applying the piercing of the veil of corporate fiction – Yes. First, by virtue its assets to another corporation, the latter is not liable for the debts
of the Free and Harmless Clause, PHIVIDEC expressly binds itself to assume and liabilities of the transferor, except: (1) where the purchaser
any liability for any claim against Phividec Railways prior to the turnover. expressly or impliedly agrees to assume such debts; (2) where the
 transaction amounts to a consolidation or merger of the
corporations; (3) where the purchasing corporation is merely a
continuation of the selling corporation; and (4) where the transaction
is entered into fraudulently in order to escape liability for such debts.
5. Moreover, as correctly pointed out by the Court of Appeals:
a. Besides, PHIVIDEC'S act of selling Phividec Railways to
PHILSUCOM shows that PHIVIDEC had complete control of
Phividec Railways’ business. This circumstance renders applicable
the rule cited by Panay Railways that if a parent- holding company
(PHIVIDEC in the present case) assumes complete control of
the operations of its subsidiary's business (Phividec Railways in
the present case), the separate corporate existence of the
subsidiary must be disregarded, such that the holding company
will be responsible for the negligence of the employees of the
subsidiary as if it were the holding company's own employees.
6. It is clear from the evidence of record that by virtue of the agreement between
PHIVIDEC and PHILSUCOM, particularly the stipulation exempting the
latter from any "claim or liability arising out of any act or transaction" prior
to the turn-over, PHIVIDEC had expressly assumed liability for any claim
against Phividec Railways. Since the accident happened before that
agreement and Phividec Railways ceased to exist after the turn-over, it
should follow that PHIVIDEC cannot evade its liability for the injuries
sustained by the private respondent.
7. A contrary conclusion would leave Borres without any recourse for her
legitimate claim. In the interest of justice and equity, and to prevent the
veil of corporate fiction from denying her the reparation to which she is
entitled, that veil must be pierced and PHIVIDEC and Phividec
Railways regarded as one and the same entity.
 005 Bank of Commerce v. RPN 9 (Adrias)
April 21, 2014 | Abad, J. | De Facto Merger
PETITIONER: Bank of Commerce
RESPONDENTS: Radio Philippines Network Inc., Intercontinental
Broadcastring Corporation and Banahaw Broadcasting Corporation thru Board of
Administrator and Sheriff Bienvenido S. Reyes, Jr., Sheriff, Regional Trial Court
of Quezon City, Branch 98
SUMMARY: In late 2001 the Traders Royal Bank (TRB) proposed to sell to Bank
of Commerce (Bancommerce) its banking business consisting of specified assets
and liabilities for ₱10.4 billion. Bancommerce agreed subject to prior BSP's
approval of their Purchase and Assumption (P & A) Agreement. The BSP
approved that agreement subject to the condition that Bancommerce and TRB
would set up an escrow fund of ₱50 million. So, TRB placed ₱50 million in escrow
with Metrobank to answer for those claims and liabilities that were excluded from
the P & A agreement and remained with TRB. BSP finally approved such
agreement. In a separate case TRB v. RPN Inc., TRB was ordered to pay RPN
actual damages. Instead of pursuing a levy in TRB’s escrow account with
Metrobank, RPN filed a Supplemental Motion for Execution where they
described TRB as "now Bank of Commerce" based on the assumption that TRB
had been merged into Bancommerce. Banccommerce denied that there was a
merger between TRB and Bancommerce. The RTC granted the writ of
execution to cover any and all assets of TRB, including those subject of the
merger/consolidation in the guise of a Purchase and Sale Agreement with Bank
of Commerce, and/or against the Escrow Fund established by TRB and Bank of
Commerce with the Metrobank. The RTC granted the motion for execution and
allowed it to execute on the assets that Bancommerce acquired from TRB under
their P & A Agreement. Bancommerce sought reconsideration of the RTC Order
considering the CA Decision actually declared that no merger existed between
TRB and Bancommerce. The RTC then issued the assailed Order denying
Bancommerce pleas and directed the release to the Sheriff of Bancommerce’s
"garnished monies and shares of stock or their monetary equivalent.” The relevant
issue in this case is WoN TRB and Bancommerce were validly merged. The SC
held in the negative because the requirements and procedures for a merger were
absent. In the case at bar, Bancommerce and TRB remained separate corporations
with distinct corporate personalities. What happened is that TRB sold and
Bancommerce purchased identified recorded assets of TRB in consideration of
Bancommerce’s assumption of identified recorded liabilities of TRB including
booked contingent accounts. There is no law that prohibits this kind of transaction
especially when it is done openly and with appropriate government approval. *see
doctrine* In the end, the decision in TRB v. RPN Inc., should not include the assets
and properties that Bancommerce acquired from TRB. These have ceased to be
assets and properties of TRB under the terms of the BSP-approved P & A
Agreement between them. They are not TRB assets and properties in the
possession of Bancommerce.
DOCTRINE: In his book, Philippine Corporate Law, Dean Cesar Villanueva
explained that under the Corporation Code, “a de facto merger can be pursued by
one corporation acquiring all or substantially all of the properties of another
corporation in exchange of shares of stock of the acquiring corporation. The
acquiring corporation would end up with the business enterprise of the target
corporation; whereas, the target corporation would end up with basically its only
remaining assets being the shares of stock of the acquiring corporation.”
No de facto merger took place in the present case simply because the TRB owners
did not get in exchange for the bank’s assets and liabilities an equivalent value in
Bancommerce shares of stock. Bancommerce and TRB agreed with BSP approval
to exclude from the sale the TRB's contingent judicial liabilities, including those
owing to RPN.
FACTS:
1. In late 2001 the Traders Royal Bank (TRB) proposed to sell to Bank of Com-
merce (Bancommerce) its banking business consisting of specified assets and
liabilities for ₱10.4 billion.
2. Bancommerce agreed subject to prior BSP's approval of their Purchase and
Assumption (P & A) Agreement.
3. On November 8, 2001 the BSP approved that agreement subject to the con-
dition that Bancommerce and TRB would set up an escrow fund of ₱50 mil-
lion with another bank to cover TRB liabilities for contingent claims that may
subsequently be adjudged against it, which liabilities were excluded from the
purchase.
4. To comply with the BSP mandate, on December 6, 2001 TRB placed ₱50
million in escrow with Metrobank to answer for those claims and liabilities
that were excluded from the P & A Agreement and remained with TRB.
5. Accordingly, the BSP finally approved such agreement on July 3, 2002.
6. On October 10, 2002, acting in G.R. 138510, TRB v. RPN Inc., this Court
ordered TRB to pay RPN actual damages of ₱10 million plus 12% legal in-
terest and some amounts. Rather than pursue a levy in execution of the cor-
responding amounts on escrow with Metrobank, RPN filed a Supplemental
Motion for Execution where they described TRB as "now Bank of Com-
merce" based on the assumption that TRB had been merged into Bancom-
merce.
7. Bancommerce filed its Special Appearance with Opposition to the same ques-
tioning the jurisdiction of the RTC over Bancommerce and denying that
there was a merger between TRB and Bancommerce.
 8. The RTC issued an Order granting and issuing the writ of execution to cover
any and all assets of TRB, including those subject of the merger/consolida-
tion in the guise of a Purchase and Sale Agreement with Bank of Commerce,
and/or against the Escrow Fund established by TRB and Bank of Commerce
with the Metrobank.
9. Bancommerce filed a petition for certiorari with the CA assailing the RTC’s
Order, but such was denied. The CA pointed out that the Decision of the RTC
was clear in that Bancommerce was not being made to answer for the liabili-
ties of TRB, but rather the assets or properties of TRB under its possession
and custody.
10. In the same Decision, the CA modified the Decision of the RTC by deleting
the phrase that the P & A Agreement is a farce or "a mere tool to effectuate
a merger and/or consolidation between TRB and BANCOM.”
11. RPN then filed with the RTC a motion to cause the issuance of an alias writ
of execution against Bancommerce based on the CA Decision.
12. The RTC granted the motion on February 19, 2010 on the premise that the
CA Decision allowed it to execute on the assets that Bancommerce acquired
from TRB under their P & A Agreement.
13. Bancommerce sought reconsideration of the RTC Order considering that the
December 2009 CA Decision actually declared that no merger existed be-
tween TRB and Bancommerce. But, since the RTC had already issued the
alias writ, Bancommerce filed a motion to quash the same, followed by sup-
plemental Motion.
14. The RTC then issued the assailed Order denying Bancommerce pleas and,
among others, directing the release to the Sheriff of Bancommerce’s
"garnished monies and shares of stock or their monetary equivalent.”
15. Aggrieved, Bancommerce appealed to the CA. However, the CA dismissed
the petition outright for the supposed failure of Bancommerce to file a motion
for reconsideration of the assailed order.
ISSUE/s:
1. WoN TRB and Bancommerce were validly merged – NO because the
requirements and procedures for a merger were absent.
2. WoN the RTC could regard Bancommerce as RPN’s judgment debtor – NO
because TRB and Bacommerce retained their separate and distinct identity
after the purchase.
RULING: Judgment in question is affirmed.
RATIO:
NO MERGER and NO DE FACTO MERGER
1. Merger is a re-organization of two or more corporations that results in
their consolidating into a single corporation, which is one of the con-
stituent corporations, one disappearing or dissolving and the other sur-
viving.
2. To put it another way, merger is the absorption of one or more corpo-
rations by another existing corporation, which retains its identity and
takes over the rights, privileges, franchises, properties, claims, liabili-
ties and obligations of the absorbed corporation(s). The absorbing cor-
poration continues its existence while the life or lives of the other cor-
poration(s) is or are terminated.
3. It is clear that no merger took place between Bancommerce and
TRB as the requirements and procedures for a merger were ab-
sent. A merger does not become effective upon the mere agreement
of the constituent corporations. All the requirements specified in the
law must be complied with in order for merger to take effect. Section
79 of the Corporation Code further provides that the merger shall be
effective only upon the issuance by the SEC of a certificate of merger.
4. In the case at bar, Bancommerce and TRB remained separate corpora-
tions with distinct corporate personalities. What happened is that TRB
sold and Bancommerce purchased identified recorded assets of TRB
in consideration of Bancommerce’s assumption of identified recorded
liabilities of TRB including booked contingent accounts. There is no
law that prohibits this kind of transaction especially when it is done
openly and with appropriate government approval.
5. No merger or consolidation took place as the records do not show
any plan or articles of merger or consolidation. More importantly,
the SEC did not issue any certificate of merger or consolidation.
6. In his book, Dean Cesar Villanueva explained that under the Cor-
poration Code, "a de facto merger can be pursued by one corpora-
tion acquiring all or substantially all of the properties of another cor-
poration in exchange of shares of stock of the acquiring corporation.
The acquiring corporation would end up with the business enterprise
of the target corporation; whereas, the target corporation would end
up with basically its only remaining assets being the shares of stock of
the acquiring corporation."
7. No de facto merger took place in the present case simply because the
TRB owners did not get in exchange for the bank’s assets and liabili-
ties an equivalent value in Bancommerce shares of stock. Bancom-
merce and TRB agreed with BSP approval to exclude from the sale
the TRB’s contingent judicial liabilities, including those owing to
 RPN. The transaction between TRB and Bancommerce was neither a
merger nor a de facto merger but a mere “sale of assets with assump-
tion of liabilities,”
8. History of de facto merger
a. The idea of a de facto merger came about because, prior to the pre-
sent Corporation Code, no law authorized the merger or consolida-
tion of Philippine Corporations, except insurance companies, rail-
way corporations, and public utilities. And, except in the case of in-
surance corporations, no procedure existed for bringing about a mer-
ger.
b. Still, the Supreme Court held in Reyes v. Blouse, that authority to
merge or consolidate can be derived from Section 28½ (now Section
40) of the former Corporation Law which provides, among others,
that a corporation may “sell, exchange, lease or otherwise dispose
of all or substantially all of its property and assets” if the board of
directors is so authorized by the affirmative vote of the stockholders
holding at least two-thirds of the voting power. The words “or oth-
erwise dispose of,” according to the Supreme Court, is very broad
and in a sense, covers a merger or consolidation.
9. The enforcement, therefore, of the decision in the main case should not in-
clude the assets and properties that Bancommerce acquired from TRB. These
have ceased to be assets and properties of TRB under the terms of the BSP-
approved P & A Agreement between them. They are not TRB assets and
properties in the possession of Bancommerce.
BANCOMERCE IS NOT RPN’S JUDGMENT DEBTOR
1. Bancommerce agreed to assume those liabilities of TRB that are spec-
ified in their P & A Agreement. That agreement specifically excluded
TRB’s contingent liabilities that the latter might have arising from
pending litigations in court, including the claims of respondent RPN,
et al.
2. The evidence in this case fails to show that Bancommerce was a mere
continuation of TRB. TRB retained its separate and distinct iden-
tity after the purchase.
3. Although it subsequently changed its name to Traders Royal Hold-
ing’s, Inc. such change did not result in its dissolution. Bancommerce
and TRB remained separate corporations.
a. "The changing of the name of a corporation is no more than
creation of a corporation than the changing of the name of a
natural person is the begetting of a natural person. The act, in
both cases, would seem to be what the language which we use
to designate it imports—a change of name and not a change
of being."
4. To protect contingent claims, the BSP directed Bancommerce and
TRB to put up ₱50 million in escrow with another bank. It was the
BSP, not Bancommerce that fixed the amount of the escrow. Conse-
quently, it cannot be said that the Bancommerce acted in bad faith with
respect to the excluded liabilities. They did not enter into the P & A
Agreement to enable TRB to escape from its liability to creditors with
pending court cases.
5. Further, even without the escrow, TRB continued to be liable to its creditors
although under its new name. Parenthetically, the P & A Agreement shows
that Bancommerce acquired greater amount of TRB liabilities than assets.
Article II of the P & A Agreement shows that Bancommerce assumed total
liabilities of ₱10,401,436,000.00 while it received total assets of only
₱10,262,154,000.00. This proves the arms length quality of the transaction.
VELASCO, JR., J. - CONCURRING OPINION
1. Procedural issue
a. Jurisdiction over the person still requires the existence of a coercive
process issued by the court to such party or its voluntary submission
to the court. Neither had been done in this case. Note that Bancom
made its entry to the case but by way of special appearance precisely
to question the trial court’s jurisdiction over its person. Thus, with-
out any summons issued by the trial court, jurisdiction over Ban-
com’s person had never been obtained by the trial court in this
case. Any pronouncement against it is void for lack of jurisdiction.
2. Merger
a. The existence of a de facto merger, this Court must at least ascertain
the presence of the most essential element of a merger apart from
compliance with the legalities set forth under the law: the dissolution
of the separate judicial personality of the target corporation in fact,
if not in law.
b. He who alleges the existence of the supposed merger must show
proof in support. The burden of proof should be taken against TRB,
not Bancom.
Mendoza, J., Dissenting Opinion
1. Procedural
a. Bancommerce failed to satisfactorily prove before the CA that in-
deed, its noncompliance with the mandatory and jurisdictional re-
quirement of a prior motion for reconsideration was justified. A writ
 of certiorari is a prerogative writ, never demandable as a matter into the shoes of the seller corporation. This is especially true in the
of right, never issued except in the exercise of judicial discretion. case of banks that take on the license of a predecessor bank.
b. Bancommerce cannot insist that TRB’s assets in its custody and pos- b. This court has held that a sale of assets is legally distinct from a
session cannot be the subject of an execution on the flimsy excuse merger or consolidation.
that it is not a party. Granting that there has been no de facto merger c. In such transactions, the purchaser corporation is now the one con-
or consolidation, the undeniable fact is that Bancommerce has tinuing the seller corporation’s original business. Consequently, as
TRB’s assets, commingled or not, and the rules provide that these far as the selling corporation is concerned, there is no more business
can be reached by levy or garnishment. remaining.
c. The Rules of Court, moreover, do not require that the garnishee be
served with summons or impleaded in the case in order to make him
liable.
d. The garnishee need not be impleaded as a party to the case. All that
is necessary for the trial court lawfully to bind the person of the
garnishee or any person who has in his possession credits belonging
to the judgment debtor is service upon him of the writ of garnish-
ment.
e.
2. Merger – THERE IS A MERGER
a. The steps necessary to accomplish a merger or consolidation, as pro-
vided for in Sections 76, 77, 78 and 79 of the Corporation Code.
b. Section 40 of the Corporation Code laid out the procedure and re-
quirements when a corporation sells or otherwise disposes of all or
substantially all of its assets. Section 40 will not apply if the sale
was necessary in the usual and regular course of business.
c. The facts obtaining in the case, however, clearly showed that the
sale was not in pursuance of the usual and regular banking business
of TRB.
d. The sale, in fact, rendered TRB incapable of carrying out the pur-
pose of its organization.
e. While there may be no merger/consolidation in its strictest sense, it
is my studied opinion that the end result of the affair that took
place between TRB and Bancommerce amounted to a merger of as-
sets where the existence of TRB as a banking entity ceased while
that of Bancommerce continued. Essentially, Bancommerce is con-
tinuing the operations of the former.

Leonen, J., Dissenting Opinion

1. Merger – NO MERGER, but Banccomerce is still liable because it is consid-
ered to be under Sec. 40
a. A corporation which purchases all or substantially all of the assets
of another corporation should be liable to satisfy the execution of a
judgment debt against the seller corporation when it impliedly ac-
cepts such obligations. The obligation is impliedly accepted if the
purchasing corporation made it appear to third parties that it stepped
 006 SUNDOWNER DEV’T v. DRILON (Yap)
December 6, 1989 | Gancayco, J. | Effects on Employees; Assets Only Transfers
PETITIONER: Sundowner Development Corporation
RESPONDENTS: DOLE Sec. Franklin Drilon, National Union of Workers in
Hotel, Restaurant and Allied Industries (NUWHRAIN), Hotel Mabuhay Chapter,
Chapter Officers and Members, Hotel Mabuhay, Inc., and Mariano Penano (Hotel
Mabuhay’s president)
SUMMARY: Hotel Mabuhay was leasing the premises of Santiago Syjuco, Inc.
in Ermita, Manila. Mabuhay failed to pay rentals so Syjuco filed an ejectment suit.
To settle the suit, Mabuhay offered to return the leased premises to Syjuco and to
sell its assets and personal properties within the premises to any interested buyer.
Syjuco subsequently leased the premises to Sundowner, and Mabuhay eventually
sold its assets and personal properties to Sundowner. The National Union of
Workers in Hotel, Restaurant and Allied Industries (NUWHRAIN) filed a
complaint for damages alleging connivance between Mabuhay and Sundowner so
that Mabuhay could evade its liabilities (backwages) owed to the employees – they
pray that Sundowner be ordered to absorb the employees and to pay backwages.
Sundowner argues that the prevailing doctrine is that there is no law requiring
bona fide purchasers of the assets of an on-going concern to absorb in its employ
the employees of the latter.
Ths issue is whether Sundowner Development Corporation can be considered a
successor-employer of the Hotel Mabuhay’s employees.
The SC ruled in the negative. First, the purchaser of the assets or enterprise is not
legally bound to absorb in its employ the employers of the seller of such assets or
enterprise – because an employer-employee relationship is in personam thus
between the direct parties only. However, they may be held liable for damages to
the employees if it were found that the transaction is colored or clothed with bad
faith. In this case, there was no bad faith because it was Syjuco who transacted
with Sundowner, and what Mabuhay did was merely to sell its assets and personal
properties within the leased premises to Sundowner (this case is under the topic
of Assets Only Transfers). Second, Mabuhay and Sundowner could not be joint-
tortfeasors since there is no privity between them, and one has no controlling
interest in the other. Lastly, there can be no implied acceptance of the employees
of Mabuhay by Sundowner and it is expressly provided in their agreement that
“Sundowner has no commitment or duty to absorb them.”
DOCTRINE:
GENERAL RULE: The purchaser of the assets or enterprise is not legally bound
to absorb in its employ the employers of the seller of such assets or enterprise.
o EXCEPTION: The parties are liable to the employees if the transaction
between the parties is colored or clothed with bad faith.
FACTS:
1. Hotel Mabuhay, Inc. (private respondent) leased the premises of Santiago
Syjuco, Inc. along Mabini St., Ermita, Manila.
2. Due to non-payment of rentals, Syjuco filed a complaint for ejectment against
Mabuhay.
a. Mabuhay offered an amicable settlement – wherein Mabughay
would surrender the premises to Syjuco and sell its assets and
personal property to any interested party.
b. Lease Agreement – Syjuco leased the premises to Sundowner
Development Corporation (petitioner).
c. Deed of Assignment – Mabuhay sold its assets and personal
properties in the premises to Sundowner.
3. The National Union of Works in Hotel, Restaurant and Allied Services
(NUWHRAIN; private co-respondent) picketed the leased premises,
barricaded the entrance, and denied entrance to Sundowner’s officers,
employees and guests.
a. This is because they wanted to be absorbed by Sundowner and to be
paid backwages.
4. After sending Syjuco a letter-complaint, Sundowner filed a complaint for
damages with preliminary injunction and/or temporary restraining order
against NUWHRAIN. DOLE ordered the absorption of the employees.
a. Sundowner signed a tri-partite agreement wherein it paid
NUWHRAIN a sum of money in order for NUWHRAIN to lift the
picket.
5. In its position paper, NUWHRAIN contends that the transaction between
Mabuhay and Sundowner was for the purpose of Mabuhay’s evasion of its
liabilities owed to the employees.
 6. Sundowner argues that the prevailing doctrine is that there is no law requiring
bona fide purchasers of the assets of an on-going concern to absorb in its
employ the employees of the latter – and that the same would be contrary to
law.
ISSUE/s:
3. Whether Sundowner Development Corporation can be considered a
successor-employer of the Hotel Mabuhay’s employees – No, because there
is no law requiring a bona fide purchaser of assets of an on-going concern to
absorb in its employ the employees of the latter.
RULING: Petition GRANTED.
e. Mabuhay and Sundowner were not joint-tortfeasors because one is
entirely different from the other. One has no controlling interest in
the other. One has no privity with the other.
4. Moreover, there was an agreement that Mabuhay would give a list of its
employees to Sundowner “for recommendation for employment” and that
Sundowner was “in no commitment to hire them in the business.”
a. There can be no implied acceptance of the employees of Mabuhay
by Sundowner and it is expressly provided in the agreement that
“Sundowner has no commitment or duty to absorb them.”
5. What is obvious is that the Sundowner, by purchasing the assets of Mabuhay
in the hotel premises, enabled Mabuhay to pay its obligations to its
employees.

