CORPO CASES III. Formation and Organization of A Private Corp.

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CASES: III. Formation & Org. of Private Corp.

G.R. No. 101897. March 5, 1993.
LYCEUM OF THE PHILIPPINES, INC., petitioner, vs. COURT OF APPEALS,
LYCEUM OF APARRI, LYCEUM OF CABAGAN, LYCEUM OF CAMALANIUGAN,
INC., LYCEUM OF LALLO, INC., LYCEUM OF TUAO, INC., BUHI LYCEUM,
CENTRAL LYCEUM OF CATANDUANES, LYCEUM OF SOUTHERN PHILIPPINES,
LYCEUM OF EASTERN MINDANAO, INC. and WESTERN PANGASINAN LYCEUM,
INC., respondents.
1. CORPORATION LAW; CORPORATE NAMES; REGISTRATION OF PROPOSED NAME
WHICH IS IDENTICAL OR CONFUSINGLY SIMILAR TO THAT OF ANY EXISTING
CORPORATION, PROHIBITED; CONFUSION AND DECEPTION EFFECTIVELY
PRECLUDED BY THE APPENDING OF GEOGRAPHIC NAMES TO THE WORD
"LYCEUM". The Articles of Incorporation of a corporation must, among other things, set out
the name of the corporation. Section 18 of the Corporation Code establishes a restrictive rule
insofar as corporate names are concerned: "Section 18. Corporate name. No corporate name
may be allowed by the Securities an Exchange Commission if the proposed name is identical or
deceptively or confusingly similar to that of any existing corporation or to any other name
already protected by law or is patently deceptive, confusing or contrary to existing laws. When
a change in the corporate name is approved, the Commission shall issue an amended certificate
of incorporation under the amended name." The policy underlying the prohibition in Section 18
against the registration of a corporate name which is "identical or deceptively or confusingly
similar" to that of any existing corporation or which is "patently deceptive" or "patently
confusing" or "contrary to existing laws," is the avoidance of fraud upon the public which
would have occasion to deal with the entity concerned, the evasion of legal obligations and
duties, and the reduction of difficulties of administration and supervision over corporations. We
do not consider that the corporate names of private respondent institutions are "identical with,
or deceptively or confusingly similar" to that of the petitioner institution. True enough, the
corporate names of private respondent entities all carry the word "Lyceum" but confusion and
deception are effectively precluded by the appending of geographic names to the word
"Lyceum." Thus, we do not believe that the "Lyceum of Aparri" can be mistaken by the general
public for the Lyceum of the Philippines, or that the "Lyceum of Camalaniugan" would be
confused with the Lyceum of the Philippines.
2. ID.; ID.; DOCTRINE OF SECONDARY MEANING; USE OF WORD "LYCEUM," NOT
ATTENDED WITH EXCLUSIVITY. It is claimed, however, by petitioner that the word
"Lyceum" has acquired a secondary meaning in relation to petitioner with the result that word,
although originally a generic, has become appropriable by petitioner to the exclusion of other
institutions like private respondents herein. The doctrine of secondary meaning originated in the
field of trademark law. Its application has, however, been extended to corporate names sine the
right to use a corporate name to the exclusion of others is based upon the same principle which
underlies the right to use a particular trademark or tradename. In Philippine Nut Industry, Inc. v.
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Standard Brands, Inc., the doctrine of secondary meaning was elaborated in the following
terms: " . . . a word or phrase originally incapable of exclusive appropriation with reference to
an article on the market, because geographically or otherwise descriptive, might nevertheless
have been used so long and so exclusively by one producer with reference to his article that, in
that trade and to that branch of the purchasing public, the word or phrase has come to mean that
the article was his product." The question which arises, therefore, is whether or not the use by
petitioner of "Lyceum" in its corporate name has been for such length of time and with such
exclusivity as to have become associated or identified with the petitioner institution in the mind
of the general public (or at least that portion of the general public which has to do with schools).
The Court of Appeals recognized this issue and answered it in the negative: "Under the doctrine
of secondary meaning, a word or phrase originally incapable of exclusive appropriation with
reference to an article in the market, because geographical or otherwise descriptive might
nevertheless have been used so long and so exclusively by one producer with reference to this
article that, in that trade and to that group of the purchasing public, the word or phrase has come
to mean that the article was his produce (Ana Ang vs. Toribio Teodoro, 74 Phil. 56). This
circumstance has been referred to as the distinctiveness into which the name or phrase has
evolved through the substantial and exclusive use of the same for a considerable period of
time. . . . No evidence was ever presented in the hearing before the Commission which
sufficiently proved that the word 'Lyceum' has indeed acquired secondary meaning in favor of
the appellant. If there was any of this kind, the same tend to prove only that the appellant had
been using the disputed word for a long period of time. . . . In other words, while the appellant
may have proved that it had been using the word 'Lyceum' for a long period of time, this fact
alone did not amount to mean that the said word had acquired secondary meaning in its favor
because the appellant failed to prove that it had been using the same word all by itself to the
exclusion of others. More so, there was no evidence presented to prove that confusion will
surely arise if the same word were to be used by other educational institutions. Consequently,
the allegations of the appellant in its first two assigned errors must necessarily fail." We agree
with the Court of Appeals. The number alone of the private respondents in the case at bar
suggests strongly that petitioner's use of the word "Lyceum" has not been attended with the
exclusivity essential for applicability of the doctrine of secondary meaning. Petitioner's use of
the word "Lyceum" was not exclusive but was in truth shared with the Western Pangasinan
Lyceum and a little later with other private respondent institutions which registered with the
SEC using "Lyceum" as part of their corporation names. There may well be other schools using
Lyceum or Liceo in their names, but not registered with the SEC because they have not adopted
the corporate form of organization.
3. ID.; ID.; MUST BE EVALUATED IN THEIR ENTIRETY TO DETERMINE WHETHER
THEY ARE CONFUSINGLY OR DECEPTIVELY SIMILAR TO ANOTHER CORPORATE
ENTITY'S NAME. petitioner institution is not entitled to a legally enforceable exclusive
right to use the word "Lyceum" in its corporate name and that other institutions may use
"Lyceum" as part of their corporate names. To determine whether a given corporate name is
"identical" or "confusingly or deceptively similar" with another entity's corporate name, it is not
enough to ascertain the presence of "Lyceum" or "Liceo" in both names. One must evaluate
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corporate names in their entirety and when the name of petitioner is juxtaposed with the names
of private respondents, they are not reasonably regarded as "identical" or "confusingly or
deceptively similar" with each other.
DECISION
FELICIANO, J p:
Petitioner is an educational institution duly registered with the Securities and Exchange
Commission ("SEC"). When it first registered with the SEC on 21 September 1950, it used the
corporate name Lyceum of the Philippines, Inc. and has used that name ever since.
On 24 February 1984, petitioner instituted proceedings before the SEC to compel the private
respondents, which are also educational institutions, to delete the word "Lyceum" from their
corporate names and permanently to enjoin them from using "Lyceum" as part of their
respective names.
Some of the private respondents actively participated in the proceedings before the SEC. These
are the following, the dates of their original SEC registration being set out below opposite their
respective names:
Western Pangasinan Lyceum 27 October 1950
Lyceum of Cabagan 31 October 1962
Lyceum of Lallo, Inc. 26 March 1972
Lyceum of Aparri 28 March 1972
Lyceum of Tuao, Inc. 28 March 1972
Lyceum of Camalaniugan 28 March 1972
The following private respondents were declared in default for failure to file an answer despite
service of summons:
Buhi Lyceum;
Central Lyceum of Catanduanes;
Lyceum of Eastern Mindanao, Inc.; and
Lyceum of Southern Philippines
Petitioner's original complaint before the SEC had included three (3) other entities:
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1. The Lyceum of Malacanay;
2. The Lyceum of Marbel; and
3. The Lyceum of Araullo
The complaint was later withdrawn insofar as concerned the Lyceum of Malacanay and the
Lyceum of Marbel, for failure to serve summons upon these two (2) entities. The case against
the Liceum of Araullo was dismissed when that school motu proprio change its corporate name
to "Pamantasan ng Araullo."
The background of the case at bar needs some recounting. Petitioner had sometime before
commenced in the SEC a proceeding (SEC-Case No. 1241) against the Lyceum of Baguio, Inc.
to require it to change its corporate name and to adopt another name not "similar [to] or
identical" with that of petitioner. In an Order dated 20 April 1977, Associate Commissioner
Julio Sulit held that the corporate name of petitioner and that of the Lyceum of Baguio, Inc.
were substantially identical because of the presence of a "dominant" word, i.e., "Lyceum," the
name of the geographical location of the campus being the only word which distinguished one
from the other corporate name. The SEC also noted that petitioner had registered as a
corporation ahead of the Lyceum of Baguio, Inc. in point of time, 1 and ordered the latter to
change its name to another name "not similar or identical [with]" the names of previously
registered entities.
The Lyceum of Baguio, Inc. assailed the Order of the SEC before the Supreme Court in a case
docketed as G.R. No. L-46595. In a Minute Resolution dated 14 September 1977, the Court
denied the Petition for Review for lack of merit. Entry of judgment in that case was made on 21
October 1977. 2
Armed with the Resolution of this Court in G.R. No. L-46595, petitioner then wrote all the
educational institutions it could find using the word "Lyceum" as part of their corporate name,
and advised them to discontinue such use of "Lyceum." When, with the passage of time, it
became clear that this recourse had failed, petitioner instituted before the SEC SEC-Case No.
2579 to enforce what petitioner claims as its proprietary right to the word "Lyceum." The SEC
hearing officer rendered a decision sustaining petitioner's claim to an exclusive right to use the
word "Lyceum." The hearing officer relied upon the SEC ruling in the Lyceum of Baguio, Inc.
case (SEC-Case No. 1241) and held that the word "Lyceum" was capable of appropriation and
that petitioner had acquired an enforceable exclusive right to the use of that word.
On appeal, however, by private respondents to the SEC En Banc, the decision of the hearing
officer was reversed and set aside. The SEC En Banc did not consider the word "Lyceum" to
have become so identified with petitioner as to render use thereof by other institutions as
productive of confusion about the identity of the schools concerned in the mind of the general
public. Unlike its hearing officer, the SEC En Banc held that the attaching of geographical
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names to the word "Lyceum" served sufficiently to distinguish the schools from one another,
especially in view of the fact that the campuses of petitioner and those of the private
respondents were physically quite remote from each other. 3
Petitioner then went on appeal to the Court of Appeals. In its Decision dated 28 June 1991,
however, the Court of Appeals affirmed the questioned Orders of the SEC En Banc. 4 Petitioner
filed a motion for reconsideration, without success.
Before this Court, petitioner asserts that the Court of Appeals committed the following errors:
1. The Court of Appeals erred in holding that the Resolution of the Supreme Court in G.R. No.
L-46595 did not constitute stare decisis as to apply to this case and in not holding that said
Resolution bound subsequent determinations on the right to exclusive use of the word Lyceum.
2. The Court of Appeals erred in holding that respondent Western Pangasinan Lyceum, Inc. was
incorporated earlier than petitioner.
3. The Court of Appeals erred in holding that the word Lyceum has not acquired a secondary
meaning in favor of petitioner.
4. The Court of Appeals erred in holding that Lyceum as a generic word cannot be appropriated
by the petitioner to the exclusion of others. 5
We will consider all the foregoing ascribed errors, though not necessarily seriatim. We begin by
noting that the Resolution of the Court in G.R. No. L-46595 does not, of course, constitute res
adjudicata in respect of the case at bar, since there is no identity of parties. Neither is stare
decisis pertinent, if only because the SEC En Banc itself has re-examined Associate
Commissioner Sulit's ruling in the Lyceum of Baguio case. The Minute Resolution of the Court
in G.R. No. L-46595 was not a reasoned adoption of the Sulit ruling.
The Articles of Incorporation of a corporation must, among other things, set out the name of the
corporation. 6 Section 18 of the Corporation Code establishes a restrictive rule insofar as
corporate names are concerned:
"SECTION 18. Corporate name. No corporate name may be allowed by the Securities an
Exchange Commission if the proposed name is identical or deceptively or confusingly similar
to that of any existing corporation or to any other name already protected by law or is patently
deceptive, confusing or contrary to existing laws. When a change in the corporate name is
approved, the Commission shall issue an amended certificate of incorporation under the
amended name." (Emphasis supplied)
The policy underlying the prohibition in Section 18 against the registration of a corporate name
which is "identical or deceptively or confusingly similar" to that of any existing corporation or
which is "patently deceptive" or "patently confusing" or "contrary to existing laws," is the
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avoidance of fraud upon the public which would have occasion to deal with the entity
concerned, the evasion of legal obligations and duties, and the reduction of difficulties of
administration and supervision over corporations. 7
We do not consider that the corporate names of private respondent institutions are "identical
with, or deceptively or confusingly similar" to that of the petitioner institution. True enough, the
corporate names of private respondent entities all carry the word "Lyceum" but confusion and
deception are effectively precluded by the appending of geographic names to the word
"Lyceum." Thus, we do not believe that the "Lyceum of Aparri" can be mistaken by the general
public for the Lyceum of the Philippines, or that the "Lyceum of Camalaniugan" would be
confused with the Lyceum of the Philippines.
Etymologically, the word "Lyceum" is the Latin word for the Greek lykeion which in turn
referred to a locality on the river Ilissius in ancient Athens "comprising an enclosure dedicated
to Apollo and adorned with fountains and buildings erected by Pisistratus, Pericles and
Lycurgus frequented by the youth for exercise and by the philosopher Aristotle and his
followers for teaching." 8 In time, the word "Lyceum" became associated with schools and
other institutions providing public lectures and concerts and public discussions. Thus today, the
word "Lyceum" generally refers to a school or an institution of learning. While the Latin word
"lyceum" has been incorporated into the English language, the word is also found in Spanish
(liceo) and in French (lycee). As the Court of Appeals noted in its Decision, Roman Catholic
schools frequently use the term; e.g., "Liceo de Manila," "Liceo de Baleno" (in Baleno,
Masbate), "Liceo de Masbate," "Liceo de Albay." 9 "Lyceum" is in fact as generic in character
as the word "university." In the name of the petitioner, "Lyceum" appears to be a substitute for
"university;" in other places, however, "Lyceum," or "Liceo" or "Lycee" frequently denotes a
secondary school or a college. It may be (though this is a question of fact which we need not
resolve) that the use of the word "Lyceum" may not yet be as widespread as the use of
"university," but it is clear that a not inconsiderable number of educational institutions have
adopted "Lyceum" or "Liceo" as part of their corporate names. Since "Lyceum" or "Liceo"
denotes a school or institution of learning, it is not unnatural to use this word to designate an
entity which is organized and operating as an educational institution.
It is claimed, however, by petitioner that the word "Lyceum" has acquired a secondary meaning
in relation to petitioner with the result that that word, although originally a generic, has become
appropriable by petitioner to the exclusion of other institutions like private respondents herein.
The doctrine of secondary meaning originated in the field of trademark law. Its application has,
however, been extended to corporate names sine the right to use a corporate name to the
exclusion of others is based upon the same principle which underlies the right to use a particular
trademark or tradename. 10 In Philippine Nut Industry, Inc. v. Standard Brands, Inc., 11 the
doctrine of secondary meaning was elaborated in the following terms:
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" . . . a word or phrase originally incapable of exclusive appropriation with reference to an
article on the market, because geographically or otherwise descriptive, might nevertheless have
been used so long and so exclusively by one producer with reference to his article that, in that
trade and to that branch of the purchasing public, the word or phrase has come to mean that the
article was his product." 12
The question which arises, therefore, is whether or not the use by petitioner of "Lyceum" in its
corporate name has been for such length of time and with such exclusivity as to have become
associated or identified with the petitioner institution in the mind of the general public (or at
least that portion of the general public which has to do with schools). The Court of Appeals
recognized this issue and answered it in the negative:
"Under the doctrine of secondary meaning, a word or phrase originally incapable of exclusive
appropriation with reference to an article in the market, because geographical or otherwise
descriptive might nevertheless have been used so long and so exclusively by one producer with
reference to this article that, in that trade and to that group of the purchasing public, the word or
phrase has come to mean that the article was his produce (Ana Ang vs. Toribio Teodoro, 74
Phil. 56). This circumstance has been referred to as the distinctiveness into which the name or
phrase has evolved through the substantial and exclusive use of the same for a considerable
period of time. Consequently, the same doctrine or principle cannot be made to apply where the
evidence did not prove that the business (of the plaintiff) has continued for so long a time that it
has become of consequence and acquired a good will of considerable value such that its articles
and produce have acquired a well-known reputation, and confusion will result by the use of the
disputed name (by the defendant) (Ang Si Heng vs. Wellington Department Store, Inc., 92 Phil.
448).
With the foregoing as a yardstick, [we] believe the appellant failed to satisfy the aforementioned
requisites. No evidence was ever presented in the hearing before the Commission which
sufficiently proved that the word 'Lyceum' has indeed acquired secondary meaning in favor of
the appellant. If there was any of this kind, the same tend to prove only that the appellant had
been using the disputed word for a long period of time. Nevertheless, its (appellant) exclusive
use of the word (Lyceum) was never established or proven as in fact the evidence tend to
convey that the cross-claimant was already using the word 'Lyceum' seventeen (17) years prior
to the date the appellant started using the same word in its corporate name. Furthermore,
educational institutions of the Roman Catholic Church had been using the same or similar word
like 'Liceo de Manila,' 'Liceo de Baleno' (in Baleno, Masbate), 'Liceo de Masbate,' 'Liceo de
Albay' long before appellant started using the word 'Lyceum'. The appellant also failed to prove
that the word 'Lyceum' has become so identified with its educational institution that confusion
will surely arise in the minds of the public if the same word were to be used by other
educational institutions.
In other words, while the appellant may have proved that it had been using the word 'Lyceum'
for a long period of time, this fact alone did not amount to mean that the said word had acquired
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secondary meaning in its favor because the appellant failed to prove that it had been using the
same word all by itself to the exclusion of others. More so, there was no evidence presented to
prove that confusion will surely arise if the same word were to be used by other educational
institutions. Consequently, the allegations of the appellant in its first two assigned errors must
necessarily fail." 13 (Underscoring partly in the original and partly supplied)
We agree with the Court of Appeals. The number alone of the private respondents in the case at
bar suggests strongly that petitioner's use of the word "Lyceum" has not been attended with the
exclusivity essential for applicability of the doctrine of secondary meaning. It may be noted also
that at least one of the private respondents, i.e., the Western Pangasinan Lyceum, Inc., used the
term "Lyceum" seventeen (17) years before the petitioner registered its own corporate name
with the SEC and began using the word "Lyceum." It follows that if any institution had acquired
an exclusive right to the word "Lyceum," that institution would have been the Western
Pangasinan Lyceum, Inc. rather than the petitioner institution.
In this connection, petitioner argues that because the Western Pangasinan Lyceum, Inc. failed to
reconstruct its records before the SEC in accordance with the provisions of R.A. No. 62, which
records had been destroyed during World War II, Western Pangasinan Lyceum should be
deemed to have lost all rights it may have acquired by virtue of its past registration. It might be
noted that the Western Pangasinan Lyceum, Inc. registered with the SEC soon after petitioner
had filed its own registration on 21 September 1950. Whether or not Western Pangasinan
Lyceum, Inc. must be deemed to have lost its rights under its original 1933 registration, appears
to us to be quite secondary in importance; we refer to this earlier registration simply to
underscore the fact that petitioner's use of the word "Lyceum" was neither the first use of that
term in the Philippines nor an exclusive use thereof. Petitioner's use of the word "Lyceum" was
not exclusive but was in truth shared with the Western Pangasinan Lyceum and a little later with
other private respondent institutions which registered with the SEC using "Lyceum" as part of
their corporation names. There may well be other schools using Lyceum or Liceo in their
names, but not registered with the SEC because they have not adopted the corporate form of
organization.
We conclude and so hold that petitioner institution is not entitled to a legally enforceable
exclusive right to use the word "Lyceum" in its corporate name and that other institutions may
use "Lyceum" as part of their corporate names. To determine whether a given corporate name is
"identical" or "confusingly or deceptively similar" with another entity's corporate name, it is not
enough to ascertain the presence of "Lyceum" or "Liceo" in both names. One must evaluate
corporate names in their entirety and when the name of petitioner is juxtaposed with the names
of private respondents, they are not reasonably regarded as "identical" or "confusingly or
deceptively similar" with each other.
WHEREFORE, the petitioner having failed to show any reversible error on the part of the
public respondent Court of Appeals, the Petition for Review is DENIED for lack of merit, and
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the Decision of the Court of Appeals dated 28 June 1991 is hereby AFFIRMED. No
pronouncement as to costs.
[G.R. No. 137592. December 12, 2001]

