Outline of Arguments

1. Independence; Board of Directors

The independence of directors is reflected in Section 23 of the Corporation Code which
expressly states that all businesses of the corporation shall be controlled by them. In the
management of affairs of the corporation, the directors are dependent solely upon their own
knowledge of its business and their own judgment as to what the corporations interest require.
(Manson v. Curtis, 223 N.Y. 313, 119 N.E. 559 [1918])

Business Judgment Rule, the will of the majority controls in corporate affairs, and contracts intra
vires entered into by the board of directors are binding on the corporation and courts will not
interfere unless such contracts are so unconscionable and oppressive as to amount to a wanton
destruction of rights of the minority. (Ingersoll v. Malabon Sugar Co., 53 Phil. 745)

Stated differently, questions of policy or management are left solely to the honest decision of
officers and directors of a corporation and the courts are without authority to substitute their
judgment of the Board of Directors. (Sales vs. Securities and Exchange Commission, G.R.
No. 54330, January 13, 1989, 169 SCRA 109.)

2. Stockholder Right; Actions of the Corporation

The stockholders do not control the directors and the concurrence of the stockholders is not
necessary for their actions unless the Corporation Code, the Articles of Incorporation or the By-
Laws provide otherwise. (Compendium on Corporate Law, Aquino)

A derivative action is a suit by a shareholder to enforce a corporate cause of action.
16
Under
the Corporation Code, where a corporation is an injured party, its power to sue is lodged with
its board of directors or trustees. But an individual stockholder may be permitted to institute a
derivative suit on behalf of the corporation in order to protect or vindicate corporate rights
whenever the officials of the corporation refuse to sue, or are the ones to be sued, or hold
control of the corporation. In such actions, the corporation is the real party-in-interest while
the suing stockholder, on behalf of the corporation, is only a nominal party.
17

In the case of Filipinas Port Services, Inc. v. Go,
18
we enumerated the foregoing requisites
before a stockholder can file a derivative suit:
a) the party bringing suit should be a shareholder as of the time of the act or transaction
complained of, the number of his shares not being material;
b) he has tried to exhaust intra-corporate remedies, i.e., has made a demand on the board of
directors for the appropriate relief but the latter has failed or refused to heed his plea; and
c) the cause of action actually devolves on the corporation, the wrongdoing or harm having
been, or being caused to the corporation and not to the particular stockholder bringing the
suit.
19

Even then, not every suit filed on behalf of the corporation is a derivative suit. For a
derivative suit to prosper, the minority stockholder suing for and on behalf of the corporation
must allege in his complaint that he is suing on a derivative cause of action on behalf of the
corporation and all other stockholders similarly situated who may wish to join him in the
suit.
20

16. R.N. Symaco Trading Corporation v. Santos, G.R. No. 142474, August 18, 2005, 467
SCRA 312, 329.
17
Filipinas Port Services, Inc. v. Go, G.R. No. 161886, March 16, 2007, 518 SCRA 453, 471.
18
Id.
19
Id. at 472.
20
Chua v. Court of Appeals, G.R. No. 150793, November 19, 2004, 443 SCRA 259, 268.
Under Section 36
13
of the Corporation Code, read in relation to Section 23,
14
where a
corporation is an injured party, its power to sue is lodged with its board of directors or
trustees.
15
An individual stockholder is permitted to institute a derivative suit on behalf of the
corporation wherein he holds stocks in order to protect or vindicate corporate rights,
whenever the officials of the corporation refuse to sue, or are the ones to be sued, or hold
the control of the corporation. In such actions, the suing stockholder is regarded as a
nominal party, with the corporation as the real party in interest.
16

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.
17

13
SEC. 36. Corporate powers and capacity.Every corporation incorporated under this
Code has the power and capacity:
1. To sue and be sued in its corporate name;
. . .
14
SEC. 23. The Board of directors or trustees.Unless otherwise provided in this Code, the
corporate powers of all corporations formed under this Code shall be exercised, all business
conducted and all property of such corporations controlled and held by the board of directors
or trustees to be elected from among the holders of stocks, or where there is no stock, from
among the members of the corporation, who shall hold office for one (1) year until their
successors are elected and qualified.
. . .
15
Tam Wing Tak v. Makasiar, G.R. No. 122452, 29 January 2001, 350 SCRA 475, 485,
citing Premium Marble Resources, Inc. v. Court of Appeals, G.R. No. 96551, 4 November
1996, 264 SCRA 11, 17.
16
Gamboa v. Victoriano, No. L-40620, 5 May 1979, 90 SCRA 40, 47.
17
Price v. Gurney, 324 U.S. 100 (1944).