RATIO:
1. Labor contracts such as employment contracts and collective bargaining
agreements are not enforceable against a transferee of an enterprise, labor
contracts being in personam, thus binding only between the parties.
a. This conclusion draws its force from the right of an employer to
select his employees and to decide when to engage them as protected
under our Constitution, and the same can only be restricted by law
through the exercise of the police power.
2. Although the purchaser of the assets or enterprise is not legally bound to
absorb in its employ the employers of the seller of such assets or enterprise,
the parties are liable to the employees if the transaction between the parties
is colored or clothed with bad faith.
3. There was no bad faith in the transaction between Sundowner and Mabuhay.
a. When Mabuhay surrendered the leased premises to Syjuco and
asked Syjuco to offer same to other lessees, it was Syjuco who found
Sundowner and persuaded it to lease said premises.
b. Mabuhay had nothing to do with the negotiation and consummation
of the lease contract between Sundowner and Syjuco.
c. The only interaction between Mabuhay and Sundowner was when
Mabuhay offered to sell its assets and personal properties within the
premises to Sundowner – it stated that “the same is purely for and
in consideration of the sale/transfer and assignment of the personal
properties and assets of Hotel Mabuhay, Inc. listed . . ." and "in no
way involves any assumption or undertaking on the part of Second
Party (petitioner) of any debts or liabilities whatsoever of Hotel
Mabuhay, Inc." – liabilities should mean both monetary and other
liabilities/obligations arising from the operation of its business.
d. Sundowner was not under duty to inform NUWHRAIN of its lease
of the premises and its purchase of Mabuhay’s assets in order for the
employees to take measures in order to protect their interests.
 007 Central Azucarera del Danao v. CA (Villavicencio)
June 29, 1985 | Cuevas, J. | Business-Enterprise Transfers
PETITIONER: CENTRAL AZUCARERA DEL DANAO
RESPONDENTS: HON. COURT OF APPEALS, NOQELON BANA-AY,
JOSE COSCULLUELA, GORGONIO PALMA, and DANAO DEVELOP-
MENT CORPORATION
SUMMARY: Central Danao sold its sugar mill properties and other assets to
Dadeco. Dadeco hired Central Danao’s regular and permanent employees. Bana-
ay, Palma, and Cosculluela were terminated, thus they filed for recovery of ter-
mination pay against Dadeco and Central Danao. Dadeco denied liability for ter-
mination pay, asserting lack of cause of action since Dadeco was not their em-
ployer for the period. Central Danao invoked the defense of lack of cause of ac-
tion, prescription, and laches in denying liability. WoN a change of ownership or
management of an establishment or corporation by virtue of the sale or disposi-
tion of all or substantially all of properties and assets operates to insulate the
selling corporation (Central Danao) from its obligation to its employees under
the Termination Pay Law. – NO, because the termination of the employees was
without prior notice due to the sale of the assets and properties that was done be-
hind their backs.
DOCTRINE: There is no law requiring that the purchaser should absorb the
employees of the selling company. Well-established is the principle “that it is
within the employer’s legitimate sphere of management control of the business to
adopt economic policies to make some changes or adjustments in their
organization or operations that would insure profit to itself or protect the
investments of its stockholders. As in the exercise of such management
prerogative, the employer may merge or consolidate its business with another, or
sell or dispose all or substantially all of its assets and properties which may bring
about the dismissal or termination of its employees in the process.
By way of reminder, employers should exercise caution and care in dealing with
its employees to prevent suspicion that the adoption of certain corporate combi-
nations such as merger or consolidation or outright sale or disposition of assets is
but a scheme to evade payment of termination pay to its employees.
Under the Termination Pay Law —an employee may be terminated with or with-
out just cause.
If there is just cause, the employer is not required to neither serve any notice nor
pay termination pay to employees concerned.
If the termination -is without just cause, the employer must serve notice to the
employee, otherwise the employer must pay termination pay, except where other
applicable statutes provide a different remedy as in unfair labor practice.
FACTS:
1. Nonelon Bana-ay, Jose Cosculluela, and Gorgonio Palma were among the
regular and permanent employees of Central Azucarera del Danao (Central
Danao, for short), owner-operator of a sugar mill in Danao milling district of
Toboso, Negros Occidental.
2. Central Danao sold its sugar mill properties and other assets to Danao Develop-
ment Corporation (Dadeco, for short), a duly organized corporation composed of
sugar planters of the milling district of Central Danao.
3. Dadeco actually took over the management and operation of the purchased sugar
mill properties pursuant to the terms and conditions of the Deed of Sale.
4. Although the document of sale made no express mention of the continued em-
ployment status of the old employees of Central Danao upon the consequent
change of its ownership and management, Dadeco, however hired Central Danao's
regular and permanent employees but in accordance with its own hiring and se-
lection policies.
5. During the period of their new employment with Dadeco, Nonelon Bana-ay was
terminated on December 15, 1961; Gorgonio Palma on July 10, 1966, and Jose
Cosculluela, on February 1, 1967.
6. As a consequence thereof, Nonelon Bana-ay, along with eight others, Jose Cos-
culluela, and Gorgonio Palma, filed separate complaints for recovery of termina-
tion pay with damages against Dadeco and Central Danao
7. Dadeco denied liability for termination pay, asserting lack of cause of action since
Dadeco was not their employer for the period in question and prior to the time it
took ovet the management and operation of the sugar central on July 8, 1961.
8. Central Danao invoked the defense of lack of cause of action, prescription, and
laches in denying liability and by way of cross-claim, shifted the burden to
Dadeco. Central Danao claimed that Dadeco assumed the liability to pay the ter-
mination pay corresponding to the alleged years of employment prior to July, 8,
1961, contending, that the assets of Central Danao had already been sold to
Dadeco
9. trial of the three cases proceeded only with respect to plaintiffs Nonelon Bana-ay,
Jose Cosculluela and Gorgonio Palma.
10. Court of First Instance of Negros Occidental, Branch 11, rendered 3 separate de-
cisions, all in favor of plaintiffs (now private respondents), ordering Central Da-
nao—
11. 1) in Civil Case No. 8214, to pay Nonelon Bana-ay the sum of Pl,320.00 plus 6%
interest per annum from the date of filing of the complaint and to pay the costs;
12. 2) in Civil Case No. 8353, to pay Gorgonio Palma the sum of P2,790.00 plus legal
 interests from the date of filing of the complaint
13. The complaints were dismissed as against the defendant, now private respondent
Dadeco.
14. Central Danao appealed to the then Court of Appeals which, on June 23, 1975,
affirmed the decisions of the Court of First Instance of Negros Occidental but
modified the award of termination pay to Jose Cosculluela so as to cover only the
years of service from 1935 to July 7, 1961, the date when the sugar mill properties
were sold to Dadeco.
ISSUE/s:
1. WoN a change of ownership or management of an establishment or corporation
by virtue of the sale or disposition of all or substantially all of properties and assets
operates to insulate the selling corporation (Central Danao) from its obligation to
its employees under the Termination Pay Law. – NO, because the termination of
the employees was without prior notice due to the sale of the assets and properties
that was done behind their backs.
RULING: WHEREFORE, and except as thus modified with respect to Jose Cos-
culluela, the decision appealed from is hereby AFFIRMED. Costs against petitioner.
RATIO:
1. Under the Termination Pay Law —an employee may be terminated with or
without just cause.
2. If there is just cause, the employer is not required to serve any notice nor pay
termination pay to employees concerned.
3. If the termination -is without just cause, the employer must serve notice to
the employee, otherwise the employer must pay termination pay, except
where other applicable statutes provide a different remedy as in unfair labor
practice.
4. The purpose of the Termination Pay Law, as a regulatory measure, is to give
the employer the opportunity o find replacement or substitute; and other place
of employment or source of livelihood in the case of an employee.
5. A judicious examination of the pertinent Deed of Sale dated July 7, 1961
reveals no express stipulation whatsoever relative to the continued employ-
ment by Dadeco of the former employees of Central Danao. Their fate under
the new owners appeared unprovided for. And there is no law requiring that
the purchaser should absorb the employees of the selling company
6. There can be no controversy for it is a principle well-recognized, that it is
within the employer's legitimate sphere of management control of the busi-
ness to adopt economic policies or make some changes or adjustments in their
organization or operations that would insure profit to itself or protect the in-
vestment of its stockholders.
7. The records further reveal that the negotiations for the sale of the assets and
properties of Central Danao to Dadeco were held behind the back of the em-
ployees who were taken by surprise upon the consummation of the sale.
8. They were not formally notified of the impending sell-out to Dadeco and its
attendant consequences with respect to their continued employment status
under the purchasing company. As such, they were uncertain of being re-
tained, hired, or absorbed by the new owner and its management.
9. Inasmuch as there was no notice of termination whatsoever given to the em-
ployees of Central Danao coupled with the fact that no efforts were exerted
by Central Danao to apprise its employees of the consequences of the sale or
disposition of its assets to Dadeco, justice and equity dictate that private re-
spondents be entitled to their termination or separation pay corresponding to
the number of years of service with Central Danao until June 7, 1961.
10. In Philippine Refining Company, Inc. vs. Garcia, this Court, speaking thru
Justice J.B.L. Reyes, stated thus: "Except where other applicable statutes pro-
vide differently, it is not the cause for the dismissal but the employer's failure
to serve notice upon the employee that renders the employer answerable to
the employee for termination pay."
11. By way of reminder, employers should exercise caution and care in dealing
with its employees to prevent suspicion that the adoption of certain corporate
combinations such as merger or consolidation or outright sale or disposition
of assets is but a scheme to evade payment of termination pay to its employ-
ees.
12. Laches issue:
13. Central Danao cannot take refuge under the equitable doctrine of laches to
shield itself from an obligation created by law, R.A. 1787 which, undoubt-
edly, is a social legislation intended to protect the workingman.
14. Since this is an obligation created by law, and as correctly ruled by the then
Court of Appeals, Article 1144(2) of the New Civil Code applies. The action
to enforce compliance with the obligation to pay termination pay may be in-
stituted within the period of 10 years from the time the right of action accrues.
 008 PEPSI-COLA BOTTLING CO. v. NLRC (Vicencio)
June 23, 1992 | Gutierrez, Jr., J. | Business Enterprise Transfers
PETITIONER: Pepsi-Cola Bottling Co., Anthony Sian, Virgilo Castillo
RESPONDENTS: NLRC, Labor Arbiter
SUMMARY: Engr. Encabo was employed by Pepsi-Cola Bottling Company (PBC) as
maintenance manager of its beverage plant in Leyte. Then, plant CEM-72 soaker machine
needed rehabilitation. A contractor, PREMACOR offered a bid to rehabilitate such machine
and such was acceped by PEPSI. Sian, the Plant General Manager of PBC, then wired
Castillo (manufacturing manager) to rpeapre a list of spare parts needed for the soaker
machine. Castillo then transmitted the wired instruction to Engr. Encabi who subsequently
prepared and submitted Purchase Requisition Orders as required by PREMACOR.
However, PREMACOR failed to make the soaker machine fully operational. Castillo then
asked Encabo to take over the work and Encabo successfully made the machine 65%
operational. But Leah, the personnel manager of the PBC, suddenly informed Encabo that
his position must be sacrificed because of the delay of the rehabilitation of the soaker
machine. Encabo was told to resign and was offered the amount og P12,000. Encabo then
filed a complaint for illegal dismissal and unfair labor practice before the NLRC.
Meanwhile, Pepsi-Cola Products Philippines Inc. (PCPPI) filed a manifestation that it
received a writ of execution addressed to PBC and Pepsi-Cola Distributors of the
Philippines (PCD) to reinstate Encabo. PCPPI further said that it was returning the writ
unsatisfied since it is a corporation separate and disntict from PCD and PBC, making it an
inappropriate party for the writ. Petitions Sian and Castillo claim that reinstatement is no
longer possible since the petitioner company PBC closed down its business on July 24,
1989 and the new franchise holder PCPPI is a new entity. Issue: WoN PCCPI is still liable
– YES
There is no evidence presented showing that PCPPI, as the new entity or purchasing
company is free from any liabilities incurred by the former corporation. PCD may have
ceased business operations and PCPPI may be a new company but it does not necessarily
follow that no one may now be held liable for illegal acts committed by the earlier firm.
The complaint was filed when PCD was still in existence. Pepsi-Cola never stopped doing
business in the Philippines. The same soft drinks products sold in 1988 when the complaint
was initiated continue to be sold now. In fact, in the surety bond put up by Castillo and
Sian, both PCD and PCPPI bound themselves to answer the monetary awards of Engr.
Encabo, which clearly implies that PCPPI as a result of the transfer of franchise to it, bound
itself to answer for the liability of PCD to its employees. Encabo is ordered to be given
separation pay.
DOCTRINE: Although a corporation may have ceased business operations and an entirely
new company has been organized to take over the same type of operations, it does not
necessarily follow that no one may now be held liable for illegal acts committed by the
earlier firm.
FACTS:
1. Engr. Oscar Encabo, a licensed mechanical and electrical engineer, was
employed by Pepsi-Cola Bottling Co. as maintenance manager of its
beverage plant at Tanauan, Leyte.
2. Then the plant CEM-72 soaker machine needed rehabilitation.
3. A contractor, Precision Machinist Corporation (PREMACOR) offered a bid
to rehabilitate said machine and submitted a quotation, which was accepted
by Pepsi.
4. Plant General Manager of the company, petitioner Sian, wired co-petitioner
Castillo, the Manufacturing Manager, to prepare a complete list of spare parts
needed for the overhaul of the soaker machine.
5. Sian also informed the Castillo that by the last week of February, Mr.
Doromal, the maintenance manager of the Pepsi-Cola plant in Iloilo, will
come over to handle the work in three (3) weeks.
6. Petitioner Castillo thereafter transmitted the wired instruction to private
respondent Engr. Encabo who subsequently prepared and submitted Purchase
Requisition Orders as required by the contractor.
7. Rehabilitation work on the soaker amchine was then commenced by a crew
of 15-20 men from PREMACOR, supervised by Doromal. However,
PREMACOR failed ot make the soaker machine fully operational.
8. Petitioner Castillo then asked private respondent Encabo to take over the
work. Assisted by the men directly under him, Encabo did so and in three
weeks time, the soaker machine became operational again at an efficiency
rate of 65%.
9. But, Leah Danaquel, personnel manager of the company informed private
respondent Encabo that his position may be sacrificed because of the delay
in the rehabilitation of the soaker machine. Disappointed, private respondent
went on leave.
10. Encabo then had a talk with the personnel manager. Private respondent
Encabo was told to resign and offered the amount of P12,000.00 if he did.
Private respondent rejected the offer.
11. Encabo then filed a complaint for illegal dismissal and unfair labor practice
against petitioners before the National Labor Relations Commission.
a. Encabo stated that his dismissal from the company was illegal. He
claimed that he was denied due process because he was not 'formally
and priorly' charged.
12. On the other hand, Castillo and Sian alleged that Encabo was terminated from
employment for:
a. (a) negligence in failing to install preventive measures in
maintenance thus resulting in machine breakdown and line
stoppages; and
b. (b) negligent repair of CEM-72 Soaker Machine by allowing outside
contractors to repair the same without his close supervision
13. Meanwhile, Pepsi-Cola Products Philippines, Inc. (PCPPI) filed a
manifestation with the NLRC stating that it received a writ of execution,
addressed to Pepsi-Cola Bottling Co. (PBC) and ordering Pepsi-Cola
 Distributors of the Philippines (PCD) to reinstate Oscar T. Encabo.
14. PCPPI further stated that it was returning the writ unsatisfied since it is a
corporation separate and distinct from PBC or PCD, making it an
inappropriate party to which the writ of execution should be served.
15. In the MR filed with the NLRC, the petitioners Castillo and Sian alleged that
reinstatement of Encabo is no longer possible since the petitioner company
PBC closed down its business on July 24, 1989 and the new franchise holder,
Pepsi-Cola Products Philippines (PCPPI) is a new entity.
16. NLRC issued a resolution denying the MR on the ground that the cessation
of the business was never raised in the arbitration level and can not now be
entertained on appeal. Thus, the petitioner company PBC and its successor-
-in-interest PCPPI were held liable for the reinstatement of the private
respondent Encabo.
ISSUE/s:
1. WoN Petitioner Pepsi-Cola Co. and Pepsi-Cola Products Phil. are liable for
reinstatement – YES, because it does not necessarily follow that no one may
now be held liable for illegal acts committed by the earlier firm.
RULING: The decision and the resolution of the NLRC, dated April 15, 1991 and
August 14, 1991 respectively are MODIFIED. Backwages limited to three (3) years
are hereby awarded and in lieu of reinstatement, the private respondent, Oscar T.
Encabo is GRANTED separation pay equivalent to one (1) month for every year of
service plus attorney's fees in the amount of P10,000.00 with costs against the
petitioners. The writ of execution dated February 18, 1991 and the alias writ of
execution dated November 8, 1991 are hereby NULLIFIED and SET ASIDE.
RATIO:
1. PCPPI claims that the CA committed grave abuse of discretion in holding it
liable for the reinstatement of the private respondent considering that PCPPI
is an entirely separate and distinct entity from the PCD.
2. On the ground of serious business losses, PCD alleged that it ceased to
operate on July 24, 1989 and PCPPI, a company separate and distinct from
PCD acquired the franchise to sell the Pepsi-Cola products.
3. Pepsi-Cola Distributors of the Philippines may have ceased business
operations and Pepsi-Cola Products Philippines Inc. may be a new
company but it does not necessarily follow that no one may now be held
liable for illegal acts committed by the earlier firm.
4. The complaint was filed when PCD was still in existence. Pepsi-Cola
never stopped doing business in the Philippines. The same soft drinks
products sold in 1988 when the complaint was initiated continue to be
sold now.
5. The sale of products, purchases of materials, payment of obligations, and
other business acts did not stop at the time PCD bowed out and PCPPI came
into being.
6. There is no evidence presented showing that PCPPI, as the new entity or
purchasing company is free from any liabilities incurred by the former
corporation.
7. In fact, the SC agrees with the public respondent's observation that in the
surety bond put up by the petitioners Castillo and Sian as appeal bond,
both PCD and PCPPI bound themselves to answer the monetary awards
of the private respondent in case of an adverse decision of the appeal,
which clearly implies that the PCPPI as a result of the transfer of the
franchise bound itself to answer for the liability of PCD to its employees.
8. Moreover, the liability of petitioners A.C. Sian and Virgilio Castillo as Plant
General Manager and Manufacturing Manager respectively of PCD is beyond
question as they are the architects of the dismissal of private respondent.
9. The petitioners acted arbitrarily and wantonly in dismissing the private
respondent Encabo on the mere basis of loss of trust and confidence.
10. The records reveal that they were the ones responsible for bypassing the
private respondent Encabo in the rehabilitation of the soaker machine and at
the end, blaming the latter for the company's financial losses.
11. Castillo's affidavit is not only self-serving but baseless. While a manager's
right to fire an employee is recognized as an inherent part of the position such
right must be exercised with utmost prudence and with humane
consideration.
12. With the finding that PCD was guilty of dismissing the private respondent
Encabo without just cause, the public respondent's order for reinstatement
should follow as a matter of right.
13. However, to order reinstatement at this juncture would serve no prudent
purpose considering the supervening facts and circumstances of the case. Not
only is PCPPI a new corporation continuing the business and operations of
PCD, there is also no doubt that the relationship between the petitioners and
the private respondent has been strained by reason of their respective
imputations of bad faith which is quite evident from the vehement and
consistent stand of the petitioners in refusing to reinstate the private
respondent.
14. Thus, in order to prevent further delay in the execution of the decision to the
prejudice of the private respondent and to spare him the agony of having to
work anew with the petitioners under an atmosphere of antagonism, and so
that the latter do not have to endure the continued services of the private
respondent in whom they have lost liking and, at this stage, confidence, the
private respondent should be awarded separation pay as an alternative to
reinstatement.
Unrelated issues (summarized):
1. While it is true that loss of trust and confidence is a ground for termination,
the same must have some basis.
2. Petitions Castillo and Sian allege that they lost confidence since Encabo
failed to install preventive measures to avoid breakdowns leading to losses
3. However, NLRC found that the allegations were too vague and did not find
factual basis.
a. Encabo allegedly failed to install preventive measures “a few
months before termination”
i. How many months exactly? How often?
ii. During that period, no more preventive measures could be
taken because the machine was no longer functioning as it
was undergoing rehabilitation already
b. Allegations of failure to supervise and purely delegating work to
contractor have no legal legs to stand on
i. The contract with the contractor specifically stated that
the contractor would have strict supervision and quality
control
ii. Company is bound by that contract
4. Encabo’s dismissal was a mere afterthought to cover up for management’s
embarrassment
a. Encabo was bypassed and is now being punished for
management’s error in judgment
5. No evidence that Encabo was remiss in his duties
6. Due process was not afforded to Encabo
a. He was not given notice of the act or omission for which dismissal
is sought
b. Only was given notice of the decision to dismiss him
 009 MANLIMOS v. NLRC (Vargas)
March 2, 1995 | Davide, Jr. J. | Equity Transfers
PETITIONER: RONALD MANLIMOS, FROILAN PAGALAN, MERLITA
DUHAY LUNGSOD, ELIZABETH ANDAGAN, DORIS SERDAN,
LEONORA BIBIANO, PERLA CUMPAY, VIRGINIA ETIC, REMEGIA
NOEL, ROSARIO CUARTO, RONALD BOOC, JAIME TIMBAL, GERMAN
GISTA, FEDERICO AMPER, FRANCISCO EVALE, and RENANTE
YACAPIN
RESPONDENTS: NATIONAL LABOR RELATIONS COMMISSION and
SUPER MAHOGANY PLYWOOD CORPORATION/ALBERT GO
SUMMARY: Petitioners were among the regular employees of the Super
Mahogany Plywood Corporation, a domestic corporation based in Butuan City.
They were hired as patchers, taper-graders and receivers-dryers. However, a new
owner/ management group acquired complete ownership of the corporation
headed by Alfredo Roxas.
Upon the change of ownership, petitioners continued to work for the new owner
until their termination when they received their separation pay and other benefits
due them. Each of them executed a Release and Waiver which they acknowledged
before Atty. Discipulo and Hearing Officer of Butuan City District Office of
DOLE.
The new owner caused a publication for the hiring of workers. Petitioners filed
their applications and were hired on probationary basis except for Rosario Cuarto.
Two (2) of the employees hired were terminated for their alleged absence without
leave and were considered to have abandoned their work. The rest were dismissed
because they allegedly committed acts prejudicial to the interest of the new
management which consisted of their including unrepaired veneers in their
reported productions on output as well as untaped corestock or whole sheets in
their supposed taped veneers/corestock. Thus, the filing of a complaint for illegal
dismissal.
The issue in this case is WON the transfer of ownership was done in good faith
making the corporation not guilty of illegal dismissal. SC said that the transfer
was made in good faith. The change in ownership of the management was
done bona fide and the petitioners did not for any moment before the filing of their
complaints raise any doubt on the motive for the change. On the contrary, upon
being informed thereof and of their eventual termination from employment, they
freely and voluntarily accepted their separation pay and other benefits and
individually executed the Release or Waiver which they acknowledged before no
less than a hearing officer of the DOLE. Since the petitioners were effectively
separated from work due to a bona fide change of ownership and they were
accordingly paid their separation pay, which they freely and voluntarily accepted,
the private respondent corporation was under no obligation to employ them; it
may, however, give them preference in the hiring.
DOCTRINE: Where transfer of ownership is in good faith, the transferee is under
no legal duty to absorb the transferor’s employees as there is no law compelling
such absorption. For reasons of public policy and social justice, transferee may
give preference to the qualified separated employees in the filling of vacancies in
the facilities of the purchaser.
FACTS:
1. The petitioner employees were among the regular employees of the Super
Mahogany Plywood Corporation hired as patchers, taper-graders, and
receivers-dryers. On Sept 1991, a new owner/management group headed by
Alfredo Roxas acquired complete ownership of the corporation.
2. The petitioner employees were advised of such change of ownership.
However, the petitioners continued to work for the new owner and were
considered terminated, with their conformity, only as of December 1991
when they received their separation pay, 13th month pay, and all other
benefits due them computed as of the said month. Each of them then executed
on 17 December 1991 a Release and Waiver which they acknowledged
before Atty. Nolasco Discipulo, Hearing Officer of the Butuan City District
Office of the Department of Labor and Employment (DOLE).
3. On 27 December 1991, the new owner caused the publication of a notice for
the hiring of workers, indicating therein who of the separated employees
could be accepted on probationary basis. The petitioners then filed their
applications for employment. Except for Rosario Cuarto, they were hired on
probationary basis for six months as patchers or tapers, but were compensated
on piece-rate or task basis.
4. For their alleged absence without leave, Perla Cumpay and Virginia Etic were
considered, as of 4 May 1992, to have abandoned their work. The rest were
dismissed on 13 June 1992 because they allegedly committed acts prejudicial
to the interest of the new management which consisted of their "including
unrepaired veneers in their reported productions on output as well as untaped
corestock or whole sheets in their supposed taped veneers/corestock."
However, upon their appeal, the effectivity of such termination was deferred
to 20 June 1992.
5. Two cases were filed by the dismissed employees for non-payment of wages,
underpayment of wages, incentive leave pay, non-payment of holiday pay,
overtime pay, 13th month pay, separation pay, reinstatement with backwages,
illegal termination, and damages.
6. EMPLOYEES’ SIDE: They remained regular employees regardless of the
change of management in September 1991 and their execution of the Release
 and Waiver. They argue that being a corporation, the private respondent's
juridical personality was unaffected even if ownership of its shares of stock
changed hands. Their signing of the Release and Waiver was of no moment
not only because the consideration was woefully inadequate, but also because
employees who receive their separation pay are not barred from contesting
the legality of their dismissal and quit claims executed by laborers are
frowned upon for being contrary to public policy.
7. CORPORATION/NEW OWNER: The employees were deemed legally
terminated from their previous employment as evidenced by the execution of
the Release and Waiver and the filing of their applications for employment
with the new owner; that the new owner was well within its legal right or
prerogative in considering as terminated the petitioners'
probationary/temporary appointment; and that the petitioners were not
illegally dismissed; hence, they are not entitled to the reliefs prayed for.
8. LA: ruled in favor of the employees. It is the thesis of the Labor Arbiter that
the transfer of ownership partook of a cessation of business operation not due
to business reverses under Article 283 of the Labor Code and pursuant to the
doctrine laid down in MobilEmployees Association vs. National Labor
Relations Commission, the following requisites must be complied with before
the dismissal of employees may be effected: (1) service of written notice to
the employees and to the Ministry of Labor and Employment (MOLE) at least
one month before the intended date thereof; (2) the cessation of or withdrawal
from business operations must be bona fide in character; and (3) payment to
the employees of termination pay amounting to at least one-half month pay
for each year of service or one month pay whichever is higher. While the 1st
and 3rd requisites were present in this case, LA ruled that there was no
cessation of operations which would lead to the dismissal of the employees.
9. NLRC: reversed the LA decision. It found that the change of ownership in
this case was made in good faith since there was no evidence on record that
"the former owners conspired with the new owners to insulate the former
management of any liability to its workers." Citing Central Azucarera del
Danao vs CA, “sale or disposition of a business enterprise which has been
motivated by good faith is "an element of exemption from liability." Thus,
"an innocent transferee of a business has no liability to the employees of the
transfer or to continue employing them. Nor is the transferee liable for past
unfair labor practices of the previous owner, except, when the liability is
assumed by the new employer under the contract of sale, or when liability
arises because the new owners participated in thwarting or defeating the
rights of the employees."
ISSUE/s:
2. WON the transfer of ownership was done in good faith making private
respondent not guilty of illegal dismissal - YES. In this case, the transfer of
ownership was made in good faith given that there was no evidence that there
was conspiracy to insulate the former management of any liability to its
workers. Thus, petitioners were validly dismissed.
RULING: WHEREFORE, the instant petition is partly GRANTED. The challenged
resolutions of public respondent National Labor Relations Commission (Fifth
Division) of 2 August 1993 and 14 October 1993 in NLRC Case No. M-001378-93
are hereby MODIFIED; and as modified, private respondent Super Mahogany
Plywood Corporation is further ordered to pay petitioners Perla Cumpay and Virginia
Etic their backwages corresponding to the period from 4 May 1992 up to the expiration
of their probationary employment contracts.
RATIO:
1. In the case at bar, there was only a change of ownership of Super Mahogany
Plywood Corporation which resulted in a change of ownership. In short, the
corporation itself, as a distinct and separate juridical entity, continues to exist.
The issue of whether there was a closing or cessation of business operations
which could have operated as a just cause for the termination of employment
was not material.
2. The change in ownership of the management was done bona fide and the
petitioners did not for any moment before the filing of their complaints raise
any doubt on the motive for the change. On the contrary, upon being informed
thereof and of their eventual termination from employment, they freely and
voluntarily accepted their separation pay and other benefits and individually
executed the Release or Waiver which they acknowledged before no less than
a hearing officer of the DOLE.
3. A change of ownership in a business concern is not proscribed by law.
In Central Azucarera del Danao vs. Court of Appeals,12 this Court-stated:
There can be no controversy for it is a principle well-recognized, that it is within the employer's
legitimate sphere of management control of the business to adopt economic policies or make
some changes or adjustments in their organization or operations that would insure profit to itself
or protect the investment of its stockholders. As in the exercise of such management prerogative,
the employer may merge or consolidate its business with another, or sell or dispose all or
substantially all of its assets and properties which may bring about the dismissal or termination
of its employees in the process. Such dismissal or termination should not however be interpreted
in such a manner as to permit the employer the very concept of social justice.
In a number of cases on this point, the rule has been laid down that the sale or disposition
must be motivated by good faith as an element of exemption from liability. Indeed, an
innocent transferee of a business establishment has no liability to the employees of the
transfer or to continue employing them. Nor is the transferee liable for past unfair labor
practices of the previous owner, except, when the liability therefor is assumed by the new
employer under the contract of sale, or when liability arises because of the new owner's
participation in thwarting or defeating the rights of the employees.
4. Where such transfer of ownership is in good faith, the transferee is under
no legal duty to absorb the transferor employees as there is no law
compelling such absorption. The most that the transferee may do, for
reasons of public policy and social justice, is to give preference to the
qualified separated employees in the filling of vacancies in the facilities
 of the purchaser.
5. Since the petitioners were effectively separated from work due to a bona
fide change of ownership and they were accordingly paid their separation
pay, which they freely and voluntarily accepted, the private respondent
corporation was under no obligation to employ them; it may, however, give
them preference in the hiring. The private respondent in fact hired, but on
probationary basis, all the petitioners, except Rosario Cuarto. The non-hiring
of Cuarto was legally permissible.
6. The hiring of employees on a probationary basis is an exclusive management
prerogative. The employer has the right or privilege to choose who will be
hired and who will be denied employment. It is settled that while
probationary employees do not enjoy permanent status, they are accorded the
constitutional protection of security of tenure. They may only be terminated
for just cause or when they fail to qualify as regular employees in accordance
with reasonable standards made known to them by the employer at the time
of their engagement. This constitutional protection, however, ends upon the
expiration of the period provided for in their probationary contract of
employment. Thereafter, the parties are free to renew the contract or not.
7. A different conclusion would have to be reached with respect to Perla
Cumpay and Virginia Etic. They were dismissed on 4 May 1992 for having
allegedly abandoned their work. It is settled that to constitute abandonment,
there must be a clear and deliberate intent to discontinue one’s employment,
without deliberate intent to discontinue one's employment, without any
intention of returning. In this case, the private respondent not only failed to
prove such intent, it as well violated the due process rule in dismissal of
employees. The requirements of lawful dismissal of an employee by his
employer are two-fold, viz., notice and hearing.
8. It results, therefore, that only petitioners Perla Cumpay and Virginia Etic
were entitled to reinstatement and back wages. Nonetheless, considering that
their probationary employment would have similarly expired six months after
commencement, reinstatement is no longer feasible.
 010 BPI v. BPI Employees union (Valle)
11 October 2011 | Leonardo-De Castro, J. | Mergers and Consolidations
PETITIONER: Bank of the Philippine Islands
RESPONDENTS: BPI employees Union-Davao Chapter-Federation of Unions
in BPI Unibank.
SUMMARY:
The issue arose when FEBTC decided to merge with BPI. In their articles of
merger contained a clause which is now in question. This clause states that new
employees have to join the Union as a condition of their employment. In the
merger, the assets and liabilities of FEBTC were absorbed by BPI. The employees
of FEBTC were hired by BPI as its own employees. The issue is whether or not
the “new employees” in the said clause are required to join the union and if they
fail to join, they would be terminated.
BPI said that the FEBTC employees can’t eb considered their new employees
since BPI merely stepped into the shoes of FEBTC. BPI claims that the employees
should be considred as “Sui generis” and different from the old BPI employees.
The SC held that the employees are deemed automatically absorbed by the surving
corporation which is BPI. The SC said that the court should be pointed out by
Section 80 of the Corp Code, the constitutional policies, and tehc urrent state of
the employees. That these three when in a corporate merger situation should be
taken together so that those employees be not left in limbo and be absorbed as
new employees.
DOCTRINE: From the outline
It is more in keeping with the dictates of social justice of according full protection
to labor to deem employment contracts as automatically assumed by the surviving
corporation in a merger, even in the absence of an express stipulation in the articles
of merger or the merger plan. This ruling strengthens judicial protection of the
right to security of tenure of employees affected by a merger and avoids confusion
regarding the status of their various benefits.
Section 80 of the Corporation code, constitutionally declared policies on work,
labor, and employment and the current case, should point the SC to a declaration
that in a corporate merger situation, where there is total takeover by one
21
Section 2. Union Shop - New employees falling within the bargain-
ing unit as defined in Article I of this Agreement, who may hereafter
be regularly employed by the Bank shall, within thirty (30) days after
they become regular employees, join the Union as a condition of their
corporation over another and there is silence in the merger agreement on the fate
of the human resource complement shall not be left in legal limbo and should
be properly provided for by compelling the surviving entity to absorb the new
employees. This is what Section 80 commands.
FACTS:
1. This case is an MR that stemmed from the conflict of FEBTC (Far East Bank
and Trust Company) absorbing BPI pursuant to a merger.
2. Lifted from the original case:
a. Bangko Sentral ng Pilipinas approved of the Articles of Meger
between BPI and FEBTC. This was also approved by the SEC.
b. According to the articles of merger, all the assets and liabilities of
FEBTC were transferred to and absorbed by BPI as the
surviving corporation. FEBTC employees, including those in its
different branches across the country, were hired by BPI as its
own employees, with their status and tenure recognized and salaries
and benefits maintained.
c. BPI employees Union (Union) is the exclusive bargaining agent of
BPIs rank and file employees in Davao City. The former FEBTC
rank-and-file employees in Davao City did not belong to any labor
union at the time of the merger.
d. Prior to the effectivity of the merger, or on March 31, 2000, Union
invited said FEBTC employees to a meeting regarding the Union
Shop Clause (Article II, Section 2)21 of the existing CBA between
BPI and Union.
3. The bone of contention between the two was whetehr or not the
continued employment. It is understood that membership in good
standing in the Union is a condition of their continued employment
with the Bank.
 “absorbed’ FEBTC employees fell within the defninition of “new
employees” under the clause, such that they may be required to join the
Union and if they fail to do so, the Union may request BPI to terminate
their employment. (basically, if the “new employees” failed to join the
Union, the Union can terminate their employment which the employees
believe to be a violation of their right to security of tenure).
4. According to BPI, the parties in the CBA intended to limit the application Of
the Union Shop Clause only to new employees who were hired as non-regular
employees but then later attained regular status at some point after hiring.
FEBTC employees can’t be considered new employees since BPI merely
stepped into the shoes of FEBTC.
a. BPI also relied on the dissent of the original case that said, “the
situation of absorbed employees can be likened to old employees of
BPI, insofar as their full tenure with FEBTC was recognized by BPI
and their salaries were maintained and safeguarded from
diminution" but such absorbed employees "cannot and should not
be treated in exactly the same way as old BPI employees for there
are substantial differences between them."
b. From this, BPI claims that the absorbed employees should be
considered as “sui generis” group of employees whose classification
will not be duplicated until BPI has another merger where it would
be the surviving corporation.
c. BPI claims that the Union Shop Clause should be strictly construed
since it curtails the right of the absorbed employees to abstain from
joining labor organizations.
5. The Union, on the other hand, said that the there is a lack of an express
stipulation in the Artciles of Meger regarding the transfer of employment
contracts as valid bases for the conclusion that the former FEBTC employees
should be deemed new employees.
a. That the creation of employment relations between FEBTC
employees and BPI occurred after themerger or to be more precise,
after the SEC approved of the merger.
b. Also, the Union used the deicison of the Court in the original case
that, “the rationale for upholding the validity of union shop clauses
in a CBA, even if they impinge upon the employee’s right of or
freedom of association, is not to protect the union for the union's
sake. Laws and jurisprudence promote unionism and afford certain
protections to the certified bargaining agent in a unionized company
because a strong and effective union presumably benefits all
employees in the bargaining unit since such a union would be in a
better position to demand improved benefits and conditions of work
from the employer
c. Notheless, settled jurisprudence has already swung the balance in
favor of unionism, in recognition that ultimately the individual
employee will be benefited by that policy.
ISSUE/s:
1. WoN the Articles of Meger when interpreted would have implications on the
employee’s security of tenure– NO- Because even in the absence of a
stipulation in the Articles of Meger, the employees are deemed automatically
absorbed by the surviving corporation.
RULING: WHEREFORE, the Motion for reconsideration is DENIED.
RATIO:
1. The Court has agreed in Justice Brion’s view in the original case that it is
more in keeping with the dictates of social justice and the state policy of
according full protection to labor to deem employment contracts as
automatically assumed by the surviving corporation ina meger, even in the
absence of an express stipulation in the articles of merger or the merge plan.
2. Section 80 of the Corporation code, constitutionally declared policies on
work, labor, and employment and the current case, should point the SC to a
declaration that in a corporate merger situation, where there is total
takeover by one corporation over another and there is silence in the merger
agreement on the fate of the human resource complement shall not be left in
legal limbo and should be properly provided for by compelling the
surviving entity to absorb the new employees. This is what Section 80
commands.
3. If the eployees are treated without consideration of the applicable
constitutional declarations or worse, disregarded, the Court will read and
interpret the alw so that they are treated in accordance with the legal
requirements of mergers and consolidation, read in light of the social justice,
economic, and social provisions of the Constitution.
4. Hence, there is a need for the surviving corporation to take responsibility
for the affected employees and to absorb them into its workforce where
no appropriate provision for the merged corporation’s human resouces
component is made in the merger plan.
5. In doing so, the SC strengthens judicial protection of the right to securitu of
tenure of employees affected by a merger and avoids confusion regarding the
status of their various benefits.
6. The legal fiction in the law on mergers (that the surviving corp continues the
corirate existence of the non-surviving corp) is mainly a tool to adjudicate the
rights and obligations between and among the merged corporations and the
persons that deal with them.
7. The Union shop clause cannot be interpreted to unduly extend the legal
fiction to a point where it defeats the purpose under labor law.
8. The clause merely stated that “new employees” who during the effectivity of
 the CBA “may be regulalarly employed” by the Bank must join the union employees to join the Union before the Union can request BPI to terminate
within 30 days from their regularization. Nothing in the clause that limits its the employees’ employment, BPI must still accord said employees the twin
application to only new employees who possess non-regular status, meaning requirements of notice and hearing on the possibility that they may have other
probationary, at the start of their employment. justifications for not joining the Union.
9. BPI also failed to point out to any provision in the CBA expressly excluding
from the clause new employees who are absorbed as regular employees from
the beginning of their employment.
10. Although BPI steps into the shoes of FEBTC as a successorye employer as if
BPO had been the emplpyer of FEBTCs employees from the beginning, in
reality, the legal consequences of the merger only occur upon its effectivity
which is the date of approval by the SEC
11. Thus, the court observed that they will both continue their respective business
operations unitl the SEC issues the certificate and in the event that no such
certificate is issued, they shall hold each other blameless for the non-
consummation of the merger.
12. In other words, the obligation of BPI to pay the salaries and benefits of the
former FEBTC employees and its right of discipline and control over them
only arose with the effectivity of the merger.
13. Concomitantly, the obligation of former FEBTC employees to render service
to BPI and their right to receive benefits from BPI also arose upon the
effectivity of the merger. What is material is that all of these legal
consequences of the merger took place during the life of an existing and valid
CBA between BPI and the Union wherein they have mutually consented to
include a Union Shop Clause.
14. The plain and ordinary meaning of the terms of Union Shop clause, covers
employees who:
a. Enter the employ of bPI during the term of the CBA
b. Part of the barganining unit
c. Become regular employees without distinguishing as to the manner
they acquire their regular status
This is Labor law na but I’ll place it here just in case
1. the twin requirements of notice and hearing constitute the essential lements
of procedural due process. The law requires the employer to furnish the
employee sought to be dismissed with two written notices before termination
of employment can be legally effected:
a. a written notice apprising the employee of the particular acts or
omissions for which his dismissal is sought in order to afford him
an opportunity to be heard and to defend himself with the assistance
of counsel, if he desires, and
b. a subsequent notice informing the employee of the employer's
decision to dismiss him. This procedure is mandatory and its
absence taints the dismissal with illegality.
2. In this case, it is appropriate to state that, apart from the fresh thirty (30)-day
period from notice of finality of the Decision given to the affected FEBTC
 SECTION 13
001 VIGILLA v. PH COLLEGE OF CRIMINOLOGY, INC. (CHIQUI)
June 10, 2013 | Mendoza, J. | Legal Effects of Dissolution
PETITIONER: Benigno M. Vigilla, Alfonso M. Bongot, Roberto Callesa, Linda C. Callo,
Nilo B. Camara, Adelia T. Camara, Adolfo G. Pinon, John A. Fernandez, Federico A. Callo,
Maxima P. Arellano, Julito B. Costales, Samson F. Bachar, Edwin P. Damo, Renato E.
Fernandez, Genero F. Callo, Jimmy C. Aleta, and Eugenio Salinas
RESPONDENTS: Philippine College of Criminology, Inc. and/or Gregory Alan F.
Bautista
SUMMARY: Petitioners were janitors, janitresses and supervisor in the Mainte-
nance Department of PCCr under the supervision and control of PCCr's Senior
Vice President for Administration. Upon application, the petitioners were made
to understand that they were under MBMSI, a corporation engaged in providing
janitorial services to clients. When PCCr learned that the Certificate of Incorpo-
ration of MBMSI was revoked, the former terminated the relationship with latter
resulting to the dismissal of the petitioners. Because of this, the petitioners filed
their respective complaints for illegal dismissal, reinstatement, back wages, sep-
aration pay, etc. PCCr contended that by virtue of the releases, waivers and quit-
claims executed by the petitioners in favor of MBMSI, PCCr’s liability should
be excused. LA decided that PCCr was the real employer. Meanwhile, NLRC
ruled that PCCr’s liability should be extinguished and that MBMSI is the one lia-
ble. Petitioners argue that MBMSI had no legal personality because its no longer
existing given that its certificate of incorporation was revoked. W/N MBMSI is
still liable even if its certificate of incorporation was revoked – YES, because the
revocation does not result in the termination of its liabilities. The Corporation
Code provides for a three-year winding up period for a corporation whose char-
ter is annulled by forfeiture or otherwise to continue as a body corporate for the
purpose, among others, of settling and closing its affairs. The executed releases,
waivers and quitclaims are valid and binding notwithstanding the revocation of
MBMSI's Certificate of Incorporation. Even if said documents were executed in
2009, six (6) years after MBMSI's dissolution in 2003, the same are still valid
and binding upon the parties and the dissolution will not terminate the liabilities
incurred by the dissolved corporation.
DOCTRINE: There is no time limit within which the trustees must complete a
liquidation placed in their hands. What is provided in Section 122 is that the con-
veyance to the trustees must be made within the three-year period. But it may be
found impossible to complete the work of liquidation within the three-year pe-
riod or to reduce disputed claims to judgment. Furthermore, Section 145 clearly
provides that “no right or remedy in favor of or against any corporation, its
stockholders, members, directors, trustees, or officers, nor any liability incurred
by any such corporation, stockholders, members, directors, trustees, or officers,
shall be removed or impaired either by the subsequent dissolution of said corpo-
ration.”
FACTS: (Will just put petitioners since there are a lot of them)
43. Philippine College of Criminology, Inc. (PCCr) is a non-stock educational
institution, while the petitioners were janitors, janitresses and supervisor in
the Maintenance Department of PCCr under the supervision and control of
Atty. Florante A. Seril, PCCr's Senior Vice President for Administration.
44. The petitioners, however, were made to understand, upon application with
PCCr, that they were under Metropolitan Building Services, Inc. (MBMSI),
a corporation engaged in providing janitorial services to clients. Atty. Seril is
also the President and General Manager of MBMSI. Note: MBMSI is a labor-
only contractor.
45. Sometime in 2008, PCCr discovered that the Certificate of Incorporation of
MBMSI had been revoked. PCCr, through its President, Gregory Alan F.
Bautista, citing the revocation, terminated the school's relationship with
MBMSI, resulting in the dismissal of the employees or maintenance person-
nel under MBMSI, except Alfonso Bongot who was retired.
46. The dismissed employees, led by their supervisor, Benigno Vigilla filed their
respective complaints for illegal dismissal, reinstatement, back wages, sepa-
ration pay (for Bongot), underpayment of salaries, overtime pay, holiday pay,
service incentive leave, and 13th month pay against MBMSI, Atty. Seril,
PCCr, and Bautista.
a. In their complaints, they alleged that it was the school, not MBMSI,
which was their real employer because (a) MBMSI's certification
had been revoked; (b) PCCr had direct control over MBMSI's oper-
ations; (c) there was no contract between MBMSI and PCCr; and
(d) the selection and hiring of employees were undertaken by PCCr.
47. On the other hand, PCCr and Bautista contended that (a) PCCr could not have
illegally dismissed the complainants because it was not their direct employer;
(b) MBMSI was the one who had complete and direct control over the com-
plainants; and (c) PCCr had a contractual agreement with MBMSI, thus, mak-
ing the latter their direct employer.
a. PCCr submitted several documents before LA Ronaldo Hernandez,
including releases, waivers and quitclaims in favor of MBMSI exe-
cuted by the complainants to prove that they were employees of
MBMSI and not PCCr. The said documents appeared to have been
notarized by one Atty. Ramil Gabao.
48. After due proceedings, the Labor Arbiter handed down his decision, finding
that (a) PCCr was the real principal employer of the complainants; (b)
 MBMSI was a mere adjunct or alter ego/labor-only contractor; (c) the com-
plainants were regular employees of PCCr; and (d) PCCr/Bautista were in
bad faith in dismissing the complainants.
a. The LA explained that PCCr was actually the one which exercised
control over the means and methods of the work of the petitioners,
thru Atty. Seril, who was acting, throughout the time in his capacity
as Senior Vice President for Administration of PCCr, not in any way
or time as the supposed employer/general manager or president of
MBMSI.
b. Despite the presentation by the PCCr of the releases, waivers and
quitclaims executed by petitioners in favor of MBMSI, the LA did
not touch on the validity and authenticity of the same. Neither did
he discuss the effects of such releases, waivers and quitclaims on
petitioners' claims.
49. NLRC affirmed the LA's findings. Nevertheless, PCCr were excused from
their liability by virtue of the releases, waivers and quitclaims executed by
the petitioners.
50. In their MR, petitioners attached as annexes their affidavits denying that they
had signed the releases, waivers, and quitclaims. They prayed for the rein-
statement in toto of the decision of the LA. MBMSI/Atty. Seril also filed a
motion for reconsideration questioning the declaration of the NLRC that he
was solidarily liable with PCCr.
51. NLRC modified its Resolution by affirming the Decision of the LA only in
so far as complainants Ernesto B. Ayento and Eduardo B. Salonga were con-
cerned. As for the other 17 complainants, the NLRC ruled that their awards
had been superseded by their respective releases, waivers and quitclaims.
52. The 17 complainants filed with the CA a petition for certiorari under Rule
65 faulting the NLRC with grave abuse of discretion for absolving the PCCr
from their liability by virtue of their respective releases, waivers and quit-
claims.
53. CA denied the petition and affirmed the two Resolutions of the NLRC. The
CA pointed out that based on the principle of solidary liability and Article
1217 of the New Civil Code, petitioners' respective releases, waivers and
quitclaims in favor of MBMSI and Atty. Seril redounded to the benefit of the
respondents.
a. It also upheld the factual findings of the NLRC as to the authenticity
and due execution of the individual releases, waivers and quitclaims
because of the failure of petitioners to substantiate their claim of
forgery and to overcome the presumption of regularity of a notarized
document.
ISSUE/s:
63. W/N MBMSI is still liable even if its certificate of incorporation was revoked
– YES, because the revocation does not result in the termination of its liabil-
ities. The Corporation Code provides for a three-year winding up period for
a corporation whose charter is annulled by forfeiture or otherwise to continue
as a body corporate for the purpose, among others, of settling and closing its
affairs.
RULING: WHEREFORE, the petition is DENIED.
SO ORDERED.

RATIO:
On the revocation of MBMSI’s Certificate of Incorporation (issue related to our
topic)
64. Petitioners argue that MBMSI had no legal personality to incur civil liabilities
as it did not exist as a corporation on account of the fact that its Certificate of
Incorporation had been revoked. Petitioners ask this Court to exempt MBMSI
from its liabilities because it is no longer existing as a corporation.
65. The executed releases, waivers and quitclaims are valid and binding not-
withstanding the revocation of MBMSI's Certificate of Incorporation.
The revocation does not result in the termination of its liabilities. Section
122 of the Corporation Code provides for a three-year winding up period
for a corporation whose charter is annulled by forfeiture or otherwise to
continue as a body corporate for the purpose, among others, of settling
and closing its affairs.
66. Even if said documents were executed in 2009, six (6) years after
MBMSI's dissolution in 2003, the same are still valid and binding upon
the parties and the dissolution will not terminate the liabilities incurred
by the dissolved corporation pursuant to Sections 122 and 145 of the
Corporation Code. In the case of Premiere Development Bank v. Flores, the
Court held that a corporation is allowed to settle and close its affairs even
after the winding up period of three (3) years.
a. As early as 1939, this Court held that, although the time during
which the corporation, through its own officers, may conduct
the liquidation of its assets and sue and be sued as a corporation
is limited to three years from the time the period of dissolution
commences, there is no time limit within which the trustees must
complete a liquidation placed in their hands. What is provided in
Section 122 of the Corporation Code is that the conveyance to the
trustees must be made within the three-year period. But it may be
found impossible to complete the work of liquidation within the
three-year period or to reduce disputed claims to judgment. The trus-
tees to whom the corporate assets have been conveyed pursuant to
the authority of Section 122 may sue and be sued as such in all mat-
ters connected with the liquidation.
b. Furthermore, Section 145 of the Corporation Code clearly provides
 that "no right or remedy in favor of or against any corporation,
its stockholders, members, directors, trustees, or officers, nor
any liability incurred by any such corporation, stockholders,
members, directors, trustees, or officers, shall be removed or
impaired either by the subsequent dissolution of said corpora-
tion." Even if no trustee is appointed or designated during the
three-year period of the liquidation of the corporation, the
Court has held that the board of directors may be permitted to
complete the corporate liquidation by continuing as "trustees"
by legal implication.
The Releases, Waivers, and Quitclaims are Valid
67. Petitioners had several opportunities to question the authenticity of the said
documents but did not do so. The records disclose that during the proceedings
before the LA, PCCr submitted several documents, including the subject re-
leases, waivers and quitclaims executed on September 11, 2009 in favor of
MBMSI, but petitioners never put their genuineness and due execution at is-
sue. These were brought up again by the PCCr in their Memorandum of Ap-
peal, but again petitioners did not bother to dispute them.
68. It was only after the NLRC's declaration in its Resolution that the claims of
petitioners had been settled amicably by virtue of the releases, waivers and
quitclaims, that petitioners, in their motion for reconsideration, denied having
executed any of these instruments. This passiveness and inconsistency of pe-
titioners will not pass the scrutiny of this Court.
69. Well-settled is the rule that this Court is not a trier of facts and this doctrine
applies with greater force in labor cases. Questions of fact are for the labor
tribunals to resolve. Only errors of law are generally reviewed in petitions for
review on certiorari criticizing decisions of the CA. Moreover, findings of
fact of quasi-judicial bodies like the NLRC, as affirmed by the CA, are gen-
erally conclusive on this Court. Hence, as correctly declared by the CA, the
following NLRC factual findings are binding and conclusive on this Court.
70. Even if the Court relaxes the foregoing rule, there is still no reason to reverse
the factual findings of the NLRC and the CA. What is on record is only the
self-serving allegation of petitioners that the releases, waivers and quitclaims
were mere forgeries. Petitioners failed to substantiate this allegation.
71. The records confirm that petitioners were really paid their separation pay and
had executed releases, waivers and quitclaims in return. Atty. Seril, President
and General Manager of MBMSI, stated that the amount of P2,000,000.00
"was coursed by PCCr to me, to be handed to the complainants, through its
employee, Rey Chavez."
A Labor-only Contractor is Solidarily Liable with the Employer
1. The issue of whether there is solidary liability between the labor-only con-
tractor and the employer is crucial in this case. If a labor-only contractor is
solidarily liable with the employer, then the releases, waivers and quitclaims
in favor of MBMSI will redound to the benefit of PCCr. On the other hand,
if a labor-only contractor is not solidarily liable with the employer, the latter
being directly liable, then the releases, waivers and quitclaims in favor of
MBMSI will not extinguish the liability of PCCr.
2. Petitioners argue that there is no solidary liability to speak of in case of an
existence of a labor-only contractor. Petitioners contend that under Article
106 of the Labor Code, a labor-only contractor's liability is not solidary as it
is the employer who should be directly responsible to the supplied worker.
Hence, the said releases, waivers and quitclaims which they purportedly is-
sued in favor of MBMSI and Atty. Seril do not automatically release respond-
ents from their liability.
3. The NLRC and the CA correctly ruled that the releases, waivers and quit-
claims executed by petitioners in favor of MBMSI redounded to the benefit
of PCCr pursuant to Article 1217 of the New Civil Code. The reason is that
MBMSI is solidarily liable with the respondents for the valid claims of peti-
tioners pursuant to Article 109 of the Labor Code.
4. As correctly pointed out by the PCCr, the basis of the solidary liability of the
principal with those engaged in labor-only contracting is the last paragraph
of Article 106 of the Labor Code, which in part provides: "In such cases [la-
bor-only contracting], the person or intermediary shall be considered merely
as an agent of the employer who shall be responsible to the workers in the
same manner and extent as if the latter were directly employed by him."
5. The DOLE recognized anew this solidary liability of the principal employer
and the labor-only contractor when it issued Department Order No. 18-A,
series of 2011, which is the latest set of rules implementing Articles 106-109
of the Labor Code.
6. These legislative rules and regulations designed to implement a primary leg-
islation have the force and effect of law. A rule is binding on the courts so
long as the procedure fixed for its promulgation is followed and its scope is
within the statutory authority granted by the legislature.
7. Jurisprudence is also replete with pronouncements that a job-only contractor
is solidarily liable with the employer.
8. Considering that MBMSI, as the labor-only contractor, is solidarily liable
with PCCr, as the principal employer, then the NLRC and the CA correctly
held that the PCCr’s solidary liability was already expunged by virtue of the
releases, waivers and quitclaims executed by each of the petitioners in favor
of MBMSI pursuant to Article 1217 of the Civil Code which provides that
"payment made by one of the solidary debtors extinguishes the obligation."
9. In light of these conclusions, the Court holds that the releases, waivers and
quitclaims executed by petitioners in favor of MBMSI redounded to the
PCCr’s benefit. The liabilities of the PCCr to petitioners are now deemed
 extinguished. The Court cannot allow petitioners to reap the benefits given to
them by MBMSI in exchange for the releases, waivers and quitclaims and,
again, claim the same benefits from PCCr.
10. While it is the duty of the courts to prevent the exploitation of employees, it
also behooves the courts to protect the sanctity of contracts that do not con-
travene the law. The law in protecting the rights of the laborer authorizes
neither oppression nor self-destruction of the employer.
 002 GELANO v. CA (TIMBOL)
February 24, 1981 | De Castro, J. | Liquidation pursued through a Trustee
PETITIONER: Carlos Gelano and Guillermina Mendoza De Gelano
RESPONDENTS: CA, Insular Sawmill, Inc.
SUMMARY: INSULAR leased a property of Guillermina to operate its business
by paying rentals. Carlos, the husband, obtained cash advances from INSULAR
with the agreement that such advances will be deducted from the rentals until such
are paid. However, Carlos was unable to pay despite repeated demands, neither did
Guillermina acknowledge the debt of Carlos. Other than this, there are various oc-
casions wherein the SPS. Gelano purchased lumber from INSULAR and such were
remained unsettled. And in another case, INSULAR jointly and severally with Car-
los, executed a promissory note in favor of China Bank in order to accommodate
Carlos. Upon maturity of the promissory note, Carlos was unable to pay and thus
INSULAR covered the payment. And when INSULAR was collecting payment,
Carlos was unable to pay and Guillermina refused. Thus, INSULAR filed a com-
plaint for collection. In the meantime, INSULAR amended its AOI to shorten its
corporate existence but was unable to inform the trial court. 4 years later, the deci-
sion was rendered in favor of INSULAR. On appeal by the SPS. Gelano, they filed
a motion to dismiss on the ground that (1) INSULAR prosecuted even after dissolu-
tion; and (2) a defunct corporation cannot maintain any suit without complying
with the requirements [3 year period to assign a trustee]. Hence this petition.
Whether INSULAR despite its ceasing to exist can continue to prosecute
The Court held that INSULAR can still maintain the suit despite losing its corpo-
rate existence. The Corporation Code provides that a corporation after ceasing to
exist still has 3 years to continue as a body corporate for the purpose of prosecuting
and defending any suit against it. Moreover, at any time within the 3 years, the Cor-
poration should appoint a trustee to continue the proceedings it had begun before
the expiration of the 3 year period. In the present case, although, no appointment
was done by the Corporation, the Court held that the the Counsel who prosecuted
and defended the interest of the Corporation and who in fact appeared in behalf of
the Corporation may be considered a trustee in the matter of litigaton. The word
“trustee” must be understood in its general concept. The purpose in the transfer of
the assets of the corporation to a trustee upon its dissolution is more for the protec-
tion of its creditor and stockholders. On the issue of the personal obligations in-
curred by Carlos, the Court held that since such obligations redounded to the bene-
fit of the family, then the conjugal property shall be liable for the debts incurred.
DOCTRINE: For purposes of dissolution and liquidation of a corporation, the term
“trustee” should include counsel of record who may be deem to have authority to
pursue pending litigation after the expiration of the 3-year liquidation period
FACTS:
27. Insular Sawmill, Inc. (INSULAR) is a corporation organized with a corporate
life of 50 years, or up to September 17, 1995, with the primary purpose of
carrying on a general lumber and sawmill business
28. To carry on this business, INSULAR leased the paraphernal property of
Guillermina at the corner of Canonigo and Otis, Paco, Manila for
P1,200/month. It was while INSULAR was leasing the aforesaid property
that its officers and directors had come to know Carlos (husband of Guiller-
mina), who received from INSULAR cash advances on account of rentals to
be paid on the land
29. Carlos obtained from INSULAR cash advances worth P25,590, of which on
agreement INSULAR could deduct the same from the monthly rentals of the
leased premises until said cash advances are fully paid.
30. Carlos was unable to pay the balance of P25,000 after repeated demands;
neither did Guillermina pay on the ground that said amount was for the per-
sonal account of her husband, without her knowledge and did not redound to
the benefit of the family
31. In order to accommodate and help Sps. Gelano renew previous loans obtained
by them frm the China Bank, INSULAR through Joseph Tan Yoc Su, exe-
cuted a joint and several promissory note with Carlos in favor of China Bank.
32. For failure of Carlos to pay the promissory note upon maturity, the bank col-
lected from INSULAR the amount of P9,106. Carlos was able to pay P5,000
but the balance remained unsettled. Guillermina refused to pay on the ground
that she had no knowledge about the accommodation made by INSULAR in
favor of her husband
33. INSULAR, through Atty. German Lee, filed a complaint for collection
against Sps. Gelano before the CFI. (Atty. Lee retired from practice and re-
placed by Atty. Eduardo Elizalde.
34. In the meantime, INSULAR amended its AOI to shorten its term of existence
up to December 31, 1960 only. The amended AOI was filed with, and ap-
proved by the SEC, but the trial court was not notified of the amendment
shortening the corporate existence and no substitution of party was ever made
35. Almost 4 years after the dissolution of INSULAR, the trial court rendered a
decision in favor of INSULAR ordering the Sps. Gelano to pay.
36. Both parties appealed to the CA, INSULAR also appealing because it insisted
that Sps. Gelano should be held liable for the substantial portion of the claim
37. The CA rendered judgment holding Sps. Gelano jointly and severally liable.
 38. After Sps. Gelano received a copy of the decision on August 24, 1973, they
came to know that INSULAR was dissolved way back on December 31,
1960
39. Hence, Sps. Gelano filed a motion to dismiss the case and/or reconsideration
of the decision of the CA on grounds that:
1. The case was prosecuted even after dissolution of INSULAR as a
corporation and
2. That a defunct corporation cannot maintain any suit for or against
it without first complying with the requirements of the winding up
of the affairs of the corporation and the assignment of its property
rights within the required period
40. Incidentally, after receipt of Sps. Gelano’s motion to dismiss and/or recon-
sideration, INSULAR thru its former directors filed a Petition for Receiver-
ship; and afterwards, the motion to dismiss was also denied after INSULAR
filed their comment
41. Hence, the present petition for review
ISSUE/s:
8. Whether a corporation, whose corporate life had ceased by the expiration of
its term of existence, could still continue prosecuting and defending suits after
its dissolution and beyond the period of 3 years to wind up its affairs, without
having undertaken any step to transfer its assets to a trustee or assignee – YES
RULING: WHEREFORE, with the modification that only the conjugal partnership
is liable, the appealed decision is hereby affirmed in all other respects. Without pro-
nouncement as to costs.
RATIO:
26. The complaint in this case was filed on May 29, 1959 when private respond-
ent Insular Sawmill, Inc. was still existing. While the case was being tried,
the stockholders amended its Articles of Incorporation by shortening the term
of its existence from December 31, 1995 to December 31, 1960, which was
approved by the Securities and Exchange Commission.
27. In American corporate law, upon which our Corporation Law was pat-
terned, it is well settled that, unless the statutes otherwise provide, all
pending suits and actions by and against a corporation are abated by a
dissolution of the corporation.
28. Section 77 of the Corporation Law provides that the corporation shall "be
continued as a body corporate for three (3) years after the time when it
would have been dissolved, for the purpose of prosecuting and defending
suits By or against it," so that, thereafter, it shall no longer enjoy corporate
existence for such purpose.
29. For this reason, Section 78 of the same law authorizes the corporation, "at
any time during said three years to convey all of its property to trustees
for the benefit of members, Stockholders, creditors and other inter-
ested," evidently for the purpose, among others, of enabling said trustees
to prosecute and defend suits by or against the corporation begun before
the expiration of said period
30. Commenting on said sections, Justice Fisher said:
1. It is to be noted that the time during which the corporation, through its own
officers, may conduct the liquidation of its assets and sue and be sued as a
corporation is limited to three years from the time the period of dissolution
commences; but that there is no time limited within which the trustees
must complete a liquidation placed in their hands. It is provided only
that the conveyance to the trustees must be made within the three-year
period. It may be found impossible to complete the work of liquidation
within the three-year period or to reduce disputed claims to judgment. The
authorities are to the effect that suits by or against a corporation abate when
it ceased to be an entity capable of suing or being sued; but trustees to whom
the corporate assets have been conveyed pursuant to the authority of Section
78 may sue and be sued as such in all matters connected with the liquidation.
By the terms of the statute the effect of the conveyance is to make the trus-
tees the legal owners of the property conveyed, subject to the beneficial in-
terest therein of creditors and stockholders
31. Wben INSULAR was dissolved under Sec 77 of the Corporation Law, it still
has the right until December 31, 1963 to prosecute in its name the present
case. After the expiration of said period, the corporation ceased to exist for
all purposes and it can no longer sue or be sued
32. However, a corporation that has a pending action and which cannot be
terminated within the 3 year period after its dissolution is authorized
under Sec. 78 to convey all its property to trustees to enable it to prose-
cute and defend suits by or against the corporation beyond the 3 year
period
1. Although INSULAR did not appoint any trustee, yet the counsel
who prosecuted and defended the interest of the corporation in the
instant case and who in fact appeared in behalf of the corporation
may be considered a trustee of the corporation at lease with respect
to the matter in litigation only
33. We therefore hold that there was a substantial compliance with Sec. 78 of the
Corporation Law and as such, INSULAR could still continue prosecuting the
present case even beyond the period of 3 years from the time of its dissolution
34. The word "trustee" as sued in the corporation statute must be under-
stood in its general concept which could include the counsel to whom was
entrusted in the instant case, the prosecution of the suit filed by the cor-
poration. The purpose in the transfer of the assets of the corporation to
a trustee upon its dissolution is more for the protection of its creditor and
stockholders.
35. Debtors like the petitioners herein may not take advantage of the failure of
the corporation to transfer its assets to a trustee, assuming it has any to trans-
fer which petitioner has failed to show, in the first place. To sustain petition-
ers' contention would be to allow them to enrich themselves at the expense of
another, which all enlightened legal systems condemn.
36. As to the issues on personal obligations incurred by Carlos Gelano, the Court
ruled that such obligations redounded to the benefit of the of the family, and
thus the conjugal property is liable for the debt
 003 ALABANG DEV’T CORP. v. ALABANG HILLS VILLAGE 55. ADC alleged that it still owns certain parcels of land that are yet to be sold,
ASSOC. INC. (Tan) as well as open spaces which have not been donated to the LGU of
Jun. 2, 2014 | Peralta, J. | A dissolved corp cannot file a case 3 years after dissolution Muntinlupa or to the Homeowners’ association.
56. This was due to ADC finding out that AHVAI started the construction of a
multi-purpose hall and a swimming pool on a parcel owned by ADC without
PETITIONER: Alabang Development Corporation
its consent and approval.
RESPONDENTS: Alabang Hills Village Association and Rafael Tinio
57. AHVAI then filed a counterclaim arguing that ADC had no legal capacity
to sue since its existence was revoked by the SEC on May 26, 2003. This
SUMMARY: Alabang Dev’t Corp (ADC) filed a complaint for injunction with
also meant that ADC had no cause of action because it was merely holding
damages against Alabang Hills Village Assoc. Inc. (AHVAI) and Rafael Tinio,
the properties in trust for AHVAI as the beneficiary.
its president. This was due to ADC finding out that AHVAI started the construc-
58. The RTC dismissed ADC’s complaint, saying that ADC had no personality
tion of a multi-purpose hall and a swimming pool on a parcel owned by ADC
to file it, that the area was for the beneficial use of homeowners are mandated
without its consent and approval. AHVAI then filed a counterclaim arguing that
by law, and that it is the HLURB which had jurisdiction over the subject
ADC had no legal capacity to sue since its existence was revoked by the SEC
matter of the complaint.
on May 26, 2003. This also meant that ADC had no cause of action because it
59. ADC appealed; and AHVAI moved that it be allowed to prosecute its
was merely holding the properties in trust for AHVAI as the beneficiary. The
counterclaim.
RTC dismissed ADC’s complaint, saying that ADC had no personality to file it.
60. RTC granted ADC’s appeal but denied AHVAI’s motion. AHVAI filed an
The issue here is whether or not ADC had the capacity to sue. The Court held
appeal with the CA, and the latter dismissed both appeals and affirmed the
that no, it didn’t because the 3-year period provided for in Sec. 122 had already
RTC’s decision which dismissed ADC’s appeal on the ground that it no
elapsed. The Court, in relation to the aforesaid provision, said that the
longer had capacity to sue.
corporation itself, through its officers may sue and be sued as a corporation
for the liquidation of assets, but this is only limited to 3 years from the time its is
ISSUE/s:
dissolved. On the other hand, there is no time limit for the trustees to whom
12. W/N ADC had the capacity to sue – NO because the 3-year period in Sec.
corporate assets have been conveyed, to sue in behalf of the corporation. It is
122 has already elapsed.
only provided that the conveyance to the trustees must be made within the 3-
year period. Here, ADC’s registration was revoked on May 26, 2003, which
RULING: WHEREFORE, the instant petition is DENIED. The assailed Decision of
means that it only had until May 26, 2006 to prosecute or defend any suit by or
the Court of Appeals in C.A.-G.R. CV No. 88864, sustaining the Decision of the
against it. Unfortunately, the corporation itself and not its trustees, only filed the
Regional Trial Court of Muntinlupa City, Branch 276, in Civil Case No. 06-138, is
suit on October 19, 2006, more than 3 years after the revocation.
AFFIRMED.
DOCTRINE: The trustee may continue to prosecute a case commenced by the
RATIO:
corporation within 3 years from its dissolution until rendition of the final judg-
72. The SC said that the CA was correct in citing the case of Columbia Pictures
ment, even if such judgment is rendered beyond the 3-year period allowed by
Inc. v. CA which distinguished the difference between “lack of capacity to
Sec. 122. However, there is nothing in the said cases that allows an already de-
sue” and “lack of personality to sue.”
funct corporation to initiate a suit after the lapse of the said 3-year period. To
73. Lack of legal capacity to sue means that the plaintiff is not in the exercise of
allow petitioner to initiate the subject complaint and pursue it until final judg-
his civil rights, or does not have the necessary qualification to appear in the
ment, on the ground that such complaint was filed for the sole purpose of liqui-
case, or does not have the character or representation he claims.
dating its assets, would be to circumvent the provisions of Sec. 122 of the Cor-
74. The term also refers to a plaintiff’s general disability to sue, such as on
poration Code.
account of minority, insanity, incompetence, lack of juridical personality or
any other general disqualifications of a party.
FACTS:
54. Alabang Dev’t Corp (ADC) filed a complaint for injunction with damages
against Alabang Hills Village Assoc. Inc. (AHVAI) and Rafael Tinio, its
president.
 75. Here, ADC no longer had the juridical capacity because the 3-year grace
period provided for in Sec. 12222 of the Corp. Code had already elapsed.
76. The Court, in relation to the aforesaid provision, said that the corporation
itself, through its officers may sue and be sued as a corporation for the
liquidation of assets, but this is only limited to 3 years from the time its is
dissolved.
77. On the other hand, there is no time limit for the trustees to whom
corporate assets have been conveyed, to sue in behalf of the corporation. It
is only provided that the conveyance to the trustees must be made within
the 3-year period.
78. In the absence of trustees, anyone having pecuniary interest in the assets,
such as shareholders or creditors of the corp, may make proper
representations with the SEC for the final settlement of corporate concerns.
79. Here, ADC’s registration was revoked on May 26, 2003, which means that it
only had until May 26, 2006 to prosecute or defend any suit by or against it.
80. Unfortunately, the corporation itself and not its trustees, only filed the suit on
October 19, 2006, more than 3 years after the revocation.
81. ADC tried several cases to prove its capacity to sue even after the 3-year
liquidation period. However, those cases involved corporations which were
still existing and already had pending actions when their corporate existence
was terminated.
82. In those cases, the SC showed that the trustee of a corporation may continue
to prosecute a case commenced by the corporation, within 3 years from
dissolution until rendition of the final judgment, even if the judgement is
rendered beyond such period.
83. However, there is nothing in those cases which allows an already defunct
corporation to initiate a suit after the lapse of the 3-year period.
84. Clearly, ADC here already lacked the capacity to sue when it filed the
complaint. To allow it to do so now would allow a circumvention of Sec. 122.