ANG MGA KAANIB SA IGLESIA NG DIOS KAY KRISTO HESUS, H.S.K. SA
BANSANG PILIPINAS, INC. petitioner, vs. IGLESIA NG DIOS KAY CRISTO JESUS,
HALIGI AT SUHAY NG KATOTOHANAN, respondent.
This is a petition for review assailing the Decision dated October 7, 1997[1] and the Resolution
dated February 16, 1999[2] of the Court of Appeals in CA-G.R. SP No. 40933, which affirmed
the Decision of the Securities and Exchange and Commission (SEC) in SEC-AC No. 539.[3]
Respondent Iglesia ng Dios Kay Cristo Jesus, Haligi at Suhay ng Katotohanan (Church of God
in Christ Jesus, the Pillar and Ground of Truth),[4] is a non-stock religious society or
corporation registered in 1936. Sometime in 1976, one Eliseo Soriano and several other
members of respondent corporation disassociated themselves from the latter and succeeded in
registering on March 30, 1977 a new non-stock religious society or corporation, named Iglesia
ng Dios Kay Kristo Hesus, Haligi at Saligan ng Katotohanan.
On July 16, 1979, respondent corporation filed with the SEC a petition to compel the Iglesia ng
Dios Kay Kristo Hesus, Haligi at Saligan ng Katotohanan to change its corporate name, which
petition was docketed as SEC Case No. 1774. On May 4, 1988, the SEC rendered judgment in
favor of respondent, ordering the Iglesia ng Dios Kay Kristo Hesus, Haligi at Saligan ng
Katotohanan to change its corporate name to another name that is not similar or identical to any
name already used by a corporation, partnership or association registered with the Commission.
[5] No appeal was taken from said decision.
It appears that during the pendency of SEC Case No. 1774, Soriano, et al., caused the
registration on April 25, 1980 of petitioner corporation, Ang Mga Kaanib sa Iglesia ng Dios
Kay Kristo Hesus, H.S.K., sa Bansang Pilipinas. The acronym H.S.K. stands for Haligi at
Saligan ng Katotohanan.[6]
On March 2, 1994, respondent corporation filed before the SEC a petition, docketed as SEC
Case No. 03-94-4704, praying that petitioner be compelled to change its corporate name and be
barred from using the same or similar name on the ground that the same causes confusion
among their members as well as the public.
Petitioner filed a motion to dismiss on the ground of lack of cause of action. The motion to
dismiss was denied. Thereafter, for failure to file an answer, petitioner was declared in default
and respondent was allowed to present its evidence ex parte.
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On November 20, 1995, the SEC rendered a decision ordering petitioner to change its corporate
name. The dispositive portion thereof reads:
PREMISES CONSIDERED, judgment is hereby rendered in favor of the petitioner (respondent
herein).
Respondent Mga Kaanib sa Iglesia ng Dios Kay Kristo Jesus (sic), H.S.K. sa Bansang Pilipinas
(petitioner herein) is hereby MANDATED to change its corporate name to another not
deceptively similar or identical to the same already used by the Petitioner, any corporation,
association, and/or partnership presently registered with the Commission.
Let a copy of this Decision be furnished the Records Division and the Corporate and Legal
Department [CLD] of this Commission for their records, reference and/or for whatever requisite
action, if any, to be undertaken at their end.
SO ORDERED.[7]
Petitioner appealed to the SEC En Banc, where its appeal was docketed as SEC-AC No. 539. In
a decision dated March 4, 1996, the SEC En Banc affirmed the above decision, upon a finding
that petitioner's corporate name was identical or confusingly or deceptively similar to that of
respondents corporate name.[8]
Petitioner filed a petition for review with the Court of Appeals. On October 7, 1997, the Court
of Appeals rendered the assailed decision affirming the decision of the SEC En Banc.
Petitioners motion for reconsideration was denied by the Court of Appeals on February 16,
1992.
Hence, the instant petition for review, raising the following assignment of errors:
I
THE HONORABLE COURT OF APPEALS ERRED IN CONCLUDING THAT PETITIONER
HAS NOT BEEN DEPRIVED OF ITS RIGHT TO PROCEDURAL DUE PROCESS, THE
HONORABLE COURT OF APPEALS DISREGARDED THE JURISPRUDENCE
APPLICABLE TO THE CASE AT BAR AND INSTEAD RELIED ON TOTALLY
INAPPLICABLE JURISPRUDENCE.
II
THE HONORABLE COURT OF APPEALS ERRED IN ITS INTEPRETATION OF THE
CIVIL CODE PROVISIONS ON EXTINCTIVE PRESCRIPTION, THEREBY RESULTING
IN ITS FAILURE TO FIND THAT THE RESPONDENT'S RIGHT OF ACTION TO
INSTITUTE THE SEC CASE HAS SINCE PRESCRIBED PRIOR TO ITS INSTITUTION.
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III
THE HONORABLE COURT OF APPEALS FAILED TO CONSIDER AND PROPERLY
APPLY THE EXCEPTIONS ESTABLISHED BY JURISPRUDENCE IN THE APPLICATION
OF SECTION 18 OF THE CORPORATION CODE TO THE INSTANT CASE.
IV
THE HONORABLE COURT OF APPEALS FAILED TO PROPERLY APPRECIATE THE
SCOPE OF THE CONSTITUTIONAL GUARANTEE ON RELIGIOUS FREEDOM,
THEREBY FAILING TO APPLY THE SAME TO PROTECT PETITIONERS RIGHTS.[9]
Invoking the case of Legarda v. Court of Appeals,[10] petitioner insists that the decision of the
Court of Appeals and the SEC should be set aside because the negligence of its former counsel
of record, Atty. Joaquin Garaygay, in failing to file an answer after its motion to dismiss was
denied by the SEC, deprived them of their day in court.
The contention is without merit. As a general rule, the negligence of counsel binds the client.
This is based on the rule that any act performed by a lawyer within the scope of his general or
implied authority is regarded as an act of his client.[11] An exception to the foregoing is where
the reckless or gross negligence of the counsel deprives the client of due process of law.[12]
Said exception, however, does not obtain in the present case.
In Legarda v. Court of Appeals, the effort of the counsel in defending his clients cause consisted
in filing a motion for extension of time to file answer before the trial court. When his client was
declared in default, the counsel did nothing and allowed the judgment by default to become
final and executory. Upon the insistence of his client, the counsel filed a petition to annul the
judgment with the Court of Appeals, which denied the petition, and again the counsel allowed
the denial to become final and executory. This Court found the counsel grossly negligent and
consequently declared as null and void the decision adverse to his client.
The factual antecedents of the case at bar are different. Atty. Garaygay filed before the SEC a
motion to dismiss on the ground of lack of cause of action. When his client was declared in
default for failure to file an answer, Atty. Garaygay moved for reconsideration and lifting of the
order of default.[13] After judgment by default was rendered against petitioner corporation,
Atty. Garaygay filed a motion for extension of time to appeal/motion for reconsideration, and
thereafter a motion to set aside the decision.[14]
Evidently, Atty. Garaygay was only guilty of simple negligence. Although he failed to file an
answer that led to the rendition of a judgment by default against petitioner, his efforts were
palpably real, albeit bereft of zeal.[15]
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Likewise, the issue of prescription, which petitioner raised for the first time on appeal to the
Court of Appeals, is untenable. Its failure to raise prescription before the SEC can only be
construed as a waiver of that defense.[16] At any rate, the SEC has the authority to de-register
at all times and under all circumstances corporate names which in its estimation are likely to
spawn confusion. It is the duty of the SEC to prevent confusion in the use of corporate names
not only for the protection of the corporations involved but more so for the protection of the
public.[17]
Section 18 of the Corporation Code provides:
Corporate Name. --- No corporate name may be allowed by the Securities and Exchange
Commission if the proposed name is identical or deceptively or confusingly similar to that of
any existing corporation or to any other name already protected by law or is patently deceptive,
confusing or is contrary to existing laws. When a change in the corporate name is approved, the
Commission shall issue an amended certificate of incorporation under the amended name.
Corollary thereto, the pertinent portion of the SEC Guidelines on Corporate Names states:
(d) If the proposed name contains a word similar to a word already used as part of the firm
name or style of a registered company, the proposed name must contain two other words
different from the name of the company already registered;
Parties organizing a corporation must choose a name at their peril; and the use of a name similar
to one adopted by another corporation, whether a business or a nonprofit organization, if
misleading or likely to injure in the exercise of its corporate functions, regardless of intent, may
be prevented by the corporation having a prior right, by a suit for injunction against the new
corporation to prevent the use of the name.[18]
Petitioner claims that it complied with the aforecited SEC guideline by adding not only two but
eight words to their registered name, to wit: Ang Mga Kaanib" and "Sa Bansang Pilipinas, Inc.,
which, petitioner argues, effectively distinguished it from respondent corporation.
The additional words Ang Mga Kaanib and Sa Bansang Pilipinas, Inc. in petitioners name are,
as correctly observed by the SEC, merely descriptive of and also referring to the members, or
kaanib, of respondent who are likewise residing in the Philippines. These words can hardly
serve as an effective differentiating medium necessary to avoid confusion or difficulty in
distinguishing petitioner from respondent. This is especially so, since both petitioner and
respondent corporations are using the same acronym --- H.S.K.;[19] not to mention the fact that
both are espousing religious beliefs and operating in the same place. Parenthetically, it is well to
mention that the acronym H.S.K. used by petitioner stands for Haligi at Saligan ng
Katotohanan.[20]
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Then, too, the records reveal that in holding out their corporate name to the public, petitioner
highlights the dominant words IGLESIA NG DIOS KAY KRISTO HESUS, HALIGI AT
SALIGAN NG KATOTOHANAN, which is strikingly similar to respondent's corporate name,
thus making it even more evident that the additional words Ang Mga Kaanib and Sa Bansang
Pilipinas, Inc., are merely descriptive of and pertaining to the members of respondent
corporation.[21]
Significantly, the only difference between the corporate names of petitioner and respondent are
the words SALIGAN and SUHAY. These words are synonymous --- both mean ground,
foundation or support. Hence, this case is on all fours with Universal Mills Corporation v.
Universal Textile Mills, Inc.,[22] where the Court ruled that the corporate names Universal
Mills Corporation and Universal Textile Mills, Inc., are undisputably so similar that even under
the test of reasonable care and observation confusion may arise.
Furthermore, the wholesale appropriation by petitioner of respondent's corporate name cannot
find justification under the generic word rule. We agree with the Court of Appeals conclusion
that a contrary ruling would encourage other corporations to adopt verbatim and register an
existing and protected corporate name, to the detriment of the public.
The fact that there are other non-stock religious societies or corporations using the names
Church of the Living God, Inc., Church of God Jesus Christ the Son of God the Head, Church
of God in Christ & By the Holy Spirit, and other similar names, is of no consequence. It does
not authorize the use by petitioner of the essential and distinguishing feature of respondent's
registered and protected corporate name.[23]
We need not belabor the fourth issue raised by petitioner. Certainly, ordering petitioner to
change its corporate name is not a violation of its constitutionally guaranteed right to religious
freedom. In so doing, the SEC merely compelled petitioner to abide by one of the SEC
guidelines in the approval of partnership and corporate names, namely its undertaking to
manifest its willingness to change its corporate name in the event another person, firm, or entity
has acquired a prior right to the use of the said firm name or one deceptively or confusingly
similar to it.
WHEREFORE, in view of all the foregoing, the instant petition for review is DENIED. The
appealed decision of the Court of Appeals is AFFIRMED in toto.
[G.R. No. 122174. October 3, 2002]