3. Parent-Subsidiary Relationship

The general rule is that as a legal entity, a corporation has a personality distinct and
separate from its individual stockholders or members, and is not affected by the personal
rights, obligations and transactions of the latter.
13
The mere fact that a corporation owns all of
the stocks of another corporation, taken alone is not sufficient to justify their being treated as
one entity. If used to perform legitimate functions, a subsidiary's separate existence may be
respected, and the liability of the parent corporation as well as the subsidiary will be confined
to those arising in their respective business. The courts may in the exercise of judicial
discretion step in to prevent the abuses of separate entity privilege and pierce the veil of
corporate entity.

While there exists no definite test of general application in determining when a subsidiary may be
treated as a mere instrumentality of the parent corporation, some factors have been identified that
will justify the application of the treatment of the doctrine of the piercing of the corporate veil. The
case of Garrett vs. Southern Railway Co.
14
is enlightening. The case involved a suit against the
Southern Railway Company. Plaintiff was employed by Lenoir Car Works and alleged that he
sustained injuries while working for Lenoir. He, however, filed a suit against Southern Railway
Company on the ground that Southern had acquired the entire capital stock of Lenoir Car Works,
hence, the latter corporation was but a mere instrumentality of the former. The Tennessee Supreme
Court stated that as a general rule the stock ownership alone by one corporation of the stock of
another does not thereby render the dominant corporation liable for the torts of the subsidiary unless
the separate corporate existence of the subsidiary is a mere sham, or unless the control of the
subsidiary is such that it is but an instrumentality or adjunct of the dominant corporation. Said Court
then outlined the circumstances which may be useful in the determination of whether the subsidiary
is but a mere instrumentality of the parent-corporation:
The Circumstance rendering the subsidiary an instrumentality. It is manifestly impossible to
catalogue the infinite variations of fact that can arise but there are certain common
circumstances which are important and which, if present in the proper combination, are
controlling.
These are as follows:
(a) The parent corporation owns all or most of the capital stock of the subsidiary.
(b) The parent and subsidiary corporations have common directors or officers.
(c) The parent corporation finances the subsidiary.
(d) The parent corporation subscribes to all the capital stock of the subsidiary or otherwise
causes its incorporation.
(e) The subsidiary has grossly inadequate capital.
(f) The parent corporation pays the salaries and other expenses or losses of the subsidiary.
(g) The subsidiary has substantially no business except with the parent corporation or no
assets except those conveyed to or by the parent corporation.
(h) In the papers of the parent corporation or in the statements of its officers, the subsidiary
is described as a department or division of the parent corporation, or its business or financial
responsibility is referred to as the parent corporation's own.
(i) The parent corporation uses the property of the subsidiary as its own.
(j) The directors or executives of the subsidiary do not act independently in the interest of the
subsidiary but take their orders from the parent corporation.
(k) The formal legal requirements of the subsidiary are not observed.
The Tennessee Supreme Court thus ruled:
In the case at bar only two of the eleven listed indicia occur, namely, the ownership of most
of the capital stock of Lenoir by Southern, and possibly subscription to the capital stock of
Lenoir. . . The complaint must be dismissed.
G.R. No. 142616 July 31, 2001
PHILIPPINE NATIONAL BANK, petitioner,
vs.
RITRATTO GROUP INC., RIATTO INTERNATIONAL, INC., and DADASAN GENERAL
MERCHANDISE,respondents.
KAPUNAN, J .
In this connection, case law lays down a three-pronged test to determine the application of the alter
ego theory, which is also known as the instrumentality theory, namely:
(1) Control, not mere majority or complete stock control, but complete domination, not only of
finances but of policy and business practice in respect to the transaction attacked so that the
corporate entity as to this transaction had at the time no separate mind, will or existence of
its own;
(2) Such control must have been used by the defendant to commit fraud or wrong, to
perpetuate the violation of a statutory or other positive legal duty, or dishonest and unjust act
in contravention of plaintiffs legal right; and
(3) The aforesaid control and breach of duty must have proximately caused the injury or
unjust loss complained of.
50
(Emphases omitted.)
The first prong is the "instrumentality" or "control" test. This test requires that the subsidiary be
completely under the control and domination of the parent.
51
It examines the parent corporations
relationship with the subsidiary.
52
It inquires whether a subsidiary corporation is so organized and
controlled and its affairs are so conducted as to make it a mere instrumentality or agent of the parent
corporation such that its separate existence as a distinct corporate entity will be ignored.
53
It seeks to
establish whether the subsidiary corporation has no autonomy and the parent corporation, though
acting through the subsidiary in form and appearance, "is operating the business directly for itself."
54

