FIRST DIVISION

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

[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.

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." Similarly, the present Corporation Code provides
that the board of directors of a stock corporation may declare dividends only out of
unrestricted retained earnings. The Code, in Section 43, adopting the change made in

The Chief Legal Counsel and Dorado Sarmen Sarson Ian & Associates for petitioner.

accounting terminology, substituted the phrase "unrestricted retained earnings," which

Rodrigo P. Villaroman and Roberto Y Miranda for private respondents.

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

SYLLABUS
surplus profit or unrestricted retained earnings, as the case may be. Preferences
1. COMMERCIAL LAW; CORPORATION CODE; SHARES OF STOCK; PREFERRED

granted to preferred stockholders, moreover, do not give them a lien upon the property

SHARES OF STOCK; NATURE THEREOF. A preferred share of stock, on one

of the corporation nor make them creditors of the corporation, the right of the

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

former being always subordinate to the latter. Dividends are thus payable only when

shares of a corporation. Preferred shares take a multiplicity of forms. The most

there are profits earned by the corporation and as a general rule, even if there are

common forms may be classified into two: (1) preferred shares as to assets; and (2)

existing profits, the board of directors has the discretion to determine whether or not

preferred shares as to dividends. The former is a share which gives the holder thereof

dividends are to be declared. Shareholders, both common and preferred, are

preference in the distribution of the assets of the corporation in case of liquidation; the

considered risk takers who invest capital in the business and who can look only to

latter is a share the holder of which is entitled to receive dividends on said share to the

what is left after corporate debts and liabilities are fully paid.

extent agreed upon before any dividends at all are paid to the holders of common
stock. There is no guaranty, however, that the share will receive any dividends. Under

2. ID.; ID.; ID.; ID.; REDEEMABLE SHARES. Redeemable shares, on the other

hand, are shares usually preferred, which by their terms are redeemable at a fixed

The redemption therefore is clearly the type known as "optional." Thus, except as

date, or at the option of either issuing corporation, or the stockholder, or both at a

otherwise provided in the stock certificate, the redemption rests entirely with the

certain redemption price. A redemption by the corporation of its stock is, in a sense, a

corporation and the stockholder is without right to either compel or refuse the

repurchase of it for cancellation. The present Code allows redemption of shares even

redemption of its stock. Furthermore, the terms and conditions set forth therein use

if there are no unrestricted retained earnings on the books of the corporation. This is a

the word "may." It is a settled doctrine in statutory construction that the word "may"

new provision which in effect qualifies the general rule that the corporation cannot

denotes discretion, and cannot be construed as having a mandatory effect. We fail to

purchase its own shares except out of current retained earnings. However, while

see how respondent judge can ignore what, in his words, are the "very wordings of the

redeemable shares may be redeemed regardless of the existence of unrestricted

terms and conditions in said stock certificates" and construe what is clearly a mere

retained earnings, this is subject to the condition that the corporation has, after such

option to be his legal basis for compelling the petitioner to redeem the shares in

redemption, assets in its books to cover debts and liabilities inclusive of capital stock.

question.

Redemption, therefore, may not be made where the corporation is insolvent or if such
redemption will cause insolvency or inability of the corporation to meet its debts as
they mature.

4. ID.; ID.; ID.; PAYMENT OF DIVIDENDS TO A STOCKHOLDER IS NOT A MATTER

OF RIGHT BUT A MATTER OF CONSENSUS. The respondent judge also stated
that since the stock certificate granted the private respondents the right to receive a

3. ID.; ID.; ID.; ID.; WHILE THE STOCK CERTIFICATE IN CASE AT BAR DOES NOT
ALLOW REDEMPTION, THE OPTION TO DO SO WAS CLEARLY VESTED IN THE
PETITIONER BANK. 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." 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.

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, plaintiffs (private respondents herein) become entitled to the payment thereof
as a matter of right without necessity of a prior declaration of dividend." 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

barred by laches. Laches has been defined as the failure or neglect, for an

matter of right but a matter of consensus. Furthermore, "interest bearing stocks," on

unreasonable length of time, to do that which by exercising due diligence could or

which the corporation agrees absolutely to pay interest before dividends are paid to

should have been done earlier; it is negligence or omission to assert a right within a

common stockholders, is legal only when construed as requiring payment of interest

reasonable time, warranting a presumption that the party entitled to assert it either has

as dividends from net earnings or surplus only. Clearly, the respondent judge, in

abandoned it or declined to assert it.

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.

6. CONSTITUTIONAL LAW; BILL OF RIGHTS; THE DIRECTIVE ISSUED BY THE

CENTRAL BANK GOVERNOR PROHIBITING THE PETITIONER BANK FROM
REDEEMING ANY PREFERRED SHARE ON THE GROUND THAT SAID
REDEMPTION WOULD REDUCE THE ASSETS OF THE BANK TO THE

5. CIVIL LAW; PRESCRIPTION OF ACTIONS; THE CLAIM OF PRIVATE

PREJUDICE OF ITS DEPOSITORS AND CREDITORS MAY BE CONSIDERED AS

RESPONDENT IS ALREADY BARRED BY PRESCRIPTION AS WELL AS LACHES.

AN EXERCISE OF POLICE POWER; IT DOES NOT CONSTITUTE AN IMPAIRMENT

This Court so holds that the claim of private respondent is already barred by

OF THE OBLIGATION OF CONTRACTS; CASE AT BAR. The

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

redemption of shares in case at bar 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, 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. 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

Herein parties debate only legal issues, no issues of fact having been raised by them

repercussions, not only to its depositors and creditors, but also to the banking industry

in the court a quo. For ready reference, however, the following narration of pertinent

as a whole. The directive, in limiting the exercise of a right granted by law to a

transactions and events is in order:

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 nonimpairment 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.

DECISION

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

HERMOSISIMA, JR., J p:

such amount partially in the form of money and partially in the form of stock
This is a petition for certiorari seeking the annulment of the Decision 1 of the then

certificates numbered 3204 and 3205, each for 400 shares with a par value of P10.00

Court of First Instance of Rizal 2 for having been rendered in grave abuse of

per share, or for P4,000.00 each, for a total of P8,000.00. Said stock certificates were

discretion.

in the name of private respondent Adalia F. Robes and Carlos F. Robes, who

Private

respondents

Robes-Francisco

Realty

and

Development

Corporation (hereafter, "the Corporation") and Adalia F. Robes filed in the court a quo,

subsequently, however, endorsed his shares in favor of Adalia F. Robes.

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

Said certificates of stock bear the following terms and conditions:

thereon as quarterly dividend owing them under the terms and conditions of the

"The Preferred Stock shall have the following rights, preferences, qualifications and

certificates of stock.

limitations, to wit:

The court a quo rendered judgment in favor of private respondents; hence, this instant

1. Of the right to receive a quarterly dividend of One Per Centum (1%), cumulative

petition.

and participating.

xxx xxx xxx

2. That such preferred shares may be redeemed, by the system of drawing lots, at any

the stock certificates as redemption price, plus 1% quarterly interest thereon until full
payment, the trial court ruled:

time after two (2) years from the date of issue at the option of the Corporation. . . ."
"There being no issue of fact raised by either of the parties who filed their respective
On January 31, 1979, private respondents proceeded against petitioner and filed a

memoranda delineating their respective contentions, a judgment on the pleadings,

complaint anchored on private respondents' alleged rights to collect dividends under

conformably with an earlier order of the Court, appears to be in order.

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

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

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

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

grounds: (1) that the trial court had no jurisdiction over the subject-matter of the

thereof as a matter of right without necessity of a prior declaration of dividend.

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.

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

Petitioner's Motion to Dismiss was denied by the trial court in an order dated March

the same.

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

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

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

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

ORDER OF THE CENTRAL BANK TO PETITIONER TO DESIST FROM

considering that the very terms and conditions in said stock certificates allowing their

REDEEMING ITS PREFERRED SHARES AND FROM PAYING DIVIDENDS

redemption are its own handiwork.

THEREON . . ..

As to the claim by the defendant that plaintiffs' cause of action is barred by

D. THE TRIAL COURT ERRED IN NOT HOLDING THAT THE COMPLAINT DOES

prescription, suffice it to state that the running of the prescriptive period was

NOT STATE A CAUSE OF ACTION.

considered interrupted by the written extrajudicial demands made by the plaintiffs from
the defendant." 7

E. THE TRIAL COURT ERRED IN NOT HOLDING THAT THE CLAIM OF

RESPONDENT ADALIA F. ROBES IS BARRED BY PRESCRIPTION OR LACHES." 8

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

The petition is meritorious.

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.

PETITIONER TO PAY RESPONDENT ADALIA F. ROBES THE AMOUNT OF

P8,213.69 AS INTERESTS FROM 1961 To 1979 ON HER PREFERRED SHARES.

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

B. RESPONDENT JUDGE COMMITTED A GRAVE ABUSE OF DISCRETION

to induce persons to subscribe for shares of a corporation. 9 Preferred shares take a

AMOUNTING TO LACK OR EXCESS OF JURISDICTION IN ORDERING

multiplicity of forms. The most common forms may be classified into two: (1) preferred

PETITIONER TO REDEEM

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

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

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

terms are redeemable at a fixed date, or at the option of either issuing corporation, or

was provided that "no corporation shall make or declare any dividend except from the

the stockholder, or both at a certain redemption price. 17 A redemption by the

surplus profits arising from its business, or distribute its capital stock or property other

corporation of its stock is, in a sense, a repurchase of it for cancellation. 18 The

than actual profits among its members or stockholders until after the payment of its

present Code allows redemption of shares even if there are no unrestricted retained

debts and the termination of its existence by limitation or lawful dissolution." 12

earnings on the books of the corporation. This is a new provision which in effect

Similarly, the present Corporation Code 13 provides that the board of directors of a

qualifies the general rule that the corporation cannot purchase its own shares except

stock corporation may declare dividends only out of unrestricted retained earnings. 14

out of current retained earnings. 19 However, while redeemable shares may be

The Code, in Section 43, adopting the change made in accounting terminology,

redeemed regardless of the existence of unrestricted retained earnings, this is subject

substituted the phrase "unrestricted retained earnings," which may be a more precise

to the condition that the corporation has, after such redemption, assets in its books to

term, in place of "surplus profits arising from its business" in the former law. Thus, the

cover debts and liabilities inclusive of capital stock. Redemption, therefore, may not be

declaration of dividends is dependent upon the availability of surplus profit or

made where the corporation is insolvent or if such redemption will cause insolvency or

unrestricted retained earnings, as the case may be. Preferences granted to preferred

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
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

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:

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 cdasia

Redeemable shares, on the other hand, are shares usually preferred, which by their

"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

as a whole. The directive, in limiting the exercise of a right granted by law to a

otherwise provided in the stock certificate, the redemption rests entirely with the

corporate entity, may thus be considered as an exercise of police power. The

corporation and the stockholder is without right to either compel or refuse the

respondent judge insists that the directive constitutes an impairment of the obligation

redemption of its stock. 22 Furthermore, the terms and conditions set forth therein use

of contracts. It has, however, been settled that the Constitutional guaranty of non-

the word "may". It is a settled doctrine in statutory construction that the word "may"

impairment of obligations of contract is limited by the exercise of the police power of

denotes discretion, and cannot be construed as having a mandatory effect. We fail to

the state, the reason being that public welfare is superior to private rights. 25

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

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

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

same are 'interest bearing stocks' or stocks issued by a corporation under an

agreement to pay a certain rate of interest thereon. As such, 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

Considering that the terms and conditions set forth in the stock certificate clearly

corresponding dividends, committed grave abuse of discretion amounting to lack or

indicate that redemption of the preferred shares may be made at any time after the

excess of jurisdiction in ignoring both the terms and conditions specified in the stock

lapse of two years from the date of issue, private respondents should have taken it

certificate, as well as the clear mandate of the law.

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

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 letter-demand made by the private respondents to the petitioner was
made only on

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.

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

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.

Costs against the private respondents.SO ORDERED.Bellosillo, Vitug and Kapunan,

JJ., concur. Padilla, J., concurs in the result.
||| (Republic Planters Bank v. Agana, Sr., G.R. No. 51765, [March 3, 1997], 336 PHIL
1- 14)

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

FIRST DIVISION

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

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

CECILIA CASTILLO, OSCAR DEL ROSARIO, ARTURO S. FLORES, XERXES

MCPI is a domestic corporation with offices at Dr. A. Santos Avenue, Sucat,

NAVARRO, MARIA ANTONIA TEMPLO and MEDICAL CENTER PARAAQUE, INC.,

Paraaque City. It was organized sometime in September 1977. At the time of its

petitioners, vs. ANGELES BALINGHASAY, RENATO BERNABE, ALODIA DEL

incorporation, Act No. 1459, the old Corporation Law was still in force and effect.

ROSARIO,

Article VII of MCPI's original Articles of Incorporation, as approved by the Securities

ROMEO

FUNTILA,

TERESITA GAYANILO,

RUSTICO

JIMENEZ,

ARACELI ** JO, ESMERALDA MEDINA, CECILIA MONTALBAN, VIRGILIO

and Exchange Commission (SEC) on October 26, 1977, reads as follows:

OBLEPIAS, CARMENCITA PARRENO, CESAR REYES, REYNALDO SAVET,

SEVENTH. That the authorized capital stock of the corporation is TWO MILLION
SERAPIO TACCAD, VICENTE VALDEZ, SALVACION VILLAMORA, and HUMBERTO
VILLAREAL, respondents.

DECISION

QUISUMBING, J p:

(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

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.

shares can have the right to vote and the right to be elected as directors or as
corporate officers. 2 (Emphasis supplied)

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

On July 31, 1981, Article VII of the Articles of Incorporation of MCPI was amended, to

petitioners' first cause of action, specifically, to annul said election for depriving

read thus:

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.

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

shares voted for and serve as members of the corporate board and some Class "B"

amendment granted the right to vote and to be elected as directors or corporate

share owners were in fact nominated for election as board members. Nonetheless,

officers only to holders of Class "A" shares, holders of Class "B" stocks were granted

Jimenez went on to announce that the candidates holding Class "A" shares were the

the same rights and privileges as holders of Class "A" stocks with respect to the

winners of all seats in the corporate board. The petitioners protested, claiming that

payment of dividends. EITcaD

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

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

Pambansa Blg. 68), as amended.

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

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-

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

01- 0140 before the RTC of Paraaque City, Branch 258. Said complaint was founded
on two (2) principal causes of action, namely:

right to vote and the right to be elected as directors or as corporate officers 4 (Stress

a. Annulment of the declaration of directors of the MCPI made during the February 9,

and emphasis supplied).

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

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

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

Rustico
Subsequently, the complaint was amended to implead MCPI as party-plaintiff for
purposes only of the second cause of action.
Jimenez, citing Article VII, as amended, and notwithstanding MCPI's history, declared
over the objections of herein petitioners, that no Class "B" shareholder was qualified to

Before the trial court, the herein petitioners alleged that they were deprived of their

run or be voted upon as a director. In the past, MCPI had seen holders of Class "B"

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

or memoranda.

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.

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

They further claimed that the privilege granted to the Class "A" shareholders was

WHEREFORE, viewed in the light of the foregoing, the election held on February 9,

more in the nature of a right granted to founder's shares. aHTcDA

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.

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 founder's 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;

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

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 MCPI's franchise or charter as granted by the State.

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

At the pre-trial, the trial court ruled that a partial judgment could be rendered on the

deemed as a mere act of benevolence on the part of the officers. Finally, the court

first cause of action and required the parties to submit their respective position papers

brushed aside the "founder's 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,

of preferred or redeemable shares, are entitled to vote and to be elected as corporate

in rendering the Partial Judgment dated November 26, 2001, has decided a question

directors or officers. Since the Class "B" shareholders are not classified as holders of

of substance in a way not in accord with law and jurisprudence considering that:

either preferred or redeemable shares, then it necessarily follows that they are entitled
to vote and to be voted for as directors or officers. CHEIcS

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;

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

2. Hence, the declaration of directors made during the February 9, 2001 Annual

5 9 of the Corporation Law (Act No. 1459), which was the prevailing law when MCPI

Stockholders' Meeting on the basis of the purported exclusive voting rights is

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

null and void for having been done without the benefit of an election and in violation of

Section 6 of the Corporation Code could not retroactively apply to it without violating

the rights of plaintiffs and Class B shareholders; and

the non- impairment clause 10 of the Constitution.

3. Perforce, another election should be conducted to elect the directors of the MCPI,

We find merit in the petition.

this time affording the holders of Class B shares full voting right and the right to be
voted. 8

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

The issue for our resolution is whether or not holders of Class "B" shares of the MCPI

governing the grant of voting powers to Class "A" shareholders. This particular

may be deprived of the right to vote and be voted for as directors in MCPI.

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

Before us, petitioners assert that Article VII of the Articles of Incorporation of MCPI,
referring to? The determination of which law to apply is necessary. There are two laws
which denied them voting rights, is null and void for being contrary to Section 6 of the
being cited and relied upon by the parties in this case. In this instance, the law in force
Corporation Code. They point out that Section 6 prohibits the deprivation of voting
at the time of the 1992 amendment was the Corporation Code (B.P. Blg. 68), not the
rights except as to preferred and redeemable shares only. Hence, under the present
Corporation Law (Act No. 1459), which had been repealed by then.
law on corporations, all shareholders, regardless of classification, other than holders

We find and so hold that the law referred to in the amendment to Article VII refers to

management of the corporation that is exercised through his vote. The right to vote is

the Corporation Code and no other law. At the time of the incorporation of MCPI in

a right inherent in and incidental to the ownership of corporate stock, and as such is a

1977,

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

the right of a corporation to classify its shares of stock was sanctioned by Section 5 of

Neither do we find merit in respondents' position that Section 6 of the Corporation

Act No. 1459. The law repealing Act No. 1459, B.P. Blg. 68, retained the same grant of

Code cannot apply to MCPI without running afoul of the non-impairment clause of the

right of classification of stock shares to corporations, but with a significant change.