22
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.
 004 Chung Ka Bio vs Intermediate Appellate Court (STA.MARIA)
July 26, 1988 | Cruz, J. | Reincorporation
PETITIONERS: Chung Ka Bio, Wellington Chung, chung Siong Pek, Victoriano Chung,
and Manuel Chung Tong Oh
RESPONDENT: INTERMEDIATE APPELLATE COURT (2nd Special Cases Divi-
sion), SECURITIES and EXCHANGE COMMISSION EN BANC, HON. ANTONIO R.
MANABAT, HON. JAMES K. ABUGAN, HON. ANTERO F.L. VILLAFLOR, JR.,
HON. SIXTO T.J. DE GUZMAN, JR., ALFREDO CHING, CHING TAN, CHIONG
TIONG TAY, CHUNG KIAT HUA, CHENG LU KUN, EMILIO TAÑEDO, ROBERTO
G. CENON and PHILIPPINE BLOOMING MILLS COMPANY, INC.,
SUMMARY: Philippine Blooming Mills Company, Inc. was incorporated
for a term of 25 years. The members of its board of directors executed a
deed of assignment of all of the accounts receivables, properties, obliga-
tions and liabilities of the old PBM in favor of Chung Siong Pek in his
capacity as treasurer of the new PBM, then in the process of reincorpora-
tion. The new PMB was issued a certificate of incorporation by the Secu-
rities and Exchange Commission. Chung Ka Bio and the other petitioners
herein, all stockholders of the old PBM, filed with the SEC a petition for
liquidation of both the old PBM and the new PBM. The allegation was that
the former had become legally non-existent for failure to extend its corpo-
rate life and that the latter had likewise beenipso facto dissolved for non-
use of the charter and continuous failure to operate within 2 years from
incorporation. The issue is WON the BOD of an already dissolved corpo-
ration does not have the inherent have the inherent power, without the ex-
press consent of the stockholders, to convey all its assets to a new corpo-
ration? – The SC ruled that since there is no proof that 2/3 proof was not
given by the stockholders, “there is a presumption of regularity which must
operate in favor of Phil. Blooming Mills who insist that the proper author-
ization as required by the Corporation Law was obtained at a meeting
called for the purpose. The Court also held that had not the required ratifi-
catory vote of the stockholders been obtained “the new PBM would not
have been issued a certificate of incorporation, which should also be pre-
sumed to have been done regularly.
In addition, the Court held that “While we agree that the board of directors
is not normally permitted to undertake any activity outside of the usual
liquidation of the business of the dissolved corporation, there is nothing to
prevent the stockholders from conveying their respective shareholdings to-
ward the creation of a new corporation to continue the business of the old.
Winding up is the sole activity of a dissolved corporation that does not
intend to incorporate anew. If it does, however, it is not unlawful for the
old board of directors to negotiate and transfer the assets of the dissolved
corporation to the new corporation intended to be created as long as the
stockholders have given their consent. This was not prohibited by the Cor-
poration Act. In fact, it was expressly allowed by Section 28-1/2.
From CLV’s Book: Chung Ka Bio failed to address the issue as to the effectivity of rein-
corporation against the existing creditors of the defunct corporation on the assets thereof.
Under the rules of dissolution, it is mandated that all assets of the dissolved corporation
must be applied first towards the payment of the existing creditors of the dissolved corpo-
ration.
Even when reincorporation would not prejudice existing creditors of the defunct corp, such
as when the assets sought to be reincorporated represent the net assets after the payment of
all liabilities, Chung Ka Bio still does not discuss the rights of dissenting stockholders who
refused to have their share in the net assets reincorporated into a new corporation. The
Finding that 2/3 of the stockholdings, or for that matter any greater vote of conformity to
the reincorporation cannot serve to bind the proprietary rights of stockholders who vote
against such decision. It must be considered that one of the contingent rights of every stock-
holder is that upon dissolution of the corp he participates in the net assets of the corp. in
proportion to his equity in the capital stock of dissolved corporation. Since the right be-
comes vested upon dissolution of the corp., such right, which is personal to him, cannot be
denied a stockholder by the majority of the stockholders voting to reincorporate the corpo-
ration.
DOCTRINE: REINCORPORATION: The procedures on the sale of all or
substantially all of the assets of the corporation, allows stockholders to
transfer the assets and business enterprise of the dissolved corporation to
a newly registered entity bearing the same corporate name.
FACTS:
1. The Philippine Blooming Mills Company, Inc. was incorporated on
January 19, 1952, for a term of 25 years which expired on January
19,1977.
2. On May 14, 1977, the members of its board of directors executed a
deed of assignment of all of the accounts receivables, properties, obli-
gations and liabilities of the old PBM in favor of Chung Siong Pek in
his capacity as treasurer of the new PBM, then in the process of rein-
corporation.
3. The new PMB was issued a certificate of incorporation by the Securi-
ties and Exchange Commission.
 4. Chung Ka Bio and the other petitioners, all stockholders of the old
PBM, filed with the SEC a petition for liquidation (but not for disso-
lution) of both the old PBM and the new PBM. The allegation was that
the former had become legally non-existent for failure to extend its
corporate life and that the latter had likewise been ipso facto dissolved
for non-use of the charter and continuous failure to operate within 2
years from incorporation.
5. Dismissed for lack of a cause of action, the case was reinstated on
appeal to the SEC en banc and remanded to a new panel of hearing
officers.
6. This order was appealed to the Intermediate Appellate Court in a pe-
tition for partial review, questioning the authority of the SEC in the
case to adjudicate a matter not properly raised on appeal or resolved
in the order appealed from.
7. In a related development, Alfredo Ching, one of the members of the
board of directors of the old PBM who executed the deed of assign-
ment, filed with the Intermediate Appellate Court a separate petition
for certiorari in which he questioned the same order and the decision
of the SEC. He alleged that the SEC had gravely erred in not dismiss-
ing the petition for liquidation since the action amounted to a quo war-
ranto proceeding which only the state could institute through the So-
licitor General.
8. Earlier, the new PBM and Alfredo Ching had filed with the SEC a
petition for suspension of payment, which was opposed by Chung Ka
Bio, et al., on the ground that the SEC had no jurisdiction over a peti-
tion for suspension of payments initiated by a mere individual.
9. The opposition was rejected and the case was set for hearing. Chung
Ka Bio elevated the matter to the SEC en banc on certiorari with pre-
liminary injunction and receivership, praying for the annulment and
setting aside of the proceedings. The case was remanded to the hearing
officers.
10. Chung Ka Bio came to this Court but we referred his case to the Inter-
mediate Appellate Court. The three cases, were then consolidated in
23
SEC. 77. Every corporation whose charter expired by its own limitation or is annulled by forfei-
ture 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 years after the time when
it would have been dissolved, for the purpose of prosecuting and defending suits by or against it
and of enabling it gradually to settle and close its affairs, to dispose of and convey its property and
to divide its capital stock, but not for the purpose of continuing the business for which it was es-
tablished."
the respondent court. The decision affirmed the orders issued by the
SEC in the said cases except the requirement for the accounting of the
assets of the old PBM, which was set aside.
11. The petitioners now contend as follows:
A. The board of directors of an already dissolved corporation does not have
the inherent power, without the express consent of the stockholders, to
convey all its assets to a new corporation.
B. The new corporation is accountable for the said assets to the stockholders
of the dissolved corporation who had not consented to the conveyance of
the same to the new corporation.
C. The new corporation has not substantially complied with the two-year re-
quirement of Section 22 of the new Corporation Code on non-user because
its stockholders never adopted a set of by-laws.
D. A quo warranto proceeding is no longer necessary to dissolve a corpora-
tion which is already "deemed dissolved" under Section 22 of the new
Corporation Code.
E. The Securities and Exchange Commission has no jurisdiction over a peti-
tion for suspension of payments filed by an individual only.
ISSUE:
1. WON the Board of Directors of an already dissolved corporation does
not have the inherent power, without the express consent of the stock-
holders, to convey all its assets to a new corporation? – Since there is
no proof that 2/3 proof was not given by the stockholders, “there
is a presumption of regularity which must operate in favor of Phil.
Blooming Mills who insist that the proper authorization as re-
quired by the Corporation Law was obtained at a meeting called
for the purpose.
RULING: WHEREFORE, the appealed decision is AFFIRMED as above
modified, with costs against the petitioners.
RATIO: *take note that this was under the Old Corporation Code, sec 77 and
sec 28 ½23 now sec 122 and 40 with modifications
SEC. 28-1/2. A corporation may, by action taken at any meeting of its board of directors, sell,
lease, exchange, or otherwise dispose of all or substantially all of its property and assets, including
its goodwill, upon such terms and conditions and for such considerations, which may be money,
stocks bonds, or other instruments for the payment of money or other property or other consider-
ations, as its board of directors deem expedient, when and as authorized by the affirmative vote
(RELEVANT TO OUR TOPIC)
PET’S 1ST CONTENTION: The board of directors of an already dissolved cor-
poration does not have the inherent power, without the express consent of the
stockholders, to convey all its assets to a new corporation.
1. As the first contention is based on the negative averment that no stock-
holders' meeting was held and the 2/3 consent vote was not obtained,
there is no need for affirmative proof. Even so, there is the pre-
sumption of regularity which must operate in favor of the private
respondents, who insist that the proper authorization as required
by the Corporation Law was duly obtained at a meeting called for
the purpose. (That authorization was embodied in a unanimous reso-
lution which was reproduced verbatim in the deed of assignment.)
2. Otherwise, the new PBM would not have been issued a certificate of
incorporation, which should also be presumed to have been done reg-
ularly.
3. It must also be noted that under Section 28-1/2, "any stockholder who
did not vote to authorize the action of the board of directors may,
within forty days after the date upon which such action was author-
ized, object thereto in writing and demand payment for his shares."
The record does not show, nor have the petitioners alleged or proven,
that they filed a written objection and demanded payment of their
shares during the reglementary forty-day period.
This circumstance should bolster the private respondents' claim that
the authorization was unanimous.
4. While we agree that the board of directors is not normally permit-
ted to undertake any activity outside of the usual liquidation of the
business of the dissolved corporation, there is nothing to prevent
the stockholders from conveying their respective shareholdings
of shareholders holding shares in the corporation entitling them to exercise at least two-thirds of
the voting power on such a proposal at a shareholders' meeting called for that purpose. Notice of
such meeting shall be given to all of the shareholders of record of the corporation whether or not
they shall be entitled to vote thereat: Provided, however, That any stockholder who did not vote to
authorize the action of the board of directors, may, within forty days after the date upon which
such action was authorized, object thereto in writing and demand payment for his shares. If, after
such a demand by a stockholder, the corporation and the stockholder can not agree upon the
value of his share or shares at the time such corporate action was authorized, such value shall be
ascertained by three disinterested persons, one of whom
shall be named by the stockholder, another by the corporation, and the third by the two thus cho-
sen. The finding of the appraisers shall be final and if their award is not paid by the corporation
within thirty days after it is made, it may be recovered in an action by the stockholder against the
corporation. Upon payment by the corporation to the stockholder of the agreed or awarded price
toward the creation of a new corporation to continue the business
of the old.
5. Winding up is the sole activity of a dissolved corporation that does
not intend to incorporate anew. If it does, however, it is not un-
lawful for the old board of directors to negotiate and transfer the
assets of the dissolved corporation to the new corporation in-
tended to be created as long as the stockholders have given their
consent. This was not prohibited by the Corporation Act. In fact,
it was expressly allowed by Section 28-1/2.
OTHER ISSUES/CONTENTIONS
AS TO ESTOPPEL
What the Court finds especially intriguing in this case is the fact that although
the deed of assignment was executed in 1977, it was only in 1981 that it oc-
curred to the petitioners to question its validity. All of four years had elapsed
before the petitioners filed their action for liquidation of both the old and the
new corporations, and during this period, the new PBM was in full operation,
openly and quite visibly conducting the same business undertaken earlier by
the old dissolved PBM.
6. The petitioners and the private respondents are not strangers but rela-
tives and close business associates. The PBM office is in the heart of
Metro Manila. The new corporation, like the old, employs as many as
2,000 persons, the same personnel who worked for the old PBM. Ad-
ditionally, one of the petitioners, Chung Siong Pek was one of the di-
rectors who executed the deed of assignment in favor of the old PBM
and it was he also who received the deeded assets on behalf and as
treasurer of the new PBM.
of his shares, the stockholder shall forthwith transfer and assign the share or shares held by him
as directed by the corporation.
Unless and until such sale, lease, or exchange shall be abandoned, the stockholder making such
demand in writing ceases to be a stockholder and shall have no rights with respect to such shares
except the right to receive payment therefor as aforesaid.
A stockholder shall not be entitled to payment for his shares under the provisions of this section
unless the value of the corporate assets which would remain after such payment would be at least
equal to the aggregate amount of its debts and liabilities exclusive of capital stock.
Nothing in this section is intended to restrict the power of any corporation, without the authorization
thereof by the shareholders, to sell, lease, exchange, or otherwise dispose of, any of its property
if thereby the corporate business be not substantially limited, or if the proceeds of such property
be appropriated to the conduct or development of its remaining business.
 7. Surely, these circumstances must operate to bar the petitioners now
from questioning the deed of assignment after this long period of in-
action in the protection of the rights they are now belatedly asserting.
Laches has operated against them.
8. Laches, in a general sense, means the failure or neglect, for an unrea-
sonable and unexplained length of time, to do that which, by exercis-
ing due diligence, could or should have been done earlier. Unlike the
statute of limitations, laches does not involve mere lapse or passage of
time but is principally an impediment to the assertion or enforcement
of a right which has become under the circumstances inequitable or
unfair to permit.
9. The essential elements of laches are: (1) conduct on the part of the
defendant, or of one under whom he claims, giving rise to the sitution
complained of; (2) delay in asserting complainant's right after he had
knowledge of the defendant's conduct and after he has an opportunity
to sue; (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;
(4) injury or prejudice to the defendant in the event relief is accorded
to the complainant.
10. All the requisites are present in the case at bar. To begin with, what
gave rise to the situation now complained of by the petitioners was the
adoption of the deed of assignment by the directors of the old PBM
allegedly without the consent of its stockholders and the acceptance
of the deeded assets by the new PBM. Secondly, there was delay on
the petitioners' part since it took them nearly four years, i.e., from May
14, 1977 to May 5,1981, before they made their move to assail the
transfer despite complete knowledge of the transaction. It is also evi-
dent that the new PBM could not have had the slightest suspicion that
the petitioners would assert the right on which they now base their
suit, especially Chung Siong Pek, who in fact acted not only as direc-
tor of the old PBM but also as treasurer of the new PBM in the trans-
action. Finally, the injury or prejudice in the event relief is granted is
obvious as all the transactions of the new PBM will have to be undone,
including credits extended and commitments made to third parties in
good faith.
PET’S 2ND CONTENTION: The new corporation is accountable for the said
assets to the stockholders of the dissolved corporation who had not consented
to the conveyance of the same to the new corporation.
1. The second contention must also fall with the first, and for the same rea-
sons.
PET’S 3rd CONTENTION: The new corporation has not substantially com-
plied with the two-year requirement of Section 22 of the new Corporation
Code on non-user because its stockholders never adopted a set of by-laws.
2. The third contention is likewise rejected. It is undeniable that the new
PBM has in fact been operating all these years. The petitioners' argument
that Alfredo Ching was merely continuing the business of the old PBM is
self-defeating for they themselves argue that the old PBM had already
been dissolved.
3. As for the contention that the election of Wellington Chung and J.R.
Blanco as directors was subject to the outcome of the petition for liquida-
tion, this is clearly self-serving and completely without proof. Moreover,
failure to file the by-laws does not automatically operate to dissolve a
corporation but is now considered only a ground for such dissolution.
4. Section 19 of the Corporation Law, part of which is now Section 22 of the
Corporation Code, provided that the powers of the corporation would
cease if it did not formally organize and commence the transaction of its
business or the continuation of its works within two years from date of its
incorporation.
5. Section 20, which has been reproduced with some modifications in Sec-
tion 46 of the Corporation Code, expressly declared that "every corpora-
tion formed under this Act, must within one month after the filing of the
articles of incorporation with the Securities and Exchange Commission,
adopt a code of by-laws."
6. Whether this provision should be given mandatory or only directory effect
remained a controversial question until it became academic with the adop-
tion of PD 902-A. Under this decree, it is now clear that the failure to file
by-laws within the required period is only a ground for suspension or rev-
ocation of the certificate of registration of corporations.
7. Non-filing of the by-laws will not result in automatic dissolution of the
corporation. Substantial compliance with conditions subsequent will suf-
fice to perfect corporate personality.
8. Under Section 19 of the Corporation Code, a corporation commences its
corporate existence and juridical personality and is deemed incorporated
from the date the Securities and Exchange Commission issues certificate
of incorporation under its official seal. This may be done even before the
filing of the by-laws, which under Section 46 of the Corporation Code,
 must be adopted "within one month after receipt of official notice of the
issuance of its certificate of incorporation."
9. It has been held that there may be a de facto corporation notwithstanding
a failure to give the notice required by the statute of the meeting of the
organization; or though there would failure to fix and limit the amount of
the capital stock of the company at the first meeting; or a failure to issue
stock; or that there were informalities in the proceedings of such meeting,
or that no certificate of organization was executed or filed.
10. In any case, the deficiency claimed by the petitioners was corrected when
the new PBM adopted and filed its by- laws thus rendering the third issue
also moot and academic.
PET’S 4th CONTENTION: A quo warranto proceeding is no longer necessary
to dissolve a corporation which is already "deemed dissolved" under Section
22 of the new Corporation Code.
1. In view of the findings that the new PBM has not been ipso facto dis-
solved.
PET’S 5th CONTENTION: The Securities and Exchange Commission has no
jurisdiction over a petition for suspension of payments filed by an individual
only.
1. Under Section 5(d), PD 902-A, as amended by PD 1758, however, it
is clearly provided that such jurisdiction may be exercised only in: d)
Petitions of corporations, partnerships or associations to be declared
in the state of suspension of payments in cases where the corporation,
partnership or association possess sufficient property to cover all its
debts but foresees the impossibility of meeting them when they re-
spectively fall due or in cases where the corporation, partnership or
association has no sufficient assets to cover its liabilities but is under
the management of a Rehabilitation Receiver or Management Com-
mittee created pursuant to this Decree.
2. This section clearly does not allow a mere individual to file the petition
which is limited to "corporations, partnerships or associations." Ad-
ministrative agencies like the SEC are tribunals of limited jurisdiction
and, as such, can exercise only those powers which are specifically
granted to them by their enabling statutes. Consequently, where no au-
thority is granted to hear petitions of individuals for suspension of pay-
ments, such petitions are beyond the competence of the SEC.
3. The circumstance that Ching is a co-signer in the corporation's prom-
issory notes, collateral or guarantee or security agreements, does not
make him a proper party. Jurisdiction over the subject matter must ex-
ist as a matter of law and cannot be fixed by agreement of the parties,
acquired through, or waived, enlarged or diminished by, any act or
omission; neither can it be conferred by acquiescence of the tribunal.
Hence, Alfredo Ching, as a mere individual, cannot be allowed as a
co-petitioner in SEC Case.
SECTION 14
001 Manuel Dulay Enterprises v CA (Soriano)
1993 August 27 | Nocon, J. | Section 14: De facto Close Corporation
PETITIONER: Manuel Dulay Enterprises
RESPONDENTS: Court of Appeals
SUMMARY: Dulay Enterprises, a domestic corporation, owned the Dulay
Apartment. The corporation’s board of directors is composed of Manuel Dulay,
and his 3 children. The corporation, through Manuel Dulay, obtained various
loans for the constructions of its hotel. It borrowed from Virgilio Dulay to
continue the construction. Manuel Dulay by virtue of Board Resolution No. 18
of petitioner corporation sold the subject property to spouses Veloso. Manuel
Dulay and the Velosos executed a Memorandum of the Absolute Sale giving
Manuel Dulay within 2 years to repurchase the subject property for 200k which
was not annotated in the TCTs. Veloso without the knowledge of Manuel,
mortgaged the property to Torres. Torres, subsequently, obtained the property as
the ighest bidder in the foreclosure sale (Veloso failed to pay Torres). Torres
filed a petition for the issuance of a writ of possession. Virgilio intervened and
alleged that Manuel was never authorized by the corporation to sell or mortgage
the property. Issue: Whether the contact is binding even without formal Board
resolution. –Yes. Virgilio E. Dulay's protestations of complete innocence to the
effect that he never participated nor was even aware of any meeting or resolution
authorizing the mortgage or sale of the subject premises is difficult to believe.
On the contrary, he is very much privy to the transactions involved. Petitioner
corporation is classified as closed corporation and consequently a board
resolution authorizing the sale or mortgage of the subject property is not
necessary to bind the corporation for the action of its president. At any rate,
corporate action taken at a board meeting without proper call or notice in a close
corporation is deemed ratified by the absent director unless the latter promptly
 files his written objection with the secretary of the corporation after having
knowledge of the meeting which, in his case, petitioner Virgilio Dulay failed to
do. Virgilio E. Dulay's protestations of complete innocence to the effect that he
never participated nor was even aware of any meeting or resolution authorizing
the mortgage or sale of the subject premises is difficult to believe. On the
contrary, he is very much privy to the transactions involved. To begin with, he is
an incorporator and one of the board of directors designated at the time of the
organization of Manuel R. Dulay Enterprise, Inc.
DOCTRINE: In ordinary parlance, the said entity is loosely referred to as a
"family corporation". The nomenclature, if imprecise, however, fairly reflects
the cohesiveness of a group and the parochial instincts of the individual
members of such an aggrupation of which Manuel R. Dulay Enterprises, Inc. is
typical: four-fifths of its incorporators being close relatives relatives namely,
three (3) children and their father whose name identifies their corporation
Court can not lose sight of the fact that the Manuel R. Dulay Enterprises, Inc. is
a closed family corporation where the incorporators and directors belong to one
single family. It cannot be concealed that Manuel R. Dulay as president,
treasurer and general manager almost had absolute control over the business and
affairs of the corporation.
FACTS:
61. Dulay Enterprsises, a domestic corporation owned the Dulay Apartment
consisting of 16 apartment units om a 689 sq. meter lot in Pasay city.
62. The corporation has the following as members of its Board of Directors:
a. Manuel Dulay with 19,960 shares and designated as president,
treasurer and manager;
b. Atty. Virgilio Dulay with 10 shares and designated as Vice-
president
c. Linda Dulay with 10 shares
d. Cecilia Dulay-Mendoza with 10 shares
e. Atty. Plaridel Jose with 10 shares and designated as secretary,
63. Petitioner corporation, through its President Manuel Dulay, obtained various
loans for the constructions of its hotel project for the Continental hotel.
64. Corporation borrowed money from Virgilio Dulay to be able to continue the
hotel project.
65. As a result of the said loan, Virgilio occupied one unit of the apartments of
the subject property since 1973 while managing the Dulay Apartment as his
shareholdings in the corporation was subsequently increased
66. Manuel Dulay by virtue of Board Resolution No. 18 of petitioner corporation
sold the subject property to spouses Veloso. Manuel Dulay and the Velosos
executed a Memorandum of the Absolute Sale giving Manuel Dulay within
2 years to repurchase the subject property for 200k which was not annotated
in the TCTs
67. Veloso (wife), without the knowledge of Manuel, mortgaged the subject
property to Torres for a loan of P250, 000 which was annotated in the TCT
68. Upon the failure of respondent Veloso to pay Torres, the subject property was
sold to the latter as the highest bidder in an extrajudicial foreclose sale.
69. Veloso executed a Deed of Absolute Assignment of the Right to Redeem in
favor of Manuel, assigning her right to repurchase the property from Torres
as a result of the extrajudicial sale.
70. Neither Veloso nor her assignee Manuel was able to redeem the property
within 1 year period for redemption. Torres filed for the consolidation of
ownership.
71. Torres filed a petition for the issuance of a writ of possession. Virgilio
intervened and alleged that Manuel was never authorized by the corporation
to sell or mortgage the property. Trial court ordered Torres to implead the
corporation
72. Torres filed a case against the corporation for the recovery of the possession
and damages.
73. Corporation files a case against the respondents Velosos and Torres for the
cancellation of the Certficate of Sheriff’s sale.
74. Another case was also intiated by Torres against the tenants of Fulay
Apartnemnt Unit part 7-B, with petitioner corporation as intervenor wherein
the MTC of Pasay rendered a decision in favor of the Torres, and ordered the
tenants to vacate the property and pay rents.
75. Corporation and Virgilio files an action to annul the decision of the MTC
judge before the RTC which was denied. CA denied the appeal.
76. Hence, this case.
ISSUE/s: Whether the contact is binding even without formal Board resolution. –Yes.
Virgilio E. Dulay's protestations of complete innocence to the effect that he never
participated nor was even aware of any meeting or resolution authorizing the mortgage
or sale of the subject premises is difficult to believe. On the contrary, he is very much
privy to the transactions involved.
RULING: WHEREFORE, the petition is DENIED and the decision appealed from is
hereby AFFIRMED.
RATIO:
85. Section 101 of the Corporation Code of the Philippines provides:
Sec. 101. When board meeting is unnecessary or improperly held. Unless the
by-laws provide otherwise, any action by the directors of a close corporation
without a meeting shall nevertheless be deemed valid if:
a. Before or after such action is taken, written consent thereto is
signed by all the directors, or
b. All the stockholders have actual or implied knowledge of the
action and make no prompt objection thereto in writing; or
c. The directors are accustomed to take informal action with the
express or implied acquiese of all the stockholders, or
d. All the directors have express or implied knowledge of the action
in question and none of them makes prompt objection thereto in
writing.
e. If a directors' meeting is held without call or notice, an action taken
therein within the corporate powers is deemed ratified by a director
who failed to attend, unless he promptly files his written objection
with the secretary of the corporation after having knowledge thereof.
86. Petitioner corporation is classified as closed corporation and consequently a
board resolution authorizing the sale or mortgage of the subject property is
not necessary to bind the corporation for the action of its president. At any
rate, corporate action taken at a board meeting without proper call or notice
in a close corporation is deemed ratified by the absent director unless the
latter promptly files his written objection with the secretary of the corporation
after having knowledge of the meeting which, in his case, petitioner Virgilio
Dulay failed to do.
87. The privilege of being treated as an entity distinct and separate from its
stockholder or members is therefore confined to its legitimate uses and is
subject to certain limitations to prevent the commission of fraud or other
illegal or unfair act. When the corporation is used merely as an alter ego or
business conduit of a person, the law will regard the corporation as the act of
that person.
88. The Supreme Court had repeatedly disregarded the separate personality of
the corporation where the corporate entity was used to annul a valid contract
executed by one of its members.
89. Petitioners' claim that the sale of the subject property by its president, Manuel
Dulay, to spouses Veloso is null and void as the alleged Board Resolution
No. 18 was passed without the knowledge and consent of the other members
of the board of directors cannot be sustained.
90. Virgilio E. Dulay's protestations of complete innocence to the effect that he
never participated nor was even aware of any meeting or resolution
authorizing the mortgage or sale of the subject premises is difficult to believe.
On the contrary, he is very much privy to the transactions involved. To begin
with, he is an incorporator and one of the board of directors designated at the
time of the organization of Manuel R. Dulay Enterprise, Inc.
91. In ordinary parlance, the said entity is loosely referred to as a "family
corporation". The nomenclature, if imprecise, however, fairly reflects the
cohesiveness of a group and the parochial instincts of the individual members
of such an aggrupation of which Manuel R. Dulay Enterprises, Inc. is typical:
four-fifths of its incorporators being close relatives namely, three (3) children
and their father whose name identifies their corporation
92. Besides, the fact that petitioner Virgilio Dulay on June 24, 1975 executed an
affidavit that he was a signatory witness to the execution of the post-dated
Deed of Absolute Sale of the subject property in favor of private respondent
Torres indicates that he was aware of the transaction executed between his
father and private respondents and had, therefore, adequate knowledge about
the sale of the subject property to private respondents.
93. Court can not lose sight of the fact that the Manuel R. Dulay Enterprises, Inc.
is a closed family corporation where the incorporators and directors belong
to one single family. It cannot be concealed that Manuel R. Dulay as
president, treasurer and general manager almost had absolute control over the
business and affairs of the corporation.
94. Hence, contract is binding even without formal Board resolution
 002 Sergio F. Naguiat v. NLRC (SIAPNO)
March 13, 1997 | Panganiban, J. | De Facto Close Corporation
PETITIONERS: SERGIO F. NAGUIAT, doing business under the name
and style SERGIO F. NAGUIAT ENT., INC., & CLARK FIELD TAXI,
INC.
RESPONDENS: NLRC, NATIONAL ORGANIZATION OF WORK-
INGMEN and its members, LEONARDO T. GALANG
SUMMARY: Clark Field Taxi, Inc. (CFTI) held a concessionaire’s con-
tract with the Army Air Force Exchange Services (AAFES) for the opera-
tion of taxi services within Clark Air Base. Sergio Naguiat was president
of CFTI while Antolin Naguiat was VP. Like Naguiat Enterprises, Inc.,
which was a trading firm, it was also a family-owned corporation. Re-
spondents were employed by the CFTI taxicab drivers. Respondents were
terminated because of the phase-out of the military bases in the Philip-
pines. The AAFES drivers union, and the CFTI held negotiations as re-
gards to separation benefits: that the separated drivers would be given
P500 for every year as a severance pay. Most of the drivers accepted this
but some refused to do so. Those who did not accept filed a complaint
against Sergio Naguiat under the name and style Naguiat Enterprises,
AAFES and AAFES union. Issue is WoN petitioner-corporations and its
officers are liable?
a. Naguiat Enterprises Not Liable – not direct employer, respondents were
confused as to Sergio on the personalities of Sergio F. Naguiat as an
individual who was the president of CFTI, and Sergio F. Naguiat En-
terprises, Inc., as a separate corporate entity with a separate business.
Naguiat is engaged in trading, not taxi business.
b. CFTI president Sergio Naguiat solidarily liable – Both CFTI and
Naguiat Enterprises were close family corporations owned by the same
family. To the extent of the stockholders are actively engaged in the man-
agement or business affairs of a close corporation, the stockholders shall
be held to strict fiduciary duties to each other and among themselves.
Petitioners conceded that both CFTI and Naguiat Enterprises were
―close family corporations owned by the Naguiat family. Section 100,
paragraph 5, (under Title XII on Close Corporations) of the Corporation
Code, states: ...
(5) To the extent that the stockholders are actively engage(d) in the
management or operation of the business and affairs of a close corpo-
ration, the stockholders shall be personally liable to corporate torts
unless the corporation has obtained reasonably adequate liability insur-
ance. (Corporate torts - consists in the violation of a right given or the
omission of a duty imposed by law, tort is a breach of a legal duty. In this
case the legal duty was to give separation pay)
c. Antolin Naguiat not personally liable - Antolin T. Naguiat was the vice
president of the CFTI. Although he carried the title of "general manager"
as well, it had not been shown that he had acted in such capacity.
DOCTRINE: Moreover, petitioners also conceded that both CFTI and
Naguiat Enterprises were "close family corporations"[34] owned by the
Naguiat family. Section 100, paragraph 5, (under Title XII on Close Corpo-
rations) of the Corporation Code, states:
(5) To the extent that the stockholders are actively engaged in the manage-
ment or operation of the business and affairs of a close corporation, the
stockholders shall be held to strict fiduciary duties to each other and
among themselves. Said stockholders shall be personally liable for corpo-
rate torts unless the corporation has obtained reasonably adequate liability
insurance."
FACTS:
1. Clark Field Taxi, Inc (CFTI) held a concessionaire's contract with the Army Air
Force Exchange Services ("AAFES") for the operation of taxi services within
Clark Air Base. Sergio F. Naguiat was CFTI's president, while Antolin T.
Naguiat was its vice-president. Like Sergio F. Naguiat Enterprises, Inc.
("Naguiat Enterprises"), a trading firm, it was a family-owned corporation.
2. Respondents were employed by CFTI as taxicab drivers. The drivers worked at
least three to four times a week, depending on the availability of taxicabs. They
earned not less than US$15.00 daily.
3. Due to the phase-out of the US military bases in the Philippines, the AAFES was
dissolved, and the services of individual respondents were officially terminated.
4. The AAFES Taxi Drivers Association ("drivers' union"), through its local presi-
dent, Eduardo Castillo, and CFTI held negotiations as regards separation benefits
that should be awarded in favor of the drivers. They arrived at an agreement that
the separated drivers will be given P500.00 for every year of service as severance
pay. Most of the drivers accepted said amount. However, some respondents re-
fused to accept theirs.
5. Instead, after disaffiliating themselves from the drivers' union, individual re-
spondents, through the National Organization of Workingmen ("NOWM"), a la-
bor organization, filed a complaint against Sergio F. Naguiat doing business un-
der the name Sergio F. Naguiat Enterprises, Inc., Antolin T. Naguiat as vice
president and general manager of CFTI, AAFES with Mark Hooper as Area Ser-
vice Manager, Pacific Region, and AAFES Taxi Drivers Association with Edu-
ardo Castillo as President, for payment of separation pay due to termina-
tion/phase-out.
6. In their complaint, herein private respondents alleged that they were regular em-
ployees of Naguiat Enterprises. They claimed to have been assigned to Naguiat
Enterprises after having been hired by CFTI, and that the former thence managed,
controlled and supervised their employment.
7. In petitioners’ position paper submitted to the labor arbiter, they claimed that the
cessation of business of CFTI, was due to "great financial losses and lost business
opportunity" resulting from the phase-out of Clark Air Base brought about by the
Mt. Pinatubo eruption and the expiration of the RP-US military bases agree-
ment. They admitted that CFTI had agreed with the drivers' union to grant its taxi
driver-employees separation pay equivalent to P500.00 for every year of service.
8. The labor arbiter, finding the individual complainants to be regular workers of
CFTI, ordered CFTI to pay them P1,200.00 for every year of service "for human-
itarian consideration," setting aside the earlier agreement between CFTI and the
drivers' union of P500.00 for every year of service and also claimed that CFTI
was profitably earning and the cessation of its business was due to the untimely
closure of Clark Air Base.
9. Herein individual private respondents appealed to the NLRC. In its Resolution,
the NLRC modified the decision by granting separation pay to the private re-
spondents US$120.00 in Philippine peso which is the legal tender, in which case,
the table of conversion (exchange rate) at the time of payment or satisfaction of
the judgment should be used. However, since the choice is left to the debtor (re-
spondents), they may choose to pay in US dollar. In discharging the above obli-
gations, Sergio F. Naguiat Enterprises, which is headed by Sergio F. Naguiat
and Antolin Naguiat, father and son at the same time the President and Vice-
President and General Manager, respectively, should be joined as indispensa-
ble party whose liability is joint and several.(Sec. 7, Rule 3, Rules of Court)"
10. MR of petitioners was denied by the NLRC. Hence, this petition with prayer for
issuance of a TRO. Upon posting by the petitioners of a surety bond, a tempo-
rary restraining order was issued by this Court enjoining execution of the as-
sailed Resolutions.
ISSUE/s:
d. WoN Petitioner-Corporations and its officers are liable [IMPT]
a. Naguiat Enterprises Not Liable – not actual and direct employe
b. CFTI president Sergio Naguiat solidarily liable -
c. Antolin Naguiat not personally liable
e. WoN public respondent NLRC (3rd Div.) committed GADALEJ in issuing the
appealed resolution - NO
f. WoN Messrs. Teofilo Rafols and Romeo N. Lopez could validly represent
herein private respondents
g. WoN the resolution issued by public respondent is contrary to law
RULING: WHEREFORE, the foregoing premises considered, the petition is
PARTLY GRANTED. The assailed February 28, 1994 Resolution of the NLRC
is hereby MODIFIED as follows:
(1) Petitioner Clark Field Taxi, Incorporated, and Sergio F. Naguiat, president and
co-owner thereof, are ORDERED to pay, jointly and severally, the individual
respondents their separation pay computed at US$120.00 for every year of ser-
vice, or its peso equivalent at the time of payment or satisfaction of the judgment;
(2) Petitioner Sergio F. Naguiat Enterprises, Incorporated, and Antolin T.
Naguiat are ABSOLVED from liability in the payment of separation pay to in-
dividual respondents.
RATIO:
Liability of Petitioner-Corporations and Their Respective Officers
Naguiat Enterprises Not Liable
1. In impleading Naguiat Enterprises as solidarily liable for the obligations of CFTI,
respondents rely on Articles 106, 107, and 109 of the Labor Code.
2. Based on factual submissions of the parties, the labor arbiter, however, found that
individual respondents were regular employees of CFTI who received wages on
a boundary or commission basis.
3. From the evidence proffered by both parties, there is no substantial basis to
hold that Naguiat Enterprises is an indirect employer of individual respond-
ents much less a labor only contractor. On the contrary, petitioners submitted
documents such as the drivers' applications for employment with CFTI, and so-
cial security remittances and payroll of Naguiat Enterprises showing that none
of the individual respondents were its employees. Moreover, in the contract
between CFTI and AAFES, the former, as concessionaire, agreed to purchase
from AAFES for a certain amount within a specified period a fleet of vehicles to
be "kept on the road" by CFTI, pursuant to their concessionaire's contract indi-
cating that CFTI became the owner of the taxicabs which became the princi-
pal investment and asset of the company.
4. Private respondents failed to substantiate their claim that Naguiat Enter-
prises managed, supervised and controlled their employment. It appears that
they were confused on the personalities of Sergio F. Naguiat as an individual
who was the president of CFTI, and Sergio F. Naguiat Enterprises, Inc., as a
separate corporate entity with a separate business. They presumed that Sergio
F. Naguiat, who was at the same time a stockholder and director of Sergio F.
Naguiat Enterprises, Inc., was managing and controlling the taxi business on be-
half of the latter.
5. However, Sergio F. Naguiat, in supervising the-taxi drivers and determining
their employment terms, was rather carrying out his responsibilities as presi-
dent of CFTI. Hence, Naguiat Enterprises as a separate corporation does not
appear to be involved at all in the taxi business.
6. Testimony of a driver-claimant on cross examination: although the witness in-
sisted that Naguiat Enterprises was his employer, he could not deny that he re-
ceived his salary from the office of CFTI inside the base.
7. Another driver-claimant admitted that Naguiat Enterprises was in the trading
business while CFTI was in taxi services.
8. In addition, the Constitution of CFTI-AAFES Taxi Drivers Association states
that members thereof are the employees of CFTI and for collective bargaining
purposes, the definite employer is the Clark Field Taxi Inc.
9. Therefore, CFTI was the actual and direct employer of individual respond-
ents, and that Naguiat Enterprises was neither their indirect employer nor
labor-only contractor.
CFTI president solidarily liable
10. Petitioner-corporations would likewise want to avoid the solidary liability of
their officers. In the broader interest of justice, Court holds that Sergio F.
Naguiat, in his capacity as president of CFTI, is jointly and severally liable
in the payment of separation pay to individual respondents.
11. A.C. Ransom Labor Union-CCLU vs. NLRC: A.C. Ransom Corporation
was a family corporation, the stockholders of which were members of the
Hernandez family. Ransom filed an application for clearance to close or
cease operations. In its last motion for execution, the union asked that of-
ficers and agents of the company be held personally liable for payment of
the backwages which was granted. Court reversed the NLRC and upheld
the labor arbiter. In imposing joint and several liability upon the company
president. Article 212(c) of the Labor Code which provides:
'(c) 'Employer' includes any person acting in the interest of an employer, directly
or indirectly. The term shall not include any labor organization or any of its of-
ficers or agents except when acting as employer.' Since RANSOM is an artificial
person, it must have an officer who can be presumed to be the employer, being
the 'person acting in the interest of (the) employer' RANSOM. The corpora-
tion, only in the technical sense, is the employer.
(c) If the policy of the law were otherwise, the corporation employer can have devious
ways for evading payment of back wages. x x x
(d) The record does not clearly identify 'the officer or officers' of RANSOM directly
responsible for failure to pay the back wages of the 22 strikers. In the absence of
definite proof in that regard, we believe it should be presumed that the responsi-
ble officer is the President of the corporation who can be deemed the chief oper-
ation officer thereof. Thus, in RA 602, criminal responsibility is with the 'Man-
ager or in his default, the person acting as such.' In RANSOM, the President ap-
pears to be the Manager."
12. Sergio F. Naguiat, admittedly, was the president of CFTI who actively managed
the business. Thus, applying A. C. Ransom, he falls within the meaning of an
"employer" as contemplated by the Labor Code, who may be held jointly and
severally liable for the obligations of the corporation to its dismissed employees.
13. Moreover, petitioners also conceded that both CFTI and Naguiat Enterprises
were "close family corporations" owned by the Naguiat family. Section 100,
paragraph 5, (under Title XII on Close Corporations) of the Corporation Code,
states:
"(5) To the extent that the stockholders are actively engaged in the
management or operation of the business and affairs of a close corpo-
ration, the stockholders shall be held to strict fiduciary duties to each other
and among themselves. Said stockholders shall be personally liable for
corporate torts unless the corporation has obtained reasonably adequate
liability insurance."
14. Our jurisprudence is wanting as to the definite scope of "corporate tort." Essen-
tially, "tort" consists in the violation of a right given or the omission of a duty
imposed by law, tort is a breach of a legal duty.
15. Article 283 of the Labor Code mandates the employer to grant separation
pay to employees in case of closure or cessation of operations of establish-
ment or undertaking not due to serious business losses or financial reverses,
which is the condition obtaining at bar. CFTI failed to comply with this law-
imposed duty or obligation. Consequently, its stockholder who was actively
engaged in the management or operation of the business should be held per-
sonally liable.
16. MAM Realty Development vs. NLRC: the Court recognized that a director or of-
ficer may still be held solidarily liable with a corporation by specific provision
of law. "x x x A corporation, being a juridical entity, may act only through its
directors, officers and employees. Obligations incurred by them, acting as such
corporate agents, are not theirs but the direct accountabilities of the corporation
they represent. True, solidary liabilities may at times be incurred but only when
exceptional circumstances warrant such as, generally, in the following cases:
4. When a director, trustee or officer is made, by specific provision of law, personally
liable for his corporate action."
17. As pointed out earlier, the fifth paragraph of Section 100 of the Corporation
Code specifically imposes personal liability upon the stockholder actively
managing or operating the business and affairs of the close corporation.
18. In fact, in posting the surety bond required by this Court for the issuance of a
temporary restraining order enjoining the execution of the assailed NLRC Reso-
lutions, only Sergio F. Naguiat, in his individual and personal capacity, princi-
pally bound himself to comply with the obligation thereunder
19. The Court here finds no application to the rule that a corporate officer cannot be
held solidarily liable with a corporation in the absence of evidence that he had
acted in bad faith or with malice. In the present case, Sergio Naguiat is held sol-
idarily liable for corporate tort because he had actively engaged in the manage-
ment and operation of CFTI, a close corporation.
Antolin Naguiat not personally liable
19. Antolin T. Naguiat was the vice president of the CFTI. Although he carried the
title of "general manager" as well, it had not been shown that he had acted in such
capacity. Furthermore, no evidence on the extent of his participation in the man-
agement or operation of the business was proffered. In this light, he cannot be
held solidarily liable for the obligations of CFTI and Sergio Naguiat to the private
respondents.
No GADALEJ in issuance of appealed resolution
1. CFTI inferred that their monthly take-home pay amounted to not less than
$240.00. Herein petitioners did not bother to refute nor offer any evidence to
controvert said allegations. Thus, petitioners are in estoppel for not having
questioned such facts when they had all opportunity to do so. Private respond-
ents, like petitioners, are bound by the factual findings of Respondent Com-
mission.
NOWM's Personality to Represent Individual Respondents-Employees
1. Petitioners in estoppel for not having seasonably raised this issue before the
labor arbiter or the NLRC. NOWM was already a party-litigant as the organ-
ization representing the taxi driver-complainants before the labor arbiter.
Therefore, they are now estopped from raising such question before this
Court. In any event, petitioners acknowledged before this Court that the taxi
drivers allegedly represented by NOWM, are themselves parties in this case.
No Denial of Due Process
2. Petitioners averred denial of due process since the individual Naguiats were
not impleaded as parties to the complaint but in the case of Ransom, Court
held the corporation president solidarily liable with the corporation.
3. Furthermore, Sergio and Antolin Naguiat voluntarily submitted themselves
to the jurisdiction of the labor arbiter when they, in their individual capacities,
filed a position paper
003 SAN JUAN STRUCTURAL AND STEEL FABRICATORS INC. v.
COURT OF APPEALS (SEE)
September 29, 1998 | Panganiban, J. | De Facto Close Corporation
PETITIONER: San Juan Structural and Steel Fabricators Inc.
RESPONDENTS: Court of Appeals, Motorich Sales Corp., Nenita Lee
Gruenberg, ACL Development Corp., and JNM Realty and Development Corp.
SUMMARY: San Juan Structural and Steel Fabricators Inc. (San Juan) entered
into an agreement with Motorich Sales Corp. for the transfer to it of a land in
Acropolis Greens Subdivision in QC. San Juan paid the 100,000 downpayment.
Motorich, despite repeated demands, refused to execute the Transfer of
Rights/Deed of Assignment. Motorich and Nenita, treasurer, claims that the
President and Chairman of Motorich did not sign the agreement and that
Nenita’s signature is inadequate to bind Motorich, that the signature of the Presi-
dent, Reynaldo Gruenberg, is required. Also, it was San Juan who insisted to pay
the 100,000 downpayment. That granting, without admitting the enforceability
of the agreement, San Juan nonetheless failed to pay in legal tender. It was
agreed that the transfer will happen upon payment in cash and since the payment
wwas in check, they agreed to meet at a bank but San Juan only told Nenita of
the availability of the check only after banking hours. The RTC ruled in favor of
Motorich ruling that there was no evidence that Nenita was authorized to dispose
of the property and that the court did not find substantial evidence to hold Nenita
liable for damages considering she did not misrepresent herself to be authorized
to sell the property. CA affirmed. The issue relevant to the doctrine is WoN Mo-
torich is a close corporation. The SC ruled that it is not. The articles of
incorporation of Motorich Sales Corporation does not contain any provision
stating that (1) the number of stockholders shall not exceed 20, or (2) a
preemption of shares is restricted in favor of any stockholder or of the
corporation, or (3) listing its stocks in any stock exchange or making a public
offering of such stocks is prohibited. From its articles, it is clear that Motorich is
not a close corporation. Motorich does not become one either, just because
Spouses Reynaldo and Nenita owned 99.866% of its subscribed capital stock.
The "[m]ere ownership by a single stockholder or by another corporation of all
or capital stock of a corporation is not of itself sufficient ground for disregarding
the separate corporate personalities." So, too, a narrow distribution of ownership
does not, by itself, make a close corporation.
DOCTRINE: The articles of incorporation of Motorich Sales Corp. does not
contain any provision required under Sec. 96, and therefore from its very articles
of incorporation, it is not a close corporation. It does not become one either, just
because Spouses Reynaldo and Nenita Gruenberg owned 99.866% of its
subscribed capital stock. The “[m]ere ownership by a single stockholder or by
another corporation of all or nearly all of the capital stock of a corporation is not
of itself sufficient ground for disregarding the separate corporate personalities.”
FACTS:
77. San Juan Structural and Steel Fabricators Inc. (San Juan) entered into an
agreement with Motorich Sales Corp. for the transfer to it of a land in
Acropolis Greens Subdivision in QC. San Juan paid the 100,000
downpayment.
78. Andres Co, president of San Juan, then wrote to Motorich requesting for a
computation of the balance to be paid, the letter was given to Motorich’s
broker, Linda Aduca, who gave the computation.
79. San Juan was ready with the payment via Metrobank Cashier’s Check. They
were supposed to be with Motorich’s treasurer, Nenita Lee, but Nenita did
not appear.
80. Motorich, despite repeated demands, refused to execute the Transfer of
Rights/Deed of Assignment which is necessary to transfer the title since the
TCT is still in the name of Motorich.
81. JNM Realty is impleaded as a necessary party since it is the transferor of right
in favor Motorich. While ACL Development Corp and Motorich entered into
a Deed of Absolute Sale whereby ACL transferred to Motorich the property.
82. San Juan claims that it suffered damages due to Motorich’s refusal to execute
the Transfer of Rights/Deeds of Assignment.
83. Motorich and Nenita claims that the President and Chairman of Motorich did
not sign the agreement and that Nenita’s signature is inadequate to bind
Motorich, that the signature of the President, Reynaldo Gruenberg, is
required. Also, it was San Juan who insisted to pay the 100,000
downpayment. That granting, without admitting the enforceability of the
agreement, San Juan nonetheless failed to pay in legal tender. It was agreed
that the transfer will happen upon payment in cash and since the payment
wwas in check, they agreed to meet at a bank but San Juan only told Nenita
 of the availability of the check only after banking hours.
84. The RTC ruled in favor of Motorich ruling that there was no evidence that
Nenita was authorized to dispose of the property and that the court did not
find substantial evidence to hold Nenita liable for damages considering she
did not misrepresent herself to be authorized to sell the property.
85. The CA affirmed the RTC ruling but ordered the refund of the 100,000
donwpayment.
ISSUE/s:
13. WoN there was a valid contract of sale– NO, because Nenita, as treasurer
can’t sell corporate property without authrozation.
14. WoN the doctrine of piercing the veil of corporate fiction can be applied
to Motorich (WoN Motorich is a closed corporation)-NO because San
Juan utterly failed to establish that said corporation was formed, or that
it is operated, for the purpose of shielding any alleged fraudulent or
illegal activities of its officers or stockholders; or that the said veil was
used to conceal fraud, illegality or inequity at the expense of third
persons like San Juan. Also, it is not a closed corporation since articles
of incorporation of Motorich Sales Corporation does not contain any
provision stating that (1) the number of stockholders shall not exceed 20,
or (2) a preemption of shares is restricted in favor of any stockholder or
of the corporation, or (3) listing its stocks in any stock exchange or
making a public offering of such stocks is prohibited.
15. WoN the alleged alteration of Nenita’s testimony in the transcript of
stenographic notes is material to the disposition of this case-NO because the
transcript has to be read in whole.
16. WoN Motorich is liable for damages and attorney’s fees-NO because San
Juan’s claim of fraud and bad faith is unsubstantiated
RULING: The petition is hereby denied and the assailed decision is affirmed.
RATIO:
There was no valid contract of sale
95. Nenita and Co signed on the Agreement, according to which a lot owned by
Motorich Sales Corporation was purportedly sold. Such contract, however,
cannot bind Motorich, because it never authorized or ratified such sale.
96. A corporation is a juridical person separate and distinct from its stockholders
or members. Accordingly, the property of the corporation is not the property
of its stockholders or members and may not be sold by the stockholders or
members without express authorization from the corporation's board of
directors.
97. The general principles of agency govern the relation between the corporation
and its officers or agents, subject to the articles of incorporation, bylaws, or
relevant provisions of law.
98. Thus, this Court has held that "a corporate officer or agent may represent and
bind the corporation in transactions with third persons to the extent that the
authority to do so has been conferred upon him, and this includes powers
which have been intentionally conferred, and also such powers as, in the usual
course of the particular business, are incidental to, or may be implied from,
the powers intentionally conferred, powers added by custom and usage, as
usually pertaining to the particular officer or agent, and such apparent powers
as the corporation has caused persons dealing with the officer or agent to
believe that it has conferred."
99. persons dealing with an assumed agent, whether the assumed agency be a
general or special one bound at their peril, if they would hold the principal
liable, to ascertain not only the fact of agency but also the nature and extent
of authority, and in case either is controverted, the burden of proof is upon
them to establish it
100. Unless duly authorized, a treasurer, whose powers are limited, cannot bind
the corporation in a sale of its assets. Selling is obviously foreign to a
corporate treasurer's function, which generally has been described as "to
receive and keep the funds of the corporation, and to disburse them in
accordance with the authority given him by the board or the properly
authorized officers."
101. In this case, Motorich denied ever authorizing Nenita so San Juan had the
burden of proving that she was authorized. However, San Juan failed to
discharge this burden. Its offer of evidence before the trial court contained no
proof of such authority. It has not shown any provision of said Motorich's
articles of incorporation, bylaws or board resolution to prove that Nenita
possessed such power.
102. There is a clear absence of proof that Motorich ever authorized Nenita , or
made it appear to any third person that she had the authority, to sell its land
or to receive the earnest money. Neither was there any proof that Motorich
ratified, expressly or impliedly, the contract. San Juan rests its argument on
the receipt which, however, does not prove the fact of ratification. The
document is a hand-written one, not a corporate receipt, and it bears only
Nenita 's signature. Certainly, this document alone does not prove that her
acts were authorized or ratified by Motorich.
103. Hence, the contract is void.
Piercing the corporate veil is not justified.
104. This issue was raised belatedly, only when it filed a sur-rejoinder before the
CA, therefore, the SC cannot entertain said issue.
105. Second, even if the above mentioned argument were to be addressed at this
time, the Court still finds no reason to uphold it.
106. In the present case, however, the Court finds no reason to pierce the corporate
veil of Motorich. San Juan utterly failed to establish that said corporation was
formed, or that it is operated, for the purpose of shielding any alleged
 fraudulent or illegal activities of its officers or stockholders; or that the said
veil was used to conceal fraud, illegality or inequity at the expense of third
persons like San Juan.
107. San Juan claims that Motorich is a close corporation. It is not. A close
corporation is defined in Sec. 96 of the Corporation Code.24
108. The articles of incorporation of Motorich Sales Corporation does not
contain any provision stating that (1) the number of stockholders shall
not exceed 20, or (2) a preemption of shares is restricted in favor of any
stockholder or of the corporation, or (3) listing its stocks in any stock
exchange or making a public offering of such stocks is prohibited.
109. From its articles, it is clear that Motorich is not a close
corporation. Motorich does not become one either, just because Spouses
Reynaldo and Nenita Gruenberg owned 99.866% of its subscribed
capital stock. The "[m]ere ownership by a single stockholder or by
another corporation of all or capital stock of a corporation is not of itself
sufficient ground for disregarding the separate corporate
personalities." So, too, a narrow distribution of ownership does not, by
itself, make a close corporation.
110. The case of Dulay is not applicable in this case. In Dulay, the sale of real
property was contracted by the president of a close corporation with the
knowledge and acquiescence of its board of directors. In the present case,
Motorich is not a close corporation, as previously discussed, and the
agreement was entered into by the corporate treasurer without the knowledge
of the board of directors.
111. The Court is not unaware that there are exceptional cases where "an action
by a director, who singly is the controlling stockholder, may be considered
as a binding corporate act and a board action as nothing more than a mere
formality." The present case, however, is not one of them.
112. As stated by San Juan, Spouses Reynaldo and Nenita Gruenberg own "almost
99.866%" of Motorich. Since Nenita is not the sole controlling stockholder
of Motorich, the aforementioned exception does not apply.
113. Granting arguendo that the corporate veil of Motorich is to be disregarded,
the subject parcel of land would then be treated as conjugal property of
Spouses Gruenberg, because the same was acquired during their marriage.
There being no indication that said spouses, who appear to have been married
before the effectivity of the Family Code, have agreed to a different property
regime, their property relations would be governed by conjugal partnership
of gains. As a consequence, Nenita could not have effected a sale of the
subject lot because "[t]here is no co-ownership between the spouses in the
24
Sec. 96. Definition and Applicability of Title. — A close corporation, within the meaning of this Code,
is one whose articles of incorporation provide that: (1) All of the corporation's issued stock of all classes,
exclusive of treasury shares, shall be held of record by not more than a specified number of persons, not
exceeding twenty (20); (2) All of the issued stock of all classes shall be subject to one or more specified
restrictions on transfer permitted by this Title; and (3) The corporation shall not list in any stock exchange
properties of the conjugal partnership of gains. Hence, neither spouse can
alienate in favor of another his or interest in the partnership or in any property
belonging to it; neither spouse can ask for a partition of the properties before
the partnership has been legally dissolved."
114. Assuming further, for the sake of argument, that the spouses' property regime
is the absolute community of property, the sale would still be invalid. Under
this regime, "alienation of community property must have the written consent
of the other spouse or he authority of the court without which the disposition
or encumbrance is void." Both requirements are manifestly absent in the
instant case.
The alleged alternation of Nenita’s testimony is not material
115. Nenita answered “yes” when asked if she ever represented to Co, the
president of San Juan, that she was authorized to sell the property, but this
was taken out of context. The whole testimony showed that Nenita did not
testify that Motorich authorized her to sell its property.
116. On the other hand, her testimony demonstrates that the president of San Juan
Corporation, in his great desire to buy the property, threw caution to the wind
by offering and paying the earnest money without first verifying Nenita's
authority to sell the lot.
Damages and Attorney’s fees are not proper
117. San Juan’s allegations lack factual bases. Hence, an award of damages or
attorney's fees cannot be justified. The amount paid as "earnest money" was
not proven to have redounded to the benefit of Motorich.
118. In fact, Nenita even offered to return the earnest money since the sale did not
push through.
119. Andres Co is not a neophyte in the world of corporate business. He has been
the president of San Juan for more than ten years and has also served as chief
executive of two other corporate entities. Co cannot feign ignorance of the
scope of the authority of a corporate treasurer such as Nenita. Neither can he
be oblivious to his duty to ascertain the scope of Nenita’s authorization to
enter into a contract to sell a parcel of land belonging to Motorich.
120. San Juan’s claim of fraud and bad faith is unsubstantiated but Nenita is or-
dered to return the money she received as earnest money.
or make any public offering of any of its stock of any class. Notwithstanding the foregoing, a corporation
shall be deemed not a close corporation when at least two-thirds (2/3) of its voting stock or voting rights is
owned or controlled by another corporation which is not a close corporation within the meaning of this
Code. . . . .

