\G.R. No.

154291 November 12, 2014

LOPEZ REALTY, INC. and ASUNCION LOPEZ-GONZALES, Petitioners,

vs.
SPOUSES REYNALDO TANJANGCO and MARIA LUISA ARGUELLES-TANJANGCO, Respondents.

DECISION

REYES, J.:

This is a Petition for Review1 under Rule 45 of the Rules of Court from the Decision2 dated February
22, 2002 of the Court of Appeals (CA) in CA-G.R. CV No. 63519 which reversed and set aside the
Decision3 dated June 25, 1997 of the Regional Trial Court (RTC) of Manila, Branch 25, in Civil Case
No. 144667.

Antecedents Facts

Lopez Realty, Inc. (LRI) and Dr. Jose Tanjangco (Jose) were the registered co-owners of three
parcels of land and the building erected thereon known as the "Trade Center Building", which
were covered by Transfer Certificates of Title (TCT) Nos. 127778, 127779 and 127780 (subject
properties) of the Register ofDeeds of Manila. Joses one-half share in the subject properties were
later transferred and registered in the name of his son Reynaldo Tanjangco and daughter-in-law,
Maria Luisa Arguelles (spouses Tanjangco).

At the time material to this case,the stockholders of record of LRI were the following:

a. Asuncion Lopez-Gonzalez (Asuncion) 7,831 shares;

b. Arturo F. Lopez (Arturo) 7,830 shares;

c. Teresita Lopez-Marquez (Teresita) 7,830 shares;

d. Rosendo de Leon (Rosendo) 5 shares

e. Benjamin Bernardino (Benjamin) 1 share;

f. Augusto de Leon (Augusto) 1 share; and

g. Leo Rivera (Leo) 1 share4

Except for Arturo and Teresita, the rest of the stockholders were members of the Board of Directors.5
Asuncion was LRIs Corporate Secretary.

In a special meeting of the stockholders held on July 27, 1981, the sale of the one-half share of LRI in
the Trade Center Building was discussed:

MINUTES OF SPECIAL MEETING OF STOCKHOLDERS OF LOPEZ REALTY[,] INCORPORATED

ON JULY 27, 1981 AT 3:00 P.M.

STOCKHOLDERS PRESENT:
1
TERESITA L. MARQUEZ - 7,830 shares
ASUNCION F. LOPEZ - 7,831 shares
ARTURO F. LOPEZ - 7,830 shares
ROSENDO DE LEON - 5 share[s]
BENJAMIN B. BERNARDINO - 1 share
LEO R. RIVERA - 1 share
TOTAL 23,498 Shares
II. Sale of One-Half (1/2) Share of Lopez Realty, Inc. in Trade Center Building

The matter of the sale of share of Lopez Realty, Inc., in the Trade Center Building was taken up.
Atty. Benjamin B. Bernardino informed the body that the selling price is pegged at 4 Million Pesos,
and the Tanjangcos are offering 3.6 Million Pesos plus 50% of the receivablesor a total of 3.8 Million
Pesos payable under the following terms:

1) 50% - upon registration 50% - 30 days thereafter

2) All expenses and documentary stamp tax to be born[e] by the Tanjangcos.

3) Transfer Tax and Reserve Fund to be borne by Lopez Realty, Inc.

ASUNCION F. LOPEZ countered for a selling price of 5 Million Pesos, LOPEZ REALTY, INC., clean
and of everything. At this point, TERESITA L. MARQUEZ and BENJAMIN B. BERNARDINO offered
to ASUNCION F. LOPEZ that they (she) accept (equal) the TANJANGCOs offer as stated above. At
this juncture, ASUNCION F. LOPEZ x x x called and talked with TANJANGCO over the phone three
(3) times and offered the selling price at 5 Million Pesos but the latter did not move from their original
offer as above-stated.

It was finally agreed by the body that ASUNCION F. LOPEZ x x x be given the priority to accept
[equal] the TANJANGCO offer and the same to be exercised within ten (10 accept) days. Failure on
her part to act on the offer, the said offer will be deemed accepted.6 (Emphasis in the original)

On July 28, 1981, Teresita died.7

Asuncion failed to exercise her option to purchase the subject properties within the stated period.
Thus, on August 17, 1981, while Asuncion was abroad, the remaining directors: Rosendo, Benjamin
and Leo convened in a special meeting, where the following resolution was passed and approved:8

III. Upon motion duly seconded, Mr. ARTURO F. LOPEZ had been authorized by the Board to
immediately negotiate with the Tanjangcos on the matter of the latters offer to purchase of
the Trade Center Building and in connection there with he is given full power and authority by the
Boardto carry out the complete termination of the sale terms and conditions as embodied in
the Resolution of July 27, 1981 and in connection therewith is likewise authorized to sign for and in
behalf of Lopez Realty Incorporated.

RESOLUTION
Series of 1981

RESOLVED, as it is hereby resolved that ARTURO F. LOPEZ negotiate with the Tanjangcos on the
matter of the sale of 1/2 of Trade Center Bldg., in accordance with the terms and conditions embodied
in the Minutes of the Special Meeting of July 27, 1981.9 (Emphasis in the original) On August 25,
2
1981, on the strength ofthe foregoing board resolution, Arturo executed a Deed of Sale selling LRIs
one-half interest in the subject properties to Jose, who was represented by his son, Manuel
Tanjangco (Manuel). The price was fixed at P3,600,000.00, payable in the following manner: 50% or
P1,800,000.00 upon registration of the Deed of Sale and the other 50% within 30 days from such
registration.10

Upon learning of the above developments, Asuncion sent cablegrams to Rosendo and Jose on
August 25, 1981,requesting them not to proceed with the sale.11 Consequently, on September 1,
1981, the Board had a special meeting where the following resolution was passed and approved:

RESOLUTION
Series of 1981

"In view of the cable of Ms. Asuncion Lopez, the [B]oard decided to postpone [the] final action on the
sale of Lopez Realty, Inc. share in Trade Center Building to the Tanjangcosso that she can be
enlightened on all proceedings of the Board during her absence.

UNANIMOUSLY APPROVED."12

Upon Asuncions arrival, the Board had a meeting on September 16, 1981, where she moved for the
repeal and/or amendment of the August 17, 1981 and August 24, 1981 Board Resolutions. While
Benjamin opposed Asuncions motion, the members of the Board agreed to defer action on the matter
until such time when Arturo and Asuncion have conferred or settled the matter.13

As Joses one-half interest in the subject properties had already been transferred to the spouses
Tanjangco,it was requested that LRI execute another deed of sale, where the spouses Tanjangco
shall be designated as buyers. Thus, on October 5, 1981, Arturoexecuted a Deed ofSale similar to
that which was executed on August 25,1981 in favor of the spouses Tanjangco.14

The spouses Tanjangco paid LRI the amount of P1,800,000.00, which the latter accepted by issuing
Official Receipt No. 723.15 The spouses Tanjangco then registered the Deed of Sale with the
Register of Deeds of Manila, causing the cancellation of TCT Nos. 127778,127779 and 127780 and
the issuance of TCT Nos. 145983, 145984 and 145985 in their name.16 Consequently, on November
4, 1981, LRI and Asuncion (herein petitioners) filed with the then Court of First Instance of
Manila, a Complaint17 for annulment of sale, cancellation of title, reconveyance and damages
with prayer for the issuance of temporary restraining order (TRO) and/or writ of preliminary
injunction against the spouses Tanjangco, Arturo and the Registrar of Deeds of Manila . The
complaint was docketed as Civil Case No. 144667 and raffled to Branch 25.Essentially, it was alleged
that the sale is not binding on LRI as the August 17, 1981 Board Resolution, authorizing Arturo to sell
the corporations one-half interest in the subject properties, is invalid for lack of notice to Asuncion. It
was also alleged that the said board resolution had already been revoked by the Board of Directors in
their September 1, 1981 and September 16, 1981 Resolutions.

On November 11, 1981, the trial court issued a TRO, enjoining the spouses Tanjangco from paying
the balance of the purchase price and Arturo from accepting payment.18

On November 13, 1981, Manuel, in representation of the spouses Tanjangco, wrote LRI, enclosing a
managers check for P1,743,000.00 covering the balance of the purchase price less the transfer tax,
LRIs share in the common fund and payables to the Bureau of Internal Revenue (BIR). Rosendo,
however, deferred acceptance in view of the pendency of the cases filed by the directors of LRI
3
against eachother and the order of the Security and Exchange Commission (SEC), restraining him
from acting on LRI matters.19 Apparently, several cases were pending with the SEC involving the
directors and shareholders of LRI, one of which is Asuncions complaint for the nullification of the
August 17, 1981 Board Resolution.

On November 21, 1981, the spouses Tanjangco filed a motion for the production of a copy of the
board resolution authorizing Asuncion to file the complaint on LRIs behalf. In her Comment, Asuncion
claimed that the action is a derivative suit she initiated as LRIs minority stockholder, for which no
authorization from LRIs Board of Directors is necessary.20

On December 7, 1981, Arturo moved to dismiss the complaint on the grounds of lack of jurisdiction
and litis pendentia. With regard to the first ground, Arturo alleged that the case essentially involves an
intra-corporate dispute, which falls within the exclusive jurisdiction of the SEC. As to the second
ground, Arturo alleged that Asuncion filed a complaint with the SEC, which was docketed as SEC
Case No. 2164, against him and Benjamin, seeking to annul the August 17, 1981 Board
Resolution.21

On July 30, 1982, the stockholders of LRI had a meeting where they voted on whether to ratify and
confirm the sale of the subject properties to the spouses Tanjangco. The minutes of such meeting
state:

At this juncture, Juanito Santos moved for the ratification and confirmation of the sale of Trade Center
Building to the [spouses Tanjangco] and thereby ratifying and confirming all minutes relative to the
sale made to the [spouses Tanjangco], and the same being seconded, it was placed to a vote
amongst the stockholders and Directors present and the votes were as follows:

Leo Rivera - yes

Rosendo de Leon - yes

Juanito Santos - yes

Benjamin Bernardino - yes

After the ratification and confirmation of the sale of Trade Center Building, Asuncion Lopez stated that
she is not preparing the minutes of todays meeting as well as that of June 29, 1982 and prior ones,
but she was reminded that if she refuses to do what is incumbent upon her as Secretary, the same
would be prepared and if she refuses to sign, thats up to her, for the corporation is governed by the
Board of Directors coupled by the majority of the stockholders who ratify the acts of the Board.

That the sale of Trade Center Building in point of stockholders and in point of the Board of Directors
had been duly ratified and confirmed and likewise it was moved and seconded that the votes will be
submitted to the Securities and Exchange Commission (SEC) in order that the said office may be
properly apprised of the situation of Lopez Realty, Inc.

There being no further business to take up, upon motion and duly seconded, the meeting [is]
adjourned.22

On November 11, 1982, the executor of Teresitas estate, Juanito L. Santos (Juanito), moved to
intervene, stating among others that the case is "basically an intra-corporate contest among the
4
stockholders of LRI in respect to the sale or disposition of corporate property and the distribution of
the proceeds thereof."23

On February 6, 1984, the trial court issued an order, denying the spouses Tanjangcos, Juanitos and
Arturos respective motions.24

On March 1, 1985, Asuncion and Arturo filed a Joint Motion to Dismiss in SEC Case No. 2164 on the
ground that a "final settlement has been arrived at and that they hereby waive and renounce any
further claim or counterclaim that they may have against each other x x x." This was granted by the
SEC.25

The petitioners then filed a supplemental complaint, claiming that the negotiations between the
parties to settle the case resulted in an agreement where the spouses Tanjangco would sell to the
petitioners their interest in the subject properties for P6,000,000.00 on the condition that the
petitioners would return the P1,800,000.00 the spouses Tanjangco paid to LRI. According to the
petitioners, in order for Asuncion to meet her obligations under the agreement, she borrowed
P4,000,000.00 from a bank at a high interest, sold her house at Magallanes for less than its market
value and disposed several pieces of her jewelry. However, during the formal signing of the
agreement, the spouses Tanjangco refused to sign for no apparent reason. The petitioners thus
prayedthat the spouses Tanjangco be compelled to sign and indemnify Asuncion for the damages she
incurred.26

During the trial, the petitioners, among others, attempted to establish that the subject sale had not
been validly ratified during the July 30, 1982 stockholders meeting in view of the failure to
meet the required number of votes. Asuncion testified that Juanito was not qualified to sit as a
director during the said meeting there being no evidence that he owned at least one share . Asuncion
likewise testified that Leo actually voted against the ratification of the sale, contrary to what is stated
in the minutes, which she and Leo did not sign.27

After trial on the merits, the trial court issued a Decision28 on June 25, 1997, the dispositive portion of
which reads:

WHEREFORE, premises considered, judgment is hereby rendered, thus:

1. Declaring null and void the Deed of Sale, dated 5 October 1981, signed by defendant Arturo Lopez,
in behalf of Lopez Realty[,] Inc., and defendants Spouses Reynaldo and Maria Luisa Tanjangco,
involving the interest of Lopez Realty, Inc. in the Trade Center Building;

2. Directing the Register of Deeds of Manila to cancel Transfer Certificate of Title Nos. 145983,
145984 and 145985 in the name of Maria Luisa Arguelles married to Reynaldo Tanjangco and to
reinstate Transfer Certificates of Title Nos. 127778, 127779 and 127780 in the names of Lopez
Realty, Inc. and Maria Luisa Arguelles married to Reynaldo Tanjangco;

3. Directing defendants Spouses Reynaldo and Maria Luisa Tanjangco to make an accounting of all
the rentals they collected from the Trade Center Building from 5 October 1981 and, thereafter, to
remit to plaintiff, Lopez Realty, Inc., one-half (1/2) of the net amount (after deducting reasonable
expenses), plus yearly interest in the amount of 12% until fully paid, all within 90 days from the finality
of this decision;

5
4. Directing plaintiff Lopez Realty, Inc. to return to defendants spouses Reynaldo and Maria Luisa
Tanjangco the amount of P1,800,000.00; and,

5. Directing defendants, SpousesReynaldo and Maria Luisa Tanjangco to pay plaintiff the amount of
P150,000.00 as attorneys fees.

SO ORDERED.29

Finding the sale null and void, the trial court ruled that Arturo lacked the authority to sell LRIs interest
on the subject properties to the spouses Tanjangco on LRIs behalf in view of the procedural
infirmities which attended the meeting held on August 17, 1981. Specifically:

On this issue, the Court rules in favor of the plaintiff. There is merit in plaintiffs contention that the 17
August 1981 meeting of the Board of Directors of Lopez Realty was illegal. Section 53 of the
Corporation Code of the Philippines categorically provides:

"Sec. 53. Regular and Special Meeting[s] of Directors [or] Trustees Regular meeting of the board
of directors or trustees of every corporation [shall be] held monthly[,] unless the by-
lawsprovides [sic] otherwise.

xxxx

Meeting[s] of directors or trustees of corporations may be held [anywhere] in or outside [of] the
Philippines, unless the by-laws provides [sic] otherwise. Notice of the regular or special meeting[s]
stating the date, time and place of the meeting must be sent to every director or trustee, at least, one
(1) day prior to the scheduled meeting[,] unless otherwise provided by the by-laws. A director or
trustee may waive this requirement, either expressly or impliedly."

Plaintiff alleged that no notice was sent to her prior to the 17 August 1981 meeting. The Court is
inclined to give credit to this allegation considering that defendants never contested the same. Hence,
the said meeting was illegal and the resolution adopted during the meeting would not produce the
effect of binding the corporation, Lopez Realty.30

The trial court likewise ruled thatthe sale between LRI and the spouses Tanjangco was not validly
ratified in the absence of the required number of votes. Thus:

Notwithstanding the assertions of the defendants, the Court gives credit to plaintiff[s] claim. The
claim, which was made under oath, has not been contested by defendants. Besides, the copy of the
minutes itself x x x corroborates it. From a physical examination of said minutes, it appears that
among the five alleged directors present[,]only de Leon, Bernardino and Santos signed over their
names at the bottom of the minutes. Gonzalez and Rivera, whose names are also written thereon
do not have their signatures on. Since the vote of Santos does not count, he not being qualified to
sit as director, only the two votes de Leon and Bernardino count for ratification . But that did not
constitute a majority vote. Consequently, there was no validratification of the sale of Lopez Realtys
interest in the Trade Center Building. The sale has remained invalid and not binding upon the
corporation.31

Nonetheless, the trial court denied Asuncions claim for damages as there is no legal compulsion for
the spouses Tanjangco to honor a compromise agreement that was not perfected prior to its reduction
into writing. Thus:
6
Concerning the third issue, the Court finds no valid reason to compel defendants to sign the alleged
compromise agreement.1wphi1 Granting that defendants Tanjangcos did signify initially their
conformity with the terms and conditions of the compromise agreement as alleged by plaintiff, the
same did not reach maturity prior to its execution in writing. Hence, defendants did not commit breach
of contract when, afterwards, they refused to sign the compromise agreement.32

On both parties appeal to the CA, the trial courts Decision dated June 25, 1997 was reversed. In its
Decision dated February 22, 2002, the CA recognized Arturos authority tosell LRIs interest on
the subject properties, holding that this Court had earlier declared the August 17, 1981 Board
Resolution as valid in Lopez Realty, Inc. v. Fontecha.33 Thus:

It is to be recalled that the validity of the board meeting of August 17, 1981 has already been
challenged before the high court, albeit, on another matter. In Lopez Realty, Inc. vs. Fontecha, 247
SCRA 183 [1995], the same plaintiffs-appellants challenged the validity of the board resolution
granting gratuity pay and other benefits to some of the companys employees on the ground that the
meeting was allegedly convened without prior notice to the directors. The high court, citing American
jurisprudence, ruled that the [sic] "an action of the board of directors during a meeting, which was
illegal for lack of notice, may be ratified either expressly, by the action of the directors in subsequent
legal meeting, or impliedly, by the corporations subsequent course of conduct." x x x In holding the
meeting to have been valid, the same Court, among others, considered the following circumstances:
petitioner corporation did not issue any resolution revoking or nullifying the board resolutions granting
gratuity pay; and, petitioner therein Asuncion Lopez-Gonzales was aware of the said obligations and
even acquiesced thereto by signing two of the checks for gratuity pay. In the case at bench, it was
duly established that the matter of the sale of the property to the Tanjangcos has been taken up in the
subsequent meetings of the corporation culminating in the meeting of July 30, 1982, where the
stockholders ratified and confirmed not only the sale of Trade Center Building to the appellants
Tanjan[g]cos but also all minutes relative to the said sale. It likewise appears that in the aforesaid July
30, 1982 meeting, appellant Gonzales was present and was clearly outvoted by the other
stockholders.34

The CA likewise ruled that whatever infirmity attended the August 17, 1981 Board Resolution was
cured by ratification of the majority of the directors in the joint stockholders and directors
meeting held on July 30, 1982. Furthermore, the CA figured that even if Juanitos vote is
disregarded, the ratification was approved by the majority of the board, including Leo, whose
signatureis nowhere on the minutes:

Based on a perusal of the title ofthe minutes, "MINUTES OF THE MEETING OF THE
STOCKHOLDERS AND BOARD OF DIRECTORS OF LOPEZ REALTY, INCORPORATED HELD AT
ITS PRINCIPAL OFFICE AT RM. 404 DON. PAQUITO BUILDING, 99 DASMARINAS STREET,
BINONDO, MANILA ON FRIDAY, JULY 30, 1982 AT 2:00 P.M.," x x x it is immediately apparent that
the meeting was a joint board and stockholders meeting. The manner of taking the roll of attendance
likewise confirms the participation of the attendees as stockholders,-

"PRESENT:

Ms. SONY LOPEZ 7,831 shares

Mr. BENJAMIN B. BERNARDINO 1 share
and representing Arturo F.Lopez 7,831 shares
Mr. JUANITO L. SANTOS (representing the Estate
7
of Teresita Lopez Marquez) 7,830 shares
Mr. LEO RIVERA 1 share
Mr. ROSENDO DE LEON 5 shares
TOTAL SHARES REPRESENTED
23,499 shares
xxxx

while the minutes of the meeting shows that there were instances when the attendees were asked to
vote as directors x x x.

Under Section 40 of the Corporation Code-

Section 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 to 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 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 tothe rights of third parties under any contract
relating thereto, without further action or approval by the stockholders or members.

xxxx

the sale of the company assets requires the majority vote of the board of directors and vote of the
stockholders representing at least two-thirds (2/3) of the outstanding capital stock. In the minutes of
the July 30, 1982 meeting, the matter of the sale of the subject property was put to a vote "among
stockholders and Directors present" x x x jointly assembled, hence, a joint vote. Going back to the
board of directors, even excluding the affirmative vote of Juanito Santos whose qualification as
director was questioned by appellant Gonzales, the votes of Leo Rivera, Benjamin Bernardino and
Rosendo de Leon, as directors, forms the majority required for the ratification of the sale, as
contemplated in the abovequoted provision of the Corporation Code. Although the tally of votes did
not indicate the capacity under which the votes were taken[.] We follow the high courts ruling in
Zamboanga Transportation Co. vs. Bachrach Motor Co.,52 Phil. 244, 259-[2]60 [1928], thus:

"We therefore conclude that when the president of the corporation, who is one ofthe principal
stockholders and at the same time its general manager, auditor, attorney or legal adviser, is
8
empowered by its by-laws to enter into chattel mortgage contracts, subject to the approval of the
board of directors, and enters into such contracts with the tacit approval of two other members of the
board of directors, one of whom is alsoa principal shareholder, both of whom, together with the
president, form a majority, and said corporation takes advantage of the benefits afforded by said
contract, such acts are equivalent to an implied ratification of said contract by the board of directors
and binds the corporation even if not formally approved by said board of directors as required by the
by-laws of the aforesaid corporation."

When therefore the aforementioned three directors voted in favor of the ratification, their votes are, at
the very least, tacit approval sufficient for the application of the aforequoted ruling. It is of no moment
that the signature of only two directors appears at the bottom of the minutes, for it does not refer to
the results of the voting.

On the part of the stockholders, it appears that Leo Rivera, Rosendo De Leon, Juanito Santos
and Benjamin Bernardino, two of them representing two principal stockholders, voted to ratify
the sale of the property to the appellants Tanjangcos. The cumulation of their votes constitute
sixty-seven per cent [sic] or two-thirds of the capital stock of the appellant company. The contract has
thus, been validly ratified.35

The CA nonetheless upheld the trial courts jurisdiction over the petitioners complaint and Asuncions
right to bring an action on LRIs behalf in this wise:

Assailing the trial courts jurisdiction over the complaint filed in the court below, the following grounds
were adduced to assail it, to wit: first, it involves an intra-corporate controversy falling under the
original and exclusive jurisdiction of the Securities and Exchange Commission under Section 5(b) of
P.D. No. 902-A; and, second, appellant Gonzales has no legal personality to institute the case.

In the determination of whether the Securities and Exchange Commission ("SEC") shall have
jurisdiction over the complaint, there must be a concurrence of [the] following elements, to wit: "(1) the
status or relationship of the parties; and (2) the nature of the question that is the subject of their
controversy." x x x The Court further explained it in this wise:

"The first element requires that the controversy must arise out of intracorporate or partnership
relations between and among stockholders, members, or associates; between any or all of them and
the corporation, partnership or association of which they are stockholders, members or associates,
respectively; and between such corporation, partnership or association and the State insofar as it
concerns their individual franchises. The second element requires that the dispute among the
parties be intrinsically connected with the regulation of the corporation , partnership or
association or dealwith the internal affairs of the corporation, partnership or association. After all, the
principal function of the SEC is the supervision and control of corporations, partnerships and
associations with the end in view that investments in these entities may be encouraged and
protected, and their activities pursued for the promotion of economic development." x x x Reading the
title of the Complaint, dated October 31, 1981, designated as one for annulment ofsale, cancellation
of title, reconveyance and damages with prayer for the issuance of a writ of preliminary prohibitory
injunction x x x, it is immediately apparent that the principal defendants being sued are not
"stockholders, members of associates" of the appellant Lopez Realty, Inc., but rather vendees of the
subject property. x x x In Dee vs. Securities and Exchange Commission, 199 SCRA 238, 250 [1991],
the Supreme Court summarized Section 5 of

P.D. No. 902-A in the following manner:

9
"In other words, in order that the SEC can take cognizance of a case, the controversy must pertain to
any of the following relationships: (a) between corporation, partnership or association and the
public; (b) between the corporation, partnership or association and its stockholders, partners,
members, or officers;(c) between the corporation, partnership or association and the state
insofar as its franchise, permit or license to operate is concerned; and (d) among the
stockholders, partners or associates themselves.["] x x x

Since the principal defendants-appellants, the Spouses Tanjangcos, are not connected, in the
above described manner,to appellant Lopez Realty, Inc., then the SEC has no jurisdiction
overthe case. Moreover, upon a further reading of the body of the complaint, it appears that the
annulment of the sale to the appellants Tanjangcos was being sought on the ground of the lack of
valid consent on the part of Lopez Realty, Inc., the vendor . The internal affairs of the corporation
were being brought into the controversy merely to prove that it never authorized appellant Arturo
Lopez to execute the deed of sale. Hence, the controversy is not intrinsically connected to the
regulation or operation of the corporation , negating the existence of the second element as
required in Lozano vs. delos Santos, x x x.

As to the alleged legal personality of appellant Asuncion Lopez- Gonzalez, to file the action in the
court below, although the Corporation Code does not contain any provision granting such right, the
Supreme Court has recognized derivative suits, as valid, provided the following requisites are
complied with, to wit:

"a) the party bringing suit be a shareholder as of the time of the act or transaction complained of; b)
he has exhausted intra-corporate remedies, i.e., has made a demand on the board of directors for the
appropriate relief butthe 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
caused to the corporation and not to the particular stockholder bringing the suit[.]" x x x Appellant
Gonzales has been duly established to be a major stockholder in appellant company and she
registeredher opposition to the sale, by cable sent on August 25, 1981, as reflected in the Minutes of
the Meeting of the Board of Directors on September 16, 1981 x x x on the ground that the corporation
would be prejudiced by the extremely low price.

The rationale for vesting the appellant Gonzales with the legal personality to file the suit may be found
in the following summary of the two leading cases on derivative suits, Atwol vs. Merriwether, 1867,
and Dodge vs. Woolsey, 1855, respectively promulgated in England and America: "that where
corporate directors have committed a breach of trust either by their frauds, [ultra] viresacts, or
negligence, and the corporation is unable or unwilling to institute suit to remedy the wrong, a single
stockholder may institute that suit, suing on behalf of himself and other stockholders and for the
benefit of the corporation, to bring about a redress for the wrong done directly to the corporation and
indirectly to the stockholders." x x x36

The CA also concurred with the trial courts finding that the parties never arrived at a perfected
compromise agreement. Thus:

We are persuaded that the trial court did not commit any error in determining that there was no
perfected compromise agreement between the appellants. It is noted that based on the aforequoted
testimony, appellant Gonzales was herself aware of the negotiation stage of the proceedings when
she allowed the appellants Tanjangcos to add conditions to the option she has chosen. The counsel
10
of appellant Gonzales was likewise of the same opinion when he took the liberty of suggesting the
additional provision on tax clearance, although [t]he latter removed it upon conferring with the counsel
of appellants Tanjangcos. The aforesaid proceedings are consistent with the process of making
reciprocal concessions, characteristic of entering into a compromise. x x x Hence, in Sanchez vs.
Court of Appeals, 279 SCRA 647, 676 [1997], the High Court acknowledged the long and tedious
process of negotiations undergone by the parties and declared, to wit: "Since this compromise
agreement was the result of a long drawn out process, with all the parties ably striving to protect their
respective interests and to come out with the best they could, there can beno doubt that the parties
entered into it freely and voluntarily. Accordingly, they should be bound thereby. To be valid, it is
merely required under the law to be based on real claims and actually agreed upon in good faith by
the parties thereto." x x x Unfortunately, in the case at bench, the parties never came to an agreement
due to the fact that the appellants Tanjangcos backedout. x x x When the appellants Tanjangcos
"backed out" or refused tosign the final draft, there was no meeting of the minds or actual agreement
between the parties. x x x.

Resolving the claim of damages allegedly sustained when appellant Gonzales sold some of her
assets and contracted a sizable loan to cover the consideration of the compromise agreement[.] We
find no legal basis for its award. She acted based on an optimistic expectation that the final draft of
the compromise agreement would be acceptable to the appellants Tanjangcos. Hence, she testified
that she sold her house and lot, as far back as December 1, 1987, orlong before the alleged meeting
at the chambers of Judge Paguio x x x. Upon further questioning, she revealed that she sold it:
"because even prior to March 1, 1988, we have been already negotiating about the compromise and
knew beforehand that I have to be ready, and I even thought that the price was a good one reason
why I sold it because I knew then thatit was a sacrifice price. I would say, that it was a sacrifice price
because after a few days someone who live nearby, at the corner, came to me and was even buying
the property [at] a higher price." x x x She thus, acted based on the expectation of a settlement and
not on the alleged belief that there was already a perfected compromise agreement between her and
the appellants Tanjangcos. She even admitted that the negotiations took some time because the
parties could not come up with agreeable terms and she herself had to do study the matter. x x x It
follows then that the sale of her properties and the loans obtained from the banks were merely tactical
errors on her part for which she has no recourse under the law.37

The Petitioners Case

Arguing for the nullity of the sale and the existence of a perfected compromise agreement, the
petitionersclaim that: (a) the August 17, 1981 meeting, where the Resolution authorizing Arturo to
negotiate for the sale of the subject properties was approved, is illegal for lack of notice to Asuncion
as required under Section 50 of the Corporation Code; (b) Fontecha does not constitute res judicata
insofar as the issue on the validity of the August 17, 1981 meeting and all the resolutions passed
therein, including the grant of authority to Arturo, are concerned; (c) in Fontecha, what was ruled as
having been ratified was the resolution granting gratuity pay to its retiring employees and there was
nothing mentioned about the resolution on the sale of the subject properties and Arturos authority to
act on LRIs behalf; (d) it cannot be rightfully claimed that the August 17, 1981 Board Resolution had
been ratified as Asuncion immediately registered her objections to its validity. The Board of Directors
responded to this by issuing the September 1, 1981 and September 16, 1981 Board Resolutions that
held the subject sale on abeyance; (e) the August 17, 1981 Board Resolution merely authorized
Arturo to "negotiate" for the sale of the subject properties and the way it was worded does not
indicate that this include the authority to conclude a sale with the spouses Tanjangco; (f) even if the
July 27, 1981 and August 17, 1981 Board Resolution are read together to support the claim of the
spouses Tanjangco that Arturo had been duly authorized to sell the subject properties, the latter acted
11
beyond the authority granted to him when he entered into a sale with the former the terms of which
substantially depart from those provided in the July 27, 1981 Resolutions; (g) there was not enough
votes to ratify the subject salesince Juanitos qualification as director had been effectively challenged
and Leo actually voted against such ratification; (h) there was a perfected compromise agreement
between the parties and there is no need for the same to be in writing for it to be considered as such;
and (i) even assuming that there was no perfected compromise agreement, the spouses Tanjangco
abused their right for having backed out and withdrawn their offer without reason resulting in damage
to Asuncion.

The Spouses Tanjangcos Case

On the other hand, the spouses Tanjangco assert the validity of the subject sale, Arturos authority to
represent LRI in such a sale and the absence of a perfected compromise agreement, alleging that:
(a) as clearly stated in the July 27, 1981 Board Resolution, the sale was perfected when Asuncion
failed to match or outdo the offer of the spouses Tanjangco within the provided period; (b) reading the
August 17, 1981 Board Resolution in conjunction with the July 27, 1981 Board Resolution, Arturos
mandate was to carry out or implement the July27, 1981 Board Resolution and his authority was not
limited to negotiating with the sale of the subject properties; (c) the petitioners do not dispute the
validity of the July 27, 1981 Board Resolution and Asuncions failure to match the offer of the spouses
Tanjangco; (d) the spouses Tanjangco are buyers in good faith and they cannot be prejudiced by the
corporate squabbles among the directors and stockholders of LRI; (e) the provisions ofthe Deed of
Sale are in accordance with the July 27, 1981 Board Resolution;(f) under the doctrine of apparent
authority, the petitioners are barred from questioning LRIs consent to the subject sale and Arturos
authority to represent LRI in such transaction; (g) the spouses Tanjangco have the right torely on the
minutes of the July 27, 1981 and August 17, 1981 Board Resolutions which appear to be regular on
their face; (h) SEC Case No. 2164, a case filed by Asuncion against Arturo questioning the validity of
August 17, 1981 Board Resolution, was dismissed on joint motion of Arturo and Asuncion on the
ground that "a final settlement has been arrived at"; (i) contrary to the petitioners claim, the August
17, 1981 Board Resolution had not been revoked; (j) the sale had been ratified during July 30, 1982
meeting of the stockholders and by LRIs acceptance of the spouses Tanjangcos payment; and (k)
withrespect to the compromise agreement, the evidence on record shows that the parties never went
beyond the negotiation phase.

Ruling of the Court

Ratification of the August 17, 1981

Board Resolution

The Court agrees with the petitioners that the August 17, 1981 Board Resolution did not give Arturo
the authority to act as LRIs representative in the subject sale, as the meeting of the board of directors
where such was passed was conducted without giving any notice to Asuncion. Section 53 of the
Corporation Code provides for the following:

SEC. 53. Regular and special meetings of directors or trustees.Regular meetings of the
board of directors or trustees of every corporation shall be held monthly, unless the by-laws
provide otherwise.

Special meetings of the board of directors or trustees may be held at any time upon call of the
president or as provided in the by-laws.
12
Meetings of directors or trustees of corporations may be held anywhere in or outside of the
Philippines, unless the by-laws provide otherwise. Notice of regular or special meetings stating the
date, time and place of the meeting must be sent to every director or trustee at least one (1) day
prior to the scheduled meeting, unless otherwise provided by the by-laws. A director or trustee may
waive this requirement, either expressly or impliedly. (Emphasis ours)

The Court took this matter up in Fontecha, involving herein parties, where it was held that a meeting
of the board of directors is legally infirm if there is failure to comply with the requirements or
formalities of the law or the corporations by laws and any action taken on such meeting may be
challenged as a consequence:

The general rule is that a corporation, through its board of directors, should act in the manner and
within the formalities, if any, prescribed by its charter or by the general law. Thus, directors must act
as a body in a meeting called pursuant tothe law or the corporations bylaws, otherwise, any action
taken therein may be questioned by any objecting director or shareholder.38 However, the actions
taken in such a meeting by the directors or trustees may be ratified expressly or impliedly.
"Ratification means that the principal voluntarily adopts, confirms and gives sanction to some
unauthorized act of its agent on its behalf. It is this voluntary choice, knowingly made, which amounts
to a ratification of what was theretofore unauthorized and becomes the authorized act of the party so
making the ratification. The substance of the doctrine is confirmation after conduct, amounting to a
substitute for a prior authority. Ratification can be made either expressly or impliedly. Implied
ratification may take various forms like silence or acquiescence, acts showing approval or adoption
of the act, or acceptance and retention of benefits flowing therefrom."39

The Court's decision in Fontecha concerns the implied ratification of one of the resolutions passed on
August 17, 1981 by the board of directors of LRI despite of the lack of notice of meeting to Asuncion.
This was owing to the subsequent actions taken therein by the stockholders, including Asuncion
herself, as cited by the CA in its decision. On the other hand, the sale of the property to the spouses
Tanjangco was ratified, not because of implied ratification as was the case in Fontecha but through
the passage of the July 30, 1982 Board Resolution.

In the present case, the ratification was expressed through the July 30, 1982 Board Resolution.
Asuncion claims that the July 30, 1982 Board Resolution did not ratify the Board Resolution dated
August 17, 1981 for lack of the required number of votes because Juanito is not entitled to vote while
Leo voted "no" to the ratification ofthe sale even if the minutes stated otherwise. Asuncion assails the
authority of Juanito to vote because he was not a director and he did not own any share of stock
which would qualify him to be one. On the contrary, Juanito defends his right to vote as the
representative of Teresitas estate. Upon examination of the July 30, 1982 minutes of the meeting, it
can be deduced that the meeting is a joint stockholders and directors meeting. The Court takes into
account that majority of the board of directors except for Asuncion, had already approved of the sale
to the spouses Tanjangco prior to this meeting. As a consequence, the power to ratify the previous
resolutions and actions of the board of directors in this case lies inthe stockholders, not in the board
of directors. It would be absurd to require the board of directors to ratify their own actsacts which
the same directors already approved of beforehand. Hence, Juanito, as the administrator of Teresitas
estate even though not a director, is entitled to vote on behalf of Teresitas estate as the administrator
thereof. The Court reiterates its ruling in Tan v. Sycip,40 viz:

In stock corporations, shareholders may generally transfer their shares. Thus, on the death of a
shareholder, the executor or administrator duly appointed by the Court is vested with the legal title to
13
the stock and entitled to vote it. Until a settlement and division of the estate is effected, the stocks of
the decedent are held by the administrator or executor.41 (Citation omitted and emphasis ours)

On the issue that Leo votedagainst the ratification of sale, the Court notes that only Juanito, Benjamin
and Rosendo signed the minutes of the meeting. It was also not stated who prepared the minutes,
given that Asuncion as the corporate secretary refused to record the same. Also, it was not explained
why Leo was not able to affix his signature on the said minutes if he really voted in favor ofthe
ratification of the sale. Whats more, Leo was not presented to testify onthe witness stand. Hence,
contrary to the position adopted by the CA, only those whose signatures appear on the minutes of the
meeting can be said to have voted in favor of the ratification. This case must be differentiated from
the Courts ruling in People v. Dumlao, et al.42

In Dumlao, the Court ruled that the signing of the minutes by all the directors is not a requisite and
that the lack of signatures on the minutes does not mean that the resolution was not passed by the
board. However, there is a notable disparity between the facts in Dumlaoand the instant case. In
Dumlao, the corporate secretary therein recorded, prepared and certified the correctness of the
minutes of the meeting despite the fact that not all directors signed the minutes. In this case, it could
not even be established who recorded the minutes in view of Asuncions refusal to do so, as
demonstrated during the cross examination of Benjamin by the petitioners counsel:

Q: I am showing to you Exhibit 14, I noticed that Exhibit 14 which is the minutes of the meeting of the
stockholders on July 30, 1982 was not prepared by a secretary but was prepared by some members
of the board.