Bill of Rights. Section 148 12 of the Corporation Code expressly provides that it shall

Under Section 6 of B.P. Blg. 68, the requirements and restrictions on voting rights

apply to corporations in existence at the time of the effectivity of the Code. Hence, the

were explicitly provided for, such that "no share may be deprived of voting rights

non- impairment clause is inapplicable in this instance. When Article VII of the Articles

except those classified and issued as "preferred" or "redeemable" shares, unless

of Incorporation of MCPI were amended in 1992, the board of directors and

otherwise provided in this Code" and that "there shall always be a class or series of

stockholders must have been aware of Section 6 of the Corporation Code and

shares which have complete voting rights." Section 6 of the Corporation Code being

intended that Article VII be construed in harmony with the Code, which was then

deemed written into Article VII of the Articles of Incorporation of MCPI, it necessarily

already in force and effect. Since Section 6 of the Corporation Code expressly

follows that unless Class "B" shares of MCPI stocks are clearly categorized to be

prohibits the deprivation of voting rights, except as to "preferred" and "redeemable"

"preferred" or "redeemable" shares, the holders of said Class "B" shares may not be

shares, then Article VII of the Articles of Incorporation cannot be construed as granting

deprived of their voting rights. Note that there is nothing in the Articles of Incorporation

exclusive voting rights to Class "A" shareholders, to the prejudice of Class "B"

nor an iota of evidence on record to show that Class "B" shares were categorized as

shareholders, without running afoul of the letter and spirit of the Corporation Code.

either "preferred" or "redeemable" shares. The only possible conclusion is that Class
The respondents then take the tack that the phrase "except when otherwise provided
"B" shares fall under neither category and thus, under the law, are allowed to exercise
by law" found in the amended Articles is only a handwritten insertion and could have
voting rights.
been inserted by anybody and that no board resolution was ever passed authorizing
One of the rights of a stockholder is the right to participate in the control and

or approving said amendment. EITcaD

EN BANC

Said contention is not for this Court to pass upon, involving as it does a factual

[G.R. No. 176579. June 28, 2011.]

question, which is not proper in this petition. In an appeal via certiorari, only questions

WILSON P. GAMBOA, petitioner, vs. FINANCE SECRETARY MARGARITO B.

of law may be reviewed. 13 Besides, respondents did not adduce persuasive

TEVES, FINANCE UNDERSECRETARY JOHN P. SEVILLA, AND COMMISSIONER

evidence, but only bare allegations, to support their suspicion. The presumption that in

RICARDO

the amendment process, the ordinary course of business has been followed 14 and

GOVERNMENT (PCGG) IN THEIR CAPACITIES AS CHAIR AND MEMBERS,

that official duty has been regularly performed 15 on the part of the SEC, applies in

RESPECTIVELY, OF THE PRIVATIZATION COUNCIL, CHAIRMAN ANTHONI SALIM

this case.

OF FIRST PACIFIC CO., LTD. IN HIS CAPACITY AS DIRECTOR OF METRO

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. 010140 is REVERSED AND SET ASIDE. No pronouncement as to costs.

ABCEDE

OF

THE

PRESIDENTIAL

COMMISSION

ON

GOOD

PACIFIC ASSET HOLDINGS INC., CHAIRMAN MANUEL V. PANGILINAN OF

PHILIPPINE LONG DISTANCE TELEPHONE COMPANY (PLDT) IN HIS CAPACITY
AS

MANAGING DIRECTOR

OF

FIRST PACIFIC

CO.,

LTD., PRESIDENT

NAPOLEON L. NAZARENO OF PHILIPPINE LONG DISTANCE TELEPHONE

SO ORDERED.Davide, Jr., C .J ., Ynares-Santiago and Carpio, JJ ., concur.Azcuna, J

COMPANY, CHAIR FE BARIN OF THE SECURITIES EXCHANGE COMMISSION,

., is on leave.||| (Castillo v. Balinghasay, G.R. No. 150976, [October 18, 2004], 483

and PRESIDENT FRANCIS LIM OF THE PHILIPPINE STOCK EXCHANGE,

PHIL 470-483)

respondents.

PABLITO V. SANIDAD and ARNO V. SANIDAD, petitioners-in- intervention.

CARPIO, J p:

DECISION

This is an original petition for prohibition, injunction, declaratory relief and declaration
of nullity of the sale of shares of stock of Philippine Telecommunications Investment

The Case

Corporation (PTIC) by the government of the Republic of the Philippines to Metro

Pacific Assets Holdings, Inc. (MPAH), an affiliate of First Pacific Company Limited

(First Pacific).

of the outstanding capital stock of PTIC, through a public bidding to be conducted on 4

December 2006. Subsequently, the public bidding was reset to 8 December 2006, and

The Antecedents

only two bidders, Parallax Venture Fund XXVII (Parallax) and Pan-Asia Presidio

The facts, according to petitioner Wilson P. Gamboa, a stockholder of Philippine Long

Capital, submitted their bids. Parallax won with a bid of P25.6 billion or US$510

Distance Telephone Company (PLDT), are as follows: 1

million. TAESDH

Thereafter, First Pacific announced that it would exercise its right of first refusal as a
On 28 November 1928, the Philippine Legislature enacted Act No. 3436 which

PTIC stockholder and buy the 111,415 PTIC shares by matching the bid price of

granted PLDT a franchise and the right to engage in telecommunications business. In

Parallax. However, First Pacific failed to do so by the 1 February 2007 deadline set by

1969, General Telephone and Electronics Corporation (GTE), an American company

IPC and instead, yielded its right to PTIC itself which was then given by IPC until 2

and a major PLDT stockholder, sold 26 percent of the outstanding common shares of

March 2007 to buy the PTIC shares. On 14 February 2007, First Pacific, through its

PLDT to PTIC. In 1977, Prime Holdings, Inc. (PHI) was incorporated by several

subsidiary, MPAH, entered into a Conditional Sale and Purchase Agreement of the

persons, including Roland Gapud and Jose Campos, Jr. Subsequently, PHI became

111,415 PTIC shares, or 46.125 percent of the outstanding capital stock of PTIC, with

the owner of 111,415 shares of stock of PTIC by virtue of three Deeds of Assignment

the Philippine Government for the price of P25,217,556,000 or US$510,580,189. The

executed by PTIC stockholders Ramon Cojuangco and Luis Tirso Rivilla. In 1986, the

sale was completed on 28 February 2007.

111,415 shares of stock of PTIC held by PHI were sequestered by the Presidential
Commission on Good Government (PCGG). The 111,415 PTIC shares, which
represent about 46.125 percent of the outstanding capital stock of PTIC, were later
declared by this Court to be owned by the Republic of the Philippines. 2

Since PTIC is a stockholder of PLDT, the sale by the Philippine Government of 46.125
percent of PTIC shares is actually an indirect sale of 12 million shares or about 6.3
percent of the outstanding common shares of PLDT. With the sale, First Pacific's
common shareholdings in PLDT increased from 30.7 percent to 37 percent, thereby

In 1999, First Pacific, a Bermuda-registered, Hong Kong-based investment firm,

increasing the common shareholdings of foreigners in PLDT to about 81.47 percent.

acquired the remaining 54 percent of the outstanding capital stock of PTIC. On 20

This violates Section 11, Article XII of the 1987 Philippine Constitution which limits

November 2006, the Inter-Agency Privatization Council (IPC) of the Philippine

foreign ownership of the capital of a public utility to not more than 40 percent. 3

Government announced that it would sell the 111,415 PTIC shares, or 46.125 percent

On the other hand, public respondents Finance Secretary Margarito B. Teves,

newspapers.

Undersecretary John P. Sevilla, and PCGG Commissioner Ricardo Abcede allege the
following relevant facts:

During the 8 December 2006 bidding, Parallax Capital Management LP emerged as

the highest bidder with a bid of P25,217,556,000. The government notified First
Pacific, the majority owner of PTIC shares, of the bidding results and gave First Pacific

On 9 November 1967, PTIC was incorporated and had since engaged in the business
of investment holdings. PTIC held 26,034,263 PLDT common shares, or 13.847

until 1 February 2007 to exercise its right of first refusal in accordance with PTIC's
Articles of Incorporation. First Pacific announced its intention to match Parallax's bid.

percent of the total PLDT outstanding common shares. PHI, on the other hand, was
incorporated in 1977, and became the owner of 111,415 PTIC shares or 46.125

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

percent of the outstanding capital stock of PTIC by virtue of three Deeds of

Government conducted a public hearing on the particulars of the then impending sale

Assignment executed by Ramon Cojuangco and Luis Tirso Rivilla. In 1986, the

of the 111,415 PTIC shares. Respondents Teves and Sevilla were among those who

111,415 PTIC shares held by PHI were sequestered by the PCGG, and subsequently

attended the public hearing. The HR Committee Report No. 2270 concluded that: (a)

declared by this Court as part of the ill-gotten wealth of former President Ferdinand

the auction of the government's 111,415 PTIC shares bore due diligence,

Marcos. The sequestered PTIC shares were reconveyed to the Republic of the

transparency and conformity with existing legal procedures; and (b) First Pacific's

Philippines in accordance with this Court's decision 4 which became final and

intended acquisition of the government's 111,415 PTIC shares resulting in First

executory on 8 August 2006.

Pacific's 100% ownership of PTIC will not violate the 40 percent constitutional limit on
foreign ownership of a public utility since PTIC holds only 13.847 percent of the total

The Philippine Government decided to sell the 111,415 PTIC shares, which represent
6.4 percent of the outstanding common shares of stock of PLDT, and designated the

outstanding common shares of PLDT. 5 On 28 February 2007, First Pacific completed

the acquisition of the 111,415 shares of stock of PTIC.

Inter- Agency Privatization Council (IPC), composed of the Department of Finance and
the PCGG, as the disposing entity. An invitation to bid was published in seven different

Respondent Manuel V. Pangilinan admits the following facts: (a) the IPC conducted a

newspapers from 13 to 24 November 2006. On 20 November 2006, a pre-bid

public bidding for the sale of 111,415 PTIC shares or 46 percent of the outstanding

conference was held, and the original deadline for bidding scheduled on 4 December

capital stock of PTIC (the remaining 54 percent of PTIC shares was already owned by

2006 was reset to 8 December 2006. The extension was published in nine different

First Pacific and its affiliates); (b) Parallax offered the highest bid amounting to

P25,217,556,000; (c) pursuant to the right of first refusal in favor of PTIC and its

Exchange (www.nyse.com) showed that those foreign entities, which own at least five

shareholders granted in PTIC's Articles of Incorporation, MPAH, a First Pacific affiliate,

percent of common equity, will collectively own 81.47 percent of PLDT's common
equity. . . .

exercised its right of first refusal

. . . as the annual disclosure reports, also referred to as Form 20-K reports . . . which
by matching the highest bid offered for PTIC shares on 13 February 2007; and (d) on
28

February

2007,

the

sale

was

consummated

when

MPAH

paid

IPC

P25,217,556,000 and the government delivered the certificates for the 111,415 PTIC

PLDT submitted to the New York Stock Exchange for the period 2003- 2005, revealed
that First Pacific and several other foreign entities breached the constitutional limit of
40 percent ownership as early as 2003. . . ." 7

shares. Respondent Pangilinan denies the other allegations of facts of petitioner.

Petitioner raises the following issues: (1) whether the consummation of the then

HcaDIA

impending sale of 111,415 PTIC shares to First Pacific violates the constitutional limit

On 28 February 2007, petitioner filed the instant petition for prohibition, injunction,
declaratory relief, and declaration of nullity of sale of the 111,415 PTIC shares.
Petitioner claims, among others, that the sale of the 111,415 PTIC shares would result
in an increase in First Pacific's common shareholdings in PLDT from 30.7 percent to
37 percent, and this, combined with Japanese NTT DoCoMo's common shareholdings

on foreign ownership of a public utility; (2) whether public respondents committed

grave abuse of discretion in allowing the sale of the 111,415 PTIC shares to First
Pacific; and (3) whether the sale of common shares to foreigners in excess of 40
percent of the entire subscribed common capital stock violates the constitutional limit
on foreign ownership of a public utility. 8

in PLDT, would result to a total foreign common shareholdings in PLDT of 51.56

On 13 August 2007, Pablito V. Sanidad and Arno V. Sanidad filed a Motion for Leave

percent which is over the 40 percent constitutional limit. 6 Petitioner asserts:

to Intervene and Admit Attached Petition-in-Intervention. In the Resolution of 28

If and when the sale is completed, First Pacific's equity in PLDT will go up from 30.7
percent to 37.0 percent of its common or voting-stockholdings, . . . . Hence, the

August 2007, the Court granted the motion and noted the Petition-in-Intervention.
caIACE

consummation of the sale will put the two largest foreign investors in PLDT First
Pacific and Japan's NTT DoCoMo, which is the world's largest wireless
telecommunications firm, owning 51.56 percent of PLDT common equity. . . . With the
completion of the sale, data culled from the official website of the New York Stock

Petitioners-in-intervention "join petitioner Wilson Gamboa . . . in seeking, among

others, to enjoin and/or nullify the sale by respondents of the 111,415 PTIC shares to
First Pacific or assignee." Petitioners-in-intervention claim that, as PLDT subscribers,

they have a "stake in the outcome of the controversy . . . where the Philippine

court, which however is not exclusive but is concurrent with the Regional Trial Court

Government is

and the Court of Appeals. The actions for declaratory relief, 10 injunction, and
annulment of sale are not embraced within the original jurisdiction of the Supreme

completing the sale of government owned assets in [PLDT], unquestionably a public

utility, in violation of the nationality restrictions of the Philippine Constitution."

The Issue

Court. On this ground alone, the petition could have been dismissed outright.

While direct resort to this Court may be justified in a petition for prohibition, 11 the
Court shall nevertheless refrain from discussing the grounds in support of the petition
for prohibition since on 28 February 2007, the questioned sale was consummated

This Court is not a trier of facts. Factual questions such as those raised by petitioner, 9

when MPAH paid IPC P25,217,556,000 and the government delivered the certificates

which indisputably demand a thorough examination of the evidence of the parties, are

for the 111,415 PTIC shares.

generally beyond this Court's jurisdiction. Adhering to this well-settled principle, the
Court shall confine the resolution of the instant controversy solely on the threshold
and purely legal issue of whether the term "capital" in Section 11, Article XII of the
Constitution refers to the total common shares only or to the total outstanding capital
stock (combined total of common and non-voting preferred shares) of PLDT, a public
utility.

The Ruling of the Court

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

In Salvacion v. Central Bank of the Philippines, 13 the Court treated the petition for
declaratory relief as one for mandamus considering the grave injustice that would
result in the interpretation of a banking law. In that case, which involved the crime of

The petition is partly meritorious.

rape committed by a foreign tourist against a Filipino minor and the execution of the
final judgment in the civil case for damages on the tourist's dollar deposit with a local

Petition for declaratory relief treated as petition for mandamus

bank, the Court declared Section 113 of Central Bank Circular No. 960, exempting
At the outset, petitioner is faced with a procedural barrier. Among the remedies

foreign currency deposits from attachment, garnishment or any other order or process

petitioner seeks, only the petition for prohibition is within the original jurisdiction of this

of any court,

In short, it is well-settled that this Court may treat a petition for declaratory relief as
inapplicable due to the peculiar circumstances of the case. The Court held that
"injustice would result especially to a citizen aggrieved by a foreign guest like accused

one for mandamus if the issue involved has far-reaching implications. As this Court
held in Salvacion:

. . . " that would "negate Article 10 of the Civil Code which provides that 'in case of

The Court has no original and exclusive jurisdiction over a petition for declaratory

doubt in the interpretation or application of laws, it is presumed that the lawmaking

relief. However, exceptions to this rule have been recognized. Thus, where the petition

body intended right and justice to prevail.'" The Court therefore required respondents

has far-reaching implications and raises questions that should be resolved, it may be

Central Bank of the Philippines, the local bank, and the accused to comply with the

treated as one for mandamus. 15 (Emphasis supplied)

writ of execution issued in the civil case for damages and to release the dollar deposit
of the accused to satisfy the judgment. ICHcTD

In the present case, petitioner seeks primarily the interpretation of the term "capital" in
Section 11, Article XII of the Constitution. He prays that this Court declare that the

In Alliance of Government Workers v. Minister of Labor, 14 the Court similarly brushed

term "capital" refers to common shares only, and that such shares constitute "the sole

aside the procedural infirmity of the petition for declaratory relief and treated the same

basis in determining foreign equity in a public utility." Petitioner further asks this Court

as one for mandamus. In Alliance, the issue was whether the government unlawfully

to declare any ruling inconsistent with such interpretation unconstitutional.

excluded petitioners, who were government employees, from the enjoyment of rights
to which they were entitled under the law. Specifically, the question was: "Are the
branches, agencies, subdivisions, and instrumentalities of the Government, including
government owned or controlled corporations included among the four 'employers'
under Presidential Decree No. 851 which are required to pay their employees . . . a
thirteenth (13th) month pay . . .?" The Constitutional principle involved therein affected
all government employees, clearly justifying a relaxation of the technical rules of

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

procedure, and certainly requiring the interpretation of the assailed presidential

decree.
The Court first encountered the issue on the definition of the term "capital" in Section

11, Article XII of the Constitution in the case of Fernandez v. Cojuangco, docketed as

reason for this Court to evade this ever recurring fundamental issue and delay again

G.R. No. 157360. 16 That case involved the same public utility (PLDT) and

defining the term "capital," which appears not only in Section 11, Article XII of the

substantially the same private respondents. Despite the importance and novelty of the

Constitution, but also in Section 2, Article XII on co-production and joint venture

constitutional issue raised therein and despite the fact that the petition involved a

agreements for the development of our natural resources, 19 in Section 7, Article XII

purely legal question, the Court declined to resolve the case on the merits, and

on ownership of private lands, 20 in Section 10, Article XII on the reservation of certain

instead denied the same for disregarding the hierarchy of courts. 17 There, petitioner

investments to Filipino citizens, 21 in Section 4 (2), Article XIV on the ownership of

Fernandez assailed on a pure question of law the Regional Trial Court's Decision of

educational institutions, 22 and in Section 11 (2), Article XVI on the ownership of

21 February 2003 via a petition for review under Rule 45. The Court's Resolution,

advertising companies. 23

denying the petition, became final on 21 December 2004.

