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JG Summit Holdings Inc. vs. CA FACTS:

G.R. No. 124293, November 20, 2000

The National Investment and Development Corporation (NIDC), a government corporation, entered into a Joint Venture Agreement (JVA) with Kawasaki Heavy Industries, Ltd. for the construction, operation and management of the Subic National Shipyard, Inc., later became the Philippine Shipyard and Engineering Corporation (PHILSECO). Under the JVA, NIDC and Kawasaki would maintain a shareholding proportion of 60%-40% and that the parties have the right of first refusal in case of a sale. Through a series of transfers, NIDC’s rights, title and interest in PHILSECO eventually went to the National Government. In t he interest of national economy, it was decided that PHILSECO should be privatized by selling 87.67% of its total outstanding capital stock to private entities. After negotiations, it was agreed that Kawasaki’s right of first refusal under the JVA be “exchanged” for the right to top by five percent the highest bid for said shares. Kawasaki that Philyards Holdings, Inc. (PHI), in which it was a stockholder, would exercise this right in its stead. During bidding, Kawasaki/PHI Consortium is the losing bidder. Even so, because of the right to top by 5% percent the highest bid, it was able to top JG Summit’s bid. JG Summit protested, contending that PHILSECO, as a shipyard is a public utility and, hence, must observe the 60%-40% Filipino-foreign capitalization. By buying 87.67% of PHILSECO’s capital stock at bidding, Kawasaki/PHI in effe ct now owns more than 40% of the stock. ISSUE: Whether or not PHILSECO is a public utility Whether or not Kawasaki/PHI can purchase beyond 40% of PHILSECO’s stocks HELD: In arguing that PHILSECO, as a shipyard, was a public utility, JG Summit relied on sec. 13, CA No. 146. On the other hand, Kawasaki/PHI argued that PD No. 666 explicitly stated that a “shipyard” was not a “public utility.” But the SC stated that se c. 1 of PD No. 666 was expressly repealed by sec. 20, BP Blg. 391 and when BP Blg. 391 was subsequently repealed by EO 226, the latter law did not revive sec. 1 of PD No. 666. Therefore, the law that states that a shipyard is a public utility still stands. A shipyard such as PHILSECO being a public utility as provided by law is therefore required to comply with the 60%-40% capitalization under the Constitution. Likewise, the JVA between NIDC and Kawasaki manifests an intention of the parties to abide by this constitutional mandate. Thus, under the JVA, should the NIDC opt to sell its shares of stock to a third party, Kawasaki could only exercise its right of first refusal to the extent that its total shares of stock would not exceed 40% of the entire shares of stock. The NIDC, on the other hand, may purchase even beyond 60% of the total shares. As a government corporation and necessarily a 100% Filipino-owned corporation, there is nothing to prevent its purchase of stocks even beyond 60% of the capitalization as the Constitution clearly limits only foreign capitalization. Kawasaki was bound by its contractual obligation under the JVA that limits its right of first refusal to 40% of the total capitalization of PHILSECO. Thus, Kawasaki cannot purchase beyond 40% of the capitalization of the joint venture on account of both constitutional and contractual proscriptions.

General Credit Corp v. Alsons Dev. and Investment Corp FACTS: Petitioner General Credit Corporation (GCC), then known as Commercial Credit Corporation (CCC), established CCC franchise companies in different urban centers of the country. In furtherance of its business, GCC was able to secure license from Central Bank (CB) and SEC to engage also in quasi-banking activities. On the other hand, respondent CCC Equity Corporation (EQUITY) was organized in by GCC for the purpose of, among other things, taking over the operations and management of the various franchise companies. At a time material hereto, respondent Alsons Development and Investment Corporation (ALSONS) and the Alcantara family, each owned, just like GCC, shares in the aforesaid GCC franchise companies, e.g., CCC Davao and CCC Cebu. ALSONS and the Alcantara family, for a consideration of P2M, sold their shareholdings (101,953 shares), in the CCC franchise companies to EQUITY. EQUITY issued ALSONS et al., a "bearer" promissory note for P2M with a one-year maturity date. 4 years later, the Alcantara family assigned its rights and interests over the bearer note to ALSONS which became the holder thereof. But even before the execution of the assignment deal aforestated, letters of demand for interest payment were already sent to EQUITY. EQUITY no longer then having assets or property to settle its obligation nor being extended financial support by GCC, pleaded inability to pay. 8 ALSONS, having failed to collect on the bearer note aforementioned, filed a complaint for a sum of money against EQUITY and GCC. GCC is being impleaded as party-defendant for any judgment ALSONS might secure against EQUITY and, under the doctrine of piercing the veil of corporate fiction, against GCC, EQUITY having been organized as a tool and mere conduit of GCC.

According to EQUITY (cross-claim against GCC): it acted merely as intermediary or bridge for loan transactions and other dealings of GCC to its franchises and the investing public; and is solely dependent upon GCC for its funding requirements. Hence, GCC is solely and directly liable to ALSONS, the former having failed to provide …EQUITY the necessary funds to meet its obligations to ALSONS. GCC filed its ANSWER to Cross-claim, stressing that it is a distinct and separate entity from EQUITY. RTC, finding that EQUITY was but an instrumentality or adjunct of GCC and considering the legal consequences and implications of such relationship, rendered judgment for Alson. CA affirmed. ISSUE: WON the doctrine of "Piercing the Veil of Corporate Fiction" should be applied in the case at bar. HELD: YES. The notion of separate personality, however, may be disregarded under the doctrine – "piercing the veil of corporate fiction" – as in fact the court will often look at the corporation as a mere collection of individuals or an aggregation of persons undertaking business as a group, disregarding the separate juridical personality of the corporation unifying the group. Another formulation of this doctrine is that when two (2) business enterprises are owned, conducted and controlled by the same parties, both law and equity will, when necessary to protect the rights of third parties, disregard the legal fiction that two corporations are distinct entities and treat them as identical or one and the same. Authorities are agreed on at least three (3) basic areas where piercing the veil, with which the law covers and isolates the corporation from any other legal entity to which it may be related, is allowed. These are: 1) defeat of public convenience, as when the corporate fiction is used as vehicle for the evasion of an existing obligation; 2) fraud cases or when the corporate entity is used to justify a wrong, protect fraud, or defend a crime; or 3) alter ego cases, where a corporation is merely a farce since it is a mere alter ego or business conduit of a person, or where the corporation is so organized and controlled and its affairs are so conducted as to make it merely an instrumentality, agency, conduit or adjunct of another corporation. The Court agrees with the disposition of the CA on the application of the piercing doctrine to the transaction subject of this case. Per the Court’s count, the trial court enumerated no less than 20 documented circumstances and transactions, which, taken as a package, indeed strongly supported the conclusion that respondent EQUITY was but an adjunct, an instrumentality or business conduit of petitioner GCC. This relation, in turn, provides a justifying ground to pierce petitioner’s corporate existence as to ALSONS’ claim in question. Foremost of what the trial court referred to as "certain circumstances" are the commonality of directors, officers and stockholders and even sharing of office between petitioner GCC and respondent EQUITY; certain financing and management arrangements between the two, allowing the petitioner to handle the funds of the latter; the virtual domination if not control wielded by the petitioner over the finances, business policies and practices of respondent EQUITY; and the establishment of respondent EQUITY by the petitioner to circumvent CB rules. Verily, indeed, as the relationships binding herein [respondent EQUITY and petitioner GCC] have been that of "parent-subsidiary corporations" the foregoing principles and doctrines find suitable applicability in the case at bar; and, it having been satisfactorily and indubitably shown that the said relationships had been used to perform certain functions not characterized with legitimacy, this Court … feels amply justified to "pierce the veil of corporate entity" and disregard the separate existence of the parent and subsidiary the latter having been so controlled by the parent that its separate identity is hardly discernible thus becoming a mere instrumentality or alter ego of the former.