A: I cannot recall anymore. I cannot give you an opinion on that, because I will be guessing.

Q: From the minutes itself?

A: That is why I told you I cannot be certain if it was prepared by the secretary or members of the
board. This came into existence. Eleven years ago is not a very short period.

Q: So you cannot remember now who prepared the minutes of the meeting on July 17, 1982? A: I
cannot be accurate - - I said that.43

It is the signature of the corporate secretary, as the one who is tasked to prepare and record the
minutes, that gives the minutes of the meeting probative value and credibility, as the Court explained
in Dumlao, to wit:

The non-signing by the majority of the members of the GSIS Board of Trustees of the said minutes
does not necessarily mean that the supposed resolution was not approved by the board. The signing
of the minutes by all the members of the board is not required. There is no provision in the
Corporation Code of the Philippines that requires that the minutes of the meeting should be signed by
all the members of the board.

The proper custodian of the books, minutes and official records of a corporation is usually the
corporate secretary. Being the custodian of corporate records, the corporate secretary has the duty to
record and prepare the minutes of the meeting. The signature of the corporate secretary gives the
minutes of the meeting probative value and credibility. In this case, Antonio Eduardo B. Nachura,
Deputy Corporate Secretary, recorded, prepared and certified the correctness of the minutes of the
meeting of 23 April 1982; and the same was confirmed by Leonilo M. Ocampo, Chairman of the GSIS
14
Board of Trustees. Said minutes contained the statement that the board approved the sale of the
properties, subject matter of this case, to respondent Lao.44 (Citations omitted and emphasis ours)

Thus, without the certification of the corporate secretary, it is incumbent upon the other directors or
stockholders as the case may be, to submit proof that the minutes of the meeting is accurate and
reflective of what transpired during the meeting. Conformably to the foregoing, in the absence of
Asuncions certification, only Juanito, Benjamin and Rosendo, whose signatures appeared on the
minutes, could be considered as to have ratified the sale to the spouses Tanjangco.

Yet, notwithstanding the lack of Leos signature to prove that he indeed voted in favor of the
ratification,the results are just the same for he owns one share of stock only. Pitted against the shares
of the other stockholders who voted in favor of ratification, Asuncion and Leo were clearly outvoted:

Ms. [ASUNCION] LOPEZ 7, 831 shares

Mr. BENJAMIN B. BERNARDINO 1 share
and representing Arturo F. Lopez 7, 831 shares
Mr. JUANITO L. SANTOS
(representing the Estate of Teresita Lopez Marquez) 7, 830 shares
Mr. LEO RIVERA 1 share
Mr. ROSENDO DE LEON 5 shares
TOTAL SHARES REPRESENTED 23, 499 shares45
In sum, whatever defect there was on the sale to the spouses Tanjangco pursuant to the August 17,
1981 Board Resolution, the same was cured through its ratification in the July 30, 1982 Board
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.1wphi1

In Cua, Jr. et al. v. Tan, et al.,46 the Court held that by virtue of ratification, the acts of the board of
directors become the acts of the stockholders themselves, even if those acts were, at the outset,
unauthorized:

Clearly, the acquisition by PRCI of JTH and the constitution of the JTH Board of Directors are no
longer just the acts of the majority of the PRCI Board of Directors, but also of the majority of the PRCI
stockholders. By ratification, even an unauthorized act of an agent becomes the authorized act of the
principal. To declare the Resolution dated 26 September 2006 of the PRCI Board of Directors null and
void will serve no practical use or value, or affect any of the rights of the parties, because the
Resolution dated 7 November 2006 of the PRCI stockholders - approving and ratifying said
acquisition and the manner in which PRCI shall constitute the JTH Board of Directors will still
remain valid and binding.47 (Citation omitted and emphasis ours) Compromise agreement

The remaining issue is whether the spouses Tanjangco could be held liable for damages for reneging
on an alleged verbal compromise agreement.

There is no reason for the Court to disturb the unanimous findings of the CA and the trial court that no
compromise agreement was perfected between the parties. The existence of a perfected contract is a
finding of fact that the Court will not disturb if there is substantial evidence supporting it. "Basic is the
rule that factual findings of trial courts, including their assessment of the witnesses' credibility, are
entitled to great weight and respect by this Court, particularly when the [CA] affirms the findings."48
For this reason, the spouses Tanjangco may not be compelled to honor a compromise agreement

15
that never left the negotiation phase and be held liable for the alleged damages Asuncion incurred as
a result of her attempts to comply to the provisions thereof.

WHEREFORE, the instant petition is DENIED. The Decision dated February 22, 2002 of the Court of
Appeals in CA-G.R. CV No. 63519 is hereby AFFIRMED.

SO ORDERED.

G.R. No. 151969 September 4, 2009

VALLE VERDE COUNTRY CLUB, INC., ERNESTO VILLALUNA, RAY GAMBOA, AMADO M.
SANTIAGO, JR., FORTUNATO DEE, AUGUSTO SUNICO, VICTOR SALTA, FRANCISCO
ORTIGAS III, ERIC ROXAS, in their capacities as members of the Board of Directors of Valle
Verde Country Club, Inc., and JOSE RAMIREZ, Petitioners,
vs.
VICTOR AFRICA, Respondent.

DECISION

BRION, J.:

In this petition for review on certiorari,1 the parties raise a legal question on corporate governance:
Can the members of a corporations board of directors elect another director to fill in a vacancy
caused by the resignation of a hold-over director?

THE FACTUAL ANTECEDENTS

On February 27, 1996, during the Annual Stockholders Meeting of petitioner Valle Verde Country
Club, Inc. (VVCC), the following were elected as members of the VVCC Board of Directors :
Ernesto Villaluna, Jaime C. Dinglasan (Dinglasan), Eduardo Makalintal (Makalintal), Francisco
Ortigas III, Victor Salta, Amado M. Santiago, Jr., Fortunato Dee, Augusto Sunico, and Ray Gamboa.2
In the years 1997, 1998, 1999, 2000, and 2001, however, the requisite quorum for the holding of the
stockholders meeting could not be obtained. Consequently, the above-named directors continued to
serve in the VVCC Board in a hold-over capacity.

On September 1, 1998, Dinglasan resigned from his position as member of the VVCC Board. In a
meeting held on October 6, 1998, the remaining director s, still constituting a quorum of VVCCs
nine-member board, elected Eric Roxas (Roxas) to fill in the vacancy created by the resignation of
Dinglasan.

A year later, or on November 10, 1998, Makalintal also resigned as member of the VVCC Board. He
was replaced by Jose Ramirez (Ramirez), who was elected by the remaining members of the VVCC
Board on March 6, 2001.

Respondent Africa (Africa), a member of VVCC, questioned the election of Roxas and Ramirez as
members of the VVCC Board with the Securities and Exchange Commission (SEC) and the Regional
Trial Court (RTC), respectively. The SEC case questioning the validity of Roxas appointment was
docketed as SEC Case No. 01-99-6177. The RTC case questioning the validity of Ramirez
appointment was docketed as Civil Case No. 68726.

16
In his nullification complaint3 before the RTC, Africa alleged that the election of Roxas was contrary
to Section 29, in relation to Section 23, of the Corporation Code of the Philippines (Corporation
Code). These provisions read:

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.

xxxx

Sec. 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. xxx. [Emphasis supplied.]

Africa claimed that a year after Makalintals election as member of the VVCC Board in 1996, his
[Makalintals] term as well as those of the other members of the VVCC Board should be
considered to have already expired. Thus, according to Africa, the resulting vacancy should have
been filled by the stockholders in a regular or special meeting called for that purpose , and not
by the remaining members of the VVCC Board, as was done in this case.

Africa additionally contends that for the members to exercise the authority to fill in vacancies in the
board of directors, Section 29 requires, among others, that there should be an unexpired term during
which the successor-member shall serve. Since Makalintals term had already expired with the lapse
of the one-year term provided in Section 23, there is no more "unexpired term" during which Ramirez
could serve.

Through a partial decision4 promulgated on January 23, 2002, the RTC ruled in favor of Africa and
declared the election of Ramirez, as Makalintals replacement, to the VVCC Board as null and
void.

Incidentally, the SEC issued a similar ruling on June 3, 2003, nullifying the election of Roxas as
member of the VVCC Board, vice hold-over director Dinglasan. While VVCC manifested its intent
to appeal from the SECs ruling, no petition was actually filed with the Court of Appeals; thus, the
appellate court considered the case closed and terminated and the SECs ruling final and executory.5

THE PETITION

VVCC now appeals to the Court to assail the RTCs January 23, 2002 partial decision for being
contrary to law and jurisprudence. VVCC made a direct resort to the Court via a petition for review on
certiorari, claiming that the sole issue in the present case involves a purely legal question.

As framed by VVCC, the issue for resolution is whether the remaining directors of the corporations
Board, still constituting a quorum, can elect another director to fill in a vacancy caused by the
resignation of a hold-over director.
17
Citing law and jurisprudence, VVCC posits that the power to fill in a vacancy created by the
resignation of a hold-over director is expressly granted to the remaining members of the corporations
board of directors.

Under the above-quoted Section 29 of the Corporation Code, a vacancy occurring in the board of
directors caused by the expiration of a members term shall be filled by the corporations
stockholders. Correlating Section 29 with Section 23 of the same law, VVCC alleges that a members
term shall be for one year and until his successor is elected and qualified; otherwise stated, a
members term expires only when his successor to the Board is elected and qualified . Thus,
"until such time as [a successor is] elected or qualified in an annual election where a quorum is
present," VVCC contends that "the term of [a member] of the board of directors has yet not expired."

As the vacancy in this case was caused by Makalintals resignation, not by the expiration of his term,
VVCC insists that the board rightfully appointed Ramirez to fill in the vacancy.

In support of its arguments, VVCC cites the Courts ruling in the 1927 El Hogar6 case which states:

Owing to the failure of a quorum at most of the general meetings since the respondent has been in
existence, it has been the practice of the directors to fill in vacancies in the directorate by choosing
suitable persons from among the stockholders. This custom finds its sanction in Article 71 of the By-
Laws, which reads as follows:

Art. 71. The directors shall elect from among the shareholders members to fill the vacancies
that may occur in the board of directors until the election at the general meeting.

xxxx

Upon failure of a quorum at any annual meeting the directorate naturally holds over and continues to
function until another directorate is chosen and qualified. Unless the law or the charter of a
corporation expressly provides that an office shall become vacant at the expiration of the term of
office for which the officer was elected, the general rule is to allow the officer to hold over until his
successor is duly qualified. Mere failure of a corporation to elect officers does not terminate the
terms of existing officers nor dissolve the corporation. The doctrine above stated finds expression in
article 66 of the by-laws of the respondent which declares in so many words that directors shall hold
office "for the term of one year or until their successors shall have been elected and taken
possession of their offices." xxx.

It results that the practice of the directorate of filling vacancies by the action of the directors
themselves is valid. Nor can any exception be taken to the personality of the individuals chosen by
the directors to fill vacancies in the body. [Emphasis supplied.]

Africa, in opposing VVCCs contentions, raises the same arguments that he did before the trial court.

THE COURTS RULING

We are not persuaded by VVCCs arguments and, thus, find its petition unmeritorious.

To repeat, the issue for the Court to resolve is whether the remaining directors of a corporations
Board, still constituting a quorum, can elect another director to fill in a vacancy caused by the
18
resignation of a hold-over director. The resolution of this legal issue is significantly hinged on the
determination of what constitutes a directors term of office.

The holdover period is not part of the term of office of a member of the board of directors

The word "term" has acquired a definite meaning in jurisprudence. In several cases, we have defined
"term" as the time during which the officer may claim to hold the office as of right, and fixes the
interval after which the several incumbents shall succeed one another.7 The term of office is not
affected by the holdover.8 The term is fixed by statute and it does not change simply because the
office may have become vacant, nor because the incumbent holds over in office beyond the end
of the term due to the fact that a successor has not been elected and has failed to qualify.

Term is distinguished from tenure in that an officers "tenure" represents the term during which the
incumbent actually holds office. The tenure may be shorter (or, in case of holdover, longer) than the
term for reasons within or beyond the power of the incumbent.

Based on the above discussion, when Section 239 of the Corporation Code declares that "the board
of directorsshall hold office for one (1) year until their successors are elected and qualified,"
we construe the provision to mean that the term of the members of the board of directors shall be
only for one year; their term expires one year after election to the office. The holdover period that
time from the lapse of one year from a members election to the Board and until his successors
election and qualification is not part of the directors original term of office, nor is it a new term; the
holdover period, however, constitutes part of his tenure. Corollary, when an incumbent member of the
board of directors continues to serve in a holdover capacity, it implies that the office has a fixed term,
which has expired, and the incumbent is holding the succeeding term.10

After the lapse of one year from his election as member of the VVCC Board in 1996, Makalintals term
of office is deemed to have already expired. That he continued to serve in the VVCC Board in a
holdover capacity cannot be considered as extending his term. To be precise, Makalintals term of
office began in 1996 and expired in 1997 , but, by virtue of the holdover doctrine in Section 23 of
the Corporation Code, he continued to hold office until his resignation on November 10, 1998.
This holdover period, however, is not to be considered as part of his term, which, as declared, had
already expired.

With the expiration of Makalintals term of office, a vacancy resulted which, by the terms of Section
2911 of the Corporation Code, must be filled by the stockholders of VVCC in a regular or special
meeting called for the purpose. To assume as VVCC does that the vacancy is caused by
Makalintals resignation in 1998, not by the expiration of his term in 1997, is both illogical and
unreasonable. His resignation as a holdover director did not change the nature of the vacancy; the
vacancy due to the expiration of Makalintals term had been created long before his resignation.

The powers of the corporations board of directors emanate from its stockholders

VVCCs construction of Section 29 of the Corporation Code on the authority to fill up vacancies in the
board of directors, in relation to Section 23 thereof, effectively weakens the stockholders power to
participate in the corporate governance by electing their representatives to the board of directors. The
board of directors is the directing and controlling body of the corporation. It is a creation of the
stockholders and derives its power to control and direct the affairs of the corporation from them. The
board of directors, in drawing to themselves the powers of the corporation, occupies a position of

19
trusteeship in relation to the stockholders, in the sense that the board should exercise not only care
and diligence, but utmost good faith in the management of corporate affairs.12

The underlying policy of the Corporation Code is that the business and affairs of a corporation must
be governed by a board of directors whose members have stood for election, and who have actually
been elected by the stockholders, on an annual basis. Only in that way can the directors' continued
accountability to shareholders, and the legitimacy of their decisions that bind the corporation's
stockholders, be assured. The shareholder vote is critical to the theory that legitimizes the exercise of
power by the directors or officers over properties that they do not own.13

This theory of delegated power of the board of directors similarly explains why, under Section 29 of
the Corporation Code, in cases where the vacancy in the corporations board of directors is caused
not by the expiration of a members term, the successor "so elected to fill in a vacancy shall be
elected only for the unexpired term of the his predecessor in office." The law has authorized the
remaining members of the board to fill in a vacancy only in specified instances, so as not to retard or
impair the corporations operations; yet, in recognition of the stockholders right to elect the members
of the board, it limited the period during which the successor shall serve only to the "unexpired term of
his predecessor in office."

While the Court in El Hogar approved of the practice of the directors to fill vacancies in the
directorate, we point out that this ruling was made before the present Corporation Code was
enacted14 and before its Section 29 limited the instances when the remaining directors can fill in
vacancies in the board, i.e., when the remaining directors still constitute a quorum and when the
vacancy is caused for reasons other than by removal by the stockholders or by expiration of the
term.1avvphi1

It also bears noting that the vacancy referred to in Section 29 contemplates a vacancy occurring
within the directors term of office. When a vacancy is created by the expiration of a term, logically,
there is no more unexpired term to speak of. Hence, Section 29 declares that it shall be the
corporations stockholders who shall possess the authority to fill in a vacancy caused by the
expiration of a members term.

As correctly pointed out by the RTC, when remaining members of the VVCC Board elected Ramirez
to replace Makalintal, there was no more unexpired term to speak of, as Makalintals one-year term
had already expired. Pursuant to law, the authority to fill in the vacancy caused by Makalintals
leaving lies with the VVCCs stockholders, not the remaining members of its board of directors.

WHEREFORE, we DENY the petitioners petition for review on certiorari, and AFFIRM the
partial decision of the Regional Trial Court, Branch 152, Manila, promulgated on January 23, 2002, in
Civil Case No. 68726. Costs against the petitioners.

SO ORDERED.

G.R. No. 157549 May 30, 2011

DONNINA C. HALLEY, Petitioner,

vs.
PRINTWELL, INC., Respondent.

DECISION
20
BERSAMIN, J:

Stockholders of a corporation are liable for the debts of the corporation up to the extent of their
unpaid subscriptions. They cannot invoke the veil of corporate identity as a shield from liability,
because the veil may be lifted to avoid defrauding corporate creditors.

Weaffirm with modification the decisionpromulgated on August 14, 2002,1whereby the Court of
Appeals(CA) upheld thedecision of the Regional Trial Court, Branch 71, in Pasig City (RTC),2ordering
the defendants (including the petitioner)to pay to Printwell, Inc. (Printwell) the principal sum of
P291,342.76 plus interest.

Antecedents

The petitioner wasan incorporator and original director of Business Media Philippines, Inc. (BMPI),
which, at its incorporation on November 12, 1987,3had an authorized capital stock of P3,000,000.00
divided into 300,000 shares each with a par value of P10.00,of which 75,000 were initially
subscribed, to wit:

Subscriber No. of sharesTotal subscription Amount paid

Donnina C. Halley 35,000 P 350,000.00P87,500.00
Roberto V. Cabrera, Jr. 18,000 P 180,000.00P45,000.00
Albert T. Yu 18,000 P 180,000.00P45,000.00
Zenaida V. Yu 2,000 P 20,000.00 P5,000.00
Rizalino C. Vineza 2,000 P 20,000.00 P5,000.00
TOTAL 75,000 P750,000.00 P187,500.00
Printwell engaged in commercial and industrial printing .BMPI commissioned Printwell for the printing
of the magazine Philippines, Inc. (together with wrappers and subscription cards) that BMPI published
and sold. For that purpose, Printwell extended 30-day credit accommodations to BMPI.

In the period from October 11, 1988 until July 12, 1989, BMPI placed with Printwell several orders on
credit, evidenced byinvoices and delivery receipts totalingP316,342.76.Considering that BMPI
paidonlyP25,000.00,Printwell sued BMPI on January 26, 1990 for the collection of the unpaid
balance of P291,342.76 in the RTC.4

On February 8, 1990,Printwell amended the complaint in order to implead as defendants all the
original stockholders and incorporators to recover on their unpaid subscriptions, as follows:5

Name Unpaid Shares

Donnina C. Halley P 262,500.00
Roberto V. Cabrera, Jr. P135,000.00
Albert T. Yu P135,000.00
Zenaida V. Yu P15,000.00
Rizalino C. Vieza P15,000.00
TOTAL P 562,500.00
The defendants filed a consolidated answer,6 averring that they all had paid their subscriptions in full;
that BMPI had a separate personality from those of its stockholders; that Rizalino C. Vieza had
assigned his fully-paid up shares to a certain Gerardo R. Jacinto in 1989; and that the directors and
stockholders of BMPI had resolved to dissolve BMPI during the annual meeting held on February 5,
1990.
21
To prove payment of their subscriptions, the defendant stockholders submitted in evidence BMPI
official receipt (OR) no. 217, OR no. 218, OR no. 220,OR no. 221, OR no. 222, OR no. 223, andOR
no. 227,to wit:

Receipt No. Date Name Amount

217 November 5, 1987 Albert T. Yu P 45,000.00
218 May 13, 1988 Albert T. Yu P 135,000.00
220 May 13, 1988 Roberto V. Cabrera, Jr. P 135,000.00
221 November 5, 1987 Roberto V. Cabrera, Jr. P 45,000.00
222 November 5, 1987 Zenaida V. Yu P 5,000.00
223 May 13, 1988 Zenaida V. Yu P 15,000.00
227 May 13, 1988 Donnina C. Halley P 262,500.00
In addition, the stockholders submitted other documents in evidence, namely:(a) an audit report dated
March 30, 1989 prepared by Ilagan, Cepillo & Associates (submitted to the SEC and the BIR);7(b)
BMPIbalance sheet8 and income statement9as of December 31, 1988; (c) BMPI income tax return
for the year 1988 (stamped "received" by the BIR);10(d) journal vouchers;11(e) cash deposit slips;12
and(f)Bank of the Philippine Islands (BPI) savings account passbookin the name of BMPI.13

Ruling of the RTC

On November 3, 1993, the RTC rendered a decision in favor of Printwell, rejecting the allegation
of payment in full of the subscriptions in view of an irregularity in the issuance of the ORs and
observing that the defendants had used BMPIs corporate personality to evade payment and
create injustice, viz:

The claim of individual defendants that they have fully paid their subscriptions to defend[a]nt
corporation, is not worthy of consideration, because:

a) in the case of defendants-spouses Albert and Zenaida Yu, it will be noted that the alleged payment
made on May 13, 1988 amounting to P135,000.00, is covered by Official Receipt No. 218 (Exh. "2"),
whereas the alleged payment made earlier on November 5, 1987, amounting to P5,000.00, is
covered by Official Receipt No. 222 (Exh. "3"). This is cogent proof that said receipts were belatedly
issued just to suit their theory since in the ordinary course of business, a receipt issued earlier must
have serial numbers lower than those issued on a later date. But in the case at bar, the receipt issued
on November 5, 1987 has serial numbers (222) higher than those issued on a later date (May 13,
1988).

b) The claim that since there was no call by the Board of Directors of defendant corporation for the
payment of unpaid subscriptions will not be a valid excuse to free individual defendants from liability.
Since the individual defendants are members of the Board of Directors of defendant corporation, it
was within their exclusive power to prevent the fulfillment of the condition, by simply not making a call
for the payment of the unpaid subscriptions. Their inaction should not work to their benefit and unjust
enrichment at the expense of plaintiff.

Assuming arguendo that the individual defendants have paid their unpaid subscriptions, still, it is very
apparent that individual defendants merely used the corporate fiction as a cloak or cover to create an
injustice; hence, the alleged separate personality of defendant corporation should be disregarded
(Tan Boon Bee & Co., Inc. vs. Judge Jarencio, G.R. No. 41337, 30 June 1988).14

22
Applying the trust fund doctrine, the RTC declared the defendant stockholders liable to Printwell pro
rata, thusly:

Defendant Business Media, Inc. is a registered corporation (Exhibits "A", "A-1" to "A-9"), and, as
appearing from the Articles of Incorporation, individual defendants have the following unpaid
subscriptions:

Names Unpaid Subscription

Donnina C. Halley P262,500.00
Roberto V. Cabrera, Jr. 135.000.00
Albert T. Yu 135,000.00
Zenaida V. Yu 15,000.00
Rizalino V. Vineza 15,000.00
--------------------------------
Total P562,500.00
and it is an established doctrine that subscriptions to the capital stock of a corporation constitute a
fund to which creditors have a right to look for satisfaction of their claims (Philippine National Bank vs.
Bitulok Sawmill, Inc., 23 SCRA 1366) and, in fact, a corporation has no legal capacity to release a
subscriber to its capital stock from the obligation to pay for his shares, and any agreement to this
effect is invalid (Velasco vs. Poizat, 37 Phil. 802).

The liability of the individual stockholders in the instant case shall be pro-rated as follows:

Names Amount
Donnina C. Halley P149,955.65
Roberto V. Cabrera, Jr. 77,144.55
Albert T. Yu 77,144.55
Zenaida V. Yu 8,579.00
Rizalino V. Vineza 8,579.00
--------------------------------
Total P321,342.7515
The RTC disposed as follows:

WHEREFORE, judgment is hereby rendered in favor of plaintiff and against defendants, ordering
defendants to pay to plaintiff the amount of P291,342.76, as principal, with interest thereon at 20%
per annum, from date of default, until fully paid, plus P30,000.00 as attorneys fees, plus costs of suit.

Defendants counterclaims are ordered dismissed for lack of merit.

SO ORDERED.16

Ruling of the CA

All the defendants, except BMPI, appealed.

Spouses Donnina and Simon Halley, and Rizalino Vieza defined the following errors committed by
the RTC, as follows:

I.

23
THE TRIAL COURT ERRED IN HOLDING APPELLANTS-STOCKHOLDERS LIABLE FOR THE
LIABILITIES OF THE DEFENDANT CORPORATION.

II.

ASSUMING ARGUENDO THAT APPELLANTS MAY BE LIABLE TO THE EXTENT OF THEIR

UNPAID SUBSCRIPTION OF SHARES OF STOCK, IF ANY, THE TRIAL COURT NONETHELESS
ERRED IN NOT FINDING THAT APPELLANTS-STOCKHOLDERS HAVE, AT THE TIME THE SUIT
WAS FILED, NO SUCH UNPAID SUBSCRIPTIONS.

On their part, Spouses Albert and Zenaida Yu averred:

I.

THE RTC ERRED IN REFUSING TO GIVE CREDENCE AND WEIGHT TO DEFENDANTS-

APPELLANTS SPOUSES ALBERT AND ZENAIDA YUS EXHIBITS 2 AND 3 DESPITE THE
UNREBUTTED TESTIMONY THEREON BY APPELLANT ALBERT YU AND THE ABSENCE OF
PROOF CONTROVERTING THEM.

II.

THE RTC ERRED IN HOLDING DEFENDANTS-APPELLANTS SPOUSES ALBERT AND ZENAIDA

YU PERSONALLY LIABLE FOR THE CONTRACTUAL OBLIGATION OF BUSINESS MEDIA PHILS.,
INC. DESPITE FULL PAYMENT BY SAID DEFENDANTS-APPELLANTS OF THEIR RESPECTIVE
SUBSCRIPTIONS TO THE CAPITAL STOCK OF BUSINESS MEDIA PHILS., INC.

Roberto V. Cabrera, Jr. argued:

I.

IT IS GRAVE ERROR ON THE PART OF THE COURT A QUO TO APPLY THE DOCTRINE OF
PIERCING THE VEIL OF CORPORATE PERSONALITY IN ABSENCE OF ANY SHOWING OF
EXTRA-ORDINARY CIRCUMSTANCES THAT WOULD JUSTIFY RESORT THERETO.

II.

IT IS GRAVE ERROR ON THE PART OF THE COURT A QUO TO RULE THAT INDIVIDUAL
DEFENDANTS ARE LIABLE TO PAY THE PLAINTIFF-APPELLEES CLAIM BASED ON THEIR
RESPECTIVE SUBSCRIPTION. NOTWITHSTANDING OVERWHELMING EVIDENCE SHOWING
FULL SETTLEMENT OF SUBSCRIBED CAPITAL BY THE INDIVIDUAL DEFENDANTS.

On August 14, 2002, the CA affirmed the RTC, holding that the defendants resort to the corporate
personality would createan injustice becausePrintwell would thereby be at a loss against whom it
would assert the right to collect, viz:

Settled is the rule that when the veil of corporate fiction is used as a means of perpetrating fraud or
an illegal act or as a vehicle for the evasion of an existing obligation, the circumvention of statutes,
the achievements or perfection of monopoly or generally the perpetration of knavery or crime, the veil
with which the law covers and isolates the corporation from the members or stockholders who
compose it will be lifted to allow for its consideration merely as an aggregation of individuals (First
24
Philippine International Bank vs. Court of Appeals, 252 SCRA 259). Moreover, under this doctrine, the
corporate existence may be disregarded where the entity is formed or used for non-legitimate
purposes, such as to evade a just and due obligations or to justify wrong (Claparols vs. CIR, 65
SCRA 613).

In the case at bench, it is undisputed that BMPI made several orders on credit from appellee
PRINTWELL involving the printing of business magazines, wrappers and subscription cards, in the
total amount of P291,342.76 (Record pp. 3-5, Annex "A") which facts were never denied by
appellants stockholders that they owe appellee the amount of P291,342.76. The said goods were
delivered to and received by BMPI but it failed to pay its overdue account to appellee as well as the
interest thereon, at the rate of 20% per annum until fully paid. It was also during this time that
appellants stockholders were in charge of the operation of BMPI despite the fact that they were not
able to pay their unpaid subscriptions to BMPI yet greatly benefited from said transactions. In view of
the unpaid subscriptions, BMPI failed to pay appellee of its liability, hence appellee in order to protect
its right can collect from the appellants stockholders regarding their unpaid subscriptions. To deny
appellee from recovering from appellants would place appellee in a limbo on where to assert their
right to collect from BMPI since the stockholders who are appellants herein are availing the defense
of corporate fiction to evade payment of its obligations.17

Further, the CA concurred with the RTC on the applicability of the trust fund doctrine, under which
corporate debtors might look to the unpaid subscriptions for the satisfaction of unpaid corporate
debts, stating thus:

It is an established doctrine that subscription to the capital stock of a corporation constitute a fund to
which creditors have a right to look up to for satisfaction of their claims, and that the assignee in
insolvency can maintain an action upon any unpaid stock subscription in order to realize assets for
the payment of its debts (PNB vs. Bitulok Sawmill, 23 SCRA 1366).

Premised on the above-doctrine, an inference could be made that the funds, which consists of the
payment of subscriptions of the stockholders, is where the creditors can claim monetary
considerations for the satisfaction of their claims. If these funds which ought to be fully subscribed by
the stockholders were not paid or remain an unpaid subscription of the corporation then the creditors
have no other recourse to collect from the corporation of its liability. Such occurrence was evident in
the case at bar wherein the appellants as stockholders failed to fully pay their unpaid subscriptions,
which left the creditors helpless in collecting their claim due to insufficiency of funds of the
corporation. Likewise, the claim of appellants that they already paid the unpaid subscriptions could
not be given weight because said payment did not reflect in the Articles of Incorporations of BMPI that
the unpaid subscriptions were fully paid by the appellants stockholders. For it is a rule that a
stockholder may be sued directly by creditors to the extent of their unpaid subscriptions to the
corporation (Keller vs. COB Marketing, 141 SCRA 86).

Moreover, a corporation has no power to release a subscription or its capital stock, without valuable
consideration for such releases, and as against creditors, a reduction of the capital stock can take
place only in the manner and under the conditions prescribed by the statute or the charter or the
Articles of Incorporation. (PNB vs. Bitulok Sawmill, 23 SCRA 1366).18

The CAdeclared thatthe inconsistency in the issuance of the ORs rendered the claim of full payment
of the subscriptions to the capital stock unworthy of consideration; andheld that the veil of corporate
fiction could be pierced when it was used as a shield to perpetrate a fraud or to confuse legitimate
issues, to wit:
25
Finally, appellants SPS YU, argued that the fact of full payment for the unpaid subscriptions was
incontrovertibly established by competent testimonial and documentary evidence, namely Exhibits
"1", "2", "3" & "4", which were never disputed by appellee, clearly shows that they should not be held
liable for payment of the said unpaid subscriptions of BMPI.

The reliance is misplaced.

We are hereby reproducing the contents of the above-mentioned exhibits, to wit:

Exh: "1" YU Official Receipt No. 217 dated November 5, 1987 amounting to P45,000.00 allegedly
representing the initial payment of subscriptions of stockholder Albert Yu.

Exh: "2" YU Official Receipt No. 218 dated May 13, 1988 amounting to P135,000.00 allegedly
representing full payment of balance of subscriptions of stockholder Albert Yu. (Record p. 352).

Exh: "3" YU Official Receipt No. 222 dated November 5, 1987 amounting to P5,000.00 allegedly
representing the initial payment of subscriptions of stockholder Zenaida Yu.

Exh: "4" YU Official Receipt No. 223 dated May 13, 1988 amounting to P15,000.00 allegedly
representing the full payment of balance of subscriptions of stockholder Zenaida Yu. (Record p. 353).

Based on the above exhibits, we are in accord with the lower courts findings that the claim of the
individual appellants that they fully paid their subscription to the defendant BMPI is not worthy of
consideration, because, in the case of appellants SPS. YU, there is an inconsistency regarding the
issuance of the official receipt since the alleged payment made on May 13, 1988 amounting to
P135,000.00 was covered by Official Receipt No. 218 (Record, p. 352), whereas the alleged payment
made earlier on November 5, 1987 amounting to P5,000.00 is covered by Official Receipt No. 222
(Record, p. 353). Such issuance is a clear indication that said receipts were belatedly issued just to
suit their claim that they have fully paid the unpaid subscriptions since in the ordinary course of
business, a receipt is issued earlier must have serial numbers lower than those issued on a later
date. But in the case at bar, the receipt issued on November 5, 1987 had a serial number (222) higher
than those issued on May 13, 1988 (218). And even assuming arguendo that the individual appellants
have paid their unpaid subscriptions, still, it is very apparent that the veil of corporate fiction may be
pierced when made as a shield to perpetuate fraud and/or confuse legitimate issues. (Jacinto vs.
Court of Appeals, 198 SCRA 211).19

Spouses Halley and Vieza moved for a reconsideration, but the CA denied their motion for
reconsideration.

Issues

Only Donnina Halley has come to the Court to seek a further review, positing the following for our
consideration and resolution, to wit:

I.

THE COURT OF APPEALS ERRED IN AFFIRMING IN TOTO THE DECISION THAT DID NOTSTATE
THE FACTS AND THE LAW UPON WHICH THE JUDGMENT WAS BASED BUT MERELY COPIED

26
THE CONTENTS OF RESPONDENTS MEMORANDUM ADOPTING THE SAME AS THE REASON
FOR THE DECISION

II.

THE COURT OF APPEALS ERRED IN AFFIRMING THE DECISION OF THE REGIONAL TRIAL
COURT WHICH ESSENTIALLY ALLOWED THE PIERCING OF THE VEIL OF CORPORATE
FICTION

III.

THE HONORABLE COURT OF APPEALS ERRED IN APPLYING THE TRUST FUND DOCTRINE
WHEN THE GROUNDS THEREFOR HAVE NOT BEEN SATISFIED.

On the first error, the petitioner contends that the RTC lifted verbatim from the memorandum of
Printwell; and submits that the RTCthereby violatedthe requirement imposed in Section 14, Article VIII
of the Constitution20 as well as in Section 1,Rule 36 of the Rules of Court,21to the effect that a
judgment or final order of a court should state clearly and distinctly the facts and the law on which it is
based. The petitioner claims that the RTCs violation indicated that the RTC did not analyze the case
before rendering its decision, thus denying her the opportunity to analyze the decision; andthat a
suspicion of partiality arose from the fact that the RTC decision was but a replica of Printwells
memorandum.She cites Francisco v. Permskul,22 in which the Court has stated that the reason
underlying the constitutional requirement, that every decision should clearly and distinctly state the
facts and the law on which it is based, is to inform the reader of how the court has reached its
decision and thereby give the losing party an opportunity to study and analyze the decision and
enable such party to appropriately assign the errors committed therein on appeal.

On the second and third errors, the petitioner maintains that the CA and the RTC erroneously pierced
the veil of corporate fiction despite the absence of cogent proof showing that she, as stockholder of
BMPI, had any hand in transacting with Printwell; thatthe CA and the RTC failed to appreciate the
evidence that she had fully paid her subscriptions; and the CA and the RTCwrongly relied on the
articles of incorporation in determining the current list of unpaid subscriptions despite the articles of
incorporationbeing at best reflectiveonly of the pre-incorporation status of BMPI.

As her submissions indicate, the petitioner assails the decisions of the CA on: (a) the propriety of
disregarding the separate personalities of BMPI and its stockholdersby piercing the thin veil that
separated them; and (b) the application of the trust fund doctrine.

Ruling

The petition for review fails.

I
The RTC did not violate
the Constitution and the Rules of Court

The contention of the petitioner, that the RTC merely copied the memorandum of Printwell in writing
its decision, and did not analyze the records on its own, thereby manifesting a bias in favor of
Printwell, is unfounded.

27
It is noted that the petition for review merely generally alleges that starting from its page 5, the
decision of the RTC "copied verbatim the allegations of herein Respondents in its Memorandum
before the said court," as if "the Memorandum was the draft of the Decision of the Regional Trial
Court of Pasig,"23but fails to specify either the portions allegedly lifted verbatim from the
memorandum, or why she regards the decision as copied. The omission renders thepetition for
review insufficient to support her contention, considering that the mere similarityin language or
thought between Printwells memorandum and the trial courts decisiondid not necessarily justify the
conclusion that the RTC simply lifted verbatim or copied from thememorandum.