Petitioner has locus standi
The instant petition therefore presents the Court with another opportunity to finally
settle this purely legal issue which is of transcendental importance to the national
economy and a fundamental requirement to a faithful adherence to our Constitution.
The Court must forthwith seize such opportunity, not only for the benefit of the
litigants, but more significantly for the benefit of the entire Filipino people, to ensure, in
the words of the Constitution, "a self-reliant and independent national economy

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

effectively controlled by Filipinos." 18 Besides, in the light of vague and confusing

More importantly, there is no question that the instant petition raises matters of

positions taken by government agencies on this purely legal issue, present and future

transcendental importance to the public. The fundamental and threshold legal issue in

foreign investors in this country deserve, as a matter of basic fairness, a categorical

this case, involving the national economy and the economic welfare of the Filipino

ruling from this Court on the extent of their participation in the capital of public utilities

people, far

and other nationalized businesses.

Despite its far-reaching implications to the national economy, this purely legal issue
has remained unresolved for over 75 years since the 1935 Constitution. There is no

outweighs any perceived impediment in the legal personality of the petitioner to bring

this action.

'public interest [was] definitely involved considering the important role [of

In Chavez v. PCGG, 24 the Court upheld the right of a citizen to bring a suit on

the subject contract] . . . in the economic development of the country and the

matters of transcendental importance to the public, thus:

In Taada v. Tuvera, the Court asserted that when the issue concerns a public right

magnitude of the financial consideration involved.' We concluded that, as a

consequence, the disclosure provision in the Constitution would constitute

and the object of mandamus is to obtain the enforcement of a public duty, the people
are regarded as the real parties in interest; and because it is sufficient that petitioner is

sufficient authority for upholding the petitioner's standing. (Emphasis supplied)

a citizen and as such is interested in the execution of the laws, he need not show that

DIHETS

he has any legal or special interest in the result of the action. In the aforesaid case,
the petitioners sought to enforce their right to be informed on matters of public

Clearly, since the instant petition, brought by a citizen, involves matters of

concern, a right then recognized in Section 6, Article IV of the 1973 Constitution, in

transcendental public importance, the petitioner has the requisite locus standi.

connection with the rule that laws in order to be valid and enforceable must be
published in the Official Gazette or otherwise effectively promulgated. In ruling for the

Definition of the Term "Capital" in Section 11, Article XII of the 1987 Constitution

petitioners' legal standing, the Court declared that the right they sought to be enforced
'is a public right recognized by no less than the fundamental law of the land.'

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

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

Section 11.No franchise, certificate, or any other form of authorization for the operation
of a public utility shall be granted except to citizens of the

and, therefore, part of the general 'public' which possesses the right.'

Further, in Albano v. Reyes, we said that while expenditure of public funds may

not have been involved under the questioned contract for the development,

Philippines or to corporations or associations organized under the laws of the

Philippines, at least sixty per centum of whose capital is owned by such citizens; nor
shall such franchise, certificate, or authorization be exclusive in character or for a

management and operation of the Manila International Container Terminal,

longer period than fifty years. Neither shall any such franchise or right be granted

except under the condition that it shall be subject to amendment, alteration, or repeal

of a public utility shall be granted except to citizens of the Philippines or to

by the Congress when the common good so requires. The State shall encourage

corporations or other entities organized under the laws of the Philippines sixty per

equity participation in public utilities by the general public. The participation of foreign

centum of the capital of which is owned by citizens of the Philippines, nor shall such

investors in the governing body of any public utility enterprise shall be limited to their

franchise, certificate, or authorization be exclusive in character or for a longer period

proportionate share in its capital, and all the executive and managing officers of such

than fifty years. No franchise or right shall be granted to any individual, firm, or

corporation or association must be citizens of the Philippines. (Emphasis supplied)

corporation, except under the condition that it shall be subject to amendment,

alteration, or repeal by the Congress when the public interest so requires. (Emphasis

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

supplied)

Constitution, thus:
Father Joaquin G. Bernas, S.J., a leading member of the 1986 Constitutional
Section 5.No franchise, certificate, or any other form of authorization for the operation
of a public utility shall be granted except to citizens of the Philippines or to

Commission, reminds us that the Filipinization provision in the 1987 Constitution is

one of the products of the spirit of nationalism which gripped the 1935 Constitutional

corporations or associations organized under the laws of the Philippines at least sixty
per centum of the capital of which is owned by such citizens, nor shall such franchise,
certificate, or authorization be exclusive in character or for a longer period than fifty

Convention. 25 The 1987 Constitution "provides for the Filipinization of public utilities
by requiring that any form of authorization for the operation of public utilities should

years. Neither shall any such franchise or right be granted except under the condition
that it shall be subject to amendment, alteration, or repeal by the National Assembly
when the public interest so requires. The State shall encourage equity participation in

be granted only to 'citizens of the Philippines or to corporations or associations

public utilities by the general public. The participation of foreign investors in the

organized under the laws of the Philippines at least sixty per centum of whose capital

governing body of any public utility enterprise shall be limited to their proportionate

is owned by such citizens.' The provision is [an express] recognition of the sensitive

share in the capital thereof. (Emphasis supplied) THAICD

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

and vital position of public utilities both in the national economy and for national
security." 26 The evident purpose of the citizenship requirement is to prevent aliens
from assuming control of public utilities, which may be inimical to the national interest.
27 This specific provision explicitly reserves to Filipino citizens control of public

Section 8.No franchise, certificate, or any other form of authorization for the operation

utilities, pursuant to an overriding economic goal of the 1987 Constitution: to

"conserve and develop our patrimony" 28 and ensure "a self-reliant and independent

Petitioners-in-intervention basically reiterate petitioner's arguments and adopt

national economy effectively controlled by Filipinos." 29

petitioner's definition of the term "capital." 33 Petitioners-in-intervention allege that "the

approximate foreign ownership of common capital stock of PLDT . . . already amounts

Any citizen or juridical entity desiring to operate a public utility must therefore meet the
minimum nationality requirement prescribed in Section 11, Article XII of the
Constitution. Hence, for a corporation to be granted authority to operate a public utility,

to at least 63.54% of the total outstanding common stock," which means that
foreigners exercise significant control over PLDT, patently violating the 40 percent
foreign equity limitation in public utilities prescribed by the Constitution.

at least 60 percent of its "capital" must be owned by Filipino citizens.

Respondents, on the other hand, do not offer any definition of the term "capital" in
The crux of the controversy is the definition of the term "capital." Does the term
"capital" in Section 11, Article XII of the Constitution refer to common shares or to the
total outstanding capital stock (combined total of common and non-voting preferred

Section 11, Article XII of the Constitution. More importantly, private respondents
Nazareno and Pangilinan of PLDT do not dispute that more than 40 percent of the
common shares of PLDT are held by foreigners.

shares)?

Petitioner submits that the 40 percent foreign equity limitation in domestic public
utilities refers only to common shares because such shares are entitled to vote and it

In particular, respondent Nazareno's Memorandum, consisting of 73 pages, harps

is through voting that control over a corporation is exercised. Petitioner posits that the

mainly on the procedural infirmities of the petition and the supposed violation of the

term "capital" in Section 11, Article XII of the Constitution refers to "the ownership of

due process rights of the "affected foreign common shareholders." Respondent

common capital stock subscribed and outstanding, which class of shares alone, under

Nazareno does not deny petitioner's allegation of foreigners' dominating the common

the corporate set-up of PLDT, can vote and elect members of the board of directors." It

shareholdings of PLDT. Nazareno stressed mainly that the petition "seeks to divest

is undisputed that PLDT's non-voting preferred shares are held mostly by Filipino

foreign common shareholders purportedly exceeding 40% of the total common

citizens. 30 This arose from Presidential Decree No. 217, 31 issued on 16 June 1973

shareholdings in PLDT of their ownership over their shares." Thus, "the foreign natural

by then President Ferdinand Marcos, requiring every applicant of a PLDT telephone

and juridical PLDT shareholders must be impleaded in this suit so that they can be

line to subscribe to non-voting preferred shares to pay for the investment cost of

heard." 34 Essentially, Nazareno invokes denial of due process on behalf of the

installing the telephone line. 32

foreign common shareholders.

While Nazareno does not introduce any definition of the term "capital," he states that

does not authorize taking one person's property (the shareholder's stock in the utility

"among the factual assertions that need to be established to counter petitioner's

company) on the basis of another party's alleged failure to satisfy a requirement that is

allegations is the uniform interpretation by government agencies (such as the SEC),

a condition only for that other party's retention of another piece of property (the utility

institutions and corporations (such as the Philippine National Oil Company-Energy

company being at least 60% Filipino-owned to keep its franchise)." 36

Development Corporation or PNOC-EDC) of including both preferred shares and

common shares in "controlling interest" in view of testing compliance with the 40%
constitutional limitation on foreign ownership in public utilities." 35

The

OSG,

representing

public

respondents

Secretary

Margarito

Teves,

Undersecretary John P. Sevilla, Commissioner Ricardo Abcede, and Chairman Fe

Barin, is likewise silent on the definition of the term "capital." In its Memorandum 37

Similarly, respondent Manuel V. Pangilinan does not define the term "capital" in

dated 24 September 2007, the OSG also limits its discussion on the supposed

Section 11, Article XII of the Constitution. Neither does he refute petitioner's claim of

procedural defects of the petition, i.e., lack of standing, lack of jurisdiction, non-

foreigners holding more than 40 percent of PLDT's common shares. Instead,

inclusion of interested parties, and lack of basis

respondent Pangilinan focuses on the procedural flaws of the petition and the alleged
violation of the due process rights of foreigners. Respondent Pangilinan emphasizes
in his Memorandum (1) the absence of this Court's jurisdiction over the petition; (2)
petitioner's lack of standing; (3) mootness of the petition; (4) non-availability of
declaratory relief; and (5) the denial of due process rights. Moreover, respondent
Pangilinan alleges that the issue should be whether "owners of shares in PLDT as

for injunction. The OSG does not present any definition or interpretation of the term
"capital" in Section 11, Article XII of the Constitution. The OSG contends that "the
petition actually partakes of a collateral attack on PLDT's franchise as a public utility,"
which in effect requires a "full-blown trial where all the parties in interest are given
their day in court." 38

well as owners of shares in companies holding shares in PLDT may be required to

relinquish their shares in PLDT and in those companies without any law requiring

Respondent Francisco Ed Lim, impleaded as President and Chief Executive Officer of

them to surrender their shares and also without notice and trial."

the Philippine Stock Exchange (PSE), does not also define the term "capital" and
seeks the dismissal of the petition on the following grounds: (1) failure to state a cause

Respondent Pangilinan further asserts that "Section 11, [Article XII of the Constitution]
imposes no nationality requirement on the shareholders of the utility company as a
condition for keeping their shares in the utility company." According to him, "Section 11

of action against Lim; (2) the PSE allegedly implemented its rules and required all
listed companies, including PLDT, to make proper and timely disclosures; and (3) the

reliefs prayed for in the petition would adversely impact the stock market.

xxx xxx xxx

In the earlier case of Fernandez v. Cojuangco, petitioner Fernandez who claimed to be

Clearly, therefore, the forty percent (40%) foreign equity limitation in public utilities

a stockholder of record of PLDT, contended that the term "capital" in the 1987
Constitution refers to shares entitled to vote or the common shares. Fernandez

prescribed by the Constitution refers to ownership of shares of stock entitled to vote,

i.e., common shares. Furthermore, ownership of record of shares will not suffice but it
must be shown that the legal and beneficial ownership rests in the hands of Filipino

explained thus: DHATcE

citizens. Consequently, in the case of petitioner PLDT,

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

since it is already admitted that the voting interests of foreigners which would gain
entry to petitioner PLDT by the acquisition of SMART shares through the Questioned

Obviously, the intent of the framers of the Constitution in imposing limitations and
restrictions on fully nationalized and partially nationalized activities is for Filipino
nationals to be always in control of the corporation undertaking said activities.

Transactions is equivalent to 82.99%, and the nominee arrangements between the

foreign principals and the Filipino owners is likewise admitted, there is, therefore, a
violation of Section 11, Article XII of the Constitution. EIDATc

Otherwise, if the Trial Court's ruling upholding respondents' arguments were to be

given credence, it would be possible for the ownership structure of a public utility

Parenthetically, the Opinions dated February 15, 1988 and April 14, 1987 cited by the

corporation to be divided into one percent (1%) common stocks and ninety-nine

Trial Court to support the proposition that the meaning of the word "capital" as used in

percent (99%) preferred stocks. Following the Trial Court's ruling adopting

Section 11, Article XII of the Constitution allegedly refers to the sum total of the shares

respondents' arguments, the common shares can be owned entirely by foreigners

subscribed and paid-in by the shareholder and it allegedly is immaterial how the stock

thus creating an absurd situation wherein foreigners, who are supposed to be minority

is classified, whether as common or preferred, cannot stand in the face of a clear

shareholders, control the public utility corporation.

legislative policy as stated in the FIA which took effect in 1991 or way after said
opinions were rendered, and as clarified by the above-quoted Amendments. In this

xxx xxx xxx

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

regard, suffice it to state that as between the law and an opinion rendered by an
administrative agency, the law indubitably prevails. Moreover, said Opinions are
merely advisory and cannot prevail over the clear intent of the framers of the
Constitution.

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

On the other hand, respondents therein, Antonio O. Cojuangco, Manuel V. Pangilinan,

PLDT's outstanding common shares is without legal basis. The language of the
Constitution should be understood in the sense it has in common use.

Carlos A. Arellano, Helen Y. Dee, Magdangal B. Elma, Mariles Cacho-Romulo, Fr.

Bienvenido F. Nebres, Ray C. Espinosa, Napoleon L. Nazareno, Albert F. Del Rosario,

xxx xxx xxx

and Orlando B. Vea, argued that the term "capital" in Section 11, Article XII of the
17.But even assuming that resort to the proceedings of the Constitutional Commission
Constitution includes preferred shares since the Constitution does not distinguish
among classes of stock, thus:

16.The Constitution applies its foreign ownership limitation on the corporation's

"capital," without distinction as to classes of shares. . . .

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

Section 137.Outstanding capital stock defined. The term "outstanding capital

stock", as used in this Code, means the total shares of stock issued under binding
subscription agreements to subscribers or stockholders, whether or not fully or
partially paid, except treasury shares.

is necessary, there is nothing in the Record of the Constitutional Commission (Vol. III)
which petitioner misleadingly cited in the Petition . . . which supports petitioner's
view that only common shares should form the basis for computing a public utility's
foreign equity. AaITCS

xxx xxx xxx

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

Section 137 of the Corporation Code also does not distinguish between common and

We agree with petitioner and petitioners-in-intervention. The term "capital" in Section

preferred shares, nor exclude either class of shares, in determining the outstanding

11, Article XII of the Constitution refers only to shares of stock entitled to vote in the

capital stock (the "capital") of a corporation. Consequently, petitioner's suggestion to

election of directors, and thus in the present case only to common shares, 41 and not

reckon PLDT's foreign equity only on the basis of

to the total outstanding capital stock comprising both common and non-voting

preferred shares.

That such terms and conditions shall be effective upon the filing of a certificate thereof
with the Securities and Exchange Commission.

The Corporation Code of the Philippines 42 classifies shares as common or preferred,

thus:

Shares of capital stock issued without par value shall be deemed fully paid and nonassessable and the holder of such shares shall not be liable to the corporation or to its

Sec. 6.Classification of shares. The shares of stock of stock corporations may be

creditors in respect thereto: Provided; That shares without par value may not be

divided into classes or series of shares, or both, any of which classes or series of

issued for a consideration less than the value of five (P5.00) pesos per share:

shares may have such rights, privileges or restrictions as may be stated in the articles

Provided, further, That the entire consideration received by the corporation for its no-

of incorporation: Provided, That no share may be deprived of voting rights except

par value shares shall be treated as capital and shall not be available for distribution

those classified and issued as "preferred" or "redeemable" shares, unless otherwise

as dividends. TcCEDS

provided in this Code: Provided, further, That there shall always be a class or series of
shares which have complete voting rights. Any or all of the shares or series of shares
may have a par value or have no par value as may be provided for in the articles of
incorporation: Provided, however, That banks, trust companies, insurance companies,
public utilities, and building and loan associations shall not be permitted to issue no-

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

Except as otherwise provided in the articles of incorporation and stated in the

certificate of stock, each share shall be equal in all respects to every other share.

par value shares of stock.

Where the articles of incorporation provide for non-voting shares in the cases allowed
Preferred shares of stock issued by any corporation may be given preference in the
distribution of the assets of the corporation in case of liquidation and in the distribution

by this Code, the holders of such shares shall nevertheless be entitled to vote on the
following matters:

of dividends, or such other preferences as may be stated in the articles of

incorporation which are not violative of the provisions of this Code: Provided, That

1.Amendment of the articles of incorporation; 2.Adoption and amendment of by-laws;

preferred shares of stock may be issued only with a stated par value. The Board of
Directors, where authorized in the articles of incorporation, may fix the terms and
conditions of preferred shares of stock or any series thereof: Provided,

3.Sale, lease, exchange, mortgage, pledge or other disposition of all or substantially

all of the corporate property;

4.Incurring, creating or increasing bonded indebtedness; 5.Increase or decrease of

capital stock;

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

articles of incorporation restricting the right of common shareholders to vote is invalid.

corporations;

47

7.Investment of corporate funds in another corporation or business in accordance with

this Code; and caIETS

8.Dissolution of the corporation.

Considering that common shares have voting rights which translate to control, as
opposed to preferred shares which usually have no voting rights, the term "capital" in
Section 11, Article XII of the Constitution refers only to common shares. However, if
the preferred shares also have the right to vote in the election of directors, then the

Except as provided in the immediately preceding paragraph, the vote necessary to

term "capital" shall include such preferred shares because the right to participate in

approve a particular corporate act as provided in this Code shall be deemed to refer
only to stocks with voting rights.

the control or management of the corporation is exercised through the right to vote in
the election of directors. In short, the term "capital" in Section 11, Article XII of the

Indisputably, one of the rights of a stockholder is the right to participate in the control

Constitution refers only to shares of stock that can vote in the election of directors.

or management of the corporation. 43 This is exercised through his vote in the

election of

This interpretation is consistent with the intent of the framers of the Constitution to
place in the hands of Filipino citizens the control and management of public utilities.
As revealed in the deliberations of the Constitutional Commission, "capital" refers to

directors because it is the board of directors that controls or manages the corporation.

the voting stock or controlling interest of a corporation, to wit:

44 In the absence of provisions in the articles of incorporation denying voting rights to

preferred shares, preferred shares have the same voting rights as common shares.
However, preferred shareholders are often excluded from any control, that is, deprived
of the right to vote in the election of directors and on other matters, on the theory that

MR. NOLLEDO.