INDUSTRIAL REFRACTORIES CORPORATION OF THE PHILIPPINES, petitioner,
vs. COURT OF APPEALS, SECURITIES AND EXCHANGE COMMISSION and
REFRACTORIES CORPORATION OF THE PHILIPPINES, respondents.
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Filed before us is a petition for review on certiorari under Rule 45 of the Rules of Court
assailing the Decision of the Court of Appeals in CA-G.R. SP No. 35056, denying due course
and dismissing the petition filed by Industrial Refractories Corp. of the Philippines (IRCP).
Respondent Refractories Corporation of the Philippines (RCP) is a corporation duly organized
on October 13, 1976 for the purpose of engaging in the business of manufacturing, producing,
selling, exporting and otherwise dealing in any and all refractory bricks, its by-products and
derivatives. On June 22, 1977, it registered its corporate and business name with the Bureau of
Domestic Trade.
Petitioner IRCP on the other hand, was incorporated on August 23, 1979 originally under the
name Synclaire Manufacturing Corporation. It amended its Articles of Incorporation on August
23, 1985 to change its corporate name to Industrial Refractories Corp. of the Philippines. It is
engaged in the business of manufacturing all kinds of ceramics and other products, except
paints and zincs.
Both companies are the only local suppliers of monolithic gunning mix.[1]
Discovering that petitioner was using such corporate name, respondent RCP filed on April 14,
1988 with the Securities and Exchange Commission (SEC) a petition to compel petitioner to
change its corporate name on the ground that its corporate name is confusingly similar with that
of petitioners such that the public may be confused or deceived into believing that they are one
and the same corporation.[2]
The SEC decided in favor of respondent RCP and rendered judgment on July 23, 1993 with the
following dispositive portion:
WHEREFORE, judgment is hereby rendered in favor of the petitioner and against the
respondent declaring the latters corporate name Industrial Refractories Corporation of the
Philippines as deceptively and confusingly similar to that of petitioners corporate name
Refractories Corporation of the Philippines. Accordingly, respondent is hereby directed to
amend its Articles of Incorporation by deleting the name Refractories Corporation of the
Philippines in its corporate name within thirty (30) days from finality of this Decision.
Likewise, respondent is hereby ordered to pay the petitioner the sum of P50,000.00 as attorneys
fees.[3]
Petitioner appealed to the SEC En Banc, arguing that it does not have any jurisdiction over the
case, and that respondent RCP has no right to the exclusive use of its corporate name as it is
composed of generic or common words.[4]
In its Decision dated July 23, 1993, the SEC En Banc modified the appealed decision in that
petitioner was ordered to delete or drop from its corporate name only the word Refractories.[5]
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Petitioner IRCP elevated the decision of the SEC En Banc through a petition for review on
certiorari to the Court of Appeals which then rendered the herein assailed decision. The
appellate court upheld the jurisdiction of the SEC over the case and ruled that the corporate
names of petitioner IRCP and respondent RCP are confusingly or deceptively similar, and that
respondent RCP has established its prior right to use the word Refractories as its corporate
name.[6] The appellate court also found that the petition was filed beyond the reglementary
period.[7]
Hence, herein petition which we must deny.
Petitioner contends that the petition before the Court of Appeals was timely filed. It must be
noted that at the time the SEC En Banc rendered its decision on May 10, 1994, the governing
rule on appeals from quasi-judicial agencies like the SEC was Supreme Court Circular No. 191. As provided therein, the remedy should have been a petition for review filed before the
Court of Appeals within fifteen (15) days from notice, raising questions of fact, of law, or mixed
questions of fact and law.[8] A motion for reconsideration suspends the running of the period.
[9]
In the case at bench, there is a discrepancy between the dates provided by petitioner and
respondent. Petitioner alleges the following dates of receipt and filing:[10]
June 10, 1994 Receipt of SECs Decision dated May 10, 1994
June 20, 1994 Filing of Motion for Reconsideration
September 1, 1994 Receipt of SECs Order dated August 3, 1994 denying petitioners motion for
reconsideration
September 2, 1994 Filing of Motion for extension of time
September 6, 1994 Filing of Petition
Respondent RCP, however, asserts that the foregoing dates are incorrect as the certifications
issued by the SEC show that petitioner received the SECs Decision dated May 10, 1994 on June
9, 1994, filed the motion for reconsideration via registered mail on June 25, 1994, and received
the Order dated August 3, 1994 on August 15, 1994.[11] Thus, the petition was filed twenty-one
(21) days beyond the reglementary period provided in Supreme Court Circular No. 1-91.[12]
If reckoned from the dates supplied by petitioner, then the petition was timely filed. On the
other hand, if reckoned from the dates provided by respondent RCP, then it was filed way
beyond the reglementary period. On this score, we agree with the appellate courts finding that
petitioner failed to rebut respondent RCPs allegations of material dates of receipt and filing.[13]
In addition, the certifications were executed by the SEC officials based on their official
records[14] which enjoy the presumption of regularity.[15] As such, these are prima facie
evidence of the facts stated therein.[16] And based on such dates, there is no question that the
petition was filed with the Court of Appeals beyond the fifteen (15) day period. On this ground
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alone, the instant petition should be denied as the SEC En Bancs decision had already attained
finality and the SECs findings of fact, when supported by substantial evidence, is final.[17]
Nevertheless, to set the matters at rest, we shall delve into the other issues posed by petitioner.
Petitioners arguments, substantially, are as follows: (1) jurisdiction is vested with the regular
courts as the present case is not one of the instances provided in P.D. 902-A; (2) respondent
RCP is not entitled to use the generic name refractories; (3) there is no confusing similarity
between their corporate names; and (4) there is no basis for the award of attorneys fees.[18]
Petitioners argument on the SECs jurisdiction over the case is utterly myopic. The jurisdiction
of the SEC is not merely confined to the adjudicative functions provided in Section 5 of P.D.
902-A, as amended.[19] By express mandate, it has absolute jurisdiction, supervision and
control over all corporations.[20] It also exercises regulatory and administrative powers to
implement and enforce the Corporation Code,[21] one of which is Section 18, which provides:
SEC. 18. Corporate name. -- No corporate name may be allowed by the Securities and
Exchange Commission if the proposed name is identical or deceptively or confusingly similar
to that of any existing corporation or to any other name already protected by law or is patently
deceptive, confusing or contrary to existing laws. When a change in the corporate name is
approved, the Commission shall issue an amended certificate of incorporation under the
amended name.
It is the SECs duty to prevent confusion in the use of corporate names not only for the
protection of the corporations involved but more so for the protection of the public, and it has
authority to de-register at all times and under all circumstances corporate names which in its
estimation are likely to generate confusion.[22] Clearly therefore, the present case falls within
the ambit of the SECs regulatory powers.[23]
Likewise untenable is petitioners argument that there is no confusing or deceptive similarity
between petitioner and respondent RCPs corporate names. Section 18 of the Corporation Code
expressly prohibits the use of a corporate name which is identical or deceptively or confusingly
similar to that of any existing corporation or to any other name already protected by law or is
patently deceptive, confusing or contrary to existing laws. The policy behind the foregoing
prohibition is to avoid fraud upon the public that will have occasion to deal with the entity
concerned, the evasion of legal obligations and duties, and the reduction of difficulties of
administration and supervision over corporation.[24]
Pursuant thereto, the Revised Guidelines in the Approval of Corporate and Partnership
Names[25] specifically requires that: (1) a corporate name shall not be identical, misleading or
confusingly similar to one already registered by another corporation with the Commission;[26]
and (2) if the proposed name is similar to the name of a registered firm, the proposed name
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must contain at least one distinctive word different from the name of the company already
registered.[27]
As held in Philips Export B.V. vs. Court of Appeals,[28] to fall within the prohibition of the law,
two requisites must be proven, to wit:
(1) that the complainant corporation acquired a prior right over the use of such corporate name;
and
(2) the proposed name is either: (a) identical, or (b) deceptively or confusingly similar to that of
any existing corporation or to any other name already protected by law; or (c) patently
deceptive, confusing or contrary to existing law.
As regards the first requisite, it has been held that the right to the exclusive use of a corporate
name with freedom from infringement by similarity is determined by priority of adoption.[29]
In this case, respondent RCP was incorporated on October 13, 1976 and since then has been
using the corporate name Refractories Corp. of the Philippines. Meanwhile, petitioner was
incorporated on August 23, 1979 originally under the name Synclaire Manufacturing
Corporation. It only started using the name Industrial Refractories Corp. of the Philippines
when it amended its Articles of Incorporation on August 23, 1985, or nine (9) years after
respondent RCP started using its name. Thus, being the prior registrant, respondent RCP has
acquired the right to use the word Refractories as part of its corporate name.
Anent the second requisite, in determining the existence of confusing similarity in corporate
names, the test is whether the similarity is such as to mislead a person using ordinary care and
discrimination and the Court must look to the record as well as the names themselves.[30]
Petitioners corporate name is Industrial Refractories Corp. of the Phils., while respondents is
Refractories Corp. of the Phils. Obviously, both names contain the identical words Refractories,
Corporation and Philippines. The only word that distinguishes petitioner from respondent RCP
is the word Industrial which merely identifies a corporations general field of activities or
operations. We need not linger on these two corporate names to conclude that they are patently
similar that even with reasonable care and observation, confusion might arise.[31] It must be
noted that both cater to the same clientele, i.e. the steel industry. In fact, the SEC found that
there were instances when different steel companies were actually confused between the two,
especially since they also have similar product packaging.[32] Such findings are accorded not
only great respect but even finality, and are binding upon this Court, unless it is shown that it
had arbitrarily disregarded or misapprehended evidence before it to such an extent as to compel
a contrary conclusion had such evidence been properly appreciated. [33] And even without such
proof of actual confusion between the two corporate names, it suffices that confusion is
probable or likely to occur.[34]
Refractory materials are described as follows:
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Refractories are structural materials used at high temperatures to [sic] industrial furnaces. They
are supplied mainly in the form of brick of standard sizes and of special shapes. Refractories
also include refractory cements, bonding mortars, plastic firebrick, castables, ramming
mixtures, and other bulk materials such as dead-burned grain magneside, chrome or ground
ganister and special clay.[35]
While the word refractories is a generic term, its usage is not widespread and is limited merely
to the industry/trade in which it is used, and its continuous use by respondent RCP for a
considerable period has made the term so closely identified with it. [36] Moreover, as held in
the case of Ang Kaanib sa Iglesia ng Dios kay Kristo Hesus, H.S.K. sa Bansang Pilipinas, Inc.
vs. Iglesia ng Dios kay Cristo Jesus, Haligi at Suhay ng Katotohanan, petitioners appropriation
of respondent's corporate name cannot find justification under the generic word rule. [37] A
contrary ruling would encourage other corporations to adopt verbatim and register an existing
and protected corporate name, to the detriment of the public.[38]
Finally, we find the award of P50,000.00 as attorney's fees to be fair and reasonable. Article
2208 of the Civil Code allows the award of such fees when its claimant is compelled to litigate
with third persons or to incur expenses to protect its just and valid claim. In this case, despite its
undertaking to change its corporate name in case another firm has acquired a prior right to use
such name,[39] it refused to do so, thus compelling respondent to undergo litigation and incur
expenses to protect its corporate name.
WHEREFORE, the instant petition for review on certiorari is hereby DENIED for lack of merit.
[G.R. No. 124293. September 24, 2003]
JG SUMMIT HOLDINGS, INC., petitioner, vs. COURT OF APPEALS, COMMITTEE
ON PRIVATIZATION, its Chairman and Members; ASSET PRIVATIZATION TRUST
and PHILYARDS HOLDINGS, INC., respondents.
The core issue posed by the Motions for Reconsideration is whether a shipyard is a public
utility whose capitalization must be sixty percent (60%) owned by Filipinos. Our resolution of
this issue will determine the fate of the shipbuilding and ship repair industry. It can either spell
the industrys demise or breathe new life to the struggling but potentially healthy partner in the
countrys bid for economic growth. It can either kill an initiative yet in its infancy, or harness
creativity in the productive disposition of government assets.
The facts are undisputed and can be summarized briefly as follows:
On January 27, 1977, the National Investment and Development Corporation (NIDC), a
government corporation, entered into a Joint Venture Agreement (JVA) with Kawasaki Heavy
Industries, Ltd. of Kobe, Japan (KAWASAKI) for the construction, operation and management
of the Subic National Shipyard, Inc. (SNS) which subsequently became the Philippine Shipyard
18
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and Engineering Corporation (PHILSECO). Under the JVA, the NIDC and KAWASAKI will
contribute P330 million for the capitalization of PHILSECO in the proportion of 60%-40%
respectively.[1] One of its salient features is the grant to the parties of the right of first refusal
should either of them decide to sell, assign or transfer its interest in the joint venture, viz:
1.4 Neither party shall sell, transfer or assign all or any part of its interest in SNS [PHILSECO]
to any third party without giving the other under the same terms the right of first refusal. This
provision shall not apply if the transferee is a corporation owned or controlled by the
GOVERNMENT or by a KAWASAKI affiliate.[2]
On November 25, 1986, NIDC transferred all its rights, title and interest in PHILSECO to the
Philippine National Bank (PNB). Such interests were subsequently transferred to the National
Government pursuant to Administrative Order No. 14. On December 8, 1986, President
Corazon C. Aquino issued Proclamation No. 50 establishing the Committee on Privatization
(COP) and the Asset Privatization Trust (APT) to take title to, and possession of, conserve,
manage and dispose of non-performing assets of the National Government. Thereafter, on
February 27, 1987, a trust agreement was entered into between the National Government and
the APT wherein the latter was named the trustee of the National Governments share in
PHILSECO. In 1989, as a result of a quasi-reorganization of PHILSECO to settle its huge
obligations to PNB, the National Governments shareholdings in PHILSECO increased to
97.41% thereby reducing KAWASAKIs shareholdings to 2.59%.[3]
In the interest of the national economy and the government, the COP and the APT deemed it
best to sell the National Governments share in PHILSECO to private entities. After a series of
negotiations between the APT and KAWASAKI, they agreed that the latters right of first refusal
under the JVA be exchanged for the right to top by five percent (5%) the highest bid for the said
shares. They further agreed that KAWASAKI would be entitled to name a company in which it
was a stockholder, which could exercise the right to top. On September 7, 1990, KAWASAKI
informed APT that Philyards Holdings, Inc. (PHI) would exercise its right to top.[4]
At the pre-bidding conference held on September 18, 1993, interested bidders were given
copies of the JVA between NIDC and KAWASAKI, and of the Asset Specific Bidding Rules
(ASBR) drafted for the National Governments 87.6% equity share in PHILSECO.[5] The
provisions of the ASBR were explained to the interested bidders who were notified that the
bidding would be held on December 2, 1993. A portion of the ASBR reads:
1.0 The subject of this Asset Privatization Trust (APT) sale through public bidding is the
National Governments equity in PHILSECO consisting of 896,869,942 shares of stock
(representing 87.67% of PHILSECOs outstanding capital stock), which will be sold as a whole
block in accordance with the rules herein enumerated.
...
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2.0 The highest bid, as well as the buyer, shall be subject to the final approval of both the APT
Board of Trustees and the Committee on Privatization (COP).
2.1 APT reserves the right in its sole discretion, to reject any or all bids.
3.0 This public bidding shall be on an Indicative Price Bidding basis. The Indicative price set
for the National Governments 87.67% equity in PHILSECO is PESOS: ONE BILLION THREE
HUNDRED MILLION (P1,300,000,000.00).
...
6.0 The highest qualified bid will be submitted to the APT Board of Trustees at its regular
meeting following the bidding, for the purpose of determining whether or not it should be
endorsed by the APT Board of Trustees to the COP, and the latter approves the same. The APT
shall advise Kawasaki Heavy Industries, Inc. and/or its nominee, Philyards Holdings, Inc., that
the highest bid is acceptable to the National Government. Kawasaki Heavy Industries, Inc.
and/or Philyards Holdings, Inc. shall then have a period of thirty (30) calendar days from the
date of receipt of such advice from APT within which to exercise their Option to Top the
Highest Bid by offering a bid equivalent to the highest bid plus five (5%) percent thereof.
6.1 Should Kawasaki Heavy Industries, Inc. and/or Philyards Holdings, Inc. exercise their
Option to Top the Highest Bid, they shall so notify the APT about such exercise of their option
and deposit with APT the amount equivalent to ten percent (10%) of the highest bid plus five
percent (5%) thereof within the thirty (30)-day period mentioned in paragraph 6.0 above. APT
will then serve notice upon Kawasaki Heavy Industries, Inc. and/or Philyards Holdings, Inc.
declaring them as the preferred bidder and they shall have a period of ninety (90) days from the
receipt of the APTs notice within which to pay the balance of their bid price.
6.2 Should Kawasaki Heavy Industries, Inc. and/or Philyards Holdings, Inc. fail to exercise
their Option to Top the Highest Bid within the thirty (30)-day period, APT will declare the
highest bidder as the winning bidder.