MEL V. VELARDE, petitioner, vs. LOPEZ, INC., respondent. FACTS On January 6, 1997, Mel Velarde loaned from Eugenio Lopez, Jr. president of respondet company an amount of P10,000,000.00. Petitioner was then the general Manager of Sky Vision, a subsidiary of respondent company. As petitioner failed to pay the installments as they became due, respondent, apparently in answer to a proposal of petitioner respecting the settlement of the loan, advised him by letter dated July 15, 1998 that he may use his retirement benefits in Sky Vision in partial settlement of his loan after he settles his accountabilities to the latter and gives his written instructions to it (Sky Vision). Petitioner protested the computation indicated in the July 15, 1998 letter, he asserting that the imputed unliquidated advances from Sky Vision had already been properly liquidated. On August 18, 1998, respondent company filed a complaint for collection of sum of money with damages at the Pasig City RTC against petitioner Velarde, alleging that petitioner violated the Section 6 of the loan agreement as he failed to put up the needed collateral for the loan and pay the installments as they became due, and that despite his receipt of letters of demand dated December 1, 1997 and January 13, 1998, he refused to pay. In his answer, petitioner alleged that the loan agreement did not reflect his true agreement with respondent, it being merely a “cover document” to evidence the reward to him of ten million pesos (P10,000,000.00) for his loyalty and excell ent performance as General Manager of Sky Vision and that the payment, if any was expected, was in the form of continued service; and that it was

when he was compelled by respondent to retire that the form of payment agreed upon was rendered impossible, prompting the late Eugenio Lopez, Jr. to agree that his retirement benefits from Sky Vision would instead be applied to the loan. As counterclaim, he contended that he was entitled to retirement benefits from Sky Vision in the amount of P98,280,000.00, unpaid salaries in the amount of P2,740,000.00, unpaid incentives in the amount of P500,000, unpaid share from the “net income of Plaintiff corporation,” equity in his service vehicle in the amount of P1,500,000, reasonable return on the stock ownership plan for services rendered as General Manager, and moral damages and attorney’s fees. Respondent moved for the dismissal of the counterclaim for want of jurisdiction. Respondent asserted that the counterclaims, being money claims arising from a labor relationship, are within the exclusive competence of the NLRC. On the other hand, petitioner alleged that due to the tortuous manner he was coerced into retirement, it is the RTC and not the NLRC which has exclusive jurisdiction over his counterclaims. ISSUE Whether or not the RTC has jurisdiction of the present case. HELD The SC held that it is the RTC which has jurisdiction by virtue of R.A. 8799. Section 5(c) of P.D. 902-A (as amended by R.A. 8799, the Securities Regulation Code) previously applies to a corporate of ficer’s dismissal. For a corporate officer’s dismissal is always a corporate act and/or an intra -corporate controversy and that its nature is not altered by the reason or wisdom which the Board of Directors may have in taking such action. With regard to petitioner’s claim for unpaid salaries, unpaid share in net income, reasonable return on the stock ownership plan and other benefits for services rendered to Sky Vision, jurisdiction thereon pertains to the Securities Exchange Commission even if the complaint by a corporate officer includes money claims since such claims are actually part of the prerequisite of his position and, therefore, interlinked with his relations with the corporation. The question of remuneration involving a person who is not a mere employee but a stockholder and officer of the corporation is not a simple labor problem but a matter that comes within the area of corporate affairs and management, and is in fact a corporate controversy in contemplation of the Corporation Code. While petitioner’s counterclaims were filed on December 1, 1998, the second challenged order of the trial court denying respondent’s motion for reconsideration of the denial of its motion to dismiss was issued on October 9, 2000 at which time P. D. 902A had been amended by R.A. 8799 (approved on July 19, 2000) which mandated the transfer of jurisdiction over intra-corporate controversies, subject of the counterclaims, to RTCs. But even if the subject matter of the counterclaims is now cognizable by RTCs, the filing thereof against respondent is improper, it not being the real party-in-interest, for it is petitioner’s employer Sky Vision, respondent’s subsidiary. It cannot be gainsaid that a subsidiary has an independent and separate juridical personality, distinct from that of its parent company, hence, any claim or suit against the latter does not bind the former and vice versa. This Court is thus not convinced that the real party-in-interest with regard to the counterclaim for damages arising from the alleged tortuous manner by which petitioner was forced to retire as General Manager of Sky Vision is respondent. Petition is denied.

Heirs of Ramon Durano, Sr. v. Uy [344 SCRA 238 (Oct.24, 2000)]
Separate Juridical Personality Alter Ego: Piercing the Veil of Corporate Fiction

Facts: Ramon Durano III & wife instituted an action for damages against Uy, etc. accusing them of officiating a hate campaign against them by lodging complaints in the police for ‘invasion of property’; sending complaints to the Office of the Presiden t depicting them as oppressors, landgrabbers & usurpers; spreading false rumors & damaging tales w/c put them into public contempt & ridicule. In their answer, Uy, etc. lodged affirmative defenses, demanded the return of their property & made counterclaims for actual, moral & exemplary damages. They claim that in the first week of August 1970, they received mimeographed notices signed by Durano, Sr. informing them that the land they were tilling, formerly owned by Cepco was purchased by Durano & Co, directing them to immediately turn over the property. Even before they could vacate, Durano & Co. proceeded to bulldoze & destroy their property & fire at air even. September 15, 1970 Durano & Co. sold the property to Durano III who proceeded to register the lands in his name. They claim that they were deprived of their independent source of income, were made victims of serious violence & demanded damages for cost of improvements on the land that were destroyed. The Duranos moved for the dismissal of their complaint w/c the trial court granted w/o prejudice to the right of Uy, etc. to maintain their counterclaim. The counterclaim was later upheld. This decision was affirmed by the CA. Hence this petition.