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

the preferred shareholders are merely investors in the corporation for income in the
same manner as bondholders. 45 In fact, under the Corporation Code only preferred

MR. VILLEGAS. That is right. MR. NOLLEDO.

or redeemable shares can be deprived of the right to vote. 46 Common shares cannot

In teaching law, we are always faced with this question: "Where do we base the equity

be deprived of the right to vote in any corporate meeting, and any provision in the

requirement, is it on the authorized capital stock, on the subscribed capital stock, or

on the paid-up capital stock of a corporation"? Will the Committee please enlighten me

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

on this? ITESAc
MR. VILLEGAS.
MR. VILLEGAS.
The portion accepted by the Committee is the deletion of the phrase "voting stock or
controlling interest." ESTAIH
We have just had a long discussion with the members of the team from the UP Law

MR. AZCUNA.

Center who provided us a draft. The phrase that is contained here which we adopted
from the UP draft is "60 percent of voting stock."
Hence, without the Davide amendment, the committee report would read:
MR. NOLLEDO.

"corporations or associations at least sixty percent of whose CAPITAL is owned by

such citizens."

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

MR. VILLEGAS.

MR. VILLEGAS. That is right. MR. NOLLEDO. Thank you.

Yes.

With respect to an investment by one corporation in another corporation, say, a

MR. AZCUNA.

corporation with 60-40 percent equity invests in another corporation which is permitted
by the Corporation Code, does the Committee adopt the grandfather rule?

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

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

Therefore, we need additional Filipino capital? MR. VILLEGAS.Yes. 48

xxx xxx xxx

MR. VILLEGAS. That is right. MR. AZCUNA.

But the control can be with the foreigners even if they are the minority. Let us say 40
percent of the capital is owned by them, but it is the voting capital, whereas, the

MR. AZCUNA.

Filipinos own the nonvoting shares. So we can have a situation where the corporation
is controlled by foreigners despite being the minority because they have the voting

capital. That is the anomaly that would result here.

trustee is a Philippine national and at least sixty percent (60%) of the fund will accrue
to the benefit of Philippine nationals: Provided, That where a corporation and its non-

MR. BENGZON.

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

Filipino stockholders own stocks in a Securities and Exchange Commission (SEC)

registered enterprise, at least sixty percent (60%) of the capital stock outstanding and
entitled to vote of each of both corporations must be owned and held by citizens of the
Philippines and at least sixty percent (60%) of the members of the Board of Directors
of each of both corporations must be citizens of the Philippines, in order that the

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

corporation, shall be considered a "Philippine national." (Emphasis supplied) TDcHCa

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

In explaining the definition of a "Philippine national," the Implementing Rules and
Thus, 60 percent of the "capital" assumes, or should result in, "controlling interest" in

Regulations of the Foreign Investments Act of 1991 provide:

the corporation. Reinforcing this interpretation of the term "capital," as referring to

controlling interest or shares entitled to vote, is the definition of a "Philippine national"

b."Philippine national" shall mean a citizen of the Philippines or a domestic partnership

or association wholly owned by the citizens of the Philippines; or a corporation

in the Foreign Investments Act of 1991, 50 to wit:

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

organized under the laws of the Philippines of which at least sixty percent [60%] of the
capital stock outstanding and entitled to vote is owned and held by citizens of the
Philippines; or a trustee of funds for pension or other employee retirement or
separation benefits, where the trustee is a Philippine national and at least sixty

a.The term "Philippine national" shall mean a citizen of the Philippines; or a domestic
partnership or association wholly owned by citizens of the Philippines; or a corporation
organized under the laws of the Philippines of which at least sixty percent (60%) of the
capital stock outstanding and entitled to vote is owned and held by citizens of the
Philippines; or a corporation organized abroad and registered as doing business in the
Philippines under the Corporation Code of which one hundred percent (100%) of the
capital stock outstanding and entitled to vote is wholly owned by Filipinos or a trustee
of funds for pension or other employee retirement or separation benefits, where the

percent [60%] of the fund will accrue to the benefit of the Philippine nationals;
Provided, that where a corporation its non- Filipino stockholders own stocks in a
Securities and Exchange Commission [SEC] registered enterprise, at least sixty
percent [60%] of the capital stock outstanding and entitled to vote of both corporations
must be owned and held by citizens of the Philippines and at least sixty percent [60%]
of the members of the Board of Directors of each of both corporation must be citizens
of the Philippines, in order that the corporation shall be considered a Philippine
national. The control test shall be applied for this purpose.

Compliance with the required Filipino ownership of a corporation shall be determined

prescribe, certain areas of investments." Thus, in numerous laws Congress has

on the basis of outstanding capital stock whether fully paid or not, but only such stocks

reserved certain areas of investments to Filipino citizens or to corporations at least

which are generally entitled to vote are considered.

sixty percent of the "capital" of which is owned by Filipino citizens. Some of these laws

For stocks to be deemed owned and held by Philippine citizens or Philippine

are: (1) Regulation of Award of Government Contracts or R.A. No. 5183; (2) Philippine

nationals, mere legal title is not enough to meet the required Filipino equity. Full

Inventors Incentives Act or R.A. No. 3850; (3) Magna Carta for Micro, Small and

beneficial ownership of the stocks, coupled with appropriate voting rights is essential.

Medium Enterprises or R.A. No. 6977; (4) Philippine Overseas Shipping Development

Thus, stocks, the voting rights of which have been assigned

Act or R.A. No. 7471; (5) Domestic Shipping Development Act of 2004 or R.A. No.
9295; (6) Philippine Technology Transfer Act of 2009 or R.A. No. 10055; and (7) Ship
Mortgage Decree or P.D. No. 1521. Hence, the term "capital" in Section 11, Article XII

or transferred to aliens cannot be considered held by Philippine citizens or Philippine

nationals. ITaESD

Individuals or juridical entities not meeting the aforementioned qualifications are

of the Constitution is also used in the same context in numerous laws reserving
certain areas of investments to Filipino citizens.

To construe broadly the term "capital" as the total outstanding capital stock, including

considered as non-Philippine nationals. (Emphasis supplied)

both common and non-voting preferred shares, grossly contravenes the intent and
Mere legal title is insufficient to meet the 60 percent Filipino-owned "capital" required

letter of the Constitution that the "State shall develop a self-reliant and independent

in the Constitution. Full beneficial ownership of 60 percent of the outstanding capital

national economy effectively controlled by Filipinos." A broad definition unjustifiably

stock, coupled with 60 percent of the voting rights, is required. The legal and beneficial

disregards who owns the all-important voting stock, which necessarily equates to

ownership of 60 percent of the outstanding capital stock must rest in the hands of

control of the public utility.

Filipino nationals in accordance with the constitutional mandate. Otherwise, the

We shall illustrate the glaring anomaly in giving a broad definition to the term "capital."
corporation is "considered as non-Philippine national[s]."
Let us assume that a corporation has 100 common shares owned by foreigners and
Under Section 10, Article XII of the Constitution, Congress may "reserve to citizens of

1,000,000 non-voting preferred shares owned by Filipinos, with both classes of share

the Philippines or to corporations or associations at least sixty per centum of whose

having a par value of one peso (P1.00) per share. Under the broad definition of the

capital is owned by such citizens, or such higher percentage as Congress may

term "capital," such corporation would be considered compliant with the 40 percent

constitutional limit on foreign equity of public utilities since the overwhelming majority,

participate in any action taken by the corporation or its stockholders, or to receive

or more than 99.999 percent, of the total outstanding capital stock is Filipino owned.

notice of any meeting of stockholders." 51

This is obviously absurd.

On the other hand, holders of common shares are granted the exclusive right to vote
in the election of directors. PLDT's Articles of Incorporation 52 state that "each holder
of Common Capital Stock shall have one vote in respect of each share of such stock
held by him on all matters voted upon by the stockholders, and the holders of
In the example given, only the foreigners holding the common shares have voting

Common Capital Stock shall have the exclusive right to vote for the election of

rights in the election of directors, even if they hold only 100 shares. The foreigners,

directors and for all other purposes." 53

with a minuscule equity of less than 0.001 percent, exercise control over the public
utility. On the other hand, the Filipinos, holding more than 99.999 percent of the equity,

In short, only holders of common shares can vote in the election of directors, meaning

cannot vote in the election of directors and hence, have no control over the public

only common shareholders exercise control over PLDT. Conversely, holders of

utility. This starkly circumvents the intent of the framers of the Constitution, as well as

preferred shares, who have no voting rights in the election of directors, do not have

the clear language of the Constitution, to place the control of public utilities in the

any control over PLDT. In fact, under PLDT's Articles of Incorporation, holders of

hands of Filipinos. It also renders illusory the State policy of an independent national

common shares have voting rights for all purposes, while holders of preferred shares

economy effectively controlled by Filipinos. HCEaDI

have no voting right for any purpose whatsoever.

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

It must be stressed, and respondents do not dispute, that foreigners hold a majority of

exists in the present case.

the common shares of PLDT. In fact, based on PLDT's 2010 General Information
Sheet (GIS), 54 which is a document required to be submitted annually to the

Holders of PLDT preferred shares are explicitly denied of the right to vote in the

Securities and Exchange Commission, 55 foreigners hold 120,046,690 common

election of directors. PLDT's Articles of Incorporation expressly state that "the holders

shares of PLDT whereas Filipinos hold only 66,750,622 common shares. 56 In other

of Serial Preferred Stock shall not be entitled to vote at any meeting of the

words, foreigners hold 64.27% of the total number of PLDT's common shares, while

stockholders for the election of directors or for any other purpose or otherwise

Filipinos hold only 35.73%. Since holding a majority of the common shares equates to

control, it is clear that foreigners exercise control over PLDT. Such amount of control

The legal and beneficial ownership of 60 percent of the outstanding capital stock must

unmistakably exceeds the allowable 40 percent limit on foreign ownership of public

rest in the hands of Filipinos in accordance with the constitutional mandate. Full

utilities expressly mandated in Section 11, Article XII of the Constitution.

beneficial ownership of 60 percent of the outstanding capital stock, coupled with 60

percent of the voting rights, is constitutionally required for the State's grant of authority

Moreover, the Dividend Declarations of PLDT for 2009, 57 as submitted to the SEC,
shows that per share the SIP 58 preferred shares earn a pittance in dividends
compared to the common shares. PLDT declared dividends for the common shares at
P70.00 per share, while the declared dividends for the preferred shares amounted to a
measly P1.00 per share. 59 So the preferred shares not only cannot vote in the
election of directors, they also have very little and obviously negligible dividend
earning capacity compared to common shares.

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

to operate a public utility. The undisputed fact that the PLDT preferred shares, 99.44%
owned by Filipinos, are non-voting and earn only 1/70 of the dividends that PLDT
common shares earn, grossly violates the constitutional requirement of 60 percent
Filipino control and Filipino beneficial ownership of a public utility.

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

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

22.15%. This kind of ownership and control of a public utility is a mockery of the

Section 11, Article XII of the Constitution, like other provisions of the Constitution

Constitution.

expressly reserving to Filipinos specific areas of investment, such as the development

of natural resources and ownership of land, educational institutions and advertising

Incidentally, the fact that PLDT common shares with a par value of P5.00 have a
current stock market value of P2,328.00 per share, 64 while PLDT preferred shares
with a par value of P10.00 per share have a current stock market value ranging from

business, is self-executing. There is no need for legislation to implement these selfexecuting provisions of the Constitution. The rationale why these constitutional
provisions are self- executing was explained in Manila Prince Hotel v. GSIS, 66 thus:

only P10.92 to P11.06 per share, 65 is a glaring confirmation by the market that

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

control and beneficial ownership of PLDT rest with the common shares, not with the

a constitutional mandate, the presumption now is that all provisions of the constitution

preferred shares.

are self-executing. If the constitutional provisions are treated as requiring legislation

instead of self-executing, the legislature would have the power to ignore and

Indisputably, construing the term "capital" in Section 11, Article XII of the Constitution

practically nullify the mandate of the fundamental law. This can be cataclysmic. That is

to include both voting and non-voting shares will result in the abject surrender of our

why the prevailing view is, as it has always been, that

telecommunications industry to foreigners, amounting to a clear abdication of the

State's constitutional duty to limit control of public utilities to Filipino citizens. Such an

. . . in case of doubt, the Constitution should be considered self-executing rather than

non-self-executing. . . . Unless the contrary is clearly intended, the provisions of the

interpretation certainly runs counter to the constitutional provision reserving certain

areas of investment to Filipino citizens, such as the exploitation of natural resources

Constitution should be considered self- executing, as a contrary rule would give the
legislature discretion to determine when, or whether, they shall be effective. These

as well as the ownership of land, educational institutions and advertising businesses.

provisions would be subordinated to the will of the lawmaking body, which could make

The Court should never open to foreign control what the Constitution has expressly

them entirely meaningless by simply refusing to pass the needed implementing

reserved to Filipinos for that would be a betrayal of the Constitution and of the national

statute. (Emphasis supplied) TAaEIc

interest. The Court must perform its solemn duty to defend and uphold the intent and
letter of the Constitution to ensure, in the words of the Constitution, "a self-reliant and
independent national economy effectively controlled by Filipinos."
In Manila Prince Hotel, even the Dissenting Opinion of then Associate Justice Reynato

S. Puno, later Chief Justice, agreed that constitutional provisions are presumed to be

that should be allowed to intervene and determine what is to be done with the property

self- executing. Justice Puno stated:

subject of the violation. We have said that what the State should do or could do in
such matters is a matter of public policy, entirely beyond the scope of judicial authority.

Courts as a rule consider the provisions of the Constitution as self-executing, rather

(Dinglasan, et al. vs. Lee Bun Ting, et al., 6 G.R. No. L-5996, June 27, 1956.) While

than as requiring future legislation for their enforcement. The reason is not difficult to

the legislature has not definitely decided what policy should be followed in cases of

discern. For if they are not treated as self-executing, the mandate of the fundamental

violations against the constitutional prohibition, courts of justice cannot go beyond by

law ratified by the sovereign people can be easily ignored and nullified by Congress.

declaring the disposition to be null and void as violative of the Constitution. . . .

Suffused with wisdom of the ages is the unyielding rule that legislative actions may

(Emphasis supplied) IScaAE

give breath to constitutional rights but congressional inaction should not suffocate
them.

To treat Section 11, Article XII of the Constitution as not self-executing would mean
that since the 1935 Constitution, or over the last 75 years, not one of the constitutional

Thus, we have treated as self-executing the provisions in the Bill of Rights on arrests,

provisions expressly reserving specific areas of investments to corporations, at least

searches and seizures, the rights of a person under custodial investigation, the rights
of an accused, and the privilege against self-incrimination. It is recognized that
legislation is unnecessary to enable courts to effectuate constitutional provisions

60 percent of the "capital" of which is owned by Filipinos, was enforceable. In short,

the framers of the 1935, 1973 and 1987 Constitutions miserably failed to effectively

guaranteeing the fundamental rights of life, liberty and the protection of property. The

reserve to Filipinos specific areas of investment, like the operation by corporations of

same treatment is accorded to constitutional provisions forbidding the taking or

public utilities, the exploitation by corporations of mineral resources, the ownership by

damaging of property for public use without just compensation. (Emphasis supplied)

corporations of real estate, and the ownership of educational institutions. All the
legislatures that convened

Thus, in numerous cases, 67 this Court, even in the absence of implementing

legislation, applied directly the provisions of the 1935, 1973 and 1987 Constitutions
limiting land ownership to Filipinos. In Soriano v. Ong Hoo, 68 this Court ruled:

since 1935 also miserably failed to enact legislations to implement these vital

. . . As the Constitution is silent as to the effects or consequences of a sale by a citizen

constitutional provisions that determine who will effectively control the national

of his land to an alien, and as both the citizen and the alien have violated the law,

economy, Filipinos or foreigners. This Court cannot allow such an absurd

none of them should have a recourse against the other, and it should only be the State

interpretation of the Constitution.

This Court has held that the SEC "has both regulatory and adjudicative functions." 69

persons to ensure compliance" with the laws and regulations that SEC administers or

Under its regulatory functions, the SEC can be compelled by mandamus to perform its

enforces. The GIS that all corporations are required to submit to SEC annually should

statutory duty when it unlawfully neglects to perform the same. Under its adjudicative

put the SEC on guard against violations of the nationality requirement prescribed in

or quasi-judicial functions, the SEC can be also be compelled by mandamus to hear

the Constitution and existing laws. This Court can compel the SEC, in a petition for

and decide a possible violation of any law it administers or enforces when it is

declaratory relief that is treated as a petition for mandamus as in the present case, to

mandated by law to investigate such violation.

hear and decide a possible violation of Section 11, Article XII of the Constitution in
view of the ownership structure of PLDT's voting shares, as admitted by respondents

Under Section 17 (4) 70 of the Corporation Code, the SEC has the regulatory function

and as stated in PLDT's 2010 GIS that PLDT submitted to SEC.

to reject or disapprove the Articles of Incorporation of any corporation where "the

required percentage of ownership of the capital stock to be owned by citizens of the

WHEREFORE, we PARTLY GRANT the petition and rule that the term "capital" in

Philippines has not been complied with as required by existing laws or the

Section 11, Article XII of the 1987 Constitution refers only to shares of stock entitled to

Constitution." Thus, the SEC is the government agency tasked with the statutory duty

vote in the election of directors, and thus in the present case only to common shares,

to enforce the nationality requirement prescribed in Section 11, Article XII of the

and not to the total outstanding capital stock (common and non-voting preferred

Constitution on the ownership of public utilities. This Court, in a petition for declaratory

shares). Respondent Chairperson of the Securities and Exchange Commission is

relief that is treated as a petition for mandamus as in the present case, can direct the

DIRECTED to apply this definition of the term "capital" in determining the extent of

SEC to perform its statutory duty under the law, a duty that the SEC has apparently

allowable foreign ownership in respondent Philippine Long Distance Telephone

unlawfully neglected to do based on the 2010 GIS that respondent PLDT submitted to

Company, and if there is a

the SEC.