It is to be observed in this connection that a trial or appellate judge may occasionally viewa partys
memorandum or brief as worthy of due consideration either entirely or partly. When he does so, the
judgemay adopt and incorporatein his adjudicationthe memorandum or the parts of it he deems
suitable,and yet not be guilty of the accusation of lifting or copying from the memorandum.24 This
isbecause ofthe avowed objective of the memorandum to contribute in the proper illumination and
correct determination of the controversy.Nor is there anything untoward in the congruence of ideas
and views about the legal issues between himself and the party drafting the memorandum.The
frequency of similarities in argumentation, phraseology, expression, and citation of authorities
between the decisions of the courts and the memoranda of the parties, which may be great or small,
can be fairly attributable tothe adherence by our courts of law and the legal profession to widely
knownor universally accepted precedents set in earlier judicial actions with identical factual milieus or
posing related judicial dilemmas.

We also do not agree with the petitioner that the RTCs manner of writing the decisiondeprivedher
ofthe opportunity to analyze its decisionas to be able to assign errors on appeal. The contrary
appears, considering that she was able to impute and assignerrors to the RTCthat she extensively
discussed in her appeal in the CA, indicating her thorough analysis ofthe decision of the RTC.

Our own readingof the trial courts decision persuasively shows that the RTC did comply with the
requirements regarding the content and the manner of writing a decision prescribed in the
Constitution and the Rules of Court. The decision of the RTC contained clear and distinct findings of
facts, and stated the applicablelaw and jurisprudence, fully explaining why the defendants were being
held liable to the plaintiff. In short, the reader was at once informed of the factual and legal reasons
for the ultimate result.

II
Corporate personality not to be used to foster injustice

Printwell impleaded the petitioner and the other stockholders of BMPI for two reasons, namely: (a) to
reach the unpaid subscriptions because it appeared that such subscriptions were the remaining
visible assets of BMPI; and (b) to avoid multiplicity of suits.25

The petitionersubmits that she had no participation in the transaction between BMPI and
Printwell;that BMPI acted on its own; and that shehad no hand in persuading BMPI to renege on its
obligation to pay. Hence, she should not be personally liable.

We rule against the petitioners submission.

Although a corporation has a personality separate and distinct from those of its stockholders,
directors, or officers,26such separate and distinct personality is merely a fiction created by law for the
sake of convenience and to promote the ends of justice.27The corporate personality may be
28
disregarded, and the individuals composing the corporation will be treated as individuals, if the
corporate entity is being used as a cloak or cover for fraud or illegality;as a justification for a wrong;
as an alter ego, an adjunct, or a business conduit for the sole benefit of the stockholders.28 As a
general rule, a corporation is looked upon as a legal entity, unless and until sufficient reason to the
contrary appears. Thus,the courts always presume good faith, andfor that reason accord prime
importance to the separate personality of the corporation, disregarding the corporate personality only
after the wrongdoing is first clearly and convincingly established.29It thus behooves the courts to be
careful in assessing the milieu where the piercing of the corporate veil shall be done.30

Although nowhere in Printwells amended complaint or in the testimonies Printwell offered can it be
read or inferred from that the petitioner was instrumental in persuading BMPI to renege onits
obligation to pay; or that sheinduced Printwell to extend the credit accommodation by misrepresenting
the solvency of BMPI toPrintwell, her personal liability, together with that of her co-defendants,
remainedbecause the CA found her and the other defendant stockholders to be in charge of the
operations of BMPI at the time the unpaid obligation was transacted and incurred, to wit:

In the case at bench, it is undisputed that BMPI made several orders on credit from appellee
PRINTWELL involving the printing of business magazines, wrappers and subscription cards, in the
total amount of P291,342.76 (Record pp. 3-5, Annex "A") which facts were never denied by
appellants stockholders that they owe(d) appellee the amount of P291,342.76. The said goods were
delivered to and received by BMPI but it failed to pay its overdue account to appellee as well as the
interest thereon, at the rate of 20% per annum until fully paid. It was also during this time that
appellants stockholders were in charge of the operation of BMPI despite the fact that they were not
able to pay their unpaid subscriptions to BMPI yet greatly benefited from said transactions. In view of
the unpaid subscriptions, BMPI failed to pay appellee of its liability, hence appellee in order to protect
its right can collect from the appellants stockholders regarding their unpaid subscriptions. To deny
appellee from recovering from appellants would place appellee in a limbo on where to assert their
right to collect from BMPI since the stockholders who are appellants herein are availing the defense
of corporate fiction to evade payment of its obligations.31

It follows, therefore, that whether or not the petitioner persuaded BMPI to renege on its obligations to
pay, and whether or not she induced Printwell to transact with BMPI were not gooddefensesin the
suit.1avvphi1

III
Unpaid creditor may satisfy its claim from
unpaid subscriptions;stockholders must
prove full payment oftheir subscriptions

Both the RTC and the CA applied the trust fund doctrineagainst the defendant stockholders, including
the petitioner.

The petitionerargues, however,that the trust fund doctrinewas inapplicablebecause she had already
fully paid her subscriptions to the capital stock of BMPI. She thus insiststhat both lower courts erred in
disregarding the evidence on the complete payment of the subscription, like receipts, income tax
returns, and relevant financial statements.

The petitioners argumentis devoid of substance.

The trust fund doctrineenunciates a

29
xxx rule that the property of a corporation is a trust fund for the payment of creditors, but such
property can be called a trust fund only by way of analogy or metaphor. As between the
corporation itself and its creditors it is a simple debtor, and as between its creditors and
stockholders its assets are in equity a fund for the payment of its debts.32

The trust fund doctrine, first enunciated in the American case of Wood v. Dummer,33was adopted in
our jurisdiction in Philippine Trust Co. v. Rivera,34where thisCourt declared that:

It is established doctrine that subscriptions to the capital of a corporation constitute a fund to which
creditors have a right to look for satisfaction of their claims and that the assignee in insolvency can
maintain an action upon any unpaid stock subscription in order to realize assets for the payment of its
debts. (Velasco vs. Poizat, 37 Phil., 802) xxx35

We clarify that the trust fund doctrineis not limited to reaching the stockholders unpaid subscriptions.
The scope of the doctrine when the corporation is insolvent encompasses not only the capital stock,
but also other property and assets generally regarded in equity as a trust fund for the payment of
corporate debts.36All assets and property belonging to the corporation held in trust for the benefit of
creditors thatwere distributed or in the possession of the stockholders, regardless of full paymentof
their subscriptions, may be reached by the creditor in satisfaction of its claim.

Also, under the trust fund doctrine,a corporation has no legal capacity to release an original
subscriber to its capital stock from the obligation of paying for his shares, in whole or in part,37
without a valuable consideration,38 or fraudulently, to the prejudice of creditors.39The creditor is
allowed to maintain an action upon any unpaid subscriptions and thereby steps into the shoes of the
corporation for the satisfaction of its debt.40To make out a prima facie case in a suit against
stockholders of an insolvent corporation to compel them to contribute to the payment of its debts by
making good unpaid balances upon their subscriptions, it is only necessary to establish that
thestockholders have not in good faith paid the par value of the stocks of the corporation.41

The petitionerposits that the finding of irregularity attending the issuance of the receipts (ORs) issued
to the other stockholders/subscribers should not affect her becauseher receipt did not suffer similar
irregularity.

Notwithstanding that the RTC and the CA did not find any irregularity in the OR issued in her favor,we
still cannot sustain the petitioners defense of full payment of her subscription.

In civil cases, theparty who pleads payment has the burden of proving it, that even where the plaintiff
must allege nonpayment, the general rule is that the burden rests on the defendant to prove payment,
rather than on the plaintiff to prove nonpayment. In other words, the debtor bears the burden of
showing with legal certainty that the obligation has been discharged by payment.42

Apparently, the petitioner failed to discharge her burden.

A receipt is the written acknowledgment of the fact of payment in money or other settlement between
the seller and the buyer of goods, thedebtor or thecreditor, or theperson rendering services, and
theclient or thecustomer.43Althougha receipt is the best evidence of the fact of payment, it isnot
conclusive, but merely presumptive;nor is it exclusive evidence,considering thatparole evidence may
also establishthe fact of payment.44

30
The petitioners ORNo. 227,presentedto prove the payment of the balance of her subscription,
indicated that her supposed payment had beenmade by means of a check. Thus, to discharge
theburden to prove payment of her subscription, she had to adduce evidence satisfactorily proving
that her payment by check wasregardedas payment under the law.

Paymentis defined as the delivery of money.45Yet, because a check is not money and only
substitutes for money, the delivery of a check does not operate as payment and does not discharge
the obligation under a judgment.46 The delivery of a bill of exchange only produces the fact of
payment when the bill has been encashed.47The following passage fromBank of Philippine Islands v.
Royeca48is enlightening:

Settled is the rule that payment must be made in legal tender. A check is not legal tender and,
therefore, cannot constitute a valid tender of payment. Since a negotiable instrument is only a
substitute for money and not money, the delivery of such an instrument does not, by itself, operate as
payment. Mere delivery of checks does not discharge the obligation under a judgment. The obligation
is not extinguished and remains suspended until the payment by commercial document is actually
realized.

To establish their defense, the respondents therefore had to present proof, not only that they
delivered the checks to the petitioner, but also that the checks were encashed. The respondents
failed to do so. Had the checks been actually encashed, the respondents could have easily produced
the cancelled checks as evidence to prove the same. Instead, they merely averred that they believed
in good faith that the checks were encashed because they were not notified of the dishonor of the
checks and three years had already lapsed since they issued the checks.

Because of this failure of the respondents to present sufficient proof of payment, it was no longer
necessary for the petitioner to prove non-payment, particularly proof that the checks were dishonored.
The burden of evidence is shifted only if the party upon whom it is lodged was able to adduce
preponderant evidence to prove its claim.

Ostensibly, therefore, the petitioners mere submission of the receipt issued in exchange of the check
did not satisfactorily establish her allegation of full payment of her subscription. Indeed, she could not
even inform the trial court about the identity of her drawee bank,49and about whether the check was
cleared and its amount paid to BMPI.50In fact, she did not present the check itself.

Theincome tax return (ITR) and statement of assets and liabilities of BMPI, albeit presented, had no
bearing on the issue of payment of the subscription because they did not by themselves prove
payment. ITRsestablish ataxpayers liability for taxes or a taxpayers claim for refund. In the same
manner, the deposit slips and entries in the passbook issued in the name of BMPI were hardly
relevant due to their not reflecting the alleged payments.

It is notable, too, that the petitioner and her co-stockholders did not support their allegation of
complete payment of their respective subscriptions with the stock and transfer book of BMPI. Indeed,
books and records of a corporation (including the stock and transfer book) are admissible in evidence
in favor of or against the corporation and its members to prove the corporate acts, its financial status
and other matters (like the status of the stockholders), and are ordinarily the best evidence of
corporate acts and proceedings.51Specifically, a stock and transfer book is necessary as a measure
of precaution, expediency, and convenience because it provides the only certain and accurate
method of establishing the various corporate acts and transactions and of showing the ownership of

31
stock and like matters.52That she tendered no explanation why the stock and transfer book was not
presented warrants the inference that the book did not reflect the actual payment of her subscription.

Nor did the petitioner present any certificate of stock issued by BMPI to her. Such a certificate
covering her subscription might have been a reliable evidence of full payment of the subscriptions,
considering that under Section 65 of the Corporation Code a certificate of stock issues only to
a subscriber who has fully paid his subscription . The lack of any explanation for the absence of a
stock certificate in her favor likewise warrants an unfavorable inference on the issue of payment.

Lastly, the petitioner maintains that both lower courts erred in relying on the articles of incorporationas
proof of the liabilities of the stockholders subscribing to BMPIs stocks, averring that the articles of
incorporationdid not reflect the latest subscription status of BMPI.

Although the articles of incorporation may possibly reflect only the pre-incorporation status of a
corporation, the lower courts reliance on that document to determine whether the original
subscribersalready fully paid their subscriptions or not was neither unwarranted nor erroneous. As
earlier explained, the burden of establishing the fact of full payment belonged not to Printwell even if it
was the plaintiff, but to the stockholders like the petitioner who, as the defendants, averredfull
payment of their subscriptions as a defense. Their failure to substantiate their averment of full
payment, as well as their failure to counter the reliance on the recitals found in the articles of
incorporation simply meant their failure or inability to satisfactorily prove their defense of full payment
of the subscriptions.

To reiterate, the petitionerwas liablepursuant to the trust fund doctrine for the corporate obligation of
BMPI by virtue of her subscription being still unpaid. Printwell, as BMPIs creditor,had a right to
reachher unpaid subscription in satisfaction of its claim.

IV
Liability of stockholders for corporate debts isup
to the extentof their unpaid subscription

The RTC declared the stockholders pro rata liable for the debt(based on the proportion to their shares
in the capital stock of BMPI); and held the petitionerpersonally liable onlyin the amount of
P149,955.65.

We do not agree. The RTC lacked the legal and factual support for its prorating the liability. Hence,
we need to modify the extent of the petitioners personal liability to Printwell. The prevailing rule is that
a stockholder is personally liable for the financial obligations of the corporation to the extent of his
unpaid subscription.53In view ofthe petitioners unpaid subscription being worth P262,500.00, shewas
liable up to that amount.

Interest is also imposable on the unpaid obligation. Absent any stipulation, interest is fixed at 12% per
annum from the date the amended complaint was filed on February 8, 1990 until the obligation (i.e.,
to the extent of the petitioners personal liability of P262,500.00) is fully paid.54

Lastly, we find no basis togrant attorneys fees, the award for which must be supported by findings of
fact and of law as provided under Article 2208 of the Civil Code55incorporated in the body of decision
of the trial court. The absence of the requisite findings from the RTC decision warrants the deletion of
the attorneys fees.

32
ACCORDINGLY, we deny the petition for review on certiorari;and affirm with modification the decision
promulgated on August 14, 2002by ordering the petitionerto pay to Printwell, Inc. the sum of
P262,500.00, plus interest of 12% per annum to be computed from February 8, 1990 until full
payment.

The petitioner shall paycost of suit in this appeal.

SO ORDERED.
G.R. No. 144476 April 8, 2003

ONG YONG, JUANITA TAN ONG, WILSON T. ONG, ANNA L. ONG, WILLIAM T. ONG, WILLIE T.
ONG, and JULIE ONG ALONZO, petitioners,
vs.
DAVID S. TIU, CELY Y. TIU, MOLY YU GAW, BELEN SEE YU, D. TERENCE Y. TIU, JOHN YU,
LOURDES C. TIU, INTRALAND RESOURCES DEVELOPMENT CORP., MASAGANA TELAMART,
INC., REGISTER OF DEEDS OF PASAY CITY, and the SECURITIES AND EXCHANGE
COMMISSION, respondents.

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

G.R. No. 144629 April 8, 2003

DAVID S. TIU, CELY Y. TIU, MOLY YU GAW, BELEN SEE YU, D. TERENCE Y. TIU, JOHN YU,
LOURDES C. TIU, and INTRALAND RESOURCES DEVELOPMENT CORP., petitioners,
vs.
ONG YONG, JUANITA TAN ONG, WILSON T. ONG, ANNA L. ONG, WILLIAM T. ONG, WILLIE T.
ONG, and JULIA ONG ALONZO, respondents.

RESOLUTION

CORONA, J.:

Before us are the (1) motion for reconsideration, dated March 15, 2002, of petitioner movants Ong
Yong, Juanita Tan Ong, Wilson Ong, Anna Ong, William Ong, Willie Ong and Julia Ong Alonzo (the
Ongs); (2) motion for partial reconsideration, dated March 15, 2002, of petitioner movant Willie Ong
seeking a reversal of this Court's Decision,1 dated February 1, 2002, in G.R. Nos. 144476 and
144629 affirming with modification the decision2 of the Court of Appeals, dated October 5, 1999,
which in turn upheld, likewise with modification, the decision of the SEC en banc, dated September
11, 1998; and (3) motion for issuance of writ of execution of petitioners David S. Tiu, Cely Y. Tiu, Moly
Yu Gow, Belen See Yu, D. Terence Y. Tiu, John Yu and Lourdes C. Tiu (the Tius) of our February 1,
2002 Decision.

A brief recapitulation of the facts shows that:

In 1994, the construction of the Masagana Citimall in Pasay City was threatened with stoppage and
incompletion when its owner, the First Landlink Asia Development Corporation (FLADC), which was
owned by the Tius, encountered dire financial difficulties. It was heavily indebted to the Philippine
National Bank (PNB) for P190 million. To stave off foreclosure of the mortgage on the two lots where
the mall was being built, the Tius invited Ong Yong, Juanita Tan Ong, Wilson T. Ong, Anna L. Ong,
William T. Ong and Julia Ong Alonzo (the Ongs), to invest in FLADC. Under the Pre-Subscription
33
Agreement they entered into, the Ongs and the Tius agreed to maintain equal shareholdings in
FLADC: the Ongs were to subscribe to 1,000,000 shares at a par value of P100.00 each while the
Tius were to subscribe to an additional 549,800 shares at P100.00 each in addition to their already
existing subscription of 450,200 shares. Furthermore, they agreed that the Tius were entitled to
nominate the Vice-President and the Treasurer plus five directors while the Ongs were entitled to
nominate the President, the Secretary and six directors (including the chairman) to the board of
directors of FLADC. Moreover, the Ongs were given the right to manage and operate the mall.

Accordingly, the Ongs paid P100 million in cash for their subscription to 1,000,000 shares of stock
while the Tius committed to contribute to FLADC a four-storey building and two parcels of land
respectively valued at P20 million (for 200,000 shares), P30 million (for 300,000 shares) and P49.8
million (for 49,800 shares) to cover their additional 549,800 stock subscription therein. The Ongs paid
in another P70 million3 to FLADC and P20 million to the Tius over and above their P100 million
investment, the total sum of which (P190 million) was used to settle the P190 million mortgage
indebtedness of FLADC to PNB.

The business harmony between the Ongs and the Tius in FLADC, however, was shortlived because
the Tius, on February 23, 1996, rescinded the Pre-Subscription Agreement. The Tius accused the
Ongs of (1) refusing to credit to them the FLADC shares covering their real property contributions; (2)
preventing David S. Tiu and Cely Y. Tiu from assuming the positions of and performing their duties as
Vice-President and Treasurer, respectively, and (3) refusing to give them the office spaces agreed
upon.

According to the Tius, the agreement was for David S. Tiu and Cely S. Tiu to assume the positions
and perform the duties of Vice-President and Treasurer, respectively, but the Ongs prevented them
from doing so. Furthermore, the Ongs refused to provide them the space for their executive offices as
Vice-President and Treasurer. Finally, and most serious of all, the Ongs refused to give them the
shares corresponding to their property contributions of a four-story building, a 1,902.30 square-meter
lot and a 151 square-meter lot. Hence, they felt they were justified in setting aside their Pre-
Subscription Agreement with the Ongs who allegedly refused to comply with their undertakings.

In their defense, the Ongs said that David S. Tiu and Cely Y. Tiu had in fact assumed the positions of
Vice-President and Treasurer of FLADC but that it was they who refused to comply with the corporate
duties assigned to them. It was the contention of the Ongs that they wanted the Tius to sign the
checks of the corporation and undertake their management duties but that the Tius shied away from
helping them manage the corporation. On the issue of office space, the Ongs pointed out that the
Tius did in fact already have existing executive offices in the mall since they owned it 100% before the
Ongs came in. What the Tius really wanted were new offices which were anyway subsequently
provided to them. On the most important issue of their alleged failure to credit the Tius with the
FLADC shares commensurate to the Tius' property contributions, the Ongs asserted that, although
the Tius executed a deed of assignment for the 1,902.30 square-meter lot in favor of FLADC, they
(the Tius) refused to pay P 570,690 for capital gains tax and documentary stamp tax. Without the
payment thereof, the 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 Transfer
Certificate of Title (TCT) over the property in FLADC's name. In any event, it was easy for the Tius to
simply pay the said transfer taxes and, after the new TCT was issued in FLADC's name, they could
then be given the corresponding shares of stocks. On the 151 square-meter property, the Tius never
executed a deed of assignment in favor of FLADC. The 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. The Ongs later on discovered that FLADC had in reality owned the property all along, even
34
before their Pre-Subscription Agreement was executed in 1994. This meant that the 151 square-
meter property was at that time already the corporate property of FLADC for which the Tius were not
entitled to the issuance of new shares of stock.

The controversy finally came to a head when this case was commenced4 by the Tius on February 27,
1996 at the Securities and Exchange Commission (SEC), seeking confirmation of their rescission of
the Pre-Subscription Agreement. After hearing, the SEC, through then Hearing Officer Rolando G.
Andaya, Jr., issued a decision on May 19, 1997 confirming the rescission sought by the Tius, as
follows:

WHEREFORE, judgment is hereby rendered confirming the rescission of the Pre-Subscription

Agreement, and consequently ordering:

(a) The cancellation of the 1,000,000 shares subscription of the individual defendants in FLADC;

(b) FLADC to pay the amount of P170,000,000.00 to the individual defendants representing the return
of their contribution for 1,000,000 shares of FLADC;

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

(d) The defendants to surrender to the plaintiffs TCT Nos. 132493, 132494, 134066 (formerly 15587),
135325 and 134204 and any other title or deed in the name of FLADC, failing in which said titles are
declared void;

(e) The Register of Deeds to issue new certificates of titles in favor of the plaintiffs and to cancel the
annotation of the Pre-Subscription Agreement dated 15 August 1994 on TCT No. 134066 (formerly
15587);

(f) The individual defendants, individually and collectively, their agents and representatives, to desist
from exercising or performing any and all acts pertaining to stockholder, director or officer of FLADC
or in any manner intervene in the management and affairs of FLADC;

(g) The individual defendants, jointly and severally, to return to FLADC interest payment in the
amount of P8,866,669.00 and all interest payments as well as any payments on principal received
from the P70,000,000.00 inexistent loan, plus the legal rate of interest thereon from the date of their
receipt of such payment until fully paid;

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

SO ORDERED.5

On motion of both parties, the above decision was partially reconsidered but only insofar as the Ongs'
P70 million was declared not as a premium on capital stock but an advance (loan) by the Ongs to
FLADC and that the imposition of interest on it was correct.6

Both parties appealed7 to the SEC en banc which rendered a decision on September 11, 1998,
affirming the May 19, 1997 decision of the Hearing Officer. The SEC en banc confirmed the rescission

35
of the Pre-Subscription Agreement but reverted to classifying the P70 million paid by the Ongs as
premium on capital and not as a loan or advance to FLADC, hence, not entitled to earn interest.8

On appeal, the Court of Appeals (CA) rendered a decision on October 5, 1999, thus:

WHEREFORE, the Order dated September 11, 1998 issued by the Securities and Exchange
Commission En Banc in SEC AC CASE NOS. 598 and 601 confirming the rescission of the Pre-
Subscription Agreement dated August 15, 1994 is hereby AFFIRMED, subject to the following
MODIFICATIONS:

1. The Ong and Tiu Groups are ordered to liquidate First Landlink Asia Development Corporation in
accordance with the following cash and property contributions of the parties therein.

(a) Ong Group P100,000,000.00 cash contribution for one (1) million shares in First Landlink Asia
Development Corporation at a par value of P100.00 per share;

(b) Tiu Group:

1) P45,020,000.00 original cash contribution for 450,200 shares in First Landlink Asia Development
Corporation at a par value of P100.00 per share;

2) A four-storey building described in Transfer Certificate of Title No. 15587 in the name of Intraland
Resources and Development Corporation valued at P20,000,000.00 for 200,000 shares in First
Landlink Asia Development Corporation at a par value of P100.00 per share;

3) A 1,902.30 square-meter parcel of land covered by Transfer Certificate of Title No. 15587 in the
name of Masagana Telamart, Inc. valued at P30,000,000.00 for 300,000 shares in First Landlink Asia
Development Corporation at a par value of P100.00 per share.

2) Whatever remains of the assets of the First Landlink Asia Development Corporation and the
management thereof is (sic) hereby ordered transferred to the Tiu Group.

3) First Landlink Asia Development Corporation is hereby ordered to pay the amount of
P70,000,000.00 that was advanced to it by the Ong Group upon the finality of this decision. Should
the former incur in delay in the payment thereof, it shall pay the legal interest thereon pursuant to
Article 2209 of the New Civil Code.

4) The Tius are hereby ordered to pay the amount of P20,000,000.00 loaned them by the Ongs upon
the finality of this decision. Should the former incur in delay in the payment thereof, it shall pay the
legal interest thereon pursuant to Article 2209 of the New Civil Code.

SO ORDERED.9

An interesting sidelight of the CA decision was its description of the rescission made by the Tius as
the "height of ingratitude" and as "pulling a fast one" on the Ongs. The CA moreover found the Tius
guilty of withholding FLADC funds from the Ongs and diverting corporate income to their own
MATTERCO account.10 These were findings later on affirmed in our own February 1, 2002 Decision
which is the subject of the instant motion for reconsideration.11

36
But there was also a strange aspect of the CA decision. The CA concluded that both the Ongs and
the Tius were in pari delicto (which would not have legally entitled them to rescission) but, "for
practical considerations," that is, their inability to work together, it was best to separate the two groups
by rescinding the Pre-Subscription Agreement, returning the original investment of the Ongs and
awarding practically everything else to the Tius.

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

In their petition docketed as G.R. No. 144476, Ong et al. vs. Tiu et al., the Ongs argued that the Tius
may not properly avail of rescission under Article 1191 of the Civil Code considering that the Pre-
Subscription Agreement did not provide for reciprocity of obligations; that the rights over the subject
matter of the rescission (capital assets and properties) had been acquired by a third party (FLADC);
that they did not commit a substantial and fundamental breach of their agreement since they did not
prevent the Tius from assuming the positions of Vice-President and Treasurer of FLADC, and that the
failure to credit the 300,000 shares corresponding to the 1,902.30 square-meter property covered by
TCT No. 134066 (formerly 15587) was due to the refusal of the Tius to pay the required transfer taxes
to secure the approval of the SEC for the property contribution and, thereafter, the issuance of title in
FLADC's name. 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 Corporation Code. Moreover,
the Ongs bewailed the failure of the CA to grant interest on their P70 million and P20 million
advances to FLADC and David S. Tiu, respectively, and to award costs and damages.

In their petition docketed as G.R. No. 144629, Tiu et al. vs. Ong et al., the Tius, on the other hand,
contended 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:
the Masagana Citimall was threatened with incompletion since FLADC was in financial distress; that
the Tius invited the Ongs to invest in FLADC to settle its P190 million loan from PNB; that they
violated the Pre-Subscription Agreement when it was the Lichaucos and not the Tius who executed
the deed of assignment over the 151 square-meter property commensurate to 49,800 shares in
FLADC thereby failing to pay the price for the said shares; that they did not turn over to the Ongs the
entire amount of FLADC funds; that they were diverting rentals from lease contracts due to FLADC to
their own MATTERCO account; that the P70 million paid by the Ongs was an advance and not a
premium on capital; and that, by rescinding the Pre-Subscription Agreement, they wanted to wrestle
away the management of the mall and prevent the Ongs from enjoying the profits of their P190 million
investment in FLADC.

On February 1, 2002, this Court promulgated its Decision (the subject of the instant motions),
affirming the assailed decision of the Court of Appeals but with the following modifications:

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

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

3. the Tius shall be credited with 49,800 shares in FLADC for their property contribution, specifically,
the 151 sq. m. parcel of land.

37
This Court affirmed the fact that 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 Vice-
President and Treasurer of the corporation. On the other hand, the Decision established that the Tius
failed to turn over FLADC funds to the Ongs and that the Tius diverted rentals due to FLADC to their
MATTERCO account. Consequently, it held that rescission was not possible since both parties were
in pari delicto. However, this Court agreed with the Court of Appeals that the remedy of specific
performance, as espoused by the Ongs, was not practical and sound either and would only lead to
further "squabbles and numerous litigations" between the parties.

On March 15, 2002, the Tius filed before this Court a Motion for Issuance of a Writ of Execution on
the grounds that: (a) the SEC order had become executory as early as September 11, 1998 pursuant
to Sections 1 and 12, Rule 43 of the Rules of Court; (b) any further delay would be injurious to the
rights of the Tius since the case had been pending for more than six years; and (c) the SEC no longer
had quasi-judicial jurisdiction under RA 8799 (Securities Regulation Code). The Ongs filed their
opposition, contending that the Decision dated February 1, 2002 was not yet final and executory; that
no good reason existed to issue a warrant of execution; and that, pursuant to Section 5.2 of RA 8799,
the SEC retained jurisdiction over pending cases involving intra-corporate disputes already submitted
for final resolution upon the effectivity of the said law.

Aside from their opposition to the Tius' Motion for Issuance of Writ of Execution, the Ongs filed their
own "Motion for Reconsideration; Alternatively, Motion for Modification (of the February 1, 2002
Decision)" on March 15, 2002, raising two 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.

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. 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. Such obligation arose from the relations between the said officers and the
corporation and not any of the individual parties such as the Ongs. Likewise, the alleged failure of the
Ongs to credit shares of stock in favor of the Tius for their property contributions also pertained to the
corporation and not to the Ongs. Just the same, it could not be done in view of the Tius' refusal to pay
the necessary transfer taxes which in turn resulted in the inability to secure SEC approval for the
property contributions and the issuance of a new TCT in the name of FLADC.

Besides, according to the Ongs, the principal objective of both parties in entering into the Pre-
Subscription Agreement in 1994 was to raise the P190 million desperately needed for the payment of
FLADC's loan to PNB. Hence, in this light, the alleged failure to provide office space for the two
corporate officers was no more than an inconsequential infringement. 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. At any rate, the 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.

The 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

38
delicto. In addition, 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.

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

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.

The Tius, in their opposition to the Ongs' motion for reconsideration, counter that the arguments
therein are a mere re-hash of the contentions in the Ongs' petition for review and previous motion for
reconsideration of the Court of Appeals' decision. The Tius compare the arguments in said pleadings
to prove that the Ongs do not raise new issues, and, based on well-settled jurisprudence,12 the Ongs'
present motion is therefore pro-forma and did not prevent the Decision of this Court from attaining
finality.

On January 29, 2003, the Special Second Division of this Court held oral arguments on the respective
positions of the parties. On February 27, 2003, Dr. Willie Ong and the rest of the movants Ong filed
their respective memoranda. On February 28, 2003, the Tius submitted their memorandum.

We grant the Ongs' motions for reconsideration.

This is not the first time that this Court has reversed itself on a motion for reconsideration. In
Philippine Consumers Foundation, Inc. vs. National Telecommunications Commission,13 this Court,
through then Chief Justice Felix V. Makasiar, said that its members may and do change their minds,
after a re-study of the facts and the law, illuminated by a mutual exchange of views.14 After a
thorough re-examination of the case, we find that our Decision of February 1, 2002 overlooked certain
aspects which, if not corrected, will cause extreme and irreparable damage and prejudice to the
Ongs, FLADC and its creditors.

The procedural rule on pro-forma motions pointed out by the Tius should not be blindly applied to
meritorious motions for reconsideration. As long as the same adequately raises a valid ground15 (i.e.,
the decision or final order is contrary to law), this Court has to evaluate the merits of the arguments to
prevent an unjust decision from attaining finality. In Security Bank and Trust Company vs. Cuenca,16
39
we ruled that a motion for reconsideration is not pro-forma for the reason alone that it reiterates the
arguments earlier passed upon and rejected by the appellate court. We explained there that a movant
may raise the same arguments, if only to convince this Court that its ruling was erroneous. Moreover,
the rule (that a motion is pro-forma if it only repeats the arguments in the previous pleadings) will not
apply if said arguments were not squarely passed upon and answered in the decision sought to be
reconsidered. In the case at bar, no ruling was made on some of the petitioner Ongs' arguments. For
instance, no clear ruling was made on why an order distributing corporate assets and property to the
stockholders would not violate the statutory preconditions for corporate dissolution or decrease of
authorized capital stock. Thus, it would serve the ends of justice to entertain the subject motion for
reconsideration since some important issues therein, although mere repetitions, were not considered
or clearly resolved by this Court.

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

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

Any contract for the acquisition of unissued stock in an existing corporation or a corporation
still to be formed shall be deemed a subscription within the meaning of this Title,
notwithstanding the fact that the parties refer to it as a purchase or some other contract (Italics
supplied).

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. 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. Otherwise stated, the Tius did
not contract in their personal capacities with the Ongs since they were not selling any of their own
shares to them. It was FLADC that did.

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

In their February 28, 2003 Memorandum, the Tius claim that there are two contracts embodied in the
Pre-Subscription Agreement: a shareholder's agreement between the Tius and the Ongs defining and
40
governing their relationship and a subscription contract between the Tius, the Ongs and FLADC
regarding the subscription of the parties to the corporation. They point out that these two component
parts form one whole agreement and that their terms and conditions are intrinsically related and
dependent on each other. Thus, the breach of the shareholders' agreement, which was allegedly the
consideration for the subscription contract, was also a breach of the latter.

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

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

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

However, although the Tius were adversely affected by the Ongs' unwillingness to let them assume
their positions, rescission due to breach of contract is definitely the wrong remedy for their personal
grievances. The Corporation Code, SEC rules and even the Rules of Court provide for appropriate
and adequate intra-corporate remedies, other than rescission, in situations like this. Rescission is
certainly not one of them, specially if the party asking for it has no legal personality to do so and the
requirements of the law therefor have not been met. A contrary doctrine will tread on extremely
dangerous ground because it will allow just any stockholder, for just about any real or imagined
offense, to demand rescission of his subscription and call for the distribution of some part of the
corporate assets to him without complying with the requirements of the Corporation Code.

Hence, the Tius, in their personal capacities, cannot seek the ultimate and extraordinary remedy of
rescission of the subject agreement based on a less than substantial breach of subscription contract.
Not only are they not parties to the subscription contract between the Ongs and FLADC; they also
have other available and effective remedies under the law.
41
All this notwithstanding, granting but not conceding that the Tius possess the legal standing to sue for
rescission based on breach of contract, said action will nevertheless still not prosper since rescission
will violate the Trust Fund Doctrine and the procedures for the valid distribution of assets and property
under the Corporation Code.

The Trust Fund Doctrine, first enunciated by this Court in the 1923 case of Philippine Trust Co. vs.
Rivera,22 provides that subscriptions to the capital stock of a corporation constitute a fund to which
the creditors have a right to look for the satisfaction of their claims.23 This doctrine is the
underlying principle in the procedure for the distribution of capital assets, embodied in the
Corporation 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,24 (2)
purchase of redeemable shares by the corporation, regardless of the existence of unrestricted
retained earnings,25 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 shares26 and in Section 122 on the prohibition against the distribution of corporate assets and
property unless the stringent requirements therefor are complied with.27

The distribution of corporate assets and property cannot be made to depend on the whims and
caprices of the stockholders, officers or directors of the corporation, or even, for that matter, on the
earnest desire of the court a quo "to prevent further squabbles and future litigations" unless the
indispensable conditions and procedures for the protection of corporate creditors are followed.
Otherwise, the "corporate peace" laudably hoped for by the court will remain nothing but a dream
because this time, it will be the creditors' turn to engage in "squabbles and litigations" should the court
order an unlawful distribution in blatant disregard of the Trust Fund Doctrine.

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

Contrary to the Tius' allegation, rescission will, in the final analysis, 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 Corporation Code.28 The Tius maintain that rescinding the subscription contract is not
synonymous to corporate liquidation because all rescission will entail would be the simple restoration
of the status quo ante and a return to the two groups of their cash and property contributions. We
wish it were that simple. Very noticeable is the fact that the Tius do not explain why rescission in the
instant case will not effectively result in liquidation. The Tius merely refer in cavalier fashion to the
end-result of rescission (which incidentally is 100% favorable to them) but turn a blind eye to its
unfair, inequitable and disastrous effect on the corporation, its creditors and the Ongs.

In their Memorandum dated February 28, 2003, the Tius claim that rescission of the agreement will
not result in an unauthorized liquidation of the corporation because their case is actually a petition to
decrease capital stock pursuant to Section 38 of the Corporation Code. 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." The Tius
claim that their case for rescission, being a petition to decrease capital stock, does not violate the
liquidation procedures under our laws. All that needs to be done, according to them, is for this Court
to order (1) FLADC to file with the SEC a petition to issue a certificate of decrease of capital stock
and (2) the SEC to approve said decrease. This new argument has no merit.
42
The Tius' case for rescission cannot validly be deemed a petition to decrease capital stock because
such action never complied with the formal requirements for decrease of capital stock under Section
33 of the Corporation Code. No majority vote of the board of directors was ever taken. Neither was
there any stockholders meeting at which the approval of stockholders owning at least two-thirds of the
outstanding capital stock was secured. There was no revised treasurer's affidavit and no proof that
said decrease will not prejudice the creditors' rights. On the contrary, all their pleadings contained
were alleged acts of violations by the Ongs to justify an order of rescission.

Furthermore, it is an improper judicial intrusion into the internal affairs of the corporation to compel
FLADC to file at the SEC a petition for the issuance of a certificate of decrease of stock. Decreasing a
corporation's authorized capital stock is an amendment of the Articles of Incorporation. It is a decision
that only the stockholders and the directors can make, considering that they are the contracting
parties thereto. In this case, the Tius are actually not just asking for a review of the legality and
fairness of a corporate decision. They want this Court to make a corporate decision for FLADC. We
decline to intervene and order corporate structural changes not voluntarily agreed upon by its
stockholders and directors.