Issue: WON Durano can invoke the doctrine of separate corporate personality to evade liability for damages Held: Denied & CA decision modified. The Duranos hinge their claim on the TCTs issued in the name of Durano III. Their validity was put into serious doubt by the ff: a) the certificates reveal the lack of registered title of Cepoc to the Properties; b) alleged reconstituted titles of Cepoc were not produced in evidence; c) deed of sale between Cepoc & Durano & Co. was unnotarized & thus unregisterable. Fraud in the issuance of a certificate of title may be raised only in an action expressly instituted for that purpose; and not collaterally as in an action for reconveyance & damages. The rule on indefeasibility of title – Torrens titles can only be attacked for fraud w/in 1 year from the date of issuance of the decree of registration; an action for reconveyance may prosper if a property wrongfully registered has not passed to an innocent purchaser for value. The purchase of Durano & Co. could not be said to have been in good faith since it is not disputed that Durano III acquired the property w/ full knowledge of Uy’s occupancy t hereon. Uy’s action for reconveyance will prosper, it being clear that the property, wrongfully registered in the name of Durano III, has not passed to an innocent purchaser for value. Notarization of the deed of sale is essential to its registrability, & the action of the RD in allowing the registration of the unacknowledged deed of sale was unauthorized & did not render validity to the registration of the document. A buyer who could not have failed to know or discover that the land sold to him was in the adverse possession of another is a buyer in bad faith. A purchaser cannot just close his eyes to facts w/c should put a reasonable man upon his guard, such as when the subject of the sale is in the possession of persons other than the seller. Uy & company were in open possession & occupancy of the properties when Durano & Co. supposedly purchased the same from Cepoc. In applying the instrumentality or alter ego doctrine, the courts are concerned w/ reality & not form, w/ how the corp operated & the individual defendant’s relationship to that operation. Whether a corporation is a mere alter ego is purely one of fact. Shortly after the sale by Cepco to Durano & Co., the latter sold the property to Durano III, who immediately procured the registration of the property in his name. Obviously, Durano & Co. was used by Durano III,etc. as an instrumentality to appropriate the disputed property for themselves. Test to enable piercing of the veil, except in express agency, estoppel or direct tort: a) Control, not mere majority or complete domination; b)Such control must have e=been used by the defendant to commit fraud or wrong, etc.; c)The aforesaid control & breach of duty must approximately cause the injury or unjust loss complained of. • Sec.8 Rule 51 indicates that the CA is not limited to reviewing only those errors assigned by appellant but also those closely related to or dependent on an assigned error. CA is imbued w/ sufficient discretion to review matters. • Ordinary acquisitive prescription, in the case of immovable property, requires possession of the thing in good faith & w/ just title for a period of 10 years. • Remedies of an owner on whose land somebody has built in bad faith: a) appropriate what has been built w/o any obligation to pay indemnity; b) demand that the builder remove what he had built; c) compel the builder to pay the value of the land. In any case, landowner is entitled to damages (Art.451)

PNB vs. RITRATTO GROUP FACTS:  May 29, 1996: PNB International Finance Ltd. (PNB-IFL) a subsidiary company of PNB, organized and doing business in Hong Kong, extended a letter of credit in favor of the Ritratto Group, Inc. (Ritartto) in the amount of US$300K secured by real estate mortgages constituted over 4 parcels of land in Makati City September 1996: increased successively to US$1,140,000.00 November 1996: to US$1,290,000.00 February 1997: US$1,425,000.00 April 1998: decreased to US$1,421,316.18 Ritratto Group, Inc. made repayments of the loan incurred by remitting those amounts to their loan account with PNB-IFL in Hong Kong. April 30, 1998: outstanding amounted to US$1,497,274.70 PNB-IFL, through its attorney-in-fact PNB, notified them of the foreclosure of all the real estate mortgages and that the properties subjected May 25, 1999: Ritratto Group, Inc filed a complaint for injunction with prayer for the issuance of a writ of preliminary injunction and/or temporary restraining order before the RTC. -granted 72-hour TRO

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RTC and CA: dismissed motion to dismiss PNB-IFL, is a wholly owned subsidiary of defendant Philippine National Bank, the suit against the defendant PNB is a suit against PNB-IFL Rittratto: entire credit facility is void as it contains stipulations in violation of the principle of mutuality of contracts ISSUE: W/N PNB is an alter ego of PNB-IFL HELD: NO. Petition is granted

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PNB is an agent with limited authority and specific duties under a special power of attorneyincorporated in the real estate mortgage. not privy to the loan contracts entered into by PNB-IFL. mere fact that a corporation owns all of the stocks of another corporation, taken alone is not sufficient to justify their being treated as one entity. If used to perform legitimate functions, a subsidiary's separate existence may be respected, and the liability of the parent corporation as well as the subsidiary will be confined to those arising in their respective business. general rule the stock ownership alone by one corporation of the stock of another does not thereby render the dominant corporation liable for the torts of the subsidiary unless the separate corporate existence of the subsidiary is a mere sham, or unless the control of the subsidiary is such that it is but an instrumentality or adjunct of the dominant corporation. The Circumstance rendering the subsidiary an instrumentality (common circumstances) (a) The parent corporation owns all or most of the capital stock of the subsidiary. (b) The parent and subsidiary corporations have common directors or officers. (c) The parent corporation finances the subsidiary. (d) The parent corporation subscribes to all the capital stock of the subsidiary or otherwise causes its incorporation. (e) The subsidiary has grossly inadequate capital. (f) The parent corporation pays the salaries and other expenses or losses of the subsidiary. (g) The subsidiary has substantially no business except with the parent corporation or no assets except those conveyed to or by the parent corporation. (h) In the papers of the parent corporation or in the statements of its officers, the subsidiary is described as a department or division of the parent corporation, or its business or financial responsibility is referred to as the parent corporation's own. (i) The parent corporation uses the property of the subsidiary as its own. (j) The directors or executives of the subsidiary do not act independently in the interest of the subsidiary but take their orders from the parent corporation. (k) The formal legal requirements of the subsidiary are not observed.



PNB vs. RITRATTO GRP FACTS: PNB-IFL, a subsidiary company of PNB extended credit to Ritratto in the amount $300,000 secured by the real estate mortgages on two parcels of land located in Makati. Said credit was increased until April 1998. Respondent’s outstandi ng obligations up to that time stood at $1,497,274.40. Pursuant to the terms of the mortgage, PNB-IFL thru PNB, foreclosed the property and were subject to public auction. Respondents filed a complaint for injunction with prayer for the issuance of a writ of preliminary injunction and/or temporary restraining order. PNB filed a motion to dismiss on the grounds of failure to state a cause of action and the absence of any privity between respondents and petitioner. Trial Court issued the writ of preliminary i njunction and denied PNB’s motion to dismiss. In the impugned decision, the CA dismissed the petition for certiorari and prohibition. ISSUE: Whether or not PNB is privy to the loan contracts entered into by respondent & PNB-IFL. RULING: No. The contract questioned is one entered into between responded and PNB-IFL. Petitioner was admittedly an agent of the latter who acted as an agent with limited authority and specific duties under a special power of attorney incorporated in the real estate mortgage. It is not privy to the loan contracts entered into by them. Yet, despite the recognition that PNB is a mere agent, the respondents, in their complaint, prayed that PNB be ordered to recompute the scheduling accordance with the terms and conditions in the documents evidencing the credit facilities, and crediting the amount previously paid to PNB by respondent.

The mere fact that a corporation owns all of the stocks of another corporation, taken alone is not sufficient to justify their being treated as one entity. If used to perform legitimate functions, a subsidiary’s separate existence may be respected, and the liability of the parent corporation as well as the subsidiary will be confined to those arising in their respective business. The courts may, in the exercise of judicial discretion, step in to prevent the abuses of separate entity privilege and pierce the veil of corporate entity.

SUNIO V NLRC (1984) EM Ramos & Co., Inc (EMRACO) and Cabugao Ice Plant, Inc. (CIPI), sister corporations, sold an ice plant to Rizal Development and Finance, Corp. (RDFC). To secure RDFC’s payment of the purchase price, the ice plant was mortgaged to EMRACO -CIPI. Because of the sale, EMRACO-CIPI terminated all of their employees, including private respondents. Later, RDFC sold the ice plant, subject to the mortgage in favor of EMRACO-CIPI, to petitioner Ilocos Commercial Corp. (ICC). When RDFC and ICC defaulted on the payment of the balance of the purchase price, EMRACO-CIPI extrajudicially foreclosed the ice plant. It then sold it to Nilo Villanueva, subject to RDFC’s right of redemption. Nilo Villanueva rehired private respondents . When RDFC redeemend the ice plant, private respondents were again dismissed. Thus, the latter filed complaints against the petitioner corporation, and its President and General manager, Alberto Sunio, for illegal dismissal. The Assistance Regional Director of the Ministry of Labor and Employment ordered petitioners to reinstate private respondents. NLRC affirmed. Petitioner Sunio, who owned ½ of ICC, was made jointly and severally liable with ICC and CIPI for the payment of backwages. RATIO: A corporation is invested by law with a personality separate and distinct from those of the persons composing it as well as from that of any other legal entity to which it may be related. Mere ownership by a single stockholder or by another corporation of all or nearly all of the capital stock of a corporation is not itself sufficient ground for disregarding the separate corporate personality. Therefore, Sunio should not have been made personally liable for the payment of back wages to private respondents.