Under Section 5 (m) of the Securities Regulation Code, 71 the SEC is vested with the
"power and function" to "suspend or revoke, after proper notice and hearing, the

violation of Section 11, Article XII of the Constitution, to impose the appropriate

franchise or certificate of registration of corporations, partnerships or associations,

sanctions under the law. aDSTIC

upon any of the grounds provided by law." The SEC is mandated under Section 5 (d)
of the same Code with the "power and function" to "investigate . . . the activities of

SO ORDERED.

Leonardo-de Castro, Brion, Peralta, Bersamin, Del Castillo, Villarama, Jr., Perez,

In 1977, Prime Holdings, Inc. (PHI) was incorporated and 100% owned by the

Mendoza and Sereno, JJ., concur.

Cojuangco group. Subsequently, PHI became the owner of 111,415 shares or

46.125% of PTIC by virtue of three (3) Deeds of Assignment executed by Ramon

Corona, C.J., I join the dissent of Mr. Justice Velasco. Velasco, Jr., J., I dissent. Please

Cojuangco and Luis Tirso Rivilla. 4

see Dissenting Opinion. Abad, J., see my dissenting opinion.

On May 9, 1986, the 111,415 PTIC shares held by PHI were sequestered by the
Separate Opinions

Presidential Commission on Good Government (PCGG) pursuant to Executive Order

No. 1. 5 Later, this Court declared the said shares to be owned by the Republic of the

VELASCO, JR., J., dissenting:With due respect, I dissent.A summary of the pertinent

Philippines. 6

facts is as follows:

Philippine Long Distance Telephone Company (PLDT), a Philippine-registered

In 1999, First Pacific Company Limited (First Pacific), a Bermuda-registered, Hong

telecommunications firm, was granted an initial 50-year charter and the right to

Kong- based investment firm, acquired the remaining 54% equity of PTIC. 7

establish a telephone network by Act No. 3436 on November 28, 1928. 1

Thereafter, the government decided to sell its 46.1% stake in PTIC (equivalent to
In 1969, American-owned General Telephone and Electronics Corporation (GTE), a

6.4% indirect stake in PLDT), designating the Privatization Council of the Philippine

major

Philippine

Government as the disposition entity. On December 8, 2006, a public bidding was held

Telecommunications Investment Corporation (PTIC). 2 PTIC was incorporated on

where Singapore-based Parallax Capital Management LP (Parallax) emerged as the

November 9, 1967 and is engaged in the business of investment holdings. It held

highest bidder with an offer of PhP25,217,556,000. 8

shareholder

of

PLDT,

sold

26%

of

PLDT's

equity

to

26,034,263 of PLDT shares, or 13.847% of the total outstanding common stocks of

PLDT. 3

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

conducted a public hearing on the particulars of the impending sale. Finance
Secretary Margarito Teves, Finance Undersecretary John Sevilla, PCGG Chairperson
Camilo Sabio, Commissioners Narciso Nario and Nick Conti, Securities and Exchange
Commission (SEC) General Counsel Vernette Umali-Paco, Philippine Stock Exchange

(PSE) Chairperson Jose Vitug and President Francisco Ed Lim, Development Bank of

PTIC. He argues that: (1) the consummation of the impending sale of 111,415 shares

the Philippines (DBP) President Reynaldo David and Director Miguel Romero all

to First Pacific violates the constitutional limitation on foreign ownership of a public

attended the hearing. 9

utility; (2) respondents committed grave abuse of discretion by allowing the sale of
PTIC

In Report No. 2270, the House Committee on Good Government concluded that: (1)

shares

to

First

Pacific;

(3)

respondents

have

made

complete

misrepresentation of the impending

the auction of the government's PTIC shares bore due diligence, transparency and
conformity with existing legal procedures; and (2) First Pacific's intended acquisition of
the government's PTIC shares resulting in its 100% ownership in PTIC will not violate
the 40% constitutional limit on foreign ownership of a public utility since PTIC held only

sale by saying that it does not breach the constitutional limitation on foreign ownership
of a public utility; and (4) the sale of common shares to foreigners in excess of 40% of
the entire subscribed common capital stock violates the 1987 Philippine Constitution.

13.847% of the total outstanding common stocks of PLDT. 10

14
Subsequently, the government informed First Pacific of the results of the bidding and
gave it until February 1, 2007 to exercise its right of first refusal as provided under
PTIC's Articles of Incorporation. Consequently, First Pacific announced that it would
match Parallax's bid. 11 However, First Pacific failed to raise the money for the
purchase by the February 1, 2007 deadline and, instead, yielded the right to PTIC

After a careful examination of the facts and law applicable to the case, I submit that
the petition should be dismissed.

At the outset, it is strikingly clear that the petition suffers from several jurisdictional and
procedural defects.

itself. The deadline was then reset to March 2, 2007. 12

Petitioner Has No Locus Standi
On February 14, 2007, First Pacific, through its subsidiary, Metro Pacific Assets
Holdings, Inc. (MPAH), entered into a Conditional Sale and Purchase Agreement with

Petitioner Gamboa claims that he filed the petition in his capacity as a "nominal

the

shareholder of PLDT and as [a] taxpayer." 15 However, these claims do not clothe him

government

for

the

latter's

46.1%

stake

in

PTIC

at

the

price

of

PhP25,217,556,000. 13 The acquisition was completed on February 28, 2007.

with the requisite legal standing to bring this suit.

On the same date, Wilson Gamboa (Gamboa) filed the instant petition for prohibition,

The Rules of Court specifically requires that "[e]very action must be prosecuted or

injunction, declaratory relief and declaration of nullity of sale of the 111,415 shares of

defended in the name of the real party in interest." 16 A real party in interest is defined

as the "party who stands to be benefited or injured by the judgment in the suit, or the
party entitled to the avails of the suit." CcSTHI

Petitioner Gamboa filed four (4) different petitions before this Court declaratory

Petitioner has failed to allege any interest in the 111,415 PTIC shares nor in any of the

relief, annulment, prohibition and injunction. However, all of these actions are not

previous purchase contracts he now seeks to annul. He is neither a shareholder of

within the exclusive and/or original jurisdiction of the Supreme Court. TIcAaH

PTIC nor of First Pacific. Also, he has not alleged that he was an interested bidder in
the government's auction sale of the PTIC shares. Finally, he has not shown how, as a

Article VII of the 1987 Constitution, particularly Section 5 (1), in relation to Sec. 5 (5),
enumerates the instances where this Court exercises original jurisdiction:

nominal shareholder of PLDT, he stands to benefit from the annulment of the sale of
the 111,415 PTIC shares or of any of the sales of the PLDT common shares held by
foreigners. In fine, petitioner has not shown any real interest substantial enough to
give him the requisite locus standi to question the sale of the government's PTIC

Article VIIISection 5.The Supreme Court shall have the following powers:

(1)Exercise original jurisdiction over cases affecting ambassadors, other public

ministers and consuls, and over petitions for certiorari, prohibition, mandamus, quo

shares to First Pacific.

warranto, and habeas corpus.

Likewise, petitioner's assertion that he has standing to bring the suit as a "taxpayer"

xxx xxx xxx

must fail. In Gonzales v. Narvasa, We discussed that "a taxpayer is deemed to have
the standing to raise a constitutional issue when it is established that public funds

(5)Promulgate rules concerning the protection and enforcement of constitutional

rights, pleading, practice, and procedure in all courts, the admission to the practice of

have been disbursed in alleged contravention of the law or the Constitution." 17 In this
case, no public funds have been disbursed. In fact, the opposite has happened
there is an inflow of funds into the government coffers.

law, the integrated bar, and legal assistance to the under-privileged. Such rules shall
provide a simplified and inexpensive procedure for the speedy disposition of cases,
shall be uniform for all courts of the same grade, and shall not diminish, increase, or
modify substantive rights. Rules of procedure of special courts and quasi-judicial

Evidently, petitioner Gamboa has no legal standing to bring the present petition before

bodies shall remain effective unless disapproved by the Supreme Court.

this Court.
Accordingly, this Court promulgated the Rules of Court, Sec. 1, Rule 56 of which
This Court Has No Jurisdiction

states: RULE 56

Original Cases

Section 1.Original cases cognizable. Only petitions for certiorari, prohibition,

mandamus, quo warranto, habeas corpus, disciplinary proceedings against members
of the judiciary and attorneys, and cases affecting ambassadors, other public ministers

As previously discussed, petitioner lacks any real interest in this action; thus, no
justiciable controversy between adverse interests exists.

Further, the Rules of Court also requires that "[a]ll persons who have or claim any
interest which would be affected by the declaration shall be made parties." 19 The

and consuls may be filed originally in the Supreme Court. CITSAc

failure to implead all persons with a claim or interest in the subject matter of the
Based on the foregoing provisos, it is patently clear that petitions for declaratory relief,

petition for declaratory relief is a jurisdictional defect. 20

annulment of sale and injunction do not fall within the exclusive original jurisdiction of
What is more, an action for declaratory relief requires that it be filed before "the breach
this Court.
or violation of the statute, deed, contract, etc. to which it refers. Where the law or
First, the court with the proper jurisdiction for declaratory relief is the Regional Trial

contract has already been contravened prior to the filing of an action for declaratory

Court (RTC). Sec. 1, Rule 63 of the Rules of Court stresses that an action for

relief, the court can no longer assume jurisdiction over the action." 21 Here, petitioner

declaratory relief is within the exclusive original jurisdiction of the RTC, viz.:

himself points out the fact that, using the common stockholding basis, the 40%
maximum foreign ownership limit on PLDT was already violated long before the sale

Any person interested under a deed, will, contract or other written instrument, whose

of the PTIC shares by the government. 22 In addition, the sale itself has already been

rights are affected by a statute, executive order or regulation, ordinance, or any other

consummated. This only means that an action for declaratory relief is no longer

governmental regulation may, before breach or violation thereof, bring an action in the

proper.

appropriate Regional Trial Court to determine any question of construction or validity

arising, and for a declaration of his rights or duties, thereunder. (Emphasis supplied.)
CcAHEI

Despite this, the ponencia decided to treat the petition for declaratory relief as one for
mandamus, citing the rule that "where the petition has far-reaching implications and
raises questions that should be resolved, it may be treated as one for mandamus." 23

An action for declaratory relief also requires the following: (1) a justiciable controversy

However, such rule is not absolute. In Macasiano v. National Housing Authority, 24 the

between persons whose interests are adverse; (2) the party seeking the relief has a

Court explicitly stated that the exercise of such discretion, whether to treat a petition

legal interest in the controversy; and (3) the issue is ripe for judicial determination. 18

for declaratory relief as one for mandamus, presupposes that the petition is otherwise

viable or meritorious. As I shall discuss subsequently in the substantive portion of this

sought by exhausting this remedy before the courts will act. 27

opinion, the petition in this case is clearly not viable or meritorious.

In the instant case, the power and authority to determine compliance with the
Moreover, one of the reasons pointed out by the Court in Macasiano when it refused

Constitution lies with the SEC. Under Section 17 (4) of the Corporation Code, the SEC

to treat the petition for declaratory relief as one for mandamus was that the petitioner

has the power to approve or reject the Articles of Incorporation of any corporation

lacked the proper standing to file the petition. Thus, the petition was subsequently

where "the required percentage of ownership of the capital stock to be owned by

dismissed. This is exactly similar to the instant case. As previously explained,

citizens of the Philippines has not been complied with as required by existing laws or

petitioner has no legal standing to bring the present petition before this Court. He

the Constitution." Similarly, under Section 5 of the Securities Regulation Code, the

failed to show any real interest in the case substantial enough to give him the required

SEC is conferred with the power to suspend or revoke the franchise or certificate of

legal standing to question the sale of the PTIC shares of the government to First

registration of corporations upon any of the grounds provided by law. 28 It bears

Pacific.

stressing that the SEC also has the power to investigate violations of the Securities
Regulation Code and its Amended Rules. With this, it is clear that petitioner failed to

Further, a petition for mandamus is premature if there are administrative remedies

available to petitioner. 25 Under the doctrine of primary administrative jurisdiction,
"courts cannot or will not determine a controversy where the issues for resolution
demand the exercise of sound administrative discretion requiring the special

invoke the primary jurisdiction of the SEC with respect to this matter.

Additionally, the petition contains numerous questions of fact which is not allowed in a
petition for mandamus. 29 Hence, based on the foregoing, a petition for mandamus is
evidently improper.

knowledge, experience, and services of the administrative tribunal to determine

technical and intricate matters of fact. In other words, if a case is such that its

Second, since an action for annulment of sale is an ordinary civil action incapable of

determination requires the expertise, specialized training and knowledge of an

pecuniary estimation, 30 it also falls within the exclusive original jurisdiction of the

administrative body, relief must first be obtained in an administrative proceeding

RTC. 31

before resort to the courts is had even if the matter may well be within their proper
Lastly, although this Court, the CA, and the RTC have "concurrent jurisdiction to issue
jurisdiction." 26 Along with this, the doctrine of exhaustion of administrative remedies
writs of certiorari, prohibition, mandamus, quo warranto, habeas corpus and
also requires that where an administrative remedy is provided by statute relief must be
injunction, such concurrence does not give the petitioner unrestricted freedom of

choice of court forum." 32 The doctrine of hierarchy of courts dictates that when

In the instant case, petitioner should have filed the petition for injunction and

jurisdiction is shared concurrently with different courts, the proper suit should first be

prohibition with the trial courts. Petitioner failed to show any exceptional or compelling

filed with the lower- ranking court. Failure to do so is sufficient cause for the dismissal

circumstance to justify the exception to the rule of hierarchy of courts. Thus, absent

of a petition. 33

such justification, the rule must be upheld.

In Santiago v. Vasquez, 34 the Court took the opportunity to explain why the blatant

In fact, in Fernandez v. Cojuangco, 35 which also involved a similar issue, questioning

disregard of the hierarchy of courts is frowned upon, to wit:

the issuance of PLDT's common shares to Smart and NTT's stockholders on the
ground, among others, that such issuance of shares violated the 40% foreign
ownership constitutional restriction for public utilities, this Court issued a Resolution
dismissing the petition filed with it for disregarding the hierarchy of courts.

. . . We discern in the proceedings in this case a propensity on the part of petitioner,

and, for that matter, the same may be said of a number of litigants who initiate

More importantly, the function of a writ of prohibition is to prevent the performance of

recourses before us, to disregard the hierarchy of courts in our judicial system by

an act which is yet to be done. It is not intended to provide a remedy for acts already

seeking relief directly from this Court despite the fact that the same is available in the
lower courts in the exercise of their original or concurrent jurisdiction, or is even

performed. 36 The rationale behind this was discussed in Cabanero v. Torres, 37

citing U.S. v. Hoffman, 38 viz.:

mandated by law to be sought therein. This practice must be stopped, not only
because of the imposition upon the precious time of this Court but also because of the

The writ of prohibition, as its name imports, is one which commands the person to

inevitable and resultant delay, intended or otherwise, in the adjudication of the case

whom it is directed not to do something which, by the suggested to the relator, the

which often has to be remanded or referred to the lower court as the proper forum

court is informed he is about to do. If the thing be already done, it is manifest the writ

under the rules of procedure, or as better equipped to resolve the issues since this

of prohibition cannot undo it, for that would require an affirmative act; and the only

Court is not a trier of facts. We, therefore, reiterate the judicial policy that this Court

effect to a writ of prohibition is to suspend all action, and to prevent any further

will not entertain direct resort to it unless the redress desired cannot be obtained in the

proceeding in the prohibited direction. IcHTED

appropriate courts or where exceptional and compelling circumstances justify

availment of a remedy within and calling for the exercise of our primary jurisdiction.

As previously pointed out, the sale by the government of the PTIC shares had already
been completed. Thus, the Petition for Prohibition has become moot. As a result, this

Court has no obligation to entertain the petition.

Filipino citizen and his or her franchise. In the second, two different property holders
and two different properties are involved, i.e., the public utility company holding its

Finally, it should be noted that the non-joinder of ordinary civil actions with special civil
actions is elementary in remedial law. Sec. 5, Rule 2 of the Rules specifically prohibits
the

franchise and the shareholders owning the capital of the utility company. However, in
both situations, Sec. 11 imposes a qualification for the retention of property on just one
property holder, the franchise holder, as a condition for keeping his or its franchise. It
imposes no nationality qualification on the shareholders of the utility company as a

joining of special civil actions or actions governed by special rules with ordinary civil

condition for keeping their shares in the utility company. Thus, if a utility company or

actions. 39 In this case, petitioner violated this basic rule when he joined several

the franchise holder fails to maintain the nationality qualification, only its franchise

special civil actions, prohibition and declaratory relief, and the ordinary civil actions for

should be revoked.

annulment and injunction.