004 ANDAYA v. RURAL BANK OF CABADBARAN INC (Sarmiento)
August 3, 2016 | Sereno, J. | Registration of transfer of shares
PETITIONER: Joseph Omar Andaya
RESPONDENTS: Rural Bank of Cabadbaran Inc, Demosthenes P. Oraiz and
Ricardo D. Gonzales
SUMMARY: Andaya bought from Chute shares of stock in the Rural Bank of
Cabdbaran. Chute duly endorsed and delivered certificates of stock to Andaya
and, subsequently, requested the bank to register the transfer and issue new stock
certificates in favor of the latter. A few days later, the bank's corporate secretary
wrote Chute to inform her that he could not register the transfer. He explained
that under a previous stockholders' Resolution, existing stockholders were given
priority to buy the shares of others in the event that the latter offered those shares
for sale. The bank eventually denied the request of Andaya. It reasoned that he
had a conflict of interest, as he was then president and chief executive officer of
the Green Bank of Caraga, a competitor bank. Consequently, Andaya instituted
an action for mandamus and damages against the Rural Bank of Cabadbaran; its
corporate secretary, Oraiz; and its legal counsel, Gonzalez. The mandamus was
to compel the registration of the of the transfer in the bank’s stock and transfer
book and to issue new certificates of stock in his own name. The issue is whether
or not the bank can be compelled through namdamus to register the transfer in
the bank’s stock and transfer book. The court held that the petitioen is partly
meritorious. It is already settled jurisprudence that the registration of a transfer
of shares of stock is a ministerial duty on the part of the corporation. Aggrieved
parties may then resort to the remedy of mandamus to compel corporations that
wrongfully or unjustifiably refuse to record the transfer or to issue new certifi-
cates of stock. This remedy is available even upon the instance of a bona fide
transferee who is able to establish a clear legal right to the registration of the
transfer. In this case, Andaya has been able to establish that he is a bona de
transferee of the shares of stock of Chute. Respondents primarily challenge the
mandamus suit on the grounds that the transfer violated the bank stockholders'
right of first refusal and that petitioner was a buyer in bad faith based on Section
98 of the Corporation Code on the validity of restriction in the transfer of shares.
It must be noted that Section 98 applies only to close corporations. Hence, before
the Court can allow the operation of this section in the case at bar, there must
first be a factual determination that respondent Rural Bank of Cabadbaran is in-
deed a close corporation. The case is to be remanded to the trial court to rule on
the propriety of the issuance of mandamus.
DOCTRINE: registration of a transfer of shares of stock is a ministerial duty on
the part of the corporation. Aggrieved parties may then resort to the remedy of
mandamus to compel corporations that wrongfully or unjustifiably refuse to
record the transfer or to issue new certificates of stock. This remedy is available
even upon the instance of a bona fide transferee who is able to establish a clear
legal right to the registration of the transfer
FACTS:
1. Andaya bought from Chute 2,200 shares of stock in the Rural Bank of Cabad-
baran for P220,000. The transaction was evidenced by a notarized document
denominated as Sale of Shares of Stocks.
a. Chute duly endorsed and delivered the certificates of stock to An-
daya and, subsequently, requested the bank to register the transfer
and issue new stock certificates in favor of the latter.
2. Andaya also separately communicated with the bank's corporate secretary,
respondent Oraiz, reiterating Chute's request for the issuance of new stock
certificates in petitioner's favor.
3. A few days later, the bank's corporate secretary wrote Chute to inform her
that he could not register the transfer. He explained that under a previous
stockholders' Resolution, existing stockholders were given priority to buy the
shares of others in the event that the latter offered those shares for sale (i.e.,
a right of first refusal).
a. He then asked Chute if she, instead, wished to have her shares of-
fered to existing stockholders. He told her that if no other stock-
holder would buy them, she could then proceed to sell her shares to
outsiders.
4. Andaya responded by reiterating his earlier request for the registration of the
transfer and the issuance of new certificates of stock in his favor.
a. Citing Section 98 of the Corporation Code, he claimed that the pur-
ported restriction on the transfer of shares of stock agreed upon dur-
ing the 2001 stockholders' meeting could not deprive him of his right
as a transferee. He pointed out that the restriction did not appear in
the bank's articles of incorporation, bylaws, or certificates of stock.
5. The bank eventually denied the request of Andaya. It reasoned that he had a
conflict of interest, as he was then president and chief executive officer of the
Green Bank of Caraga, a competitor bank.
a. Respondent bank concluded that the purchase of shares was not in
good faith, and that the purchase "could be the beginning of a hostile
bid to take-over control of the [Rural Bank of Cabadbaran]."
 b. Citing Gokongwei v. Securities and Exchange Commission, re-
spondent insisted that it may refuse to accept a competitor as one of
its stockholders. It also maintained that Chute should have first of-
fered her shares to the other stockholders, as agreed upon during the
2001 stockholders' meeting.
6. Consequently, Andaya instituted an action for mandamus and damages
against the Rural Bank of Cabadbaran; its corporate secretary, Oraiz; and its
legal counsel, Gonzalez.
a. Petitioner sought to compel them to record the transfer in the bank's
stock and transfer book and to issue new certificates of stock in his
name.
7. The RTC issued a Decision dismissing the complaint.
a. Citing Ponce v. Alsons Cement Corporation, the trial court ruled that
Andaya had no standing to compel the bank to register the transfer
and issue stock certificates in his name.
b. It explained that he had failed "[to show] that the transfer of subject
shares of stock [was] recorded in the stock and transfer book of [the]
bank or that [he was] authorized by [Chute] to make the transfer."
c. According to the trial court, Ponce requires that a person seeking to
transfer shares must appear to have an express instruction and a
speci c authority from the registered stockholder, such as a special
power of attorney, to cause the disposition of stocks registered in the
stockholder's name.
d. It ruled that "[w]ithout the sale first registered or an authority from
the transferor, it [was] therefore unmistakably clear that [Andaya
had] no cause of action for mandamus against [the] bank."
ISSUE: Whether Andaya, as a transferee of shares of stock, may initiate an ac-
tion for mandamus compelling the Rural bank of Cabadbaran to record the
transfer of shares in its stock and transfer book, as well as issue new stock cer-
tificates in his name
RULING:
WHEREFORE, premises considered, the instant petition is GRANTED.
The Decision dated 17 April 2009 and the Order dated 15 July 2009 of the Regional
Trial Court, Branch 34, Cabadbaran City, which dismissed petitioner's action for
mandamus, are SET ASIDE. The action is hereby REINSTATED and the case RE-
MANDED to the court of origin for further proceedings. The trial court is further en-
joined to proceed with the resolution of this case with dispatch.
SO ORDERED.
RATIO:
1. The petition is partly meritorious.
2. It is already settled jurisprudence that the registration of a transfer of shares
of stock is a ministerial duty on the part of the corporation. Aggrieved parties
may then resort to the remedy of mandamus to compel corporations that
wrongfully or unjustifiably refuse to record the transfer or to issue new cer-
tificates of stock. This remedy is available even upon the instance of a bona
fide transferee who is able to establish a clear legal right to the registration
of the transfer. This legal right inherently owes from the transferee's estab-
lished ownership of the stocks, a right that has been recognized by this Court
as early as
a. in Price v. Martin: “A person who has purchased stock, and who
desires to be recognized as a stockholder, for the purpose of voting,
must secure a standing by having the transfer recorded upon the
books. If the transfer is not duly made upon request, he has, as his
remedy, to compel it to be made.”
b. Pacific Basin Securities Co., Inc. v. Oriental Petroleum and Miner-
als Corp.,: “Clearly, the right of a transferee/assignee to have stocks
transferred to his name is an inherent right owing from his owner-
ship of the stocks.”
c. The duty of the corporation to transfer is a ministerial one and if it
refuses to make such transaction without good cause, it may be com-
pelled to do so by mandamus.
3. The Court further held in Rural Bank of Salinas that the only limitation im-
posed by Section 63 of the Corporation Code is when the corporation holds
any unpaid claim against the shares intended to be transferred.
a. Consequently, transferees of shares of stock are real parties in inter-
est having a cause of action for mandamus to compel the registration
of the transfer and the corresponding issuance of stock certificates.
4. We also rule that Andaya has been able to establish that he is a bona de trans-
feree of the shares of stock of Chute.
a. In proving this fact, he presented to the RTC the following docu-
ments evidencing the sale: (1) a notarized Sale of Shares of Stocks
showing Chute's sale of 2,200 shares of stock to petitioner; (2) a
Documentary Stamp Tax Declaration/Return; (3) a Capital Gains
Tax Return; and (4) stock certificates covering the subject shares
duly endorsed by Chute. The existence, genuineness, and due exe-
cution of these documents have been admitted and remain undis-
puted.
b. There is no doubt that Andaya had the standing to initiate an action
for mandamus to compel the Rural Bank of Cabadbaran to record
 the transfer of shares in its stock and transfer book and to issue new
stock certificates in his name.
c. As the transferee of the shares, petitioner stands to be benefitted or
injured by the judgment in the instant petition, a judgment that will
either order the bank to recognize the legitimacy of the transfer and
petitioner's status as stockholder or to deny the legitimacy thereof.
5. This Court further finds that the reliance of the RTC on Ponce in finding that
petitioner had no cause of action for mandamus against the defendant bank
was misplaced.
a. In Ponce, the issue resolved by this Court was whether the petitioner
therein had a cause of action for mandamus to compel the issuance
of stock certificates, not the registration of the transfer.
b. Ruling in the negative, the Court said in that case that without any
record of the transfer of shares in the stock and transfer book of the
corporation, there would be no clear basis to compel that corporation
to issue a stock certificate.
c. By the import of Section 63 of the Corporation Code, the stock and
transfer book would be the main reference book in ascertaining a
person's entitlement to the rights of a stockholder. Consequently,
without the registration of the transfer, the alleged transferee could
not yet be recognized as a stockholder who is entitled to be given a
stock certificate.
6. In contrast, at the crux of this petition are the registration of the transfer and
the issuance of the corresponding stock certificates.
a. Requiring petitioner to register the transaction before he could insti-
tute a mandamus suit in supposed abidance by the ruling in Ponce
was a palpable error.
b. It led to an absurd, circuitous situation in which Andaya was pre-
vented from causing the registration of the transfer, ironically be-
cause the shares had not been registered. Transferees of shares of
stock would never be able to compel the registration of the transfer
and the issuance of new stock certificates in their favor. They would
first be required to show the registration of the transfer in their
names — the ministerial act that is the subject of the mandamus suit
in the first place.
c. The trial court confuses the application of the dicta in Ponce, which
is pertinent only to the issuance of new stock certificates, and not to
the registration of a transfer of shares. As Ponce itself provides,
these two are entirely different events. The RTC's anomalous rea-
soning cannot be given legal imprimatur by this Court.
7. With regard to the requisite authorization from the transferor, the Court
stresses that the concern in Ponce was rooted in whether or not the alleged
right of the petitioner therein to compel the issuance of new stock certificates
was clearly established.
a. Reiterating the ruling in Rivera v. Florendo and Hager v. Bryan, the
Court therein maintained that a mere endorsement of stock certifi-
cates by the supposed owners of the stock could not be the basis of
an action for mandamus in the absence of express instructions from
them.
b. According to the Court, the reason behind this ruling was that the
corporation's duty and legal obligation therein were not so clear and
indisputable as to justify the issuance of the writ.
c. The ambiguity of the alleged transferee's deed of undertaking with
endorsement led the Court in Ponce to rule that mandamus would
have issued had the registered owner himself requested the registra-
tion of the transfer, or had the person requesting the registration se-
cured a special power of attorney from the registered owner.
8. In the instant case, however, the submitted documents did not merely consist
of an endorsement.
a. Rather, petitioner presented several undisputed documents, among
which was respondent Oraiz's letter to Chute denying her request to
transfer the stock standing in her name in favor of Andaya.
b. This letter clearly indicated that the registered owner herself had re-
quested the registration of the transfer of shares of stock.
c. There was therefore no sensible reason for the RTC to perfunctorily
extract the pronouncement in Ponce and then disregard it in the face
of admitted facts in addition to the duly endorsed stock certificates.
9. On whether the writ of mandamus should issue, Section 3, Rule 65 of the
Rules of Court, provides for the rules governing a petition for mandamus,
viz.:
a. SECTION 3. Petition for mandamus. — When any tribunal, cor-
poration, board, of officer or person unlawfully neglects the perfor-
mance of an act which the law specifically enjoins as a duty resulting
from an office, trust, or station , or unlawfully excludes another from
the use and enjoyment of a right or office to which such other is
entitled, and there is no other plain, speedy and adequate remedy in
the ordinary course of law, the person aggrieved thereby may le a
verified petition in the proper court, alleging the facts with certainty
and praying that judgment be rendered commanding the respondent,
immediately or at some other time to be specified by the court, to do
the act required to be done to protect the rights of the petitioner, and
 to pay the damages sustained by the petitioner by reason of the
wrongful acts of the respondent.

10. Respondents primarily challenge the mandamus suit on the grounds that the
transfer violated the bank stockholders' right of first refusal and that petitioner
was a buyer in bad faith. Both parties refer to Section 98 of the Corporation
Code to support their arguments, which reads as follows:
a. SECTION 98. Validity of restrictions on transfer of shares. —
Restrictions on the right to transfer shares must appear in the articles
of incorporation and in the by-laws as well as in the certificate of
stock; otherwise, the same shall not be binding on any purchaser
thereof in good faith. Said restrictions shall not be more than oner-
ous than granting the existing stockholders or the corporation the
option to purchase the shares of the transferring stockholder with
such reasonable terms, conditions or period stated therein. If upon
the expiration of said period, the existing stockholders or the corpo-
ration fails to exercise the option to purchase, the transferring stock-
holder may sell his shares to any third person.

11. It must be noted that Section 98 applies only to close corporations. Hence,
before the Court can allow the operation of this section in the case at bar,
there must first be a factual determination that respondent Rural Bank of
Cabadbaran is indeed a close corporation.
a. There needs to be a presentation of evidence on the relevant re-
strictions in the articles of incorporation and bylaws of the said bank.
From the records or the RTC Decision, there is apparently no such
determination or even allegation that would assist this Court in rul-
ing on these two major factual matters.
b. With the foregoing, the validity of the transfer cannot yet be tested
using that provision. These are the factual matters that the parties
must first thresh out before the RTC.