G.R. No. L-12719

May 31, 1962

THE COLLECTOR OF INTERNAL REVENUE, petitioner, vs. THE CLUB FILIPINO, INC. DE CEBU, respondent. FACTS: This is a petition to review the decision of the Court of Tax Appeals, reversing the decision of the Collector of Internal Revenue, assessing against and demanding from the "Club Filipino, Inc. de Cebu", the sum of P12,068.84 as fixed and percentage taxes, surcharge and compromise penalty, allegedly due from it as a keeper of bar and restaurant. As found by the Court of Tax Appeals, the "Club Filipino, Inc. de Cebu," (Club, for short), is a civic corporation organized under the laws of the Philippines with an original authorized capital stock of P22,000.00, which was subsequently increased to P200,000.00, among others, to it "proporcionar, operar, y mantener un campo de golf, tenis, gimnesio (gymnasiums), juego de bolos (bowling alleys), mesas de billar y pool, y
todaclase de juegos no prohibidosporleyesgenerales y ordenanzasgenerales; y desarollar y cultivar deportes de todaclase y denominacioncualquierapara el recreo y entrenamientosaludable de susmiembros y accionistas" (sec. 2, Escriturade Incorporacion del Club Filipino, Inc. Exh. A). Neither in the articles or by-laws is

there a provision relative to dividends and their distribution, although it is covenanted that upon its dissolution, the Club's remaining assets, after paying debts, shall be donated to a charitable Philippine Institution in Cebu (Art. 27, Estatutos del Club, Exh. A-a.). The Club owns and operates a club house, a bowling alley, a golf course (on a lot leased from the government), and a bar-restaurant where it sells wines and liquors, soft drinks, meals and short orders to its members and their guests. The bar-restaurant was a necessary incident to the operation of the club and its golf-course. The club is operated mainly with funds derived from membership fees and dues. Whatever profits it had, were used to defray its overhead expenses and to improve its golf-course. In 1951.as a result of a capital surplus, arising from the re-valuation of its real properties, the value or price of which increased, the Club declared stock dividends; but no actual cash dividends were distributed to the stockholders. In 1952, a BIR agent discovered that the Club has never paid percentage tax on the gross receipts of its bar and restaurant, although it secured B-4, B-9(a) and B-7 licenses. The Club wrote the Collector, requesting for the cancellation of the assessment. The request having been denied, the Club filed the instant petition for review. ISSUES 1. Whether the respondent Club is liable for the payment of the sum of 12,068.84, as fixed and percentage taxes and surcharges prescribed in sections 182, 183 and 191 of the Tax Code, under which the assessment was made, in connection with the operation of its bar and restaurant, during the periods mentioned above Whether it is liable for the payment of the sum of P500.00 as compromise penalty.

2.

3.

WON, Club Filipino is a stock corporation

RULING 1. No. Section 182, of the Tax Code states, "Unless otherwise provided, every person engaging in a business on which the percentage tax is imposed shall pay in full a fixed annual tax of ten pesos for each calendar year or fraction thereof in which such person shall engage in said business." Section 183 provides in general that "the percentage taxes on business shall be payable at the end of each calendar quarter in the amount lawfully due on the business transacted during each quarter; etc." And section 191, same Tax Code, provides "Percentage tax . . . Keepers of restaurants, refreshment parlors and other eating places shall pay a tax three per centum, and keepers of bar and cafes where wines or liquors are served five per centum of their gross receipts . . .". It has been held that the liability for fixed and percentage taxes, as provided by these sections, does not ipso facto attach by mere reason of the operation of a bar and restaurant. For the liability to attach, the operator thereof must be engaged in th e business as a barkeeper and restaurateur . The plain and ordinary meaning of business is restricted to activities or affairs where profit is the purpose or livelihood is the motive, and the term business when used without qualification, should be construed in its plain and ordinary meaning, restricted to activities for profit or livelihood (The Coll. of Int. Rev. v. Manila Lodge No. 761 of the BPOE [Manila Elks Club] & Court of Tax Appeals, G.R. No. L-11176, June 29, 1959 Having found as a fact that the Club was organized to develop and cultivate sports of all class and denomination, for the healthful recreation and entertainment of its stockholders and members; that upon its dissolution, its remaining assets, after paying debts, shall be donated to a charitable Philippine Institution in Cebu; that it is operated mainly with funds derived from membership fees and dues; that the Club's bar and restaurant catered only to its members and their guests; that there was in fact no cash dividend distribution to its stockholders and that whatever was derived on retail from its bar and restaurant was used to defray its overall overhead expenses and to improve its golf-course (cost-plus-expenses-basis), it stands to reason that the Club is not engaged in the business of an operator of bar and restaurant (same authorities, cited above ). It is conceded that the Club derived profit from the operation of its bar and restaurant, but such fact does not necessarily convert it into a profit-making enterprise. . That a Club makes some profit, does not make it a profit-making Club. As has been remarked a club should always strive, whenever possible, to have surplus (JesusSacredHeartCollege v. Collector of Int. Rev., G.R. No. L-6807, May 24, 1954; Collector of Int. Rev. v. Sinco Educational Corp., G.R. No. L-9276, Oct. 23, 1956).1äwphï1.ñët 2. No. Having arrived at the conclusion that respondent Club is not engaged in the business as an operator of a bar and restaurant, and therefore, not liable for fixed and percentage taxes , it follows that it is not liable for any penalty, much less of a compromise penalty. 3. The facts that the capital stock of the respondent Club is divided into shares, does not detract from the finding of the trial court that it is not engaged in the business of operator of bar and restaurant. What is determinative of whether or not the Club is engaged in such business is its object or purpose, as stated in its articles and by-laws. It is a familiar rule that the actual purpose is not controlled by the corporate form or by the commercial aspect of the business prosecuted, but may be shown by extrinsic evidence, including the by-laws and the method of operation. From the extrinsic evidence adduced, the Tax Court concluded that the Club is not engaged in the business as a barkeeper and restaurateur. Moreover, for a stock corporation to exist, two requisites must be complied with, to wit: (1) a capital stock divided into shares and (2) an authority to distribute to the holders of such shares, dividends or allotments of the surplus profits on the basis of the shares held (sec. 3, Act No. 1459). In the case at bar, nowhere in its articles of incorporation or by-laws could be found an authority for the distribution of its dividends or surplus profits. Strictly speaking, it cannot, therefore, be considered a stock corporation, within the contemplation of the corporation law. A tax is a burden, and, as such, it should not be deemed imposed upon fraternal, civic, non-profit, nonstock organizations, unless the intent to the contrary is manifest and patent" (Collector v. BPOE Elks Club, et al., supra), which is not the case in the present appeal. Having arrived at the conclusion that respondent Club is not engaged in the business as an operator of a bar and restaurant, and therefore, not liable for fixed and percentage taxes, it follows that it is not liable for any penalty, much less of a compromise penalty. WHEREFORE, the decision appealed from is affirmed without costs. SHIPSIDE INCORPORATED, petitioner, vs. THE HON. COURT OF APPEALS [Special Former TwelfthDivision], HON. REGIONAL TRIAL COURT, BRANCH 26 (San Fernando City, La Union) & THE REPUBLICOF THE PHILIPPINES, respondents. G.R. No. 143377, February 20, 2001 Facts: On October 29, 1958, Original Certificate No. 0-381 was issued in favour of Rafael Galvez, over four parcels of land. On April 11, 1960, Lots No. 1 and 4 were sold by Rafael Galvez to Filipina Mamaril, Cleopatra Llana, Regina Bustos, and Erlinda Balatbat, with deed of sale inscribed as entry no. 9115OCT 0-381 on August 10, 1960. Consequently, Transfer Certificate No. T-4304 was issued in favour of the buyers covering Lots No. 1 and 4.On August 16, 1960, Mamaril, et al. sold Lots No. 1 and 4 to Lepanto Consolidated