In J.G. Summit Holdings, Inc. v. CA, 42 this Court had the chance to rule on a similar
Violation of Due Process

set of facts. In that case, We refused to annul the sale of the government's shares
despite the petitioner's claim that it would breach the maximum 40% foreign

It is a fundamental guarantee in the Constitution that "[n]o person shall be deprived of

ownership limit found in the Constitution. According to the Court:
life, liberty or property without due process of law." 40 Due process has two aspects:
substantive and procedural. Substantive due process is a prohibition of arbitrary laws,

. . . In fact, it can even be said that if the foreign shareholdings of a landholding

while procedural due process is a guarantee of procedural fairness. 41 Here, what

corporation exceeds 40%, it is not the foreign stockholders' ownership of the shares

petitioner asks of this Court is a finding of a violation of both substantive and

which is adversely affected but the capacity of the corporation to own land that is,

procedural due process.

the corporation becomes disqualified to own land. This finds support under the basic
corporate law principle that the corporation and its stockholders are separate juridical

Sec. 11, Art. XII of the Constitution contemplates of two situations: first, where the

entities. In this vein, the right of first refusal over shares pertains to the shareholders

applicant of a franchise is a natural person, he must be a Filipino citizen; and second,

whereas the capacity to own land pertains to the corporation. Hence, the fact that

where the applicant is a juridical person, 60% of its capital must be owned by Filipino
citizens. In the first scenario, only one person and one property is involved, i.e., the

PHILSECO owns land cannot deprive stockholders of their right of first refusal. No law
disqualifies a person from purchasing shares in a landholding corporation even if the
latter will exceed the allowed foreign equity, what the law disqualifies is the corporation

from owning land. (Emphasis supplied.) THESAD

parties or "[p]arties in interest without whom no final determination can be had." 45

This is mandatory. As held in Pepsico, Inc. v. Emerald Pizza, Inc., 46 their absence

Certainly, the Court has differentiated the two property owners and their properties.
Confusing the two would result in "an unreasonable curtailment of property rights
without due process of law." 43

renders all actions of the court null and void, viz.:

. . . Their presence is necessary to vest the court with jurisdiction, which is "the
authority to hear and determine a cause, the right to act in a case." Thus, without their
presence to a suit or proceeding, judgment of a court cannot attain real finality. The

Furthermore, procedural due process requires that before any of the common shares
in excess of the 40% maximum foreign ownership limit can be taken, all the
shareholders have to be given notice and a trial should be held before their shares are

absence of an indispensable party renders all subsequent actions of the court null and
void for want of authority to act, not only as to the absent parties but even as to those
present. (Emphasis supplied.)

taken. This means that petitioner should have impleaded all the foreign natural and
juridical shareholders of PLDT so that they can be heard. The foreign shareholders

In this case, petitioner failed to implead all the indispensable parties. Accordingly, in

are considered as an "indispensable party" or one who:

the absence of such indispensable parties, this Court is wanting in authority to act or
rule on the present petition.

has such an interest in the controversy or subject matter that a final adjudication
cannot be made, in his absence, without injuring or affecting that interest[;] a party

Ultimately, the present petition partakes of a collateral attack on PLDT's franchise as a

who has not only an interest in the subject matter of the controversy, but also has an

public utility with petitioner pleading as ground PLDT's alleged breach of the 40% limit

interest of such nature that a final decree cannot be made without affecting his interest

on foreign equity. Such is not allowed. As discussed in PLDT v. National

or leaving the controversy in such a condition that its final determination may be
wholly inconsistent with equity and good conscience. It has also been considered that

Telecommunications Commission, 47 a franchise is a property right that can only be

questioned in a direct proceeding:

an indispensable party is a person in whose absence there cannot be a determination

between the parties already before the court which is effective, complete, or equitable.
Further, an indispensable party is one who must be included in an action before it may

. . . A franchise is a property right and cannot be revoked or forfeited without due

properly go forward. 44

process of law. The determination of the right to the exercise of a franchise, or

whether the right to enjoy such privilege has been forfeited by non-user, is more

At the same time, the Rules of Court explicitly requires the joinder of indispensable

properly the subject of the prerogative writ of quo warranto, the right to assert which,

as a rule, belongs to the State "upon complaint or otherwise" . . . the reason being that

common good so requires. The State shall encourage equity participation in public

the abuse of a franchise is a public wrong and not a private injury. A forfeiture of a

utilities by the general public. The participation of foreign investors in the governing

franchise will have to be declared in a direct proceeding for the purpose brought by

body of any public utility enterprise shall be limited to their proportionate share in its

the State because a franchise is granted by law and its unlawful exercise is primarily a

capital, and all the executive and managing officers of such corporation or association

concern of Government.

must be citizens of the Philippines. (Emphasis supplied.)

Hence, due process requires that for the revocation of franchise a petition for quo

He argues that the framers of the Constitution intended the word "capital" to be limited

warranto be filed directly attacking the franchise itself.

to voting shares alone and not the total outstanding capital stock (combined total of
voting and non-voting shares). Specifically, he contends that the term "capital" refers

Evidently, the petition is patently flawed and the petitioner availed himself of the wrong
remedies. These jurisdictional and procedural grounds, by themselves, are ample

only to shares of stock that can vote in the election of the members of the Board of
Directors. The question is, is this the proper definition?

enough to warrant the dismissal of the petition. Granting arguendo that the petition is
sufficient in substance and form, it will still suffer the same fate. HSTaEC

The ponencia resolved this in the affirmative and held that the term "capital" only
refers to voting shares since these are the shares that "have voting rights which

The Proper Definition of "Capital"

translate to control",

Petitioner's main substantive issue revolves around the proper definition of the word
"capital" found in Section 11, Article 12 of the Constitution. The said section reads:

Section 11.No franchise, certificate, or any other form of authorization for the operation
of a public utility shall be granted except to citizens of the Philippines or to

48 i.e., the right to elect directors who ultimately control or manage the corporation.
Generally, these are referred to as "common" shares. However, he clarified that if
preferred shares also have the right to vote in the election of the members of the

corporations or associations organized under the laws of the Philippines, at least sixty

Board of Directors, then the term "capital" shall also include such preferred shares.

per centum of whose capital is owned by such citizens; nor shall such franchise,

Further, the ponencia maintains that "mere legal title is insufficient to meet the

certificate, or authorization be exclusive in character or for a longer period than fifty

required Filipino equity," but that "full beneficial ownership of the stocks coupled with

years. Neither shall any such franchise or right be granted except under the condition

appropriate voting rights" is required. 49

that it shall be subject to amendment, alteration, or repeal by the Congress when the

I beg to disagree with the ponencia's resolution of this issue for the following reasons:

but I notice that this is now different from the provision in the 1973 Constitution in that
the basis for the equity provision is voting stock or controlling interest instead of the

First, contrary to pronouncement of the ponencia, the intent of the framers of the

usual capital percentage as provided for in the 1973 Constitution. We would like to

Constitution was not to limit the application of the word "capital" to voting or common

know what the difference

shares alone. In fact, the Records of the Constitutional Commission reveal that even
though the UP Law Center proposed the phrase "voting stock or controlling interest,"
the framers of the Constitution did not adopt this but instead used the word "capital,"
viz.:

MR. BENGZON.

would be between the previous and the proposed provisions regarding equity interest.

MR. VILLEGAS.Commissioner Suarez will answer that. MR. SUAREZ.Thank you.

As a matter of fact, this particular portion is still being reviewed by this Committee. In

We would also like to indicate that perhaps the better term in order to avoid any

Section 1, Article XIII of the 1935 Constitution, the wording is that the percentage

conflict or misinterpretations would be the use of the phrase "capital stock." ACTaDH

should be based on the capital which is owned by such citizens. In the proposed draft,
this phrase was proposed: "voting stock or controlling interest." This was a plan

MR. NATIVIDAD. Capital stock?MR. SUAREZ.

submitted by the UP Law Center. aCHDST

We will discuss that on the committee level because precisely, there were three

Three days ago, we had an early morning breakfast conference with the members of

criteria that were submitted. One of them is with reference to the authorized capital

the UP Law Center and precisely, we were seeking clarification regarding the

stock; the second would be with respect to the voting rights; and the third would be

difference. We would have three criteria to go by: One would be based on capital,

with respect to the management. And so, again, we would like to inform the members

which is capital stock of the corporation, authorized, subscribed or paid up, as

that the Committee is still trying to polish this particular provision. 50

employed under the 1935 and the 1973 Constitution. The idea behind the introduction
of the phrase "voting stock or controlling interest" was precisely to avoid the

xxx xxx xxx

MR. FOZ.

perpetration of dummies, Filipino dummies of multinationals. It is theoretically possible

that a situation may develop where these multinational interests would not really be
only 40 percent but will extend beyond that in the matter of voting because they could

Mr. Vice-President, in Sections 3 and 9, 51 the provision on equity is both 60 percent,

enter into what is known as a voting trust or voting agreement with the rest of the

stockholders and, therefore, notwithstanding the fact that on record their capital extent

Madam President, may I propose an amendment on line 14 of Section 3 by deleting

is only up to 40-percent interest in the corporation, actually, they would be managing

therefrom "whose voting stock and controlling interest." And in lieu thereof, insert the

and controlling the entire company. That is why the UP Law Center members

CAPITAL so the line should read: "associations at least sixty percent of the CAPITAL

suggested that we utilize the words "voting interest" which would preclude

is owned by such citizens".

multinational control in the matter of voting, independent of the capital structure of the
corporation. And then they also added the phrase "controlling interest" which up to
now they have not been able to successfully define the exact meaning of. . . . And as

MR. VILLEGAS.

We accept the amendment.

far as I am concerned, I am not speaking in behalf of the Committee, I would feel

more comfortable if we go back to the wording of the 1935 and the 1973 Constitution,

MR. TREAS.

that is to say, the 60-40 percentage could be based on the capital stock of the
corporation.

MR. FOZ.

Thank you.

THE PRESIDENT.

The amendment of Commissioner Treas on line 14 has been accepted by the

I understand that that was the same view of Dean Carale who does not agree with the

Committee. HcDaAI

other on this panel at the UP Law Center regarding the percentage of the ratio.
Is there any objection? (Silence) The Chair hears none; the amendment is approved.
MR. SUAREZ.That is right. Dean Carale shares my sentiment about this matter. MR.

53

BENGZON.

I also share the sentiment of Commissioner Suarez in that respect. So there are
already two in the Committee who want to go back to the wording of the 1935 and the

MR. VILLEGAS.

xxx xxx xxx

1973 Constitution. 52
Yes, Commissioner Davide has accepted the word "CAPITAL" in place of "voting stock
xxx xxx xxx

MR. TREAS.

or controlling interest." This is an amendment already accepted by the Committee. 54

...

instances. Control over investments may cover aspects of management and

MR. NOLLEDO.

participation in the fruits of production or exploitation.

Thank you, Madam President.

So, I hope the committee will consider favorably my recommendation that instead of

xxx xxx xxx

using "controlling interests," we just use "CAPITAL" uniformly in cases where foreign
equity is permitted by law, because the purpose is really to help the Filipinos in the

I would like to propound some questions to the chairman and members of the

exploitation of natural resources and in the operation of public utilities. I know the

committee. I have here a copy of the approved provisions on Article on the National

committee, at its own instance, can make the amendment. TASCEc

Economy and Patrimony. On page 2, the first two lines are with respect to the Filipino
and foreign equity and I said: "At least sixty percent of whose capital or controlling
interest is owned by such citizen."

What does the committee say?

MR. VILLEGAS.

I notice that this provision was amended by Commissioner Davide by changing "voting
stocks" to "CAPITAL," but I still notice that there appears the term "controlling interest"

We completely agree with the Commissioner's views. Actually, it was really an

which seems to refer to associations other than corporations and it is merely 50

oversight. We did decide on the word "CAPITAL." I think it was the opinion of the

percent plus one percent which is less than 60 percent. Besides, the wordings may

majority that the phrase "controlling interest" is ambiguous.

indicate that the 60 percent may be based not only on capital but also on controlling
interest; it could mean 60 percent or 51 percent.

So, we do accept the Commissioner's proposal to eliminate the phrase "or controlling
interest" in all the provisions that talk about foreign participation. (Emphasis supplied.)

Before I propound the final question, I would like to make a comment in relation to
Section 15 since they are related to each other. I notice that in Section 15, there still
appears the phrase "voting stock or controlling interest." The term "voting stocks" as
the basis of the Filipino equity means that if 60 percent of the voting stocks belong to

MR. NOLLEDO.Not only in Section 3, but also with respect to Section 15. Thank you
very much. 55

Undoubtedly, the framers of the Constitution decided to use the word "capital" in all

Filipinos, foreigners may not own more than 40 percent of the capital as long as the
40 percent or the excess thereof will cover nonvoting stock. This is aside from the fact
that under the Corporation Code, even nonvoting shares can vote on certain

provisions that talk about foreign participation and intentionally left out the phrase
"voting stocks" or "controlling interest." Cassus Omissus Pro Omisso Habendus Est
a person, object or thing omitted must have been omitted intentionally. In this

case, the intention of the framers of the Constitution is very clear to omit the

MR. AZCUNA.

phrases "voting stock" and "controlling interest." EScAID

Evidently, the framers of the Constitution were more comfortable with going back to

Hence, without the Davide amendment, the committee report would read:

the wording of the 1935 and 1973 Constitutions, which is to use the 60-40 percentage

"corporations or associations at least sixty percent of whose CAPITAL is owned by

for the basis of the capital stock of the corporation. Additionally, the phrases "voting

such citizens."

stock or controlling interest" were also initially used in Secs. 2 56 and 10, 57 Article XII
MR. Yes. MR. So if
of the 1987 Constitution. These provisions involve the development of natural
resources and certain investments. However, after much debate, they were also

MR. That

replaced with the word "capital" alone. All of these were very evident in the
MR.
aforementioned deliberations.
Yes,
Much more significant is the fact that a comprehensive examination of the
constitutional deliberations in their entirety will reveal that the framers of the
Constitution themselves understood that the word capital includes both voting and

MR.

Yes,

non-voting shares and still decided to use "capital" alone, to wit:

VILLEGAS.
MR. AZCUNA.
AZCUNA.the Davide amendment is lost, we are stuck with 60 percent of the capital to
May I be clarified as to that portion that was accepted by the Committee.
be owned by citizens? HICSaD VILLEGAS.is right.
MR. VILLEGAS.
xxx xxx xxx
The portion accepted by the Committee is the deletion of the phrase "voting stock or
controlling interest."

AZCUNA.but what I mean is that the control should be with the Filipinos. BENGZON.
that is understood.

MR. AZCUNA.

Yes, because if we just say "sixty percent of whose capital is owned by the

To emphasize, by using the word "capital," the framers of the Constitution adopted the
definition or interpretation that includes all types of shares, whether voting or nonvoting.

Filipinos," the capital may be voting or non-voting. MR. BENGZON.

The fundamental principle in the construction of constitutional provisions is "to give the
intent to the framers of the organic law and the people adopting it. The intention to
That is correct. 58
which force is to be given is that which is embodied and expressed in the
MR. GARCIA.

constitutional provisions themselves." 60 Generally, "in construing constitutional

provisions which are ambiguous or of doubtful meaning, the courts may consider the

xxx xxx xxx

debates in the constitutional convention as throwing light on the intent of the framers
of the Constitution. It is true that the intent of the convention is not controlling by itself,
Thank you very much, Madam President.

but as its proceeding was preliminary to the adoption by the people of the Constitution

I would like to propose the following amendment on Section 3, line 14 on page 2. I

the understanding of the convention as to what was meant by the terms of the

propose to change the word "sixty" to SEVENTY-FIVE. So, this will read: "or it may

constitutional provision which was the subject of the deliberation, goes a long way

enter into co-production, joint venture, production sharing agreements with Filipino

toward explaining the understanding of the people when they ratified it." 61

citizens or corporations or associations at least

Second, the ponencia also points to the provisions of the Foreign Investments Act of
SEVENTY-FIVE percent of whose CAPITAL stock or controlling interest is owned by
such citizens." aTICAc

1991 (FIA), 62 as a reinforcement of the interpretation of the word "capital" as only

referring to those shares entitled to vote. However, a careful examination of its

MR. VILLEGAS.

provisions would reveal otherwise.

This is just a correction. I think Commissioner Azcuna is not insisting on the retention

Section 3 (a) of the FIA, as amended, defines the term "Philippine national" as:

of the phrase "controlling interest," so we will retain "CAPITAL" to go back really to the
1935 and 1973 formulations. 59 (Emphasis supplied.)

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

a.The term "Philippine national" shall mean a citizen of the Philippines; of a domestic

By adding the phrase "entitled to vote," the FIA sought to distinguish between the

partnership or association wholly owned by citizens of the Philippines; or a corporation

shares that can vote and those that cannot. Thus, it is very clear that even the FIA

organized under the laws of the Philippines of which at least sixty percent (60%) of the

itself supports the definition of the term "capital" as including all types of shares.

capital stock outstanding and entitled to vote is owned and held by citizens of the
Philippines; or a corporation organized abroad and registered as doing business in the

As a matter of fact, in the Senate deliberations of the FIA, Senator Angara pointed out

Philippines under the Corporation Code of which one hundred percent (100%) of the

that the word "capital," as used in the 1987 Constitution, includes all types of shares:

capital stock outstanding and entitled to vote is wholly owned by Filipinos or a trustee
of funds for pension or other employee retirement or separation benefits, where the

Senator Angara. . . .

trustee is a Philippine national and at least sixty percent (60%) of the fund will accrue
to the benefit of

Before I leave that point, Mr. President, as we know, the constitutional test is capital.
That means, equity investment, not control. Would this control test then now become
an additional requirement to the constitutional requirement?

Philippine nationals: Provided, That where a corporation and its non-Filipino

Senator Paterno.Well, this is an amplification of the constitutional stipulation, Mr.

stockholders own stocks in a Securities and Exchange Commission (SEC) registered

President. It is

enterprise, at least sixty percent (60%) of the capital stock outstanding and entitled to
vote of each of both corporations must be owned and held by citizens of the
Philippines and at least sixty percent (60%) of the members of the Board of Directors
of each of both corporations must be citizens of the Philippines, in order that the
corporation, shall be considered a "Philippine national." (Emphasis supplied.)
2005cdasia

The ponencia failed to see the fact that the FIA specifically has the phrase "entitled to

a definition, by law, of what is contained in the Constitution. Senator Angara.

No, Mr. President, because the Constitution requires 60 percent of capital. That
means, whether voting or nonvoting, 60 percent of that must belong to Filipinos.
Whereas, under this proposed definition, it is only the voting shares that we require to
be 60 percent owned. DcaSIH

Senator Paterno. Yes.Senator Angara.

vote" after the phrase "total outstanding capital stock." Logically, this means that
interpreting the phrase "total outstanding capital stock" alone connotes the inclusion of
all types of shares under the term "capital" and not just those that are entitled to vote.

So, my question is: Would this requirement of control be in addition to what the
Constitution imposes?

Senator Paterno.