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

xxx xxx xxx (C)ontracts intra vires entered into by the board of directors are binding upon the
corporation and courts will not interfere unless such contracts are so unconscionable and oppressive
as to amount to wanton destruction to the rights of the minority, as when plaintiffs aver that the
defendants (members of the board), have concluded a transaction among themselves as will result in
serious injury to the plaintiffs stockholders.29

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

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

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

Stripped to its barest essentials, the issue of rescission in this case is not difficult to understand. If
rescission is denied, will injustice be inflicted on any of the parties? The answer is no because the
financial interests of both the Tius and the Ongs will remain intact and safe within FLADC. On the
other hand, if rescission is granted, will any of the parties suffer an injustice? Definitely yes because
the Ongs will find themselves out in the streets with nothing but the money they had in 1994 while the

43
Tius will not only enjoy a windfall estimated to be anywhere from P450 million to P900 million31 but
will also take over an extremely profitable business without much effort at all.

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

We are appalled by the attempt by the Tius, in the words of the Court of Appeals, to "pull a fast one"
on the Ongs because that was where the problem precisely started. It is clear that, when the finances
of FLADC improved considerably after the equity infusion of the Ongs, the Tius started planning to
take over the corporation again and exclude the Ongs from it. It appears that the Tius' refusal to pay
transfer taxes might not have really been at all unintentional because, by failing to pay that relatively
small amount which they could easily afford, the Tius should have expected that they were not going
to be given the corresponding shares. It was, from every angle, the perfect excuse for blackballing the
Ongs. In other words, the Tius created a problem then used that same problem as their pretext for
showing their partners the door. In the process, they stood to be rewarded with a bonanza of
anywhere between P450 million to P900 million in assets (from an investment of only P45 million
which was nearly foreclosed by PNB), to the extreme and irreparable damage of the Ongs, FLADC
and its creditors.

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

Without the Ongs, the Tius would have lost everything they originally invested in said mall. If only for
this and the fact that this Resolution can truly pave the way for both groups to enjoy the fruits of their
investments assuming good faith and honest intentions we cannot allow the rescission of the
subject subscription agreement. The Ongs' shortcomings were far from serious and certainly less
than substantial; they were 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.

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

44
The motion for the issuance of a writ of execution, dated March 15, 2002, of petitioners David S. Tiu,
Cely Y. Tiu, Moly Yu Gow, Belen See Yu, D. Terence Y. Tiu, John Yu and Lourdes C. Tiu is hereby
DENIED for being moot.

Accordingly, the Decision of this Court, dated February 1, 2002, affirming with modification the
decision of the Court of Appeals, dated October 5, 1999, and the SEC en banc, dated September 11,
1998, is hereby REVERSED.

Costs against the petitioner Tius.

SO ORDERED.
G.R. No. 150976 October 18, 2004

CECILIA CASTILLO, OSCAR DEL ROSARIO, ARTURO S. FLORES, XERXES NAVARRO, MARIA
ANTONIA TEMPLO and MEDICAL CENTER PARAAQUE, INC., petitioners,
vs.
ANGELES BALINGHASAY, RENATO BERNABE, ALODIA DEL ROSARIO, ROMEO FUNTILA,
TERESITA GAYANILO, RUSTICO JIMENEZ, ARACELI** JO, ESMERALDA MEDINA, CECILIA
MONTALBAN, VIRGILIO OBLEPIAS, CARMENCITA PARRENO, CESAR REYES, REYNALDO
SAVET, SERAPIO TACCAD, VICENTE VALDEZ, SALVACION VILLAMORA, and HUMBERTO
VILLAREAL, respondents.

DECISION

QUISUMBING, J.:

For review on certiorari is the Partial Judgment1 dated November 26, 2001 in Civil Case No. 01-0140,
of the Regional Trial Court (RTC) of Paraaque City, Branch 258. The trial court declared the
February 9, 2001, election of the board of directors of the Medical Center Paraaque, Inc. (MCPI)
valid. The Partial Judgment dismissed petitioners first cause of action, specifically, to annul said
election for depriving petitioners their voting rights and to be voted on as members of the board.

The facts, as culled from records, are as follows:

Petitioners and the respondents are stockholders of MCPI, with the former holding Class "B" shares
and the latter owning Class "A" shares.

MCPI is a domestic corporation with offices at Dr. A. Santos Avenue, Sucat, Paraaque City. It was
organized sometime in September 1977. At the time of its incorporation, Act No. 1459, the old
Corporation Law was still in force and effect. Article VII of MCPIs original Articles of Incorporation, as
approved by the Securities and Exchange Commission (SEC) on October 26, 1977, reads as follows:

SEVENTH. That the authorized capital stock of the corporation is TWO MILLION (P2,000,000.00)
PESOS, Philippine Currency, divided into TWO THOUSAND (2,000) SHARES at a par value of P100
each share, whereby the ONE THOUSAND SHARES issued to, and subscribed by, the incorporating
stockholders shall be classified as Class A shares while the other ONE THOUSAND unissued shares
shall be considered as Class B shares. Only holders of Class A shares can have the right to vote and
the right to be elected as directors or as corporate officers.2 (Stress supplied)

On July 31, 1981, Article VII of the Articles of Incorporation of MCPI was amended, to read thus:
45
SEVENTH. That the authorized capital stock of the corporation is FIVE MILLION (P5,000,000.00)
PESOS, divided as follows:

CLASS NO. OF SHARES PAR VALUE

"A" 1,000 P1,000.00
"B" 4,000 P1,000.00
Only holders of Class A shares have the right to vote and the right to be elected as directors or as
corporate officers.3 (Emphasis supplied)

The foregoing amendment was approved by the SEC on June 7, 1983. While the amendment granted
the right to vote and to be elected as directors or corporate officers only to holders of Class "A"
shares, holders of Class "B" stocks were granted the same rights and privileges as holders of Class
"A" stocks with respect to the payment of dividends.

On September 9, 1992, Article VII was again amended to provide as follows:

SEVENTH: That the authorized capital stock of the corporation is THIRTY TWO MILLION PESOS
(P32,000,000.00) divided as follows:

CLASS NO. OF SHARES PAR VALUE

"A" 1,000 P1,000.00
"B" 31,000 1,000.00
Except when otherwise provided by law, only holders of Class "A" shares have the right to vote and
the right to be elected as directors or as corporate officers4 (Stress and underscoring supplied).

The SEC approved the foregoing amendment on September 22, 1993.

On February 9, 2001, the shareholders of MCPI held their annual stockholders meeting and election
for directors. During the course of the proceedings, respondent Rustico Jimenez, citing Article VII, as
amended, and notwithstanding MCPIs history, declared over the objections of herein petitioners, that
no Class "B" shareholder was qualified to run or be voted upon as a director. In the past, MCPI had
seen holders of Class "B" shares voted for and serve as members of the corporate board and some
Class "B" share owners were in fact nominated for election as board members. Nonetheless, Jimenez
went on to announce that the candidates holding Class "A" shares were the winners of all seats in the
corporate board. The petitioners protested, claiming that Article VII was null and void for depriving
them, as Class "B" shareholders, of their right to vote and to be voted upon, in violation of the
Corporation Code (Batas Pambansa Blg. 68), as amended.

On March 22, 2001, after their protest was given short shrift, herein petitioners filed a Complaint for
Injunction, Accounting and Damages, docketed as Civil Case No. CV-01-0140 before the RTC of
Paraaque City, Branch 258. Said complaint was founded on two (2) principal causes of action,
namely:

a. Annulment of the declaration of directors of the MCPI made during the February 9, 2001 Annual
Stockholders Meeting, and for the conduct of an election whereat all stockholders, irrespective of the
classification of the shares they hold, should be afforded their right to vote and be voted for; and

b. Stockholders derivative suit challenging the validity of a contract entered into by the Board of
Directors of MCPI for the operation of the ultrasound unit.5
46
Subsequently, the complaint was amended to implead MCPI as party-plaintiff for purposes only of the
second cause of action.

Before the trial court, the herein petitioners alleged that they were deprived of their right to vote and to
be voted on as directors at the annual stockholders meeting held on February 9, 2001, because
respondents had erroneously relied on Article VII of the Articles of Incorporation of MCPI, despite
Article VII being contrary to the Corporation Code, thus null and void. Additionally, respondents were
in estoppel, because in the past, petitioners were allowed to vote and to be elected as members of
the board. They further claimed that the privilege granted to the Class "A" shareholders was more in
the nature of a right granted to founders shares.

In their Answer, the respondents averred that the provisions of Article VII clearly and categorically
state that only holders of Class "A" shares have the exclusive right to vote and be elected as directors
and officers of the corporation. They denied that the exclusivity was intended only as a privilege
granted to founders shares, as no such proviso is found in the Articles of Incorporation. The
respondents further claimed that the exclusivity of the right granted to Class "A" holders cannot be
defeated or impaired by any subsequent legislative enactment, e.g. the New Corporation Code, as
the Articles of Incorporation is an intra-corporate contract between the corporation and its members;
between the corporation and its stockholders; and among the stockholders. They submit that to allow
Class "B" shareholders to vote and be elected as directors would constitute a violation of MCPIs
franchise or charter as granted by the State.

At the pre-trial, the trial court ruled that a partial judgment could be rendered on the first cause of
action and required the parties to submit their respective position papers or memoranda.

On November 26, 2001, the RTC rendered the Partial Judgment, the dispositive portion of which
reads:

WHEREFORE, viewed in the light of the foregoing, the election held on February 9, 2001 is VALID as
the holders of CLASS "B" shares are not entitled to vote and be voted for and this case based on the
First Cause of Action is DISMISSED.

SO ORDERED.6

In finding for the respondents, the trial court ruled that corporations had the power to classify
their shares of stocks, such as "voting and non-voting" shares, conformably with Section 67
of the Corporation Code of the Philippines. It pointed out that Article VII of both the original and
amended Articles of Incorporation clearly provided that only Class "A" shareholders could vote and be
voted for to the exclusion of Class "B" shareholders, the exception being in instances provided by law,
such as those enumerated in Section 6, paragraph 6 of the Corporation Code. The RTC found merit
in the respondents theory that the Articles of Incorporation, which defines the rights and limitations of
all its shareholders, is a contract between MCPI and its shareholders. It is thus the law between the
parties and should be strictly enforced as to them. It brushed aside the petitioners claim that the
Class "A" shareholders were in estoppel, as the election of Class "B" shareholders to the corporate
board may be deemed as a mere act of benevolence on the part of the officers. Finally, the court
brushed aside the "founders shares" theory of the petitioners for lack of factual basis.

47
Hence, this petition submitting the sole legal issue of whether or not the Court a quo, in rendering the
Partial Judgment dated November 26, 2001, has decided a question of substance in a way not in
accord with law and jurisprudence considering that:

1. Under the Corporation Code, the exclusive voting right and right to be voted granted by the Articles
of Incorporation of the MCPI to Class A shareholders is null and void, or already extinguished;

2. Hence, the declaration of directors made during the February 9, 2001 Annual Stockholders
Meeting on the basis of the purported exclusive voting rights is null and void for having been done
without the benefit of an election and in violation of the rights of plaintiffs and Class B shareholders;
and

3. Perforce, another election should be conducted to elect the directors of the MCPI, this time
affording the holders of Class B shares full voting right and the right to be voted.8

The issue for our resolution is whether or not holders of Class "B" shares of the MCPI may be
deprived of the right to vote and be voted for as directors in MCPI.

Before us, petitioners assert that Article VII of the Articles of Incorporation of MCPI, which denied
them voting rights, is null and void for being contrary to Section 6 of the Corporation Code. They point
out that Section 6 prohibits the deprivation of voting rights except as to preferred and redeemable
shares only. Hence, under the present law on corporations, all shareholders, regardless of
classification, other than holders of preferred or redeemable shares, are entitled to vote and to be
elected as corporate directors or officers. Since the Class "B" shareholders are not classified as
holders of either preferred or redeemable shares, then it necessarily follows that they are entitled to
vote and to be voted for as directors or officers.

The respondents, in turn, maintain that the grant of exclusive voting rights to Class "A" shares is
clearly provided in the Articles of Incorporation and is in accord with Section 59 of the Corporation
Law (Act No. 1459), which was the prevailing law when MCPI was incorporated in 1977. They
likewise submit that as the Articles of Incorporation of MCPI is in the nature of a contract between the
corporation and its shareholders and Section 6 of the Corporation Code could not retroactively apply
to it without violating the non-impairment clause10 of the Constitution.

We find merit in the petition.

When Article VII of the Articles of Incorporation of MCPI was amended in 1992, the phrase "except
when otherwise provided by law" was inserted in the provision governing the grant of voting powers to
Class "A" shareholders. This particular amendment is relevant for it speaks of a law providing for
exceptions to the exclusive grant of voting rights to Class "A" stockholders. Which law was the
amendment referring to? The determination of which law to apply is necessary. There are two laws
being cited and relied upon by the parties in this case. In this instance, the law in force at the time of
the 1992 amendment was the Corporation Code (B.P. Blg. 68), not the Corporation Law (Act No.
1459), which had been repealed by then.

We find and so hold that the law referred to in the amendment to Article VII refers to the Corporation
Code and no other law. At the time of the incorporation of MCPI in 1977, the right of a corporation to
classify its shares of stock was sanctioned by Section 5 of Act No. 1459. The law repealing Act No.
1459, B.P. Blg. 68, retained the same grant of right of classification of stock shares to corporations,
but with a significant change. Under Section 6 of B.P. Blg. 68, the requirements and restrictions on
48
voting rights were explicitly provided for, such that "no share may be deprived of voting rights except
those classified and issued as "preferred" or "redeemable" shares, unless otherwise provided in this
Code" and that "there shall always be a class or series of shares which have complete voting rights."
Section 6 of the Corporation Code being deemed written into Article VII of the Articles of Incorporation
of MCPI, it necessarily follows that unless Class "B" shares of MCPI stocks are clearly categorized to
be "preferred" or "redeemable" shares, the holders of said Class "B" shares may not be deprived of
their voting rights. Note that there is nothing in the Articles of Incorporation nor an iota of evidence on
record to show that Class "B" shares were categorized as either "preferred" or "redeemable" shares.
The only possible conclusion is that Class "B" shares fall under neither category and thus, under the
law, are allowed to exercise voting rights.

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

Neither do we find merit in respondents position that Section 6 of the Corporation Code cannot apply
to MCPI without running afoul of the non-impairment clause of the Bill of Rights. Section 14812 of the
Corporation Code expressly provides that it shall apply to corporations in existence at the time of the
effectivity of the Code. Hence, the non-impairment clause is inapplicable in this instance. When
Article VII of the Articles of Incorporation of MCPI were amended in 1992, the board of directors and
stockholders must have been aware of Section 6 of the Corporation Code and intended that Article
VII be construed in harmony with the Code, which was then already in force and effect. Since Section
6 of the Corporation Code expressly prohibits the deprivation of voting rights, except as to "preferred"
and "redeemable" shares, then Article VII of the Articles of Incorporation cannot be construed as
granting exclusive voting rights to Class "A" shareholders, to the prejudice of Class "B" shareholders,
without running afoul of the letter and spirit of the Corporation Code.

The respondents then take the tack that the phrase "except when otherwise provided by law" found in
the amended Articles is only a handwritten insertion and could have been inserted by anybody and
that no board resolution was ever passed authorizing or approving said amendment.

Said contention is not for this Court to pass upon, involving as it does a factual question, which is not
proper in this petition. In an appeal via certiorari, only questions of law may be reviewed.13 Besides,
respondents did not adduce persuasive evidence, but only bare allegations, to support their
suspicion. The presumption that in the amendment process, the ordinary course of business has
been followed14 and that official duty has been regularly performed15 on the part of the SEC, applies
in this case.

WHEREFORE, the petition is GRANTED. The Partial Judgment dated November 26, 2001 of the
Regional Trial Court of Paraaque City, Branch 258, in Civil Case No. 01-0140 is REVERSED AND
SET ASIDE. No pronouncement as to costs.

SO ORDERED.

G.R. No. 176579 June 28, 2011

WILSON P. GAMBOA, Petitioner,

vs.
49
FINANCE SECRETARY MARGARITO B. TEVES, FINANCE UNDERSECRETARY JOHN P.
SEVILLA, AND COMMISSIONER RICARDO ABCEDE OF THE PRESIDENTIAL COMMISSION ON
GOOD GOVERNMENT (PCGG) IN THEIR CAPACITIES AS CHAIR AND MEMBERS,
RESPECTIVELY, OF THE PRIVATIZATION COUNCIL, CHAIRMAN ANTHONI SALIM OF FIRST
PACIFIC CO., LTD. IN HIS CAPACITY AS DIRECTOR OF METRO PACIFIC ASSET HOLDINGS
INC., CHAIRMAN MANUEL V. PANGILINAN OF PHILIPPINE LONG DISTANCE TELEPHONE
COMPANY (PLDT) IN HIS CAPACITY AS MANAGING DIRECTOR OF FIRST PACIFIC CO., LTD.,
PRESIDENT NAPOLEON L. NAZARENO OF PHILIPPINE LONG DISTANCE TELEPHONE
COMPANY, CHAIR FE BARIN OF THE SECURITIES EXCHANGE COMMISSION, and PRESIDENT
FRANCIS LIM OF THE PHILIPPINE STOCK EXCHANGE, Respondents.
PABLITO V. SANIDAD and ARNO V. SANIDAD, Petitioners-in-Intervention.

DECISION

CARPIO, J.:

The Case

This is an original petition for prohibition, injunction, declaratory relief and declaration of nullity of the
sale of shares of stock of Philippine Telecommunications Investment Corporation (PTIC) by the
government of the Republic of the Philippines to Metro Pacific Assets Holdings, Inc. (MPAH), an
affiliate of First Pacific Company Limited (First Pacific).

The Antecedents

The facts, according to petitioner Wilson P. Gamboa, a stockholder of Philippine Long Distance
Telephone Company (PLDT), are as follows:1

On 28 November 1928, the Philippine Legislature enacted Act No. 3436 which granted PLDT a
franchise and the right to engage in telecommunications business. In 1969, General Telephone and
Electronics Corporation (GTE), an American company and a major PLDT stockholder, sold 26 percent
of the outstanding common shares of PLDT to PTIC. In 1977, Prime Holdings, Inc. (PHI) was
incorporated by several persons, including Roland Gapud and Jose Campos, Jr. Subsequently, PHI
became the owner of 111,415 shares of stock of PTIC by virtue of three Deeds of Assignment
executed by PTIC stockholders Ramon Cojuangco and Luis Tirso Rivilla. In 1986, the 111,415 shares
of stock of PTIC held by PHI were sequestered by the Presidential Commission on Good Government
(PCGG). The 111,415 PTIC shares, which represent about 46.125 percent of the outstanding capital
stock of PTIC, were later declared by this Court to be owned by the Republic of the Philippines.2

In 1999, First Pacific, a Bermuda-registered, Hong Kong-based investment firm, acquired the
remaining 54 percent of the outstanding capital stock of PTIC. On 20 November 2006, the Inter-
Agency Privatization Council (IPC) of the Philippine Government announced that it would sell the
111,415 PTIC shares, or 46.125 percent of the outstanding capital stock of PTIC, through a public
bidding to be conducted on 4 December 2006. Subsequently, the public bidding was reset to 8
December 2006, and only two bidders, Parallax Venture Fund XXVII (Parallax) and Pan-Asia Presidio
Capital, submitted their bids. Parallax won with a bid of P25.6 billion or US$510 million.

Thereafter, First Pacific announced that it would exercise its right of first refusal as a PTIC
stockholder and buy the 111,415 PTIC shares by matching the bid price of Parallax. However, First
Pacific failed to do so by the 1 February 2007 deadline set by IPC and instead, yielded its right to
50
PTIC itself which was then given by IPC until 2 March 2007 to buy the PTIC shares. On 14 February
2007, First Pacific, through its subsidiary, MPAH, entered into a Conditional Sale and Purchase
Agreement of the 111,415 PTIC shares, or 46.125 percent of the outstanding capital stock of PTIC,
with the Philippine Government for the price of P25,217,556,000 or US$510,580,189. The sale was
completed on 28 February 2007.

Since PTIC is a stockholder of PLDT, the sale by the Philippine Government of 46.125 percent of
PTIC shares is actually an indirect sale of 12 million shares or about 6.3 percent of the outstanding
common shares of PLDT. With the sale, First Pacifics common shareholdings in PLDT increased
from 30.7 percent to 37 percent, thereby increasing the common shareholdings of foreigners in PLDT
to about 81.47 percent. This violates Section 11, Article XII of the 1987 Philippine Constitution which
limits foreign ownership of the capital of a public utility to not more than 40 percent.3

On the other hand, public respondents Finance Secretary Margarito B. Teves, Undersecretary John P.
Sevilla, and PCGG Commissioner Ricardo Abcede allege the following relevant facts:

On 9 November 1967, PTIC was incorporated and had since engaged in the business of investment
holdings. PTIC held 26,034,263 PLDT common shares, or 13.847 percent of the total PLDT
outstanding common shares. PHI, on the other hand, was incorporated in 1977, and became the
owner of 111,415 PTIC shares or 46.125 percent of the outstanding capital stock of PTIC by virtue of
three Deeds of Assignment executed by Ramon Cojuangco and Luis Tirso Rivilla. In 1986, the
111,415 PTIC shares held by PHI were sequestered by the PCGG, and subsequently declared by this
Court as part of the ill-gotten wealth of former President Ferdinand Marcos. The sequestered PTIC
shares were reconveyed to the Republic of the Philippines in accordance with this Courts decision4
which became final and executory on 8 August 2006.

The Philippine Government decided to sell the 111,415 PTIC shares, which represent 6.4 percent of
the outstanding common shares of stock of PLDT, and designated the Inter-Agency Privatization
Council (IPC), composed of the Department of Finance and the PCGG, as the disposing entity. An
invitation to bid was published in seven different newspapers from 13 to 24 November 2006. On 20
November 2006, a pre-bid conference was held, and the original deadline for bidding scheduled on 4
December 2006 was reset to 8 December 2006. The extension was published in nine different
newspapers.

During the 8 December 2006 bidding, Parallax Capital Management LP emerged as the highest
bidder with a bid of P25,217,556,000. The government notified First Pacific, the majority owner of
PTIC shares, of the bidding results and gave First Pacific until 1 February 2007 to exercise its right of
first refusal in accordance with PTICs Articles of Incorporation. First Pacific announced its intention to
match Parallaxs bid.

On 31 January 2007, the House of Representatives (HR) Committee on Good Government

conducted a public hearing on the particulars of the then impending sale of the 111,415 PTIC shares.
Respondents Teves and Sevilla were among those who attended the public hearing. The HR
Committee Report No. 2270 concluded that: (a) the auction of the governments 111,415 PTIC shares
bore due diligence, transparency and conformity with existing legal procedures; and (b) First Pacifics
intended acquisition of the governments 111,415 PTIC shares resulting in First Pacifics 100%
ownership of PTIC will not violate the 40 percent constitutional limit on foreign ownership of a public
utility since PTIC holds only 13.847 percent of the total outstanding common shares of PLDT.5 On 28
February 2007, First Pacific completed the acquisition of the 111,415 shares of stock of PTIC.

51
Respondent Manuel V. Pangilinan admits the following facts: (a) the IPC conducted a public bidding
for the sale of 111,415 PTIC shares or 46 percent of the outstanding capital stock of PTIC (the
remaining 54 percent of PTIC shares was already owned by First Pacific and its affiliates); (b)
Parallax offered the highest bid amounting to P25,217,556,000; (c) pursuant to the right of first refusal
in favor of PTIC and its shareholders granted in PTICs Articles of Incorporation, MPAH, a First Pacific
affiliate, exercised its right of first refusal by matching the highest bid offered for PTIC shares on 13
February 2007; and (d) on 28 February 2007, the sale was consummated when MPAH paid IPC
P25,217,556,000 and the government delivered the certificates for the 111,415 PTIC shares.
Respondent Pangilinan denies the other allegations of facts of petitioner.

On 28 February 2007, petitioner filed the instant petition for prohibition, injunction, declaratory relief,
and declaration of nullity of sale of the 111,415 PTIC shares. Petitioner claims, among others, that the
sale of the 111,415 PTIC shares would result in an increase in First Pacifics common shareholdings
in PLDT from 30.7 percent to 37 percent, and this, combined with Japanese NTT DoCoMos common
shareholdings in PLDT, would result to a total foreign common shareholdings in PLDT of 51.56
percent which is over the 40 percent constitutional limit.6 Petitioner asserts:

If and when the sale is completed, First Pacifics equity in PLDT will go up from 30.7 percent to 37.0
percent of its common or voting- stockholdings, x x x. Hence, the consummation of the sale will put
the two largest foreign investors in PLDT First Pacific and Japans NTT DoCoMo, which is the
worlds largest wireless telecommunications firm, owning 51.56 percent of PLDT common equity. x x x
With the completion of the sale, data culled from the official website of the New York Stock Exchange
(www.nyse.com) showed that those foreign entities, which own at least five percent of common
equity, will collectively own 81.47 percent of PLDTs common equity. x x x

x x x as the annual disclosure reports, also referred to as Form 20-K reports x x x which PLDT
submitted to the New York Stock Exchange for the period 2003-2005, revealed that First Pacific and
several other foreign entities breached the constitutional limit of 40 percent ownership as early as
2003. x x x"7

Petitioner raises the following issues: (1) whether the consummation of the then impending sale of
111,415 PTIC shares to First Pacific violates the constitutional limit on foreign ownership of a public
utility; (2) whether public respondents committed grave abuse of discretion in allowing the sale of the
111,415 PTIC shares to First Pacific; and (3) whether the sale of common shares to foreigners in
excess of 40 percent of the entire subscribed common capital stock violates the constitutional limit on
foreign ownership of a public utility.8

On 13 August 2007, Pablito V. Sanidad and Arno V. Sanidad filed a Motion for Leave to Intervene and
Admit Attached Petition-in-Intervention. In the Resolution of 28 August 2007, the Court granted the
motion and noted the Petition-in-Intervention.

Petitioners-in-intervention "join petitioner Wilson Gamboa x x x in seeking, among others, to enjoin

and/or nullify the sale by respondents of the 111,415 PTIC shares to First Pacific or assignee."
Petitioners-in-intervention claim that, as PLDT subscribers, they have a "stake in the outcome of the
controversy x x x where the Philippine Government is completing the sale of government owned
assets in [PLDT], unquestionably a public utility, in violation of the nationality restrictions of the
Philippine Constitution."

The Issue

52
This Court is not a trier of facts. Factual questions such as those raised by petitioner,9 which
indisputably demand a thorough examination of the evidence of the parties, are generally beyond this
Courts jurisdiction. Adhering to this well-settled principle, the Court shall confine the resolution of the
instant controversy solely on the threshold and purely legal issue of whether the term "capital" in
Section 11, Article XII of the Constitution refers to the total common shares only or to the total
outstanding capital stock (combined total of common and non-voting preferred shares) of PLDT, a
public utility.

The Ruling of the Court

The petition is partly meritorious.

Petition for declaratory relief treated as petition for mandamus

At the outset, petitioner is faced with a procedural barrier. Among the remedies petitioner seeks, only
the petition for prohibition is within the original jurisdiction of this court, which however is not exclusive
but is concurrent with the Regional Trial Court and the Court of Appeals. The actions for declaratory
relief,10 injunction, and annulment of sale are not embraced within the original jurisdiction of the
Supreme Court. On this ground alone, the petition could have been dismissed outright.

While direct resort to this Court may be justified in a petition for prohibition,11 the Court shall
nevertheless refrain from discussing the grounds in support of the petition for prohibition since on 28
February 2007, the questioned sale was consummated when MPAH paid IPC P25,217,556,000 and
the government delivered the certificates for the 111,415 PTIC shares.

However, since the threshold and purely legal issue on the definition of the term "capital" in Section
11, Article XII of the Constitution has far-reaching implications to the national economy, the Court
treats the petition for declaratory relief as one for mandamus.12

In Salvacion v. Central Bank of the Philippines,13 the Court treated the petition for declaratory relief
as one for mandamus considering the grave injustice that would result in the interpretation of a
banking law. In that case, which involved the crime of rape committed by a foreign tourist against a
Filipino minor and the execution of the final judgment in the civil case for damages on the tourists
dollar deposit with a local bank, the Court declared Section 113 of Central Bank Circular No. 960,
exempting foreign currency deposits from attachment, garnishment or any other order or process of
any court, inapplicable due to the peculiar circumstances of the case. The Court held that "injustice
would result especially to a citizen aggrieved by a foreign guest like accused x x x" that would "negate
Article 10 of the Civil Code which provides that in case of doubt in the interpretation or application of
laws, it is presumed that the lawmaking body intended right and justice to prevail." The Court
therefore required respondents Central Bank of the Philippines, the local bank, and the accused to
comply with the writ of execution issued in the civil case for damages and to release the dollar deposit
of the accused to satisfy the judgment.

In Alliance of Government Workers v. Minister of Labor,14 the Court similarly brushed aside the
procedural infirmity of the petition for declaratory relief and treated the same as one for mandamus. In
Alliance, the issue was whether the government unlawfully excluded petitioners, who were
government employees, from the enjoyment of rights to which they were entitled under the law.
Specifically, the question was: "Are the branches, agencies, subdivisions, and instrumentalities of the
Government, including government owned or controlled corporations included among the four
employers under Presidential Decree No. 851 which are required to pay their employees x x x a
53
thirteenth (13th) month pay x x x ?" The Constitutional principle involved therein affected all
government employees, clearly justifying a relaxation of the technical rules of procedure, and
certainly requiring the interpretation of the assailed presidential decree.

In short, it is well-settled that this Court may treat a petition for declaratory relief as one for
mandamus if the issue involved has far-reaching implications. As this Court held in Salvacion:

The Court has no original and exclusive jurisdiction over a petition for declaratory relief. However,
exceptions to this rule have been recognized. Thus, where the petition has far-reaching implications
and raises questions that should be resolved, it may be treated as one for mandamus.15 (Emphasis
supplied)

In the present case, petitioner seeks primarily the interpretation of the term "capital" in Section 11,
Article XII of the Constitution. He prays that this Court declare that the term "capital" refers to
common shares only, and that such shares constitute "the sole basis in determining foreign equity in
a public utility." Petitioner further asks this Court to declare any ruling inconsistent with such
interpretation unconstitutional.

The interpretation of the term "capital" in Section 11, Article XII of the Constitution has far-reaching
implications to the national economy. In fact, a resolution of this issue will determine whether Filipinos
are masters, or second class citizens, in their own country. What is at stake here is whether Filipinos
or foreigners will have effective control of the national economy. Indeed, if ever there is a legal issue
that has far-reaching implications to the entire nation, and to future generations of Filipinos, it is the
threshhold legal issue presented in this case.

The Court first encountered the issue on the definition of the term "capital" in Section 11, Article XII of
the Constitution in the case of Fernandez v. Cojuangco, docketed as G.R. No. 157360.16 That case
involved the same public utility (PLDT) and substantially the same private respondents. Despite the
importance and novelty of the constitutional issue raised therein and despite the fact that the petition
involved a purely legal question, the Court declined to resolve the case on the merits, and instead
denied the same for disregarding the hierarchy of courts.17 There, petitioner Fernandez assailed on a
pure question of law the Regional Trial Courts Decision of 21 February 2003 via a petition for review
under Rule 45. The Courts Resolution, denying the petition, became final on 21 December 2004.

The instant petition therefore presents the Court with another opportunity to finally settle this purely
legal issue which is of transcendental importance to the national economy and a fundamental
requirement to a faithful adherence to our Constitution. The Court must forthwith seize such
opportunity, not only for the benefit of the litigants, but more significantly for the benefit of the entire
Filipino people, to ensure, in the words of the Constitution, "a self-reliant and independent national
economy effectively controlled by Filipinos."18 Besides, in the light of vague and confusing positions
taken by government agencies on this purely legal issue, present and future foreign investors in this
country deserve, as a matter of basic fairness, a categorical ruling from this Court on the extent of
their participation in the capital of public utilities and other nationalized businesses.

Despite its far-reaching implications to the national economy, this purely legal issue has remained
unresolved for over 75 years since the 1935 Constitution. There is no reason for this Court to evade
this ever recurring fundamental issue and delay again defining the term "capital," which appears not
only in Section 11, Article XII of the Constitution, but also in Section 2, Article XII on co-production and
joint venture agreements for the development of our natural resources,19 in Section 7, Article XII on
ownership of private lands,20 in Section 10, Article XII on the reservation of certain investments to
54
Filipino citizens,21 in Section 4(2), Article XIV on the ownership of educational institutions,22 and in
Section 11(2), Article XVI on the ownership of advertising companies.23

Petitioner has locus standi

There is no dispute that petitioner is a stockholder of PLDT. As such, he has the right to question the
subject sale, which he claims to violate the nationality requirement prescribed in Section 11, Article XII
of the Constitution. If the sale indeed violates the Constitution, then there is a possibility that PLDTs
franchise could be revoked, a dire consequence directly affecting petitioners interest as a
stockholder.

More importantly, there is no question that the instant petition raises matters of transcendental
importance to the public. The fundamental and threshold legal issue in this case, involving the
national economy and the economic welfare of the Filipino people, far outweighs any perceived
impediment in the legal personality of the petitioner to bring this action.

In Chavez v. PCGG,24 the Court upheld the right of a citizen to bring a suit on matters of
transcendental importance to the public, thus:

In Taada v. Tuvera, the Court asserted that when the issue concerns a public right and the object of
mandamus is to obtain the enforcement of a public duty, the people are regarded as the real parties
in interest; and because it is sufficient that petitioner is a citizen and as such is interested in the
execution of the laws, he need not show that he has any legal or special interest in the result of the
action. In the aforesaid case, the petitioners sought to enforce their right to be informed on matters of
public concern, a right then recognized in Section 6, Article IV of the 1973 Constitution, in connection
with the rule that laws in order to be valid and enforceable must be published in the Official Gazette or
otherwise effectively promulgated. In ruling for the petitioners legal standing, the Court declared that
the right they sought to be enforced is a public right recognized by no less than the fundamental law
of the land.

Legaspi v. Civil Service Commission, while reiterating Taada, further declared that when a
mandamus proceeding involves the assertion of a public right, the requirement of personal interest is
satisfied by the mere fact that petitioner is a citizen and, therefore, part of the general public which
possesses the right.

Further, in Albano v. Reyes, we said that while expenditure of public funds may not have been
involved under the questioned contract for the development, management and operation of the
Manila International Container Terminal, public interest [was] definitely involved considering the
important role [of the subject contract] . . . in the economic development of the country and the
magnitude of the financial consideration involved. We concluded that, as a consequence, the
disclosure provision in the Constitution would constitute sufficient authority for upholding the
petitioners standing. (Emphasis supplied)

Clearly, since the instant petition, brought by a citizen, involves matters of transcendental public
importance, the petitioner has the requisite locus standi.

Definition of the Term "Capital" in

Section 11, Article XII of the 1987 Constitution

55
Section 11, Article XII (National Economy and Patrimony) of the 1987 Constitution mandates the
Filipinization of public utilities, to wit:

Section 11. No franchise, certificate, or any other form of authorization for the operation of a public
utility shall be granted except to citizens of the Philippines or to corporations or associations
organized under the laws of the Philippines, at least sixty per centum of whose capital is owned by
such citizens; nor shall such franchise, certificate, or authorization be exclusive in character or for a
longer period than fifty years. Neither shall any such franchise or right be granted except under the
condition that it shall be subject to amendment, alteration, or repeal by the Congress when the
common good so requires. The State shall encourage equity participation in public utilities by the
general public. The participation of foreign investors in the governing body of any public utility
enterprise shall be limited to their proportionate share in its capital, and all the executive and
managing officers of such corporation or association must be citizens of the Philippines. (Emphasis
supplied)

The above provision substantially reiterates Section 5, Article XIV of the 1973 Constitution, thus:

Section 5. No franchise, certificate, or any other form of authorization for the operation of a public
utility shall be granted except to citizens of the Philippines or to corporations or associations
organized under the laws of the Philippines at least sixty per centum of the capital of which is owned
by such citizens, nor shall such franchise, certificate, or authorization be exclusive in character or for
a longer period than fifty years. Neither shall any such franchise or right be granted except under the
condition that it shall be subject to amendment, alteration, or repeal by the National Assembly when
the public interest so requires. The State shall encourage equity participation in public utilities by the
general public. The participation of foreign investors in the governing body of any public utility
enterprise shall be limited to their proportionate share in the capital thereof. (Emphasis supplied)

The foregoing provision in the 1973 Constitution reproduced Section 8, Article XIV of the 1935
Constitution, viz:

Section 8. No franchise, certificate, or any other form of authorization for the operation of a public
utility shall be granted except to citizens of the Philippines or to corporations or other entities
organized under the laws of the Philippines sixty per centum of the capital of which is owned by
citizens of the Philippines, nor shall such franchise, certificate, or authorization be exclusive in
character or for a longer period than fifty years. No franchise or right shall be granted to any
individual, firm, or corporation, except under the condition that it shall be subject to amendment,
alteration, or repeal by the Congress when the public interest so requires. (Emphasis supplied)

Father Joaquin G. Bernas, S.J., a leading member of the 1986 Constitutional Commission, reminds
us that the Filipinization provision in the 1987 Constitution is one of the products of the spirit of
nationalism which gripped the 1935 Constitutional Convention.25 The 1987 Constitution "provides for
the Filipinization of public utilities by requiring that any form of authorization for the operation of public
utilities should be granted only to citizens of the Philippines or to corporations or associations
organized under the laws of the Philippines at least sixty per centum of whose capital is owned by
such citizens. The provision is [an express] recognition of the sensitive and vital position of public
utilities both in the national economy and for national security."26 The evident purpose of the
citizenship requirement is to prevent aliens from assuming control of public utilities, which may be
inimical to the national interest.27 This specific provision explicitly reserves to Filipino citizens control
of public utilities, pursuant to an overriding economic goal of the 1987 Constitution: to "conserve and

56
develop our patrimony"28 and ensure "a self-reliant and independent national economy effectively
controlled by Filipinos."29

Any citizen or juridical entity desiring to operate a public utility must therefore meet the minimum
nationality requirement prescribed in Section 11, Article XII of the Constitution. Hence, for a
corporation to be granted authority to operate a public utility, at least 60 percent of its "capital" must
be owned by Filipino citizens.