The second prong is the "fraud" test. This test requires that the parent corporations conduct in using
the subsidiary corporation be unjust, fraudulent or wrongful.
55
It examines the relationship of the
plaintiff to the corporation.
56
It recognizes that piercing is appropriate only if the parent corporation
uses the subsidiary in a way that harms the plaintiff creditor.
57
As such, it requires a showing of "an
element of injustice or fundamental unfairness."
58

The third prong is the "harm" test. This test requires the plaintiff to show that the defendants control,
exerted in a fraudulent, illegal or otherwise unfair manner toward it, caused the harm suffered.
59
A
causal connection between the fraudulent conduct committed through the instrumentality of the
subsidiary and the injury suffered or the damage incurred by the plaintiff should be established. The
plaintiff must prove that, unless the corporate veil is pierced, it will have been treated unjustly by the
defendants exercise of control and improper use of the corporate form and, thereby, suffer
damages.
60

To summarize, piercing the corporate veil based on the alter ego theory requires the concurrence of
three elements: control of the corporation by the stockholder or parent corporation, fraud or
fundamental unfairness imposed on the plaintiff, and harm or damage caused to the plaintiff by the
fraudulent or unfair act of the corporation. The absence of any of these elements prevents piercing
the corporate veil.
61

This Court finds that none of the tests has been satisfactorily met in this case.
In applying the alter ego doctrine, the courts are concerned with reality and not form, with how the
corporation operated and the individual defendants relationship to that operation.
62
With respect to
the control element, it refers not to paper or formal control by majority or even complete stock control
but actual control which amounts to "such domination of finances, policies and practices that the
controlled corporation has, so to speak, no separate mind, will or existence of its own, and is but a
conduit for its principal."
63
In addition, the control must be shown to have been exercised at the time
the acts complained of took place.
64

G.R. No. 167530 March 13, 2013
PHILIPPINE NATIONAL BANK, Petitioner,
vs.
HYDRO RESOURCES CONTRACTORS CORPORATION, Respondent.
x - - - - - - - - - - - - - - - - - - - - - - - x
G.R. No. 167561
ASSET PRIVATIZATION TRUST, Petitioner,
vs.
HYDRO RESOURCES CONTRACTORS CORPORATION, Respondent.
x - - - - - - - - - - - - - - - - - - - - - - - x
G.R. No. 167603
DEVELOPMENT BANK OF THE PHILIPPINES, Petitioner,
vs.
HYDRO RESOURCES CONTRACTORS CORPORATION, Respondent.
The record is lacking in circumstances that would suggest that petitioner corporation, Placer Dome
and Marcopper are one and the same entity. While admittedly, petitioner is a wholly-owned
subsidiary of Placer Dome, which in turn, which, in turn, was then a minority stockholder of
Marcopper, however, the mere fact that a corporation owns all of the stocks of another
corporation, taken alone is not sufficient to justify their being treated as one entity. If used to
perform legitimate functions, a subsidiarys separate existence shall be respected, and the liability of
the parent corporation as well as the subsidiary will be confined to those arising in their respective
business.
39