...
12.0 The bidder shall be solely responsible for examining with appropriate care these rules, the
official bid forms, including any addenda or amendments thereto issued during the bidding
period. The bidder shall likewise be responsible for informing itself with respect to any and all
conditions concerning the PHILSECO Shares which may, in any manner, affect the bidders
proposal. Failure on the part of the bidder to so examine and inform itself shall be its sole risk
and no relief for error or omission will be given by APT or COP. . ..[6]
At the public bidding on the said date, petitioner J.G. Summit Holdings, Inc. submitted a bid of
Two Billion and Thirty Million Pesos (P2,030,000,000.00) with an acknowledgement of
KAWASAKI/Philyards right to top, viz:
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4. I/We understand that the Committee on Privatization (COP) has up to thirty (30) days to act
on APTs recommendation based on the result of this bidding. Should the COP approve the
highest bid, APT shall advise Kawasaki Heavy Industries, Inc. and/or its nominee, Philyards
Holdings, Inc. that the highest bid is acceptable to the National Government. Kawasaki Heavy
Industries, Inc. and/or Philyards Holdings, Inc. shall then have a period of thirty (30) calendar
days from the date of receipt of such advice from APT within which to exercise their Option to
Top the Highest Bid by offering a bid equivalent to the highest bid plus five (5%) percent
thereof.[7]
As petitioner was declared the highest bidder, the COP approved the sale on December 3, 1993
subject to the right of Kawasaki Heavy Industries, Inc./Philyards Holdings, Inc. to top JGSMIs
bid by 5% as specified in the bidding rules.[8]
On December 29, 1993, petitioner informed APT that it was protesting the offer of PHI to top
its bid on the grounds that: (a) the KAWASAKI/PHI consortium composed of Kawasaki,
Philyards, Mitsui, Keppel, SM Group, ICTSI and Insular Life violated the ASBR because the
last four (4) companies were the losing bidders thereby circumventing the law and prejudicing
the weak winning bidder; (b) only KAWASAKI could exercise the right to top; (c) giving the
same option to top to PHI constituted unwarranted benefit to a third party; (d) no right of first
refusal can be exercised in a public bidding or auction sale; and (e) the JG Summit consortium
was not estopped from questioning the proceedings.[9]
On February 2, 1994, petitioner was notified that PHI had fully paid the balance of the purchase
price of the subject bidding. On February 7, 1994, the APT notified petitioner that PHI had
exercised its option to top the highest bid and that the COP had approved the same on January
6, 1994. On February 24, 1994, the APT and PHI executed a Stock Purchase Agreement.[10]
Consequently, petitioner filed with this Court a Petition for Mandamus under G.R. No. 114057.
On May 11, 1994, said petition was referred to the Court of Appeals. On July 18, 1995, the
Court of Appeals denied the same for lack of merit. It ruled that the petition for mandamus was
not the proper remedy to question the constitutionality or legality of the right of first refusal and
the right to top that was exercised by KAWASAKI/PHI, and that the matter must be brought by
the proper party in the proper forum at the proper time and threshed out in a full blown trial.
The Court of Appeals further ruled that the right of first refusal and the right to top are prima
facie legal and that the petitioner, by participating in the public bidding, with full knowledge of
the right to top granted to KASAWASAKI/Philyards is . . .estopped from questioning the
validity of the award given to Philyards after the latter exercised the right to top and had paid in
full the purchase price of the subject shares, pursuant to the ASBR. Petitioner filed a Motion for
Reconsideration of said Decision which was denied on March 15, 1996. Petitioner thus filed a
Petition for Certiorari with this Court alleging grave abuse of discretion on the part of the
appellate court.[11]
21
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On November 20, 2000, this Court rendered the now assailed Decision ruling among others that
the Court of Appeals erred when it dismissed the petition on the sole ground of the impropriety
of the special civil action of mandamus because the petition was also one of certiorari.[12] It
further ruled that a shipyard like PHILSECO is a public utility whose capitalization must be
sixty percent (60%) Filipino-owned.[13] Consequently, the right to top granted to KAWASAKI
under the Asset Specific Bidding Rules (ASBR) drafted for the sale of the 87.67% equity of the
National Government in PHILSECO is illegal---not only because it violates the rules on
competitive bidding--- but more so, because it allows foreign corporations to own more than
40% equity in the shipyard.[14] It also held that although the petitioner had the opportunity to
examine the ASBR before it participated in the bidding, it cannot be estopped from questioning
the unconstitutional, illegal and inequitable provisions thereof.[15] Thus, this Court voided the
transfer of the national governments 87.67% share in PHILSECO to Philyard Holdings, Inc.,
and upheld the right of JG Summit, as the highest bidder, to take title to the said shares, viz:
WHEREFORE, the instant petition for review on certiorari is GRANTED. The assailed
Decision and Resolution of the Court of Appeals are REVERSED and SET ASIDE. Petitioner is
ordered to pay to APT its bid price of Two Billion Thirty Million Pesos (P2,030,000,000.00 ),
less its bid deposit plus interests upon the finality of this Decision. In turn, APT is ordered to:
(a) accept the said amount of P2,030,000,000.00 less bid deposit and interests from petitioner;
(b) execute a Stock Purchase Agreement with petitioner;
(c) cause the issuance in favor of petitioner of the certificates of stocks representing 87.6% of
PHILSECOs total capitalization;
(d) return to private respondent PHGI the amount of Two Billion One Hundred Thirty-One
Million Five Hundred Thousand Pesos (P2,131,500,000.00); and
(e) cause the cancellation of the stock certificates issued to PHI.
SO ORDERED.[16]
In separate Motions for Reconsideration,[17] respondents submit three basic issues for our
resolution: (1) Whether PHILSECO is a public utility; (2) Whether under the 1977 JVA,
KAWASAKI can exercise its right of first refusal only up to 40% of the total capitalization of
PHILSECO; and (3) Whether the right to top granted to KAWASAKI violates the principles of
competitive bidding.
I.
Whether PHILSECO is a Public Utility.
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After carefully reviewing the applicable laws and jurisprudence, we hold that PHILSECO is not
a public utility for the following reasons:
First. By nature, a shipyard is not a public utility.
A public utility is a business or service engaged in regularly supplying the public with some
commodity or service of public consequence such as electricity, gas, water, transportation,
telephone or telegraph service.[18] To constitute a public utility, the facility must be necessary
for the maintenance of life and occupation of the residents. However, the fact that a business
offers services or goods that promote public good and serve the interest of the public does not
automatically make it a public utility. Public use is not synonymous with public interest. As its
name indicates, the term public utility implies public use and service to the public. The principal
determinative characteristic of a public utility is that of service to, or readiness to serve, an
indefinite public or portion of the public as such which has a legal right to demand and receive
its services or commodities. Stated otherwise, the owner or person in control of a public utility
must have devoted it to such use that the public generally or that part of the public which has
been served and has accepted the service, has the right to demand that use or service so long as
it is continued, with reasonable efficiency and under proper charges.[19] Unlike a private
enterprise which independently determines whom it will serve, a public utility holds out
generally and may not refuse legitimate demand for service.[20] Thus, in Iloilo Ice and Cold
Storage Co. vs. Public Utility Board,[21] this Court defined public use, viz:
Public use means the same as use by the public. The essential feature of the public use is that it
is not confined to privileged individuals, but is open to the indefinite public. It is this indefinite
or unrestricted quality that gives it its public character. In determining whether a use is public,
we must look not only to the character of the business to be done, but also to the proposed mode
of doing it. If the use is merely optional with the owners, or the public benefit is merely
incidental, it is not a public use, authorizing the exercise of jurisdiction of the public utility
commission. There must be, in general, a right which the law compels the owner to give to the
general public. It is not enough that the general prosperity of the public is promoted. Public use
is not synonymous with public interest. The true criterion by which to judge the character of the
use is whether the public may enjoy it by right or only by permission.[22] (emphasis supplied)
Applying the criterion laid down in Iloilo to the case at bar, it is crystal clear that a shipyard
cannot be considered a public utility.
A shipyard is a place or enclosure where ships are built or repaired.[23] Its nature dictates that it
serves but a limited clientele whom it may choose to serve at its discretion. While it offers its
facilities to whoever may wish to avail of its services, a shipyard is not legally obliged to render
its services indiscriminately to the public. It has no legal obligation to render the services sought
by each and every client. The fact that it publicly offers its services does not give the public a
legal right to demand that such services be rendered.
23
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There can be no disagreement that the shipbuilding and ship repair industry is imbued with
public interest as it involves the maintenance of the seaworthiness of vessels dedicated to the
transportation of either persons or goods. Nevertheless, the fact that a business is affected with
public interest does not imply that it is under a duty to serve the public. While the business may
be regulated for public good, the regulation cannot justify the classification of a purely private
enterprise as a public utility. The legislature cannot, by its mere declaration, make something a
public utility which is not in fact such; and a private business operated under private contracts
with selected customers and not devoted to public use cannot, by legislative fiat or by order of a
public service commission, be declared a public utility, since that would be taking private
property for public use without just compensation, which cannot be done consistently with the
due process clause.[24]
It is worthy to note that automobile and aircraft manufacturers, which are of similar nature to
shipyards, are not considered public utilities despite the fact that their operations greatly impact
on land and air transportation. The reason is simple. Unlike commodities or services
traditionally regarded as public utilities such as electricity, gas, water, transportation, telephone
or telegraph service, automobile and aircraft manufacturing---and for that matter ship building
and ship repair--- serve the public only incidentally.
Second. There is no law declaring a shipyard as a public utility.
History provides us hindsight and hindsight ought to give us a better view of the intent of any
law. The succession of laws affecting the status of shipyards ought not to obliterate, but rather,
give us full picture of the intent of the legislature. The totality of the circumstances, including
the contemporaneous interpretation accorded by the administrative bodies tasked with the
enforcement of the law all lead to a singular conclusion: that shipyards are not public utilities.
Since the enactment of Act No. 2307 which created the Public Utility Commission (PUC) until
its repeal by Commonwealth Act No. 146, establishing the Public Service Commission (PSC), a
shipyard, by legislative declaration, has been considered a public utility.[25] A Certificate of
Public Convenience (CPC) from the PSC to the effect that the operation of the said service and
the authorization to do business will promote the public interests in a proper and suitable
manner is required before any person or corporation may operate a shipyard.[26] In addition,
such persons or corporations should abide by the citizenship requirement provided in Article
XIII, section 8 of the 1935 Constitution,[27] viz:
Sec. 8. No franchise, certificate, or any other form or 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,
24
CORPO LAW
alteration, or repeal by the National Assembly when the public interest so requires. (emphasis
supplied)
To accelerate the development of shipbuilding and ship repair industry, former President
Ferdinand E. Marcos issued P.D. No. 666 granting the following incentives:
SECTION 1. Shipbuilding and ship repair yards duly registered with the Maritime Industry
Authority shall be entitled to the following incentive benefits:
(a) Exemption from import duties and taxes.- The importation of machinery, equipment and
materials for shipbuilding, ship repair and/or alteration, including indirect import, as well as
replacement and spare parts for the repair and overhaul of vessels such as steel plates, electrical
machinery and electronic parts, shall be exempt from the payment of customs duty and
compensating tax: Provided, however, That the Maritime Industry Authority certifies that the
item or items imported are not produced locally in sufficient quantity and acceptable quality at
reasonable prices, and that the importation is directly and actually needed and will be used
exclusively for the construction, repair, alteration, or overhaul of merchant vessels, and other
watercrafts; Provided, further, That if the above machinery, equipment, materials and spare
parts are sold to non-tax exempt persons or entities, the corresponding duties and taxes shall be
paid by the original importer; Provided, finally, That local dealers and/or agents who sell
machinery, equipment, materials and accessories to shipyards for shipbuilding and ship repair
are entitled to tax credits, subject to approval by the total tariff duties and compensating tax paid
for said machinery, equipment, materials and accessories.
(b) Accelerated depreciation.- Industrial plant and equipment may, at the option of the
shipbuilder and ship repairer, be depreciated for any number of years between five years and
expected economic life.
(c) Exemption from contractors percentage tax.- The gross receipts derived by shipbuilders and
ship repairers from shipbuilding and ship repairing activities shall be exempt from the
Contractors Tax provided in Section 91 of the National Internal Revenue Code during the first
ten years from registration with the Maritime Industry Authority, provided that such registration
is effected not later than the year 1990; Provided, That any and all amounts which would
otherwise have been paid as contractors tax shall be set aside as a separate fund, to be known as
Shipyard Development Fund, by the contractor for the purpose of expansion, modernization
and/or improvement of the contractors own shipbuilding or ship repairing facilities; Provided,
That, for this purpose, the contractor shall submit an annual statement of its receipts to the
Maritime Industry Authority; and Provided, further, That any disbursement from such fund for
any of the purposes hereinabove stated shall be subject to approval by the Maritime Industry
Authority.
In addition, P.D. No. 666 removed the shipbuilding and ship repair industry from the list of
public utilities, thereby freeing the industry from the 60% citizenship requirement under the
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Constitution and from the need to obtain Certificate of Public Convenience pursuant to section
15 of C.A No. 146. Section 1 (d) of P.D. 666 reads:
(d) Registration required but not as a Public Utility.- The business of constructing and repairing
vessels or parts thereof shall not be considered a public utility and no Certificate of Public
Convenience shall be required therefor. However, no shipyard, graving dock, marine railway or
marine repair shop and no person or enterprise shall engage in construction and/or repair of any
vessel, or any phase or part thereof, without a valid Certificate of Registration and license for
this purpose from the Maritime Industry Authority, except those owned or operated by the
Armed Forces of the Philippines or by foreign governments pursuant to a treaty or agreement.
(emphasis supplied)
Any law, decree, executive order, or rules and regulations inconsistent with P.D. No. 666 were
repealed or modified accordingly.[28] Consequently, sections 13 (b) and 15 of C.A. No. 146
were repealed in so far as the former law included shipyards in the list of public utilities and
required the certificate of public convenience for their operation. Simply stated, the repeal was
due to irreconcilable inconsistency, and by definition, this kind of repeal falls under the
category of an implied repeal.[29]
On April 28, 1983, Batas Pambansa Blg. 391, also known as the Investment Incentive Policy
Act of 1983, was enacted. It laid down the general policy of the government to encourage
private domestic and foreign investments in the various sectors of the economy, to wit:
Sec. 2. Declaration of Investment Policy.- It is the policy of the State to encourage private
domestic and foreign investments in industry, agriculture, mining and other sectors of the
economy which shall: provide significant employment opportunities relative to the amount of
the capital being invested; increase productivity of the land, minerals, forestry, aquatic and other
resources of the country, and improve utilization of the products thereof; improve technical
skills of the people employed in the enterprise; provide a foundation for the future development
of the economy; accelerate development of less developed regions of the country; and result in
increased volume and value of exports for the economy.
It is the policy of the State to extend to projects which will significantly contribute to the
attainment of these objectives, fiscal incentives without which said projects may not be
established in the locales, number and/or pace required for optimum national economic
development. Fiscal incentive systems shall be devised to compensate for market imperfections,
reward performance of making contributions to economic development, cost-efficient and be
simple to administer.
The fiscal incentives shall be extended to stimulate establishment and assist initial operations of
the enterprise, and shall terminate after a period of not more than 10 years from registration or
start-up of operation unless a special period is otherwise stated.
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The foregoing declaration shall apply to all investment incentive schemes and in particular will
supersede article 2 of Presidential Decree No. 1789. (emphases supplied)
With the new investment incentive regime, Batas Pambansa Blg. 391 repealed the following
laws, viz:
Sec. 20. The following provisions are hereby repealed:
1) Section 53, P.D. 463 (Mineral Resources Development Decree);
2.) Section 1, P.D. 666 (Shipbuilding and Ship Repair Industry);
3) Section 6, P.D. 1101 (Radioactive Minerals);
4) LOI 508 extending P.D. 791 and P.D. 924 (Sugar); and
5) The following articles of Presidential Decree 1789: 2, 18, 19, 22, 28, 30, 39, 49 (d), 62, and
77. Articles 45, 46 and 48 are hereby amended only with respect to domestic and export
producers.
All other laws, decrees, executive orders, administrative orders, rules and regulations or parts