Mining Company. The deed of sale covering the aforesaid property was inscribed as Entry No. 9173 on TCT No. T-4304. Subsequently, Transfer Certificate No. T-4314 was issued in the name of Lepanto Consolidated Mining Company as owner of Lots 1 and 4. On February 1, 1963, unknown to Lepanto Consolidated Mining Company, the Court of First Instance of La Union, Second Judicial District, issued an order in Land registration Case No. N-361 entitled “Rafael Galvez, Applicant, Eliza Bustos, et al., Parties-In-Interest; Republic of the Philippines, Movant” declaring OCT No. 0-381 of the Registry of Deeds for the Province of La Union issued in the name of Rafel Galvez, null and void, and ordered the cancellation thereof. On October 28, 1963, Lepanto Consolidated Mining Company sold to the petitioner Lots No. 1 and 4, with the deed being entered in TCT No. 4314 as entry No. 12381. Transfer Certificate of Title No T-5710was thus issued in favour of the petitioner which starting since then exercised proprietary rights over Lots No. 1 and 4. In the meantime, Rafael Galvez filed his motion for reconsideration against the order by the trial court declaring OCT No. 0-381 null and void. The motion was denied on January 25, 1965. On appeal, the Court of Appeals ruled in favor of the Republic of the Philippines in a resolution promulgated on August 14,1973 in CA-G.R. No. 36061`-R.Thereafter, the court of Appeals, issued an Entry of judgement, certifying that its decision dated August14, 1973 became final and executor on October 23, 1973.On April 22, 1974, the trial court in L.R.C. Case No. N-361 is sued a writ of execution of the judgement which was served on the Register of Deeds, San Fernando, La Union on April 29, 1974 On January 14, 1999, the office of the Solicitor General received a letter dated January 11, 1999, fromMr. Victor Floresca, VicePresident, John Hay Poro Point Development Corporation, stating that theaforementioned orders and decision of the trial court in L.R.C. No. N-361 have not been executed by the Register of Deeds, San Fernando, La Union despite receipt of the writ of execution. On April 21, 1999, the Office of the Solicitor General filed a complaint for the revival of judgment and cancellation of titles before the Regional Trial Court of the First judicial Region (Branch 26, San Fernando, La Union) docketed therein as Civil Case No., 6346 entitled, “Republic of the Philippines, Plaintiff, vs. Heirs of Rafael Galvez, represented by Teresita Tan, Reynaldo Mamaril, Elisa Bustos, Erlinda Balatbat, Regina Bustos, Shipside Incorporated and the Register of Deeds of La Union, defendants.” In its complaint in Civil Case No. 6346, the Solicitor General argued that since the trial court in LRC Caseno. 361 had ruled and declared OCT No. 0381 to be null and void, which ruling was subsequently affirmed by the court of appeals, the defendantssuccessors-in-interest of Rafael Galvez have no validtitle over the property covers by OCT No. 0-381, and the subsequent Torrens titles issued in their names should be consequently cancelled. On July 22, 1999, petitioner Shipside, Inc. Filed its Motion to Dismiss, based on the following grounds:(1) the complaint stated no cause of action because only final and executor judgements may be subject of an action for revival for judgment; (2) the plaintiff is not the real party-in-interest because the real property covered by the Torrens titles sought to be cancelled, allegedly part of Camp Wallace (Wallace Air Station), were under the ownership and administration of the Bases Conversion Development Authority under RA No. 7227; (3) Plaintiff’s cause of action is barred by prescription; (4) twenty-five years having lapsed since the issuance of the writ of execution, no action for revival of judgment may be instituted because under Paragraph 3 of Article 1144 of the Civil Code, such action may be brought only within ten (10) years from the time the judgement had been rendered. On August 31, 1999, the trial court denied petitioner’s motion to dismiss and on October 14, 1999, its motion for reconsideration was likewise turned down. On October 21, 1999, petitioner instituted a petition for certiorari and prohibition with the Court of Appeals, docketed therein as CA-G.R. SP No. 55535, on the ground that the orders of the trial court denying its motion to dismiss and its subsequent motion for reconsideration were issued in excess of jurisdiction. On November 4, 1999, the court of Appeals dismissed the petition in CA-G.R. SP No. 55535 on the ground that the verification and certification in the petition, under the signature of Lorenzo Balbin, Jr.,was made without authority, there being no proof therein that Balbin was authorized to institute the petition for and in behalf and of petitioner. On May 23, 2000, the Court of Appeals denied petitioner’s motion for reconsideration on the grounds that: (1) a complaint filed on behalf of a corporation can be made only if authorized by its Board of Directors, and in the absence thereof, the petition cannot prosper and be granted due course; and (2) the petitioner was unable to show that it had substantially complied with the rule requiring proof of authority to institute an action or proceeding. In support of its petition, Shipside, Inc. asseverates that: 1. The honourable Court of Appeals gravely abused its discretion in dismissing the petition when itmade a conclusive legal presumption that Mr. Balbin had no authority to sign the petitiondespite the clarity of laws, jurisprudence and Secretary’ certificate to the contrary. 2. The honourable Court of Appeals abused its discretion when it dismissed the petition, in effectaffirming the grave abuse of discretion committed by the lower court, when it refused to dismissthe 1999 Complaint for Revival of a 1973 judgment, in violation of clear laws and jurisprudence.

Issues: (1) Whether an authorization from petitioner’s Board of Directors is still required in order for its resident manager to institute or commence a legal action for and in behalf of the corporation; (2) Whether the instant petition should be allowed; and (3) Whether the republic of the Philippines can maintain action for revival of judgment therein.