The recent case of Philippine National Bank vs. Ritratto Group Inc.,
40
outlines the circumstances
which are useful in the determination of whether a subsidiary is but a mere instrumentality of the
parent-corporation, to wit:
(a) The parent corporation owns all or most of the capital stock of the subsidiary.
(b) The parent and subsidiary corporations have common directors or officers.
(c) The parent corporation finances the subsidiary.
(d) The parent corporation subscribes to all the capital stock of the subsidiary or otherwise
causes its incorporation.
(e) The subsidiary has grossly inadequate capital.
(f) The parent corporation pays the salaries and other expenses or losses of the subsidiary.
(g) The subsidiary has substantially no business except with the parent corporation or no
assets except those conveyed to or by the parent corporation.
(h) In the papers of the parent corporation or in the statements of its officers, the subsidiary
is described as a department or division of the parent corporation, or its business or financial
responsibility is referred to as the parent corporations own.
(i) The parent corporation uses the property of the subsidiary as its own.
(j) The directors or executives of the subsidiary do not act independently in the interest of the
subsidiary, but take their orders from the parent corporation.
(k) The formal legal requirements of the subsidiary are not observed.
In this catena of circumstances, what is only extant in the records is the matter of stock
ownership. There are no other factors indicative that petitioner is a mere instrumentality of
Marcopper or Placer Dome. The mere fact that Placer Dome agreed, under the terms of the
"Support and Standby Credit Agreement" to provide Marcopper with cash flow support in paying its
obligations to ADB, does not mean that its personality has merged with that of Marcopper. This
singular undertaking, performed by Placer Dome with its own stockholders in Canada and
elsewhere, is not a sufficient ground to merge its corporate personality with Marcopper which has its
own set of shareholders, dominated mostly by Filipino citizens. The same view applies to petitioners
payment of Marcoppers remaining debt to ADB.
With the foregoing considerations and the absence of fraud in the transaction of the three foreign
corporations, we find it improper to pierce the veil of corporate fiction that equitable doctrine
developed to address situations where the corporate personality of a corporation is abused or used
for wrongful purposes.
39
Philippine National Bank vs. Rittrato Group Inc., G.R. No. 142616, July 31, 2001.
40
Supra. citing Garrett vs. Southern Railway Co., 173 F. Supp. 915, E.D. Tenn. (1959).
G.R. No. 138104 April 11, 2002
MR HOLDINGS, LTD., petitioner,
vs.
SHERIFF CARLOS P. BAJAR, SHERIFF FERDINAND M. JANDUSAY, SOLIDBANK
CORPORATION, AND MARCOPPER MINING CORPORATION, respondents.
While the right of a stockholder to examine the books and records of a corporation for a lawful
purpose is a matter of law, the right of such stockholder to examine the books and records of a
wholly-owned subsidiary of the corporation in which he is a stockholder is a different thing.
Some state courts recognize the right under certain conditions, while others do not. Thus, it has
been held that where a corporation owns approximately no property except the shares of stock of
subsidiary corporations which are merely agents or instrumentalities of the holding company, the
legal fiction of distinct corporate entities may be disregarded and the books, papers and documents
of all the corporations may be required to be produced for examination,
60
and that a writ of
mandamus, may be granted, as the records of the subsidiary were, to all incontents and purposes, the
records of the parent even though subsidiary was not named as a party.
61
mandamus was likewise held
proper to inspect both the subsidiary's and the parent corporation's books upon proof of sufficient control
or dominion by the parent showing the relation of principal or agent or something similar thereto.
62