thereof which are inconsistent with the provisions of this Act are hereby repealed, amended or
modified accordingly.
All other incentive systems which are not in any way affected by the provisions of this Act may
be restructured by the President so as to render them cost-efficient and to make them conform
with the other policy guidelines in the declaration of policy provided in Section 2 of this Act.
(emphasis supplied)
From the language of the afore-quoted provision, the whole of P.D. No. 666, section 1 was
expressly and categorically repealed. As a consequence, the provisions of C.A. No. 146, which
were impliedly repealed by P.D. No. 666, section 1 were revived.[30] In other words, with the
enactment of Batas Pambansa Blg. 391, a shipyard reverted back to its status as a public utility
and as such, requires a CPC for its operation.
The crux of the present controversy is the effect of the express repeal of Batas Pambansa Blg.
391 by Executive Order No. 226 issued by former President Corazon C. Aquino under her
emergency powers.
We rule that the express repeal of Batas Pambansa Blg. 391 by E.O. No. 226 did not revive
Section 1 of P.D. No. 666. But more importantly, it also put a period to the existence of sections
13 (b) and 15 of C.A. No. 146. It bears emphasis that sections 13 (b) and 15 of C.A. No. 146, as
originally written, owed their continued existence to Batas Pambansa Blg. 391. Had the latter
27
CORPO LAW
not repealed P.D. No. 666, the former should have been modified accordingly and shipyards
effectively removed from the list of public utilities. Ergo, with the express repeal of Batas
Pambansa Blg. 391 by E.O. No. 226, the revival of sections 13 (b) and 15 of C.A. No. 146 had
no more leg to stand on. A law that has been expressly repealed ceases to exist and becomes
inoperative from the moment the repealing law becomes effective.[31] Hence, there is simply
no basis in the conclusion that shipyards remain to be a public utility. A repealed statute cannot
be the basis for classifying shipyards as public utilities.
In view of the foregoing, there can be no other conclusion than to hold that a shipyard is not a
pubic utility. A shipyard has been considered a public utility merely by legislative declaration.
Absent this declaration, there is no more reason why it should continuously be regarded as such.
The fact that the legislature did not clearly and unambiguously express its intention to include
shipyards in the list of public utilities indicates that that it did not intend to do so. Thus, a
shipyard reverts back to its status as non-public utility prior to the enactment of the Public
Service Law.
This interpretation is in accord with the uniform interpretation placed upon it by the Board of
Investments (BOI), which was entrusted by the legislature with the preparation of annual
Investment Priorities Plan (IPPs). The BOI has consistently classified shipyards as part of the
manufacturing sector and not of the public utilities sector. The enactment of Batas Pambansa
Blg. 391 did not alter the treatment of the BOI on shipyards. It has been, as at present, classified
as part of the manufacturing and not of the public utilities sector.[32]
Furthermore, of the 441 Ship Building and Ship Repair (SBSR) entities registered with the
MARINA,[33] none appears to have an existing franchise. If we continue to hold that a
shipyard is a pubic utility, it is a necessary consequence that all these entities should have
obtained a franchise as was the rule prior to the enactment of P.D. No. 666. But MARINA
remains without authority, pursuant to P.D. No. 474[34] to issue franchises for the operation of
shipyards. Surely,
the legislature did not intend to create a vacuum by continuously treating a shipyard as a public
utility without giving MARINA the power to issue a Certificate of Public Convenience (CPC)
or a Certificate of Public Convenience and Necessity (CPCN) as required by section 15 of C.A.
No. 146.
II.
Whether under the 1977 Joint Venture Agreement,
KAWASAKI can purchase only a maximum of 40%
of PHILSECOs total capitalization.
A careful reading of the 1977 Joint Venture Agreement reveals that there is nothing that
prevents KAWASAKI from acquiring more than 40% of PHILSECOs total capitalization.
Section 1 of the 1977 JVA states:
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1.3 The authorized capital stock of Philseco shall be P330 million. The parties shall thereafter
increase their subscription in Philseco as may be necessary and as called by the Board of
Directors, maintaining a proportion of 60%-40% for NIDC and KAWASAKI respectively, up to
a total subscribed and paid-up capital stock of P312 million.
1.4 Neither party shall sell, transfer or assign all or any part of its interest in SNS [renamed
PHILSECO] to any third party without giving the other under the same terms the right of first
refusal. This provision shall not apply if the transferee is a corporation owned and controlled by
the GOVERMENT [of the Philippines] or by a Kawasaki affiliate.
1.5 The By-Laws of SNS [PHILSECO] shall grant the parties preemptive rights to unissued
shares of SNS [PHILSECO].[35]
Under section 1.3, the parties agreed to the amount of P330 million as the total capitalization of
their joint venture. There was no mention of the amount of their initial subscription. What is
clear is that they are to infuse the needed capital from time to time until the total subscribed and
paid-up capital reaches P312 million. The phrase maintaining a proportion of 60%-40% refers
to their respective share of the burden each time the Board of Directors decides to increase the
subscription to reach the target paid-up capital of P312 million. It does not bind the parties to
maintain the sharing scheme all throughout the existence of their partnership.
The parties likewise agreed to arm themselves with protective mechanisms to preserve their
respective interests in the partnership in the event that (a) one party decides to sell its shares to
third parties; and (b) new Philseco shares are issued. Anent the first situation, the non-selling
party is given the right of first refusal under section 1.4 to have a preferential right to buy or to
refuse the selling partys shares. The right of first refusal is meant to protect the original or
remaining joint venturer(s) or shareholder(s) from the entry of third persons who are not
acceptable to it as co-venturer(s) or co-shareholder(s). The joint venture between the Philippine
Government and KAWASAKI is in the nature of a partnership[36] which, unlike an ordinary
corporation, is based on delectus personae.[37] No one can become a member of the partnership
association without the consent of all the other associates. The right of first refusal thus ensures
that the parties are given control over who may become a new partner in substitution of or in
addition to the original partners. Should the selling partner decide to dispose all its shares, the
non-selling partner may acquire all these shares and terminate the partnership. No person or
corporation can be compelled to remain or to continue the partnership. Of course, this
presupposes that there are no other restrictions in the maximum allowable share that the nonselling partner may acquire such as the constitutional restriction on foreign ownership in public
utility. The theory that KAWASAKI can acquire, as a maximum, only 40% of PHILSECOs
shares is correct only if a shipyard is a public utility. In such instance, the non-selling partner
who is an alien can acquire only a maximum of 40% of the total capitalization of a public utility
despite the grant of first refusal. The partners cannot, by mere agreement, avoid the
constitutional proscription. But as afore-discussed, PHILSECO is not a public utility and no
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CORPO LAW
other restriction is present that would limit the right of KAWASAKI to purchase the
Governments share to 40% of Philsecos total capitalization.
Furthermore, the phrase under the same terms in section 1.4 cannot be given an interpretation
that would limit the right of KAWASAKI to purchase PHILSECO shares only to the extent of
its original proportionate contribution of 40% to the total capitalization of the PHILSECO.
Taken together with the whole of section 1.4, the phrase under the same terms means that a
partner to the joint venture that decides to sell its shares to a third party shall make a similar
offer to the non-selling partner. The selling partner cannot make a different or a more onerous
offer to the non-selling partner.
The exercise of first refusal presupposes that the non-selling partner is aware of the terms of the
conditions attendant to the sale for it to have a guided choice. While the right of first refusal
protects the non-selling partner from the entry of third persons, it cannot also deprive the other
partner the right to sell its shares to third persons if, under the same offer, it does not buy the
shares.
Apart from the right of first refusal, the parties also have preemptive rights under section 1.5 in
the unissued shares of Philseco. Unlike the former, this situation does not contemplate transfer
of a partners shares to third parties but the issuance of new Philseco shares. The grant of
preemptive rights preserves the proportionate shares of the original partners so as not to dilute
their respective interests with the issuance of the new shares. Unlike the right of first refusal, a
preemptive right gives a partner a preferential right over the newly issued shares only to the
extent that it retains its original proportionate share in the joint venture.
The case at bar does not concern the issuance of new shares but the transfer of a partners share
in the joint venture. Verily, the operative protective mechanism is the right of first refusal which
does not impose any limitation in the maximum shares that the non-selling partner may acquire.
III.
Whether the right to top granted to KAWASAKI
in exchange for its right of first refusal violates
the principles of competitive bidding.
We also hold that the right to top granted to KAWASAKI and exercised by private respondent
did not violate the rules of competitive bidding.
The word bidding in its comprehensive sense means making an offer or an invitation to
prospective contractors whereby the government manifests its intention to make proposals for
the purpose of supplies, materials and equipment for official business or public use, or for
public works or repair.[38] The three principles of public bidding are: (1) the offer to the public;
(2) an opportunity for competition; and (3) a basis for comparison of bids.[39] As long as these
three principles are complied with, the public bidding can be considered valid and legal. It is not
30
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necessary that the highest bid be automatically accepted. The bidding rules may specify other
conditions or the bidding process be subjected to certain reservation or qualification such as
when the owner reserves to himself openly at the time of the sale the right to bid upon the
property, or openly announces a price below which the property will not be sold. Hence, where
the seller reserves the right to refuse to accept any bid made, a binding sale is not consummated
between the seller and the bidder until the seller accepts the bid. Furthermore, where a right is
reserved in the seller to reject any and all bids received, the owner may exercise the right even
after the auctioneer has accepted a bid, and this applies to the auction of public as well as
private property. [40] Thus:
It is a settled rule that where the invitation to bid contains a reservation for the Government to
reject any or all bids, the lowest or the highest bidder, as the case may be, is not entitled to an
award as a matter of right for it does not become a ministerial duty of the Government to make
such an award. Thus, it has been held that where the right to reject is so reserved, the lowest bid
or any bid for that matter may be rejected on a mere technicality, that all bids may be rejected,
even if arbitrarily and unwisely, or under a mistake, and that in the exercise of a sound
discretion, the award may be made to another than the lowest bidder. And so, where the
Government as advertiser, availing itself of that right, makes its choice in rejecting any or all
bids, the losing bidder has no cause to complain nor right to dispute that choice, unless an
unfairness or injustice is shown. Accordingly, he has no ground of action to compel the
Government to award the contract in his favor, nor compel it to accept his bid.[41]
In the instant case, the sale of the Government shares in PHILSECO was publicly known. All
interested bidders were welcomed. The basis for comparing the bids were laid down. All bids
were accepted sealed and were opened and read in the presence of the COAs official
representative and before all interested bidders. The only question that remains is whether or not
the existence of KAWASAKIs right to top destroys the essence of competitive bidding so as to
say that the bidders did not have an opportunity for competition. We hold that it does not.
The essence of competition in public bidding is that the bidders are placed on equal footing.
This means that all qualified bidders have an equal chance of winning the auction through their
bids. In the case at bar, all of the bidders were exposed to the same risk and were subjected to
the same condition, i.e., the existence of KAWASAKIs right to top. Under the ASBR, the
Government expressly reserved the right to reject any or all bids, and manifested its intention
not to accept the highest bid should KAWASAKI decide to exercise its right to top under the
ABSR. This reservation or qualification was made known to the bidders in a pre-bidding
conference held on September 28, 1993. They all expressly accepted this condition in writing
without any qualification. Furthermore, when the Committee on Privatization notified petitioner
of the approval of the sale of the National Government shares of stock in PHILSECO, it
specifically stated that such approval was subject to the right of KAWASAKI Heavy Industries,
Inc./Philyards Holdings, Inc. to top JGSMIs bid by 5% as specified in the bidding rules. Clearly,
the approval of the sale was a conditional one. Since Philyards eventually exercised its right to
top petitioners bid by 5%, the sale was not consummated. Parenthetically, it cannot be argued
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CORPO LAW
that the existence of the right to top set for naught the entire public bidding. Had Philyards
Holdings, Inc. failed or refused to exercise its right to top, the sale between the petitioner and
the National Government would have been consummated. In like manner, the existence of the
right to top cannot be likened to a second bidding, which is countenanced, except when there is
failure to bid as when there is only one bidder or none at all. A prohibited second bidding
presupposes that based on the terms and conditions of the sale, there is already a highest bidder
with the right to demand that the seller accept its bid. In the instant case, the highest bidder was
well aware that the acceptance of its bid was conditioned upon the non-exercise of the right to
top.
To be sure, respondents did not circumvent the requirements for bidding by granting
KAWASAKI, a non-bidder, the right to top the highest bidder. The fact that KAWASAKIs
nominee to exercise the right to top has among its stockholders some losing bidders cannot also
be deemed unfair.
It must be emphasized that none of the parties questions the existence of KAWASAKIs right of
first refusal, which is concededly the basis for the grant of the right to top. Under KAWASAKIs
right of first refusal, the National Government is under the obligation to give preferential right
to KAWASAKI in the event it decides to sell its shares in PHILSECO. It has to offer to
KAWASAKI the shares and give it the option to buy or refuse under the same terms for which it
is willing to sell the said shares to third parties. KAWASAKI is not a mere non-bidder. It is a
partner in the joint venture; the incidents of which are governed by the law on contracts and on
partnership.
It is true that properties of the National Government, as a rule, may be sold only after a public
bidding is held. Public bidding is the accepted method in arriving at a fair and reasonable price
and ensures that overpricing, favoritism and other anomalous practices are eliminated or
minimized.[42] But the requirement for public bidding does not negate the exercise of the right
of first refusal. In fact, public bidding is an essential first step in the exercise of the right of first
refusal because it is only after the public bidding that the terms upon which the Government
may be said to be willing to sell its shares to third parties may be known. It is only after the
public bidding that the Government will have a basis with which to offer KAWASAKI the
option to buy or forego the shares.
Assuming that the parties did not swap KAWASAKIs right of first refusal with the right to top,
KAWASAKI would have been able to buy the National Governments shares in PHILSECO
under the same terms as offered by the highest bidder. Stated otherwise, by exercising its right
of first refusal, KAWASAKI could have bought the shares for only P2.03 billion and not the
higher amount of P2.1315 billion. There is, thus, no basis in the submission that the right to top
unfairly favored KAWASAKI. In fact, with the right to top, KAWASAKI stands to pay higher
than it should had it settled with its right of first refusal. The obvious beneficiary of the scheme
is the National Government.
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If at all, the obvious consideration for the exchange of the right of first refusal with the right to
top is that KAWASAKI can name a nominee, which it is a shareholder, to exercise the right to
top. This is a valid contractual stipulation; the right to top is an assignable right and both parties
are aware of the full legal consequences of its exercise. As aforesaid, all bidders were aware of
the existence of the right to top, and its possible effects on the result of the public bidding was
fully disclosed to them. The petitioner, thus, cannot feign ignorance nor can it be allowed to
repudiate its acts and question the proceedings it had fully adhered to.[43]
The fact that the losing bidder, Keppel Consortium (composed of Keppel, SM Group, Insular
Life Assurance, Mitsui and ICTSI), has joined Philyards in the latters effort to raise P2.131
billion necessary in exercising the right to top is not contrary to law, public policy or public
morals. There is nothing in the ASBR that bars the losing bidders from joining either the
winning bidder (should the right to top is not exercised) or KAWASAKI/PHI (should it exercise
its right to top as it did), to raise the purchase price. The petitioner did not allege, nor was it
shown by competent evidence, that the participation of the losing bidders in the public bidding
was done with fraudulent intent. Absent any proof of fraud, the formation by Philyards of a
consortium is legitimate in a free enterprise system. The appellate court is thus correct in
holding the petitioner estopped from questioning the validity of the transfer of the National
Governments shares in PHILSECO to respondent.
Finally, no factual basis exists to support the view that the drafting of the ASBR was illegal
because no prior approval was given by the COA for it, specifically the provision on the right to
top the highest bidder and that the public auction on December 2, 1993 was not witnessed by a
COA representative. No evidence was proffered to prove these allegations and the Court cannot
make legal conclusions out of mere allegations. Regularity in the performance of official duties
is presumed[44] and in the absence of competent evidence to rebut this presumption, this Court
is duty bound to uphold this presumption.
IN VIEW OF THE FOREGOING, the Motion for Reconsideration is hereby GRANTED. The
impugned
G.R. No. 104175 June 25, 1993