The crux of the controversy is the definition of the term "capital." Does the term "capital" in Section 11,
Article XII of the Constitution refer to common shares or to the total outstanding capital stock
(combined total of common and non-voting preferred shares)?

Petitioner submits that the 40 percent foreign equity limitation in domestic public utilities refers only to
common shares because such shares are entitled to vote and it is through voting that control over a
corporation is exercised. Petitioner posits that the term "capital" in Section 11, Article XII of the
Constitution refers to "the ownership of common capital stock subscribed and outstanding,
which class of shares alone, under the corporate set-up of PLDT, can vote and elect members
of the board of directors." It is undisputed that PLDTs non-voting preferred shares are held mostly
by Filipino citizens.30 This arose from Presidential Decree No. 217,31 issued on 16 June 1973 by
then President Ferdinand Marcos, requiring every applicant of a PLDT telephone line to subscribe to
non-voting preferred shares to pay for the investment cost of installing the telephone line.32

Petitioners-in-intervention basically reiterate petitioners arguments and adopt petitioners definition of

the term "capital."33 Petitioners-in-intervention allege that "the approximate foreign ownership of
common capital stock of PLDT x x x already amounts to at least 63.54% of the total outstanding
common stock," which means that foreigners exercise significant control over PLDT, patently violating
the 40 percent foreign equity limitation in public utilities prescribed by the Constitution.

Respondents, on the other hand, do not offer any definition of the term "capital" in Section 11, Article
XII of the Constitution. More importantly, private respondents Nazareno and Pangilinan of PLDT do
not dispute that more than 40 percent of the common shares of PLDT are held by foreigners.

In particular, respondent Nazarenos Memorandum, consisting of 73 pages, harps mainly on the

procedural infirmities of the petition and the supposed violation of the due process rights of the
"affected foreign common shareholders." Respondent Nazareno does not deny petitioners allegation
of foreigners dominating the common shareholdings of PLDT. Nazareno stressed mainly that the
petition "seeks to divest foreign common shareholders purportedly exceeding 40% of the total
common shareholdings in PLDT of their ownership over their shares." Thus, "the foreign natural and
juridical PLDT shareholders must be impleaded in this suit so that they can be heard."34 Essentially,
Nazareno invokes denial of due process on behalf of the foreign common shareholders.

While Nazareno does not introduce any definition of the term "capital," he states that "among the
factual assertions that need to be established to counter petitioners allegations is the uniform
interpretation by government agencies (such as the SEC), institutions and corporations (such as the
Philippine National Oil Company-Energy Development Corporation or PNOC-EDC) of including both
preferred shares and common shares in "controlling interest" in view of testing compliance with the
40% constitutional limitation on foreign ownership in public utilities."35

Similarly, respondent Manuel V. Pangilinan does not define the term "capital" in Section 11, Article XII
of the Constitution. Neither does he refute petitioners claim of foreigners holding more than 40
57
percent of PLDTs common shares. Instead, respondent Pangilinan focuses on the procedural flaws
of the petition and the alleged violation of the due process rights of foreigners. Respondent
Pangilinan emphasizes in his Memorandum (1) the absence of this Courts jurisdiction over the
petition; (2) petitioners lack of standing; (3) mootness of the petition; (4) non-availability of
declaratory relief; and (5) the denial of due process rights. Moreover, respondent Pangilinan alleges
that the issue should be whether "owners of shares in PLDT as well as owners of shares in
companies holding shares in PLDT may be required to relinquish their shares in PLDT and in those
companies without any law requiring them to surrender their shares and also without notice and trial."

Respondent Pangilinan further asserts that "Section 11, [Article XII of the Constitution] imposes no
nationality requirement on the shareholders of the utility company as a condition for keeping their
shares in the utility company." According to him, "Section 11 does not authorize taking one persons
property (the shareholders stock in the utility company) on the basis of another partys alleged failure
to satisfy a requirement that is a condition only for that other partys retention of another piece of
property (the utility company being at least 60% Filipino-owned to keep its franchise)."36

The OSG, representing public respondents Secretary Margarito Teves, Undersecretary John P.
Sevilla, Commissioner Ricardo Abcede, and Chairman Fe Barin, is likewise silent on the definition of
the term "capital." In its Memorandum37 dated 24 September 2007, the OSG also limits its discussion
on the supposed procedural defects of the petition, i.e. lack of standing, lack of jurisdiction, non-
inclusion of interested parties, and lack of basis for injunction. The OSG does not present any
definition or interpretation of the term "capital" in Section 11, Article XII of the Constitution. The OSG
contends that "the petition actually partakes of a collateral attack on PLDTs franchise as a public
utility," which in effect requires a "full-blown trial where all the parties in interest are given their day in
court."38

Respondent Francisco Ed Lim, impleaded as President and Chief Executive Officer of the Philippine
Stock Exchange (PSE), does not also define the term "capital" and seeks the dismissal of the petition
on the following grounds: (1) failure to state a cause of action against Lim; (2) the PSE allegedly
implemented its rules and required all listed companies, including PLDT, to make proper and timely
disclosures; and (3) the reliefs prayed for in the petition would adversely impact the stock market.

In the earlier case of Fernandez v. Cojuangco, petitioner Fernandez who claimed to be a stockholder
of record of PLDT, contended that the term "capital" in the 1987 Constitution refers to shares entitled
to vote or the common shares. Fernandez explained thus:

The forty percent (40%) foreign equity limitation in public utilities prescribed by the Constitution refers
to ownership of shares of stock entitled to vote, i.e., common shares, considering that it is through
voting that control is being exercised. x x x

Obviously, the intent of the framers of the Constitution in imposing limitations and restrictions on fully
nationalized and partially nationalized activities is for Filipino nationals to be always in control of the
corporation undertaking said activities. Otherwise, if the Trial Courts ruling upholding respondents
arguments were to be given credence, it would be possible for the ownership structure of a public
utility corporation to be divided into one percent (1%) common stocks and ninety-nine percent (99%)
preferred stocks. Following the Trial Courts ruling adopting respondents arguments, the common
shares can be owned entirely by foreigners thus creating an absurd situation wherein foreigners, who
are supposed to be minority shareholders, control the public utility corporation.

xxxx
58
Thus, the 40% foreign ownership limitation should be interpreted to apply to both the beneficial
ownership and the controlling interest.

xxxx

Clearly, therefore, the forty percent (40%) foreign equity limitation in public utilities prescribed by the
Constitution refers to ownership of shares of stock entitled to vote, i.e., common shares. Furthermore,
ownership of record of shares will not suffice but it must be shown that the legal and beneficial
ownership rests in the hands of Filipino citizens. Consequently, in the case of petitioner PLDT, since it
is already admitted that the voting interests of foreigners which would gain entry to petitioner PLDT by
the acquisition of SMART shares through the Questioned Transactions is equivalent to 82.99%, and
the nominee arrangements between the foreign principals and the Filipino owners is likewise
admitted, there is, therefore, a violation of Section 11, Article XII of the Constitution.

Parenthetically, the Opinions dated February 15, 1988 and April 14, 1987 cited by the Trial Court to
support the proposition that the meaning of the word "capital" as used in Section 11, Article XII of the
Constitution allegedly refers to the sum total of the shares subscribed and paid-in by the shareholder
and it allegedly is immaterial how the stock is classified, whether as common or preferred, cannot
stand in the face of a clear legislative policy as stated in the FIA which took effect in 1991 or way after
said opinions were rendered, and as clarified by the above-quoted Amendments. In this regard,
suffice it to state that as between the law and an opinion rendered by an administrative agency, the
law indubitably prevails. Moreover, said Opinions are merely advisory and cannot prevail over the
clear intent of the framers of the Constitution.

In the same vein, the SECs construction of Section 11, Article XII of the Constitution is at best merely
advisory for it is the courts that finally determine what a law means.39

On the other hand, respondents therein, Antonio O. Cojuangco, Manuel V. Pangilinan, Carlos A.
Arellano, Helen Y. Dee, Magdangal B. Elma, Mariles Cacho-Romulo, Fr. Bienvenido F. Nebres, Ray
C. Espinosa, Napoleon L. Nazareno, Albert F. Del Rosario, and Orlando B. Vea, argued that the term
"capital" in Section 11, Article XII of the Constitution includes preferred shares since the Constitution
does not distinguish among classes of stock, thus:

16. The Constitution applies its foreign ownership limitation on the corporations "capital," without
distinction as to classes of shares. x x x

In this connection, the Corporation Code which was already in force at the time the present (1987)
Constitution was drafted defined outstanding capital stock as follows:

Section 137. Outstanding capital stock defined. The term "outstanding capital stock", as
used in this Code, means the total shares of stock issued under binding subscription
agreements to subscribers or stockholders, whether or not fully or partially paid, except
treasury shares.

Section 137 of the Corporation Code also does not distinguish between common and preferred
shares, nor exclude either class of shares, in determining the outstanding capital stock (the "capital")
of a corporation. Consequently, petitioners suggestion to reckon PLDTs foreign equity only on the
basis of PLDTs outstanding common shares is without legal basis. The language of the Constitution
should be understood in the sense it has in common use.
59
xxxx

17. But even assuming that resort to the proceedings of the Constitutional Commission is necessary,
there is nothing in the Record of the Constitutional Commission (Vol. III) which petitioner
misleadingly cited in the Petition x x x which supports petitioners view that only common shares
should form the basis for computing a public utilitys foreign equity.

xxxx

18. In addition, the SEC the government agency primarily responsible for implementing the
Corporation Code, and which also has the responsibility of ensuring compliance with the
Constitutions foreign equity restrictions as regards nationalized activities x x x has categorically
ruled that both common and preferred shares are properly considered in determining outstanding
capital stock and the nationality composition thereof.40

We agree with petitioner and petitioners-in-intervention. The term "capital" in Section 11, Article XII of
the Constitution refers only to shares of stock entitled to vote in the election of directors, and
thus in the present case only to common shares ,41 and not to the total outstanding capital stock
comprising both common and non-voting preferred shares.

The Corporation Code of the Philippines42 classifies shares as common or preferred, thus:

Sec. 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. Any or all of the shares or
series of shares may have a par value or have no par value as may be provided for in the articles of
incorporation: Provided, however, That banks, trust companies, insurance companies, public utilities,
and building and loan associations shall not be permitted to issue no-par value shares of stock.

Preferred shares of stock issued by any corporation may be given preference in the distribution of the
assets of the corporation in case of liquidation and in the distribution of dividends, or such other
preferences as may be stated in the articles of incorporation which are not violative of the provisions
of this Code: Provided, That preferred shares of stock may be issued only with a stated par value.
The Board of Directors, where authorized in the articles of incorporation, may fix the terms and
conditions of preferred shares of stock or any series thereof: Provided, That such terms and
conditions shall be effective upon the filing of a certificate thereof with the Securities and Exchange
Commission.

Shares of capital stock issued without par value shall be deemed fully paid and non-assessable and
the holder of such shares shall not be liable to the corporation or to its creditors in respect thereto:
Provided; That shares without par value may not be issued for a consideration less than the value of
five (P5.00) pesos per share: Provided, further, That the entire consideration received by the
corporation for its no-par value shares shall be treated as capital and shall not be available for
distribution as dividends.

60
A corporation may, furthermore, classify its shares for the purpose of insuring compliance with
constitutional or legal requirements.

Except as otherwise provided in the articles of incorporation and stated in the certificate of stock,
each share shall be equal in all respects to every other share.

Where the articles of incorporation provide for non-voting shares in the cases allowed by this Code,
the holders of such shares shall nevertheless be entitled to vote on the following matters:

1. Amendment of the articles of incorporation;

2. Adoption and amendment of by-laws;

3. Sale, lease, exchange, mortgage, pledge or other disposition of all or substantially all of the
corporate property;

4. Incurring, creating or increasing bonded indebtedness;

5. Increase or decrease of capital stock;

6. Merger or consolidation of the corporation with another corporation or other corporations;

7. Investment of corporate funds in another corporation or business in accordance with this Code;
and

8. Dissolution of the corporation.

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.

Indisputably, one of the rights of a stockholder is the right to participate in the control or management
of the corporation.43 This is exercised through his vote in the election of directors because it is the
board of directors that controls or manages the corporation.44 In the absence of provisions in the
articles of incorporation denying voting rights to preferred shares, preferred shares have the same
voting rights as common shares. However, preferred shareholders are often excluded from any
control, that is, deprived of the right to vote in the election of directors and on other matters, on the
theory that the preferred shareholders are merely investors in the corporation for income in the same
manner as bondholders.45 In fact, under the Corporation Code only preferred or redeemable shares
can be deprived of the right to vote.46 Common shares cannot be deprived of the right to vote in any
corporate meeting, and any provision in the articles of incorporation restricting the right of common
shareholders to vote is invalid.47

Considering that common shares have voting rights which translate to control, as opposed to
preferred shares which usually have no voting rights, the term "capital" in Section 11, Article XII of the
Constitution refers only to common shares. However, if the preferred shares also have the right to
vote in the election of directors, then the term "capital" shall include such preferred shares because
the right to participate in the control or management of the corporation is exercised through the right
to vote in the election of directors. In short, the term "capital" in Section 11, Article XII of the
Constitution refers only to shares of stock that can vote in the election of directors.
61
This interpretation is consistent with the intent of the framers of the Constitution to place in the hands
of Filipino citizens the control and management of public utilities. As revealed in the deliberations of
the Constitutional Commission, "capital" refers to the voting stock or controlling interest of a
corporation, to wit:

MR. NOLLEDO. In Sections 3, 9 and 15, the Committee stated local or Filipino equity and foreign
equity; namely, 60-40 in Section 3, 60-40 in Section 9 and 2/3-1/3 in Section 15.

MR. VILLEGAS. That is right.

MR. NOLLEDO. In teaching law, we are always faced with this question: "Where do we base the
equity requirement, is it on the authorized capital stock, on the subscribed capital stock, or on the
paid-up capital stock of a corporation"? Will the Committee please enlighten me on this?

MR. VILLEGAS. We have just had a long discussion with the members of the team from the UP Law
Center who provided us a draft. The phrase that is contained here which we adopted from the UP
draft is "60 percent of voting stock."

MR. NOLLEDO. That must be based on the subscribed capital stock, because unless declared
delinquent, unpaid capital stock shall be entitled to vote.

MR. VILLEGAS. That is right.

MR. NOLLEDO. Thank you.

With respect to an investment by one corporation in another corporation, say, a corporation with 60-
40 percent equity invests in another corporation which is permitted by the Corporation Code, does the
Committee adopt the grandfather rule?

MR. VILLEGAS. Yes, that is the understanding of the Committee.

MR. NOLLEDO. Therefore, we need additional Filipino capital?

MR. VILLEGAS. Yes.48

xxxx

MR. AZCUNA. May I be clarified as to that portion that was accepted by the Committee.

MR. VILLEGAS. The portion accepted by the Committee is the deletion of the phrase "voting stock or
controlling interest."

MR. AZCUNA. Hence, without the Davide amendment, the committee report would read:
"corporations or associations at least sixty percent of whose CAPITAL is owned by such citizens."

MR. VILLEGAS. Yes.

MR. AZCUNA. So if the Davide amendment is lost, we are stuck with 60 percent of the capital to be
owned by citizens.
62
MR. VILLEGAS. That is right.

MR. AZCUNA. But the control can be with the foreigners even if they are the minority. Let us say 40
percent of the capital is owned by them, but it is the voting capital, whereas, the Filipinos own the
nonvoting shares. So we can have a situation where the corporation is controlled by foreigners
despite being the minority because they have the voting capital. That is the anomaly that would result
here.

MR. BENGZON. No, the reason we eliminated the word "stock" as stated in the 1973 and 1935
Constitutions is that according to Commissioner Rodrigo, there are associations that do not have
stocks. That is why we say "CAPITAL."

MR. AZCUNA. We should not eliminate the phrase "controlling interest."

MR. BENGZON. In the case of stock corporations, it is assumed.49 (Emphasis supplied)

Thus, 60 percent of the "capital" assumes, or should result in, "controlling interest" in the corporation.
Reinforcing this interpretation of the term "capital," as referring to controlling interest or shares
entitled to vote, is the definition of a "Philippine national" in the Foreign Investments Act of 1991,50 to
wit:

SEC. 3. Definitions. - As used in this Act:

a. The term "Philippine national" shall mean a citizen of the Philippines; or a domestic partnership or
association wholly owned by citizens of the Philippines; or a corporation organized under the laws of
the Philippines of which at least sixty percent (60%) of the capital stock outstanding and entitled to
vote is owned and held by citizens of the Philippines; or a corporation organized abroad and
registered as doing business in the Philippines under the Corporation Code of which one hundred
percent (100%) of the capital stock outstanding and entitled to vote is wholly owned by Filipinos or a
trustee of funds for pension or other employee retirement or separation benefits, where the trustee is
a Philippine national and at least sixty percent (60%) of the fund will accrue to the benefit of Philippine
nationals: Provided, That where a corporation and its non-Filipino stockholders own stocks in a
Securities and Exchange Commission (SEC) registered enterprise, at least sixty percent (60%) of the
capital stock outstanding and entitled to vote of each of both corporations must be owned and held by
citizens of the Philippines and at least sixty percent (60%) of the members of the Board of Directors of
each of both corporations must be citizens of the Philippines, in order that the corporation, shall be
considered a "Philippine national." (Emphasis supplied)

In explaining the definition of a "Philippine national," the Implementing Rules and Regulations of the
Foreign Investments Act of 1991 provide:

b. "Philippine national" shall mean a citizen of the Philippines or a domestic partnership or association
wholly owned by the citizens of the Philippines; or a corporation organized under the laws of the
Philippines of which at least sixty percent [60%] of the capital stock outstanding and entitled to vote is
owned and held by citizens of the Philippines; or a trustee of funds for pension or other employee
retirement or separation benefits, where the trustee is a Philippine national and at least sixty percent
[60%] of the fund will accrue to the benefit of the Philippine nationals; Provided, that where a
corporation its non-Filipino stockholders own stocks in a Securities and Exchange Commission [SEC]
registered enterprise, at least sixty percent [60%] of the capital stock outstanding and entitled to vote
63
of both corporations must be owned and held by citizens of the Philippines and at least sixty percent
[60%] of the members of the Board of Directors of each of both corporation must be citizens of the
Philippines, in order that the corporation shall be considered a Philippine national. The control test
shall be applied for this purpose.

Compliance with the required Filipino ownership of a corporation shall be determined on the basis of
outstanding capital stock whether fully paid or not, but only such stocks which are generally entitled to
vote are considered.

For stocks to be deemed owned and held by Philippine citizens or Philippine nationals, mere legal
title is not enough to meet the required Filipino equity. Full beneficial ownership of the stocks, coupled
with appropriate voting rights is essential. Thus, stocks, the voting rights of which have been assigned
or transferred to aliens cannot be considered held by Philippine citizens or Philippine nationals.

Individuals or juridical entities not meeting the aforementioned qualifications are considered as non-
Philippine nationals. (Emphasis supplied)

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

Under Section 10, Article XII of the Constitution, Congress may "reserve to citizens of the Philippines
or to corporations or associations at least sixty per centum of whose capital is owned by such
citizens, or such higher percentage as Congress may prescribe, certain areas of investments." Thus,
in numerous laws Congress has reserved certain areas of investments to Filipino citizens or to
corporations at least sixty percent of the "capital" of which is owned by Filipino citizens. Some of
these laws are: (1) Regulation of Award of Government Contracts or R.A. No. 5183; (2) Philippine
Inventors Incentives Act or R.A. No. 3850; (3) Magna Carta for Micro, Small and Medium Enterprises
or R.A. No. 6977; (4) Philippine Overseas Shipping Development Act or R.A. No. 7471; (5) Domestic
Shipping Development Act of 2004 or R.A. No. 9295; (6) Philippine Technology Transfer Act of 2009
or R.A. No. 10055; and (7) Ship Mortgage Decree or P.D. No. 1521. Hence, the term "capital" in
Section 11, Article XII of the Constitution is also used in the same context in numerous laws reserving
certain areas of investments to Filipino citizens.

To construe broadly the term "capital" as the total outstanding capital stock, including both common
and non-voting preferred shares, grossly contravenes the intent and letter of the Constitution that the
"State shall develop a self-reliant and independent national economy effectively controlled by
Filipinos." A broad definition unjustifiably disregards who owns the all-important voting stock, which
necessarily equates to control of the public utility.

We shall illustrate the glaring anomaly in giving a broad definition to the term "capital." Let us assume
that a corporation has 100 common shares owned by foreigners and 1,000,000 non-voting preferred
shares owned by Filipinos, with both classes of share having a par value of one peso (P1.00) per
share. Under the broad definition of the term "capital," such corporation would be considered
compliant with the 40 percent constitutional limit on foreign equity of public utilities since the
overwhelming majority, or more than 99.999 percent, of the total outstanding capital stock is Filipino
owned. This is obviously absurd.

64
In the example given, only the foreigners holding the common shares have voting rights in the
election of directors, even if they hold only 100 shares. The foreigners, with a minuscule equity of less
than 0.001 percent, exercise control over the public utility. On the other hand, the Filipinos, holding
more than 99.999 percent of the equity, cannot vote in the election of directors and hence, have no
control over the public utility. This starkly circumvents the intent of the framers of the Constitution, as
well as the clear language of the Constitution, to place the control of public utilities in the hands of
Filipinos. It also renders illusory the State policy of an independent national economy effectively
controlled by Filipinos.

The example given is not theoretical but can be found in the real world, and in fact exists in the
present case.

Holders of PLDT preferred shares are explicitly denied of the right to vote in the election of directors.
PLDTs Articles of Incorporation expressly state that "the holders of Serial Preferred Stock shall not
be entitled to vote at any meeting of the stockholders for the election of directors or for any other
purpose or otherwise participate in any action taken by the corporation or its stockholders, or to
receive notice of any meeting of stockholders."51

On the other hand, holders of common shares are granted the exclusive right to vote in the election of
directors. PLDTs Articles of Incorporation52 state that "each holder of Common Capital Stock shall
have one vote in respect of each share of such stock held by him on all matters voted upon by the
stockholders, and the holders of Common Capital Stock shall have the exclusive right to vote for the
election of directors and for all other purposes."53

In short, only holders of common shares can vote in the election of directors, meaning only common
shareholders exercise control over PLDT. Conversely, holders of preferred shares, who have no
voting rights in the election of directors, do not have any control over PLDT. In fact, under PLDTs
Articles of Incorporation, holders of common shares have voting rights for all purposes, while holders
of preferred shares have no voting right for any purpose whatsoever.

It must be stressed, and respondents do not dispute, that foreigners hold a majority of the common
shares of PLDT. In fact, based on PLDTs 2010 General Information Sheet (GIS),54 which is a
document required to be submitted annually to the Securities and Exchange Commission,55
foreigners hold 120,046,690 common shares of PLDT whereas Filipinos hold only 66,750,622
common shares.56 In other words, foreigners hold 64.27% of the total number of PLDTs common
shares, while Filipinos hold only 35.73%. Since holding a majority of the common shares equates to
control, it is clear that foreigners exercise control over PLDT. Such amount of control unmistakably
exceeds the allowable 40 percent limit on foreign ownership of public utilities expressly mandated in
Section 11, Article XII of the Constitution.

Moreover, the Dividend Declarations of PLDT for 2009,57 as submitted to the SEC, shows that per
share the SIP58 preferred shares earn a pittance in dividends compared to the common shares.
PLDT declared dividends for the common shares at P70.00 per share, while the declared dividends
for the preferred shares amounted to a measly P1.00 per share.59 So the preferred shares not only
cannot vote in the election of directors, they also have very little and obviously negligible dividend
earning capacity compared to common shares.

As shown in PLDTs 2010 GIS,60 as submitted to the SEC, the par value of PLDT common shares is
P5.00 per share, whereas the par value of preferred shares is P10.00 per share. In other words,
preferred shares have twice the par value of common shares but cannot elect directors and have only
65
1/70 of the dividends of common shares. Moreover, 99.44% of the preferred shares are owned by
Filipinos while foreigners own only a minuscule 0.56% of the preferred shares.61 Worse, preferred
shares constitute 77.85% of the authorized capital stock of PLDT while common shares constitute
only 22.15%.62 This undeniably shows that beneficial interest in PLDT is not with the non-voting
preferred shares but with the common shares, blatantly violating the constitutional requirement of 60
percent Filipino control and Filipino beneficial ownership in a public utility.

The legal and beneficial ownership of 60 percent of the outstanding capital stock must rest in the
hands of Filipinos in accordance with the constitutional mandate. Full beneficial ownership of 60
percent of the outstanding capital stock, coupled with 60 percent of the voting rights, is
constitutionally required for the States grant of authority to operate a public utility. The undisputed
fact that the PLDT preferred shares, 99.44% owned by Filipinos, are non-voting and earn only 1/70 of
the dividends that PLDT common shares earn, grossly violates the constitutional requirement of 60
percent Filipino control and Filipino beneficial ownership of a public utility.

In short, Filipinos hold less than 60 percent of the voting stock, and earn less than 60 percent of the
dividends, of PLDT. This directly contravenes the express command in Section 11, Article XII of the
Constitution that "[n]o franchise, certificate, or any other form of authorization for the operation of a
public utility shall be granted except to x x x corporations x x x organized under the laws of the
Philippines, at least sixty per centum of whose capital is owned by such citizens x x x."

To repeat, (1) foreigners own 64.27% of the common shares of PLDT, which class of shares
exercises the sole right to vote in the election of directors, and thus exercise control over PLDT; (2)
Filipinos own only 35.73% of PLDTs common shares, constituting a minority of the voting stock, and
thus do not exercise control over PLDT; (3) preferred shares, 99.44% owned by Filipinos, have no
voting rights; (4) preferred shares earn only 1/70 of the dividends that common shares earn;63 (5)
preferred shares have twice the par value of common shares; and (6) preferred shares constitute
77.85% of the authorized capital stock of PLDT and common shares only 22.15%. This kind of
ownership and control of a public utility is a mockery of the Constitution.

Incidentally, the fact that PLDT common shares with a par value of P5.00 have a current stock market
value of P2,328.00 per share,64 while PLDT preferred shares with a par value of P10.00 per share
have a current stock market value ranging from only P10.92 to P11.06 per share,65 is a glaring
confirmation by the market that control and beneficial ownership of PLDT rest with the common
shares, not with the preferred shares.

Indisputably, construing the term "capital" in Section 11, Article XII of the Constitution to include both
voting and non-voting shares will result in the abject surrender of our telecommunications industry to
foreigners, amounting to a clear abdication of the States constitutional duty to limit control of public
utilities to Filipino citizens. Such an interpretation certainly runs counter to the constitutional provision
reserving certain areas of investment to Filipino citizens, such as the exploitation of natural resources
as well as the ownership of land, educational institutions and advertising businesses. The Court
should never open to foreign control what the Constitution has expressly reserved to Filipinos for that
would be a betrayal of the Constitution and of the national interest. The Court must perform its
solemn duty to defend and uphold the intent and letter of the Constitution to ensure, in the words of
the Constitution, "a self-reliant and independent national economy effectively controlled by Filipinos."

Section 11, Article XII of the Constitution, like other provisions of the Constitution expressly reserving
to Filipinos specific areas of investment, such as the development of natural resources and ownership
of land, educational institutions and advertising business, is self-executing. There is no need for
66
legislation to implement these self-executing provisions of the Constitution. The rationale why these
constitutional provisions are self-executing was explained in Manila Prince Hotel v. GSIS,66 thus:

x x x Hence, unless it is expressly provided that a legislative act is necessary to enforce a

constitutional mandate, the presumption now is that all provisions of the constitution are self-
executing. If the constitutional provisions are treated as requiring legislation instead of self-executing,
the legislature would have the power to ignore and practically nullify the mandate of the fundamental
law. This can be cataclysmic. That is why the prevailing view is, as it has always been, that

. . . in case of doubt, the Constitution should be considered self-executing rather than non-self-
executing. . . . Unless the contrary is clearly intended, the provisions of the Constitution should be
considered self-executing, as a contrary rule would give the legislature discretion to determine when,
or whether, they shall be effective. These provisions would be subordinated to the will of the
lawmaking body, which could make them entirely meaningless by simply refusing to pass the needed
implementing statute. (Emphasis supplied)

In Manila Prince Hotel, even the Dissenting Opinion of then Associate Justice Reynato S. Puno, later
Chief Justice, agreed that constitutional provisions are presumed to be self-executing. Justice Puno
stated:

Courts as a rule consider the provisions of the Constitution as self-executing, rather than as requiring
future legislation for their enforcement. The reason is not difficult to discern. For if they are not treated
as self-executing, the mandate of the fundamental law ratified by the sovereign people can be easily
ignored and nullified by Congress. Suffused with wisdom of the ages is the unyielding rule that
legislative actions may give breath to constitutional rights but congressional inaction should not
suffocate them.

Thus, we have treated as self-executing the provisions in the Bill of Rights on arrests, searches and
seizures, the rights of a person under custodial investigation, the rights of an accused, and the
privilege against self-incrimination. It is recognized that legislation is unnecessary to enable courts to
effectuate constitutional provisions guaranteeing the fundamental rights of life, liberty and the
protection of property. The same treatment is accorded to constitutional provisions forbidding the
taking or damaging of property for public use without just compensation. (Emphasis supplied)

Thus, in numerous cases,67 this Court, even in the absence of implementing legislation, applied
directly the provisions of the 1935, 1973 and 1987 Constitutions limiting land ownership to Filipinos.
In Soriano v. Ong Hoo,68 this Court ruled:

x x x As the Constitution is silent as to the effects or consequences of a sale by a citizen of his land to
an alien, and as both the citizen and the alien have violated the law, none of them should have a
recourse against the other, and it should only be the State that should be allowed to intervene and
determine what is to be done with the property subject of the violation. We have said that what the
State should do or could do in such matters is a matter of public policy, entirely beyond the scope of
judicial authority. (Dinglasan, et al. vs. Lee Bun Ting, et al., 6 G. R. No. L-5996, June 27, 1956.) While
the legislature has not definitely decided what policy should be followed in cases of violations against
the constitutional prohibition, courts of justice cannot go beyond by declaring the disposition to be null
and void as violative of the Constitution. x x x (Emphasis supplied)

To treat Section 11, Article XII of the Constitution as not self-executing would mean that since the
1935 Constitution, or over the last 75 years, not one of the constitutional provisions expressly
67
reserving specific areas of investments to corporations, at least 60 percent of the "capital" of which is
owned by Filipinos, was enforceable. In short, the framers of the 1935, 1973 and 1987 Constitutions
miserably failed to effectively reserve to Filipinos specific areas of investment, like the operation by
corporations of public utilities, the exploitation by corporations of mineral resources, the ownership by
corporations of real estate, and the ownership of educational institutions. All the legislatures that
convened since 1935 also miserably failed to enact legislations to implement these vital constitutional
provisions that determine who will effectively control the national economy, Filipinos or foreigners.
This Court cannot allow such an absurd interpretation of the Constitution.

This Court has held that the SEC "has both regulatory and adjudicative functions."69 Under its
regulatory functions, the SEC can be compelled by mandamus to perform its statutory duty when it
unlawfully neglects to perform the same. Under its adjudicative or quasi-judicial functions, the SEC
can be also be compelled by mandamus to hear and decide a possible violation of any law it
administers or enforces when it is mandated by law to investigate such violation.1awphi1

Under Section 17(4)70 of the Corporation Code, the SEC has the regulatory function to reject or
disapprove the Articles of Incorporation of any corporation where "the required percentage of
ownership of the capital stock to be owned by citizens of the Philippines has not been complied with
as required by existing laws or the Constitution." Thus, the SEC is the government agency tasked
with the statutory duty to enforce the nationality requirement prescribed in Section 11, Article XII of
the Constitution on the ownership of public utilities. This Court, in a petition for declaratory relief that
is treated as a petition for mandamus as in the present case, can direct the SEC to perform its
statutory duty under the law, a duty that the SEC has apparently unlawfully neglected to do based on
the 2010 GIS that respondent PLDT submitted to the SEC.

Under Section 5(m) of the Securities Regulation Code,71 the SEC is vested with the "power and
function" to "suspend or revoke, after proper notice and hearing, the franchise or certificate of
registration of corporations, partnerships or associations, upon any of the grounds provided by law."
The SEC is mandated under Section 5(d) of the same Code with the "power and function" to
"investigate x x x the activities of persons to ensure compliance" with the laws and regulations that
SEC administers or enforces. The GIS that all corporations are required to submit to SEC annually
should put the SEC on guard against violations of the nationality requirement prescribed in the
Constitution and existing laws. This Court can compel the SEC, in a petition for declaratory relief that
is treated as a petition for mandamus as in the present case, to hear and decide a possible violation
of Section 11, Article XII of the Constitution in view of the ownership structure of PLDTs voting
shares, as admitted by respondents and as stated in PLDTs 2010 GIS that PLDT submitted to SEC.

WHEREFORE, we PARTLY GRANT the petition and rule that the term "capital" in Section 11, Article
XII of the 1987 Constitution refers only to shares of stock entitled to vote in the election of
directors, and thus in the present case only to common shares, and not to the total outstanding
capital stock (common and non-voting preferred shares). Respondent Chairperson of the Securities
and Exchange Commission is DIRECTED to apply this definition of the term "capital" in determining
the extent of allowable foreign ownership in respondent Philippine Long Distance Telephone
Company, and if there is a violation of Section 11, Article XII of the Constitution, to impose the
appropriate sanctions under the law.

SO ORDERED.
G.R. No. 176579 October 9, 2012

HEIRS OF WILSON P. GAMBOA,* Petitioners,

68
vs.
FINANCE SECRETARYMARGARITO B. TEVES, FINANCE UNDERSECRETARYJOHN P. SEVILLA,
AND COMMISSIONER RICARDO ABCEDE OF THE PRESIDENTIAL COMMISSION ON GOOD
GOVERNMENT(PCGG) IN THEIR CAPACITIES AS CHAIR AND MEMBERS, RESPECTIVELY, OF
THE PRIVATIZATION COUNCIL, CHAIRMAN ANTHONI SALIM OF FIRST PACIFIC CO., LTD. IN
HIS CAPACITY AS DIRECTOR OF METRO PACIFIC ASSET HOLDINGS INC., CHAIRMAN
MANUEL V. PANGILINAN OF PHILIPPINE LONG DISTANCE TELEPHONE COMPANY (PLDT) IN
HIS CAPACITY AS MANAGING DIRECTOR OF FIRST PACIFIC CO., LTD., PRESIDENT
NAPOLEON L. NAZARENO OF PHILIPPINE LONG DISTANCE TELEPHONE COMPANY, CHAIR FE
BARIN OF THE SECURITIES AND EXCHANGE COMMISSION, and PRESIDENT FRANCIS LIM OF
THE PHILIPPINE STOCK EXCHANGE, Respondents.

PABLITO V. SANIDAD and ARNO V. SANIDAD, Petitioner-in-Intervention.

RESOLUTION

CARPIO, J.:

This resolves the motions for reconsideration of the 28 June 2011 Decision filed by (1) the Philippine
Stock Exchange's (PSE) President, 1 (2) Manuel V. Pangilinan (Pangilinan),2 (3) Napoleon L.
Nazareno (Nazareno ),3 and ( 4) the Securities and Exchange Commission (SEC)4 (collectively,
movants ).

The Office of the Solicitor General (OSG) initially filed a motion for reconsideration on behalfofthe
SEC,5 assailing the 28 June 2011 Decision. However, it subsequently filed a Consolidated Comment
on behalf of the State,6 declaring expressly that it agrees with the Court's definition of the term
"capital" in Section 11, Article XII of the Constitution. During the Oral Arguments on 26 June 2012, the
OSG reiterated its position consistent with the Court's 28 June 2011 Decision.

We deny the motions for reconsideration.

I.
Far-reaching implications of the legal issue justify
treatment of petition for declaratory relief as one for mandamus.

As we emphatically stated in the 28 June 2011 Decision, the interpretation of the term "capital" in
Section 11, Article XII of the Constitution has far-reaching implications to the national economy. In
fact, a resolution of this issue will determine whether Filipinos are masters, or second-class citizens,
in their own country. What is at stake here is whether Filipinos or foreigners will have effective control
of the Philippine national economy. Indeed, if ever there is a legal issue that has far-reaching
implications to the entire nation, and to future generations of Filipinos, it is the threshold legal issue
presented in this case.

Contrary to Pangilinans narrow view, the serious economic consequences resulting in the
interpretation of the term "capital" in Section 11, Article XII of the Constitution undoubtedly demand an
immediate adjudication of this issue. Simply put, the far-reaching implications of this issue justify the
treatment of the petition as one for mandamus.7

In Luzon Stevedoring Corp. v. Anti-Dummy Board,8 the Court deemed it wise and expedient to
resolve the case although the petition for declaratory relief could be outrightly dismissed for being
procedurally defective. There, appellant admittedly had already committed a breach of the Public
69
Service Act in relation to the Anti-Dummy Law since it had been employing non- American aliens long
before the decision in a prior similar case. However, the main issue in Luzon Stevedoring was of
transcendental importance, involving the exercise or enjoyment of rights, franchises, privileges,
properties and businesses which only Filipinos and qualified corporations could exercise or enjoy
under the Constitution and the statutes. Moreover, the same issue could be raised by appellant in an
appropriate action. Thus, in Luzon Stevedoring the Court deemed it necessary to finally dispose of
the case for the guidance of all concerned, despite the apparent procedural flaw in the petition.