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

In the Nash case,
65
The Supreme Court of New York held that the contractual right of former
stockholders to inspect books and records of the corporation included the right to inspect corporation's
subsidiaries' books and records which were in corporation's possession and control in its office in New
York."
In the Bailey case,
66
stockholders of a corporation were held entitled to inspect the records of a
controlled subsidiary corporation which used the same offices and had Identical officers and directors.
In his "Urgent Motion for Production and Inspection of Documents" before respondent SEC,
petitioner contended that respondent corporation "had been attempting to suppress information for
the stockholders" and that petitioner, "as stockholder of respondent corporation, is entitled to copies
of some documents which for some reason or another, respondent corporation is very reluctant in
revealing to the petitioner notwithstanding the fact that no harm would be caused thereby to the
corporation."
67
There is no question that stockholders are entitled to inspect the books and records of a
corporation in order to investigate the conduct of the management, determine the financial condition of
the corporation, and generally take an account of the stewardship of the officers and directors.
68

In the case at bar, considering that the foreign subsidiary is wholly owned by respondent San Miguel
Corporation and, therefore, under its control, it would be more in accord with equity, good faith and
fair dealing to construe the statutory right of petitioner as stockholder to inspect the books and
records of the corporation as extending to books and records of such wholly subsidiary which are in
respondent corporation's possession and control.
60 Martin v. D. B. Martin Co., 10 Del. Ch. 211, 88 A. 612, 102 A. 373.
61 Woodward v. Old Second National Bank, 154 Mich, 459, 117 NW 893, 118 NW 581.
62 Martin v. D.B. Martin Co., supra.
63 State v. Sherman Oil Co., 1 W.W. Harr. (31 Del) 570, 117 A. 122.
64 Lisle v. Shipp, 96 Cal. App. 264, 273 P. 1103.
65 Nash v. Gay Apparel Corp., 193 NYS 2d 246.
66 Bailey v. Boxbound Products Co., 314 Pa. 45, 170 A. 127.
67 Rollo, pp. 50-51.
68 18 Am. Jur. 2d 718
G.R. No. L-45911 April 11, 1979
JOHN GOKONGWEI, JR., petitioner,
vs.
SECURITIES AND EXCHANGE COMMISSION, ANDRES M. SORIANO, JOSE M. SORIANO,
ENRIQUE ZOBEL, ANTONIO ROXAS, EMETERIO BUNAO, WALTHRODE B. CONDE, MIGUEL
ORTIGAS, ANTONIO PRIETO, SAN MIGUEL CORPORATION, EMIGDIO TANJUATCO, SR., and
EDUARDO R. VISAYA, respondents.
It cannot be gainsaid that a subsidiary has an independent and separate juridical personality,
distinct from that of its parent company, hence, any claim or suit against the latter does not
bind the former and vice versa.

G.R. No. 153886 January 14, 2004
MEL V. VELARDE, petitioner,
vs.
LOPEZ, INC., respondent.
It is a doctrine well-established and obtains both at law and in equity that a corporation is a
distinct legal entity to be considered as separate and apart from the individual stockholders
or members who compose it, and is not affected by the personal rights, obligations and
transactions of its stockholders or members.
4
The property of the corporation is its property
and not that of the stockholders, as owners, although they have equities in it. Properties
registered in the name of the corporation are owned by it as an entity separate and distinct from
its members.
5
Conversely, a corporation ordinarily has no interest in the individual property of its
stockholders unless transferred to the corporation, "even in the case of a one-man corporation.
6


4 I Fletcher Cyclopedia Corporations, 1974 Ed., sec. 25, pp. 99-100; Borja v. Vasquez, 74
Phil. 560, 566-567' Villa-Rey Transit, Inc. v. Ferrer, 25 SCRA 845, 857.
5 Stockholder of F. Guanzon and Sons, Inc. v. Register of Deeds of Manila, 6 SCRA 373. 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 (Hall & Faley v.
Alabama Terminal, 173 Ala., 398, 56 So., 235), but its holder is not the owner of any definite
portion of its property or assets (Gottfried v. Miller, 104 U.S., 521; Jones v. Davis 35 Ohio St.
474). The stockholder is not a co-owner or tenant in common of the corporate property
(Harton v. Hohnston, 166 Ala., 317, 51 So., 992). (Ibid., pp. 375-376.)
6 I Fletcher, supra, pp. 132-133.
4. COA CIRCULAR No. 89-296 27 January 1986 on Divestment or Disposal of Property
5. The Deed of Assignment is a SALE without any consideration (COABLE)