12. After finding that petitioner has legal standing to initiate an action for man-
damus, the Court now reinstates the action he filed and remands the case to
the RTC to resolve the propriety of issuing a writ of mandamus. The resolu-
tion of the case must include the determination of all relevant factual matters
in connection with the issues at bar.
 005 ONG YONG v. TIU (Santos – summary box; Sarmiento Digest)
08 April 2003 | Corona, J. | Deadlocks; Missed Opportunity; S104-105, Corp Code
Petitioner: Ong Yong, Juanita Tan Ong, Wilson Ong, Anna Ong, William Ong, Willie Ong,
And Julie Ong Alonzo
Respondents: David Tiu, Cely Tiu, Moly Yu Gaw, Belen See Yu, Terence Tiu, John Yu,
Lourdes Tiu, Intraland Resources Dev’t Corp., Masagana Telamart, Inc., Pasay Register of
Deeds, SEC
Petitioners: David Tiu, Cely Tiu, Moly Yu Gaw, Belen See Yu, Terence Tiu, John Yu,
Lourdes Tiu, and Intraland Resources Dev’t Corp.
Respondents: Ong Yong, Juanita Tan Ong, Wilson Ong, Anna Ong, William Ong, Willie
Ong, and Julia Ong Alonzo
SUMMARY: Tius owned the entire equity in First Land-link Asia Development
Corporation (FLADC), which experienced financial difficulties, preventing it from
completing the construction of Masagana Citimall. Under a “Pre-subscription agreement”,
Ongs agreed to contribute fresh capital into FLADC under the terms that (1) Ongs and Tius
are to maintain equal shareholdings in FLADC: Ongs are to subscribe to 1m shares; Tius
are to subscribe to an additional 550k shares (2) Tius were entitled to nominate the VP,
treasurer and 5 directors while Ongs can nominate the pres, sec and 6 directors (including
chairman) (3) Ongs have the right to manage and operate the mall. Ong paid P100m and
Tius committed to contribute to FLADC a 4-storey building and 2 parcels of land to cover
their additional stock subscription. Ongs paid another P90m. The total of P190m paid by
the Tius were used to settle the P190m mortgage indebtedness of FLADC to PNB. The
Ongs-Tius relationship soured and Tius decided to rescind the Pre-Subscription agreement,
accusing Ong of (1) refusal to credit to them the FLADC shares covering the real property
contributions; (2) Preventing David and Cely Tiu from assuming positions and performing
their duties as VP and treasurer; and (3) refusing to give them office spaces as agreed. Upon
filing with the SEC, it decided to rescind the Pre-Subscription Agreement and to cancel
Ongs’ subscription to FLADC, providing for (1) return of cash payments made, (2)
submission to SEC of the amended AoI to conform with the decision and (3) return of
properties contributed. CA affirmed but ordered (1) liquidation of FLADC and (2) return
of: (a) capital contribution of the 2 families; (b) advances of Ongs, (3) transfer to the Tius
of whatever remains of the assets of FLADC and its management. SC affirmed but reversed
eventually on the grounds that: (1) Pre-subscription agreement constituted a subscription
agreement under Sec 60, Corp Code; and is in violation of the trust fund doctrine and (2)
Directing the amendment of AoI would be contrary to the business judgment rule by
preempting the exercise of proper judgment of the BoD of FLADC.
DOCTRINE: Sec. 104. Deadlocks. - Notwithstanding any contrary provision in the AoI or
by-laws or agreement of stockholders of a close corporation, if the directors or stockholders
are so divided respecting the management of the corporation's business and affairs that the
votes required for any corporate action cannot be obtained, with the consequence that the
business and affairs of the corporation can no longer be conducted to the advantage of the
stockholders generally, the SEC, upon written petition by any stockholder, shall have the
power to arbitrate the dispute.
Book: SEC decision reached the SC not having laid down the critical premise that its
decisions and the reliefs given therein were under “close corporation setting” which
prevented the SCfrom evaluating the proper application of the deadlock provisions under
Sec. 104, Corp. Code, and instead apply the general principles of trust fund doctrine and the
business judgment rule applicable to publicly-held corporations.
FACTS:
1. Masagana Citimall’s construction was threatened with stoppage and incompletion
when its owner, FLADC, owned by Tius, encountered financial difficulties.
a. It was indebted to PNB for P190m.
b. To stave off foreclosure of the mortgage on the 2 lots where the mall was
being built, Tius invited the Ongs, to invest in FLADC.
2. Pre-Subscription Agreement: Ongs and the Tius agreed to maintain equal
shareholdings in FLADC: the Ongs were to subscribe to 1m shares while the
Tius were to subscribe to an additional 549,800 shares in addition to their already
existing subscription of 450,200 shares. They also agreed that Tius were entitled
to nominate the VP and Treasurer + 5 directors; Ongs were entitled to nominate
the Pres, the Sec and 6 directors (including the chairman) to the BoD of FLADC.
Ongs were also given the right to manage and operate the mall.
3. Ongs paid P100m in cash for their subscription while the Tius committed to
contribute to FLADC a 4-storey building and two parcels of land respectively to
cover their additional 549,800 stock subscription therein. Ongs paid in another
P70m to FLADC and P20m to Tius over their P100m investment (total of P190m)
which was used to settle the P190m mortgage indebtedness of FLADC to PNB.
4. Tius rescinded the Pre-Subscription Agreement, accusing Ongs of (1) refusing to
credit to them the shares covering their real property contributions; (2) preventing
David and Cely Y. Tiu from assuming the positions of and performing their duties
as VP and Treasurer, respectively, and (3) refusing to give them the office spaces
agreed upon.
5. Tius: agreement was Tius are to assume the positions and perform the duties of
VP and Treasurer, but Ongs prevented them from doing so by:
a. Refusing to provide them the space for their executive
b. Refusing to give them the shares corresponding to their property
contributions of a 4-story building,
6. Ongs: David and Cely Tiu assumed the positions of VP and Treasurer of FLADC
but refused to comply with the corporate duties assigned to them. Tius did in fact
already have existing executive offices in the mall since they owned it 100%
before the Ongs came in. Tius wanted new offices which were anyway
subsequently provided to them.
7. On the issue of Ongs’ alleged failure to credit the Tius with the FLADC shares
commensurate to the Tius’ property contributions, Ongs asserted that, although
the Tius executed a deed of assignment for the 1,902.30 sqm lot in favor of
FLADC, Tius refused to pay P 570,690 for capital gains tax and documentary
stamp tax. Without such, SEC would not approve the valuation of the Tius’
 property contribution (as opposed to cash contribution). This, in turn, would make
it impossible to secure a new TCT over the property in FLADC’s name.
8. Tius initially claimed that they could not as yet surrender the TCT because it was
“still being reconstituted” by the Lichaucos from whom the Tius bought it; but
Ongs later on discovered that FLADC had in reality owned the property all
along, even before their Pre-Subscription Agreement was executed in 1994.
The 151 sqm property was at that time already the corporate property of FLADC
for which the Tius were not entitled to the issuance of new shares of stock.
9. This case was commenced by the Tius at the SEC, seeking confirmation of their
rescission of the Pre-Subscription Agreement.
ISSUE: WoN the Tius can rescind the Pre-subscription agreement—NO, because
Ongs’ shortcomings were far from serious and certainly less than substantial; but are,
in fact, remediable and correctable under the law. It would be totally against all rules
of justice, fairness and equity to deprive the Ongs of their interests on petty and
tenuous grounds.
RULING: MR of Ong Yong, Juanita Tan Ong, Wilson Ong, Anna Ong, William Ong,
Willie Ong and Julie Ong Alonzo and the motion for partial reconsideration, dated
March 15, 2002, of petitioner Willie Ong are hereby GRANTED. Petition for
Confirmation of the Rescission of the Pre-Subscription Agreement is
hereby DISMISSED for lack of merit. Unilateral rescission by the Tius of the subject
Pre-Subscription Agreement is declared as null and void.
RATIO:
1. Their MR having been denied, both parties filed separate petitions for review
before the SC.
2. Ong et al. vs. Tiu et al. Ongs argued:
a. Tius may not properly avail of rescission under Art. 1191, CC considering
that the Pre-Subscription Agreement did not provide for reciprocity of
obligations;
b. Ong did not commit a substantial and fundamental breach of their
agreement since they did not prevent the Tius from assuming the positions
of Vice-President and Treasurer of FLADC,
c. They also argued that the liquidation of FLADC may not legally be ordered
by the appellate court even for so called “practical considerations” or even
to prevent “further squabbles and numerous litigations,” since the same are
not valid grounds under the Corp. Code.
3. Tiu et al. vs. Ong et al., Tius contend that the rescission should have been limited
to the restitution of the parties’ respective investments and not the liquidation of
FLADC based on the erroneous perception by the court that:
i. the Masagana Citimall was threatened with incompletion since FLADC
was in financial distress;
ii. that, by rescinding the Pre-Subscription Agreement, they wanted to
wrestle away the management of the mall and prevent the Ongs from
enjoying the profits of their P190 million investment in FLADC.
4. Both the Ongs and the Tius violated their respective obligations under the Pre-
Subscription Agreement. The Ongs prevented the Tius from assuming the
positions of VP and Treasurer; and the Tius failed to turn over FLADC funds
to the Ongs and that the Tius diverted rentals due to FLADC to their MATTERCO
account. Hence, rescission was NOT possible since both parties were in pari
delicto. Remedy of specific performance, as espoused by the Ongs, was NOT
practical and sound either and would only lead to further “squabbles and
numerous litigations” between the parties.
5. Aside from their opposition to the Tius’ Motion for Issuance of Writ of Execution,
the Ongs filed their own “MR; Alternatively, Motion for Modification, raising 2
main points:
a. that specific performance and not rescission was the proper remedy under
the premises; and
b. that, assuming rescission to be proper, the subject decision of this Court
should be modified to entitle movants to their proportionate share in the mall.
6. On their first point (specific performance and not rescission was the proper
remedy), movants Ong argue that their alleged breach of the Pre-Subscription
Agreement was, at most, casual which did not justify the rescission of the contract.
a. They stress that providing appropriate offices for David S. Tiu and Cely Y.
Tiu as Vice-President and Treasurer, respectively, had no bearing on their
obligations under the Pre-Subscription Agreement since the said obligation
(to provide executive offices) pertained to FLADC itself.
b. Such obligation arose from the relations between the officers and the
corporation and not any of the individual parties such as the Ongs. The
alleged failure of Ongs to credit shares of stock in favor of Tius for their
property contributions also pertained to the corporation and not to the Ongs.
c. Just the same, it could not be done in view of the Tius’ refusal to pay the
necessary transfer taxes which in turn resulted in the inability to secure SEC
approval for the property contributions and the issuance of a new TCT in the
name of FLADC.
7. Besides, according to the Ongs, the principal objective of both parties in entering
into the Pre-Subscription Agreement in 1994 was to raise the P190mi desperately
needed for the payment of FLADC’s loan to PNB.
a. The alleged failure to provide office space for the 2 corporate officers was
no more than an inconsequential infringement.
b. For rescission to be justified, the law requires that the breach of contract
should be so “substantial or fundamental” as to defeat the primary objective
of the parties in making the agreement.
c. Ongs claim that it was the Tius who were guilty of fundamental violations
in failing to remit funds due to FLADC and diverting the same to their
MATTERCO account.
8. Ongs also allege that, in view of the findings of the Court that both parties were
 guilty of violating the Pre-Subscription Agreement, neither of them could resort
to rescission under the principle of pari delicto; and since the cash and other
contributions now sought to be returned already belong to FLADC, an innocent
third party, said remedy may no longer be availed of under the law.
9. On their second point (assuming rescission to be proper, the Ongs should be
given their proportionate share of the mall), movants Ong vehemently take
exception to the second item in the dispositive portion of the questioned Decision
insofar as it decreed that whatever remains of the assets of FLADC and the
management thereof (after liquidation) shall be transferred to the Tius.
a. They point out that the mall itself, which would have been foreclosed by
PNB if not for their timely investment of P190 million in 1994 and which is
now worth about P1 billion mainly because of their efforts, should be
included in any partition and distribution.
b. They (the Ongs) should not merely be given interest on their capital
investments. The said portion of our Decision, according to them, amounted
to the unjust enrichment of the Tius and ran contrary to our own
pronouncement that the act of the Tius in unilaterally rescinding the
agreement was “the height of ingratitude” and an attempt “to pull a fast one”
as it would prevent the Ongs from enjoying the fruits of their P190 million
investment in FLADC.
c. It also contravenes this Court’s assurance in the questioned Decision that the
Ongs and Tius “will have a bountiful return of their respective investments
derived from the profits of the corporation.”
10. Willie Ong filed a separate “Motion for Partial Reconsideration” dated March 8,
2002, pointing out that there was no violation of the Pre-Subscription Agreement
on the part of the Ongs; that, after more than seven years since the mall began its
operations, rescission had become not only impractical but would also adversely
affect the rights of innocent parties; and that it would be highly inequitable and
unfair to simply return the P100 million investment of the Ongs and give the
remaining assets now amounting to about P1 billion to the Tius.
11. We grant the Ongs’ MR. SC ruled that Tius could NOT legally rescind the Pre-
Subscription Agreement.
12. FLADC was originally incorporated with an authorized capital stock of 500k
shares with the Tius owning 450,200 shares representing the paid-up capital.
a. When Tius invited the Ongs to invest in FLADC as stockholders, an increase
of the authorized capital stock became necessary to give each group equal
(50-50) shareholdings as agreed upon in the Pre-Subscription Agreement.
b. The subject matter of the contract was the 1m unissued shares of FLADC
stock allocated to the Ongs.
13. Since these were unissued shares, the parties’ Pre-Subscription Agreement
was in fact a subscription contract as defined under Section 60, Title VII of
the Corp. Code:
a. Any contract for the acquisition of unissued stock in an existing
corporation or a corporation still to be formed shall be deemed a
subscription within the meaning of this Title, notwithstanding the fact that
the parties refer to it as a purchase or some other contract (Italics supplied).
b. A subscription contract necessarily involves the corporation as one of the
contracting parties since the subject matter of the transaction is property
owned by the corporation – its shares of stock.
14. Thus, the subscription contract (denominated by the parties as a Pre-Subscription
Agreement) whereby the Ongs invested P100 million for 1,000,000 shares of
stock was, from the viewpoint of the law, one between the Ongs and FLADC, not
between the Ongs and the Tius.
a. Otherwise stated, the Tius did not contract in their personal capacities with
the Ongs since they were not selling any of their own shares to them. It was
FLADC that did.
15. Considering therefore that the real contracting parties to the subscription
agreement were FLADC and the Ongs alone, a civil case for rescission on the
ground of breach of contract filed by the Tius in their personal capacities will
not prosper.
a. Assuming it had valid reasons to do so, only FLADC (and certainly not the
Tius) had the legal personality to file suit rescinding the subscription
agreement with the Ongs inasmuch as it was the real party in interest therein.
16. Tius claim that there are 2 contracts embodied in the Pre-Subscription Agreement:
a shareholder’s agreement between the Tius and the Ongs defining and governing
their relationship and a subscription contract between the Tius, the Ongs and
FLADC regarding the subscription of the parties to the corporation.
a. These 2 component parts form one whole agreement and that their terms and
conditions are intrinsically related and dependent on each other.
b. Thus, breach of the shareholders’ agreement, which was allegedly the
consideration for the subscription contract, was also a breach of the latter.
17. Though FLADC was represented by Tius in the subscription contract, FLADC
had a separate juridical personality from the Tius. The case does not warrant
piercing the veil of corporate fiction since there is no proof that the corporation
is being used “as a cloak or cover for fraud or illegality, or to work injustice.”
18. Tius also argue that, since Ongs represent FLADC as its management, breach by
the Ongs is breach by FLADC. This must also fail because such an argument
disregards the separate juridical personality of FLADC.
a. The Tius allege that they were prevented from participating in the
management of the corporation.
b. There is evidence that the Ongs did prevent the rightfully elected Treasurer,
Cely Tiu, from exercising her function as such. The records show that the
President, Wilson Ong, supervised the collection and receipt of rentals in the
Masagana Citimall;[19] that he ordered the same to be deposited in the
bank;[20] and that he held on to the cash and properties of the corporation.[21]
c. Sec.25, Corp. Code prohibits the Pres from acting concurrently as Treasurer
of the corporation. The rationale behind the provision is to ensure the
effective monitoring of each officer’s separate functions.
19. Although the Tius were adversely affected by the Ongs’ unwillingness to let them capital stock because such action never complied with the formal requirements
assume their positions, rescission due to breach of contract is definitely the wrong for decrease of capital stock under Section 33 of the Corp. Code.
remedy for their personal grievances. The Corp. Code, SEC rules and even the 24. It is an improper judicial intrusion into the internal affairs of the corporation to
Rules of Court provide for appropriate and adequate intra-corporate compel FLADC to file at the SEC a petition for the issuance of a certificate of
remedies, other than rescission, in situations like this. decrease of stock. Decreasing a corporation’s authorized capital stock is an
a. Rescission is certainly not one of them, specially if the party asking for it amendment of the Articles of Incorporation.
has no legal personality to do so and the requirements of the law therefor a. It is a decision that only the stockholders and the directors can make,
have not been met. considering that they are the contracting parties thereto.
b. Hence, the Tius, in their personal capacities, cannot seek the ultimate b. In this case, the Tius are actually not just asking for a review of the legality
and extraordinary remedy of rescission of the subject agreement based and fairness of a corporate decision. They want this Court to make a
on a less than substantial breach of subscription contract. Not only are corporate decision for FLADC.
they not parties to the subscription contract between the Ongs and c. We decline to intervene and order corporate structural changes not
FLADC; they also have other available and effective remedies under the voluntarily agreed upon by its stockholders and directors.
law. 25. A judicial order to decrease capital stock without the assent of FLADC’s directors
20. All this notwithstanding, that the Tius possess the legal standing to sue for and stockholders is a violation of the “business judgment rule”. Apparently, the
rescission based on breach of contract, said action will nevertheless still not Tius do not realize the illegal consequences of seeking rescission and control of
prosper since rescission will violate the Trust Fund Doctrine and the procedures the corporation to the exclusion of the Ongs. Such an act infringes on the law on
for the valid distribution of assets and property under the Corp. Code. reduction of capital stock.
a. The Trust Fund Doctrine: subscriptions to the capital stock of a corporation constitute a
fund to which the creditors have a right to look for the satisfaction of their claims.
(Philippine Trust Co. vs. Rivera)
b. This doctrine is the underlying principle in the procedure for the distribution of capital
assets, embodied in the Corp. Code, which allows the distribution of corporate capital only
in three instances: (1) amendment of the Articles of Incorporation to reduce the
authorized capital stock, (2) purchase of redeemable shares by the corporation, regardless
of the existence of unrestricted retained earnings, and (3) dissolution and eventual
liquidation of the corporation. Furthermore, the doctrine is articulated in Section 41 on
the power of a corporation to acquire its own shares and in Section 122 on the prohibition
against the distribution of corporate assets and property unless the stringent requirements
therefor are complied with.
21. The distribution of corporate assets and property cannot be made to depend on the
whims of the stockholders, officers or directors unless the indispensable
conditions and procedures for the protection of corporate creditors are followed.
a. In the instant case, the rescission of the Pre-Subscription Agreement will
effectively result in the unauthorized distribution of the capital assets and
property of the corporation, thereby violating the Trust Fund Doctrine and
the Corp. Code, since rescission of a subscription agreement is not one of
the instances when distribution of capital assets and property of the
corporation is allowed.
22. Contrary to the Tius’ allegation, rescission will, result in the premature liquidation
of the corporation without the benefit of prior dissolution in accordance with
Sections 117, 118, 119 and 120 of the Corp. Code.[28]
a. Section 122 of the law provides that “(e)xcept by decrease of capital stock…,
no corporation shall distribute any of its assets or property except upon
lawful dissolution and after payment of all its debts and liabilities.”
23. The Tius’ case for rescission cannot validly be deemed a petition to decrease
 SECTION 16
001 MARSHALL-WELLS v. ELSER (Sabaupan)
September 1, 1924 | Malcolm, J. | Rationale for requiring license
PETITIONER: Marshell-Wells Company
RESPONDENTS: Henry W. Elser & Co., Inc.
SUMMARY: Marshall-Wells, an Oregon corporation sold to Henry W. Elser &
Co., Inc., (Elser), a domestic corporation, goods and for which, Elser holds
accepted drafts. Elser defaulted. Marshall-Wells sued Elser for the unpaid balance.
Elser claims that as a foreign corporation, Marshall-Wells had no legal capacity
to sue. The Court of First Instance ruled in favor of the Elser. Hence, Marshall-
Wells appealed. Section 68 of the Corporation Law provides that no foreign
corporation shall be permitted to transact business n the Philippines until after it
shall have obtained a license for that purpose x x x. Section 69 of the same law
provides that “no foreign corporation or corporation formed, organized, or
existing under any laws other than those of the Philippine Islands shall be
permitted to transact business in the Philippine Islands or maintain by itself or
assignee any suit for the recovery of any debt, claim, or demand whatever, unless
it shall have the license prescribed in the section immediately preceding x x x. The
issue is whether the obtaining of the license provided in Section 68, as amended,
of the Corporation Law a condition precedent before a foreign corporation can
maintain any kind of action in the Philippines. The Court ruled in the negative.
Corporations have no legal status beyond the bounds of the sovereignty by which
they are created. As the state may restrict the right of a foreign corporation to
engage in business within its limits, and to sue in its courts. But by virtue of state
comity, a corporation created by the laws of one state is usually allowed to transact
business in other states and to sue in the courts of the forum. The object of the
Corporation Law was to subject the foreign corporation doing business in the
Philippines to the jurisdiction of its courts. The object of the statute was not to
prevent the foreign corporation from performing single acts, but to prevent it from
acquiring a domicile for the purpose of business without taking the steps necessary
to render it amenable to suit in the local courts. The implication of the law is that
it was never the purpose of the Legislature to exclude a foreign corporation which
happens to obtain an isolated order for business from the Philippines from securing
redress in the Philippine courts, and thus, in effect permit persons to avoid their
contracts made with such foreign corporations.
DOCTRINE: Section 69 of old Corporation Law was intended to subject the
foreign corporation doing business in the Philippines to the jurisdiction of our
courts, not to prevent the foreign corporation from performing single acts, but to
prevent it from acquiring domicile for the purpose of business without taking the
necessary steps to render it amenable to suit in the local courts.
FACTS:
86. Marshall-Wells, an Oregon corporation sold to Henry W. Elser & Co., Inc.,
(Elser), a domestic corporation, goods and for which, Elser holds accepted
drafts. Elser defaulted.
87. Marshall-Wells sued Elser for the unpaid balance.
88. Elser claims that as a foreign corporation, Marshall-Wells had no legal
capacity to sue. Elser stated that the complaint does not show that Marshall-
Wells has complied with the laws of the Philippines in that which is required
of foreign corporations desiring to do business in the Philippines, neither does
it show that it was authorized to do business in the Philippines.
89. The Court of First Instance ruled in favor of the Elser. Hence, Marshall-Wells
appealed.
90. Section 68 of the Corporation Law provides that:
No foreign corporation "shall be permitted to transact business in the
Philippine Islands until after it shall have obtained a license for that purpose
from the Chief of the Mercantile Register of the Bureau of Commerce and
Industry," upon order either of the Secretary of Finance or the Secretary of
Commerce and Communications. No order for a license shall be issued
except upon a statement under oath of the managing agent of the corporation,
showing to the satisfaction of the proper Secretary that the corporation is
solvent and in sound financial condition, and setting forth the resources and
liabilities of the corporation. Said statement shall contain the following: (1)
The name of the corporation; (2) the purpose for which it was organized; (3)
the location of its principal or home office; (4) the capital stock of the
corporation and the amount thereof actually subscribed and paid into the
treasury; (5) the net assets of the corporation over and above all debts,
liabilities, obligations, and claims outstanding against it; and (6) the name of
 an agent residing in the Philippine Islands authorized by the corporation to
accept service of summons and process in all legal proceedings against the
corporation and of all notices affecting the corporation. Further evidence of
the solvency and fair dealing of the corporation may be required.
91. Moreover, Section 69 of the Corporation Law provides that:
No foreign corporation or corporation formed, organized, or existing under
any laws other than those of the Philippine Islands shall be permitted to
transact business in the Philippine Islands or maintain by itself or assignee
any suit for the recovery of any debt, claim, or demand whatever, unless it
shall have the license prescribed in the section immediately preceding. Any
officer, director, or agent of the corporation or any person transacting
business for any foreign corporation not having the license prescribed shall
be punished by imprisonment for not less than six months nor more than two
years or by a fine of not less than two hundred pesos nor more than one
thousand pesos, or by both such imprisonment and fine, in the discretion of
the court."
92. Elser isolates a portion of one sentence of Section 69 of the Corporation Law
and asks the court to give it a literal meaning. It would have the law read thus:
“no foreign corporation shall be permitted to maintain by itself or assignee
any suit for recovery of any debt, claim, or demand whatever, unless it shall
have the license prescribed in Section 68 of the law.
93. Marshall-Wells, on the other hand, argues that the court should consider the
particular point under discussion with reference to all the law, and thereafter
to give the law a common sense interpretation.
ISSUE/s:
17. Whether the obtaining of the license provided in Section 68, as amended, of
the Corporation Law a condition precedent before a foreign corporation can
maintain any kind of action in the Philippines. NO. What the law requires is
for a foreign corporation to obtain a license if said corporation will transact
business in the Philippines and only when such license is obtained can a
foreign corporation transacting business in the Philippines maintain a suit in
Philippine courts. However, when the suit is based on an isolated transaction,
the license need not be obtained before the foreign corporation can maintain
a suit in Philippine courts.
RULING: The order appealed from shall be set aside and the record shall be returned
to the court of origin for further proceedings.
RATIO:
121. The case presents a question of first impression. Previous rulings have not
addressed the said issue squarely.
a. Dampfschieffs Rhederei Union v. Compania Trasatlantica: Relating
to the Code of Commerce held that a foreign corporation which has
not established itself in the Philippines, nor engaged in business in
the Philippines, could, without filing its articles of incorporation in
the mercantile registry, maintain an action against another for
damages.
b. Spreckels v. Ward: The provisions of Section 69 of the Corporation
Law denying to unregistered foreign corporations the right to
maintain suits for the recovery of any debt, claim, or demand, do not
impose on all plaintiff-litigants the burden of establishing
affirmative proof that they are not unregistered foreign corporation;
that fact will not be presumed without some evidence tending to
establish its existence.
122. Corporations have no legal status beyond the bounds of the sovereignty by
which they are created. As the state may restrict the right of a foreign
corporation to engage in business within its limits, and to sue in its courts.
But by virtue of state comity, a corporation created by the laws of one
state is usually allowed to transact business in other states and to sue in
the courts of the forum.
123. The object of the Corporation Law was to subject the foreign corporation
doing business in the Philippines to the jurisdiction of its courts. The object
of the statute was not to prevent the foreign corporation from
performing single acts, but to prevent it from acquiring a domicile for
the purpose of business without taking the steps necessary to render it
amenable to suit in the local courts.
124. The implication of the law is that it was never the purpose of the
Legislature to exclude a foreign corporation which happens to obtain an
isolated order for business from the Philippines from securing redress in
the Philippine courts, and thus, in effect permit persons to avoid their
contracts made with such foreign corporations.
125. The effect of the statue preventing foreign corporation from doing business
and from brining actions in the local courts, except on compliance with
elaborate requirements, must not be unduly extended or improperly applied.
It should not be construed to extend beyond the plain meaning of its terms,
considered in connection with its object, and in connection with the spirit of
the entire law.
126. The law simply means that no foreign corporation shall be permitted "to
transact business in the Philippine Islands," as this phrase is known in
corporation law, unless it shall have the license required by law, and, until it
complies with the law, shall not be permitted to maintain any suit in the local
courts. A contrary holding would bring the law to the verge of
unconstitutionality a result which should be and can be easily avoided.
127. The noncompliance of a foreign corporation with the statute may be pleaded
as an affirmative defense. Thereafter, it must appear from the evidence, first,
that the plaintiff is a foreign corporation, second, that it is doing business in
the Philippines, and third, that it has not obtained the proper license as
provided by the statute.
 002 Home Insurance Inc v. Eastern Shipping Lines (Rosales)
July 20, 1983 | Gutierrez, Jr. J. | Foreign Corporations
PETITIONER: Home Insurance Company
RESPONDENTS: Eastern Shipping Lines and/or Angel Jose Transportation Inc,
N.V. Nedlloyd Lijnen, Columbian Philippines Inc, and/or Guacods, Inc.
SUMMARY: These are consolidated petitions questionining the capacity to sue
of Home Insurance, a foreign corporation doing business in the Philippines. S.
Kajita & Co., on behalf of Atlas Consolidated Mining & Development Corpora-
tion, shipped on board the SS “Eastern Jupiter” from Osaka, Japan, 2,361 coils
of Black Hot Rolled Copper Wire Rods. The vessel is owned and operated by
Eastern Shipping Lines. The shipment was covered by a bill of lading with arri-
val notice to Phelps Dodge Copper Products Corporation of the Philippines
(Consignee) at Manila. The shipment was insured with Home Insurance Com-
pany against all risks in the amount of P1,580,105.06 under its Insurance Policy.
For the loss/damage suffered by the cargo, Home Insurance paid the consignee
under its insurance policy by virtue of which Home Insurance became subro-
gated to the rights and actions of Phelps Dodge. Home Insurance made demands
for payment against Eastern Shipping Lines and the transportation company for
reimbursement of the aforesaid amount but each refused to pay the same. Hansa
Transport Kontor shipped from Bremen, Germany, 30 packages of Service Parts
of Farm Equipment and Implements on board SS "Neder Rijn" owned by N. V.
Nedlloyd Lijnen, and represented in the Philippines by its local agent, Colum-
bian Philippines, Inc. Out of these 9 packages, 1 package was accepted by the In-
ternational Harvester in good order due to the negligible damages sustained. De-
mands were made on Columbian Philippines and International Harvester for re-
imbursement but they failed and refused to pay the same. The lower court dis-
missed the complaints on both cases on the same ground that Home Insurance
failed to prove its capacity to sue: it has to be held that Home Insurance is do-
ing business in the Philippines. Consequently, it must have a license under
Section 68 of the Corporation Law before it can be allowed to sue. Issue is
WoN Home Insurance has the legal capacity to sue? The SC held that it did.
Home Insurance was telling the truth when it averred in its complaints that it was
a foreign insurance company duly authorized to do business in the Philippines
through its agent Mr. Victor H. Bello. However, when the insurance contracts
which formed the basis of these cases were executed, Home Insurance had
not yet secured the necessary licenses and authority. The lower court declared
that pursuant to the basic public policy reflected in the Corporation Law, the in-
surance contracts executed before a license was secured must be held null and
void. The court ruled that the contracts could not be validated by the subsequent
procurement of the license. Therefore, it is not necessary to declare the contract
null and void even as against the erring foreign corporation. The penal
sanction for the violation and the denial of access to our courts and
administrative bodies are sufficient from the viewpoint of legislative policy.
DOCTRINE: The contract itself is valid, but it is the standing to sue of the for-
eign corporation that is missing, which can be remedied with the subsequent ob-
taining of license to do business. (syllabus)
FACTS:
1. These are consolidated cases of two petitions.
2. Case L-34382: On or about January 13, 1967, S. Kajita & Co., on behalf of
Atlas Consolidated Mining & Development Corporation, shipped on board
the SS “Eastern Jupiter” from Osaka, Japan, 2,361 coils of Black Hot Rolled
Copper Wire Rods. The vessel is owned and operated by Eastern Shipping
Lines. The shipment was covered by a bill of lading with arrival notice to
Phelps Dodge Copper Products Corporation of the Philippines (Consignee)
at Manila. The shipment was insured with Home Insurance Company against
all risks in the amount of P1,580,105.06 under its Insurance Policy.
3. The coils discharged from SS Eastern Jupiter numbered 2,361 of which 53
were in bad order. What Phelps Dodge ultimately received at its warehouse
was the same number of 2,361 coils with 73 coils loose and partly cut, and
28 coils entangled, partly cut, and which had to be considered scrap. Upon
weigihn at Phelps Dodge’s warehouse, the 2,361 coils were found to weight
263,940.85 kilos as against its invoiced weight of 264,530 kilos or a net
loss/shortage of 593.15 kilos or 1,209.56 lbs according to the claims
presented by the consignee against Home Insurance, Eastern Shipping and
the transportation company.
4. For the loss/damage suffered by the cargo, Home Insurance paid the
consignee under its insurance policy the amount of P3,260.44, by virtue of
which Home Insurance became subrogated to the rights and actions of Phelps
Dodge. Home Insurance made demands for payment against Eastern
Shipping Lines and the transportation company for reimbursement of the
aforesaid amount but each refused to pay the same.
5. Case L-34383: On or about December 22, 1966, the Hansa Transport Kontor
shipped from Bremen, Germany, 30 packages of Service Parts of Farm
Equipment and Implements on board SS "Neder Rijn" owned by N. V.
Nedlloyd Lijnen, and represented in the Philippines by its local agent,
Columbian Philippines, Inc. The shipment was covered by Bill of Lading No.
22 for transportation to, and delivery at, Manila, in favor of the consignee,
International Harvester Macleod, Inc. The shipment was insured with Home
Insurance under its Cargo Policy No. AS-73735 "with average terms" for
P98,567.79.
6. The packages discharged from the SS Neder Rijn numbered 29, of which
seven packages were found to be in bad order. What International Harvester
 Macleod ultimately received at its warehouse was the same number of 29
packages with 9 packages in bad order. Out of these 9 packages, 1 package
was accepted by the International Harvester in good order due to the
negligible damages sustained. Upon inspection at the International
Harvester’s warehouse, the contents of 3 out of the 8 cases were also found
to be complete and intact, leaving 5 cases in bad order. The contents of these
5 packages showed several items missing in the total amount of $131.14;
while the contents of the undelivered 1 package were valued at $394.66, or a
total of $525.80 or P2,426.98.
7. For the short-delivery of 1 package and the missing items in 5 other packages,
Home Insurance paid International Harvester under its Insurance Cargo
Policy the amount of P2,426.98, by virtue of which Home Insurance became
subrogated to the rights and actions of the International Harvester. Demands
were made on Columbian Philippines and International Harvester for
reimbursement but they failed and refused to pay the same.
8. Home Insurance is a foreign insurance company duly authorized to do
business in the Philippines through its agent, Mr. Victor H. Bello of legal age
and with office address at Oledan Building, Ayala Avenue, Makati, Rizal.
9. Case L-34382: Eastern Shipping Lines, Inc., filed its answer and alleged that
it: Denies the allegations of Paragraph I which refer to Home Insurance’s
capacity to sue for lack of knowledge or information sufficient to form a
belief as to the truth thereof.
10. Angel Jose Transportation, Inc., in turn filed its answer admitting the
allegations of the complaint, regarding the capacity of Home Insurance.
11. Case L-34383: N. V. Nedlloyd Lijhen, Columbian Philippines, Inc. and
Guacods, Inc., filed their answers. They denied Home Insurance’s capacity
to sue for lack of knowledge or information sufficient to form a belief as to
the truth thereof.
12. The lower court dismissed the complaints on both cases on the same ground
that Home Insurance failed to prove its capacity to sue:
a. The Court is of the opinion that Section 68 of the Corporation Law
reflects a policy designed to protect the public interest. Hence,
although defendants have not raised the question of Home
Insurance’s compliance with that provision of law, the Court has
resolved to take the matter into account.
b. A suing foreign corporation, like Home Insurance, has to plead
affirmatively and prove either that the transaction upon which it
bases its complaint is an isolated one, or that it is licensed to transact
business in this country, failing which, it will be deemed that it has
no valid cause of action.
c. In view of the number of cases filed by Home Insurance before this
Court, of which judicial cognizance can be taken, and under the
ruling in Far East International Import and Export Corporation vs.
Hankai Koayo Co., 6 SCRA 725, it has to be held that Home
Insurance is doing business in the Philippines. Consequently, it
must have a license under Section 68 of the Corporation Law
before it can be allowed to sue.
d. This Court views Section 68 of the Corporation Law as reflective of
a basic public policy. Hence, it is of the opinion that, in the eyes of
Philippine law, the insurance contract involved in this case must be
held void under the provisions of Article 1409 (1) of the Civil Code,
and could not be validated by subsequent procurement of the
license.
e. Although the usual construction is to the contrary, and to the effect
that only the remedy for enforcement is affected thereby, a statute
prohibiting a non-complying corporation from suing in the state
courts on any contract has been held by some courts to render the
contract void and unenforceable by the corporation, even after its
has complied with the statute.
ISSUE/s:
1. WoN Home Insurance has the legal capacity to sue – YES, because where
contract itself is valid, but it is the standing to sue of the foreign corporation
that is missing, it can be remedied with the subsequent obtaining of license
to do business.
RULING: WHEREFORE, the petitions are hereby granted. The decisions of the
respondent court are reversed and set aside.
In L-34382, respondent Eastern Shipping Lines is ordered to pay the petitioner the
sum of P1,630.22 with interest at the legal rate from January 5, 1968 until fully paid
and respondent Angel Jose Transportation Inc. is ordered to pay the petitioner the sum
of P1,630.22 also with interest at the legal rate from January 5, 1968 until fully paid.
Each respondent shall pay one-half of the costs. The counterclaim of Angel Jose
Transportation Inc. is dismissed.
In L-34383, respondent N. V. Nedlloyd Lijnen, or its agent Columbian Phil. Inc. is
ordered to pay the petitioner the sum of P2,426.98 with interest at the legal rate from
February 1, 1968 until fully paid, the sum of P500.00 attorney's fees, and costs, The
complaint against Guacods, Inc. is dismissed.
RATIO:
1. On the basis of factual and equitable considerations, there is no question that
the private respondents should pay the obligations found by the trial court as
owing to Home Insurace. Only the question of validity of the contracts in
relation to lack of capacity to sue stands in the way of Home Insurance being
given the affirmative relief it seeks.
2. Home Insurance was engaged in business without a license. The private
respondents' obligation to pay under the terms of the contracts has been
proved. When the complaints in these two cases were filed, Home
 Insurance had already secured the necessary license to conduct its insurance
business in the Philippines. It could already filed suits.
3. Home Insurance was telling the truth when it averred in its complaints that it
was a foreign insurance company duly authorized to do business in the
Philippines through its agent Mr. Victor H. Bello. However, when the
insurance contracts which formed the basis of these cases were executed,
Home Insurance had not yet secured the necessary licenses and
authority. The lower court declared that pursuant to the basic public policy
reflected in the Corporation Law, the insurance contracts executed before a
license was secured must be held null and void. The court ruled that the
contracts could not be validated by the subsequent procurement of the license.
4. The applicable provisions of the old Corporation Law, Act 1459, as
amended are Sections 68 and 69. As early as 1924, this Court ruled that
the object of Sections 68 and 69 of the Corporation Law was to subject
the foreign corporation doing business in the Philippines to the jurisdiction
of our courts.
5. The objective of the law was to subject the foreign corporation to the
jurisdiction of our courts. The Corporation Law must be given a reasonable,
not an unduly harsh, interpretation which does not hamper the development
of trade relations and which fosters friendly commercial intercourse among
countries. The objectives enunciated in the 1924 decision are even more
relevant today when we view commercial relations in terms of a world
economy, when the tendency is to re-examine the political boundaries
separating one nation from another insofar as they define business
requirements or restrict marketing conditions.
6. We distinguish between the denial of a right to take remedial action and
the penal sanction for non-registration.
7. Insofar as transacting business without a license is concerned, Section 69 of
the Corporation Law imposed a penal sanction-imprisonment for not less than
six months nor more than two years or payment of a fine not less than P200.00
nor more than P1,000.00 or both in the discretion of the court. There is a
penalty for transacting business without registration.
8. And insofar as litigation is concerned, the foreign corporation or its assignee
may not maintain any suit for the recovery of any debt, claim, or demand
whatever. The Corporation Law is silent on whether or not the contract
executed by a foreign corporation with no capacity to sue is null and void ab
initio.
9. In various US jurisprudence, we are not unaware of the conflicting schools
of thought both here and abroad which are divided on whether such contracts
are void or merely voidable:
a. Where a contract which is entered into by a foreign corporation
without complying with the local requirements of doing business is
rendered void either by the express terms of a statute or by statutory
construction, a subsequent compliance with the statute by the
corporation will not enable it to maintain an action on the contract.
b. But where the statute merely prohibits the maintenance of a suit on
such contract (without expressly declaring the contract "void"), it