YOUNG AUTO SUPPLY CO. AND NEMESIO GARCIA, petitioners,
vs.THE HONORABLE COURT OF APPEALS (THIRTEENTH DIVISION) AND
GEORGE CHIONG ROXAS, respondents.
Petitioners seek to set aside the decision of respondent Court of Appeals in CA-G.R. SP No.
25237, which reversed the Order dated February 8, 1991 issued by the Regional Trial Court,
Branch 11, Cebu City in Civil Case No. CEB 6967. The order of the trial court denied the
33
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motion to dismiss filed by respondent George C. Roxas of the complaint for collection filed by
petitioners.
It appears that sometime on October 28, 1987, Young Auto Supply Co. Inc. (YASCO)
represented by Nemesio Garcia, its president, Nelson Garcia and Vicente Sy, sold all of their
shares of stock in Consolidated Marketing & Development Corporation (CMDC) to Roxas. The
purchase price was P8,000,000.00 payable as follows: a downpayment of P4,000,000.00 and the
balance of P4,000,000.00 in four post dated checks of P1,000,000.00 each.
Immediately after the execution of the agreement, Roxas took full control of the four markets of
CMDC. However, the vendors held on to the stock certificates of CMDC as security pending
full payment of the balance of the purchase price.
The first check of P4,000,000.00, representing the down-payment, was honored by the drawee
bank but the four other checks representing the balance of P4,000,000.00 were dishonored. In
the meantime, Roxas sold one of the markets to a third party. Out of the proceeds of the sale,
YASCO received P600,000.00, leaving a balance of P3,400,000.00 (Rollo, p. 176).
Subsequently, Nelson Garcia and Vicente Sy assigned all their rights and title to the proceeds of
the sale of the CMDC shares to Nemesio Garcia.
On June 10, 1988, petitioners filed a complaint against Roxas in the Regional Trial Court,
Branch 11, Cebu City, praying that Roxas be ordered to pay petitioners the sum of P3,400,00.00
or that full control of the three markets be turned over to YASCO and Garcia. The complaint
also prayed for the forfeiture of the partial payment of P4,600,000.00 and the payment of
attorney's fees and costs (Rollo, p. 290).
Roxas filed two motions for extension of time to submit his answer. But despite said motion, he
failed to do so causing petitioners to file a motion to have him declared in default. Roxas then
filed, through a new counsel, a third motion for extension of time to submit a responsive
pleading.
On August 19, 1988, the trial court declared Roxas in default. The order of default was,
however, lifted upon motion of Roxas.
On August 22, 1988, Roxas filed a motion to dismiss on the grounds that:
1.
The complaint did not state a cause of action due to non-joinder of indispensable parties;
2.
The claim or demand set forth in the complaint had been waived, abandoned or otherwise
extinguished; and
3.
The venue was improperly laid (Rollo, p. 299).
34
CORPO LAW
After a hearing, wherein testimonial and documentary evidence were presented by both parties,
the trial court in an Order dated February 8, 1991 denied Roxas' motion to dismiss. After
receiving said order, Roxas filed another motion for extension of time to submit his answer. He
also filed a motion for reconsideration, which the trial court denied in its Order dated April 10,
1991 for being pro-forma (Rollo, p. 17). Roxas was again declared in default, on the ground that
his motion for reconsideration did not toll the running of the period to file his answer.
On May 3, 1991, Roxas filed an unverified Motion to Lift the Order of Default which was not
accompanied with the required affidavit or merit. But without waiting for the resolution of the
motion, he filed a petition for certiorari with the Court of Appeals.
The Court of Appeals sustained the findings of the trial court with regard to the first two
grounds raised in the motion to dismiss but ordered the dismissal of the complaint on the
ground of improper venue (Rollo, p. 49).
A subsequent motion for reconsideration by petitioner was to no avail.
Petitioners now come before us, alleging that the Court of Appeals
erred in:
1.
holding the venue should be in Pasay City, and not in Cebu City (where both
petitioners/plaintiffs are residents;
2.
not finding that Roxas is estopped from questioning the choice of venue (Rollo, p. 19).
The petition is meritorious.