The circumstances surrounding the present case, such as the supposed procedural defect of the
petition and the pivotal legal issue involved, resemble those in Luzon Stevedoring. Consequently, in
the interest of substantial justice and faithful adherence to the Constitution, we opted to resolve this
case for the guidance of the public and all concerned parties.

II.
No change of any long-standing rule;
thus, no redefinition of the term "capital."

Movants contend that the term "capital" in Section 11, Article XII of the Constitution has long been
settled and defined to refer to the total outstanding shares of stock, whether voting or non-voting. In
fact, movants claim that the SEC, which is the administrative agency tasked to enforce the 60-40
ownership requirement in favor of Filipino citizens in the Constitution and various statutes, has
consistently adopted this particular definition in its numerous opinions. Movants point out that with the
28 June 2011 Decision, the Court in effect introduced a "new" definition or "midstream redefinition"9
of the term "capital" in Section 11, Article XII of the Constitution.

This is egregious error.

For more than 75 years since the 1935 Constitution, the Court has not interpreted or defined the term
"capital" found in various economic provisions of the 1935, 1973 and 1987 Constitutions. There has
never been a judicial precedent interpreting the term "capital" in the 1935, 1973 and 1987
Constitutions, until now. Hence, it is patently wrong and utterly baseless to claim that the Court in
defining the term "capital" in its 28 June 2011 Decision modified, reversed, or set aside the purported
long-standing definition of the term "capital," which supposedly refers to the total outstanding shares
of stock, whether voting or non-voting. To repeat, until the present case there has never been a Court
ruling categorically defining the term "capital" found in the various economic provisions of the 1935,
1973 and 1987 Philippine Constitutions.

The opinions of the SEC, as well as of the Department of Justice (DOJ), on the definition of the term
"capital" as referring to both voting and non-voting shares (combined total of common and preferred
shares) are, in the first place, conflicting and inconsistent. There is no basis whatsoever to the claim
that the SEC and the DOJ have consistently and uniformly adopted a definition of the term "capital"
contrary to the definition that this Court adopted in its 28 June 2011 Decision.

In DOJ Opinion No. 130, s. 1985,10 dated 7 October 1985, the scope of the term "capital" in Section
9, Article XIV of the 1973 Constitution was raised, that is, whether the term "capital" includes "both
preferred and common stocks." The issue was raised in relation to a stock-swap transaction between
a Filipino and a Japanese corporation, both stockholders of a domestic corporation that owned lands
in the Philippines. Then Minister of Justice Estelito P. Mendoza ruled that the resulting ownership
structure of the corporation would be unconstitutional because 60% of the voting stock would be
owned by Japanese while Filipinos would own only 40% of the voting stock, although when the non-
70
voting stock is added, Filipinos would own 60% of the combined voting and non-voting stock. This
ownership structure is remarkably similar to the current ownership structure of PLDT. Minister
Mendoza ruled:

xxxx

Thus, the Filipino group still owns sixty (60%) of the entire subscribed capital stock (common and
preferred) while the Japanese investors control sixty percent (60%) of the common (voting) shares.

It is your position that x x x since Section 9, Article XIV of the Constitution uses the word "capital,"
which is construed "to include both preferred and common shares" and "that where the law does not
distinguish, the courts shall not distinguish."

xxxx

In light of the foregoing jurisprudence, it is my opinion that the stock-swap transaction in question may
not be constitutionally upheld. While it may be ordinary corporate practice to classify corporate shares
into common voting shares and preferred non-voting shares, any arrangement which attempts to
defeat the constitutional purpose should be eschewed. Thus, the resultant equity arrangement which
would place ownership of 60%11 of the common (voting) shares in the Japanese group, while
retaining 60% of the total percentage of common and preferred shares in Filipino hands would
amount to circumvention of the principle of control by Philippine stockholders that is implicit in the
60% Philippine nationality requirement in the Constitution. (Emphasis supplied)

In short, Minister Mendoza categorically rejected the theory that the term "capital" in Section 9, Article
XIV of the 1973 Constitution includes "both preferred and common stocks" treated as the same class
of shares regardless of differences in voting rights and privileges. Minister Mendoza stressed that the
60-40 ownership requirement in favor of Filipino citizens in the Constitution is not complied with
unless the corporation "satisfies the criterion of beneficial ownership" and that in applying the same
"the primordial consideration is situs of control."

On the other hand, in Opinion No. 23-10 dated 18 August 2010, addressed to Castillo Laman Tan
Pantaleon & San Jose, then SEC General Counsel Vernette G. Umali-Paco applied the Voting
Control Test, that is, using only the voting stock to determine whether a corporation is a Philippine
national. The Opinion states:

Applying the foregoing, particularly the Control Test, MLRC is deemed as a Philippine national
because: (1) sixty percent (60%) of its outstanding capital stock entitled to vote is owned by a
Philippine national, the Trustee; and (2) at least sixty percent (60%) of the ERF will accrue to the
benefit of Philippine nationals. Still pursuant to the Control Test, MLRCs investment in 60% of
BFDCs outstanding capital stock entitled to vote shall be deemed as of Philippine nationality, thereby
qualifying BFDC to own private land.

Further, under, and for purposes of, the FIA, MLRC and BFDC are both Philippine nationals,
considering that: (1) sixty percent (60%) of their respective outstanding capital stock entitled to vote is
owned by a Philippine national (i.e., by the Trustee, in the case of MLRC; and by MLRC, in the case
of BFDC); and (2) at least 60% of their respective board of directors are Filipino citizens. (Boldfacing
and italicization supplied)

71
Clearly, these DOJ and SEC opinions are compatible with the Courts interpretation of the 60-40
ownership requirement in favor of Filipino citizens mandated by the Constitution for certain economic
activities. At the same time, these opinions highlight the conflicting, contradictory, and inconsistent
positions taken by the DOJ and the SEC on the definition of the term "capital" found in the economic
provisions of the Constitution.

The opinions issued by SEC legal officers do not have the force and effect of SEC rules and
regulations because only the SEC en banc can adopt rules and regulations. As expressly provided in
Section 4.6 of the Securities Regulation Code,12 the SEC cannot delegate to any of its individual
Commissioner or staff the power to adopt any rule or regulation. Further, under Section 5.1 of the
same Code, it is the SEC as a collegial body, and not any of its legal officers, that is empowered to
issue opinions and approve rules and regulations. Thus:

4.6. The Commission may, for purposes of efficiency, delegate any of its functions to any department
or office of the Commission, an individual Commissioner or staff member of the Commission except
its review or appellate authority and its power to adopt, alter and supplement any rule or regulation.

The Commission may review upon its own initiative or upon the petition of any interested party any
action of any department or office, individual Commissioner, or staff member of the Commission.

SEC. 5. Powers and Functions of the Commission.- 5.1. The Commission shall act with transparency
and shall have the powers and functions provided by this Code, Presidential Decree No. 902-A, the
Corporation Code, the Investment Houses Law, the Financing Company Act and other existing laws.
Pursuant thereto the Commission shall have, among others, the following powers and functions:

xxxx

(g) Prepare, approve, amend or repeal rules, regulations and orders, and issue opinions and provide
guidance on and supervise compliance with such rules, regulations and orders;

x x x x (Emphasis supplied)

Thus, the act of the individual Commissioners or legal officers of the SEC in issuing opinions that
have the effect of SEC rules or regulations is ultra vires. Under Sections 4.6 and 5.1(g) of the Code,
only the SEC en banc can "issue opinions" that have the force and effect of rules or regulations.
Section 4.6 of the Code bars the SEC en banc from delegating to any individual Commissioner or
staff the power to adopt rules or regulations. In short, any opinion of individual Commissioners or
SEC legal officers does not constitute a rule or regulation of the SEC.

The SEC admits during the Oral Arguments that only the SEC en banc, and not any of its individual
commissioners or legal staff, is empowered to issue opinions which have the same binding effect as
SEC rules and regulations, thus:

JUSTICE CARPIO:

So, under the law, it is the Commission En Banc that can issue an

SEC Opinion, correct?

COMMISSIONER GAITE:13
72
Thats correct, Your Honor.

JUSTICE CARPIO:

Can the Commission En Banc delegate this function to an SEC officer?

COMMISSIONER GAITE:

Yes, Your Honor, we have delegated it to the General Counsel.

JUSTICE CARPIO:

It can be delegated. What cannot be delegated by the Commission En Banc to a commissioner or an

individual employee of the Commission?

COMMISSIONER GAITE:

Novel opinions that [have] to be decided by the En Banc...

JUSTICE CARPIO:

What cannot be delegated, among others, is the power to adopt or amend rules and regulations,
correct?

COMMISSIONER GAITE:

Thats correct, Your Honor.

JUSTICE CARPIO:

So, you combine the two (2), the SEC officer, if delegated that power, can issue an opinion but that
opinion does not constitute a rule or regulation, correct?

COMMISSIONER GAITE:

Correct, Your Honor.

JUSTICE CARPIO:

So, all of these opinions that you mentioned they are not rules and regulations, correct?

COMMISSIONER GAITE:

They are not rules and regulations.

JUSTICE CARPIO:

If they are not rules and regulations, they apply only to that particular situation and will not constitute
a precedent, correct?
73
COMMISSIONER GAITE:

Yes, Your Honor.14 (Emphasis supplied)

Significantly, the SEC en banc, which is the collegial body statutorily empowered to issue rules and
opinions on behalf of the SEC, has adopted even the Grandfather Rule in determining compliance
with the 60-40 ownership requirement in favor of Filipino citizens mandated by the Constitution for
certain economic activities. This prevailing SEC ruling, which the SEC correctly adopted to thwart any
circumvention of the required Filipino "ownership and control," is laid down in the 25 March 2010 SEC
en banc ruling in Redmont Consolidated Mines, Corp. v. McArthur Mining, Inc., et al.,15 to wit:

The avowed purpose of the Constitution is to place in the hands of Filipinos the exploitation of our
natural resources. Necessarily, therefore, the Rule interpreting the constitutional provision should not
diminish that right through the legal fiction of corporate ownership and control. But the constitutional
provision, as interpreted and practiced via the 1967 SEC Rules, has favored foreigners contrary to
the command of the Constitution. Hence, the Grandfather Rule must be applied to accurately
determine the actual participation, both direct and indirect, of foreigners in a corporation engaged in a
nationalized activity or business.

Compliance with the constitutional limitation(s) on engaging in nationalized activities must be

determined by ascertaining if 60% of the investing corporations outstanding capital stock is owned by
"Filipino citizens", or as interpreted, by natural or individual Filipino citizens. If such investing
corporation is in turn owned to some extent by another investing corporation, the same process must
be observed. One must not stop until the citizenships of the individual or natural stockholders of layer
after layer of investing corporations have been established, the very essence of the Grandfather Rule.

Lastly, it was the intent of the framers of the 1987 Constitution to adopt the Grandfather Rule. In one
of the discussions on what is now Article XII of the present Constitution, the framers made the
following exchange:

MR. NOLLEDO. In Sections 3, 9 and 15, the Committee stated local or Filipino equity and foreign
equity; namely, 60-40 in Section 3, 60-40 in Section 9, and 2/3-1/3 in Section 15.

MR. VILLEGAS. That is right.

MR. NOLLEDO. In teaching law, we are always faced with the question: Where do we base the
equity requirement, is it on the authorized capital stock, on the subscribed capital stock, or on the
paid-up capital stock of a corporation? Will the Committee please enlighten me on this?

MR. VILLEGAS. We have just had a long discussion with the members of the team from the UP Law
Center who provided us a draft. The phrase that is contained here which we adopted from the UP
draft is 60 percent of voting stock.

MR. NOLLEDO. That must be based on the subscribed capital stock, because unless declared
delinquent, unpaid capital stock shall be entitled to vote.

MR. VILLEGAS. That is right.

74
MR. NOLLEDO. Thank you. With respect to an investment by one corporation in another corporation,
say, a corporation with 60-40 percent equity invests in another corporation which is permitted by the
Corporation Code, does the Committee adopt the grandfather rule?

MR. VILLEGAS. Yes, that is the understanding of the Committee.

MR. NOLLEDO. Therefore, we need additional Filipino capital?

MR. VILLEGAS. Yes. (Boldfacing and underscoring supplied; italicization in the original)

This SEC en banc ruling conforms to our 28 June 2011 Decision that the 60-40 ownership
requirement in favor of Filipino citizens in the Constitution to engage in certain economic activities
applies not only to voting control of the corporation, but also to the beneficial ownership of the
corporation. Thus, in our 28 June 2011 Decision we stated:

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

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

The interpretation by legal officers of the SEC of the term "capital," embodied in various opinions
which respondents relied upon, is merely preliminary and an opinion only of such officers. To repeat,
any such opinion does not constitute an SEC rule or regulation. In fact, many of these opinions
contain a disclaimer which expressly states: "x x x the foregoing opinion is based solely on facts
disclosed in your query and relevant only to the particular issue raised therein and shall not be used
in the nature of a standing rule binding upon the Commission in other cases whether of similar or
dissimilar circumstances."16 Thus, the opinions clearly make a caveat that they do not constitute
binding precedents on any one, not even on the SEC itself.

Likewise, the opinions of the SEC en banc, as well as of the DOJ, interpreting the law are neither
conclusive nor controlling and thus, do not bind the Court. It is hornbook doctrine that any
interpretation of the law that administrative or quasi-judicial agencies make is only preliminary, never
conclusive on the Court. The power to make a final interpretation of the law, in this case the term
"capital" in Section 11, Article XII of the 1987 Constitution, lies with this Court, not with any other
government entity.

In his motion for reconsideration, the PSE President cites the cases of National Telecommunications
Commission v. Court of Appeals17 and Philippine Long Distance Telephone Company v. National
Telecommunications Commission18 in arguing that the Court has already defined the term "capital" in
Section 11, Article XII of the 1987 Constitution.19

The PSE President is grossly mistaken. In both cases of National Telecommunications v. Court of
Appeals20 and Philippine Long Distance Telephone Company v. National Telecommunications
Commission,21 the Court did not define the term "capital" as found in Section 11, Article XII of the
1987 Constitution. In fact, these two cases never mentioned, discussed or cited Section 11, Article XII
75
of the Constitution or any of its economic provisions, and thus cannot serve as precedent in the
interpretation of Section 11, Article XII of the Constitution. These two cases dealt solely with the
determination of the correct regulatory fees under Section 40(e) and (f) of the Public Service Act, to
wit:

(e) For annual reimbursement of the expenses incurred by the Commission in the supervision of other
public services and/or in the regulation or fixing of their rates, twenty centavos for each one hundred
pesos or fraction thereof, of the capital stock subscribed or paid, or if no shares have been issued, of
the capital invested, or of the property and equipment whichever is higher.

(f) For the issue or increase of capital stock, twenty centavos for each one hundred pesos or fraction
thereof, of the increased capital. (Emphasis supplied)

The Courts interpretation in these two cases of the terms "capital stock subscribed or paid," "capital
stock" and "capital" does not pertain to, and cannot control, the definition of the term "capital" as used
in Section 11, Article XII of the Constitution, or any of the economic provisions of the Constitution
where the term "capital" is found. The definition of the term "capital" found in the Constitution must not
be taken out of context. A careful reading of these two cases reveals that the terms "capital stock
subscribed or paid," "capital stock" and "capital" were defined solely to determine the basis for
computing the supervision and regulation fees under Section 40(e) and (f) of the Public Service Act.

III.
Filipinization of Public Utilities

The Preamble of the 1987 Constitution, as the prologue of the supreme law of the land, embodies the
ideals that the Constitution intends to achieve.22 The Preamble reads:

We, the sovereign Filipino people, imploring the aid of Almighty God, in order to build a just and
humane society, and establish a Government that shall embody our ideals and aspirations, promote
the common good, conserve and develop our patrimony, and secure to ourselves and our posterity,
the blessings of independence and democracy under the rule of law and a regime of truth, justice,
freedom, love, equality, and peace, do ordain and promulgate this Constitution. (Emphasis supplied)

Consistent with these ideals, Section 19, Article II of the 1987 Constitution declares as State policy
the development of a national economy "effectively controlled" by Filipinos:

Section 19. The State shall develop a self-reliant and independent national economy effectively
controlled by Filipinos.

Fortifying the State policy of a Filipino-controlled economy, the Constitution decrees:

Section 10. The Congress shall, upon recommendation of the economic and planning agency, when
the national interest dictates, reserve to citizens of the Philippines or to corporations or associations
at least sixty per centum of whose capital is owned by such citizens, or such higher percentage as
Congress may prescribe, certain areas of investments. The Congress shall enact measures that will
encourage the formation and operation of enterprises whose capital is wholly owned by Filipinos.

In the grant of rights, privileges, and concessions covering the national economy and patrimony, the
State shall give preference to qualified Filipinos.

76
The State shall regulate and exercise authority over foreign investments within its national jurisdiction
and in accordance with its national goals and priorities.23

Under Section 10, Article XII of the 1987 Constitution, Congress may "reserve to citizens of the
Philippines or to corporations or associations at least sixty per centum of whose capital is owned by
such citizens, or such higher percentage as Congress may prescribe, certain areas of investments."
Thus, in numerous laws Congress has reserved certain areas of investments to Filipino citizens or to
corporations at least sixty percent of the "capital" of which is owned by Filipino citizens. Some of
these laws are: (1) Regulation of Award of Government Contracts or R.A. No. 5183; (2) Philippine
Inventors Incentives Act or R.A. No. 3850; (3) Magna Carta for Micro, Small and Medium Enterprises
or R.A. No. 6977; (4) Philippine Overseas Shipping Development Act or R.A. No. 7471; (5) Domestic
Shipping Development Act of 2004 or R.A. No. 9295; (6) Philippine Technology Transfer Act of 2009
or R.A. No. 10055; and (7) Ship Mortgage Decree or P.D. No. 1521.

With respect to public utilities, the 1987 Constitution specifically ordains:

Section 11. No franchise, certificate, or any other form of authorization for the operation of a public
utility shall be granted except to citizens of the Philippines or to corporations or associations
organized under the laws of the Philippines, at least sixty per centum of whose capital is owned by
such citizens; nor shall such franchise, certificate, or authorization be exclusive in character or for a
longer period than fifty years. Neither shall any such franchise or right be granted except under the
condition that it shall be subject to amendment, alteration, or repeal by the Congress when the
common good so requires. The State shall encourage equity participation in public utilities by the
general public. The participation of foreign investors in the governing body of any public utility
enterprise shall be limited to their proportionate share in its capital, and all the executive and
managing officers of such corporation or association must be citizens of the Philippines. (Emphasis
supplied)

This provision, which mandates the Filipinization of public utilities, requires that any form of
authorization for the operation of public utilities shall be granted only to "citizens of the Philippines or
to corporations or associations organized under the laws of the Philippines at least sixty per centum
of whose capital is owned by such citizens." "The provision is [an express] recognition of the sensitive
and vital position of public utilities both in the national economy and for national security."24

The 1987 Constitution reserves the ownership and operation of public utilities exclusively to (1)
Filipino citizens, or (2) corporations or associations at least 60 percent of whose "capital" is owned by
Filipino citizens. Hence, in the case of individuals, only Filipino citizens can validly own and operate a
public utility. In the case of corporations or associations, at least 60 percent of their "capital" must be
owned by Filipino citizens. In other words, under Section 11, Article XII of the 1987 Constitution, to
own and operate a public utility a corporations capital must at least be 60 percent owned by
Philippine nationals.

IV.
Definition of "Philippine National"

Pursuant to the express mandate of Section 11, Article XII of the 1987 Constitution, Congress
enacted Republic Act No. 7042 or the Foreign Investments Act of 1991 (FIA), as amended, which
defined a "Philippine national" as follows:

SEC. 3. Definitions. - As used in this Act:

77
a. The term "Philippine national" shall mean a citizen of the Philippines; or a domestic partnership or
association wholly owned by citizens of the Philippines; or a corporation organized under the laws of
the Philippines of which at least sixty percent (60%) of the capital stock outstanding and entitled to
vote is owned and held by citizens of the Philippines; or a corporation organized abroad and
registered as doing business in the Philippines under the Corporation Code of which one hundred
percent (100%) of the capital stock outstanding and entitled to vote is wholly owned by Filipinos or a
trustee of funds for pension or other employee retirement or separation benefits, where the trustee is
a Philippine national and at least sixty percent (60%) of the fund will accrue to the benefit of Philippine
nationals: Provided, That where a corporation and its non-Filipino stockholders own stocks in a
Securities and Exchange Commission (SEC) registered enterprise, at least sixty percent (60%) of the
capital stock outstanding and entitled to vote of each of both corporations must be owned and held by
citizens of the Philippines and at least sixty percent (60%) of the members of the Board of Directors of
each of both corporations must be citizens of the Philippines, in order that the corporation, shall be
considered a "Philippine national." (Boldfacing, italicization and underscoring supplied)

Thus, the FIA clearly and unequivocally defines a "Philippine national" as a Philippine citizen, or a
domestic corporation at least "60% of the capital stock outstanding and entitled to vote" is owned by
Philippine citizens.

The definition of a "Philippine national" in the FIA reiterated the meaning of such term as provided in
its predecessor statute, Executive Order No. 226 or the Omnibus Investments Code of 1987,25 which
was issued by then President Corazon C. Aquino. Article 15 of this Code states:

Article 15. "Philippine national" shall mean a citizen of the Philippines or a diplomatic partnership or
association wholly-owned by citizens of the Philippines; or a corporation organized under the laws of
the Philippines of which at least sixty per cent (60%) of the capital stock outstanding and entitled to
vote is owned and held by citizens of the Philippines; or a trustee of funds for pension or other
employee retirement or separation benefits, where the trustee is a Philippine national and at least
sixty per cent (60%) of the fund will accrue to the benefit of Philippine nationals: Provided, That where
a corporation and its non-Filipino stockholders own stock in a registered enterprise, at least sixty per
cent (60%) of the capital stock outstanding and entitled to vote of both corporations must be owned
and held by the citizens of the Philippines and at least sixty per cent (60%) of the members of the
Board of Directors of both corporations must be citizens of the Philippines in order that the
corporation shall be considered a Philippine national. (Boldfacing, italicization and underscoring
supplied)

Under Article 48(3)26 of the Omnibus Investments Code of 1987, "no corporation x x x which is not a
Philippine national x x x shall do business

x x x in the Philippines x x x without first securing from the Board of Investments a written certificate
to the effect that such business or economic activity x x x would not conflict with the Constitution or
laws of the Philippines."27 Thus, a "non-Philippine national" cannot own and operate a reserved
economic activity like a public utility. This means, of course, that only a "Philippine national" can own
and operate a public utility.

In turn, the definition of a "Philippine national" under Article 15 of the Omnibus Investments Code of
1987 was a reiteration of the meaning of such term as provided in Article 14 of the Omnibus
Investments Code of 1981,28 to wit:

78
Article 14. "Philippine national" shall mean a citizen of the Philippines; or a domestic partnership or
association wholly owned by citizens of the Philippines; or a corporation organized under the laws of
the Philippines of which at least sixty per cent (60%) of the capital stock outstanding and entitled to
vote is owned and held by citizens of the Philippines; or a trustee of funds for pension or other
employee retirement or separation benefits, where the trustee is a Philippine national and at least
sixty per cent (60%) of the fund will accrue to the benefit of Philippine nationals: Provided, That where
a corporation and its non-Filipino stockholders own stock in a registered enterprise, at least sixty per
cent (60%) of the capital stock outstanding and entitled to vote of both corporations must be owned
and held by the citizens of the Philippines and at least sixty per cent (60%) of the members of the
Board of Directors of both corporations must be citizens of the Philippines in order that the
corporation shall be considered a Philippine national. (Boldfacing, italicization and underscoring
supplied)

Under Article 69(3) of the Omnibus Investments Code of 1981, "no corporation x x x which is not a
Philippine national x x x shall do business x x x in the Philippines x x x without first securing a written
certificate from the Board of Investments to the effect that such business or economic activity x x x
would not conflict with the Constitution or laws of the Philippines."29 Thus, a "non-Philippine national"
cannot own and operate a reserved economic activity like a public utility. Again, this means that only a
"Philippine national" can own and operate a public utility.

Prior to the Omnibus Investments Code of 1981, Republic Act No. 518630 or the Investment
Incentives Act, which took effect on 16 September 1967, contained a similar definition of a "Philippine
national," to wit:

(f) "Philippine National" shall mean a citizen of the Philippines; or a partnership or association wholly
owned by citizens of the Philippines; or a corporation organized under the laws of the Philippines of
which at least sixty per cent of the capital stock outstanding and entitled to vote is owned and held by
citizens of the Philippines; or a trustee of funds for pension or other employee retirement or
separation benefits, where the trustee is a Philippine National and at least sixty per cent of the fund
will accrue to the benefit of Philippine Nationals: Provided, That where a corporation and its non-
Filipino stockholders own stock in a registered enterprise, at least sixty per cent of the capital stock
outstanding and entitled to vote of both corporations must be owned and held by the citizens of the
Philippines and at least sixty per cent of the members of the Board of Directors of both corporations
must be citizens of the Philippines in order that the corporation shall be considered a Philippine
National. (Boldfacing, italicization and underscoring supplied)

Under Section 3 of Republic Act No. 5455 or the Foreign Business Regulations Act, which took effect
on 30 September 1968, if the investment in a domestic enterprise by non-Philippine nationals
exceeds 30% of its outstanding capital stock, such enterprise must obtain prior approval from the
Board of Investments before accepting such investment. Such approval shall not be granted if the
investment "would conflict with existing constitutional provisions and laws regulating the degree of
required ownership by Philippine nationals in the enterprise."31 A "non-Philippine national" cannot
own and operate a reserved economic activity like a public utility. Again, this means that only a
"Philippine national" can own and operate a public utility.

The FIA, like all its predecessor statutes, clearly defines a "Philippine national" as a Filipino citizen, or
a domestic corporation "at least sixty percent (60%) of the capital stock outstanding and entitled to
vote" is owned by Filipino citizens. A domestic corporation is a "Philippine national" only if at least
60% of its voting stock is owned by Filipino citizens. This definition of a "Philippine national" is crucial
in the present case because the FIA reiterates and clarifies Section 11, Article XII of the 1987
79
Constitution, which limits the ownership and operation of public utilities to Filipino citizens or to
corporations or associations at least 60% Filipino-owned.

The FIA is the basic law governing foreign investments in the Philippines, irrespective of the nature of
business and area of investment. The FIA spells out the procedures by which non-Philippine nationals
can invest in the Philippines. Among the key features of this law is the concept of a negative list or the
Foreign Investments Negative List.32 Section 8 of the law states:

SEC. 8. List of Investment Areas Reserved to Philippine Nationals [Foreign Investment Negative List].
- The Foreign Investment Negative List shall have two 2 component lists: A and B:

a. List A shall enumerate the areas of activities reserved to Philippine nationals by mandate of the
Constitution and specific laws.

b. List B shall contain the areas of activities and enterprises regulated pursuant to law:

1. which are defense-related activities, requiring prior clearance and authorization from the
Department of National Defense [DND] to engage in such activity, such as the manufacture, repair,
storage and/or distribution of firearms, ammunition, lethal weapons, military ordinance, explosives,
pyrotechnics and similar materials; unless such manufacturing or repair activity is specifically
authorized, with a substantial export component, to a non-Philippine national by the Secretary of
National Defense; or

2. which have implications on public health and morals, such as the manufacture and distribution of
dangerous drugs; all forms of gambling; nightclubs, bars, beer houses, dance halls, sauna and steam
bathhouses and massage clinics. (Boldfacing, underscoring and italicization supplied)

Section 8 of the FIA enumerates the investment areas "reserved to Philippine nationals." Foreign
Investment Negative List A consists of "areas of activities reserved to Philippine nationals by mandate
of the Constitution and specific laws," where foreign equity participation in any enterprise shall be
limited to the maximum percentage expressly prescribed by the Constitution and other specific laws.
In short, to own and operate a public utility in the Philippines one must be a "Philippine national" as
defined in the FIA. The FIA is abundant notice to foreign investors to what extent they can invest in
public utilities in the Philippines.

To repeat, among the areas of investment covered by the Foreign Investment Negative List A is the
ownership and operation of public utilities, which the Constitution expressly reserves to Filipino
citizens and to corporations at least 60% owned by Filipino citizens. In other words, Negative List A of
the FIA reserves the ownership and operation of public utilities only to "Philippine nationals," defined
in Section 3(a) of the FIA as "(1) a citizen of the Philippines; x x x or (3) a corporation organized under
the laws of the Philippines of which at least sixty percent (60%) of the capital stock outstanding and
entitled to vote is owned and held by citizens of the Philippines; or (4) a corporation organized abroad
and registered as doing business in the Philippines under the Corporation Code of which one
hundred percent (100%) of the capital stock outstanding and entitled to vote is wholly owned by
Filipinos or a trustee of funds for pension or other employee retirement or separation benefits, where
the trustee is a Philippine national and at least sixty percent (60%) of the fund will accrue to the
benefit of Philippine nationals."

Clearly, from the effectivity of the Investment Incentives Act of 1967 to the adoption of the Omnibus
Investments Code of 1981, to the enactment of the Omnibus Investments Code of 1987, and to the
80
passage of the present Foreign Investments Act of 1991, or for more than four decades, the statutory
definition of the term "Philippine national" has been uniform and consistent: it means a Filipino citizen,
or a domestic corporation at least 60% of the voting stock is owned by Filipinos. Likewise, these
same statutes have uniformly and consistently required that only "Philippine nationals" could own and
operate public utilities in the Philippines. The following exchange during the Oral Arguments is
revealing:

JUSTICE CARPIO:

Counsel, I have some questions. You are aware of the Foreign Investments Act of 1991, x x x? And
the FIA of 1991 took effect in 1991, correct? Thats over twenty (20) years ago, correct?

COMMISSIONER GAITE:

Correct, Your Honor.

JUSTICE CARPIO:

And Section 8 of the Foreign Investments Act of 1991 states that []only Philippine nationals can own
and operate public utilities[], correct?

COMMISSIONER GAITE:

Yes, Your Honor.

JUSTICE CARPIO:

And the same Foreign Investments Act of 1991 defines a "Philippine national" either as a citizen of
the Philippines, or if it is a corporation at least sixty percent (60%) of the voting stock is owned by
citizens of the Philippines, correct?

COMMISSIONER GAITE:

Correct, Your Honor.

JUSTICE CARPIO:

And, you are also aware that under the predecessor law of the Foreign Investments Act of 1991, the
Omnibus Investments Act of 1987, the same provisions apply: x x x only Philippine nationals can own
and operate a public utility and the Philippine national, if it is a corporation, x x x sixty percent (60%)
of the capital stock of that corporation must be owned by citizens of the Philippines, correct?

COMMISSIONER GAITE:

Correct, Your Honor.

JUSTICE CARPIO:

And even prior to the Omnibus Investments Act of 1987, under the Omnibus Investments Act of 1981,
the same rules apply: x x x only a Philippine national can own and operate a public utility and a
81
Philippine national, if it is a corporation, sixty percent (60%) of its x x x voting stock, must be owned
by citizens of the Philippines, correct?

COMMISSIONER GAITE:

Correct, Your Honor.

JUSTICE CARPIO:

And even prior to that, under [the]1967 Investments Incentives Act and the Foreign Company Act of
1968, the same rules applied, correct?

COMMISSIONER GAITE:

Correct, Your Honor.

JUSTICE CARPIO:

So, for the last four (4) decades, x x x, the law has been very consistent only a Philippine national
can own and operate a public utility, and a Philippine national, if it is a corporation, x x x at least sixty
percent (60%) of the voting stock must be owned by citizens of the Philippines, correct?

COMMISSIONER GAITE:

Correct, Your Honor.33 (Emphasis supplied)

Government agencies like the SEC cannot simply ignore Sections 3(a) and 8 of the FIA which
categorically prescribe that certain economic activities, like the ownership and operation of public
utilities, are reserved to corporations "at least sixty percent (60%) of the capital stock outstanding and
entitled to vote is owned and held by citizens of the Philippines." Foreign Investment Negative List A
refers to "activities reserved to Philippine nationals by mandate of the Constitution and specific laws."
The FIA is the basic statute regulating foreign investments in the Philippines. Government agencies
tasked with regulating or monitoring foreign investments, as well as counsels of foreign investors,
should start with the FIA in determining to what extent a particular foreign investment is allowed in the
Philippines. Foreign investors and their counsels who ignore the FIA do so at their own peril. Foreign
investors and their counsels who rely on opinions of SEC legal officers that obviously contradict the
FIA do so also at their own peril.

Occasional opinions of SEC legal officers that obviously contradict the FIA should immediately raise a
red flag. There are already numerous opinions of SEC legal officers that cite the definition of a
"Philippine national" in Section 3(a) of the FIA in determining whether a particular corporation is
qualified to own and operate a nationalized or partially nationalized business in the Philippines. This
shows that SEC legal officers are not only aware of, but also rely on and invoke, the provisions of the
FIA in ascertaining the eligibility of a corporation to engage in partially nationalized industries. The
following are some of such opinions:

1. Opinion of 23 March 1993, addressed to Mr. Francis F. How;

2. Opinion of 14 April 1993, addressed to Director Angeles T. Wong of the Philippine Overseas
Employment Administration;
82
3. Opinion of 23 November 1993, addressed to Messrs. Dominador Almeda and Renato S. Calma;

4. Opinion of 7 December 1993, addressed to Roco Bunag Kapunan Migallos & Jardeleza;

5. SEC Opinion No. 49-04, addressed to Romulo Mabanta Buenaventura Sayoc & De Los Angeles;

6. SEC-OGC Opinion No. 17-07, addressed to Mr. Reynaldo G. David; and

7. SEC-OGC Opinion No. 03-08, addressed to Attys. Ruby Rose J. Yusi and Rudyard S. Arbolado.

The SEC legal officers occasional but blatant disregard of the definition of the term "Philippine
national" in the FIA signifies their lack of integrity and competence in resolving issues on the 60-40
ownership requirement in favor of Filipino citizens in Section 11, Article XII of the Constitution.

The PSE President argues that the term "Philippine national" defined in the FIA should be limited and
interpreted to refer to corporations seeking to avail of tax and fiscal incentives under investment
incentives laws and cannot be equated with the term "capital" in Section 11, Article XII of the 1987
Constitution. Pangilinan similarly contends that the FIA and its predecessor statutes do not apply to
"companies which have not registered and obtained special incentives under the schemes
established by those laws."

Both are desperately grasping at straws. The FIA does not grant tax or fiscal incentives to any
enterprise. Tax and fiscal incentives to investments are granted separately under the Omnibus
Investments Code of 1987, not under the FIA. In fact, the FIA expressly repealed Articles 44 to 56 of
Book II of the Omnibus Investments Code of 1987, which articles previously regulated foreign
investments in nationalized or partially nationalized industries.

The FIA is the applicable law regulating foreign investments in nationalized or partially nationalized
industries. There is nothing in the FIA, or even in the Omnibus Investments Code of 1987 or its
predecessor statutes, that states, expressly or impliedly, that the FIA or its predecessor statutes do
not apply to enterprises not availing of tax and fiscal incentives under the Code. The FIA and its
predecessor statutes apply to investments in all domestic enterprises, whether or not such
enterprises enjoy tax and fiscal incentives under the Omnibus Investments Code of 1987 or its
predecessor statutes. The reason is quite obvious mere non-availment of tax and fiscal incentives
by a non-Philippine national cannot exempt it from Section 11, Article XII of the Constitution regulating
foreign investments in public utilities. In fact, the Board of Investments Primer on Investment Policies
in the Philippines,34 which is given out to foreign investors, provides:

PART III. FOREIGN INVESTMENTS WITHOUT INCENTIVES

Investors who do not seek incentives and/or whose chosen activities do not qualify for incentives,
(i.e., the activity is not listed in the IPP, and they are not exporting at least 70% of their production)
may go ahead and make the investments without seeking incentives. They only have to be guided by
the Foreign Investments Negative List (FINL).

The FINL clearly defines investment areas requiring at least 60% Filipino ownership. All other areas
outside of this list are fully open to foreign investors. (Emphasis supplied)

V.
83
Right to elect directors, coupled with beneficial ownership,
translates to effective control.

The 28 June 2011 Decision declares that the 60 percent Filipino ownership required by the
Constitution to engage in certain economic activities applies not only to voting control of the
corporation, but also to the beneficial ownership of the corporation. To repeat, we held:

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

This is consistent with Section 3 of the FIA which provides that where 100% of the capital stock is
held by "a trustee of funds for pension or other employee retirement or separation benefits," the
trustee is a Philippine national if "at least sixty percent (60%) of the fund will accrue to the benefit of
Philippine nationals." Likewise, Section 1(b) of the Implementing Rules of the FIA provides that "for
stocks to be deemed owned and held by Philippine citizens or Philippine nationals, mere legal title is
not enough to meet the required Filipino equity. Full beneficial ownership of the stocks, coupled with
appropriate voting rights, is essential."