was held that a failure to comply with the statute rendered the
contract voidable and not void, and compliance at any time before
suit was sufficient.
c. Notwithstanding the above decision, the Illinois statute provides
that “a foreign corporation that fails to comply with the conditions
of doing business in that state cannot maintain a suit or action.” The
court said: the contract upon which this suit was brought, having
been entered into in this state when appellant was not permitted to
transact business in this state, is in violation of the plain provisions
of the statute, and is therefore null and void, and no action can be
maintained thereon at any time, even if the corporation shall, at some
time after the making of the contract, qualify itself to transact
business in this state by a compliance with our laws in reference to
foreign corporations that desire to engage in business here.
d. On the other hand, A Michigan statute provides that “No foreign
corporation subject to the provisions of this Act, shall maintain any
action in this state upon any contract made by it in this state after the
taking effect of this Act, until it shall have fully complied with the
requirement of this Act, and procured a certificate to that effect from
the Secretary of State.” The above statute does not render contracts
of a foreign corporation that fails to comply with the statute void,
but they may be enforced only after compliance therewith. It has
also been held that where the law provided that a corporation which
has not complied with the statutory requirements “shall not maintain
an action until such compliance.”
e. The statute does not fix any time within which foreign corporations
shall comply with the Act. If such contracts were void, no suits could
be prosecuted on them in any court. The primary purpose of our
statute is to compel a foreign corporation desiring to do business
within the state to submit itself to the jurisdiction of the courts of
this state. The statute was not intended to exclude foreign
corporations from the state. It does not, in terms, render invalid
contracts made in this state by non-complying corporations.
10. Our jurisprudence leans towards the later view. There is no question that
the contracts are enforceable. The requirement of registration affects only the
remedy. Significantly, Batas Pambansa Blg. 68, the Corporation Code of the
Philippines has corrected the ambiguity caused by the wording of Section 69
of the old Corporation Law.
11. Section 133 of the present Corporation Code provides:
a. SEC. 133. Doing business without a license. No foreign corporation
transacting business in the Philippines without a license, or its
 successors or assigns, shall be permitted to maintain or intervene in
any action, suit or proceeding in any court or administrative agency
in the Philippines; but such corporation may be sued or proceeded
against before Philippine courts or administrative tribunals on any
valid cause of action recognized under Philippine laws.
12. The old Section 69 has been reworded in terms of non-access to courts and
administrative agencies in order to maintain or intervene in any action or
proceeding.
13. The prohibition against doing business without first securing a license is now
given penal sanction which is also applicable to other violations of the Cor-
poration Code under the general provisions of Section 144 of the Code.
14. Therefore, it is not necessary to declare the contract null and void even as
against the erring foreign corporation. The penal sanction for the violation
and the denial of access to our courts and administrative bodies are sufficient
from the viewpoint of legislative policy.
15. Our ruling that the lack of capacity at the time of the execution of the
contracts was cured by the subsequent registration is also strengthened
by the procedural aspects of these cases.
16. Home Insurance averred in its complaints that it is a foreign insurance
company, that it is authorized to do business in the Philippines, that its agent
is Mr. Victor H. Bello, and that its office address is the Oledan Building at
Ayala Avenue, Makati. These are all the averments required by Section 4,
Rule 8 of the Rules of Court. Home Insurance sufficiently alleged its capacity
to sue. The private respondents countered either with an admission of the
Home Insurance’s jurisdictional averments or with a general denial based on
lack of knowledge or information sufficient to form a belief as to the truth of
the averments.
17. We find the general denials inadequate to attack the foreign corporations lack
of capacity to sue in the light of its positive averment that it is authorized to
do so. Section 4, Rule 8 requires that "a party desiring to raise an issue as to
the legal existence of any party or the capacity of any party to sue or be sued
in a representative capacity shall do so by specific denial, which shag include
such supporting particulars as are particularly within the pleader's
knowledge.
18. At the very least, the private respondents should have stated particulars in
their answers upon which a specific denial of the petitioner's capacity to sue
could have been based or which could have supported its denial for lack of
knowledge. And yet, even if Home Insurance’s lack of capacity to sue was
not properly raised as an issue by the answers, the Home Insurance
introduced documentary evidence that it had the authority to engage in the
insurance business at the time it filed the complaints.
 003 Mentholatum v. Mangaliman (Cristelle)
June 27 1941| LAUREL, J.| Jurisprudential concepts of doing business
PETITIONER: THE MENTHOLATUM CO., INC., ET AL/ Ara-
neta, Zaragoza, Araneta & Bautista
RESPONDENTS: ANACLETO MANGALIMAN, ET AL/ Benito
Soliven
SUMMARY: The Mentholatum Co., Inc., a foreign corporation, and
the Philippine-American Drug Co., Inc., the former’s exclusive dis-
tributing agent of the product “Mentholatum” in the Philippine Is-
lands, instituted an action against Anacleto Mangaliman, Florencio
Mangaliman and the Director of the Bureau of Commerce for in-
fringement of trade mark and unfair competition, praying for the is-
suance of an order restraining Anacleto and Florencio Mangaliman
from selling their product “Mentholiman,” and directing them to ren-
der an accounting of their sales and profits and to pay damages.
Mentholatum, not licensed to do business in the Philippines, claims
that they have not sold personally any of their products in the Philip-
pines and that products were imported from them by local entities in-
cluding Philippine-American Drug under their own account. (1)
Whether or not Mentholatum Co. Inc. “doing business” in the
Philippines? YES. The test is whether the foreign corporation is
continuing the body or substance of the business or enterprise for
which it was organized or whether it has substantially retired from it
and turned it over to another. The term implies a continuity of com-
mercial dealings and arrangements, and contemplates, to that extent,
the performance of acts or works or the exercise of some of the func-
tions normally incident to, and in progressive prosecution of, the
purpose and object of its organization. The Philippine-American
Drug Co., Inc., is the exclusive distributing agent in the Philippine
Islands of the Mentholatum Co., Inc., in the sale and distribution of
its product known as the Mentholatum. It follows that whatever
transactions the Philippine-American Drug Co., Inc., had executed in
view of the law, the Mentholatum Co., Inc., did it itself.
(2) Whether or not Mentholatum Co. Inc. allowed prosecute its
action?
NO. Section 69 of Act No. 1459 provides that “No foreign corpora-
tion or corporation formed, organized, or existing under any laws
other than those of the Philippine Islands shall be permitted to…
maintain by itself or assignee any suit for the recovery of any debt,
claim, or demand whatever, unless it shall have the license.” The
Mentholatum Co., Inc., being a foreign corporation doing business in
the Philippines without the license required by section 68 of the Cor-
poration Law, may not prosecute this action for violation of trade
mark and unfair competition. Neither may the Philippine-American
Drug Co., Inc., maintain the action here for the reason that the distin-
guishing features of the agent being his representative character and
derivative authority.
DOCTRINE: Jurisprudential Concepts of “Doing Business”: It im-
plies a continuity of commercial dealings and arrangements and the
performance of acts or works or the exercise of some of the func-
tions normally incident to the purpose or object of a foreign corpora-
tion’s organization.
FACTS:
1. Mentholatum Co., Inc., and the Philippine-American Drug Co.,
Inc.(M&PMDC) instituted an action in the Court of First Instance of
Manila against Anacleto Mangaliman, Florencio Mangaliman and the
Director of the Bureau of Commerce for infringement of trade mark
and unfair competition.
2. M&PMDC prayed for the issuance of an order restraining Anacleto
and Florencio Mangaliman from selling their product "Mentholiman,"
and directing them to render an accounting of their sales and profits
and to pay damages.
3. The complaint stated that Mentholatum Co., Inc., is a corporation
which manufactures Mentholatum," a medicament and salve adapted
for the treatment of colds, nasal irritations, chapped skin, insect bites,
rectal irritation and other external ailments of the body. Only the Phil-
ippine-American Drug co., Inc., is its exclusive distributing agent in
the Philippines authorized by it to look after and protect its interests
 4. Mentholatum Co., Inc., registered with the Bureau of Commerce and
Industry the word, "Mentholatum," as trade mark for its products; that
the Mangaliman brothers prepared a medicament and salve named
"Mentholiman" which they sold to the public packed in a container of
the same size, color and shape as "Mentholatum"; and that, as a con-
sequence of these acts of Anacleto et. Al , M&PMDC suffered dam-
ages from the dimunition of their sales and the loss of goodwill and
reputation of their product in the market.
5. After a protracted trial, featured by the dismissal of the case on 9
March 1936 for failure of plaintiff's counsel to attend, and its subse-
quent reinstatement on April 4, 1936, the Court of First Instance of
Manila, on 29 October 1937, rendered judgment in favor of Mentho-
latum, etc.
6. In the Court of Appeals, the decision of the trial court was, on 29 June
1940, reversed, said tribunal holding that the activities of the Mentho-
latum Co., Inc., were business transactions in the Philippines, and that
by section 69 of the Corporation Law, it may not maintain the suit.
7. Hence Mentholatum filed the petition for certiorari. Categorically
stated, this appeal simmers down to an interpretation of section 69 of
the Corporation Law.
ISSUES: (1) Whether or not the petitioners could prosecute the instant
action without having secured the license required in section 69 of the
Corporation Law? Yes, The Philippine-American Drug Co., Inc., is the
exclusive distributing agent in the Philippine Islands of the Menthola-
tum Co., Inc., in the sale and distribution of its product known as the
Mentholatum. It follows that whatever transactions the Philippine-
American Drug Co., Inc., had executed in view of the law, the Men-
tholatum Co., Inc., did it itself.
(2) Whether or not the Philippine-American Drug Co., Inc., could by
itself maintain this proceeding? No, The Mentholatum Co., Inc., being
a foreign corporation doing business in the Philippines without the li-
cense required by section 68 of the Corporation Law, may not prose-
cute this action for violation of trade mark and unfair competition.
Neither may the Philippine-American Drug Co., Inc., maintain the ac-
tion here for the reason that the distinguishing features of the agent be-
ing his representative character and derivative authority.
RULING: The writ prayed for should be, as it hereby is, denied, with
costs against the petitioners.
RATIO:
1. SEC. 69. No foreign corporation or corporation formed, organized, or
existing under any laws other than those of the Philippine Islands shall
be permitted to transact business in the Philippine Islands or maintain
by itself or assignee any suit for the recovery of any debt, claim, or
demand whatever, unless it shall have the license prescribed in the
section immediately preceding. Any officer, or agent of the corpora-
tion or any person transacting business for any foreign corporation not
having the license prescribed shall be punished by imprisonment for
not less than six months nor more than two years or by a fine of not
less than two hundred pesos nor more than one thousand pesos, or by
both such imprisonment and fine, in the discretion of the court.
2. In the present case, no dispute exists as to facts: (1) that the plaintiff,
the Mentholatum Co., Inc., is a foreign corporation; (2) that it is not
licensed to do business in the Philippines. The controversy, in reality,
hinges on the question of whether the said corporation is or is not
transacting business in the Philippines.
3. No general rule or governing principle can be laid down as to what
constitutes "doing" or "engaging in" or "transacting" business. Indeed,
each case must be judged in the light of its peculiar environmental
circumstances.
a. The true test, however, seems to be whether the foreign
corporation is continuing the body or substance of the
business or enterprise for which it was organized or
whether it has substantially retired from it and turned it
over to another. The term implies a continuity of commercial
dealings and arrangements, and contemplates, to that extent,
the performance of acts or works or the exercise of some of
the functions normally incident to, and in progressive prose-
cution of, the purpose and object of its organization.
4. The CA decision that "it is undeniable that the Mentholatum Co.,
through its agent, the Philippine-American Drug Co., Inc., has
been doing business in the Philippines by selling its products here
since the year 1929, at least." This finding is predicated upon the
testimony of Mr. Roy Springer of the Philippine-American Drug Co.,
Inc., and the pleadings filed by Mentholatum.
5. The complaint filed clearly stated that the Philippine-American Drug
Co., Inc., is the exclusive distributing agent in the Philippine Islands
 of the Mentholatum Co., Inc., in the sale and distribution of its product
known as the Mentholatum." The object of the pleadings being to draw
the lines of battle between litigants and to indicate fairly the nature of
the claims or defenses of both parties, a party cannot subsequently
take a position contradictory to, or inconsistent with, his plead-
ings, as the facts therein admitted are to be taken as true for the
purpose of the action.
6. It follows that whatever transactions the Philippine-American Drug
Co., Inc., had executed in view of the law, the Mentholatum Co., Inc.,
did it itself. And, the Mentholatum Co., Inc., being a foreign cor-
poration doing business in the Philippines without the license re-
quired by section 68 of the Corporation Law, it may not prosecute
this action for violation of trade mark and unfair competition.
Neither may the Philippine-American Drug Co., Inc., maintain
the action here for the reason that the distinguishing features of
the agent being his representative character and derivative au-
thority it cannot now, to the advantage of its principal, claim an inde-
pendent standing in court..
DISSENTING OPINION:
1. MORAN, J., dissenting: Section 69 of the Corporation Law provides
that, without license no foreign corporation may maintain by itself or
assignee any suit in the Philippine courts for the recovery of any debt,
claim or demand whatever. But this provision, as we have held in
Western Equipment & Supply Company vs. Reyes, does not apply to
suits for infringement of trademarks and unfair competition, the theory
being that "the right to the use of the corporate and trade name of
a foreign corporation is a property right, a right in rem, which it
may assert and protect in any of the courts of the world even in
countries where it does not personally transact any business," and
that "trade mark does not acknowledge any territorial boundaries
but extends to every mark where the traders' goods have become
known and identified by the use of the mark."
 004 Marubeni Nederland B.V. v. Tensuan (Punsalan)
Sept. 28, 1990 | Fernan, CJ. | “Doing business”: Territoriality Rule
PETITIONER: Marubeni Nederland B.V.
RESPONDENTS: Hon. Judge Ricardo Tensuan and Artemio Gatchalian
SUMMARY: Marubeni and DBT entered into a supply contract where the former was
to supply all the necessary equipment, machinery, materials, technical know-how and
the general design of the construction of DBT’s lime plant at the Guimaras Islands,
Iloilo for $5.4M. They entered into two more contracts (construction loan and cash
loan). A revision of the payment scheme and of the amounts due were reflected in a
Settlement Agreement between the two because of alleged delay of Marubeni in the
performance of its contractual commitments. DBT eventually informed Marubeni that
it unilaterally rejected the lime plant because it was not constructed in accordance with
their agreement. Marubeni refused to accept DBT’s unilateral rejection of the plant
and reasoned that the problems alleged were “totally unrelated to the guaranteed
capacity and specifications of the plant and definitely are not attributable to any fault
or omission on Marubeni’s part.” Artemio Gatchalian, a stockholder of DBT, sued
Marubeni for breach of contract. CFI Judge Ricardo Tensuan issued a TRO directed
against DBT and NIDC not to make any payments yet to Marubeni and set the
injunction for hearing.
Issue: WoN Marubeni Nederland B.V. can be considered as “doing business” in the
PH and therefore subject to the jurisdiction of PH courts – YES
Records show that Marubeni had solicited the lime plant business from DBT through
the Marubeni Manila branch. (See ratio 4) Even assuming that Marubeni is a different
and separate business entity from Marubeni Japan and the Manila branch, Marubeni
through its acts had effectively solicited orders, purchases (sales) or service
contracts as well as constituted Marubeni Corporation, Tokyo and the Manila
branch as its representatives in the Philippines to transact business for its account
as principal.
DOCTRINE: Syllabus outline: “Territoriality Rule” – Doing business in the
Philippines requires that the contract must be perfected or consummated… (naputol
yung doctrine sa outline) of business contracts constitutes doing business in the
Philippines.
Additional doctrine found in the case: It must be emphasized that a corporation doing
business in the PH with or without license is subject to process and jurisdiction of the
local courts. If such corp is properly licensed, then well and good but it shall not be
allowed, under any circumstances, to invoke its lack of license to impugn the
jurisdiction of our courts.
FACTS:
1. 1976, Tokyo Japan: Marubeni Nederland B.V. (Marubeni) and D.B. Teodoro
Devt Corporation (DBT) entered into a supply contract.
a. Marubeni agreed to supply all the necessary equipment, machinery,
materials, technical know-how and the general design of the
construction of DBT’s lime plant at the Guimaras Islands in Iloilo
for $5.4M on a deferred payment basis.
2. Simultaneously with this, the parties entered into two financing contracts:
a. Construction loan agreement ($1.6M); and a
b. Cash loan agreement ($1.5M)
c. DBT’s obligation to pay the loan amortizations on their due dates
under the 3 contracts were absolutely and unconditionally
guaranteed by the National Investment and Devt Corporation
(NIDC).
3. The loan amortizations of DBT fell due on Jan. 7, 1980, July 7, 1980 and Jan.
7, 1981.
4. Before the 1st installment became due, DBT wrote to NIDC interposing
certain claims against Marubeni and at the same time requesting for a revision
of the repayment schedule and of the amounts due under the contracts on
account of Marubeni’s delay in the performance of its contractual
commitments. This was ironed out through a Settlement Agreement.
5. May 14, 1982: DBT informed Marubeni that it was rejecting the lime plant
on the ground that it has not been constructed in accordance with their
agreements.
6. Marubeni refused to accept DBT’s unilateral rejection of the plant and
reasoned that the problems alleged were “totally unrelated to the guaranteed
capacity and specifications of the plant and definitely are not attributable to
any fault or omission on Marubeni’s part.”
7. Before the 1st installment under the Settlement Agreement was paid, Artemio
Gatchalian, a stockholder of DBT, sued Marubeni for contractual breach in
CFI of Rizal, Quezon City.
8. CFI Judge Ricardo Tensuan issued a TRO directed against DBT and NIDC
and set the injunction for hearing
9. Marubeni sought the dismissal of the complaint on the ground that the court
had no jurisdiction over the person of Marubeni since it is a foreign
corporation neither doing nor licensed to do business in the Philippines.
a. The lower court denied this for lack of merit. Hence this petition.
10. Marubeni claims that it is a foreign corporation not doing business in the
country and as an entity with its own capitalization, it is separate and distinct
from Marubeni Corporation, Japan which is doing business in the Philippines
through its Manila branch.
a. That the 3 contracts entered into with DBT were perfected and
consummated in Tokyo, Japan
b. that the sale and purchase of the machineries and equipment for the
Guimaras lime plant were isolated contracts and in no way indicated
a purpose to engage in business
 c. that the services performed by petitioner in the Philippines were
merely auxillary to the aforesaid isolated transactions entered into
and perfected outside the Philippines.
11. Gatchalian contends that Marubeni can be sued in Philippine courts on
liabilities arising from even a single transaction because in reality, it is
already engaging in business in the country through Marubeni Corporation,
Manila branch and that they, together with Nihon Cement Company, Ltd. of
Japan are but "alter egos, adjuncts, conduits instruments or branch affiliates
of Marubeni Corporation of Japan", the parent company.
ISSUE/s:
1. WoN Marubeni Nederland B.V. can be considered as “doing business” in the
PH and therefore subject to the jurisdiction of PH courts – YES, because the
factual milieu
RULING: Petition dismissed for lack of merit. Respondent CFI is directed to
proceeded with the hearing of Civil Case No. Q-35534 with dispatch. Immediately
executory.
RATIO:
1. There is no general rule that can be laid down to determine what constitutes
“doing or engaging in business.” Each case must be judged in the light of
its factual milieu and upon he language of the statute applicable.
2. Marubeni can be sued in the regular courts because it is doing business in the
Philippines.
3. Applicable law: RA 5455 as implemented by the ff. rules and regulations of
the Board of Investments which took effect on Feb. 3, 1969.
a. “(f) the performance within the Philippines of any act or
combination of acts enumerated in Section 1 (1) of the Act shall
constitute "doing business" therein. In particular, "doing business"
includes:
b. 1) Soliciting orders, purchases (sales) or service contracts.
Concrete and specific solicitations by a foreign firm amounting to
negotiation or fixing of the terms and conditions of sales or service
contracts, regardless of whether the contracts are actually reduced
to writing, shall constitute doing business even if the enterprise has
no office or fixed place of business in the Philippines. . . .
c. 2) Appointing a representative or distributor who is domiciled in the
Philippines, unless said representative or distributor has an
independent status, i.e., it transacts business in its name and for its
own account, and not in the name or for the account of the principal.
d. 4) Opening offices whether called "liaison" offices, agencies or
branches, unless proved otherwise.
e. 10) Any other act or acts that imply a continuity of commercial
dealings or arrangements, and contemplate to that extent the
performance of acts or works, or the exercise of some of the
functions normally incident to, or in the progressive prosecution of,
commercial gain or of the purpose and objective of the business
organization.”
4. It cannot be denied that Marubeni had solicited the lime plant business from
DBT through the Marubeni Manila branch.
a. Records show that the “turn-key proposal for the 300T/D Lime
Plant” was initiated by the Manila office through its Mr. Hojo.
b. In a follow-up letter, Hojo committed the firm to a price reduction
of $200k and submitted the proposed contract forms. As reflected in
the letterhead used, it was Marubeni Corporation, Tokyo, Japan
which assumed an active role in the initial stages of the negotiation.
c. Marubeni Nederland B.V had no visible participation until the
actual signing of the agreement in Tokyo and even there it was
the signature of the General Manager of Marubeni Corporation
Tokyo on behalf of Marubeni Nederland B.V. which appeared.
5. Even assuming that Marubeni is a different and separate business entity from
Marubeni Japan and the Manila branch, Marubeni through its acts had
effectively solicited orders, purchases (sales) or service contracts as well
as constituted Marubeni Corporation, Tokyo and the Manila branch as
its representatives in the Philippines to transact business for its account
as principal.
a. These circumstances (in ratio 4) constitute “doing business in
the Philippines” within the contemplation of the law.
6. It must be emphasized that a corporation doing business in the PH with or
without license is subject to process and jurisdiction of the local courts.
a. If such corp is properly licensed = well and good but it shall not be
allowed, under any circumstances, to invoke its lack of license to
impugn the jurisdiction of our courts.
With regard to denial of due process (unrelated to the doctrine in the syllabus)
7. Marubeni contends denial of due process when Judge Tensuan peremptorily
denied its motion to dismiss without giving Marubeni any opportunity to present
evidence at a hearing set for this purpose.
8. Under Sec. 13, Rule 16 of te Revised ROC, the court is given two courses of
action:
a. To deny or grant the motion or allow the amendment of the pleading; or
b. To defer the hearing and determination of the motion until the trial on
the merits, if the ground alleged does not appear to be indubitable.
9. In the case at bar, assuming there was no formal hearing on the motion to dismiss
prior to its rejection, such did not unduly prejudice Marubeni’s rights because it
still had to conduct trial on the merits during which time it could grant the motion
 after sufficient evidence is presented showing want of jurisdiction over the person
of the movant.
10. In the absence of a hearing, the appellate court, in an appeal from an order of
dismissal, would have had no means of determining or resolving the legality of
the proceedings and the sufficiency of the proofs on which the order was based.
005 AGILENT TECHNOLOGIES SINGAPORE (PTE) LTD. v.
INTEGRATED SILICON TECHNOLOGY PHIL. CORP. (Pleyto)
Apr. 14, 2004 | Ynares-Santiago, J. | Profit-Seeking Transactions Rule
PETITIONER: Agilent Technologies Singapore (Pte.) Ltd.
RESPONDENTS: Integrated Silicon Technology Philippines Corporation, Teoh
Kiang Hong, Teoh Kiang Seng, Anthony Choo, Joanne Kate M. Dela Cruz, Jean
Kay M. Dela Cruz, and Rolando T. Nacilla
SUMMARY: The juridical relation among the various parties can be traced to a
5-year Value Added Assembly Services Agreement (VAASA). Integrated Silicon
filed a complaint for “Specific Performance and Damages” against Agilent and its
officers Tan Bian Ee, Lim Chin Hong, Tey Boon Teck and Francis Khor for
allegedly breaching the oral agreement to extend the VAASA. Agilent filed a
separate complaint praying that a writ of replevin or a prelim mandatory injunction
be issued ordering the defendants to immediately return and deliver to plaintiff its
equipment, machineries and the materials to be used for the fiber-optic
components (left in the plant of Integrated). The issue is won Agilent is doing
business in the Philippines and won it has legal capacity to sue in Philippine
courts. Read #21 and 23 of ratio for the definition and IRR of what “doing
business” constitutes but By and large, to constitute “doing business,” the activity
to be undertaken in the Philippines is one that is for profit-making. By the clear
terms of the VAASA, Agilent’s activities in the Philippines were confined to (1)
maintaining a stock of goods in the Philippines solely for the purpose of having
the same processed by Integrated Silicon; and (2) consignment of equipment with
Integrated Silicon to be used in the processing of products for export. As such, we
hold that, based on the evidence presented thus far, Agilent cannot be deemed to
be “doing business” in the Philippines. Respondents’ contention that Agilent lacks
the legal capacity to file suit is therefore devoid of merit. As a foreign corporation
not doing business in the Philippines, it needed no license before it can sue before
our courts.
DOCTRINE: Although each case must be judged in light of attendant
circumstances, jurisprudence has evolved several guiding principles for the
application of these tests. “By and large, to constitute ‘doing business,’ the activity
to be undertaken in the Philippines is one that is profit-making.
FACTS:
1. Parties:
a. Agilent Technologies Singapore (Pte), Ltd. (Agilent) is a foreing corporation, which,
by its own admission, is not licensed to do business in the Philippines.
b. Integrated Silicon Technology Phil. Corp. (Integrated Silicon) is a private domestic
corporation, 100% foreign owned, which is engaged in the business of manufacturing
and assembling electronics components
c. Teoh Kiang Hong, Teoh Kiang Seng and Anthony Choo, Malaysian nationals, are
current members of Integrated Silicon’s Board of Directors
d. Joanne Kate Dela Cruz, Jay Dela Cruz, and Rolando Nacilla are former members
2. The juridical relation among the various parties can be traced to a 5-year
Value Added Assembly Services Agreement (VAASA), which was entered
into on Apr. 2, 1996 between Integraed Silicon and Hewlett-Packard
Singapore (Pte.) Ltd., Singapore Comoponents Operate (HP-Singapore)
a. Terms of the VAASA: Integrated Silicon will locally manufacture
and assemble fiber optics for the expore to HP-Singapore
b. HP-Singapore was to consign raw materials to Integrated Silicon,
transport machinery to the plant of Integrated Silicon, and pay them
the purchase of the finished products
c. Can be renewed by mutual written consent
d. With the consent of Integrated Silicon, HP-Singapore assigned all
its rights and obligations in the VAASA to Agilent
3. May 25, 2001: Integrated Silicon filed a complaint for “Specific Performance
and Damages” against Agilent and its officers Tan Bian Ee, Lim Chin Hong,
Tey Boon Teck and Francis Khor (1st case)
a. Alleged that Agilent breach the oral agreement to extend VAASA
b. Integrated Silicon prayed that defendant be ordered to execute a
written extension for a period of 5 years
4. Jun. 1, 2001, summons and a copy of the complaint were served on Atty.
Ramon Quisumbing, who returned the processes saying that he was not the
registered agent of Agilent
a. Later, he entered a specila approach to assail the court’s jurisdiction
over Agilent
5. Agilent filed a separate complaint against Integrated Silicon, Teoh Kang
Seng, Teoh Kiang Gong, Anthony Choo, Joanne Kate Dela Cruz, Jean dela
Cruz and Rolando Nacilla for “Specific Performance, Recovery of
Possession, and Sum of Money with Replevin, Preliminary Mandatory
Injunction and Damages” before the RTC of Calamba (2nd case)
a. Agilent prayed that a writ of replevin or a prelim mandatory
injunction be issued ordering the defendants to immediately return
and deliver to plaintiff its equipment, machineries and the materials
to be used for the fiber-optic components (left in the plant of
Integrated)
6. Respondents filed a Motion to Dismiss on the ground of Agilent’s legal
capacity to sue, litis pendetia, forum shopping and failure to state a cause of
action – Sept. 4, 2001, Denied by the trial court and granted Agilent’s writ of
 replevin
7. Judge Pozas inhibited himself from the 2nd case and was re-raffled and
assigned where the 1st case is pending. Aug. 12, 2002, CA granted
respondents’ petition for certiorari and set aside the order of the TC
ISSUE/s:
1. WoN the CA committed reversible error in giving due course to respondents’
petition, notwithstanding the failure to file a MR of the Sep. 4, 2001 Order –
YES, because certiorari was a premature remedy at the time (Ratio #1-7 but
this is not relevant)
1. WoN Agilent is doing business in the Philippines and won it has legal
capacity to sue in Philippine courts – it is not doing business in the Philippines
and it has legal capacity to sue. Respondents’ contention that Agilent lacks
the legal capacity to file suit is therefore devoid of merit. As a foreign
corporation not doing business in the Philippines, it needed no license before
it can sue before our courts.
RULING: Petition is granted
RATIO:
1. CA held that the lower court had no jurisdiction over the 2nd case because of the
pendency of the 1st case and, therefore, a MR was not necessary before resorting to a
petition for certiorari – SC held that this is wrong
2. Jurisdiction is fixed by law. BP Blg. 129 vests jurisdiction over the 2nd case in the
RTC
3. CA’s ruling that the ruling of the Trial court was a nullity for lack of jurisdiction due
to litis pendentia and forum shopping had no legal basis. Litis pendentia does not strip
a court of jurisdiction
4. CA further ruled that a MR was not necessary in view of the urgent necessity in this
case – SC was not convinced.
5. CA relied on Bache and Co., Inc. v. Ruiz, which held that time is of the essence in
view of the tax assessments sought to be enforced by the officers of the BIR.”
6. Respondents, on the other hand, cited the case of Geronimo v. COMELEC, where the
urgent necessity of resolving a disqualification case for a position in local government
warranted the expeditious resort to certiorari. There is no analogously urgent
circumstance which would necessitate the relaxation of the rule on the MR
7. None of the exceptions for dispensing with a motion for recon is present
Litis pendentia
8. That situation wherein another action is pending between the same parties for the same
cause of action, such that the second action becomes unnecessary and vexatious
9. Requisites:
a. Identity of parties or at least such as represent the same interest in both
actions
b. Identity of rights asserted and reliefs prayed for, the reliefs being found on
the same facts
c. Identity in the two cases should be such that the judgment that may be
rendered in one would, regardless of which party is successful, amount to
res judicata in the other
10. Lis pendens requires only substantial identity of parties (when there is a community
of interest between a party in the first case and a party in the second case, even if the
latter was not impleaded in the first)
a. The parties in these cases are vying over the interests of the 2 opposing
corporations; the individuals are only incidentally impleaded, being the
natural persons purportedly accused of violating these corporations’ rights
11. The fact that the positions of the parties are reversed (plaintiff in the 1st case is the
defendant in the second and vice versa), first case does not negate the identiy of parties
for purposes of fetermining whether the case is dismissible on the ground of lis
pendentia
12. The second and third requisites are absent. The rights asserted in each of the cases
involved are separate and distinct; there are two subjects of controversy presented for
adjudication and 2 causes are involved
13. The 1st case (filed by the respondents) is not a ground for defeating the 2nd case (filed
by the petitioners)
14. The issue in the first case is WoN there was a breach of an oral promise to renew of
the VAASA. The issue in the second case is WoN Agilent has the right to take
possession of the subject properties
15. Agilent’s right of possession is founded on the ownership of the goods, which is not
disputed and not contingent on the extension of the VAASA
16. Hence, the replevin suit can validly be tried even while prior suit is being litigated in
the RTC
17. Possession is the issue in the issue in the first case and reliefs sought are also different.
It cannot also be said that the same evidence will support the decisions in both since
the legally significant and controlling facts in each are entirely different.
18. The 1st case is premised on the breach of an oral obligation to extend. The 2nd case is
premised on a breach of the VAASA itself and damages.
19. Res judicata is also absent:
a. The former judgment must be final
b. The court which rendered judgment must have jurisdiction ove rhte parties
and the subject matter
c. Must be a judgment on the merits
d. Must be between the first and second actions identiy of parties, subject
matter and cause of action
20. Here, there are different causes of action
Forum shopping
2. This exists where the elements of litis pendentia are present, or where a final
judgment in one case will amount to res judicata in the other
3. There being no litis pendentia, a judgment in the said case will not amount to
res judicata in the other case
4. If Integrated Silicon eventually wins the first case and the terms are extended,
Agilent will have to comply with its obligations thereunder, which would
include the consignment of properties similar to those it may recover by
replevin in the second case
5. However, Agilent will also suffer injustice if denied the remedy of replevin
6. Respondents argue that since Agilent is an unlicensed foreign corporation
 doing business in the Philippines, it lacks the legal capacity to file suit.
7. The assailed acts of Agilent, purportedly in the nature of “doing business in
the Philippines” are the following:
a. Mere entering into the VAASA, which is a “service contract”
b. appointment of a full-time representative in Integrated Silicon, to “oversee
and supervise the production” of Agilent’s products
c. the appointment by Agilent of six full-time staff members, who were
permanently stationed at Integrated Silicon’s facilities in order to inspect
the nished goods for Agilent
d. Agilent’s participation in the management, supervision and control of
Integrated Silicon, including instructing Integrated Silicon to hire more
employees to meet Agilent’s increasing production needs, regularly
performing quality audit, evaluation and supervision of Integrated Silicon’s
employees, regularly performing inventory audit of raw materials to be used
by Integrated Silicon, which was also required to provide weekly inventory
updates to Agilent, and providing and dictating Integrated Silicon on the
daily production schedule, volume and models of the products to
manufacture and ship for Agilent
8. A foreign corporation without a license is not ipso facto incapacitated from
bringing an action in the Philippine courts. A license is necessary only if a
foreign corporation is “transacting” or “doing business” in the country
9. Corporation Code provides:
Sec. 133. Doing business without a license. — No foreign corporation transacting
business in the Philippines without a license, or its successors or assigns, shall be
permitted to maintain or intervene in any action, suit or proceeding in any court or
administrative agency of the Philippines; but such corporation may be sued or
proceeded against before Philippine courts or administrative tribunals on any valid
cause of action recognized under Philippine laws.
10. Sec. 133 prevents an unlicensed foreign corp. “doing business” in the Phil.
From accessing our courts
11. In a number of cases, however, SC has held that an unlicensed foreign corp
doing business in the Phil. May bring suit in Phil. Courts against a Philippine
citizen or entity who had contracted with and benefited from said corporation.
Such is premised on the doctrine of estoppel
12. A party is estopped from challenging the personality of a corporation after
having acknowledged the same by entering into a contract with it.
13. This doctrine of estoppel to deny corporate existence and capacity applies to
foreign as well as domestic corporations
14. The application of this principle prevents a person contracting with a foreign
corporation from later taking advantage of its noncompliance with the
statutes chiefly in cases where such person has received the benefits of the
contract
15. The principles regarding the right of a foreing corporation to bring suit in
Philippine courts may thus be condensed in four statements:
a. If a foreign corporation does business in the Philippines without a
license, it cannot sue before the Philippine courts
b. If a foreign corporation is not doing business in the Philippines, it
needs no license to sue before Philippine courts on an isolated
transaction or on a cause of action entirely independent of any
business transaction
c. if a foreign corporation does business in the Philippines without a
license, a Philippine citizen or entity which has contracted with said
corporation may be estopped from challenging the foreign
corporation’s corporate personality in a suit brought before
Philippine courts
d. and if a foreign corporation does business in the Philippines with the
required license, it can sue before Philippine courts on any
transaction.
16. The challenge to Agilent’s legal capacity to file suit hinges on WoN it is
doing business in the Philippines. However, there is no definitive rule on what
constitutes “doing”, “engaging in”, or “transacting” business in the
Philppines
17. Corp code is also silent as to what acts constitute doing or transacting
business in the Philippines
18. Jurisprudence has it, however, that the term “implies a continuity of
commercial dealings and arrangements, and contemplates, to that extent, the
performance of acts or works or the exercise of some of the functions
normally incident to or in progressive prosecution of the purpose and subject
of its organization.”
19. Mentholatum v. Mangaliman: the court discoursed on the two general tests
to determine WoN a foreign corporation can be considered as “doing
business: in the Philippines:
a. Substance Test: Whether the foreign corporation is continuing the
body of the business or enterprise for which it was organized or
whether it has substantially retired from it and turned over to another
b. Continuity Test: same with ratio #17
20. Jurisprudence has evolved several guiding principles for the application of
these tests:
a. Merrill Lynch Futures, Inc. v. CA and Spouses Lara: it transacted with its Philippine
counterpart for 7 years, engaging in future contracts
b. CIR v. JAL: its commercial dealings were continuous as despite the fact that no JAL
aircraft landed in the country, it still sold tickets here through a general sales agent
and opened a promotions office here as well
c. Gene. Corp. of the Phils. v. Union Insurance Society of Canton and Fireman’s Fund
Insurance: appointed a settling agent here and issued 112 marine insurance policies
d. Erik’s PTE Ltd. v. CA and Enriquez: foreign corp sold its products to a Filipino buyer
who ordered the goods 16 times within an 8-month period (SC held that there was a
clear intention on its part to continue the body of its business despite the relatively
short span of time involved)
e. Communication Materials and Design, Inc. et al. v. CA, ITEC, et. al. and Top-Weld
Manufacturing v. ECED, IRTI, et al.: both involved the License and Technical
Agreement and Distributor Agreement of foreign corporations with their respective
local counterparts that were the primary bases for the Court’s ruling that the foreign
 corporations were doing business in the Philippines 26. Respondents’ contention that Agilent lacks the legal capacity to file suit is
i. Communication Materials became a mere extension or instrument of the
therefore devoid of merit. As a foreign corporation not doing business in the
foreing corp.
21. Case law evolved into a statutory definition: FIA 1991:
Philippines, it needed no license before it can sue before our courts.
Sec. 3, par. (d). The phrase “doing business” shall include soliciting orders, service 27. Finally, as to Agilent’s purported failure to state a cause of action against the
contracts, opening o ces, whether called “liaison” o ces or branches; appointing individual respondents, SC also rules in favor of Agilent.
representatives or distributors domiciled in the Philippines or who in any calendar 28. A Motion to Dismiss hypothetically admits all the allegations in the
year stay in the country for a period or periods totaling one hundred eighty (180) days Complaint, which plainly alleges that these individual respondents had
or more; participating in the management, supervision or control of any domestic committed or permitted the commission of acts prejudicial to Agilent.
business, rm, entity, or corporation in the Philippines; and any other act or acts that 29. Whether or not these individuals had divested themselves of their interests in
imply a continuity of commercial dealings or arrangements, and contemplate to that Integrated Silicon, or are no longer members of Integrated Silicon’s Board of
extent the performance of acts or works, or the exercise of some of the functions Directors, is a matter of defense best threshed out during trial.
normally incident to, and in the progressive prosecution of, commercial gain or of the
purpose and object of the business organization.
22. Acts enumerated in the VAASA do not constitute “doing business” in the
Philippines as shown by the case las and Sec. 1. Of the IRR of the FIA
23. Section 1 of the Implementing Rules and Regulations of the FIA (as amended by
Republic Act No. 8179) provides that the following shall not be deemed “doing
business”:
a. Mere investment as a shareholder by a foreign entity in domestic
corporations duly registered to do business, and/or the exercise of rights as
such investor
b. Having a nominee director or officer to represent its interest in such
corporation;
c. Appointing a representative or distributor domiciled in the Philippines
which transacts business in the representative’s or distributor’s own name
and account;
d. The publication of a general advertisement through any print or broadcast
media;
e. Maintaining a stock of goods in the Philippines solely for the purpose of
having the same processed by another entity in the Philippines;
f. Consignment by a foreign entity of equipment with a local company to be
used in the processing of products for export;
g. Collecting information in the Philippines; and
h. Performing services auxiliary to an existing isolated contract of sale which
are not on a continuing basis, such as installing in the Philippines
machinery it has manufactured or exported to the Philippines, servicing
the same, training domestic workers to operate it, and similar incidental
services.
24. By and large, to constitute “doing business,” the activity to be undertaken in
the Philippines is one that is for profit-making
25. By the clear terms of the VAASA, Agilent’s activities in the Philippines were
confined to (1) maintaining a stock of goods in the Philippines solely for the
purpose of having the same processed by Integrated Silicon; and (2)
consignment of equipment with Integrated Silicon to be used in the
processing of products for export. As such, we hold that, based on the
evidence presented thus far, Agilent cannot be deemed to be “doing business”
in the Philippines.
 006 GRANGER ASSOCIATES v. MICROWAVE SYSTEMS, and be bound by Philippine law in proper cases, as in the one at bar.
INC (PERRAL)
September 14, 1990 | Purisima, J. | transactions with agents and brokers