No, this would be the definition of what the Constitution requires. We are saying that it
is the capital stock outstanding and entitled to vote. It is the definition of capital as
maintained by the Constitution.

common shares alone or those shares entitled to vote in the election of members of
the Board of Directors. It should also include those deemed non-voting because they
also have voting rights. Sec. 6 of the Corporation Code 65 grants voting rights to
holders of shares of a corporation on certain key fundamental corporate matters
despite being classified as non-voting in the articles of incorporation. These are:

Senator Angara.
1.Amendment of the articles of incorporation; 2.Adoption and amendment of by-laws;
On the contrary, I am saying that the constitutional test is capital, which is
distinguished from capital stock entitled to vote. Capital means equity which can be

3.Sale, lease, exchange, mortgage, pledge or other disposition of all or substantially

voting or nonvoting, common or preferred. That is the constitutional test. 63 . . .

all of the corporate property;

(Emphasis supplied.)
4.Incurring, creating or increasing bonded indebtedness; 5.Increase or decrease of
Moreover, it is a well-settled rule of statutory construction that a statute should be

capital stock;

construed whenever possible in a manner that will avoid conflict with the Constitution.
64 Where a statute is reasonably susceptible of two constructions, one constitutional
and the other unconstitutional, the construction in favor of its constitutionality should
be adopted.

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

corporations; HEcIDa

7.Investment of corporate funds in another corporation or business in accordance with

In this case, the FIA should be read in harmony with the Constitution. Since the

this Code; and

Constitution only provides for a single requirement for the operation of a public utility
under Sec. 11, i.e., 60% capital must be Filipino-owned, a mere statute cannot add

8.Dissolution of the corporation.

another requirement. Otherwise, such statute may be considered unconstitutional.

Clearly, the shares classified as non-voting are also entitled to vote under these
HSDaTC
circumstances.
Accordingly, the phrase "entitled to vote" should not be interpreted to be limited to
In fact, the FIA did not say "entitled to vote in the management affairs of the

corporation" or "entitled to vote in the election of the members of the Board of

owners. DAHaTc

Directors." Verily, where the law does not distinguish, neither should We. Hence, the
proper interpretation of the phrase "entitled to vote" under the FIA should be that it
applies to all shares, whether classified as voting or non-voting shares. Such
construction is in fact in harmony with the fundamental law of the land.

It is settled that when the activity or business of a corporation falls within any of the
partly nationalized provisions of the Constitution or a special law, the "control test"
must also be applied to determine the nationality of a corporation on the basis of the
nationality of the stockholders who control its equity.

Stockholders, whether holding voting or non-voting stocks, have all the rights, powers
and privileges of ownership over their stocks. This necessarily includes the right to
vote because such is inherent in and incidental to the ownership of corporate stocks,
and as such is a property right. 66

The control test was laid down by the Department of Justice (DOJ) in its Opinion No.
18 dated January 19, 1989. It determines the nationality of a corporation with alien
equity based on the percentage of capital owned by Filipino citizens. It reads:

Additionally, control is another inherent right of ownership. 67 The circumstances

Shares belonging to corporations or partnerships at least 60% of the capital of which

enumerated in Sec. 6 of the Corporation Code clearly evince this. It gives voting rights

is owned by Filipino citizens shall be considered as Philippine nationality, but if the

to the stocks deemed as non-voting as to fundamental and major corporate changes.

percentage of Filipino ownership in the corporation or partnership is less than 60%

Thus, the issue should not only dwell on the daily management affairs of the

only the number of shares corresponding to such percentage shall be counted as of

corporation but also on the equally important fundamental changes that may need to

Philippine nationality. 68

be voted on. On this, the "non-voting" shares also exercise control, together with the
voting shares.

In a catena of opinions, the SEC, "the government agency tasked with the statutory
duty to enforce the nationality requirement prescribed in Section 11, Article XII of the

Consequently, the fact that only holders of common shares can elect a corporation's

Constitution on the ownership of public utilities," 69 has consistently applied the

board of directors does not mean that only such holders exercise control over the

control test. 70

corporation. Particularly, the control exercised by the board of directors over the
corporation, by virtue of the corporate entity doctrine, is totally distinct from the
corporation's stockholders and any power stockholders have over the corporation as

The FIA likewise adheres to the control test. This intent is evident in the May 21, 1991
deliberations of the Bicameral Conference Committee (Committees on Economic
Affairs of the Senate and House of Representatives), to wit:

CHAIRMAN TEVES.

CHAIRMAN TEVES.

. . . On definition of terms, Ronnie, would you like anything to say here on the
definition of terms of Philippine national?

That's what I understood, that we could manifest our decision on the control test
formula even if we adopt the wordings here by the Senate version.

HON. RONALDO B. ZAMORA.

xxx xxx xxx
I think we've we have already agreed that we are adopting here the control test.
Wasn't that the result of the

CHAIRMAN PATERNO.

CHAIRMAN PATERNO.

The most we can do is to say that we have explained is to say that although the
House Panel wanted to adopt language which would make clear that the control test is

No. I thought that at the last meeting, I have made it clear that the Senate was not

the guiding philosophy in the definition of [a] Philippine national, we explained to them

able to make a decision for or against the grandfather rule and the control test,

the situation in the Senate and said that we would be was asked them to adopt the

because we had gone into caucus and we had voted but later on the agreement was

present wording of the law cognizant of the fact that the present administrative

rebutted and so we had to go back to adopting the wording in the present law which is

interpretation is the control test interpretation. But, you know, we cannot go beyond

not clearly, by its language, a control test formulation. aSEDHC

that. 71

HON. ANGARA.

MR. AZCUNA.

Well, I don't know. Maybe I was absent, Ting, when that happened but my recollection

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

is that we went into caucus, we debated [the] pros and cons of the control versus the
grandfather rule and by actual vote the control test bloc won. I don't know when
subsequent rejection took place, but anyway even if the we are adopting the
present language of the law I think by interpretation, administrative interpretation,

MR. VILLEGAS.

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

while there may be some differences at the beginning, the current interpretation of this
is the control test. It amounts to the control test.

This intent is even more apparent in the Implementing Rules and Regulations (IRR)of
the FIA. In defining a "Philippine national," Section 1 (b) of the IRR of the FIA

categorically states that for the purposes of determining the nationality of a

units, the sum of which constitutes the capital stock of corporation. (Fletcher, sec.

corporation the control test should be applied. 72

5083).

The cardinal rule in the interpretation of laws is to ascertain and give effect to the
intention of the legislator. 73 Therefore, the legislative intent to apply the control test in

The equitable interest of the shareholder in the property of the corporation is

represented by the term stock, and the extent of his interest is described by the term
shares. The expression shares of stock when qualified by words indicating number

the determination of nationality must be given effect.

Significantly, in applying the control test, the SEC has consistently ruled that the

and ownership expresses the extent of the owner's interest in the corporate property
(Ibid., Sec. 5083, emphasis supplied).

determination of the nationality of the corporation must be based on the entire

Likewise, in all provisions of the Corporation Code the stockholders' right to vote and

outstanding capital stock, which includes both voting and non-voting shares. One such

receive dividends is always determined and based on the "outstanding capital stock",

ruling can be found in an Opinion dated November 21, 1989 addressed to Atty.

defined as follows:

Reynaldo G. Geronimo, to wit:

"SECTION 137.Outstanding capital stock defined. The term "outstanding capital
As to the basis of computation of the 60-40 percentage nationality requirement under

stock" as used in this Code, means the total shares of stock issued to subscribers or

existing laws (whether it should be based on the number of shares or the aggregate

stockholders, whether or not fully or partially paid (as long as there is a binding

amount in pesos of the par value of the shares), the following definitions of corporate

subscription agreement, except treasury shares." caHCSD

terms are worth mentioning.

The computation, therefore, should be based on the total outstanding capital stock,
irrespective of the amount of the par value of the shares.
"The term capital stock signifies the aggregate of the shares actually subscribed". (11
Fletcher, Cyc. Corps. (1971 Rev. Vol.) sec. 5082, citing Goodnow v. American Writing

Again in SEC Opinion dated December 22, 2004 addressed to Atty. Priscilla B. Valer,

Paper Co., 73 NJ Eq. 692, 69 A 1014 aff'g 72 NJ Eq. 645, 66 A, 607).

the SEC reiterated the application of the control test to the total outstanding capital
stock irrespective of the amount of the par value of shares, viz.:

"Capital stock means the capital subscribed (the share capital)". (Ibid., emphasis
supplied).

"Under the 'control concept', the nationality of the corporation depends on the
nationality of the controlling stockholders. In determining the nationality of a

"In its primary sense a share of stock is simply one of the proportionate integers or

corporation under the 'control test', the following ruling was adopted by the

The pertinent provision of the Philippine Constitution under Article XII, Section 7, reads

Commission:

in part thus:

xxx xxx xxx

"No franchise, certificate, or any form of authorization for the operation of a public
utility shall be granted except to citizens of the Philippines, or to corporations or

Hence, we confirm your view that the test for compliance with the nationality
requirement is based on the total outstanding capital stock irrespective of the amount

associations organized under the laws of the Philippines at least sixty per centum of
whose capital is owned by such citizens. . ." . . . HAEDCT

of the par value of shares. 74 (Emphasis supplied.)

The issue raised on your letter zeroes in on the meaning of the word "capital" as used
in the above constitutional provision.
More importantly, the SEC defined "capital" as to include both voting and non-voting in
the determination of the nationality of a corporation, to wit:

Anent thereto, please be informed that the term "capital" as applied to corporations,
refers to the money, property or means contributed by stockholders as the form or

In view of the foregoing, it is opined that the term "capital" denotes the sum total of the
shares subscribed and paid by the shareholders, or secured to be paid, irrespective of
their nomenclature to be issued by the corporation in the conduct of its operation.
Hence, non-voting preferred shares are considered in the computation of the 60-40%
Filipino-alien equity requirement of certain economic activities under the Constitution.
75 (Emphasis supplied.) DHITcS

In fact, the issue in the present case was already answered by the SEC in its Opinion

basis for the business or enterprise for which the corporation was formed and
generally implies that such money or property or means have been contributed in
payment for stock issued to the contributors. (United Grocers, Ltd. v. United States F.
Supp. 834, cited in 11 Fletcher, Cyc. Corp., 1986, rev. vol., sec. 5080 at 18). As further
ruled by the court, "capital of a corporation is the fund or other property, actually or
potentially in its possession, derived or to be derived from the sale by it of shares of its
stock or his exchange by it for property other than money. This fund includes not only
money or other property received by the corporation for shares of stock but all

dated February 15, 1988. The opinion was issued as an answer to the query
"Would it be legal for foreigners to own more than 40% of the common shares but not
more than 40% of the total outstanding capital stock which would include both

balances of purchase money, or installments, due the corporation for shares of stock
sold by it, and all unpaid subscriptions for shares." (Williams v. Brownstein, 1F. 2d 470,
cited in 11 Fletcher, Cyc. Corp., 1058 rev. vol., sec. 5080, p. 21).

common and non-voting preferred shares?" This is exactly the question in this case.
The SEC ruled in the affirmative and stated:

The term "capital" is also used synonymously with the words "capital stock", as
meaning the amount subscribed and paid-in and upon which the corporation is to

conduct its operation. (11 Fletcher, Cyc. Corp. 1986, rev. vol., sec. 5080 at 15).

otherwise. (Emphasis supplied.)

In Opinion No. 32-03 dated June 2, 2003 addressed to Commissioner Armi Jane R.
And, as held by the court in Haggard v. Lexington Utilities Co., (260 Ky 251, 84 SW 2d

Borje, the SEC likewise held that the word "capital" as used in Sec. 11, Art. XII of the

84, cited in 11 Fletcher, Cyc. Corp., 1958 rev. vol., sec. 5079 at 17), "The capital stock
of a corporation is the amount paid-in by its stockholders in money, property or
services with which it is to conduct its business, and it is immaterial how the stock is
classified, whether as common or preferred."

The Commission, in a previous opinion, ruled that the term 'capital' denotes the sum
total of the shares subscribed and paid by the shareholders or served to be paid,
irrespective of their nomenclature. (Letter to Supreme Technotronics Corporation,
dated April 14, 1987). TEAcCD

Hence, your query is answered in the affirmative. 76 (Emphasis supplied.)This opinion

was reiterated in another Opinion dated July 16, 1996 addressed to Mr.

Mitsuhiro Otsuki:

1987 Constitution refers to the entire outstanding capital stock, regardless of its share
classification, viz.:

Please note that Article XII, Section 11 of the Philippine Constitution provides:

"No franchise, certificate, or any other form of authorization for the operation of a
public utility shall be granted except to citizens of the Philippines or to corporations or
associations organized under the laws of the Philippines at least sixty per centum of
whose capital is owned by such citizens . . ."

The legal capacity of the corporation to acquire franchise, certificate, or authority for
the operation of a public utility is regulated by the aforequoted Constitutional provision,
which requires that at least sixty per centum (60%) of the capital of such corporation
be owned by citizens of the Philippines. However, such provision does not qualify

Relative to the second issue, "In the absence of special provisions the holders of

whether the required ownership of "capital" shall be that of the voting or non-voting,

preferred stock in a corporation are in precisely the same position, both with respect to

common or preferred. Hence, it should be interpreted to refer to the sum total of the

the corporation itself and with respect to the creditors of the corporation, as the

outstanding capital stock,

holders of common stock, except only that they are entitled to receive dividends on
their shares, to the extent guaranteed or agreed upon, before any dividends can be
paid to the holders of common stock. . . . . Accordingly, as a general rule, they are
considered in the computation of the 60-40% Filipino-alien equity percentage
requirement, unless the law covering the type of business to be undertaken provides

irrespective of the nomenclature or classification as common, preferred, voting or non-

voting. (Emphasis supplied.)

if said Japanese entity is allowed to subscribe to its preferred shares. The issuance of
shares to an alien will reduce the ownership of Filipino citizens to less than the

In the same way, the SEC has also adopted the same interpretation of the word

required percentage based on the outstanding capital stock of the corporation,

"capital" to various laws or statutes imposing a minimum on Filipino ownership. In an

regardless of the fact that said shares are non-voting and non- convertible.

Opinion dated November 11, 1988 addressed to Mr. Nito Doria, which involved
Executive Order No. 226, otherwise known as the Omnibus Investments Code of

Please be advised that under the Retail Trade Nationalization Law (R.A. 1180), "No
association, partnership, or corporation the capital of which is not wholly owned by

1987, the SEC stated:

citizens of the Philippines, shall engage directly or indirectly in the retail business."

For permitted and permissible investments, the maximum percentage of control

allowable to foreign investors is found in Sections 46 and 47 of the Omnibus
Investments Code of 1987, copy enclosed. In relation thereto, "Outstanding capital

Notably, the foregoing Opinion was rendered before the promulgation of the 1987
Constitution. Thus, it must be assumed that the framers of the Constitution were

stock" refers to the total shares issued to subscribers or stockholders, whether or not

aware of the administrative interpretation of the word "capital" and that they also

fully or partially paid, except treasury shares. (Section 137, Corporation Code of the

adhered to the same interpretation when they re-adopted it in the 1987 Constitution

Philippines), and it is immaterial how the stock is classified, whether as common or

from the 1935 and 1973 Constitutions. As held in Laxamana v. Baltazar, "[w]here a

preferred, (SEC Opinions, dated June 13, 1988, April 14, 1987, and February 15,

statute has received a contemporaneous and practical interpretation and the statute

1988). IDAESH

as interpreted is re-enacted, the practical interpretation is accorded greater weight

Again, in an Opinion dated October 16, 1981 addressed to Atty. Jose A. Baez which
involved Republic Act No. 1180, otherwise known as the Retail Trade Nationalization
Law, the SEC opined that the issuance of preferred shares to a foreigner will

than it ordinarily receives, and is regarded as presumptively the correct interpretation

of the law. The rule here is based upon the theory that the legislature is acquainted
with the contemporaneous interpretation of a

disqualify the corporation from engaging in retail trade, because the law provides that
"no association, partnership, or corporation the capital of which is not wholly owned by
citizens of the Philippines, shall engage directly or indirectly in the retail business." 77
The SEC held:
statute, especially when made by an administrative body or executive officers charged
Your client will lose its character of being one hundred percent (100%) Filipino- owned

with the duty of administering or enforcing the law, and therefore impliedly adopts the

be controlled thereby. (Ibid., 555) Since then, such a doctrine has been reiterated in

interpretation upon re-enactment." 78

numerous decisions. 79 (Emphasis supplied.)

Without a doubt, the SEC's definition of the word "capital" has been consistently

Similarly, the Corporation Code defines "outstanding capital stock" as the "total shares

applied to include the entire outstanding capital stock of a corporation, irregardless of

of stock issued." 80 It does not distinguish between common and preferred shares. It

whether it is common or preferred or voting or non-voting.

includes all types of shares. DCHIAS

This contemporaneous construction of the SEC is entitled to great respect and weight

Since foreigners hold 64.27% of to the total number of PLDT's common shares which

especially since it is consistent with the Constitutional Commission's intention to use

are entitled to select the Board of Directors, the ponencia claims foreigners will elect

the term "capital" as applying to all shares, whether common or preferred. It is well to

the majority of the Board of Director in PLDT and, hence, have control over the

reiterate the principle of contemporaneous construction and the reason why it is

company.

entitled to great respect, viz.:

This is incorrect.

. . . As far back as In re Allen, (2 Phil. 630) a 1903 decision, Justice McDonough, as

ponente, cited this excerpt from the leading American case of Pennoyer v.
McConnaughy, decided in 1891: "The principle that the contemporaneous construction

First of all, it has been established that the word "capital" in the phrase "corporation or
associations organized under the laws of the Philippines, at least sixty per centum of

of a statute by the executive officers of the government, whose duty it is to execute it,

whose 'capital' is owned by such citizens" under Sec. 11, Art. XII of the 1987

is entitled to great respect, and should ordinarily control the construction of the statute

Constitution means

by the courts, is so firmly embedded in our jurisprudence that no authorities need be

cited to support it.' (Ibid., 640. Pennoyer v. McConnaughly is cited in 140 US 1. The

both common or preferred shares or voting or non-voting shares. This phrase is

excerpt is on p. 23 thereof. Cf. Government v. Municipality of Binalonan, 32 Phil. 634

[1915]) There was a paraphrase by Justice Malcolm of such a pronouncement in

qualified by the last sentence of Sec. 11, which reads:

Molina v. Rafferty, (37 Phil. 545) a 1918 decision:" Courts will and should respect the

. . . The participation of foreign investors in the governing body of any public utility

contemporaneous construction placed upon a statute by the executive officers whose

enterprise shall be limited to their proportionate share in its capital, and all the

duty it is to enforce it, and unless such interpretation is clearly erroneous will ordinarily

executive and managing officers of such corporation or association must be citizens of

the Philippines. (Emphasis supplied.)

ownership of the common shares and their directors will only constitute the minority. In
no instance can the foreigners obtain the majority seats in the Board of Directors.