Since the constitutional requirement of at least 60 percent Filipino ownership applies not only to
voting control of the corporation but also to the beneficial ownership of the corporation, it is therefore
imperative that such requirement apply uniformly and across the board to all classes of shares,
regardless of nomenclature and category, comprising the capital of a corporation. Under the
Corporation Code, capital stock35 consists of all classes of shares issued to stockholders, that is,
common shares as well as preferred shares, which may have different rights, privileges or restrictions
as stated in the articles of incorporation.36

The Corporation Code allows denial of the right to vote to preferred and redeemable shares, but
disallows denial of the right to vote in specific corporate matters. Thus, common shares have the right
to vote in the election of directors, while preferred shares may be denied such right. Nonetheless,
preferred shares, even if denied the right to vote in the election of directors, are entitled to vote on the
following corporate matters: (1) amendment of articles of incorporation; (2) increase and decrease of
capital stock; (3) incurring, creating or increasing bonded indebtedness; (4) sale, lease, mortgage or
other disposition of substantially all corporate assets; (5) investment of funds in another business or
corporation or for a purpose other than the primary purpose for which the corporation was organized;
(6) adoption, amendment and repeal of by-laws; (7) merger and consolidation; and (8) dissolution of
corporation.37

Since a specific class of shares may have rights and privileges or restrictions different from the rest of
the shares in a corporation, the 60-40 ownership requirement in favor of Filipino citizens in Section
11, Article XII of the Constitution must apply not only to shares with voting rights but also to shares
without voting rights. Preferred shares, denied the right to vote in the election of directors, are anyway
still entitled to vote on the eight specific corporate matters mentioned above. Thus, if a corporation,
engaged in a partially nationalized industry, issues a mixture of common and preferred non-voting
shares, at least 60 percent of the common shares and at least 60 percent of the preferred non-voting
shares must be owned by Filipinos. Of course, if a corporation issues only a single class of shares, at
least 60 percent of such shares must necessarily be owned by Filipinos. In short, the 60-40
84
ownership requirement in favor of Filipino citizens must apply separately to each class of shares,
whether common, preferred non-voting, preferred voting or any other class of shares. This uniform
application of the 60-40 ownership requirement in favor of Filipino citizens clearly breathes life to the
constitutional command that the ownership and operation of public utilities shall be reserved
exclusively to corporations at least 60 percent of whose capital is Filipino-owned. Applying uniformly
the 60-40 ownership requirement in favor of Filipino citizens to each class of shares, regardless of
differences in voting rights, privileges and restrictions, guarantees effective Filipino control of public
utilities, as mandated by the Constitution.

Moreover, such uniform application to each class of shares insures that the "controlling interest" in
public utilities always lies in the hands of Filipino citizens. This addresses and extinguishes
Pangilinans worry that foreigners, owning most of the non-voting shares, will exercise greater control
over fundamental corporate matters requiring two-thirds or majority vote of all shareholders.

VI.
Intent of the framers of the Constitution

While Justice Velasco quoted in his Dissenting Opinion38 a portion of the deliberations of the
Constitutional Commission to support his claim that the term "capital" refers to the total outstanding
shares of stock, whether voting or non-voting, the following excerpts of the deliberations reveal
otherwise. It is clear from the following exchange that the term "capital" refers to controlling interest of
a corporation, thus:

MR. NOLLEDO. In Sections 3, 9 and 15, the Committee stated local or Filipino equity and foreign
equity; namely, 60-40 in Section 3, 60-40 in Section 9 and 2/3-1/3 in Section 15.

MR. VILLEGAS. That is right.

MR. NOLLEDO. In teaching law, we are always faced with this question: "Where do we base the
equity requirement, is it on the authorized capital stock, on the subscribed capital stock, or on the
paid-up capital stock of a corporation"? Will the Committee please enlighten me on this?

MR. VILLEGAS. We have just had a long discussion with the members of the team from the UP Law
Center who provided us a draft. The phrase that is contained here which we adopted from the UP
draft is "60 percent of voting stock."

MR. NOLLEDO. That must be based on the subscribed capital stock, because unless declared
delinquent, unpaid capital stock shall be entitled to vote.

MR. VILLEGAS. That is right.

MR. NOLLEDO. Thank you.

With respect to an investment by one corporation in another corporation, say, a corporation with 60-
40 percent equity invests in another corporation which is permitted by the Corporation Code, does the
Committee adopt the grandfather rule?

MR. VILLEGAS. Yes, that is the understanding of the Committee.

MR. NOLLEDO. Therefore, we need additional Filipino capital?

85
MR. VILLEGAS. Yes.39

xxxx

MR. AZCUNA. May I be clarified as to that portion that was accepted by the Committee.

MR. VILLEGAS. The portion accepted by the Committee is the deletion of the phrase "voting stock or
controlling interest."

MR. AZCUNA. Hence, without the Davide amendment, the committee report would read:
"corporations or associations at least sixty percent of whose CAPITAL is owned by such citizens."

MR. VILLEGAS. Yes.

MR. AZCUNA. So if the Davide amendment is lost, we are stuck with 60 percent of the capital to be
owned by citizens.

MR. VILLEGAS. That is right.

MR. AZCUNA. But the control can be with the foreigners even if they are the minority. Let us say 40
percent of the capital is owned by them, but it is the voting capital, whereas, the Filipinos own the
nonvoting shares. So we can have a situation where the corporation is controlled by foreigners
despite being the minority because they have the voting capital. That is the anomaly that would result
here.

MR. BENGZON. No, the reason we eliminated the word "stock" as stated in the 1973 and 1935
Constitutions is that according to Commissioner Rodrigo, there are associations that do not have
stocks. That is why we say "CAPITAL."

MR. AZCUNA. We should not eliminate the phrase "controlling interest."

MR. BENGZON. In the case of stock corporations, it is assumed.40 (Boldfacing and underscoring
supplied)

Thus, 60 percent of the "capital" assumes, or should result in, a "controlling interest" in the
corporation.

The use of the term "capital" was intended to replace the word "stock" because associations without
stocks can operate public utilities as long as they meet the 60-40 ownership requirement in favor of
Filipino citizens prescribed in Section 11, Article XII of the Constitution. However, this did not change
the intent of the framers of the Constitution to reserve exclusively to Philippine nationals the
"controlling interest" in public utilities.

During the drafting of the 1935 Constitution, economic protectionism was "the battle-cry of the
nationalists in the Convention."41 The same battle-cry resulted in the nationalization of the public
utilities.42 This is also the same intent of the framers of the 1987 Constitution who adopted the exact
formulation embodied in the 1935 and 1973 Constitutions on foreign equity limitations in partially
nationalized industries.

86
The OSG, in its own behalf and as counsel for the State,43 agrees fully with the Courts interpretation
of the term "capital." In its Consolidated Comment, the OSG explains that the deletion of the phrase
"controlling interest" and replacement of the word "stock" with the term "capital" were intended
specifically to extend the scope of the entities qualified to operate public utilities to include
associations without stocks. The framers omission of the phrase "controlling interest" did not mean
the inclusion of all shares of stock, whether voting or non-voting. The OSG reiterated essentially the
Courts declaration that the Constitution reserved exclusively to Philippine nationals the ownership
and operation of public utilities consistent with the States policy to "develop a self-reliant and
independent national economy effectively controlled by Filipinos."

As we held in our 28 June 2011 Decision, to construe broadly the term "capital" as the total
outstanding capital stock, treated as a single class regardless of the actual classification of shares,
grossly contravenes the intent and letter of the Constitution that the "State shall develop a self-reliant
and independent national economy effectively controlled by Filipinos." We illustrated the glaring
anomaly which would result in defining the term "capital" as the total outstanding capital stock of a
corporation, treated as a single class of shares regardless of the actual classification of shares, to wit:

Let us assume that a corporation has 100 common shares owned by foreigners and 1,000,000 non-
voting preferred shares owned by Filipinos, with both classes of share having a par value of one peso
(P 1.00) per share. Under the broad definition of the term "capital," such corporation would be
considered compliant with the 40 percent constitutional limit on foreign equity of public utilities since
the overwhelming majority, or more than 99.999 percent, of the total outstanding capital stock is
Filipino owned. This is obviously absurd.

In the example given, only the foreigners holding the common shares have voting rights in the
election of directors, even if they hold only 100 shares. The foreigners, with a minuscule equity of less
than 0.001 percent, exercise control over the public utility. On the other hand, the Filipinos, holding
more than 99.999 percent of the equity, cannot vote in the election of directors and hence, have no
control over the public utility. This starkly circumvents the intent of the framers of the Constitution, as
well as the clear language of the Constitution, to place the control of public utilities in the hands of
Filipinos. x x x

Further, even if foreigners who own more than forty percent of the voting shares elect an all-Filipino
board of directors, this situation does not guarantee Filipino control and does not in any way cure the
violation of the Constitution. The independence of the Filipino board members so elected by such
foreign shareholders is highly doubtful. As the OSG pointed out, quoting Justice George Sutherlands
words in Humphreys Executor v. US,44 "x x x it is quite evident that one who holds his office only
during the pleasure of another cannot be depended upon to maintain an attitude of independence
against the latters will." Allowing foreign shareholders to elect a controlling majority of the board,
even if all the directors are Filipinos, grossly circumvents the letter and intent of the Constitution and
defeats the very purpose of our nationalization laws.

VII.
Last sentence of Section 11, Article XII of the Constitution

The last sentence of Section 11, Article XII of the 1987 Constitution reads:

The participation of foreign investors in the governing body of any public utility enterprise shall be
limited to their proportionate share in its capital, and all the executive and managing officers of such
corporation or association must be citizens of the Philippines.
87
During the Oral Arguments, the OSG emphasized that there was never a question on the intent of the
framers of the Constitution to limit foreign ownership, and assure majority Filipino ownership and
control of public utilities. The OSG argued, "while the delegates disagreed as to the percentage
threshold to adopt, x x x the records show they clearly understood that Filipino control of the public
utility corporation can only be and is obtained only through the election of a majority of the members
of the board."

Indeed, the only point of contention during the deliberations of the Constitutional Commission on 23
August 1986 was the extent of majority Filipino control of public utilities. This is evident from the
following exchange:

THE PRESIDENT. Commissioner Jamir is recognized.

MR. JAMIR. Madam President, my proposed amendment on lines 20 and 21 is to delete the phrase
"two thirds of whose voting stock or controlling interest," and instead substitute the words "SIXTY
PERCENT OF WHOSE CAPITAL" so that the sentence will read: "No franchise, certificate, or any
other form of authorization for the operation of a public utility shall be granted except to citizens of the
Philippines or to corporations or associations organized under the laws of the Philippines at least
SIXTY PERCENT OF WHOSE CAPITAL is owned by such citizens."

xxxx

THE PRESIDENT: Will Commissioner Jamir first explain?

MR. JAMIR. Yes, in this Article on National Economy and Patrimony, there were two previous
sections in which we fixed the Filipino equity to 60 percent as against 40 percent for foreigners. It is
only in this Section 15 with respect to public utilities that the committee proposal was increased to
two-thirds. I think it would be better to harmonize this provision by providing that even in the case of
public utilities, the minimum equity for Filipino citizens should be 60 percent.

MR. ROMULO. Madam President.

THE PRESIDENT. Commissioner Romulo is recognized.

MR. ROMULO. My reason for supporting the amendment is based on the discussions I have had with
representatives of the Filipino majority owners of the international record carriers, and the subsequent
memoranda they submitted to me. x x x

Their second point is that under the Corporation Code, the management and control of a corporation
is vested in the board of directors, not in the officers but in the board of directors. The officers are only
agents of the board. And they believe that with 60 percent of the equity, the Filipino majority
stockholders undeniably control the board. Only on important corporate acts can the 40-percent
foreign equity exercise a veto, x x x.

x x x x45

MS. ROSARIO BRAID. Madam President.

THE PRESIDENT. Commissioner Rosario Braid is recognized.

88
MS. ROSARIO BRAID. Yes, in the interest of equal time, may I also read from a memorandum by the
spokesman of the Philippine Chamber of Communications on why they would like to maintain the
present equity, I am referring to the 66 2/3. They would prefer to have a 75-25 ratio but would settle
for 66 2/3. x x x

xxxx

THE PRESIDENT. Just to clarify, would Commissioner Rosario Braid support the proposal of two-
thirds rather than the 60 percent?

MS. ROSARIO BRAID. I have added a clause that will put management in the hands of Filipino
citizens.

x x x x46

While they had differing views on the percentage of Filipino ownership of capital, it is clear that the
framers of the Constitution intended public utilities to be majority Filipino-owned and controlled. To
ensure that Filipinos control public utilities, the framers of the Constitution approved, as additional
safeguard, the inclusion of the last sentence of Section 11, Article XII of the Constitution commanding
that "[t]he participation of foreign investors in the governing body of any public utility enterprise shall
be limited to their proportionate share in its capital, and all the executive and managing officers of
such corporation or association must be citizens of the Philippines." In other words, the last sentence
of Section 11, Article XII of the Constitution mandates that (1) the participation of foreign investors in
the governing body of the corporation or association shall be limited to their proportionate share in the
capital of such entity; and (2) all officers of the corporation or association must be Filipino citizens.

Commissioner Rosario Braid proposed the inclusion of the phrase requiring the managing officers of
the corporation or association to be Filipino citizens specifically to prevent management contracts,
which were designed primarily to circumvent the Filipinization of public utilities, and to assure Filipino
control of public utilities, thus:

MS. ROSARIO BRAID. x x x They also like to suggest that we amend this provision by adding a
phrase which states: "THE MANAGEMENT BODY OF EVERY CORPORATION OR ASSOCIATION
SHALL IN ALL CASES BE CONTROLLED BY CITIZENS OF THE PHILIPPINES." I have with me
their position paper.

THE PRESIDENT. The Commissioner may proceed.

MS. ROSARIO BRAID. The three major international record carriers in the Philippines, which
Commissioner Romulo mentioned Philippine Global Communications, Eastern
Telecommunications, Globe Mackay Cable are 40-percent owned by foreign multinational
companies and 60-percent owned by their respective Filipino partners. All three, however, also have
management contracts with these foreign companies Philcom with RCA, ETPI with Cable and
Wireless PLC, and GMCR with ITT. Up to the present time, the general managers of these carriers
are foreigners. While the foreigners in these common carriers are only minority owners, the foreign
multinationals are the ones managing and controlling their operations by virtue of their management
contracts and by virtue of their strength in the governing bodies of these carriers.47

xxxx
89
MR. OPLE. I think a number of us have agreed to ask Commissioner Rosario Braid to propose an
amendment with respect to the operating management of public utilities, and in this amendment, we
are associated with Fr. Bernas, Commissioners Nieva and Rodrigo. Commissioner Rosario Braid will
state this amendment now.

Thank you.

MS. ROSARIO BRAID. Madam President.

THE PRESIDENT. This is still on Section 15.

MS. ROSARIO BRAID. Yes.

MR. VILLEGAS. Yes, Madam President.

xxxx

MS. ROSARIO BRAID. Madam President, I propose a new section to read: THE MANAGEMENT
BODY OF EVERY CORPORATION OR ASSOCIATION SHALL IN ALL CASES BE CONTROLLED
BY CITIZENS OF THE PHILIPPINES."

This will prevent management contracts and assure control by Filipino citizens. Will the committee
assure us that this amendment will insure that past activities such as management contracts will no
longer be possible under this amendment?

xxxx

FR. BERNAS. Madam President.

THE PRESIDENT. Commissioner Bernas is recognized.

FR. BERNAS. Will the committee accept a reformulation of the first part?

MR. BENGZON. Let us hear it.

FR. BERNAS. The reformulation will be essentially the formula of the 1973 Constitution which reads:
"THE PARTICIPATION OF FOREIGN INVESTORS IN THE GOVERNING BODY OF ANY PUBLIC
UTILITY ENTERPRISE SHALL BE LIMITED TO THEIR PROPORTIONATE SHARE IN THE CAPITAL
THEREOF AND..."

MR. VILLEGAS. "ALL THE EXECUTIVE AND MANAGING OFFICERS OF SUCH CORPORATIONS
AND ASSOCIATIONS MUST BE CITIZENS OF THE PHILIPPINES."

MR. BENGZON. Will Commissioner Bernas read the whole thing again?

FR. BERNAS. "THE PARTICIPATION OF FOREIGN INVESTORS IN THE GOVERNING BODY OF

ANY PUBLIC UTILITY ENTERPRISE SHALL BE LIMITED TO THEIR PROPORTIONATE SHARE IN
THE CAPITAL THEREOF..." I do not have the rest of the copy.

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MR. BENGZON. "AND ALL THE EXECUTIVE AND MANAGING OFFICERS OF SUCH
CORPORATIONS OR ASSOCIATIONS MUST BE CITIZENS OF THE PHILIPPINES." Is that correct?

MR. VILLEGAS. Yes.

MR. BENGZON. Madam President, I think that was said in a more elegant language. We accept the
amendment. Is that all right with Commissioner Rosario Braid?

MS. ROSARIO BRAID. Yes.

xxxx

MR. DE LOS REYES. The governing body refers to the board of directors and trustees.

MR. VILLEGAS. That is right.

MR. BENGZON. Yes, the governing body refers to the board of directors.

MR. REGALADO. It is accepted.

MR. RAMA. The body is now ready to vote, Madam President.

VOTING

xxxx

The results show 29 votes in favor and none against; so the proposed amendment is approved.

xxxx

THE PRESIDENT. All right. Can we proceed now to vote on Section 15?

MR. RAMA. Yes, Madam President.

THE PRESIDENT. Will the chairman of the committee please read Section 15?

MR. VILLEGAS. The entire Section 15, as amended, reads: "No franchise, certificate, or any other
form of authorization for the operation of a public utility shall be granted except to citizens of the
Philippines or to corporations or associations organized under the laws of the Philippines at least 60
PERCENT OF WHOSE CAPITAL is owned by such citizens." May I request Commissioner Bengzon
to please continue reading.

MR. BENGZON. "THE PARTICIPATION OF FOREIGN INVESTORS IN THE GOVERNING BODY OF

ANY PUBLIC UTILITY ENTERPRISE SHALL BE LIMITED TO THEIR PROPORTIONATE SHARE IN
THE CAPITAL THEREOF AND ALL THE EXECUTIVE AND MANAGING OFFICERS OF SUCH
CORPORATIONS OR ASSOCIATIONS MUST BE CITIZENS OF THE PHILIPPINES."

MR. VILLEGAS. "NOR SHALL SUCH FRANCHISE, CERTIFICATE OR AUTHORIZATION BE

EXCLUSIVE IN CHARACTER OR FOR A PERIOD LONGER THAN TWENTY-FIVE YEARS
RENEWABLE FOR NOT MORE THAN TWENTY-FIVE YEARS. Neither shall any such franchise or
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right be granted except under the condition that it shall be subject to amendment, alteration, or repeal
by Congress when the common good so requires. The State shall encourage equity participation in
public utilities by the general public."

VOTING

xxxx

The results show 29 votes in favor and 4 against; Section 15, as amended, is approved.48 (Emphasis
supplied)

The last sentence of Section 11, Article XII of the 1987 Constitution, particularly the provision on the
limited participation of foreign investors in the governing body of public utilities, is a reiteration of the
last sentence of Section 5, Article XIV of the 1973 Constitution,49 signifying its importance in
reserving ownership and control of public utilities to Filipino citizens.

VIII.
The undisputed facts

There is no dispute, and respondents do not claim the contrary, that (1) foreigners own 64.27% of the
common shares of PLDT, which class of shares exercises the sole right to vote in the election of
directors, and thus foreigners control PLDT; (2) Filipinos own only 35.73% of PLDTs common shares,
constituting a minority of the voting stock, and thus Filipinos do not control PLDT; (3) preferred
shares, 99.44% owned by Filipinos, have no voting rights; (4) preferred shares earn only 1/70 of the
dividends that common shares earn;50 (5) preferred shares have twice the par value of common
shares; and (6) preferred shares constitute 77.85% of the authorized capital stock of PLDT and
common shares only 22.15%.

Despite the foregoing facts, the Court did not decide, and in fact refrained from ruling on the question
of whether PLDT violated the 60-40 ownership requirement in favor of Filipino citizens in Section 11,
Article XII of the 1987 Constitution. Such question indisputably calls for a presentation and
determination of evidence through a hearing, which is generally outside the province of the Courts
jurisdiction, but well within the SECs statutory powers. Thus, for obvious reasons, the Court limited its
decision on the purely legal and threshold issue on the definition of the term "capital" in Section 11,
Article XII of the Constitution and directed the SEC to apply such definition in determining the exact
percentage of foreign ownership in PLDT.

IX.
PLDT is not an indispensable party;
SEC is impleaded in this case.

In his petition, Gamboa prays, among others:

xxxx

5. For the Honorable Court to issue a declaratory relief that ownership of common or voting shares is
the sole basis in determining foreign equity in a public utility and that any other government rulings,
opinions, and regulations inconsistent with this declaratory relief be declared unconstitutional and a
violation of the intent and spirit of the 1987 Constitution;

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6. For the Honorable Court to declare null and void all sales of common stocks to foreigners in excess
of 40 percent of the total subscribed common shareholdings; and

7. For the Honorable Court to direct the Securities and Exchange Commission and Philippine Stock
Exchange to require PLDT to make a public disclosure of all of its foreign shareholdings and their
actual and real beneficial owners.

Other relief(s) just and equitable are likewise prayed for. (Emphasis supplied)

As can be gleaned from his prayer, Gamboa clearly asks this Court to compel the SEC to perform its
statutory duty to investigate whether "the required percentage of ownership of the capital stock to be
owned by citizens of the Philippines has been complied with [by PLDT] as required by x x x the
Constitution."51 Such plea clearly negates SECs argument that it was not impleaded.

Granting that only the SEC Chairman was impleaded in this case, the Court has ample powers to
order the SECs compliance with its directive contained in the 28 June 2011 Decision in view of the
far-reaching implications of this case. In Domingo v. Scheer,52 the Court dispensed with the
amendment of the pleadings to implead the Bureau of Customs considering (1) the unique backdrop
of the case; (2) the utmost need to avoid further delays; and (3) the issue of public interest involved.
The Court held:

The Court may be curing the defect in this case by adding the BOC as party-petitioner. The petition
should not be dismissed because the second action would only be a repetition of the first. In
Salvador, et al., v. Court of Appeals, et al., we held that this Court has full powers, apart from that
power and authority which is inherent, to amend the processes, pleadings, proceedings and decisions
by substituting as party-plaintiff the real party-in-interest. The Court has the power to avoid delay in
the disposition of this case, to order its amendment as to implead the BOC as party-respondent.
Indeed, it may no longer be necessary to do so taking into account the unique backdrop in this case,
involving as it does an issue of public interest. After all, the Office of the Solicitor General has
represented the petitioner in the instant proceedings, as well as in the appellate court, and maintained
the validity of the deportation order and of the BOCs Omnibus Resolution. It cannot, thus, be claimed
by the State that the BOC was not afforded its day in court, simply because only the petitioner, the
Chairperson of the BOC, was the respondent in the CA, and the petitioner in the instant recourse. In
Alonso v. Villamor, we had the occasion to state:

There is nothing sacred about processes or pleadings, their forms or contents. Their sole purpose is
to facilitate the application of justice to the rival claims of contending parties. They were created, not
to hinder and delay, but to facilitate and promote, the administration of justice. They do not constitute
the thing itself, which courts are always striving to secure to litigants. They are designed as the
means best adapted to obtain that thing. In other words, they are a means to an end. When they lose
the character of the one and become the other, the administration of justice is at fault and courts are
correspondingly remiss in the performance of their obvious duty.53 (Emphasis supplied)

In any event, the SEC has expressly manifested54 that it will abide by the Courts decision and defer
to the Courts definition of the term "capital" in Section 11, Article XII of the Constitution. Further, the
SEC entered its special appearance in this case and argued during the Oral Arguments, indicating its
submission to the Courts jurisdiction. It is clear, therefore, that there exists no legal impediment
against the proper and immediate implementation of the Courts directive to the SEC.

93
PLDT is an indispensable party only insofar as the other issues, particularly the factual questions, are
concerned. In other words, PLDT must be impleaded in order to fully resolve the issues on (1)
whether the sale of 111,415 PTIC shares to First Pacific violates the constitutional limit on foreign
ownership of PLDT; (2) whether the sale of common shares to foreigners exceeded the 40 percent
limit on foreign equity in PLDT; and (3) whether the total percentage of the PLDT common shares with
voting rights complies with the 60-40 ownership requirement in favor of Filipino citizens under the
Constitution for the ownership and operation of PLDT. These issues indisputably call for an
examination of the parties respective evidence, and thus are clearly within the jurisdiction of the SEC.
In short, PLDT must be impleaded, and must necessarily be heard, in the proceedings before the
SEC where the factual issues will be thoroughly threshed out and resolved.

Notably, the foregoing issues were left untouched by the Court. The Court did not rule on the factual
issues raised by Gamboa, except the single and purely legal issue on the definition of the term
"capital" in Section 11, Article XII of the Constitution. The Court confined the resolution of the instant
case to this threshold legal issue in deference to the fact-finding power of the SEC.

Needless to state, the Court can validly, properly, and fully dispose of the fundamental legal issue in
this case even without the participation of PLDT since defining the term "capital" in Section 11, Article
XII of the Constitution does not, in any way, depend on whether PLDT was impleaded. Simply put,
PLDT is not indispensable for a complete resolution of the purely legal question in this case.55 In
fact, the Court, by treating the petition as one for mandamus,56 merely directed the SEC to apply the
Courts definition of the term "capital" in Section 11, Article XII of the Constitution in determining
whether PLDT committed any violation of the said constitutional provision. The dispositive portion of
the Courts ruling is addressed not to PLDT but solely to the SEC, which is the administrative agency
tasked to enforce the 60-40 ownership requirement in favor of Filipino citizens in Section 11, Article
XII of the Constitution.

Since the Court limited its resolution on the purely legal issue on the definition of the term "capital" in
Section 11, Article XII of the 1987 Constitution, and directed the SEC to investigate any violation by
PLDT of the 60-40 ownership requirement in favor of Filipino citizens under the Constitution,57 there
is no deprivation of PLDTs property or denial of PLDTs right to due process, contrary to Pangilinan
and Nazarenos misimpression. Due process will be afforded to PLDT when it presents proof to the
SEC that it complies, as it claims here, with Section 11, Article XII of the Constitution.

X.
Foreign Investments in the Philippines

Movants fear that the 28 June 2011 Decision would spell disaster to our economy, as it may result in
a sudden flight of existing foreign investors to "friendlier" countries and simultaneously deterring new
foreign investors to our country. In particular, the PSE claims that the 28 June 2011 Decision may
result in the following: (1) loss of more than P 630 billion in foreign investments in PSE-listed shares;
(2) massive decrease in foreign trading transactions; (3) lower PSE Composite Index; and (4) local
investors not investing in PSE-listed shares.58

Dr. Bernardo M. Villegas, one of the amici curiae in the Oral Arguments, shared movants
apprehension. Without providing specific details, he pointed out the depressing state of the Philippine
economy compared to our neighboring countries which boast of growing economies. Further, Dr.
Villegas explained that the solution to our economic woes is for the government to "take-over"
strategic industries, such as the public utilities sector, thus:

94
JUSTICE CARPIO:

I would like also to get from you Dr. Villegas if you have additional information on whether this high
FDI59 countries in East Asia have allowed foreigners x x x control [of] their public utilities, so that we
can compare apples with apples.

DR. VILLEGAS:

Correct, but let me just make a comment. When these neighbors of ours find an industry strategic,
their solution is not to "Filipinize" or "Vietnamize" or "Singaporize." Their solution is to make sure that
those industries are in the hands of state enterprises. So, in these countries, nationalization means
the government takes over. And because their governments are competent and honest enough to the
public, that is the solution. x x x 60 (Emphasis supplied)

If government ownership of public utilities is the solution, then foreign investments in our public
utilities serve no purpose. Obviously, there can never be foreign investments in public utilities if, as
Dr. Villegas claims, the "solution is to make sure that those industries are in the hands of state
enterprises." Dr. Villegass argument that foreign investments in telecommunication companies like
PLDT are badly needed to save our ailing economy contradicts his own theory that the solution is for
government to take over these companies. Dr. Villegas is barking up the wrong tree since State
ownership of public utilities and foreign investments in such industries are diametrically opposed
concepts, which cannot possibly be reconciled.

In any event, the experience of our neighboring countries cannot be used as argument to decide the
present case differently for two reasons. First, the governments of our neighboring countries have, as
claimed by Dr. Villegas, taken over ownership and control of their strategic public utilities like the
telecommunications industry. Second, our Constitution has specific provisions limiting foreign
ownership in public utilities which the Court is sworn to uphold regardless of the experience of our
neighboring countries.

In our jurisdiction, the Constitution expressly reserves the ownership and operation of public utilities
to Filipino citizens, or corporations or associations at least 60 percent of whose capital belongs to
Filipinos. Following Dr. Villegass claim, the Philippines appears to be more liberal in allowing foreign
investors to own 40 percent of public utilities, unlike in other Asian countries whose governments own
and operate such industries.

XI.
Prospective Application of Sanctions

In its Motion for Partial Reconsideration, the SEC sought to clarify the reckoning period of the
application and imposition of appropriate sanctions against PLDT if found violating Section 11, Article
XII of the Constitution.1avvphi1

As discussed, the Court has directed the SEC to investigate and determine whether PLDT violated
Section 11, Article XII of the Constitution. Thus, there is no dispute that it is only after the SEC has
determined PLDTs violation, if any exists at the time of the commencement of the administrative
case or investigation, that the SEC may impose the statutory sanctions against PLDT. In other words,
once the 28 June 2011 Decision becomes final, the SEC shall impose the appropriate sanctions only
if it finds after due hearing that, at the start of the administrative case or investigation, there is an
existing violation of Section 11, Article XII of the Constitution. Under prevailing jurisprudence, public
95
utilities that fail to comply with the nationality requirement under Section 11, Article XII and the FIA
can cure their deficiencies prior to the start of the administrative case or investigation.61

XII.
Final Word

The Constitution expressly declares as State policy the development of an economy "effectively
controlled" by Filipinos. Consistent with such State policy, the Constitution explicitly reserves the
ownership and operation of public utilities to Philippine nationals, who are defined in the Foreign
Investments Act of 1991 as Filipino citizens, or corporations or associations at least 60 percent of
whose capital with voting rights belongs to Filipinos. The FIAs implementing rules explain that "[f]or
stocks to be deemed owned and held by Philippine citizens or Philippine nationals, mere legal title is
not enough to meet the required Filipino equity. Full beneficial ownership of the stocks, coupled with
appropriate voting rights is essential." In effect, the FIA clarifies, reiterates and confirms the
interpretation that the term "capital" in Section 11, Article XII of the 1987 Constitution refers to shares
with voting rights, as well as with full beneficial ownership. This is precisely because the right to vote
in the election of directors, coupled with full beneficial ownership of stocks, translates to effective
control of a corporation.

Any other construction of the term "capital" in Section 11, Article XII of the Constitution contravenes
the letter and intent of the Constitution. Any other meaning of the term "capital" openly invites alien
domination of economic activities reserved exclusively to Philippine nationals. Therefore,
respondents interpretation will ultimately result in handing over effective control of our national
economy to foreigners in patent violation of the Constitution, making Filipinos second-class citizens in
their own country.

Filipinos have only to remind themselves of how this country was exploited under the Parity
Amendment, which gave Americans the same rights as Filipinos in the exploitation of natural
resources, and in the ownership and control of public utilities, in the Philippines. To do this the 1935
Constitution, which contained the same 60 percent Filipino ownership and control requirement as the
present 1987 Constitution, had to be amended to give Americans parity rights with Filipinos. There
was bitter opposition to the Parity Amendment62 and many Filipinos eagerly awaited its expiration. In
late 1968, PLDT was one of the American-controlled public utilities that became Filipino-controlled
when the controlling American stockholders divested in anticipation of the expiration of the Parity
Amendment on 3 July 1974.63 No economic suicide happened when control of public utilities and
mining corporations passed to Filipinos hands upon expiration of the Parity Amendment.

Movants interpretation of the term "capital" would bring us back to the same evils spawned by the
Parity Amendment, effectively giving foreigners parity rights with Filipinos, but this time even without
any amendment to the present Constitution. Worse, movants interpretation opens up our national
economy to effective control not only by Americans but also by all foreigners, be they Indonesians,
Malaysians or Chinese, even in the absence of reciprocal treaty arrangements. At least the Parity
Amendment, as implemented by the Laurel-Langley Agreement, gave the capital-starved Filipinos
theoretical parity the same rights as Americans to exploit natural resources, and to own and control
public utilities, in the United States of America. Here, movants interpretation would effectively mean a
unilateral opening up of our national economy to all foreigners, without any reciprocal arrangements.
That would mean that Indonesians, Malaysians and Chinese nationals could effectively control our
mining companies and public utilities while Filipinos, even if they have the capital, could not control
similar corporations in these countries.

96
The 1935, 1973 and 1987 Constitutions have the same 60 percent Filipino ownership and control
requirement for public utilities like PLOT. Any deviation from this requirement necessitates an
amendment to the Constitution as exemplified by the Parity Amendment. This Court has no power to
amend the Constitution for its power and duty is only to faithfully apply and interpret the Constitution.

WHEREFORE, we DENY the motions for reconsideration WITH FINALITY. No further pleadings shall
be entertained.

SO ORDERED.
G.R. No. 195580 January 28, 2015

NARRA NICKEL MINING AND DEVELOPMENT CORP., TESORO MINING AND DEVELOPMENT,
INC., and McARTHUR MINING, INC., Petitioners,
vs.
REDMONT CONSOLIDATED MINES CORP., Respondent.

RESOLUTION

VELASCO, JR., J.:

Before the Court is the Motion for Reconsideration of its April 21, 2014 Decision, which denied the
Petition for Review on Certiorari under Rule 45 jointly interposed by petitioners Narra Nickel and
Mining Development Corp. (Narra), Tesoro Mining and Development, Inc. (Tesoro), and McArthur
Mining Inc. (McArthur), and affirmed the October 1, 2010 Decision and February 15, 2011 Resolution
of the Court of Appeals (CA) in CA-G.R. SP No. 109703.

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

In a strongly worded Motion for Reconsideration dated June 5, 2014, petitioners-movants argued, in
the main, that the Court's Decision was not in accord with law and logic. In its September 2, 2014
Comment, on the other hand, respondent Redmont Consolidated Mines Corp. (Redmont)
countered that petitioners motion for reconsideration is nothing but a rehash of their
arguments and should, thus, be denied outright for being pro-forma. Petitioners have interposed
on September 30, 2014 their Reply to the respondents Comment.

After considering the parties positions, as articulated in their respective submissions, We resolve to
deny the motion for reconsideration.

I.

The case has not been rendered moot and academic

Petitioners have first off criticized the Court for resolving in its Decision a substantive issue, which,as
argued, has supposedly been rendered moot by the fact that petitioners applications for MPSAs had
already been converted to an application for a Financial Technical Assistance Agreement (FTAA), as
97
petitioners have in fact been granted an FTAA. Further, the nationality issue, so petitioners presently
claim, had been rendered moribund by the fact that MBMI had already divested itself and sold all its
shareholdings in the petitioners, as well as in their corporate stockholders, to a Filipino corporation
DMCI Mining Corporation (DMCI).

As a counterpoint, respondent Redmontavers that the present case has not been rendered moot by
the supposed issuance of an FTAA in petitioners favor as this FTAA was subsequently revoked by
the Office of the President (OP) and is currently a subject of a petition pending in the Courts First
Division. Redmont likewise contends that the supposed sale of MBMIs interest in the petitioners and
in their "holding companies" is a question of fact that is outside the Courts province to verify in a Rule
45 certiorari proceedings. In any case, assuming that the controversy has been rendered moot,
Redmont claims that its resolution on the merits is still justified by the fact that petitioners have
violated a constitutional provision, the violation is capable of repetition yet evading review, and the
present case involves a matter of public concern.

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

We can assume for the nonce that the controversy had indeed been rendered moot by these two
events. Asthis Court has time and again declared, the "moot and academic" principle is not a magical
formula that automatically dissuades courts in resolving a case.1 The Court may still take cognizance
of an otherwise moot and academic case, if it finds that (a) there is a grave violation of the
Constitution;(b) the situation is of exceptional character and paramount public interest is involved; (c)
the constitutional issue raised requires formulation of controlling principles to guide the bench, the
bar, and the public; and (d) the case is capable of repetition yet evading review.2 The Courts April 21,
2014 Decision explained in some detail that all four (4) of the foregoing circumstances are present in
the case. If only to stress a point, we will do so again. First, allowing the issuance of MPSAs to
applicants that are owned and controlled by a 100% foreign-owned corporation, albeit through an
intricate web of corporate layering involving alleged Filipino corporations, is tantamount to permitting
a blatant violation of Section 2, Article XII of the Constitution. The Court simply cannot allow this
breach and inhibit itself from resolving the controversy on the facile pretext that the case had already
been rendered academic.

Second, the elaborate corporate layering resorted to by petitioners so as to make it appear that there
is compliance with the minimum Filipino ownership in the Constitution is deftly exceptional in
character. More importantly, the case is of paramount public interest, as the corporate layering
employed by petitioners was evidently designed to circumvent the constitutional caveat allowing only
Filipino citizens and corporations 60%-owned by Filipino citizens to explore, develop, and use the
countrys natural resources.

Third, the facts of the case, involving as they do a web of corporate layering intended to go around
the Filipino ownership requirement in the Constitution and pertinent laws, requirethe establishment of
a definite principle that will ensure that the Constitutional provision reserving to Filipino citizens or
"corporations at least sixty per centum of whose capital is owned by such citizens" be effectively

98
enforced and complied with. The case, therefore, is an opportunity to establish a controlling principle
that will "guide the bench, the bar, and the public."