PETITIONER: Granger Associates

RESPONDENTS: Microwave Systems, Inc.

SUMMARY: Granger Associates is a foreign corporation organized in the US and

has no license to do business in the Philippines. MSI is a domestic corporation
which has been sued for recovery of $900,633.30 for nonpayment of a series of
contracts entered into by the parties. MSI filed a motion to dismiss alleging that
Granger had no capacity to sue, being an unlicensed foreign corporation. Granger
insists that it has dealt only with MSI and not the general public and contends that
dealing with the pubcli itself is an indispensable ingredient of transacting business.
Granger contends that its various transactions with MSI were mere facets of the
basic agreement licensing MSI to manufacture and sell Granger’s products in the
Philippines. All subsequent agreements were merely auxiliary to that first contract
and should not be considered separate transactions coming within the concept of
“doing business in the Philippines”. ISSUE: WoN Granger is considered to be
transacting business in the Philippines. The SC held in the affirmative, because the
terms and conditions of the contracts and agreements entered into between Granger
and MSI indicate that they established within our country a continuous business,
and not merely one of a temporary character. Such agreements did not constitute
only one isolated transaction but a succession of acts signifying the intent of
Granger to extend its operations in the Philippines.
DOCTRINE: If a corporation performs acts for which it was created or exercises
some of the functions for which it was organized, the amount or volume of the
business is immaterial and a single act of that character may constitute doing busi-
ness.
The purpose of the rule requiring foreign corporations to secure a license to do
business in the Philippines is to enable us to exercise jurisdiction over them for the
regulation of their activities in this country. If a foreign corporation operates in the
Philippines without submitting to our laws, it is only just that it not be allowed to
invoke them in our courts when it should need them later for its own protection.
While foreign investors are always welcome in this land to collaborate with us for
our mutual benefit, they must be prepared as an indispensable condition to respect
FACTS:
42. The foreign corporation is Granger Associates, which was organized in the
United States and has no license to do business in the Philippines.
43. The domestic corporation is Microwave Systems, Inc., which has been sued
for recovery of a sum of $900,633.30 allegedly due from it to Granger.
44. The claim arose from a series of agreements concluded between the two par-
ties, principally the contract dated March 28, 1997, under which Granger li-
censed MSI to manufacture and sell its products in the Philippines and ex-
tended to the latter certain loans, equipment and parts; the contract dated May
17, 1979, for the sale by Grager of its Multiplex Equipment to MSI; and the
Supplemental and Amendatory Agreement in December 1979.
45. Granger filed a comaplaint against MSI for nonpayment of said contracts.
MSI alleged that Granger had no capacity to sue, being an unlicensed foreign
corporation, and moved to dismiss under Section 133 of the Corporation
Code25.
46. Trial Court: granted motion to dismiss. CA: affirmed order of dismissal.
47. In the petition with the SC, Granger seeks the reversal of the ruling on the
ground that MSI has failed to prove that Granger was transacting business in
the Philippines. It insists that it has dealt only with MSI and not the general
public and contends that dealing with the public itself is an indispensable in-
gredient of transacting business; and that its agreements with MSI covered
only one isolated transaction for which it did not have a secure license to be
able to file its complaint. Granger contends that its various transactions with

25
No foreign corporation transacting business in the Philippines without a license, or its suc-
cessors or assigns, shall be permitted to maintain or intervene in any action, suit or proceeding
in any court or administrative agency of the Philippines.
 MSI were mere facets of the basic agreement licensing MSI to manufacture
and sell Granger’s products in the Philippines. All subsequent agreements
were merely auxiliary to that first contract and should not be considered sep-
arate transactions coming within the concept of “doing business in the Phil-
ippines”.
ISSUE/s:
1. WoN Granger is considered to be transacting business in the Philippines –
YES, the terms and conditions of the contracts and agreements entered into
between Granger and MSI indicate that they established within our country a
continuous business, and not merely one of a temporary character. Such
agreements did not constitute only one isolated transaction but a succession
of acts signifying the intent of Granger to extend its operations in the Philip-
pines.
RULING: The petition is DENIED.
RATIO:
1. Sec 1 of RA No. 5455 provides that “doing business” shall include soliciting
orders, purchases, service contracts, opening officers whether called “liaison”
offices or branches; appointing representatives or distributors domiciled in
the Philippines or who may in any calendar year stay in the Philippines for a
period or periods totaling 180 days or more; participating in the management,
supervision or control of any domestic business firm, entity or corporation in
the Philippines; any other act or acts that imply a continuity of commercial
dealings or arrangements and contemplates to that extent the performance of
acts or works, or the exercise of some of these functions normally incident
to, and in progressive prosecution of, commercial gain or of the purpose and
object of the business organization.
2. Mentholatum v. Mangaliman: The true test seems to be whether the foreign
corporation is continuing the body or substance of the business or enterprise
for which it was organized or whether it has substantially retired from it and
turned it over to another. The term implies a continuity of commercial deal-
ings and arrangements, and contemplates the performance of facts or works
or the exercise of some of the functions normally incident to, and in progres-
sive prosecution of, the purpose and objects of its organization.
3. Top-Weld Manufacturing v. ECED: There is no general rule laid down as to
what constitutes doing or engaging in or transacting business in the Philip-
pines. Each case must be judged in the light of its peculiar circumstances.
The acts of these corporations should be distinguished from a single or iso-
lated business transaction or occasional, incidental and casual transactions
which do not come within the meaning of the law. Where a single act or
transaction, however, is not merely incidental or casual but indicates the for-
eign corporation’s intention to do other business in the Philippines, said sin-
gle act or transaction constitutes doing or engaging in or transacting business
in the Philippines.
4. A study of the May 1979 contract and the Supplemental and Amendatory
Agremeent shows that these contracts do not support the contention that
many of the agremenets concluded by Granger and MSI were intended
merely to supplement the basic contract of March 1977. The May 1979 con-
tract dealt with a different subject matter and had a different considetation to
be paid under a different method from that specified in the first agreement.
In the Supplemental and Amendatory Agreement, Granger sold to MSI cer-
tain materials/parts for 80 radios and granted it the right to exploit the designs
of Model 6016, Series of radio qeuipment. The subject matter of this transac-
tion is also different from those covered by the previous agreements.
5. Even if it be assumed for the sake of argument that the subject matter of the
first contract is of the same kind as that of the subsequent agreements, that
fact alone would not necessarily signify that all such agreements are merely
auxiliary to the first. As long as it can be shown that the parties entered into
a series of agreements, as in successive sales of the foreign company’s regular
products, that company shall be deemed as doing business in the Philippines.
6. The quoted stipulations show that Granger had extended its personality in the
Philippines and would receive orders for its products and discharge its war-
ranty obligations through the agency of MSI. It would even appear that
Granger intended to transact business in the Philippines through the instru-
mentality of MSI, not only for the sale and warranty of its products in this
country. The agency was expected to extend also in mainland China and other
ASEAN countries, where MSI was to act as its representative in the develop-
ment of possible markets for Granger products.
7. In the Supplemental and Amendatory Agreement, Granger saw to it that it
was assured of at least one seat in the board of directors of MSI, without
prejudice to the right of Granger to request additional seats as its interest may
require. Granger actually purchased 9,000 shares of MSI, representing 30%
of the latter’s issued and outstanding shares of stock. The fact that it was
directly involved in the business of MSI was also manifested in another stip-
ulation where Grange acknowledged and confirmed the transfer of a block of
stocks from one shareholder to another group of investors. Such approval is
not normally given except by a stockholder enjoying substantial participation
in the management of the business of the company. The investment of
Granger in MSI is quite substantial, enabling it to participate in the actual
management and control of MSI.
8. As to the question of whether the foreign corporation must be shown to have
dealt with the public in general to be considered as transacting business in the
Philippines, the Court has this to say: if a corporation performs acts for which
it was created or exercises some of the functions for which it was organized,
the amount or volume of the business is immaterial and a single act of that
 character may constitute doing business.
9. We are convinced from an examination of the terms and conditions of the
contracts and agreements entered into between Granger and MSI indicate that
they established within our country a continuous business, and not merely
one of a temporary character. Such agreements did not constitute only one
isolated transaction but a succession of acts signifying the intent of Granger
to extend its operations in the Philippines.
10. The purpose of the rule requiring foreign corporations to secure a license to
do business in the Philippines is to enable us to exercise jurisdiction over
them for the regulation of their activities in this country. If a foreign corpo-
ration operates in the Philippines without submitting to our laws, it is only
just that it not be allowed to invoke them in our courts when it should need
them later for its own protection. While foreign investors are always welcome
in this land to collaborate with us for our mutual benefit, they must be pre-
pared as an indispensable condition to respect and be bound by Philippine
law in proper cases, as in the one at bar.
 007 ANTAM CONSOLIDATED v. CA (Peliño)
July 31, 1986 | Gutierrez, Jr., J. | Doctrine on Unrelated or Isolated Transactions
PETITIONERS: Antam Consolidated, Inc., Tambunting Trading Corporation, and Aurora
Consolidated Securities and Investment Corporation
RESPONDENTS: The Court of Appeals, the Honorable Maximiano C. Asuncion (Court
of First Instance of Laguna, Branch II), and Stokely Van Camp, Inc.
SUMMARY: Capital (foreign corporation not doing business in the PH) and Comphil
(domestic corporation) entered into an agreement wherein Comphil would deliver 500 long
tons of crude coconut oil and that Capital would pay. Comphil failed to deliver. But Stokely
and Comphil entered into a 2nd contract wherein Comphil would repurchase the undelivered
coconut oil, but Comphil again failed in its obligations. To again settle losses, they entered
into a 3rd contract wherein Comphil would sell and deliver and Capital will pay for the
crude coconut oils at a discounted price. But then Comphil, for the 3rd time failed in its
obligation, so it was informed that Comphil was already in default but even after demands,
it still refused to pay. Stokely (Capital was a subdivision of Stokely; it’s also a foreign corp
not doing business in the PH) filed a writ of attachment against the properties of the
petitioners. This was because these petitioners owned stocks in Comphil. Trial court
ordered the issuance of the writ of attachment. Petitioners filed a MTD on the ground that
Stokely had no capacity to sue. Trial court ruled in favor of Stokely. Petitioners filed a
petition for certiorari to the Indianapolis IAC (Idk why) but this was dismissed, filed for a
MR but was likewise denied. Hence, this petition. The issue in this case is whether or not
Stokely’s transactions constitute as “doing business in the Philippines”. The SC held in the
negative. The transactions entered into by Stokely with the petitioners are not a series of
commercial dealings which signify an intent on Stokely to do business in the Philippines,
but constitute an isolated one which does not fall under the category of “doing business”.
The only reason why Stokely entered into the 2nd and 3rd transactions with the petitioners
was because it wanted to recover the loss it sustained because of the failure of the petitioners
to deliver the crude coconut oil in the 1st transaction. They wanted to give the petitioners
the chance to make good on their obligations. In Metholatum v. Mangaliman, the SC said
that the term implies a continuity of commercial dealings and arrangements, and
contemplates, to that extent, the performance of acts or workers or the exercise of some of
the functions normally incident to, and in progressive prosecution of, the purpose and object
of its organization.
DOCTRINE: The performance of services auxiliary to an existing isolated contract of sale
which are not on a continuing basis do not constitute “doing business in the Philippines”.
FACTS:
1. Stokely Van Camp, Inc. (Stokely) filed a complaint against Banahaw Milling
Corp. (Banahaw), Antam Consolidated, Inc. (Antam), Tambunting Trading
Corp. (Tambunting, Aurora Consolidated Securities and Investment Corp.
(Aurora), and United Coconut Oil Mills, Inc. (Unicom) for a collection of
sum of money (to be known collectively as petitioners)
2. Stokely alleged the following:
a. Stokely was a corporation existing under the laws of Indiana, USA and has
a principal office there.
b. One of its subdivisions, Capital City Product Company (Capital), has an
office in Ohio, USA.
c. Stokely and Capital were not engaged in business in the Philippines prior to
filing the suit, so Stokely is not licensed to do business in the PH nor required
to secure a license.
d. Capital and Coconut Oil Manufacturing Inc. (Compil) acting throught its
broker, Roths Child Brokerage Company (Roths), entered into a contract
wherein Comphil would sell and deliver and Capital agreed to buy 500 long
tons of crude coconut oil to be delivered.
e. Comphil failed to deliver coconut oil, so Capital had to cover its coconut oil
needs in the open market at a price in excess of the contract, so it sustained
a loss.
f. To settle Capital’s loss, they entered into a second contract, where Compil
would buy and Capital would sell 500 long tons of coconut crude oil under
the same terms and conditions but an increased cif price.
i. In the second contract, Comphil was supposed to repurchase the
undelivered coconut oil from Capital by paying it US$ 103,600, which
is the same amount of loss that Capital obtained from the 1st contract.
g. Comphil again failed to pay the amount, so to settle again, they entered into
a 3rd contract with Comphil.
h. Comphil agreed to sell and deliver and Capital would buy the same quantity
of crude coconut oil.
i. Comphil again failed to deliver the coconut oil, so Capital notified it that it
was already in default.
j. Capital sustained damages of US$ 175k and that even after demands,
Comphil still refused to pay.
3. Stokely also prayed for a writ of attachment to be issued against any and all
properties of Antam, Tambunting, and Aurora.
a. When Stokely demanded on Comphil, Tambunting ceased to be the directors
and officers of Comphil and were replaced by employees of tambunting who
changed the name of Comphil to Banahaw.
b. Unicom has taken over the operations and assets of Banahaw because the
entire and outstanding capital stock was sold.
c. All of the issued and outstanding capital stock of Comphil are owned by
Tambuntings who were directors and officers of Comphil and also benefited
from the sale of Banahaw’s assets or shares to Unicom.
d. All of them evaded on their obligation to Stokely by the devious scheme of
using Tambunting employees to replace the Tambuntings in the management
of Banahaw and disposing of the oil mill of Banahaw or their entire interests
to Unicom.
e. Coconut oil milk is about to be sold or removed so no assets will be left to
satisfy their claim.
4. Trial court ordered the issuance of the writ of attachment and for Stokely to
deposit a bond of around Php 1.285m.
a. Stokely filed a MR to reduce the attachment bond.
 b. Petitioners filed MTD on the ground that since Stokely was a foreign
corporation not licensed to do business in the PH, it has no personality to
maintain the suit.
c. Stokely filed an opposition to the MTD.
d. Trial court issued an order reducing the attachment bond and denying the
MTD.
5. Petitioners filed a petition for certiorari in the Indianapolis IAC.
a. The court dimissed the petition stating that the judge did not commit any
GAOD.
b. They filed a MR but was denied.
6. Hence, this petition.
7. Claims of the petitioners:
a. Stokely has no personality to sue.
b. To maintain the suit filed, Stokely should have secured the requisite license
to do business in the PH because it is in fact doing business.
c. Since Stokely is a foreign corporation doing business in the PH, it has
participated in 3 transactions, either as buyers or sellers, which are, by their
nature, in the pursuit of the purpose and object for which it was organized.
d. Test of whether one is doing business or not is whether there is continuity of
transactions which are in the pursuance of the normal business of the
corporation and that the transactions entered into by the respondent
undoubtedly fall within this category.
ISSUE/s:
1. WON Stokely’s transactions constitute as “doing business in the
Philippines”. – NO. The transactions entered into by Stokely with the
petitioners are not a series of commercial dealings which signify an intent on
Stokely to do business in the Philippines but constitute an isolated one which
does not fall under the category of “doing business”.
RULING: WHEREFORE, IN VIEW OF THE FOREGOING, the petition is
DISMISSED for lack of merit. The TRO is hereby DISSOLVED.
RATIO:
On whether Stokely’s transactions constitute as “doing business in the PH”
1. Top-Weld Manufacturing, Inc. v. ECED: There is no general rule or
governing principle laid down as to what constitutes ‘doing’ or ‘engaging in’
or ‘transacting business’ in the Philippines.
a. Each case must be judged in light of its peculiar circumstances.
b. The acts of the corporations should be distinguished from a single or
isolated business transaction or occasional, incidental, and casual
transactions which do not come within the meaning of the law.
c. Where a single act/transaction is not merely incidental or casual, but
indicates the foreign corporation’s intention to do other business in the
Philippines, the said single act or transaction constitutes ‘doing’ or
‘engaging in’ or ‘transacting’ business in the Philippines.
2. Mentholatum Co. v. Mangaliman: The true test is whether the foreign
corporation is continuing the body or substance of the business or enterprise
for which it warning-organized or whether it has substantially retired from it
and turned it over to another.
a. The term implies a continuity of commercial dealings and arrangements,
and contemplates, to that extent, the performance of acts or workers or
the exercise of some of the functions normally incident to, and in
progressive prosecution of, the purpose and object of its organization.
3. The transactions entered into by Stokely with the petitioners are not a
series of commercial dealings which signify an intent on Stokely to do
business in the Philippines but constitute an isolated one which does not
fall under the category of “doing business”.
a. The only reason why Stokely entered into the 2nd and 3rd transactions
with the petitioners was because it wanted to recover the loss it sustained
because of the failure of the petitioners to deliver the crude coconut oil
in the 1st transaction. They wanted to give the petitioners the chance to
make good on their obligations.
b. Instead of making an outright demand on the loss, they opted to try to
push for the transaction.
c. This explains why the petitioners were supposed to buy back the crude
coconut oil.
4. In reality, there was only 1 agreement between petitioners and Stokely, which
was to deliver 500 long tons of crude coconut oil and that Stokely would pay.
a. The 3 seemingly different transactions were entered into only to fulfill
the agreement.
b. It wasn’t an intent on the part of Stokely to engage in a continuity of
transactions with the petitioners which will categorize it as a foreign
corporation doing business in the PH.
5. Eastboard Navigation Ltd. V. Juan Ysmael and Co., Inc.: While the plaintiff
is a foreign corporation without license to transact business in the PH, it does
not follow that it has no capacity to bring the present action.
a. Such license is not necessary because it is not engaged in business in the
PH.
6. Doctrine of lack of capacity to sue based on failure to first acquire a local
license is based on considerations of sound public policy.
a. It intended to favor domestic corporations.
b. But the SC can’t rule in favor of petitioners considering that they failed
to show that they had a valid and meritorious defense.
**Other issues:
1. As to the issue on the attachment being defective considering that the person
who made the verification did not personally know of the facts relied upon,
the SC said that the defect in the original verification was cured when the
 person subsequently executed an affidavit in support of the prayer for
attachment.
2. As to the attachment itself, the SC said that the allegations in Stokely’s
complaint satisfactorily justify the issuance of the order.
 008 ATLANTIC MUTUAL v. CEBU STEVEDORING (MERILLES)
August 31, 1966 | Makalintal, J. | Local Suits Brought by Foreign Corporations:
Need to Allege Capacity to Sue
PETITIONER: Atlantic Mutual Insutance Company and Continental Insurance
Co.
RESPONDENTS: Cebu Stevedoring
SUMMARY: Atlantic and Continental are US corporations who sued Cebu
Stevedoring for recovery of sum of money. Cebu Stevedoing filed a motion to
dismiss on the ground that the foreign corporations have to legal capacity to sue
3.
here in the Philippines. The trial court dismissed the case, saying that the
complaint failed to state that Atlantic and Continental were duly licensed to
transact in the Philippines. Atlantic filed an appeal.
4.
The issue before the court is whether Atlantic and Continental have capacity to
sue in PH courts.
The Court ruled that for a foreign corporation to have legal capacity to sue, the
complaint must allege first whether they are engaged in business in the
Philippines or they are not so engaged. If the first, they must have been duly
licensed in order to maintain this suit.I f the second, if the transaction sued upon
is singular and isolated, no such license is required. In either case, the qualifying
circumstance is an essential part of the element of plaintiffs' capacity to sue and
must be affirmatively pleaded
It was indeed in the light of these and other consideration that this Court has seen
fit to amend the former rule by requiring in the Revised Rules (Section 4, Rule 8)
that "facts showing the capacity of a party to sue or be sued or the authority
5.
of a party to sue or be sued in a representative capacity or the legal existence
of an organized association of persons that is made a party, must be
averred."
DOCTRINE: The fact that a foreign corporation is not doing business in the
6.
Philippines must be alleged if a foreign corporation desires to sue in Philippines
courts under the “isolated transactions rule.”
FACTS:
1. Present case is an appeal from orders of the CFI of Cebu which dismissed
Atlantic Mutual and Continental Insurance, both are foreign corporations
existing user laws of the US.
2. Atlantic and Continental sued Cebu Stevedoring, a domestic corproation, for
recovery of sum of money alleging:
a. Cebu Stevedoring undertook to carry a shipment of copra for deliver
to Procter & Gamble Company, at Cebu City
b. that upon discharge, a portion of the copra was found damaged
c. since the copra had been previously insured with Atlantic and
Continental they paid the shipper and/or consignee, upon proper
claim and assessment of the damage, the sum of P15,980.30
d. As subrogee to the shipper's and/or consignee's rights, Atlantic and
Continental demanded, without success, settlement from Cebu
Stevedoring by reason of its failure to comply with its obligation, as
carrier, to deliver the copra in good order.
Cebu Stevedoring moved to dismiss on two grounds:
a. Atlantic and Continental had “No legal personality to appear before
Philippine courts and with no capacity to sue;” and
b. that the complaint did not state a cause of action
Both grounds were based upon failure of the complaint to allege compliance
with section 69 of the Corporation Law, which states:
a. SEC. 69. No foreign corporation or corporation formed, organized,
or existing under any laws other than those of the Philippines shall
be permitted to transact business in the Philippines or maintain by
itself or assigned any suit for the recovery of any debt, claim, or
demand whatever, unless it shall have the license prescribed in the
section immediately preceeding. Any officer, director or agent of the
corporation or any person transacting business for any foreign
corporation not having the license prescribed shall be punished by
imprisonment for not less than six months nor more than two years
or by a fine of not less than two hundred pesos nor more than one
thousand pesos, or by both such imprisonment and fine, in the
discretion of the Court.
Section 68 of the Corporation Law is almost identical with the first part of
Section 69 which requires a license before a foreign corporation may be
permitted to transact business in the Philippines, but adds that such license
may be obtained from the Director of Commerce upon order of the Secretary
of Commerce and Industry.
The trial court (CFI) found the complaint deficient in that it failed to state
that Atlantic and Continental were duly licensed to transact int he Philippines,
but gave them an opportunity to amend said complaint within a period of 10
days.
a. The trial court would have plaintiffs amend the complaint by
including therein an allegation that as foreign corporations they
were duly licensed to engage in business in the Philippines.
b. The implication of the court's ruling is that without such license a
foreign corporation may not sue in our courts in view of section 69
of the Corporation Law.
 7. Atlantic and Continental contend that this is an erroneous interpretation of
the statute; that a license is necessary before a foreign corporation may
transact, that is, engage in, business in the Philippines, and if so engaged
before, it may maintain a suit in our courts; but that if a foreign corporation
is not doing business here it is not barred from seeking redress in our courts
in proper cases, as when it sues on an isolated transaction, even if it has not
obtained a license pursuant to Section 69.
ISSUE/s:
1. WoN Atlantic and Continental have capacity to sue in PH courts - NO, The
fact that a foreign corporation is not doing business in the Philippines must
be alleged if a foreign corporation desires to sue in Philippines courts under
the “isolated transactions rule.”
RULING: The orders appealed from are affirmed, with costs against plaintiffs-
appellants.
RATIO:
1. Justice Malcolm in Marshall-Wells Co. vs. Elser & Co., said after analyzing
Section 69 of the Corporation Law: "The Law simply means that no foreign
corporation shall be permitted to transact business in the Philippines, ...
unless it shall have the license required by law, and, until it complies with
this law, shall not be permitted to maintain any suit in the local courts.”
2. The object of the statute was not to prevent the foreign corporation from
performing single acts, but to prevent it from acquiring a domicile for the
purpose of business without taking the steps necessary to render it amenable
to suit in the local courts.
3. The implication of the law is that it was never the purpose of the Legislature
to exclude a foreign corporation which happens to obtain an isolated order
for business from the Philippines, from securing redress in the Philippine
Courts, and thus, in effect, to permit persons to avoid their contracts made
with such foreign corporations.
4. The effect of the statute preventing foreign corporations from doing business
and from bringing actions in the local courts, except in compliance with
elaborate requirements, must not be unduly extended or improperly applied.
5. It should not be construed to extend beyond the plain meaning of its terms,
considered in connection with its object, and in connection with the spirit of
the entire law.
6. But merely to say that a foreign corporation not doing business in the
Philippines does not need a license in order to sue in our courts does not
completely resolve the issue in the present case.
7. It should be noted that insofar as the allegations in the complaint have a
bearing on appellants' capacity to sue, all that is averred is that they are both
foreign corporations existing under the laws of the United States.
a. This averment conjures two alternative possibilities: either they are
engaged in business in the Philippines or they are not so
engaged.
b. If the first, they must have been duly licensed in order to maintain
this suit;
c. if the second, if the transaction sued upon is singular and isolated,
no such license is required.
d. In either case, the qualifying circumstance is an essential part of
the element of plaintiffs' capacity to sue and must be
affirmatively pleaded
8. Where the law denies to a foreign corporation the right to maintain suit unless
it has previously complied with a certain requirement, then such compliance,
or the fact that the suing corporation is exempt therefrom, becomes a
necessary averment in the complaint.
9. These are matters peculiarly within the knowledge of appellants alone, and it
would be unfair to impose upon appellee the burden of asserting and proving
the contrary.
10. It is enough that foreign corporations are allowed by law to seek redress in
our courts under certain conditions: the interpretation of the law should not
go so far as to include, in effect, an inference that those conditions have been
met from the mere fact that the party suing is a foreign corporation.
11. It was indeed in the light of these and other consideration that this Court
has seen fit to amend the former rule by requiring in the Revised Rules
(Section 4, Rule 8) that "facts showing the capacity of a party to sue or
be sued or the authority of a party to sue or be sued in a representative
capacity or the legal existence of an organized association of persons that
is made a party, must be averred."
 009 MERI.L LYNCH FUTURES INC. V CA (ARMAND)
July 24, 1992 | Narvasa, J. | Estoppel
PETITIONER: Merill Lunch Futures, Inc
RESPONDENTS: Court of Appeals and Spouses Pedro Lara and Elisa Lara
SUMMARY: On November 23, 1987, Merrill Lynch Futures, Inc. (ML) filed a
complaint with the QC RTC against Spouses LARA for the recovery of a debt and
interest thereon, damages, and attorney's fees.
In ML’s complaint, it described itself as (a) a non-resident foreign corporation, not
doing business in the Philippines and a (b) "futures commission merchant" duly
licensed in the futures markets and exchanges in the United States. He essentially
functions as a broker, executing orders to buy and sell futures contracts received from
its customers on U.S. futures exchanges. A "futures contract" is a contractual
commitment to buy and sell a standardized quantity of a particular item at a specified
future settlement date and at a price agreed upon, with the purchase or sale being
executed on a regulated futures exchange. Petitioner alleges that on September 28,
1983 ML entered into a Futures Customer Agreement with the defendant spouses.
Pursuant to the contract, Spouses transmitted orders to buy and sell futures contracts
to ML through the facilities of Merrill Lynch Philippines, Inc., a Philippine
corporation and a company servicing ML’s customers. The Spouses knew and were
duly advised that Merrill Lynch Philippines, Inc. was not a broker in futures contracts
and that it did not have a license from the SEC to operate as a commodity trading
advisor. The Spouses actively traded in futures contracts for four years there being
regular accounting and corresponding remittances of money made between the
parties.Because of a loss amounting to US$160,749.69 incurred in respect of three (3)
transactions, Spouses became indebted to ML FUTURES for US$84,836.27. The
Lara Spouses however refused to pay alleging that the transactions were null and void
because Merrill Lynch Philippines, Inc. had no license to operate as a 'commodity
and/or financial futures broker. In a motion to dismiss, the defendant spouses averred
that: (a) ML is prohibited by law to maintain or intervene in any action, suit or
proceeding in any court or administrative agency of the Philippines because it
described itself in the complaint as “not being licensed, but had been doing business
in the Philippines at least for the last four (4) years; (b) they had never been informed
that Merrill Lynch Philippines, Inc. was not licensed to do business in this country;
and (c) all their transactions had actually been with MERRILL LYNCH PIERCE
FENNER & SMITH, INC., and not with ML FUTURES. RTC and CA: Dismissed
the case because the plaintiff has no legal capacity to sue and that the complaint states
no cause of action. WoN Merrill Lynch Futures is prohibited from suing in Phil-
ippine Courts for doing business in the country without a license. - NO, remand
to determine Spouses’ liability. Despite having no license to transact business in the
Philippines, the fact that the Lara Spouses had done business with ML in the
Philippines through ML Philippines, the Spouses are now estopped to impugn ML’s
capacity to sue them in Philippine courts. Under Sec. 133 of the Corporation Code,
“no foreign corporation transacting business in the Philippines without a license, or
its successors or assigns, shall be permitted to maintain or intervene in any action,
suit or proceeding in any court or administrative agency in the Philippines; but such
corporation may be sued or proceeded against before Philippine courts or
administrative tribunals on any valid cause of action recognized under Philippine
laws.”
However, one who has dealt with a corporation of foreign origin as a corporate entity
is estopped to deny its corporate existence and capacity. This principle will be
applied to prevent a person contracting with a foreign corporation from later taking
advantage of its noncompliance with the statutes, chiefly in cases where such person
has received the benefits of the contract. The Court is satisfied that the Spouses did
transact business with ML through its agent corporation organized in the Philippines,
and that on several occasions the latter received account documents and money in
connection with those transactions. There would seem to be no question that the
Spouses received benefits generated by their business relations with ML. Those
business relations, spanned a period of 7 years; and they evidently found those
relations to be of such profitability as warranted their maintaining them for that not
insignificant period of time; otherwise, it is reasonably certain that they would have
terminated their dealings with ML much, much earlier. Considerations of equity
dictate that, at the very least, the issue of whether the Spouses are in truth liable to
ML and if so in what amount, and whether they were so far aware of the absence of
the requisite licenses on the part of ML and its Philippine correspondent, as to be
estopped from alleging that fact as defense to such liability, should be ventilated and
adjudicated on the merits by the proper trial court.
DOCTRINE: Under the principle of estoppel, a foreign corporation doing business
in the Philippines may sue in Philippine courts even without license to do business
against a Philippine citizen who had contracted with and been benefited by said cor-
poration and knew it to be without the necessary license to do business.
FACTS:
1. November 23, 1987 – Merrill Lynch Futures Inc (ML Futures) filed a com-
plaint with the RTC Quezon City against Spouses Pedro and Elisa Lara for
the recovery of a debt and interest thereon, damages and attorney’s fees.
2. ML Futures described itself as
1. non-resident foreign corporation not doing business in the Philip-
pines, duly organized and existing under and by virtue of the laws
of the state of Delaware USA
2. futures commission merchant duly licensed to act as such in the fu-
ture markets and excahnges in the United States essentialy func-
tioning as a broker, executing orders to buy and sell futures con-
tracts received from its customers on US future exchanges
3. It also defined a "futures contract" as a "contractual commitment to buy and
sell a standardized quantity of a particular item at a specified future settle-
ment date and at a price agreed upon, with the purchase or sale being exe-
cuted on a regulated futures exchange."
 4. ML futures alleges the following in its complaint
1) that on September 28, 1983 it entered into a Futures Customer Agree-
ment with the defendant spouses (Account No. 138-12161), in virtue of
which it agreed to act as the latter's broker for the purchase and sale of fu-
tures contracts in the U.S.;
2) that pursuant to the contract, orders to buy and sell futures contracts were
transmitted to ML FUTURES by the Lara Spouses "through the facilities of
Merrill Lynch Philippines, Inc., a Philippine corporation and a company
servicing plaintiffs customers;
3) that from the outset, the Lara Spouses "knew and were duly advised that
Merrill Lynch Philippines, Inc. was not a broker in futures contracts," and
that it "did not have a license from the Securities and Exchange Commis-
sion to operate as a commodity trading advisor (i.e., 'an entity which, not
being a broker, furnishes advice on commodity futures to persons who trade
in futures contracts');
4) that in line with the above mentioned agreement and through said Merrill
Lynch Philippines, Inc., the Lara Spouses actively traded in futures con-
tracts, including "stock index futures" for four years or so, i.e., from 1983 to
October, 1987, 3 there being more or less regular accounting and corre-
sponding remittances of money (or crediting or debiting) made between the
spouses and ML FUTURES;
5) that because of a loss amounting to US$160,749.69 incurred in respect of
three (3) transactions involving "index futures," and after setting this off
against an amount of US$75,913.42 then owing by ML FUTURES to the
Lara Spouses, said spouses became indebted to ML FUTURES for the en-
suing balance of US$84,836.27, which the latter asked them to pay;
6) that the Lara Spouses however refused to pay this balance, "alleging that
the transactions were null and void because Merrill Lynch Philippines, Inc.,
the Philippine company servicing accounts of plaintiff, . . had no license to
operate as a 'commodity and/or financial futures broker.'"
ISSUE/s:
WoN Merrill Lynch Futures is prohibited from suing in Philippine Courts for
doing business in the country without a license. - NO, remand to determine
Spouses’ liability. Despite having no license to transact business in the Philippines,
the fact that the Lara Spouses had done business with ML in the Philippines through
ML Philippines, the Spouses are now estopped to impugn ML’s capacity to sue them
in Philippine courts.
RULING: WHEREFORE, the decision of the CA are REVERSED and SET
ASIDE, and the Regional Trial Court at Quezon City is ORDERED to reinstate Civil
Case No. Q-52360 and forthwith conduct a hearing to adjudicate the issues set out in
the preceding paragraph on the merits.
RATIO:
37. As just stated, the Lara Spouse's motion to dismiss was founded on two (2)
grounds: (a) that the plaintiff has no legal capacity to sue, and (b) that the
complaint states no cause of action
38. As regards the second ground, i.e., that the complaint states no cause of ac-
tion, the settled doctrine of course is that said ground must appear on the face
of the complaint, and its existence may be determined only by the allegations
of the complaint, consideration of other facts being proscribed, and any at-
tempt to prove extraneous circumstances not being allowed. The test of the
sufficiency of the facts alleged in a complaint as constituting a cause of action
is whether or not, admitting the facts alleged, the court might render a valid
judgment upon the same in accordance with the prayer of the complaint. In-
deed, it is error for a judge to conduct a preliminary hearing and receive evi-
dence on the affirmative defense of failure of the complaint to state a cause
of action.
39. The other ground for dismissal relied upon, i.e., that the plaintiff has no legal
capacity to sue — may be understood in two senses: one, that the plaintiff is
prohibited or otherwise incapacitated by law to institute suit in Philippine
Courts, or two, although not otherwise incapacitated in the sense just stated,
that it is not a real party in interest.Now, the Lara Spouses contend that ML
Futures has no capacity to sue them because the transactions subject of the
complaint were had by them, not with the plaintiff ML Futures, but with Mer-
rill Lynch Pierce Fenner & Smith, Inc. Evidence is quite obviously needed in
this situation, for it is not to be expected that said ground, or any facts from
which its existence may be inferred, will be found in the averments of the
complaint. When such a ground is asserted in a motion to dismiss, the general
rule governing evidence on motions applies. The rule is embodied in Section
7, Rule 133 of the Rules of Court.
40. There was, to be sure, no affidavit or deposition attached to the Lara Spouses'
motion to dismiss or thereafter proffered in proof of the averments of their
motion. The motion itself was not verified. What the spouses did do was to
refer in their motion to documents which purported to establish that it was
not with ML Futures that they had theretofore been dealing, but another, dis-
tinct entity, Merrill Lynch, Pierce, Fenner & Smith, Inc., copies of which
documents were attached to the motion. It is significant that ML Futures
raised no issue relative to the authenticity of the documents thus annexed to
the Laras' motion. In fact, its arguments subsumed the genuineness thereof
and even adverted to one or two of them. Its objection was centered on the
propriety of taking account of those documents as evidence, considering the
established principle that no evidence should be received in the resolution of
a motion to dismiss based on an alleged failure of the complaint to state a
cause of action. There being otherwise no question respecting the genu-
ineness of the documents, nor of their relevance to at least one of the
grounds for dismissal — i.e., the prohibition on suits in Philippine
 Courts by foreign corporations doing business in the country without li-
cense — it would have been a superfluity for the Court to require prior
proof of their authenticity, and no error may be ascribed to the Trial
Court in taking account of them in the determination of the motion on
the ground, not that the complaint fails to state a cause of action — as
regards which evidence is improper and impermissible — but that the
plaintiff has no legal capacity to sue — respecting which proof may and
should be presented.
41. Neither may ML Futures argue with any degree of tenability that it had been
denied due process in the premises. As just pointed out, it was very clear
from the outset that the claim of lack of its capacity to sue was being
made to rest squarely on the documents annexed thereto, and ML Fu-
tures had more than ample opportunity to impugn those documents and
require their authentication, but did not do so. To sustain its theory that
there should have been identification and authentication, and formal offer, of
those documents in the Trial Court pursuant to the rules of evidence would
be to give unwarranted importance to technicality and make it prevail over
the substance of the issue.
42. The Court is satisfied that the facts on record adequately establish that
ML Futures, operating in the United States, had indeed done business
with the Lara Spouses in the Philippines over several years, had done so
at all times through Merrill Lynch Philippines, Inc. (MLPI), a corpora-
tion organized in this country, and had executed all these transactions
without ML Futures being licensed to so transact business here, and
without MLPI being authorized to operate as a commodity futures trad-
ing advisor. These are the factual findings of both the Trial Court and the
Court of Appeals. These, too, are the conclusions of the Securities & Ex-
change Commission which denied MLPI's application to operate as a com-
modity futures trading advisor, a denial subsequently affirmed by the Court
of Appeals. Prescinding from the proposition that factual findings of the
Court of Appeals are generally conclusive this Court has been cited to no
circumstance of substance to warrant reversal of said Appellate Court's find-
ings or conclusions in this case.
43. The Court is satisfied, too, that the Laras did transact business with ML Fu-
tures through its agent corporation organized in the Philippines, it being un-
necessary to determine whether this domestic firm was MLPI (Merrill Lynch
Philippines, Inc.) or Merrill Lynch Pierce Fenner & Smith (MLPI's alleged
predecessor). The fact is that ML Futures did deal with futures contracts
in exchanges in the United States in behalf and for the account of the
Lara Spouses, and that on several occasions the latter received account
documents and money in connection with those transactions.
44. If it be true that during all the time that they were transacting with ML Fu-
tures, the Laras were fully aware of its lack of license to do business in the
Philippines, and in relation to those transactions had made payments to, and
received money from it for several years, the question is whether or not the
Lara Spouses are now estopped to impugn ML FUTURES' capacity to sue
them in the courts of the forum
45. The rule is that a party is estopped to challenge the personality of a corpora-
tion after having acknowledged the same by entering into a contract with
it. And the "doctrine of estoppel to deny corporate existence applies to
foreign as well as to domestic corporations;" “one who has dealt with a
corporation of foreign origin as a corporate entity is estopped to deny its
corporate existence and capacity." The principle "will be applied to pre-
vent a person contracting with a foreign corporation from later taking
advantage of its noncompliance with the statutes, chiefly in cases where
such person has received the benefits of the contract where such person
has acted as agent for the corporation and has violated his fiduciary ob-
ligations as such, and where the statute does not provide that the contract
shall be void, but merely fixes a special penalty for violation of the stat-
ute.
46. The doctrine was adopted by this Court as early as 1924 in Asia Banking
Corporation v. Standard Products Co.
The general rule that in the absence of fraud of person who has contracted or otherwise dealt with an asso-
ciation in such a way as to recognize and in effect admit its legal existence as a corporate body is thereby
estopped to deny its corporate existence in any action leading out of or involving such contract or dealing,
unless its existence is attacked for causes which have arisen since making the contract or other dealing re-
lied on as an estoppel and this applies to foreign as well as domestic corporations.
47. There would seem to be no question that the Laras received benefits gener-
ated by their business relations with ML Futures. Those business relations,
according to the Laras themselves, spanned a period of seven (7) years; and
they evidently found those relations to be of such profitability as warranted
their maintaining them for that not insignificant period of time; otherwise, it
is reasonably certain that they would have terminated their dealings with ML
Futures much, much earlier. In fact, even as regards their last transaction, in
which the Laras allegedly suffered a loss in the sum of US$160,749.69, the
Laras nonetheless still received some monetary advantage, for ML Futures
credited them with the amount of US$75,913.42 then due to them, thus re-
ducing their debt to US$84,836.27. Given these facts, and assuming that the
Lara Spouses were aware from the outset that ML Futures had no license to
do business in this country and MLPI, no authority to act as broker for it, it
would appear quite inequitable for the Laras to evade payment of an other-
wise legitimate indebtedness due and owing to ML Futures upon the plea that
it should not have done business in this country in the first place, or that its
agent in this country, MLPI, had no license either to operate as a "commodity
and/or financial futures broker."
48. Considerations of equity dictate that, at the very least, the issue of
whether the Laras are in truth liable to ML Futures and if so in what
amount, and whether they were so far aware of the absence of the requi-
site licenses on the part of ML Futures and its Philippine correspondent,
MLPI, as to be estopped from alleging that fact as defense to such liabil-
ity, should be ventilated and adjudicated on the merits by the proper
trial court.
 010 ERIKS LTD. v. CA (MATSUMURA)
Feb. 6, 1997 | Panganiban J. | Estoppel Doctrine
PETITIONER: Eriks PTE., Ltd
RESPONDENTS: Court of Appeals and Delfin Enriquez, Jr.
SUMMARY: Eriks Pte., Ltd is a non-resident foreign corporation engaged in the
manufacture and sale of elements such as valves and pipes used for industrial pur-
poses. It transacted with Delfin Enriquez (under the business name Darlene EB Con-
trols Centre and/or EB Karmine Commercial) 16 times in the span of 5 months where
Enriquez ordered various elements from Eriks on various occasions which would be
paid through the 90-day credit term of Enriquez. However, Enriquez didn’t settle his
account despite demand, so Eriks filed a case with the RTC of Makati. This was dis-
missed on the ground that Eriks is a foreign corporation doing business in the Philip-
pines without a license. Such was affirmed by the SC.
The issue in this case is W/N Eriks, a foreign corporation, can maintain an action in
the Philippine courts without first obtaining a license to do business in the Philippine
—NO. The SC ruled that Section 133 of the Corporation Code prohibits, not merely
absence of the prescribed license, but it also bars a foreign corporation “doing busi-
ness” in the Philippines without such license access to our courts. Note that the opera-
tive word is “doing business” meaning foreign corporations doing isolated transactions
may seek recourse in philippine courts even without a license. Thus, the court looked
into what “doing business” meant under our jurisdiction because the Corporation Code
does not provide such.What is determinative of “doing business” is not really the num-
ber or the quantity of the transactions, but more importantly, the intention of an entity
to continue the body of its business in the country. The number and quantity are
merely evidence of such intention. Moreover, the accepted rule in jurisprudence is that
each case must be judged in the light of its own environmental circumstances.
In this case, facts show that Eriks showed an intention to continue transacting with En-
riquez because of facts such as (1) the sale by Eriks was actually carried out in the
progressive prosecution of commercial gain and the pursuit of the purpose and object
of its business, pure and simple (2) it granted and extended the 90-day credit terms to
Enriquez, and (3) absence of any fact or circumstance which might tend even remotely
to negate such intention to continue the progressive prosecution of Eriks’s business ac-
tivities in this country. Given the facts, the SC cannot see how Eriks’ business deal-
ings will fit the category of “isolated transactions” considering that its intention to
continue and pursue the corpus of its business in the country had been clearly estab-
lished. Hence, Eriks must be held to be incapacitated to maintain the action a quo
against Enriquez. The Court cannot allow foreign corporations or entities which con-
duct regular business any access to courts without the fulfillment by such corporations
of the necessary requisites to be subjected to our government’s regulation and author-
ity. However, this judgment will not create res judicata, and Eriks may seek redress
from the courts once it acquires a license.
DOCTRINE: Foreign corporations which conduct regular business should be denied
any access to courts until they secure a license so as to ensure that they will abide by
the decisions of our courts, even if adverse to it. Dismissal of the petition would be
without prejudice to the foreign corporation subsequently re-filing the case when it has
obtained the requisite license
FACTS:
1. Eriks Pte., Ltd. is a non-resident foreign corporation engaged in the man-
ufacture and sale of elements used in sealing pumps, valves and pipes for
industrial purposes, valves and control equipment used for industrial fluid
control and PVC pipes and fittings for industrial uses.
2. On various dates during the period of January 17 to August 16, 1989, Delfin
Enriquez, under the business name Darlene EB Controls Center and/or EB
Karmine Commercial, ordered and received from Eriks various elements
used in sealing pumps, valves, pipes and control equipment, PVC pipes and
fittings. (A total of 16 times over the past 5 months)
3. These ordered materials were delivered via airfreight with corresponding in-
voices.
4. The transfers of goods were perfected in Singapore, for Enriquez’s account,
F.O.B. Singapore, with a 90-day credit term. Subsequently, Eriks demanded
that Enriquez settle his account, but the latter refused.
5. On August 28, 1991, Eriks filed a case with the RTC of Makati against En-
riquez for the recovery of S$41,939.63 or its equivalent in Philippine cur-
rency, plus interest thereon and damages.
6. Enriquez responded with a Motion to Dismiss, contending that Eriks had no
legal capacity to sue.
7. The RTC dismissed the action on the ground that Eriks is a foreign corpora-
tion doing business in the Philippines without a license.
8. The CA affirmed this decision stating that Eriks had no legal capacity to sue.
9. Hence, this petition.
10. Eriks insists that the series of sales made to Enriquez would still constitute
isolated transactions despite the number of invoices covering several separate
and distinct items sold and shipped over a span of four to five months, and
that an affirmation of the CA’s ruling would result in injustice and unjust
enrichment.
11. Enriquez counters that to declare Eriks as possessing capacity to sue will ren-
der nugatory the provisions of the Corporation Code and constitute a gross
 violation of our laws. Thus, he argues, petitioner is undeserving of legal pro-
tection.
ISSUE/s:
1. WoN a foreign corporation which sold its products sixteen times over a five-
month period to the same Filipino buyer can maintain maintaining an action
to collect payment therefor in Philippine courts without first obtaining a li-
cense to do business in the Philippines – NO because a foreign corporation
doing business in the Philippines needs a license to have access to our courts.
RULING: WHEREFORE, premises considered, the instant petition is hereby DE-
NIED and the assailed Decision is AFFIRMED.
RATIO:
1. The resolution of this issue depends on whether Eriks’ business with En-
riquez may be treated as isolated transactions.
2. Section 133 of the Corporation Code states that: Sec. 133. Doing business
without a license.—No foreign corporation transacting business in the Phil-
ippines without a license, or its successors or assigns, shall be permitted to
maintain or intervene in any action, suit or proceeding in any court or admin-
istrative agency of the Philippines; but such corporation may be sued or pro-
ceeded against before Philippine courts or administrative tribunals on any
valid cause of action recognized under Philippine laws
3. This provision prohibits, not merely absence of the prescribed license, but
it also bars a foreign corporation “doing business” in the Philippines
without such license access to our courts.
4. A foreign corporation without such license is not ipso facto incapacitated
from bringing an action. A license is necessary only if it is “transacting or
doing business” in the country.
5. However, there is no definitive rule on what constitutes “doing,” “engaging
in,” or “transacting” business. The Corporation Code itself does not define
such terms.
6. To fill the gap, the evolution of its statutory definition has produced a rather
all-encompassing concept in Republic Act No. 7042 (An Act to Promote For-
eign Investments, Prescribe the Procedures for Registering Enterprises Doing
Business in the Philippines, and for Other Purposes)
“SEC. 3. Definitions.—As used in this Act:
xxx xxx xxx
(d) the phrase ‘doing business’ shall include soliciting orders, service con-
tracts, opening offices, whether called liaison’ offices or branches; appoint-
ing representatives or distributors domiciled in the Philippines or who in
any calendar year stay in the country for a period or periods totalling one
hundred eight(y) (180) days or more; participating in the management, su-
pervision or control of any domestic business, firm, entity or corporation in
the Philippines; and any other act or acts that imply a continuity of com-
mercial dealings or arrangements, and contemplate to that extent the
performance of acts or works, or the exercise of some of the functions
normally incident to, and in progressive prosecution of, commercial
gain or of the, purpose and object of the business organization. Pro-
vided, however, That the phrase ‘doing business’ shall not be deemed to in-
clude mere investment as a shareholder by a foreign entity in domestic cor-
porations duly registered to do business, and/or the exercise of rights as
such investor; nor having a nominee director or officer to represent its inter-
ests in such corporation; nor appointing a representative or distributor domi-
ciled in the Philippines which transacts business in its own name and for its
own account.”
7. In The Mentholatum Co., Inc. vs. Mangaliman, the SC discussed the test to
determine whether a foreign company is “doing business” in the Philip-
pines: The true test, however, seems to be whether the foreign corporation is
continuing the body or substance of the business or enterprise for which it
‘was organized or whether it has substantially retired from it and turned it
over to another. The term implies a continuity of commercial dealings and
arrangements, and contemplates, to that extent, the performance of acts or
works or the exercise of some of the functions normally incident to, and in
progressive prosecution of, the purpose and object of its organization.
8. The accepted rule in jurisprudence is that each case must be judged in
the light of its own environmental circumstances. It should be kept in mind
that the purpose of the law is to subject the foreign corporation doing business
in the Philippines to the jurisdiction of our courts.
9. It is not to prevent the foreign corporation from performing single or isolated
acts, but to bar it from acquiring a domicile for the purpose of business with-
out first taking the steps necessary to render it amenable to suits in the local
courts.
10. More than the sheer number of transactions entered into, a clear and unmis-
takable intention on the part of petitioner to continue the body of its business
in the Philippines is more than apparent.
11. As alleged in its complaint, it is engaged in the manufacture and sale of ele-
ments used in sealing pumps, valves, and pipes for industrial purposes, valves
 and control equipment used for industrial fluid control and PVC pipes and and pursue the corpus of its business in the country had been clearly estab-
fittings for industrial use. Thus, the sale by Eriks of the items covered by the lished. It has not presented any convincing argument with equally convincing
receipts, which are part and parcel of its main product line, was actually car- evidence for us to rule otherwise.
ried out in the progressive prosecution of commercial gain and the pursuit of 19. Hence, Eriks must be held to be incapacitated to maintain the action a quo
the purpose and object of its business, pure and simple. against Enriquez.
12. Further, its grant and extension of 90-day credit terms to Enriquez for 20. It was never the intent of the legislature to bar court access to a foreign cor-
every purchase made, unarguably shows an intention to continue trans- poration or entity which happens to obtain an isolated order for business in
acting with Enriquez, since in the usual course of commercial transactions, the Philippines. Neither, did it intend to shield debtors from their legitimate
credit is extended only to customers in good standing or to those on whom liabilities or obligations. But it cannot allow foreign corporations or enti-
there is an intention to maintain long-term relationship. This being so, the ties which conduct regular business any access to courts without the ful-
existence of a distributorship agreement between the parties, as alleged fillment by such corporations of the necessary requisites to be subjected
but not proven by Enriquez, would, if duly established by competent ev- to our government’s regulation and authority.
idence, be merely corroborative, and failure to sufficiently prove said al- 21. By securing a license, the foreign entity would be giving assurance that it will
legation will not significantly affect the finding of the courts below. Nor abide by the decisions of our courts, even if adverse to it.
our own ruling. 22. However, the SC mentions that there are still remedies that Eriks may avail
13. It is precisely upon the set of facts above detailed that the SC concur with the of. Res judicata does not set in a case dismissed for lack of capacity to sue,
CA that Eriks corporation was doing business in the country. because there has been no determination on the merits.
14. Equally important is the absence of any fact or circumstance which might 23. Subsequent acquisition of the license will cure the lack of capacity at the
tend even remotely to negate such intention to continue the progressive time of the execution of the contract. The requirement of a license is not
prosecution of Eriks’s business activities in this country. Had Enriquez not meant to put foreign corporations at a disadvantage. Rather, the doctrine of
turned out to be a bad risk, in all likelihood Eriks would have indefinitely lack of capacity to sue is based on considerations of sound public policy.
continued its commercial transactions with him, and not surprisingly, in ever
increasing volumes.
15. The series of transactions in question could not have been isolated or
casual transactions.
16. What is determinative of “doing business” is not really the number or the
quantity of the transactions, but more importantly, the intention of an en-
tity to continue the body of its business in the country. The number and
quantity are merely evidence of such intention.
17. The phrase “isolated transaction” has a definite and fixed meaning, i.e. a
transaction or series of transactions set apart from the common business of a
foreign enterprise in the sense that there is no intention to engage in a pro-
gressive pursuit of the purpose and object of the business organization.
Whether a foreign corporation is “doing business” does not necessarily de-
pend upon the frequency of its transactions, but more upon the nature and
character of the transactions.
18. Given the facts, the SC cannot see how Eriks’ business dealings will fit the
category of “isolated transactions” considering that its intention to continue
 011 GENERAL CORP. OF THE PHIL. v. UNION INSURANCE virtue of the laws of the Philippines.
SOCIETY OF CANTON, LTD. (Marcos) 2. The Union Insurance Society of Canton, Ltd. (Union) is a foreign
Sept. 14, 1950 | Montemayor, J. | Suits against Foreign Corporations insurance corporation, duly authorized to do business in the Philippines,
with head of office in the City of Hongkong, China, and branch office in
Manila.
PETITIONER: General Corporation of the Philippines and Mayon Investment
3. The Fireman's Fund Insurance Co. (Fireman) is a foreign insurance
Co.
corporation duly organized and existing under the laws of the State of
California, USA.
RESPONDENTS: Union Insurance Society of Canton, Ltd. and/or Fireman's
4. Union has been acting as settling agent of and settling insurance claims
Fund Insurance Co.
against Fireman.
5. General Corp. sued Union and Fireman for the payment of twelve marine
SUMMARY: Fireman, a foreign insurance corporation, organized in California,
insurance policies. Said policies were issued by Fireman for merchandise
was sued by General Corp. for the payment of 12 marine insurance claims since
shipped from the United States to the Philippines.
the merchandise covered by its insurance policies were lost and damaged while in
6. The suit stremmed from the merchandise because upon its arrival in Manila,
transit. The 11 claims were adjudged in the Superior Court of the State of
it was found out that some of it were lost and damaged while in transit.
Washington for King County and the decision was rendered against General Corp.
7. General Corp. filed corresponding claims with Union in Manila who was
The trial court held that this was res judicata among the parties except for that 1
acting as settling agent of Fireman.
insurance claim that wasn’t adjudicated upon. The trial court condemned Fireman
8. All the 11 claim papers, except one based on insurance policy no. 70448/6,
to pay General Corp. the sum of $2,000 based on that 1 insurance policy. Fireman
were forwarded to Fireman’s office in Seattle Washington.
contends that the trial court erred in holding that it acquired jurisdiction over it,
9. The claims were then adjudicated by the Superior Court of the State of
because when service of summons was served against him through its agent
Washington for King County and the decision was rendered against General
(Union), it had not yet been registered and authorized to do business in the
Corp.
Philippines. The issue is WoN the trial court acquired jurisdiction over Fireman–
10. The claim based on insurance policy no. 70448/6 was not forwarded to the
YES, because it was clearly doing business in the Philippines and the Rules made
US and so it was never passed upon by Fireman, and was neither approved
no distinction whether this was done legally or not. As long as the foreign private
or disapproved by the Union.
corporation does or engages in business in this jurisdiction, it should and will be
11. The trial court (the one here in the PH), after hearing found and held that as
amenable to process and the jurisdiction of the local courts. Fireman was found to
regards to the 11 marine insurance policies, the decision by the Superior
be doing business since it maintained a settling agent in the Philippines to conduct
Court in the State of Washington, constituted as res adjudicata, binding
its business transactions. Further, the Court also noted that 2 months after it was
General Corp. therein.
served summons, it already obtained a license to do business in the Philippines. In
12. The trial court absolved Union from the complaint but condemned Fireman
the trial process, it employed attorneys and actively participated in the case.
to pay General Corp. the sum of $2,000 or its equivalent on the claim based
on marine insurance policy No. 70448/6.
DOCTRINE: A foreign corporation with a Philippine settling agent which issues
13. An appeal was made by both parties: General Corp. appealed the part of the
twelve marine policies covering different shipments to the Philippines is doing
decision referring to the 11 marine insurance policies, and Fireman on the
business here.
part were it was asked to pay $2,000.
14. Fireman contends that the trial court erred in holding that it acquired
Participation of a foreign corporation’s counsel in the trial process, e.g., cross-
jurisdiction over it, because when service of summons was served against
examination of witnesses, agreement and objection to documentary evidence, and
him through its agent (Union), it had not yet been registered and
the introduction of witnesses and documentary evidence would prevent the plea
authorized to do business in the Philippines.
of lack of jurisdiction over the person of such foreign corporation
15. The attorneys for the Union, petitioned the trial court to quash and declare
null and void the summons issued thru it on its co-defendant Fireman on the
FACTS: ground that the said company was not doing business in the Philippines, and
1. General Corporation of the Philippines and the Mayon Investment Co. that the Union had no authority from its co-defendant to receive summons on
(General Corp.) are domestic corporations duly organized and existing by its behalf.
 16. Trial court however overruled said petition on the ground that Fireman was 6. Also this events weren’t isolated business transactions since before the war,
indeed doing business and a mere denial was not sufficient to quash the Fireman would appear to have engaged in this kind of business and had
summons. employed its co-defendant Union as its settling agent.
7. Section 14, Rule 7 of the Rules of Court makes no distinction as to
ISSUE/s: WoN the trial court acquired jurisdiction over Fireman– YES, because it corporations with or without authority to do business in the Philippines.
was clearly doing business in the Philippines and the Rules made no distinction The test is whether a foreign corporation was actually doing business
whether this was done legally or not. here.
8. Otherwise, a foreign corporation illegally doing business here because of its
RULING: In view of the foregoing, the decision appealed from is hereby modified so refusal or neglect to obtain the corresponding license and authority to do
as to reduce the amount awarded to the plaintiffs and to be paid by the appellant business may successfully though unfairly plead such neglect or illegal act so
Fireman's Fund Insurance Co., from $2,000 to $635.50 or its equivalent in Philippine as to avoid service and thereby impugn the jurisdiction of the local courts.
currency, and in all other respects, the decision is affirmed. 9. Fireman further contends that according to section 68 of the Corporation
Law, service of summons on a foreign corporation may be made only upon
an agent of said corporation residing in the Philippines and authorized by the
RATIO: foreign corporation to accept service.
1. Section 14, Rule 7 of the Rules of Court reads as follows: 10. However, this said section does not apply to it since it refers to a foreign
"SEC. 14. Service upon private foreign corporations. — If the defendant is a foreign corporation doing business in the Philippines which has complied with the
corporation, or a non-resident joint stock company or association, doing business in law and obtained the corresponding license.
the Philippines, service may be made on its resident agent designated in accordance 11. It does not refer to a foreign corporation actually doing business here but
with law for that purpose, or, if there be no such agent, on the government official without the corresponding license or authority. In the latter case, service of
designated by law to that effect, or on any of its officers or agents within the summons is governed by section 14, Rule 7 of the Rules of Court.
Philippines.
12. Although Fireman had not yet been authorized to do business in the
2. Section 14, Rule 7 of the Rules of Court above-quoted in employing the
Philippines and so it had not yet designated an agent authorized to accept
phrase "doing business in the Philippines" makes no distinction as to
service of summons. But less than two months thereafter, it obtained such
whether said business was being done or engaged in legally with the
license or authority and even according to its own theory was then amenable
corresponding authority and license of the Government or, perhaps illegally,
to the jurisdiction of the local courts.
without the benefit of any such authority or license.
13. It employed able attorneys who led an answer, including motions on its
3. As long as the foreign private corporation does or engages in business in
behalf, and during the hearing, it was represented by the same attorneys
this jurisdiction, it should and will be amenable to process and the
who not only cross-examined the witness for the plaintiffs and agreed to or
jurisdiction of the local courts. This for the protection of the citizens, and
objected to documentary evidence, but introduced a witness on its behalf and
service upon any agent of said foreign corporation constitutes personal
presented documentary evidence. Under such circumstances, it must be
service upon the corporation and accordingly judgment may be rendered
clear that the appellant may not successfully plead lack of jurisdiction
against said foreign corporation.
over its person.
4. In order that a foreign corporation may be regarded as doing business within
a State, there must be continuity of conduct and intention to establish a
continuous business, such as the appointment of a local agent, and not one of
a temporary character.
5. Fireman, to judge by the twelve marine insurance policies issued as already
mentioned, policies covering different shipments, made payable in Manila,
indorsed in blank, and in practice, collectible by the consignees in Manila or
such other persons or entities who meet the terms by paying the amounts of
the invoices, rendering it not only convenient but necessary to appoint and
keep a settling agent in this jurisdiction. Such is certainly doing business in
the Philippines.