Held: (1) Yes. The court of Appeals dismissed the petition for certiorari on the ground that Lorenzo Balbin, the resident manager for petitioner, who was the signatory in the verification and certification on non- forum shopping, failed to show proof that he was authorized by petitioner’s board of directors to file such a petition. A corporation, such as petitioner, has no power except those expressly conferred on it by the Corporation Code and those that are implied or incidental to its existence. In turn, a corporation exercises said powers through its board of directors and /or its duly authorized officers and agents. Thus, it has been observed that the power of a corporation to sue and be sued in any court is lodged with the board of directors that exercises its corporate powers. In turn, physical acts of the corporation, like the signing of documents, can be performed only by natural persons duly authorized for the purpose by the corporate by-laws or by a specific act of the board of directors to file said petition. On October 21, 1999, when Balbin filed the petition, there was no proof attached thereto that Balbin was authorized to sign the verification and non-forum shopping certification therein. As a consequence, the petition was dismissed by the Court of Appeals. However, subsequent to such dismissal, petitioner filed a motion for reconsideration, attaching to said motion a certificate issued by its board secretary stating that on October 11, 1999, or ten days prior to the filing of the petition, Balbin had been authorized by petitioner’s board of directors to file said petition. Verification is simply intended to secure an assurance that the allegations in the pleading are true and correct and not the product of the imagination or a matter of speculation, and that the pleading is filed in good faith. The court may order the correction of the pleading if verification is lacking or act on the pleading although it is not verified, if the attending circumstances are such that strict compliance with the rules may be dispensed with in order that the ends of justice may thereby be served. On the other hand, the lack of certification against forum shopping is generally incurable by the submission thereof after filing of the petition. Section 5, Rule 45 of the 1997 Rules of Civil Procedure provides that the failure of the petitioner to submit the required documents that should accompany the petition, including the certification against forum shopping, shall be sufficient ground for the dismissal thereof. The same rule applies to certifications against forum shopping signed by a person on behalf of a corporation which are unaccompanied by proof that said signatory is authorized to file a petition on behalf of the corporation. (2) Yes. In the instant case, the merits of the petitioner’s case should be considered special circumstances or compelling reasons that justify tempering the requirement in regard to the certificate of non-forum shopping. With more reason should the instant petition be allowed since the petitioner did submit a certification on non-forum shopping, failing only to show proof that the signatory was authorized to do so. That petitioner subsequently submitted a secretary’s certificate attesting that Balbin was authorized to file an action. It must also be kept in mind that while the requirement of the certificate of non-forum shopping is mandatory, nonetheless the requirements should not be interpreted literally and thus defeat the objective of preventing the undesirable practice of forumshopping. Lastly, technical rules of procedure should be used to promote, not frustrate justice. While the swift unclogging of court dockets is a laudable objective, the granting of substantial justice is an even more urgent ideal.(3) No. The action instituted by the Solicitor General in the trial court is one for revival of judgment which is governed by Article 1144 (3) of the Civil Code and Section 6, Rule 39 of the 1997 Rules on Civil Procedure. Article1144 (3) provides that an action upon a judgement “must be brought within 10 years from the time the right of action accrues.” On the other hand, Section 6, Rule 39 provides that a final and executor judgment or order may be executed on motion within five (5)years from the date of its entry, but that after the lapse of such time, and before it is barred by the statute of limitations, a judgement may be enforced by action. Taking those two provisions into consideration, it is plain that an action for revival of judgment must be brought within ten years from the time said judgment becomes final. From the records of the case, it is clear that the judgment sought to be revived became final on October 23, 1973. On the other hand, the action for revival of judgment was instituted only in1999, or more than 25 uyears after the judgment had become final. Hence, the action is abarred by extinctive prescription considering that such an action can be instituted only within ten (10)years from the time the cause of action accrues.

The Solicitor-general’s contention that the state’s cause of action in the cancellation of the land title issued to petitioner’s predecessor-in-interest is imprescriptible because it is included in Camp Wallace, which belong to the government, is misleading. While it is true that the prescription does not run against the State, the same may not be invoked by the government in this case since it is no longer interested in the subject matter. While Camp Wallace may have belonged to the Government at the time Rafael Galvez’s title was ordered cancelled in Land Registration Case no N-361, the same no longer holds true today. With the transfer of Camp Wallace to the BCDA, the government no longer has a right or interest to protect. Consequently, the republic is not a real party in interest and it may not institute the instant action. Nor may it raise the defense of imprescriptibility the same being applicable only in cases where the government is a party in interest. Under section 2 of Rule 3 of the 1997 Rules of Civil procedure, “every action must be prosecuted or defined in the name of the real party in interest.” And to qualify a person to be a real party in interest whose name inaction must be prosecuted, he must appear to be the present real owner of the right sought to be enforced (Pioneer Insurance v. CA, 175 SCRA 668 [1989]). A real party in interest is the party who stands to be benefitted or injured by the judgment in the suit, or the party entitled to the avails of the suit. And by real interest is meant a present substantial interest, as distinguished from a mere expectancy, or a future, contingent, subordinate or consequential interest (Ibonillav. Province of Cebu, 210 SCRA 526 [1992]). Being the owner of the areas covered by Camp Wallace, it is the Bases Conversion and Development Authority, not the Government, which stands to be benefited if the land covered by TCT No. T5710 issued in the name of petitioner is cancelled.

Roman Catholic Apostolic Administrator of Davao V. LRC (1957) FACTS:  October 4, 1954: Mateo L. Rodis, a Filipino citizen and resident of the City of Davao, executed adeed of sale of a parcel of land in favor of the Roman Catholic Apostolic Administrator of Davao Inc.(Roman), a corporation sole organized and existing in accordance with Philippine Laws, with Msgr. Clovis Thibault, a Canadian citizen, as actual incumbent. The Register of Deeds of Davao for registration, having in mind a previous resolution of the CFI in Carmelite Nuns of Davao were made to prepare an affidavit to the effect that 60% of the members of their corp. were Filipino citizens when they sought to register in favor of their congregation of deed of donation of a parcel of land, required it to submit a similar affidavitdeclaring the same. June 28, 1954: Roman in the letter expressed willingness to submit an affidavit but not in the same tenor as the Carmelite Nuns because it had five incorporators while as a corporation sole it has only one and it was ownership through donation and this was purchased As the Register of the Land Registration Commissioner (LRC) : Deeds has some doubts as to the registerability, the matter was referred to the Land Registration Commissioner en consulta for resolution (section 4 of Republic Act No. 1151) LRC: In view of the provisions of Section 1 and 5 of Article XIII of the Philippine Constitution, the vendee was not qualified to acquire private lands in the Philippines in the absence of proof that at least 60 per centum of the capital, property, or assets of the Roman Catholic Apostolic Administrator of Davao, Inc., was actually owned or controlled by Filipino citizens, there being no question that the present incumbent of the corporation sole was a Canadian citizen ordered the Registered Deeds of Davao to deny registration of the deed of sale in the absence of proof of compliance with such condition action for mandamus was instituted by Roman alleging the land is held in true for the benefit of the Catholic population of a place





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ISSUE: W/N Roman is qualified to acquire private agricultural lands in the Philippines pursuant to the provisions of Article XIII of the Constitution HELD: YES. Register of Deeds of the City of Davao is ordered to register the deed of sale  A corporation sole consists of one person only, and his successors (who will always be one at a time), in some particular station, who are incorporated by law in order to give them some legal capacities and advantages, particularly that of perpetuity, which in their natural persons they could not have had. In this sense, the king is a sole corporation; so is a bishop, or dens, distinct from their several chapters corporation sole 1. composed of only one persons, usually the head or bishop of the diocese, a unit which is not subject to expansion for the purpose of determining any percentage whatsoever

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only the administrator and not the owner of the temporalities located in the territory comprised by said corporation sole and such temporalities are administered for and on behalf of the faithful residing in the diocese or territory of the corporation sole has no nationality and the citizenship of the incumbent and ordinary has nothing to do with the operation, management or administration of the corporation sole, nor effects the citizenship of the faithful connected with their respective dioceses or corporation sole. Constitution demands that in the absence of capital stock, the controlling membership should be composed of Filipino citizens. (Register of Deeds of Rizal vs. Ung Sui Si Temple) undeniable proof that the members of the Roman Catholic Apostolic faith within the territory of Davao are predominantly Filipino citizens presented evidence to establish that the clergy and lay members of this religion fully covers the percentage of Filipino citizens required by the Constitution fact that the law thus expressly authorizes the corporations sole to receive bequests or gifts of real properties (which were the main source that the friars had to acquire their big haciendas during the Spanish regime), is a clear indication that the requisite that bequests or gifts of real estate be for charitable, benevolent, or educational purposes, was, in the opinion of the legislators, considered sufficient and adequate protection against the revitalization of religious landholdings. as in respect to the property which they hold for the corporation, they stand in position of TRUSTEES and the courts may exercise the same supervision as in other cases of trust