Lastly, the petitioners actions during the lifetime and existence of the instant case that gave rise to
the present controversy are capable of repetition yet evading review because, as shown by
petitioners actions, foreign corporations can easily utilize dummy Filipino corporations through
various schemes and stratagems to skirt the constitutional prohibition against foreign mining in
Philippine soil.

II.

The application of the Grandfather Ruleis justified by the circumstances of the case to determine the
nationality of petitioners.

To petitioners, the Courts application of the Grandfather Rule to determine their nationality is
erroneous and allegedly without basis in the Constitution, the Foreign Investments Act of 1991 (FIA),
the Philippine Mining Act of 1995,3 and the Rules issued by the Securities and Exchange
Commission (SEC). These laws and rules supposedly espouse the application of the Control Test in
verifying the Philippine nationality of corporate entities for purposes of determining compliance
withSec. 2, Art. XII of the Constitution that only "corporations or associations at least sixty per centum
of whose capital is owned by such [Filipino] citizens" may enjoy certain rights and privileges, like the
exploration and development of natural resources.

The application of the Grandfather Rule in the present case does not eschew the Control Test.

Clearly, petitioners have misread, and failed to appreciate the clear import of, the Courts April 21,
2014 Decision. Nowhere in that disposition did the Court foreclose the application of the Control Test
in determining which corporations may be considered as Philippine nationals. Instead, to borrow
Justice Leonens term, the Court used the Grandfather Rule as a "supplement" to the Control Test so
that the intent underlying the averted Sec. 2, Art. XII of the Constitution be given effect. The following
excerpts of the April 21, 2014 Decision cannot be clearer:

In ending, the "control test" is still the prevailing mode of determining whether or not a corporation is a
Filipino corporation, within the ambit of Sec. 2, Art. XII of the 1987 Constitution, entitled to undertake
the exploration, development and utilization of the natural resources of the Philippines. When in the
mind of the Court, there is doubt, based on the attendant facts and circumstances of the case, in the
60-40 Filipino equity ownership in the corporation, then it may apply the "grandfather rule." (emphasis
supplied)

With that, the use of the Grandfather Rule as a "supplement" to the Control Test is not proscribed by
the Constitution or the Philippine Mining Act of 1995.

The Grandfather Rule implements the intent of the Filipinization provisions of the Constitution.

To reiterate, Sec. 2, Art. XII of the Constitution reserves the exploration, development, and utilization
of natural resources to Filipino citizens and "corporations or associations at least sixty per centum of
whose capital is owned by such citizens." Similarly, Section 3(aq) of the Philippine Mining Act of 1995
considers a "corporation x x x registered in accordance with law at least sixty per cent of the capital of
which is owned by citizens of the Philippines" as a person qualified to undertake a mining operation.
Consistent with this objective, the Grandfather Rulewas originally conceived to look into the
99
citizenshipof the individuals who ultimately own and control the shares of stock of a corporation for
purposes of determining compliance with the constitutional requirement of Filipino ownership. It
cannot, therefore, be denied that the framers of the Constitution have not foreclosed the Grandfather
Rule as a tool in verifying the nationality of corporations for purposes of ascertaining their right to
participate in nationalized or partly nationalized activities. The following excerpts from the Record of
the 1986 Constitutional Commission suggest as much:

MR. NOLLEDO: In Sections 3, 9 and 15, the Committee stated local or Filipino equity and foreign
equity; namely, 60-40 in Section 3, 60-40 in Section 9, and 2/3-1/3 in Section 15.

MR. VILLEGAS: That is right.

xxxx

MR. NOLLEDO: Thank you.

With respect to an investment by one corporation in another corporation, say, a corporation with 60-
40 percent equity invests in another corporation which is permitted by the Corporation Code, does the
Committee adopt the grandfather rule?

MR. VILLEGAS: Yes, that is the understanding of the Committee.

As further defined by Dean Cesar Villanueva, the Grandfather Rule is "the method by which the
percentage of Filipino equity in a corporation engaged in nationalized and/or partly nationalized areas
of activities, provided for under the Constitution and other nationalization laws, is computed, in cases
where corporate shareholders are present, by attributing the nationality of the second or even
subsequent tier of ownership to determine the nationality of the corporate shareholder."4 Thus, to
arrive at the actual Filipino ownership and control in a corporation, both the direct and indirect
shareholdings in the corporation are determined.

This concept of stock attribution inherent in the Grandfather Rule to determine the ultimate ownership
in a corporation is observed by the Bureau of Internal Revenue (BIR) in applying Section 127 (B)5 of
the National Internal Revenue Code on taxes imposed on closely held corporations, in relation to
Section 96 of the Corporation Code6 on close corporations. Thus, in BIR Ruling No. 148-10,
Commissioner Kim Henares held:

In the case of a multi-tiered corporation, the stock attribution rule must be allowed to run
continuously along the chain of ownership until it finally reaches the individual stockholders. This is in
consonance with the "grandfather rule" adopted in the Philippines under Section 96 of the
Corporation Code(Batas Pambansa Blg. 68) which provides that notwithstanding the fact that all the
issued stock of a corporation are held by not more than twenty persons, among others, a corporation
is nonetheless not to be deemed a close corporation when at least two thirds of its voting stock or
voting rights is owned or controlled by another corporation which is not a close corporation.7

In SEC-OGC Opinion No. 10-31 dated December 9, 2010 (SEC Opinion 10-31), the SEC applied the
Grandfather Rule even if the corporation engaged in mining operation passes the 60-40 requirement
of the Control Test, viz:

You allege that the structure of MMLs ownership in PHILSAGA is as follows: (1) MML owns 40%
equity in MEDC, while the 60% is ostensibly owned by Philippine individual citizens who are actually
100
MMLs controlled nominees; (2) MEDC, in turn, owns 60% equity in MOHC, while MML owns the
remaining 40%; (3) Lastly, MOHC owns 60% of PHILSAGA, while MML owns the remaining 40%. You
provide the following figure to illustrate this structure:

xxxx

We note that the Constitution and the statute use the concept "Philippine citizens." Article III, Section
1 of the Constitution provides who are Philippine citizens: x x x This enumeration is exhaustive. In
other words, there can be no other Philippine citizens other than those falling within the enumeration
provided by the Constitution. Obviously, only natural persons are susceptible of citizenship. Thus, for
purposes of the Constitutional and statutory restrictions on foreign participation in the exploitation of
mineral resources, a corporation investing in a mining joint venture can never be considered as a
Philippine citizen.

The Supreme Court En Banc confirms this [in] Pedro R. Palting, vs. San Jose Petroleum [Inc.]. The
Court held that a corporation investing in another corporation engaged ina nationalized activity cannot
be considered as a citizen for purposes of the Constitutional provision restricting foreign exploitation
of natural resources:

xxxx

Accordingly, we opine that we must look into the citizenship of the individual stockholders, i.e. natural
persons, of that investor-corporation in order to determine if the Constitutional and statutory
restrictions are complied with. If the shares of stock of the immediate investor corporation is in turn
held and controlled by another corporation, then we must look into the citizenship of the individual
stockholders of the latter corporation. In other words, if there are layers of intervening corporations
investing in a mining joint venture, we must delve into the citizenship of the individual stockholders of
each corporation. This is the strict application of the grandfather rule, which the Commission has
been consistently applying prior to the 1990s. Indeed, the framers of the Constitution intended for the
"grandfather rule" to apply in case a 60%-40% Filipino-Foreign equity corporation invests in
another corporation engaging in an activity where the Constitution restricts foreign participation.

xxxx

Accordingly, under the structure you represented, the joint mining venture is 87.04 % foreign owned,
while it is only 12.96% owned by Philippine citizens. Thus, the constitutional requirement of 60%
ownership by Philippine citizens isviolated. (emphasis supplied)

Similarly, in the eponymous Redmont Consolidated Mines Corporation v. McArthur Mining Inc., et
al.,8 the SEC en bancapplied the Grandfather Rule despite the fact that the subject corporations
ostensibly have satisfied the 60-40 Filipino equity requirement. The SEC en bancheld that to attain
the Constitutional objective of reserving to Filipinos the utilization of natural resources, one should not
stop where the percentage of the capital stock is 60%.Thus:

[D]oubt, we believe, exists in the instant case because the foreign investor, MBMI, provided
practically all the funds of the remaining appellee-corporations. The records disclose that: (1) Olympic
Mines and Development Corporation ("OMDC"), a domestic corporation, and MBMI subscribed to
6,663 and 3,331 shares, respectively, out of the authorized capital stock of Madridejos; however,
OMDC paid nothing for this subscription while MBMI paid P2,803,900.00 out of its total subscription
cost of P3,331,000.00; (2) Palawan Alpha South Resource Development Corp. ("Palawan Alpha"),
101
also a domestic corporation, and MBMI subscribed to 6,596 and 3,996 shares, respectively, out of the
authorized capital stock of PatriciaLouise; however, Palawan Alpha paid nothing for this subscription
while MBMI paid P2,796,000.00 out of its total subscription cost of P3,996,000.00; (3) OMDC and
MBMI subscribed to 6,663 and 3,331 shares, respectively, out of the authorized capital stock of Sara
Marie; however, OMDC paid nothing for this subscription while MBMI paid P2,794,000.00 out of its
total subscription cost of P3,331,000.00; and (4) Falcon Ridge Resources Management Corp.
("Falcon Ridge"), another domestic corporation, and MBMI subscribed to 5,997 and 3,998 shares,
respectively, out of the authorized capital stock of San Juanico; however, Falcon Ridge paid nothing
for this subscription while MBMI paid P2,500,000.00 out of its total subscription cost of
P3,998,000.00. Thus, pursuant to the afore-quoted DOJ Opinion, the Grandfather Rule must be used.

xxxx

The avowed purpose of the Constitution is to place in the hands of Filipinos the exploitation of our
natural resources. Necessarily, therefore, the Rule interpreting the constitutional provision should not
diminish that right through the legal fiction of corporate ownership and control. But the constitutional
provision, as interpreted and practicedvia the 1967 SEC Rules, has favored foreigners contrary to the
command of the Constitution. Hence, the Grandfather Rule must be applied to accurately determine
the actual participation, both direct and indirect, of foreigners in a corporation engaged in a
nationalized activity or business.

The method employed in the Grandfather Rule of attributing the shareholdings of a given corporate
shareholder to the second or even the subsequent tier of ownership hews with the rule that the
"beneficial ownership" of corporations engaged in nationalized activities must reside in the hands of
Filipino citizens. Thus, even if the 60-40 Filipino equity requirement appears to have been satisfied,
the Department of Justice (DOJ), in its Opinion No. 144, S. of 1977, stated that an agreement that
may distort the actual economic or beneficial ownership of a mining corporation may be struck down
as violative of the constitutional requirement, viz:

In this connection, you raise the following specific questions:

1. Can a Philippine corporation with 30% equity owned by foreigners enter into a mining service
contract with a foreign company granting the latter a share of not morethan 40% from the proceeds of
the operations?

xxxx

By law, a mining lease may be granted only to a Filipino citizen, or to a corporation or partnership
registered with the [SEC] at least 60% of the capital of which is owned by Filipino citizens and
possessing x x x.The sixty percent Philippine equity requirement in mineral resource exploitation x x
xis intended to insure, among other purposes, the conservation of indigenous natural resources, for
Filipino posterityx x x. I think it is implicit in this provision, even if it refers merely to ownership of stock
in the corporation holding the mining concession, that beneficial ownership of the right to dispose,
exploit, utilize, and develop natural resources shall pertain to Filipino citizens, and that the nationality
requirementis not satisfied unless Filipinos are the principal beneficiaries in the exploitation of the
countrys natural resources. This criterion of beneficial ownership is tacitly adopted in Section 44 of
P.D. No. 463, above-quoted, which limits the service fee in service contracts to 40% of the proceeds
of the operation, thereby implying that the 60-40 benefit-sharing ration is derived from the 60-40
equity requirement in the Constitution.

102
xxxx

It is obvious that while payments to a service contractor may be justified as a service fee, and
therefore, properly deductible from gross proceeds, the service contract could be employed as a
means of going about or circumventing the constitutional limit on foreign equity participation and the
obvious constitutional policy to insure that Filipinos retain beneficial ownership of our mineral
resources. Thus, every service contract scheme has to be evaluated in its entirety, on a case to case
basis, to determine reasonableness of the total "service fee" x x x like the options available tothe
contractor to become equity participant in the Philippine entity holding the concession, or to acquire
rights in the processing and marketing stages. x x x (emphasis supplied)

The "beneficial ownership" requirement was subsequently used in tandem with the "situs of
control" todetermine the nationality of a corporation in DOJ Opinion No. 84, S.of 1988, through
the Grandfather Rule, despite the fact that both the investee and investor corporations
purportedly satisfy the 60-40 Filipino equity requirement:9

This refers to your request for opinion on whether or not there may be an investment in real estate by
a domestic corporation (the investing corporation) seventy percent (70%) of the capital stock of which
is owned by another domestic corporation withat least 60%-40% Filipino-Foreign Equity, while the
remaining thirty percent (30%) of the capital stock is owned by a foreign corporation.

xxxx

This Department has had the occasion to rule in several opinions that it is implicit in the constitutional
provisions, even if it refers merely to ownership of stock in the corporation holding the land or natural
resource concession, that the nationality requirement is not satisfied unless it meets the criterion of
beneficial ownership, i.e. Filipinos are the principal beneficiaries in the exploration of natural
resources(Op. No. 144, s. 1977; Op. No. 130, s. 1985), and that in applying the same "the primordial
consideration is situs of control, whether in a stock or nonstock corporation"(Op. No. 178, s. 1974). As
stated in the Register of Deeds vs. Ung Sui Si Temple (97 Phil. 58), obviously toinsure that
corporations and associations allowed to acquire agricultural land or to exploit natural resources
"shall be controlled by Filipinos." Accordingly, any arrangement which attempts to defeat the
constitutional purpose should be eschewed (Op. No 130, s. 1985).

We are informed that in the registration of corporations with the [SEC], compliance with the sixty per
centum requirement is being monitored by SEC under the "Grandfather Rule" a method by which the
percentage of Filipino equity in corporations engaged in nationalized and/or partly nationalized areas
of activities provided for under the Constitution and other national laws is accurately computed, and
the diminution if said equity prevented (SEC Memo, S. 1976). The "Grandfather Rule" is applied
specifically in cases where the corporation has corporate stockholders with alien stockholdings,
otherwise, if the rule is not applied, the presence of such corporate stockholders could diminish the
effective control of Filipinos.

Applying the "Grandfather Rule" in the instant case, the result is as follows: x x x the total foreign
equity in the investing corporation is 58% while the Filipino equity is only 42%, in the investing
corporation, subject of your query, is disqualified from investing in real estate, which is a nationalized
activity, as it does not meet the 60%-40% Filipino-Foreign equity requirement under the Constitution.

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This pairing of the concepts "beneficial ownership" and the "situs of control" in determining what
constitutes"capital" has been adopted by this Court in Heirs of Gamboa v. Teves.10 In its October 9,
2012 Resolution, the Court clarified, thus:

This is consistent with Section 3 of the FIA which provides that where 100% of the capital stock is
heldby "a trustee of funds for pension or other employee retirement or separation benefits," the
trustee is a Philippine national if "at least sixty percent (60%) of the fund will accrue to the benefit of
Philippine nationals." Likewise, Section 1(b) of the Implementing Rules of the FIA provides that "for
stocks to be deemed owned and held by Philippine citizens or Philippine nationals, mere legal title is
not enough to meet the required Filipino equity. Full beneficial ownership of the stocks, coupled
with appropriate voting rights, is essential." (emphasis supplied)

In emphasizing the twin requirements of "beneficial ownership" and "control" in determining

compliance with the required Filipino equity in Gamboa, the en bancCourt explicitly cited with
approval the SEC en bancs application in Redmont Consolidated Mines, Corp. v. McArthur Mining,
Inc., et al. of the Grandfather Rule, to wit:

Significantly, the SEC en banc, which is the collegial body statutorily empowered to issue rules and
opinions on behalf of SEC, has adopted the Grandfather Rulein determining compliance with the 60-
40 ownership requirement in favor of Filipino citizens mandated by the Constitution for certain
economic activities. This prevailing SEC ruling, which the SEC correctly adopted to thwart any
circumvention of the required Filipino "ownership and control," is laid down in the 25 March 2010 SEC
en banc ruling in Redmont Consolidated Mines, Corp. v. McArthur Mining, Inc., et al. x x x (emphasis
supplied)

Applying Gamboa, the Court, in Express Investments III Private Ltd. v. Bayantel Communications,
Inc.,11 denied the foreign creditors proposal to convert part of Bayantels debts to common shares of
the company at a rate of 77.7%. Supposedly, the conversion of the debts to common shares by the
foreign creditors would be done, both directly and indirectly, in order to meet the control test principle
under the FIA.Under the proposed structure, the foreign creditors would own 40% of the outstanding
capital stock of the telecommunications company on a direct basis, while the remaining 40% of
shares would be registered to a holding company that shall retain, on a direct basis, the other 60%
equity reserved for Filipino citizens. Nonetheless, the Court found the proposal non-compliant with the
Constitutional requirement of Filipino ownership as the proposed structure would give more than 60%
of the ownership of the common shares of Bayantel to the foreign corporations, viz:

In its Rehabilitation Plan, among the material financial commitments made by respondent Bayantelis
that its shareholders shall relinquish the agreed-upon amount of common stock[s] as payment to
Unsecured Creditors as per the Term Sheet. Evidently, the parties intend to convert the unsustainable
portion of respondents debt into common stocks, which have voting rights. If we indulge petitioners
on their proposal, the Omnibus Creditors which are foreign corporations, shall have control over
77.7% of Bayantel, a public utility company. This is precisely the scenario proscribed by the
Filipinization provision of the Constitution.Therefore, the Court of Appeals acted correctly in sustaining
the 40% debt-to-equity ceiling on conversion. (emphasis supplied) As shown by the quoted legislative
enactments, administrative rulings, opinions, and this Courts decisions, the Grandfather Rule not
only finds basis, but more importantly, it implements the Filipino equity requirement, in the
Constitution.

Application of the Grandfather

104
Rule with the Control Test.

Admittedly, an ongoing quandary obtains as to the role of the Grandfather Rule in determining
compliance with the minimum Filipino equity requirement vis--vis the Control Test. This confusion
springs from the erroneous assumption that the use of one method forecloses the use of the other.

As exemplified by the above rulings, opinions, decisions and this Courts April 21, 2014 Decision, the
Control Test can be, as it has been, applied jointly withthe Grandfather Rule to determine the
observance of foreign ownership restriction in nationalized economic activities. The Control Test and
the Grandfather Rule are not, as it were, incompatible ownership-determinant methods that canonly
be applied alternative to each other. Rather, these methodscan, if appropriate, be used cumulatively
in the determination of the ownership and control of corporations engaged in fully or partly
nationalized activities, as the mining operation involved in this case or the operation of public utilities
as in Gamboa or Bayantel.

The Grandfather Rule, standing alone, should not be used to determine the Filipino ownership and
control in a corporation, as it could result in an otherwise foreign corporation rendered qualified to
perform nationalized or partly nationalized activities. Hence, it is only when the Control Test is first
complied with that the Grandfather Rule may be applied. Put in another manner, if the subject
corporations Filipino equity falls below the threshold 60%, the corporation is immediately considered
foreign-owned, in which case, the needto resort to the Grandfather Rule disappears.

On the other hand, a corporation that complies with the 60-40 Filipino to foreign equity requirement
can be considered a Filipino corporation if there is no doubtas to who has the "beneficial
ownership" and "control" of the corporation. In that instance, there is no need fora dissection or
further inquiry on the ownership of the corporate shareholders in both the investing and investee
corporation or the application of the Grandfather Rule.12 As a corollary rule, even if the 60-40 Filipino
to foreign equity ratio is apparently met by the subject or investee corporation, a resort to the
Grandfather Rule is necessary if doubt existsas to the locusof the "beneficial ownership" and
"control." In this case, a further investigation as to the nationality of the personalities with the
beneficial ownership and control of the corporate shareholders in both the investing and investee
corporations is necessary.

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

1. That the foreign investors provide practically all the funds for the joint investment undertaken by
these Filipino businessmen and their foreign partner;

2. That the foreign investors undertake to provide practically all the technological support for the joint
venture;

105
3. That the foreign investors, while being minority stockholders, manage the company and prepare all
economic viability studies.

Thus, In the Matter of the Petition for Revocation of the Certificate of Registration of Linear Works
Realty Development Corporation,13 the SEC held that when foreigners contribute more capital to an
enterprise, doubt exists as to the actual control and ownership of the subject corporation even if the
60% Filipino equity threshold is met. Hence, the SEC in that one ordered a further investigation, viz:

x x x The [SEC Enforcement and Prosecution Department (EPD)] maintained that the basis for
determining the level of foreign participation is the number of shares subscribed, regardless of the par
value. Applying such an interpretation, the EPD rules that the foreign equity participation in Linear
works Realty Development Corporation amounts to 26.41% of the corporations capital stock since
the amount of shares subscribed by foreign nationals is 1,795 only out of the 6,795 shares. Thus, the
subject corporation is compliant with the 40% limit on foreign equity participation. Accordingly, the
EPD dismissed the complaint, and did not pursue any investigation against the subject corporation.

xxxx

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

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

With this in mind, we find it proper for the EPD to investigate the subject corporation. The EPD is
advised to avail of the Commissions subpoena powers in order to gather sufficient evidence, and file
the necessary complaint.

As will be discussed, even if atfirst glance the petitioners comply with the 60-40 Filipino to foreign
equity ratio, doubt exists in the present case that gives rise to a reasonable suspicion that the Filipino
shareholders do not actually have the requisite number of control and beneficial ownership in
petitioners Narra, Tesoro, and McArthur. Hence, a further investigation and dissection of the extent of
the ownership of the corporate shareholders through the Grandfather Rule is justified.

Parenthetically, it is advanced that the application of the Grandfather Rule is impractical as tracing the
shareholdings to the point when natural persons hold rights to the stocks may very well lead to an
investigation ad infinitum. Suffice it to say in this regard that, while the Grandfather Rule was
originally intended to trace the shareholdings to the point where natural persons hold the shares, the
SEC had already set up a limit as to the number of corporate layers the attribution of the nationality of
the corporate shareholders may be applied.

106
In a 1977 internal memorandum, the SEC suggested applying the Grandfather Rule on two (2) levels
of corporate relations for publicly-held corporations or where the shares are traded in the stock
exchanges, and to three (3) levels for closely held corporations or the shares of which are not
traded in the stock exchanges.14 These limits comply with the requirement in Palting v. San Jose
Petroleum, Inc.15 that the application of the Grandfather Rule cannot go beyond the level of what is
reasonable.

A doubt exists as to the extent of control and beneficial ownership of MBMI over the petitioners and
their investing corporate stockholders.

In the Decision subject of this recourse, the Court applied the Grandfather Rule to determine the
matter of true ownership and control over the petitioners as doubt exists as to the actual extent of the
participation of MBMI in the equity of the petitioners and their investing corporations.

We considered the following membership and control structures and like nuances:

Tesoro

Supposedly Filipino corporation Sara Marie Mining, Inc. (Sara Marie) holds 59.97% of the 10,000
commonshares of petitioner Tesoro while the Canadian-owned company, MBMI, holds 39.98% of its
shares.

Name Nationality Number of Shares Amount Subscribed Amount Paid

Sara Marie Mining, Inc. Filipino 5,997 P5,997,000.00 P825,000.00
MBMI Resources, Inc.16 Canadian 3,998 P3,998,000.00 P1,878,174.60
Lauro L. Salazar Filipino 1 P1,000.00 P1,000.00
Fernando B. Esguerra Filipino 1 P1,000.00 P1,000.00
Manuel A. Agcaoili Filipino 1 P1,000.00 P1,000.00
Michael T. Mason American 1 P1,000.00 P1,000.00
Kenneth Cawkel Canadian 1 P1,000.00 P1,000.00
Total 10,000 P10,000,000.00 P2,708,174.60
In turn, the Filipino corporation Olympic Mines & Development Corp. (Olympic) holds 66.63% of Sara
Maries shares while the same Canadian company MBMI holds 33.31% of Sara Maries shares.
Nonetheless, it is admitted that Olympic did not pay a single peso for its shares. On the contrary,
MBMI paid for 99% of the paid-up capital of Sara Marie.

Name Nationality Number of Shares Amount Subscribed Amount Paid

Olympic Mines & Development Corp.17 Filipino 6,663 P6,663,000.00 P0.00
MBMI Resources, Inc. Canadian 3,331 P3,331,000.00 P2,794,000.00
Amanti Limson Filipino 1 P1,000.00 P1,000.00
Fernando B. Esguerra Filipino 1 P1,000.00 P1,000.00
Lauro Salazar Filipino 1 P1,000.00 P1,000.00
Emmanuel G.
Hernando

Filipino 1 P1,000.00 P1,000.00

Michael T. Mason American 1 P1,000.00 P1,000.00
Kenneth Cawkel Canadian 1 P1,000.00 P1,000.00
Total 10,000 P10,000,000.00 P2,800,000.00

107
The fact that MBMI had practically provided all the funds in Sara Marie and Tesoro creates serious
doubt as to the true extent of its (MBMI) control and ownership over both Sara Marie and Tesoro
since, as observed by the SEC, "a reasonable investor would expect to have greater control and
economic rights than other investors who invested less capital than him." The application of the
Grandfather Rule is clearly called for, and as shown below, the Filipinos control and economic
benefits in petitioner Tesoro (through Sara Marie) fallbelow the threshold 60%, viz:

Filipino participation in petitioner Tesoro: 40.01%

66.67
100 (Filipino equity in Sara Marie) x 59.97 (Sara Maries share in Tesoro) = 39.98%
39.98% + .03% (shares of individual Filipino shareholders [SHs] in Tesoro)
=40.01%
Foreign participation in petitioner Tesoro: 59.99%

33.33
100 (Foreign equity in Sara Marie) x 59.97 (Sara Maries share in Tesoro) = 19.99%
19.99% + 39.98% (MBMIs direct participation in Tesoro) + .02% (shares of foreign individual SHs in
Tesoro)
= 59.99%
With only 40.01% Filipino ownership in petitioner Tesoro, as compared to 59.99% foreign ownership
of its shares, it is clear that petitioner Tesoro does not comply with the minimum Filipino equity
requirement imposed in Sec. 2, Art. XII of the Constitution. Hence, the appellate courts observation
that Tesoro is a foreign corporation not entitled to an MPSA is apt.

McArthur

Petitioner McArthur follows the corporate layering structure of Tesoro, as 59.97% of its 10, 000
common shares is owned by supposedly Filipino Madridejos Mining Corporation (Madridejos),
while 39.98% belonged to the Canadian MBMI.

Name Nationality Number of Shares Amount Subscribed Amount Paid

Madridejos Mining Corporation Filipino 5,997 P5,997,000.00 P825,000.00
MBMI Resources, Inc.18 Canadian 3,998 P3,998,000.0P1,878,174.60
Lauro L. Salazar Filipino 1 P1,000.00 P1,000.00
Fernando B. Filipino 1 P1,000.00 P1,000.00
Manuel A. Agcaoili Filipino 1 P1,000.00 P1,000.00
Michael T. Mason American 1 P1,000.00 P1,000.00
Kenneth Cawkel Canadian 1 P1,000.00 P1,000.00
Total 10,000 P10,000,000.00 P2,708,174.60
In turn, 66.63% of Madridejos shares were held by Olympic while 33.31% of its shares belonged to
MBMI. Yet again, Olympic did not contribute to the paid-up capital of Madridejos and it was MBMI that
provided 99.79% of the paid-up capital of Madridejos.

Name Nationality Number of Shares Amount Subscribed Amount Paid

Olympic Mines & Development Corp.19 Filipino 6,663 P6,663,000.00 P0.00
MBMI Resources, Inc. Canadian 3,331 P3,331,000.00 P2,803,900.00
Amanti Limson Filipino 1 P1,000.00 P1,000.00
Fernando B. Esguerra Filipino 1 P1,000.00 P1,000.00
Lauro Salazar Filipino 1 P1,000.00 P1,000.00
108
Emmanuel G. Hernando Filipino 1 P1,000.00 P1,000.00
Michael T. Mason American 1 P1,000.00 P1,000.00
Kenneth Cawkel Canadian 1 P1,000.00 P1,000.00
Total 10,000 P10,000,000.00 P2,809,900.00
Again, the fact that MBMI had practically provided all the funds in Madridejos and McArthur creates
serious doubt as to the true extent of its control and ownership of MBMI over both Madridejos and
McArthur. The application of the Grandfather Rule is clearly called for, and as will be shown below,
MBMI, along with the other foreign shareholders, breached the maximum limit of 40% ownership in
petitioner McArthur, rendering the petitioner disqualified to an MPSA:

Filipino participation in petitioner McArthur: 40.01%

66.67
100 (Filipino equity in Madridejos) x 59.97 (Madridejos share in McArthur) = 39.98%
39.98% + .03% (shares of individual Filipino SHs in McArthur)
=40.01%
Foreign participation in petitioner McArthur: 59.99%

33.33
(Foreign equity in Madridejos) x 59.97 (Madridejos share in McArthur) = 19.99%
19.99% + 39.98% (MBMIs direct participation inMcArthur) + .02% (shares of foreign individual SHs in
McArthur)
= 59.99%
As with petitioner Tesoro, with only 40.01% Filipino ownership in petitioner McArthur, as compared to
59.99% foreign ownership of its shares, it is clear that petitioner McArthur does not comply with the
minimum Filipino equity requirement imposed in Sec. 2, Art. XII of the Constitution. Thus, the
appellate court did not err in holding that petitioner McArthur is a foreign corporation not entitled to an
MPSA.

Narra

As for petitioner Narra, 59.97% of its shares belonged to Patricia Louise Mining &
Development Corporation (PLMDC), while Canadian MBMI held 39.98% of its shares.

Name Nationality Number of Shares Amount Subscribed Amount Paid

Patricia Lousie Mining and Development Corp. Filipino 5,997 P5,997,000.00
P1,677,000.00
MBMI Resources, Inc.20 Canadian 3,996 P3,996,000.00 P1,116,000.00
Higinio C. Mendoza, Filipino 1 P1,000.00 P1,000.00
Henry E. FernandezFilipino 1 P1,000.00 P1,000.00
Ma. Elena A. Bocalan Filipino 1 P1,000.00 P1,000.00
Michael T. Mason American 1 P1,000.00 P1,000.00
Robert L. McCurdy Canadian 1 P1,000.00 P1,000.00
Manuel A. Agcaoili Filipino 1 P1,000.00 P1,000.00
Bayani H. Agabin Filipino 1 P1,000.00 P1,000.00
Total 10,000 P10,000,000.00 P2,800,000.00
PLMDCs shares, in turn, were held by Palawan Alpha South Resources Development Corporation
(PASRDC), which subscribed to 65.96% of PLMDCs shares, and the Canadian MBMI, which
subscribed to 33.96% of PLMDCs shares.

109
Name Nationality Number of Shares Amount Subscribed Amount Paid
Palawan Alpha South Resource Development Corp. Filipino 6,596 P6,596,000.00 P0
MBMI Resources, Inc.21 Canadian 3,396 P3,396,000.00 P2,796,000.00
Higinio C. Mendoza, Jr. Filipino 1 P1,000.00 P1,000.00
Fernando B. Esguerra Filipino 1 P1,000.00 P1,000.00
Henry E. FernandezFilipino 1 P1,000.00 P1,000.00
Ma. Elena A. Bocalan Filipino 1 P1,000.00 P1,000.00
Michael T. Mason American 1 P1,000.00 P1,000.00
Robert L. McCurdy Canadian 1 P1,000.00 P1,000.00
Manuel A. Agcaoili Filipino 1 P1,000.00 P1,000.00
Bayani H, Agabin Filipino 1 P1,000.00 P1,000.00
Total 10,000 P10,000,000.00 P2,804,000.00
Yet again, PASRDC did not pay for any of its subscribed shares, while MBMI contributed 99.75% of
PLMDCs paid-up capital. This fact creates serious doubt as to the true extent of MBMIs control and
ownership over both PLMDC and Narra since "a reasonable investor would expect to have greater
control and economic rights than other investors who invested less capital than him." Thus, the
application of the Grandfather Rule is justified. And as will be shown, it is clear that the Filipino
ownership in petitioner Narra falls below the limit prescribed in both the Constitution and the
Philippine Mining Act of 1995.

Filipino participation in petitioner Narra: 39.64%

66.02
100 (Filipino equity in PLMDC) x 59.97 (PLMDCs share in Narra) = 39.59%
39.59% + .05% (shares of individual Filipino SHs in McArthur)
=39.64%
Foreign participation in petitioner Narra: 60.36%

33.98
100 (Foreign equity in PLMDC) x 59.97 (PLMDCs share in Narra) = 20.38%
20.38% + 39.96% (MBMIs direct participation in Narra) + .02% (shares of foreign individual SHs in
McArthur)
= 60.36%
With 60.36% foreign ownership in petitioner Narra, as compared to only 39.64% Filipino ownership of
its shares, it is clear that petitioner Narra does not comply with the minimum Filipino equity
requirement imposed in Section 2, Article XII of the Constitution. Hence, the appellate court did not
err in holding that petitioner McArthur is a foreign corporation not entitled to an MPSA.

It must be noted that the foregoing determination and computation of petitioners Filipino equity
composition was based on their common shareholdings, not preferred or redeemable shares.
Section 6 of the Corporation Code of the Philippines explicitly provides that "no share may be
deprived of voting rights except those classified as preferred or redeemable shares." Further,
as Justice Leonen puts it, there is "no indication that any of the shares x x x do not have voting rights,
[thus] it must be assumed that all such shares have voting rights."22 It cannot therefore be gain said
that the foregoing computation hewed with the pronouncements of Gamboa, as implemented by SEC
Memorandum Circular No. 8, Series of 2013, (SEC Memo No. 8)23 Section 2 of which states:

Section 2. All covered corporations shall, at all times, observe the constitutional or statutory
requirement.1wphi1 For purposes of determining compliance therewith, the required percentage of
Filipino ownership shall be applied to BOTH (a) the total outstanding shares of stock entitled to vote
110
in the election of directors; AND (b) the total number of outstanding shares of stock, whether or not
entitled to vote in the election of directors.

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

III.

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

Petitioners also scoffed at this Courts decision to uphold the jurisdiction of the Panel of Arbitrators
(POA) of the Department of Environment and Natural Resources (DENR) since the POAs
determination of petitioners nationalities is supposedly beyond its limited jurisdiction, as defined in
Gonzales v. Climax Mining Ltd.24 and Philex Mining Corp. v. Zaldivia.25

The April 21, 2014 Decision did not dilute, much less overturn, this Courts pronouncements in either
Gonzales or Philex Mining that POAs jurisdiction "is limited only to mining disputes which raise
questions of fact," and not judicial questions cognizable by regular courts of justice. However, to
properly recognize and give effect to the jurisdiction vested in the POA by Section 77 of the Philippine
Mining Act of 1995,26 and in parallel with this Courts ruling in Celestial Nickel Mining Exploration
Corporation v. Macroasia Corp.,27 the Court has recognized in its Decision that in resolving disputes
"involving rights to mining areas" and "involving mineral agreements or permits," the POA has
jurisdiction to make a preliminary finding of the required nationality of the corporate applicant in order
to determine its right to a mining area or a mineral agreement.

There is certainly nothing novel or aberrant in this approach. In ejectment and unlawful detainer
cases, where the subject of inquiry is possession de facto, the jurisdiction of the municipal trial courts
to make a preliminary adjudication regarding ownership of the real property involved is allowed, but
only for purposes of ruling on the determinative issue of material possession.

The present case arose from petitioners' MPSA applications, in which they asserted their respective
rights to the mining areas each applied for. Since respondent Redmont, itself an applicant for
exploration permits over the same mining areas, filed petitions for the denial of petitioners'
applications, it should be clear that there exists a controversy between the parties and it is POA's
jurisdiction to resolve the said dispute. POA's ruling on Redmont's assertion that petitioners are
foreign corporations not entitled to MPSA is but a necessary incident of its disposition of the mining
dispute presented before it, which is whether the petitioners are entitled to MPSAs.

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

WHEREFORE, We DENY the motion for reconsideration WITH FINALITY. No further pleadings shall
be entertained. Let entry of judgment be made in due course.

SO ORDERED.
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Assignment for next meeting.
Capital structure of corporations + Secs. 60 to 65
Cases:
Lopez Realty vs Spouses Tanjangco, GR 154291, 11/12/14
Valle Verde Country Club vs. Africa, GR 151969, 9/4/09
Bernas vs Cinco, GR 163356-57, 7/10/15
CIR vs Club Filipino (1962)
Republic vs City of P'que (2012) (stock vs. non-stock corp doctrine only)
Halley vs. Printwell, G.R. No. 157549, May 30, 2011
Ong Yong vs. Tiu, G.R. No. 144476, April 8, 2003
Castillo, et al. vs. Balinghasay, et al., G.R. No. 150976, October 18, 2004
Gamboa vs. Teves, G.R. No. 176579, June 28, 2011
Heirs of Gamboa vs. Teves, G.R. No. 176579, October 9, 2012
Narra Nickel vs. Redmont, G.R. No. 195580, January 28, 2015

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