012 Facilities Mgmt Corp vs. De la Osa (LOYOLA)
March 26, 1979 | Makasiar, J. | Confidentiality
PETITIONER: Facilities Management Corporation, J.S. Dreyer, and J.V. Catuira
RESPONDENT: Leonardo de la Rosa and the Honorable Court of Industrial Rela-
tions
SUMMARY: Dela Osa was employed a painter, houseboy, and cashier by Facili-
ties Management (Wake Island – under US govt); he rendered overtime and night
shift for w/c he was not paid. Dela Osa filed a complaint for reinstatement and
backwages against Facilities; summons was served upon its resident agent (ap-
pointed in compliance w/ a DOLE Order) but Facilities averred that it is beyond the
territorial jurisdiction of the Philippine Courts being domiciled in Wake Island. The
case had become moot considering that Facilities eventually paid Dela Osa.
The issue in this case is WoN the FMC is engaged in business in the PH and
WoN PH courts have jurisdiction over FMC – YES to both since it has an agent
with authority to execute employment contracts and be bound by processes of PH
Courts. Facilities Management admitted that Mr. Catuira represented it in this
country for the purpose of making arrangements for the approval by the Depart-
ment of Labor of the employment of Filipinos who are recruited by the company as
its own employees for assignment abroad. In effect, Catuira was an officer repre-
senting Facilities Management in the Philippines. (see doctrine)
DOCTRINE: Indeed, if a foreign corporation, not engaged in business in the Phil-
ippines, is not barred from seeking redress from the courts in the Philippines, a for-
tiori, that same corporation cannot claim exemption from being sued in Philippine
courts for acts done against a person or persons in the Philippines.
FACTS:
1. Petitioner Leonardo dela Osa sought his reinstatement with full backwages
as well as the recovery of his overtime compensation, swing shift and
graveyard shift differentials.
2. Dela Osa alleges that he was employed by Facilities Management as fol-
lows:
a. Painter with an hourly rate $1.25 from March to November 1964
b. Houseboy with an hourly rate of $1.26 from Dec 1964 to Nov
1965
c. Houseboy with an hourly rate of $1.33 from Dec 1965 to Aug
1966
d. Cashier with an hourly rate of $1.40 from Aug 1966 to March
1967
3. He further avers that he was not paid both overtime and night shift premi-
ums despite his repeated demands from the corporation.
4. Facilities Management filed an answer interposing the defense that, being
domiciled in Wake Island (which is in Micronesia, southeast of Tokyo, but
under US govt)f, it is beyond the territorial jurisdiction of the Philippine
Government.
5. It also avers that J.V. Catuira, though and employee of Facilities Manage-
ment, is without power and authority of legal representation.
6. Lastly, it argues that the employment contract between Dela Osa and the
corporation carries the approval of the Department of Labor of the Philip-
pines.
7. Subsequently, it filed a motion to dismiss Dela Osa’s petition on the
ground that this court has no jurisdiction over the instant case. This motion
was denied by the court.
8. Facilities Management was also ordered to pay Dela Osa his overtime
compensation as well as his swing shift and graveyard shift premiums.
Hence, Facilities Management filed a petition for review on certiorari of
the decision of the lower court.
ISSUE/s:
1. WoN Facilities Management is engaged in business in the Philip-
pines – YES, this is evidenced by the appointment of Jaime Catuira
as its agent
2. WoN Philippine courts have jurisdiction over Facilities Manage-
ment, being domiciled in Wake Island – YES, the corporation had it-
self bound by processes of PH Courts
RULING: WHEREFORE, the petition is hereby DENIED with costs against the
petitioners.
RATIO:
13. The Supreme Court recognized that there are three other cases before it
involving Facilities Management. The Supreme Court also recognized that
the issue in the three cases previously resolved is the same as that pre-
sented to it in the case at bar – whether Facilities Management has been
doing business in the Philippines.
14. It then cited and adopted the majority opinion of the Court of Appeals in-
volving one of those three cases. Said CA decision explained that Facilities
Management is indeed doing business in the Philippines evidenced by
its appointment of Jaime Catuira as its agent with authority to execute
 Employment Contracts and receive, in behalf of the corporation, legal i. Soliciting orders, purchases (sales) or service contracts.
services and be bound by processes of the Philippine Courts of Justice, Concrete and specific solicitations by a foreign firm, not
for as long as he remains an employee of Facilities Management. acting independently of the foreign firm amounting to ne-
15. Also, Facilities Management admitted that Mr. Catuira represented it in gotiation or fixing of the terms and conditions of sales or
this country for the purpose of making arrangements for the approval by service contracts, regardless of whether the contracts are
the Department of Labor of the employment of Filipinos who are recruited actually reduced to writing, shall constitute doing busi-
by the company as its own employees for assignment abroad. In effect, ness even if the enterprise has no office or fixed place of
Catuira was an officer representing Facilities Management in the business in the Philippines. xxx
Philippines. ii. Appointing a representative or distributor who is doc-
16. The Supreme Court also cited the case of Aetna Casualty vs. Pacific Star iled in the Philippines, unless said representative or dis-
Line, which is, according to it, similar to the instant case. tributor has an independent status, i.e., it transacts busi-
a. In that case, the Court found that Aetna Casualty is not engaged ness in its name and for its own account, and not in the
in business in the Philippines but is merely collecting a claim as- name or for the account of the principal.
signed to it by the consignee – a mere isolated transaction. b. Opening offices, whether called “liaison offices, agencies or
b. It is not barred, therefore, from securing redress in the Philippine branches, unless proved otherwise.
courts although it has not secured a license to transact business in c. Any other act or acts that imply a continuity of commercial deal-
the country. ings or arrangements, and contemplate to that extent the perfor-
c. The Supreme Court holds that “indeed, if a foreign corporation, mance of acts or wroks, or the exercise of some of the functions
not engaged in business in the Philippines, is not barred from seek- normally incident to, or in the progressive prosecution of, com-
ing redress from the courts in the Philippines, a fortiori, that same mercial gain or of the purpose and objective of the business or-
corporation cannot claim exemption from being sued in Philippine ganization.
courts for acts done against a person or persons in the Philip-
pines.” NOTE: The case had become moot considering that Facilities eventually paid Dela
17. Further, from the facts of record, FMC may be considered as doing busi- Osa.
ness in the Philippines within the scope of Section 14, Rule 14 of the Rules
of the Court which provide:
a. Sec 14. Service upon private foreign corporations – If the de-
fendant is a foreign corporation or a non-resident joint stock com-
pany or association: doing business in the Philippines, service may
be made on its resident agent designated in accordance with law
for that purpose or, if there be no such agent, on the government
official designated by law to that effect, or on any of its officers
or agents within the Philippines.
18. Under the rules and regulations promulgated by the Board of Investments
implementing Rep. Act No. 5455, the phrase 'doing business' has been ex-
emption with illustrations, among them being as follows:
a. The performance within the Philippines of any act or combination
of acts enumerated in section l(l) of the Act shall constitute 'do-
ing business' therein. in particular, 'doing business includes:
 013 SIGNETICS CORPORATION VS. CA (ARIELLE)
August 31, 1993 | Vitug, J. | Local suits against foreign corporations
PETITIONER: Signetics Corporation
RESPONDENTS: Court of Appeals and Freuhauf Electronics Phils. Inc.
SUMMARY: Signetics Corporation is a foreign corporation. Through a wholly-
owned subsidiary, Signetics Filipinas, Signetics entered into a lease contract
over a piece of land with Freuhauf, a local company. Freuhauf filed a case
against Signetics for damages arising from the lease contract. Signetics filed by
special appearance a motion to dismiss the complaint on the ground of lack of
jurisdiction over its person, invoking Sec. 14 of Rule 14 of the Rules of Court.
Signetics also alleged that its fact of doing business in the Philippines should
first be established in order for summons to be validly made and jurisdiction ac-
quired by the court over its person. The trial court denied the motion to dismiss.
The CA affirmed the lower court’s ruling. The issue is WoN the fact of doing
business in the Philippines must first be established before a foreign corporation
could be served summons. The SC held in the negative.
The fact of doing business must be established by appropriate allegations in the
complaint. It must be noted that jurisdiction and venue of actions are initially
determined by the allegations of the complaint.
DOCTRINE: Evidence is not necessary to establish that a foreign corporation
is doing business in the Philippines. The minimum requirement for one to sue a
foreign corporation is to ALLEGE FACTS in the complaint that the corporation
is doing business in the Pilippines (accdg to Kat Gaw’s annotated syllabus).
Sine qua non requirement for service of summons and other legal processes or
any such agent or representative is that the foreign corporation is doing business
in the Philippines (From the original syllabus).
FACTS:
11. Petitioner Signetics Corporation was organized under the laws of the United
States. Through Signetics Filipinas Corporation, a wholly-owned subsidiary,
Signetics entered into a lease contract over a piece of land with Fruehauf
Electronics Phils.
12. In a complaint, Freuhauf sued Signetics for damages, accounting or return of
certain machinery, equipment and accessories, as well as the transfer of title
and surrender of possession of the buildings, installations and improvements
1
Sec. 14. Service upon private foreign corporation. – If the defendant is a foreign corporation,
or a non-resident joint stock company or association, doing business in the Philippines, service
may be made on its resident agent designated in accordance with law for that purpose, or, if
on the leased land.
13. Claiming that Signetics caused SigFil to insert in the lease contract the words,
“machineries, equipment, and accessories,” the defendants were able to with-
draw these assets from the cost-free transfer provision of the contract.
14. On the basis of the allegation that Signetics is a “subsidiary of US PHILIPS
CORPORATION and may be served summons at Phillips Electrical Lamps,”
service of summons was made on Signetics through TEAM Pacific Corpora-
tion.
15. By special appearance, Signetics filed a motion to dismiss the complaint on
the ground of lack of jurisdiction over its person. Invoking Sec. 14 of Rule
141 of the Rules of Court and the rule laid down in Pacific Micronisian Line
Inc vs. Del Rosario and Pelington to the effect that the fact of doing business
in the PH should first be established in order that summons could validly
made and jurisdiction acquired by the court over a foreign corporation.
16. The trial court denied the motion to dismiss on the ground that “doing busi-
ness” means a single act or transaction of a foreign corporation is not merely
incidental or causal but is of such character as distinctly to indicate a purpose
to do other business, such constitutes doing business within the meaning of
statutes.
17. Assuming arguendo that Signetics is a foreign corporation not doing business
in the PH, it has been held in other cases that although a foreign corporation
is not doing business in the PH, it may be used for acts done against persons
in the Philippines.
18. Signetics filed a motion for reconsideration but this was also denied. The CA
dismissed Signetics’ petition for certiorari and affirmed the order of the lower
court.
19. Signetics stresses that the averments in the complaint are at best mere allega-
tions and do not constitute “proof of doing business,” and that the allegations
do not demonstrate “doing business” and that the phrase “becoming inter-
ested in doing business” is not actually doing business here.
20. Signetics argues that what was effectively only alleged in th4e complaint as
an activity of doing business was the “mere equity investment” of Signetics
in SigFil.
ISSUE/s:
1. WoN given the factual allegations in the complaint, the lower court had correctly
assumed jurisdiction over Signetics, a foreign corporation – YES because juris-
diction and venue of actions are initially determined by the allegations of the com-
plaint.
there be no such agent, on the government official designated by law to that effect, or on any
of its officers or agents within the Philippines.
RULING: WHEREFORE, the instant petition for review on certiorari is DENIED.
RATIO:
1. Petitioner’s contention that there should be “proof” of the foreign corpora-
tion’s doing business in this country before it may be summoned is based on
the decision of Pacific Micronisian.
2. Signetics opines that the phrase, “the fact of doing business must first be es-
tablished in order that summons be made and jurisdiction acquired,” used in
the Pacific Micronisian pronouncement, would indicate that a mere allega-
tion to that effect in the complaint is not enough – there must instead be proof
of doing business.
3. The complaint may have been vaguely structured but not disjunctively as the
petitioner would rather suggest, it is not really so weak as to be fatally defi-
cient in the above requirement.
4. The allegations in the complaint are as follows:
a. That in 1978, Signetic became interested in engaging business in the
Philippines
b. Signetics organized a wholly owned domestic subsidiary corpora-
tion known as SIGNETICS FILIPINAS CORPORATION
c. That in 1987, the new owners unmasked itself when it dropped SIG-
FIL’S name and changed its corporate name to TECHNOLOGY
ELECTRONICS ASSEMBLY AND CORPORATION.
5. Signetics’ reliance on Hyopsung Maritime Co vs CA is misplaced. The Hy-
opsung case is under a completely different factual milieu. As summarized
by the Court, the complaint in that case was:
…for the recovery of damages based on a breach of contract which appears
to have been entirely entered into, executed, and consummated in Korea. In-
disputably, the shipment was loaded on board the foreign vessel MV "Don
Aurelio" at Pohang, Korea, by a Korean firm with offices at Seoul, Korea;
the corresponding bill of lading was issued in Seoul, Korea and the freight
was prepaid also at Seoul; the above vessel with its cargo never ever docked
at Manila or at any other port of entry in the Philippines; lastly, the petitioner
did not appoint any ship agent in the Philippines. Simply put, the petitioner
is beyond the reach of our courts.
6. However, in this case, the complaint alleged that Signetics had become inter-
ested in engaging in business in the Philippines; that it entered into the lease
contract involving properties in the Philippines, a situation that could have
allowed Frehauf to avail itself of the provisions of Sec. 17 of Rule 14, on the
extraterritorial service of summons, since the relief sought consists in exclud-
ing the defendant from any interest in property within the Philippines.
7. And that wile Signetics may have had transferred all its shareholdings in fa-
vor of TEAM Holdings, another foreign corporation, which Freuhauf claims
is a devious attempt to shield chicanery and to perpetuate fraud. On this score,
what might in a way also be revealing is that after Freuhauf moved to sell the
attached property, Signetics filed a pleading, intriguingly captioned “Mani-
festation.”
8. The said Manifestation provides the following:
Defendant, by counsel, respectfully states:
• Plaintiff filed a Motion to Sell Attached Properties and scheduled it
for hearing on August 24, 1990, justifying the sale on the allegations
that certain properties belonging to the defendant are perishable in
nature and liable to material depreciation in value.
• In pleadings filed by the defendant, the Court was requested to de-
termine whether there is a valid attachment on these alleged prop-
erties. This determination is necessary because defendant has
pointed out that personal jurisdiction could not be justified on the
basis of the so-called attachment because it was legally ineffective.
Two reasons were given to the Court. First, the property has not
been taken into actual custody of the sheriff as required by Rule 57,
Section 7 (c). Second, the property has not been shown to be owned
by the defendant.
• Since jurisdiction over the defendant is premised on the attachment,
the Honorable Court should therefore act on the motion to sell by
determining (i) whether plaintiff has shown that the property pro-
posed to be sold belongs to the defendant (ii) whether it was effec-
tively attached and (iii) whether its sale is justified (because it is
perishable or deteriorating in value).
9. Signetics contends that the motion to sell was filed by Freuhauf “ostensibly
to ask permission to sell properties, but really to hurt Signetics in the first
fight (the dismissal of the incident). However, the manifestation reflects noth-
ing less than a surprising interest in the property which Signetics claims are
not its own.
10. Having said that, Freuhauf, in effect, has invoked the doctrine of piercing the
veil of corporate fiction, and it cannot thus be held to have improperly caused
the service of summons on TEAM Pacific pursuant to Sec. 14 of Rule 14.
11. As explained, summons may be served upon an agent of the defendant who
may not necessarily be its “resident agent designated in accordance with
law.”
12. The term “agent” as used in Sec. 14 refers to its general meaning, or one who
acts on behalf of a principal. The allegations in the complaint, taken together,
have thus been able to amply convey that not only is TEAM Pacific the busi-
ness conduit of Signetics in the Philippines, but that also, by the charge of
fraud, is none other than Signetics itself.
13. In any event, a foreign corporation, although not engaged in business in the
Philippines, may still look up to our courts for relief and reciprocally, such
corporation may likewise be sued in Philippine courts for acts done against a
person or persons in the Philippines provided that it would not be impossible
for court processes to reach the corporation.
14. This is not to say, however, that Signetics’ right to question the jurisdiction
of the court over its person is now to be deemed a foreclosed matter. If it is
true, as Signetics claims, that its only involvement in the Philippines was
through a passive investment in SigFIl, then it cannot be really said to be
doing business in the Philippines.
15. It is a defense, however, that requires the contravention of the allegations of
the complaint, as well as a full ventilation, in effect, of the main merits of the
case, which should not thus be within the province of a mere motion to dis-
miss.
16. Also, as to the issue posed by Signetics as to whether a foreign corporation
which has done business in the country, but which has ceased to do business
at the time of the filing of a complaint, can still be made to answer for a cause
of action which accrued while it was doing business, is another matter that
has to await the reception and admission of evidence.
17. All told, Signetics cannot, at least in this early stage, assail the veracity
and correctness of the allegations in the complaint and proceed to prove
its own in order to hasten a peremptory escape.
 014 AVON INSURANCE PLC V. CA (HIRANG)
August 29, 1997|J. Torres | Foreign Corporations DOCTRINE: A foreign corporation, is one which owes its existence to the laws of
another state, and generally has no legal existence within the state in which it is for-
eign. A foreign corporation illegally doing business here because of its refusal or
PETITIONER: AVON INSURANCE PLC, BRITISH RESERVE INSURANCE. neglect to obtain the required license and authority to do business may successfully
CO. LTD., CORNHILL INSURANCE PLC, IMPERIO REINSURANCE CO. though unfairly plead such neglect or illegal act so as to avoid service and thereby
(UK) LTD., INSTITUTE DE RESEGURROS DO BRAZIL, INSURANCE COR- impugn the jurisdiction of the local courts. The same danger does not exist among
PORATION OF IRELAND PLC, LEGAL AND GENERAL ASSURANCE SOCI- foreign corporations that are indubitably not doing business in the Philippines. In-
ETY LTD., PROVINCIAL INSURANCE PLC, QBL INSURANCE (UK) LTD., deed, if a foreign corporation does not do business here, there would be no reason
ROYAL INSURANCE CO. LTD., TRINITY INSURANCE CO. LTD., GEN-
for it to be subject to the States regulation. As we observed, in so far as State is con-
ERAL ACCIDENT FIRE AND LIFE ASSURANCE CORP. LTD., COOPERA-
cerned, such foreign corporation has no legal existence. Therefore, to subject such
TIVE INSURANCE SOCIETY and PEARL ASSURANCE CO. LTD
corporation to the court’s jurisdiction would violate the essence of sovereignty.
(BOOK DOCTRINE)
RESPONDENTS: COURT OF APPEALS, REGIONAL TRIAL COURT OF MA-
NILA, BRANCH 51, YUPANGCO COTTON MILLS, WORLDWIDE SURETY
& INSURANCE CO., INC., FACTS:
SUMMARY: Properties of Yupangco Cotton Mills were insured by Worldwide
8. Respondent Yupangco Cotton Mills filed a complaint against several foreign
Surety and Insurance (Worldwide) and several foreign REINSURANCE companies
reinsurance companies (among which are petitioners) to collect their alleged
including Avon Insurance PLC (Avon). Unfortunately, the properties of Yupangco
percentage liability under contract treaties between the foreign insurance
were razed by fire, giving rise to the obligation to indemnify Yupangco. Worldwide
companies and the international insurance broker C.J. Boatright, acting as
assigned to Yupangco the proceeds still collectible from the other reinsurance com-
agent for respondent Worldwide Surety and Insurance Company.
pany and thus, Yupangco filed a collection case againt Avon. Avon filed a motion
9. BACKGROUND OF THE COLLECTION SUIT: PROPERTIES OF
to dismiss contending that the court has no jurisdiction to try the case as Avon is a
YUPANGCO WERE INSURED (FIRE INSURANCE) BY WORLDWIDE
foreign corporation not doing business in the PH. It has no office, place of business
SURETY AND INSURANCE AND SEVERAL FOREIGN REINSUR-
nor an agent in the PH. Yupangco on the other hand was stating that a foreign cor-
ANCE COMPANIES, INCLUDING AVON. PROPERTIES THEREIN IN-
poration not doing business in the PH can still be sued in the PH court and that the
SURED WERE RAZED BY FIRE GIVING RISE TO THE OBLIGATION
voluntary appearance of Avon (filing of the motion to dismiss) constituted volun-
TO INDEMNIFY YUPANGCO. WORLDWIDE SURETY AND INSUR-
tary surrender to the court’s jurisdiction. Both the RTC of Manila and CA dis-
ANCE, IN A DEED OF ASSIGNMENT, ACKNOWLEDGE A REMAIN-
missed the motion of Avon stating that Avon cannot argue that they are not doing
ING BALANCE OF P19,444,447.75 STILL DUE TO YUPANGCO COT-
business in the PH as Avon is a reinsurer of Worldwide. Avon must be deemed to
TON MILLS, AND ASSIGNED TO THE LATTER ALL REINSURANCE
have engaged in business in the Philippines no matter how isolated or singular such
PROCEEDS STILL COLLECTIBLE FROM ALL THE FOREIGN REIN-
business might be. The issue in this case is WoN Avon can be considered as a for-
SURANCE COMPANIES. THUS, IN ITS INTEREST AS ASSIGNEE
eign corporation doing business in the PH. The SC ruled in the negative stating that
AND ORIGINAL INSURED, YUPANGCO COTTON MILLS INSTI-
both in jurisprudence (Communication Materials and Design, Inc. et. al vs. Court of
TUTED THIS COLLECTION SUIT AGAINST THE PETITIONERS.
Appeals) and the law (Omnibus Investment Code) provide that the term “doing
10. Even though Avon is not engaged in business in the Philippines, having
business” ordinarily implies a continuity of commercial dealings and arrange-
no offices, place of business or agents in the Philippines and the reinsur-
ments. There is no sufficient basis in the records which would merit the institu-
ance treaties having been rendered abroad, Avon was still served sum-
tion of this collection suit in the Philippines. More specifically, there is nothing
mons upon request of Yupangco.
to substantiate the Yupangco’s submission that Avon had engaged in business
11. Avon filed a motion to dimiss disputing the jurisdiction of respondent
activities in this country. (READ RATIO 7-11 FOR THE CONTEXT OF THE
Court and the extra-territorial service of summons.
DOCTRINE)
a. Court has no jurisdiction over Avon, being a foreign corporationnot
doing business in the Philippines with no office, place of business
or agents in the Philippines
 b.Extra-territorial service of summons on petitioners is null and void
because the complaint for collection is not one affecting Yupangco’s
status and not relating to property within the Philippines
12. Yupangco’s contentions:
a. Foreign corporations, such as Avon, not doing business in the Phil-
ippines, can be sued in the Philippine Courts, not withstanding
Avon’s claim to the contrary.
b. The voluntary appearance of Avon amounted to voluntary submis-
sion to its jurisdiction over their persons
13. RTC of Manila and CA denied Avon’s motion to dismiss.
a. Petitioners were properly served with summons and whatever
defect, if any, in the service of summons were cured by their
voluntary appearance in court, via motion to dismiss.
b. Avon, as reinsurer of Worlwide Surety and Insurance of
the risk which the latter assumed when it issued the fire
insurance policies in dispute in favor of respondent
Yupangco, cannot now validly argue that they do not do
business in this country. At the very least, Avon must be
deemed to have engaged in business in the Philippines no
matter how isolated or singular such business might be,
even on the assumption that among the local domestic
insurance corporations of this country, it is only in favor of
Worldwide Surety and Insurance that they have ever
reinsured any risk arising from reinsurance within the
territory.
ISSUE/s: WoN Avon can be considered as a foreign corporation doing business
in the Philippines and therefor be under the jurisdiction of the Philippine
Courts– NO, because the term “doing business” implies a continuity of commercial
dealings and arrangements but in the case at bar, there was no record to show that
Avon has continually engaged in business activities in the Philippines and as such
Avon cannot be under the jurisdiction of Philippine courts.
RULING: The decision appealed from dated October 11, 1990, is SET ASIDE and
the instant petition is hereby GRANTED. The respondent Regional Trial Court of
Manila, Branch 51 is declared without jurisdiction to take cognizance of Civil Case
No. 86-37932, and all its orders and issuances in connection therewith are hereby
ANNULLED and SET ASIDE. The respondent court is hereby ORDERED to DE-
SIST from maintaining further proceeding in the case aforestated.
RATIO:
7. In Communication Materials and Design, Inc. et. al vs. Court of Appeals, it
was observed that:
a. There is no exact rule of governing principle as to what consti-
tutes doing or engaging in or transacting business. Indeed, such
case must be judged in the light of its peculiar circumstances, upon
its peculiar facts and upon the language of the statute applicable.
The true test, however, seems to be whether the foreign corpo-
ration is continuing the body or substance of the business or en-
terprise for which it was organized
8. Omnibus Investments Code of 1987 defines the phrase to include
a. “soliciting orders, purchases, service contracts opening offices,
whether called liaison offices of branches; appointing representa-
tives or distributors who are domiciled in the Philippines or who in
any calendar year stay in the Philippines for a period or periods to-
taling one hundred eighty (180) days or more; participating in the
management, supervision or control of any domestic business firm,
entity or corporation in the Philippines, and any other act or acts that
imply a continuity or commercial dealings or arrangements and con-
template to that extent the performance of acts or works, or the ex-
ercise of some of the functions normally incident to and in progres-
sive prosecution of, commercial gain or of purpose and object of the
business organization.”
9. Both in jurisprudence and the law shows that the term ordinarily implies
a continuity of commercial dealings and arrangements, and contemplates,
to that extent, the performance of acts or works or the exercise of the func-
tions normally incident to and in progressive prosecution of the purpose and
object of its organization
10. There is no sufficient basis in the records which would merit the institu-
tion of this collection suit in the Philippines. More specifically, there is
nothing to substantiate the Yupangco’s submission that Avon had en-
gaged in business activities in this country
11. Although the court is aware of the doctrine in Signetics Corp. vs. CA which
states that for the purpose of acquiring jurisdiction by way of summons on a
defendant foreign corporation, there is no need to prove first the fact that de-
fendant is doing business in the Philippines. The plaintiff only has to allege
in the complaint that the defendant has an agent in the Philippines for sum-
mons to be validly served thereto, even without prior evidence advancing
such factual allegation, Yupangco has made no allegation or demonstra-
tion of the existence of petitioners domestic agent, but avers simply that
they are doing business not only abroad but in the Philippines as well.
12. Moreover there is authority to the effect that a reinsurance company is
not doing business in a certain state merely because the property which
are insured by the original insurer company are located in that state. The
 reason for this is that a contract or reinsurance is generally a separate courts jurisdiction, the defendant in an action can, by special ap-
and distinct arrangement from the original contract of insurance, whose pearance object to the courts assumption on the ground of lack
contracted risk is insured in the reinsurance agreement. Hence, the orig- of jurisdiction.
inal insured has generally no interest in the contract of reinsurance.
b. In the case of foreign corporations, it has been held that they may
13. A foreign corporation, is one which owes its existence to the laws of an- seek relief against the wrongful assumption of jurisdiction by local
other state, and generally has no legal existence within the state in which courts
it is foreign. In Marshall Wells Co. vs. Elser, it was held that corporations
have no legal status beyond the bounds of sovereignty by which they are
created. Nevertheless, it is widely accepted that foreign corporations are, by
reason of state comity, allowed to transact business in other states and to
sue in the courts of such fora. In the Philippines foreign corporations are
allowed such privileges, subject to certain restrictions, arising from the states
sovereign right of regulation
14. Before a foreign corporation can transact business in the country, it must first
obtain a license to transact business here and secure the proper authorizations
under existing law
15. If a foreign corporation engages in business activities without the necessary
requirements, it opens itself to court actions against it, but it shall not be al-
lowed maintain or intervene in an action, suit or proceeding for its own ac-
count in any court or tribunal or agency in the Philippines
16. The purpose of the law in requiring that foreign corporations doing busi-
ness in the country be licensed to do so, is to subject the foreign corpora-
tions doing business in the Philippines to the jurisdiction of the courts,
otherwise, a foreign corporation illegally doing business here because of its
refusal or neglect to obtain the required license and authority to do business
may successfully, though unfairly, plead such neglect or illegal act so as
to avoid service and thereby impugn the jurisdiction of the local courts.
17. The same danger does not exist among foreign corporations that are not
doing business in the Philippines. Indeed, if a foreign corporation does
not do business here, there would be no reason for it to be subject to the
States regulation. As we observed, in so far as State is concerned, such for-
eign corporation has no legal existence. Therefore, to subject such corpora-
tion to the courts jurisdiction would violate the essence of sovereignty
18. Lastly, the voluntary appearance of Avon to dismiss the case did not
amount to a voluntary submission before the jurisdiction of the court
a. When a defendant voluntarily appears, he is deemed to have submit-
ted himself to the jurisdiction of the court. This is not, however,
always the case. Admittedly, and without subjecting himself to the