In holding that the venue was improperly laid in Cebu City, the Court of Appeals relied on the
address of YASCO, as appearing in the Deed of Sale dated October 28, 1987, which is "No.
1708 Dominga Street, Pasay City." This was the same address written in YASCO's letters and
several commercial documents in the possession of Roxas (Decision, p. 12; Rollo, p. 48).
In the case of Garcia, the Court of Appeals said that he gave Pasay City as his address in three
letters which he sent to Roxas' brothers and sisters (Decision, p. 12; Rollo, p. 47). The appellate
court held that Roxas was led by petitioners to believe that their residence is in Pasay City and
that he had relied upon those representations (Decision, p. 12, Rollo, p. 47).
The Court of Appeals erred in holding that the venue was improperly laid in Cebu City.
In the Regional Trial Courts, all personal actions are commenced and tried in the province or
city where the defendant or any of the defendants resides or may be found, or where the
35
CORPO LAW
plaintiff or any of the plaintiffs resides, at the election of the plaintiff [Sec. 2(b) Rule 4, Revised
Rules of Court].
There are two plaintiffs in the case at bench: a natural person and a domestic corporation. Both
plaintiffs aver in their complaint that they are residents of Cebu City, thus:
1.1. Plaintiff Young Auto Supply Co., Inc., ("YASCO") is a domestic corporation duly
organized and existing under Philippine laws with principal place of business at M. J. Cuenco
Avenue, Cebu City. It also has a branch office at 1708 Dominga Street, Pasay City, Metro
Manila.
Plaintiff Nemesio Garcia is of legal age, married, Filipino citizen and with business address at
Young Auto Supply Co., Inc., M. J. Cuenco Avenue, Cebu City. . . . (Complaint, p. 1; Rollo, p.
81).
The Article of Incorporation of YASCO (SEC Reg. No. 22083) states:
THIRD
That the place where the principal office of the corporation is to be established or
located is at Cebu City, Philippines (as amended on December 20, 1980 and further amended on
December 20, 1984) (Rollo, p. 273).
A corporation has no residence in the same sense in which this term is applied to a natural
person. But for practical purposes, a corporation is in a metaphysical sense a resident of the
place where its principal office is located as stated in the articles of incorporation (Cohen v.
Benguet Commercial Co., Ltd., 34 Phil. 256 [1916] Clavecilla Radio System v. Antillon, 19
SCRA 379 [1967]). The Corporation Code precisely requires each corporation to specify in its
articles of incorporation the "place where the principal office of the corporation is to be located
which must be within the Philippines" (Sec. 14 [3]). The purpose of this requirement is to fix
the residence of a corporation in a definite place, instead of allowing it to be ambulatory.
In Clavencilla Radio System v. Antillon, 19 SCRA 379 ([1967]), this Court explained why
actions cannot be filed against a corporation in any place where the corporation maintains its
branch offices. The Court ruled that to allow an action to be instituted in any place where the
corporation has branch offices, would create confusion and work untold inconvenience to said
entity. By the same token, a corporation cannot be allowed to file personal actions in a place
other than its principal place of business unless such a place is also the residence of a coplaintiff or a defendant.
If it was Roxas who sued YASCO in Pasay City and the latter questioned the venue on the
ground that its principal place of business was in Cebu City, Roxas could argue that YASCO
was in estoppel because it misled Roxas to believe that Pasay City was its principal place of
business. But this is not the case before us.
36
CORPO LAW
With the finding that the residence of YASCO for purposes of venue is in Cebu City, where its
principal place of business is located, it becomes unnecessary to decide whether Garcia is also a
resident of Cebu City and whether Roxas was in estoppel from questioning the choice of Cebu
City as the venue.
WHEREFORE, the petition is GRANTED. The decision of the Court of Appeals appealed from
is SET ASIDE and the Order dated February 8, 1991 of the Regional Trial Court is
REINSTATED.
[G.R. No. 51765. March 3, 1997]