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Philippine Long Distance Telephone Company (PLDT) vs. National Telecommunications Commission (NTC), G.R. 152685, December 4, 2007 Facts: This case pertains to Section 40 (e) of the Public Service Act (PSA), as amended on March 15, 1984, pursuant to Batas Pambansa Blg. 325, which authorized the NTC to collect from publictelecommunications companies Supervision and Regulation Fees (SRF) of PhP 0.50 for every PhP 100 or a fraction of the capital and stock subscribed or paid for of a stock corporation, partnership or single proprietorship of the capital invested, or of the property and equipment, whichever is higher. PLDT wanted the July 28, 1999 Decision in G.R. No. 127937 clarified. It posited that the SRF should be based on the par value in consonance with our holding in Philippine Long Distance Telephone Company v. Public Service Commission, and that the premiums on issued shares should not be included in the valuation of the outstanding capital stock. Through the November 15, 1999 Resolution in G.R. No. 127937, we elucidated that the July 28, 1999 decision was not in conflict with the ruling in Philippine Long Distance Telephone Company since it never enunciated in the said case that the phrase “capital stock subscribed or paid” must be determined at par value. It is reiterated that the term “capital stocksubscribed or paid” is the amount that the corporation receives, inclusive of the premiums, if any, in consideration of the original issuance of the shares. PLDT now contends that the disposition in G.R. No. 127937 excluded stock dividends from the SRF coverage, while the NTC asserts the contrary. Also, PLDT questions the assessments for violating the disposition in G.R. No. 127937 since these assessments were identical to the previous assessments from 1988 which were questioned by PLDT in G.R. No. 127937 for being based on the market value of its outstanding capital stock. Issue: Whether or not the appellate court erred in holding that the assessments of the NTC were contrary to our Decision in G.R. No. 127937 entitled NTC v. Honorable Court of Appeals Held: No. The term “capital” and other terms used to describe the capital structure of a c orporation are of universal acceptance and their usages have long been established in jurisprudence. The capital subscribed is the total amount of the capital that subscribers or shareholders have agreed to take and pay for, which need not necessarily by, and can be more than, the par value of the shares. In fine, it is the amount that the corporation receives, inclusive of the premiums if any, in consideration of the original issuance of the shares. In the case of stock dividends, it is the amount that the corporation transfers from its surplus profit account to its capital account. It is the same amount that can be loosely termed as the “ trust fund” of the corporation. The “Trust Fund” doctrine considers this subscribed capital as a trust fund for the payment of the debts of the corporation, to which the creditors may look for satisfaction. Until the liquidation of the corporation, no part of the subscribed capital may be returned or released to the stockholder without violating this principle. Thus, dividends must never impair the subscribed capital; subscription commitments cannot be condoned or remitted; nor can the corporation buy its own shares using the subscribed capital as the considerations therefore.

WILSON P. GAMBOA vs. FINANCE SECRETARY TEVES G.R. No. 176579, promulgated June 28, 2011 I. THE FACTS This is a petition to nullify the sale of shares of stock of Philippine Telecommunications Investment Corporation (PTIC) by the government of the Republic of the Philippines, acting through the Inter-Agency Privatization Council (IPC), to Metro Pacific Assets Holdings, Inc. (MPAH), an affiliate of First Pacific Company Limited (First Pacific), a Hong Kong-based investment management and holding company and a shareholder of the Philippine Long Distance Telephone Company (PLDT). The petitioner questioned the sale on the ground that it also involved an indirect sale of 12 million shares (or about 6.3 percent of the outstanding common shares) of PLDT owned by PTIC to First Pacific. With the this sale, First Pacific’s common shareholdings in PLDT increased from 30.7 percent to 37 percent, thereby increasing the total common shareholdings of foreigners in PLDT to about 81.47%. This, according to the petitioner, violates Section 11, Article XII of the 1987 Philippine Constitution which limits foreign ownership of the capital of a public utility to not more than 40%.

II. THE ISSUE Does the term “capital” in Section 11, Article XII of the Constitution refer to the total common shares only, or to the total outstanding capital stock (combined total of common and non-voting preferred shares) of PLDT, a public utility?

III. THE RULING [The Court partly granted the petition and held that the term “capital” in Section 11, Article XII of the Constitution refers only to shares of stock entitled to vote in the election of directors of a public utility, or in the instant case, to the total common shares of PLDT.] 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 term “capital” in Section 11, Article XII of the Constitution refers only to shares of stock entitled to vote in the elec tion of directors, and thus in the present case only to common shares, and not to the total outstanding capital stock comprising both common and non-voting preferred shares [of PLDT]. xxx xxx xxx

Indisputably, one of the rights of a stockholder is the right to participate in the control or management of the corporation. This is exercised through his vote in the election of directors because it is the board of directors that controls or manages the corporation. 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. xxx. 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. Ho wever, 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. xxx xxx xxx

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+.” xxx xxx xxx

To construe broadly the term “capital” as the total outstanding capital stock, including both common and nonvoting 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. 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. xxx xxx xxx

[O]nly holders of common shares can vote in the election of directors [of PLDT], 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 PLDT’s Articles of Incorporat ion, 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 PLDT’s 2010 General Information Sheet (GIS), which is a document required to be submitted annually to the Securities and Exchange Commission, foreigners hold 120,046,690 common shares of PLDT whereas Filipinos hold only 66,750,622 common shares. In other words, foreigners hold 64.27% of the total number of PLDT’s common shares, while Filipinos hold only 35.73%. Since holding a majority of the common shares equates to control, it is clear that foreigners exercise control over PLDT. Such amount of control unmistakably exceeds the allowable 40 percent limit on foreign ownership of public utilities expressly mandated in Section 11, Article XII of the Constitution. As shown in PLDT’s 2010 GIS, as submitted to the SEC, the par value of PLDT common shares is P5.00 per share, whereas the par value of preferred shares is P10.00 per share. In other words, preferred shares have twice the par value of common shares but cannot elect directors and have only 1/70 of the dividends of common shares. Moreover, 99.44% of the preferred shares are owned by Filipinos while foreigners own only a minuscule 0.56% of the preferred shares. Worse, preferred shares constitute 77.85% of the authorized capital stock of PLDT while common shares constitute only 22.15%. This undeniably shows that beneficial interest in PLDT is not with the non-voting preferred shares but with the common shares, blatantly violating the constitutional requirement of 60 percent Filipino control and Filipino beneficial ownership in a public utility. 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 State’s 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 PLDT’s common shares, consti tuting a minority of the voting stock, and thus do not exercise control over PLDT; (3) preferred shares, 99.44% owned by Filipinos, have no voting rights; (4) preferred shares earn only 1/70 of the dividends that common shares earn; (5) preferred shares have twice the par

value of common shares; and (6) preferred shares constitute 77.85% of the authorized capital stock of PLDT and common shares only 22.15%. This kind of ownership and control of a public utility is a mockery of the Constitution. 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, 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, is a glaring confirmation by the market that control and beneficial ownership of PLDT rest with the common shares, not with the preferred shares. xxx xxx xxx

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.