REPUBLIC PLANTERS BANK, petitioner, vs. HON. ENRIQUE A. AGANA, SR., as
Presiding Judge, Court of First Instance of Rizal, Branch XXVIII, Pasay City, ROBESFRANCISCO REALTY & DEVELOPMENT CORPORATION and ADALIA F. ROBES,
respondents.
This is a petition for certiorari seeking the annulment of the Decision[1] of the then Court of
First Instance of Rizal[2] for having been rendered in grave abuse of discretion. Private
respondents Robes-Francisco Realty and Development Corporation (hereafter, "the
Corporation") and Adalia F. Robes filed in the court a quo, an action for specific performance to
compel petitioner to redeem 800 preferred shares of stock with a face value of P8,000.00 and to
pay 1% quarterly interest thereon as quarterly dividend owing them under the terms and
conditions of the certificates of stock.
The court a quo rendered judgment in favor of private respondents; hence, this instant petition.
Herein parties debate only legal issues, no issues of fact having been raised by them in the court
a quo. For ready reference, however, the following narration of pertinent transactions and events
is in order:
On September 18, 1961, private respondent Corporation 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, through its officers then, private respondent 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, petitioner 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 private respondent 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:
37
CORPO LAW
"The Preferred Stock shall have the following rights, preferences, qualifications and limitations,
to wit:
1. Of the right to receive a quarterly dividend of One Per Centum (1%), cumulative and
participating.
xxx
2. That such preferred shares may be redeemed, by the system of drawing lots, at any time
after two (2) years from the date of issue at the option of the Corporation. x x x."
On January 31, 1979, 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. Private respondents attached to their complaint, a letter-demand dated January 5,
1979 which, significantly, was not formally offered in evidence.
Petitioner 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.
Petitioner's Motion to Dismiss was denied by the trial court in an Order dated March 16, 1979.
[4] Petitioner then filed its Answer on May 2, 1979.[5] Thereafter, the trial court gave the
parties ten (10) days from July 30, 1979 to submit their respective memoranda after the
submission of which the case would be deemed submitted for resolution.[6]
On September 7, 1979, the trial court rendered the herein assailed decision in favor of private
respondents. In ordering petitioner to pay private respondents the face value of the stock
certificates as redemption price, plus 1% quarterly interest thereon until full payment, the trial
court ruled:
"There being no issue of fact raised by either of the parties who filed their respective
memoranda delineating their respective contentions, a judgment on the pleadings, conformably
with an earlier order of the Court, appears to be in order.
From a further perusal of the pleadings, it appears that the provision of the stock certificates in
question to the effect that the plaintiffs shall have the right to receive a quarterly dividend of
One Per Centum (1%), cumulative and participating, clearly and unequivocably [sic] indicates
that the same are 'interest bearing stocks' which are stocks issued by a corporation under an
agreement to pay a certain rate of interest thereon (5 Thompson, Sec. 3439). As such, plaintiffs
become entitled to the payment thereof as a matter of right without necessity of a prior
declaration of dividend.
On the question of the redemption by the defendant of said preferred shares of stock, the very
wordings of the terms and conditions in said stock certificates clearly allows the same.
38
CORPO LAW
To allow the herein defendant not to redeem said preferred shares of stock and/or pay the
interest due thereon despite the clear import of said provisions by the mere invocation of
alleged Central Bank Circulars prohibiting the same is tantamount to an impairment of the
obligation of contracts enshrined in no less than the fundamental law itself.
Moreover, the herein defendant is considered in estoppel from taking shelter behind a General
Banking Act provision to the effect that it cannot buy its own shares of stocks considering that
the very terms and conditions in said stock certificates allowing their redemption are its own
handiwork.
As to the claim by the defendant that plaintiffs' cause of action is barred by prescription, suffice
it to state that the running of the prescriptive period was considered interrupted by the written
extrajudicial demands made by the plaintiffs from the defendant."[7]
Aggrieved by the decision of the trial court, petitioner elevated the case before us essentially on
pure questions of law. Petitioner's statement of the issues that it submits for us to adjudicate
upon, is as follows:
"A.
RESPONDENT JUDGE COMMITTED A GRAVE ABUSE OF DISCRETION
AMOUNTING TO LACK OR EXCESS OF JURISDICTION IN ORDERING PETITIONER
TO PAY RESPONDENT ADALIA F. ROBES THE AMOUNT OF P8,213.69 AS INTERESTS
FROM 1961 To 1979 ON HER PREFERRED SHARES.
B.
RESPONDENT JUDGE COMMITTED A GRAVE ABUSE OF DISCRETION
AMOUNTING TO LACK OR EXCESS OF JURISDICTION IN ORDERING PETITIONER
TO REDEEM RESPONDENT ADALIA F. ROBES' PREFERRED SHARES FOR P8,000.00
C.
RESPONDENT JUDGE COMMITTED A GRAVE ABUSE OF
DISCRETION AMOUNTING TO LACK OR EXCESS OF JURISDICTION IN
DISREGARDING THE ORDER OF THE CENTRAL BANK TO PETITIONER TO DESIST
FROM REDEEMING ITS PREFERRED SHARES AND FROM PAYING DIVIDENDS
THEREON x x x.
D.
THE TRIAL COURT ERRED IN NOT HOLDING THAT THE
COMPLAINT DOES NOT STATE A CAUSE OF ACTION.
E.
THE TRIAL COURT ERRED IN NOT HOLDING THAT THE CLAIM OF
RESPONDENT ADALIA F. ROBES IS BARRED BY PRESCRIPTION OR LACHES."[8]
The petition is meritorious.
39
CORPO LAW
Before passing upon the merits of this petition, it may be pertinent to provide an overview on
the nature of preferred shares and the redemption thereof, considering that these issues lie at the
heart of the dispute.
A preferred share of stock, on one hand, 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.[9] 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 shares as to dividends. The former is a share which gives the holder thereof preference
in the distribution of the assets of the corporation in case of liquidation;[10] 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.[11] There is no guaranty,
however, that the share will receive any dividends. Under the old Corporation Law in force at
the time the contract between the petitioner and the private respondents was entered into, it was
provided that "no corporation shall make or declare any dividend except from the surplus profits
arising from its business, or distribute its capital stock or property other than actual profits
among its members or stockholders until after the payment of its debts and the termination of its
existence by limitation or lawful dissolution."[12] Similarly, the present Corporation Code[13]
provides that the board of directors of a stock corporation may declare dividends only out of
unrestricted retained earnings.[14] The Code, in Section 43, adopting the change made in
accounting terminology, substituted the phrase unrestricted retained earnings," which may be a
more precise term, in place of "surplus profits arising from its business" in the former law.
Thus, the declaration of dividends is dependent upon the availability of surplus profit or
unrestricted retained earnings, as the case may be. Preferences granted to preferred
stockholders, moreover, 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.
Dividends are thus payable only when there are profits earned by the corporation and as a
general rule, even if there are existing profits, the board of directors has the discretion to
determine whether or not dividends are to be declared.[15] Shareholders, both common and
preferred, are considered risk takers who invest capital in the business and who can look only to
what is left after corporate debts and liabilities are fully paid.[16]
Redeemable shares, on the other hand, 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 a certain redemption price.[17] A redemption by the corporation of its stock is, in a
sense, a repurchase of it for cancellation.[18] The present Code allows redemption of shares
even if there are no unrestricted retained earnings on the books of the corporation. This is a new
provision which in effect qualifies the general rule that the corporation cannot purchase its own
shares except out of current retained earnings.[19] However, while redeemable shares may be
redeemed regardless of the existence of unrestricted retained earnings, this is subject to the
condition that the corporation has, after such redemption, assets in its books to cover debts and
liabilities inclusive of capital stock. Redemption, therefore, may not be made where the
40
CORPO LAW
corporation is insolvent or if such redemption will cause insolvency or inability of the
corporation to meet its debts as they mature.[20]
We come now to the merits of the case. The petitioner argues that it cannot be compelled to
redeem the preferred shares issued to the private respondent. We agree. Respondent judge, in
ruling that petitioner must redeem the shares in question, stated that:
"On the question of the redemption by the defendant of said preferred shares of stock, the very
wordings of the terms and conditions in said stock certificates clearly allows the same."[21]
What respondent Judge failed to recognize was that while the stock certificate does allow
redemption, the option to do so was clearly vested in the petitioner 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.[22] 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. We fail to see how respondent judge can ignore what, in his words, are the
"very wordings of the terms and conditions in said stock certificates" and construe what is
clearly a mere option to be his legal basis for compelling the petitioner to redeem the shares in
question.
The redemption of said shares cannot be allowed. As pointed out by the petitioner, the Central
Bank made a finding that said petitioner has been suffering from chronic reserve deficiency,[23]
and that such finding resulted in a directive, issued on January 31, 1973 by then Gov. G. S.
Licaros of the Central Bank, to the President and Acting Chairman of the Board of the petitioner
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.
[24] 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. The respondent judge insists that the
directive constitutes an impairment of the obligation of contracts. It has, however, been settled
that the Constitutional guaranty of non-impairment of obligations of contract is limited by the
exercise of the police power of the state, the reason being that public welfare is superior to
private rights.[25]
The respondent judge also stated that since the stock certificate granted the private respondents
the right to receive a quarterly dividend of one Per Centum (1%), cumulative and participating,
it "clearly and unequivocably (sic) indicates that the same are 'interest bearing stocks' or stocks
issued by a corporation under an agreement to pay a certain rate of interest thereon. As such,
41
CORPO LAW
plaintiffs (private respondents herein) become entitled to the payment thereof as a matter of
right without necessity of a prior declaration of dividend."[26] There is no legal basis for this
observation. Both Sec. 16 of the Corporation Law and Sec. 43 of the present Corporation Code
prohibit the issuance of any stock dividend without the approval of stockholders, representing
not less than two-thirds (2/3) of the outstanding capital stock at a regular or special meeting
duly called for the 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.[27] Clearly, the respondent judge, in compelling
the petitioner to redeem the shares in question and to pay the corresponding dividends,
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.
Anent the issue of prescription, this Court so holds that the claim of private respondent is
already barred by prescription as well as laches. Art. 1144 of the New Civil Code provides that
a right of action that is founded upon a written contract prescribes in ten (10) years. The letterdemand made by the private respondents to the petitioner was made only on January 5, 1979, or
almost eighteen years after receipt of the written contract in the form of the stock certificate. As
noted earlier, this letter-demand, significantly, was not formally offered in evidence, nor were
any other evidence of demand presented. Therefore, we conclude that the only time the private
respondents saw it fit to assert their rights, if any, to the preferred shares of stock, was after the
lapse of almost eighteen years. The same clearly indicates that the right of the private
respondents to any relief under the law has already prescribed. Moreover, the claim of the
private respondents is also barred by laches. Laches has been defined as the failure or neglect,
for an unreasonable length of time, to do that which by exercising due diligence could or should
have been done earlier; it is negligence or omission to assert a right within a reasonable time,
warranting a presumption that the party entitled to assert it either has abandoned it or declined
to assert it.[28]
Considering that the terms and conditions set forth in the stock certificate clearly indicate that
redemption of the preferred shares may be made at any time after the lapse of two years from
the date of issue, private respondents should have taken it upon themselves, after the lapse of
the said period, to inquire from the petitioner the reason why the said shares have not been
redeemed. As it is, not only two years had lapsed, as agreed upon, but an additional sixteen
years passed before the private respondents saw it fit to demand their right. The petitioner, at the
time it issued said preferred shares to the private respondents in 1961, could not have known
that it would be suffering from chronic reserve deficiency twelve years later. Had the private
respondents been vigilant in asserting their rights, the redemption could have been effected at a
time when the petitioner bank was not suffering from any financial crisis.
42
CORPO LAW
WHEREFORE, the instant petition, being impressed with merit, is hereby GRANTED. The
challenged decision of respondent judge is set aside and the complaint against the petitioner is
dismissed.
[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.
For review on certiorari is the Partial Judgment[1] 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)
43
CORPO LAW
On July 31, 1981, Article VII of the Articles of Incorporation of MCPI was amended, to read
thus:
SEVENTH. That the authorized capital stock of the corporation is FIVE MILLION
(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 officers[4] (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.
44
CORPO LAW
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]
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:
45
CORPO LAW
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 6[7] 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.
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
46
CORPO LAW
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 5[9] 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 clause[10] of the
Constitution.
We find merit in the petition.
When Article VII of the Articles of Incorporation of MCPI was amended in 1992, the phrase
except when otherwise provided by law was inserted in the provision governing the grant of
voting powers to Class A shareholders. This particular amendment is relevant for it speaks of a
law providing for exceptions to the exclusive grant of voting rights to Class A stockholders.
Which law was the amendment referring to? The determination of which law to apply is
necessary. There are two laws being cited and relied upon by the parties in this case. In this
instance, the law in force at the time of the 1992 amendment was the Corporation Code (B.P.
Blg. 68), not the Corporation Law (Act No. 1459), which had been repealed by then.
We find and so hold that the law referred to in the amendment to Article VII refers to the
Corporation Code and no other law. At the time of the incorporation of MCPI in 1977, the right
of a corporation to classify its shares of stock was sanctioned by Section 5 of Act No. 1459. The
law repealing Act No. 1459, B.P. Blg. 68, retained the same grant of right of classification of
stock shares to corporations, but with a significant change. Under Section 6 of B.P. Blg. 68, the
requirements and restrictions on voting rights were explicitly provided for, such that no share
may be deprived of voting rights except those classified and issued as preferred or redeemable
shares, unless otherwise provided in this Code and that there shall always be a class or series of
shares which have complete voting rights. Section 6 of the Corporation Code being deemed
written into Article VII of the Articles of Incorporation of MCPI, it necessarily follows that
unless Class B shares of MCPI stocks are clearly categorized to be preferred or redeemable
shares, the holders of said Class B shares may not be deprived of their voting rights. Note that
there is nothing in the Articles of Incorporation nor an iota of evidence on record to show that
Class B shares were categorized as either preferred or redeemable shares. The only possible
conclusion is that Class B shares fall under neither category and thus, under the law, are allowed
to exercise voting rights.
One of the rights of a stockholder is the right to participate in the control and management of
the corporation that is exercised through his vote. The right to vote is a right inherent in and
47
CORPO LAW
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 148[12] 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 followed[14] and that official duty has been regularly performed[15] 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.
48

CORPO CASES III. Formation and Organization of A Private Corp.

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CORPO LAW

CASES: III. Formation & Org. of Private Corp.

[G.R. No. 137592. December 12, 2001]

[G.R. No. 122174. October 3, 2002]

G.R. No. 104175 June 25, 1993

The venue was improperly laid (Rollo, p. 299).

The petition is meritorious.

[G.R. No. 51765. March 3, 1997]

[G.R. No. 150976. October 18, 2004]

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