Republic Planters Bank vs. Agana, Sr. [March 3, 1997]
Rights of Holders of Preferred Shares Legality of Interest Bearing Shares

1. Private respondent Robes Francisco Realty & Dev’t Corp. secured a loan from petitioner in the amount of P120,000.00. As part of the proceeds of the loan, preferred shares of stocks were issued to private respondent corporation. In other words, instead of giving the legal tender totaling to the full amount of the loan which is P120,000.00, petitioner lent such amount partially in the form of stock certificates numbered 3204 and 3205, each for 400 shares with a par value of P10.00 per share, or for P4,000 each, for a total of P8,000.00. Said stock certificates were in the name of private respondent Adalia Robes and Carlos Robes, who, however, subsequently endorsed his shares in favor of Adalia Robes. Said certificates of stock bear the following terms and conditions: 1. The right to receive a quarterly dividend of 1%, cumulative and participating. 2. That such preferred shares may be redeemed, by the system of drawing lots, at any time after 2 years from the date of issue at the option of the Corporation. Private respondents proceeded against petitioner and filed a complaint anchored on private respondents’ alleged rights to collect dividends under the preferred shares in question and to have petitioner redeem the same under the terms and conditions of the stock certificates. The trial court ordered the petitioner to pay private respondents the face value of the stock certificates as redemption price, plus 1% quarterly interest. Hence this petition. Issue: W/N respondents have the right to collect dividends and whether they can compel petitioner to redeem the preferred shares. Held: 1. A preferred share of stock is one which entitles the holder thereof to certain preferences over the holders of common stock. The preferences are designed to induce persons to subscribe for shares of a corporation. Preferred shares take a multiplicity of forms. The most common forms may be classified into two: (1) preferred shares as to assets; and (2) preferred as to dividends. The former is a share which gives the holder thereof the preference in the distribution of the assets of the corporation in case of liquidation; the latter is a share the holder of which is entitled to receive dividends on said share to the extent agreed upon before any dividends at all are paid to the holders of common stock. There is no guarantee, however, that the share will receive any dividends. 2. Preferences granted to preferred stockholders do not give them a lien upon the property of the corporation nor make them creditors of the corporation, the right of the former being always subordinate to the latter. Shareholders, both common and preferred are considered risk takers who invest capital in the business arid who can look only to what is left after corporate debts and liabilities are fully paid. 3. Redeemable shares are shares usually preferred, which by their terms are redeemable at a fixed date, or at the option of either issuing corporation, or the stockholder, or both at certain redemption price; redemption may not be made where the corporation is insolvent or if such redemption will cause insolvency or inability of the corporation to meet its debts as they mature. 4. While the stock certificates in the case at bar does allow redemption, the option to do so was clearly vested in the petitioner bank. The redemption is therefore optional. 5. The redemption of said shares cannot be allowed. The Central Bank made a finding that said petitioner has been suffering from chronic reserve deficiency, and that such finding resulted in the directive prohibiting the petitioner bank from redeeming any

preferred share, on the ground that said redemption would reduce the assets of the Bank to the prejudice of its depositors and creditors. Redemption of preferred shares was prohibited for a just and valid reason. 6. ”Interest bearing stocks”, on which the corporation agrees absolutely to pay interest before dividends are paid to common stockholders, is legal only when construed as requiring payment of interest as dividends from net earnings or surplus only.

Republic Planters Bank vs. Agana [GR 51765, 3 March 1997] Facts: On 18 September 1961, the Robes-Francisco Realty & Development Corporation (RFRDC) secured a loan from the Republic Planters Bank in the amount of P120,000.00. As part of the proceeds of the loan, preferred shares of stocks were issued to RFRDC through its officers then, Adalia F. Robes and one Carlos F. Robes. In other words, instead of giving the legal tender totaling to the full amount of the loan, which is P120,000.00, the Bank lent such amount partially in the form of money and partially in the form of stock certificates numbered 3204 and 3205, each for 400 shares with a par value of P10.00 per share, or for P4,000.00 each, for a total of P8,000.00. Said stock certificates were in the name of Adalia F. Robes and Carlos F. Robes, who subsequently, however, endorsed his shares in favor of Adalia F. Robes. Said certificates of stock bear the following terms and conditions: "The Preferred Stock shall have the following rights, preferences, qualifications and limitations, to wit: 1. Of the right to receive a quarterly dividend of 1%, cumulative and participating. xxx 2. That such preferred shares may be redeemed, by the system of drawing lots, at any time after 2 years from the date of issue at the option of the Corporation." On 31 January 1979, RFRDC and Robes proceeded against the Bank and filed a complaint anchored on their alleged rights to collect dividends under the preferred shares in question and to have the bank redeem the same under the terms and conditions of the stock certificates. The bank filed a Motion to Dismiss 3 private respondents' Complaint on the following grounds: (1) that the trial court had no jurisdiction over the subject-matter of the action; (2) that the action was unenforceable under substantive law; and (3) that the action was barred by the statute of limitations and/or laches. The bank's Motion to Dismiss was denied by the trial court in an order dated 16 March 1979. The bank then filed its Answer on 2 May 1979. Thereafter, the trial court gave the parties 10 days from 30 July 1979 to submit their respective memoranda after the submission of which the case would be deemed submitted for resolution. On 7 September 1979, the trial court rendered the decision in favor of RFRDC and Robes; ordering the bank to pay RFRDC and Robes the face value of the stock certificates as redemption price, plus 1% quarterly interest thereon until full payment. The bank filed the petition for certiorari with the Supreme Court, essentially on pure questions of law. Issue: 1. Whether the bank can be compelled to redeem the preferred shares issued to RFRDC and Robes. 2. Whether RFRDC and Robes are entitled to the payment of certain rate of interest on the stocks as a matter of right without necessity of a prior declaration of dividend. Held: 1. While the stock certificate does allow redemption, the option to do so was clearly vested in the bank. The redemption therefore is clearly the type known as "optional". Thus, except as otherwise provided in the stock certificate, the redemption rests entirely with the corporation and the stockholder is without right to either compel or refuse the redemption of its stock. Furthermore, the terms and conditions set forth therein use the word "may". It is a settled doctrine in statutory construction that the word "may" denotes discretion, and cannot be construed as having a mandatory effect. The redemption of said shares cannot be allowed. The Central Bank made a finding that the Bank has been suffering from chronic reserve deficiency, and that such finding resulted in a directive, issued on 31 January 1973 by then Gov. G. S. Licaros of the Central Bank, to the President and Acting Chairman of the Board of the bank prohibiting the latter from redeeming any preferred share, on the ground that said redemption would reduce the assets of the Bank to the prejudice of its depositors and creditors. Redemption of preferred shares was prohibited for a just and valid reason. The directive issued by the Central Bank Governor was obviously meant to preserve the status quo, and to prevent the financial ruin of a banking institution that would have resulted in adverse repercussions, not only to its depositors and creditors, but also to the banking industry as a whole. The directive, in limiting the exercise of a right granted by law to a corporate entity, may thus be considered as an exercise of police power. 2. Both Section 16 of the Corporation Law and Section 43 of the present Corporation Code prohibit the issuance of any stock dividend without the approval of stockholders, representing not less than two-thirds (2/3) of the outstanding capital stock at a regular or special meeting duly called for the purpose. These provisions underscore the fact that payment of dividends to a stockholder is not a matter of right but a matter of consensus. Furthermore, "interest bearing stocks", on which the corporation agrees absolutely to pay interest before dividends are paid to common stockholders, is legal only when construed as requiring payment of interest as dividends from net earnings or surplus only. In compelling the bank to redeem the shares and to pay the corresponding dividends, the Trial committed grave abuse of discretion amounting to lack or excess of jurisdiction in ignoring both the terms and conditions specified in the stock certificate, as well as the clear mandate of the law.

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