The aforequoted constitutional provision is unequivocal it limits the participation of

the foreign investors in the governing body to their proportionate share in the capital of

Further, the 2010 General Information Sheet (GIS) of PLDT reveals that among the

the corporation. Participation is "the act of taking part in something." 81 Accordingly, it

thirteen (13) members of the Board of Directors, only two (2) are foreigners. It also

includes the right to elect or vote for in the election of the members of the Board of

reveals that the foreign investors only own 13.71% of the capital of PLDT. 82

Directors. However, this right to participate in the election is restricted by the first
sentence of Sec. 11 such that their right cannot exceed their proportionate share in the
capital, i.e., 40%. In other words, the right of foreign investors to elect the members of
the Board of Directors cannot exceed the voting rights of the 40% of the common
shares, even though their ownership of common shares may exceed 40%. Thus, since
they can only vote up to 40% of the common shares of the corporation, they will never
be in a position to elect majority of the members of the Board of Directors.
Consequently, control over the membership of the Board of Directors will always be in
the hands of Filipino stockholders although they actually own less than 50% of the

Obviously, the nomination and election committee of PLDT uses the 40% cap on the
foreign ownership of the capital which explains why the foreigners only have two (2)
members in the Board of Directors. It is apparent that the 64.27% ownership by
foreigners of the common shares cannot be used to elect the majority of the Board of
Directors. The fact that the proportionate share of the foreigners in the capital (voting
and non-voting shares or common and preferred shares) is even less than 40%, then
they are only entitled to voting rights equivalent to the said proportionate share in the
capital and in the process

common shares.
elect only a smaller number of directors. This is the reality in the instant case. Hence,
Let Us apply the foregoing principles to the situation of PLDT. Granting without
admitting that foreigners own 64.27% of PLDT's common shares and say they own

the majority control of Filipinos over the management of PLDT is, at all times, assured.
ASHECD

40% of the total number of common and preferred shares, still they can only vote up
to 40% of the common shares of PLDT since their participation in the election of the

This intent to limit the participation of the foreign investors in the governing body of the

Board of Directors (the governing body of the corporation) is limited by the 40%

corporation was solidified in Commonwealth Act No. 108, otherwise known as the

ownership of the capital under the first sentence of Sec. 11, Art. XII of the Constitution.

Anti- Dummy Law. Sec. 2-A of the aforementioned law, as amended, provides in part:

The foreigners can only elect members of the Board of Directors based on their 40%

. . . Provided, finally, that the election of aliens as members of the Board of Directors

stock subscribed, irrespective of their nomenclature and whether or not they are

of governing body of corporations or associations engaging in partially nationalized

voting or non-voting. The use of the phrase "capital stock belongs" connotes that in

activity shall be allowed in proportion to their allowable participation or share in the

order to comply with the Filipino nationality requirement for land ownership, it is

capital of such entities.

necessary that the criterion of "beneficial ownership" should be met, not merely the
control of the corporation. ISaTCD

The view that the definition of the word "capital" is limited to common or voting shares
alone would certainly have the effect of removing the 60-40% nationality requirement
on the non-voting shares. This would then give rise to a situation wherein foreign
interest would not really be limited to only 40% but may even extend beyond that

To construe the 60-40% equity requirement is merely based on the voting shares,
disregarding the preferred non-voting shares, not on the total outstanding subscribed
capital stock, would give rise to a situation where the actual foreign interest would not
really be only 40% but may extend beyond that because they could also own even the

because foreigners could also own the entire 100% of the preferred or non-voting
shares. As a result, Filipinos will no longer have effective ownership of the corporate
assets which may include lands. This is because the actual Filipino equity constitutes

entire preferred non-voting shares. In this situation, Filipinos may have the control in
the operation of the corporation by way of voting rights, but have no effective
ownership of the

only a minority of the entire outstanding capital stock. Therefore, the company would
then be technically owned by foreigners since the actual ownership of at least 60% of
the entire outstanding capital stock would be left to the hands of the foreigners.

corporate assets which include lands, because the actual Filipino equity constitutes
only a minority of the entire outstanding capital stock. Therefore, in essence, the

Allowing this to happen would violate and circumvent the purpose for which the

company, although controlled by Filipinos, is beneficially owned by foreigners since

provision in the Constitution was created. 83

the actual ownership of at least 60% of the entire outstanding capital stocks would be
in the hands of foreigners. Allowing this situation would open the floodgates to

This situation was the subject matter of the Opinion dated December 27, 1995
addressed to Mr. George Lavidia where the SEC opined that for the computation of

circumvention of the intent of the law to make the Filipinos the principal beneficiaries
in the ownership of Philippine alienable lands.

the required minimum 60% Filipino ownership in a land owning corporation, both
voting and preferred non-voting shares must be included, to wit:

The [law] does not qualify whether the required ownership of "capital stock" are voting
or non-voting. Hence, it should be interpreted to mean the sum total of the capital

xxx xxx xxx

Thus, for purpose of "land ownership", non-voting preferred shares should be included
in the computation of the statutory 60-40% Filipino-alien equity requirement. To rule

otherwise would result in the emergence of foreign beneficial ownership of land,

control over the Board of Directors and full beneficial ownership of 60% of the capital

thereby defeating the purpose of the law. On the other hand, to view the equity ratio

stock of the corporation are secured in the hands of the Filipinos. DHATcE

as determined on the basis of the entire outstanding capital stock would be to uphold
the unequivocal purpose of the above-cited law of ensuring Filipino rightful domination

I, therefore, vote to DISMISS the petition. ABAD, J., dissenting:

of land ownership. (Emphasis supplied.)

Clearly, applying the ponencia's definition of the word "capital" will give rise to a

In 1928, the legislature enacted Act 3436, granting Philippine Long Distance

greater anomaly because it will result in the foreigner's obtaining beneficial ownership

Telephone Company (PLDT) a franchise to provide telecommunications services

over the corporation, which is contrary to the provisions of the Constitution; whereas

across the country. Forty years later in 1969, General Telephone and Electronics

interpreting "capital" to include both voting and non-voting shares will result in giving

Corporation, an American company and major PLDT stockholder, sold 26% of PLDT's

both legal and beneficial ownership of the corporation to the Filipinos.

equity to the Philippine Telecommunications Investment Corporation (PTIC).

In the event that the word "capital" is construed as limited to common or voting shares

Subsequently, PTIC assigned 46% of its equity or 111,415 shares of stock to Prime

only, it should not have any retroactive effect. Reliance in good faith on the opinions

Holdings, Inc. In 1986, the Presidential Commission on Good Government

issued by the SEC, the regulating body in charged with the duty to enforce the

sequestered these shares. Eventually, the Court declared these as properties of the

nationality required by the Constitution, should not prejudice any one, especially not

Republic of the Philippines.

the foreign investors. Giving such interpretation retroactive effect is tantamount to

violation of due process and would impact negatively on the various foreign

In 1999, First Pacific, a Bermuda-registered and Hongkong-based investment firm,

acquired the remaining 54% of PTIC's equity in PLDT.

investments already present in the country. Accordingly, such construction should only
be applied prospectively.

In 2006, the government's Inter-agency Privatization Council offered to auction the

46% PTIC equity in PLDT that the Court adjudged to the Republic. Parallax Venture

In sum, the Constitution requires that 60% of the capital be owned by Filipinos. It
further requires that the foreign ownership of capital be limited to 40%, as well as its
participation in the governing body of the public utility corporation be limited to its
proportionate share in the capital which cannot exceed 40% thereof. As a result,

Fund XXVII won with a bid of P25.2 billion or US$510 million. First Pacific announced
that it would exercise its right of first refusal and buy those shares by matching
Parallax's bid. In 2007, First Pacific, through its subsidiary, Metro Pacific Assets

Holdings, Inc., entered into a Conditional Sale and Purchase Agreement with the

seems to have some basis in the rules. Under Section 1, Rule 56 of the Rules of

national government involving the 46% PTIC equity for P25.2 billion or US$510

Court, only the following cases may be filed originally in the Supreme Court:

million. IaDcTC
Sec. 1.Original cases cognizable. Only petitions for certiorari, prohibition,
In this petition for prohibition, injunction, declaratory relief, and declaration of nullity of
sale, petitioner Wilson P. Gamboa, a PLDT stockholder, seeks to annul the sale of the
46% PTIC equity or 111,415 shares of stock to Metro Pacific on the ground that it

mandamus, quo warranto, habeas corpus, disciplinary proceedings against members

of the judiciary and attorneys, and cases affecting ambassadors, other public ministers
and consuls may be filed originally in the Supreme Court. caADSE

violates Section 11, Article XII of the 1987 Constitution which limits foreign ownership

Strictly speaking, Gamboa actions for injunction, declaratory relief, and declaration of

of a public utility company to 40% of its capital. Gamboa claims that since PTIC is a

nullity of sale are not among the cases that can be initiated before the Supreme Court.

PLDT stockholder, the sale of the 46% of its equity is actually an indirect sale of 6.3%

Those actions belong to some other tribunal.

PLDT equity or 12 million shares of stock. This would increase First Pacific's equity in
PLDT from 30.7% to 37%, and concomitantly increase the common shareholdings of

And, although the Court has original jurisdiction in prohibition cases, the Court shares

foreigners in PLDT to about 64.27%.

this authority with the Court of Appeals and the Regional Trial Courts. But this
concurrence of jurisdiction does not give the parties absolute and unrestrained

The action presents two primordial issues:

1.Whether or not the Court can hear and decide Gamboa's petition for prohibition,
injunction, declaratory relief, and declaration of nullity of sale; and

freedom of choice on which court the remedy will be sought. They must observe the
hierarchy of courts. 1 As a rule, the Supreme Court will not entertain direct resort to it
unless the remedy desired cannot be obtained in other tribunals. Only exceptional and
compelling circumstances such as cases of national interest and of serious

2.Whether or not Metro Pacific's acquisition of 46% of PTIC's equity violates the

implications justify direct resort to the Supreme Court for the extraordinary remedy of

constitutional limit on foreign ownership of the capital of PLDT, a public utility

writ of certiorari, prohibition, or mandamus. 2

company, provided under Section 11, Article XII of the 1987 Constitution.
The majority of the Court of course suggests that although Gamboa entitles his
actions as ones for injunction, declaratory relief, and declaration of nullity of sale, what
One. The objection to the idea of the Court hearing and deciding Gamboa's action

controls the nature of such actions are the allegations of his petition. And a valid

special civil action for mandamus can be made out of those allegations since

afford. But at the same time, the Constitution wants to limit foreign involvement to

respondent Secretary of Finance, his undersecretary, and respondent Chairman of the

prevent them from assuming control of public utilities which may be inimical to national

Securities and Exchange Commission are the officials who appear to have the duty in

interest. 6

law to implement the foreign ownership restriction that the Constitution commands. 3
Two. Still, the question is whether it is for the Court to decide in this case the shape
To a certain extent, I agree with the position that the majority of my colleagues takes

and substance of what the Constitution meant when it restricted the size of foreign

on this procedural issue. I believe that a case can be made for giving due course to

ownership of the capital of public utility corporations provided for in Section 11, Article

Gamboa's action. Indeed, there are in his actions compelling reasons to relax the

XII of the 1987 Constitution which reads:

doctrine of hierarchy of courts. The need to address the important question of defining
Section 11.No franchise, certificate, or any other form of authorization for the operation
the constitutional limit on foreign ownership of public utilities under Section 11, Article
XII of the 1987 Constitution, a bedrock policy adopted by the Filipino people, is
certainly a matter of serious national interest. Such policy is intended to develop a

of a public utility shall be granted except to citizens of the Philippines or to

corporations or associations organized under the laws of the Philippines, at least sixty
per centum of whose capital is owned by such citizens; . . . .

self-reliant and independent national economy effectively controlled by Filipino

entrepreneurs. cITCAa

Gamboa contends that the constitutional limit on foreign ownership in public utilities
should be based on the ownership of common or voting shares since it is through

Indeed, as the Court said in Espina v. Zamora, 4 the provisions of Article XII of the

voting that stockholders are able to have control over a corporation. Preferred or non-

1987 Constitution lay down the ideals of economic nationalism. One of these is the

voting shares should be excluded from the reckoning.

Filipinization of public utilities under Section 11 which recognizes the very strategic
position of public utilities both in the national economy and for national security. 5 The

But this interpretation, adopted by the majority, places on the Court the authority to

participation of foreign capital is encouraged since the establishment and operation of

define and interpret the meaning of "capital" in section 11. I believe, however, that

public utilities may

such authority should be for Congress to exercise since it partakes of policy making
founded on a general principle laid down by the fundamental law. The capital
restriction written in the constitution lacks sufficient details for orderly and meaningful

require the investment of substantial capital that Filipino citizens could possibly not
implementation. Indeed, in the twenty-four years that the provision has been in the

Constitution, no concrete step has been taken by any government agency to see to its

classification depends on how profits are to be distributed and which stockholders

actual implementation given the absence of clear legislative guidance on how to go

have the right to vote the members of the corporation's board of directors.

about it. THcEaS

The Corporation Code does not offer much help, albeit it only confuses, since it uses
It has been said that a constitution is a system of fundamental laws for the

the terms "capital," "capital stock," or "outstanding capital stock" interchangeably.

governance and administration of a nation. It prescribes the permanent framework of

"Capital" refers to the money, property, or means contributed by stockholders in the

a system of government, assigns to the different departments their respective powers

corporation and generally implies that the same have been contributed in payment for

and duties, and establishes certain fixed principles on which the government is

stock issued to the stockholders. 9 "Capital stock" signifies the amount subscribed and

founded. 7 But while some constitutional provisions are self-executing, others are not.

paid-in in money, property or services. 10 "Outstanding capital stock" means the total
shares of stock issued to stockholders, whether or not fully or partially paid, except

A constitutional provision is self-executing if it fixes the nature and extent of the right

treasury shares. 11

conferred and the liability imposed such that they can be determined by an
examination and construction of its terms, and there is no language indicating that the

Meanwhile, the Foreign Investments Act of 1991 defines a "Philippine national" as,

subject is referred to the legislature for action. On the other hand, if the provision

among others, a corporation organized under the laws of the Philippines of which at

needs a supplementary or enabling legislation, it is merely a declaration of policy and

least 60% of the capital stock outstanding and entitled to vote is owned and held by

principle which is not self- executing. 8

citizens of the Philippines. 12 This gives the impression, as Justice Carpio noted, that
the term "capital" refers only to controlling interest or shares entitled to vote. 13

Here, the Constitution simply states that no franchise for the operation of a public
utility shall be granted to a corporation organized under Philippine laws unless at least

On the other hand, government agencies such as the Securities and Exchange

sixty per centum of its capital is owned by Filipino citizens.

Commission, institutions, and corporations (such as the Philippine National Oil

Company-Energy Development Corporation) interpret the term "capital" to include
both preferred and common shares. 14

Evidently, the Constitution fails to provide for the meaning of the term "capital,"
considering that the shares of stock of a corporation vary in kinds. The usual

Under this confusing legislative signals, the Court should not leave the matter of
compliance with the constitutional limit on foreign ownership in public utilities, a matter

of transcendental importance, to judicial legislation especially since any ruling the

Court makes on the matter could have deep economic repercussions. This is not a
concern over which the Court has competence. The 1987 Constitution laid down the

FIRST DIVISION

[G.R. No. 108576. January 20, 1999.]

general framework for restricting foreign ownership of public utilities. It is apt for
Congress to build up on this framework by defining the meaning of "capital,"

COMMISSIONER OF INTERNAL REVENUE, petitioner, vs. THE COURT OF

establishing rules for the implementation of the State policy, providing sanctions for its

APPEALS, COURT OF TAX APPEALS and A. SORIANO CORP., respondents.

violation, and vesting in the appropriate agency the responsibility for carrying out the
purposes of such policy. DACIHc

Parenthetically, there have been several occasions in the past where Congress

M. L. Gadioma Law Office for private respondent. The Solicitor General for petitioner.

SYNOPSIS

provided supplementary or enabling legislation for constitutional provisions that are

Don Andres Soriano, a citizen and resident of the United States formed in the 1930's

not self- executing. To name just some: the Comprehensive Agrarian Reform Law of

the corporation "A Soriano Y Cia," predecessor of ANSCOR. On December 30, 1964

1988, 15 the Indigenous Peoples Rights Act of 1997, 16 the Local Government Code

Don Andres died. On June 30, 1968, pursuant to a Board Resolution, ANSCOR

of 1991, 17 the Anti-Graft and Corrupt Practices Act, 18 the Speedy Trial Act of 1998,

redeemed 28,000 common shares from Don Andres' estate. By November 1968, the

19 the Overseas Absentee Voting Act of 2003, 20 the Party-List System Act, 21 the

Board further increased ANSCOR's capital stock to P75M divided into 150,000

Paternity Leave Act of 1996, 22 and the Solo Parents' Welfare Act of 2000. 23

preferred shares and 600,000 common shares. About a year later ANSCOR again
redeemed 80,000 common shares from Don Andres' estate, further reducing the
latter's common shareholdings. ANSCOR's business purpose for both redemptions of
stock is to partially retire said stocks as treasury shares in order to reduce the

Based on the foregoing, I vote to DENY the petition on the ground that the
company's foreign exchange remittances in case cash dividends are declared. In
constitutional limit on foreign ownership in public utilities under Section 11, Article XII
1973, after examining ANSCOR's books of account and records Revenue Examiners
of the 1987 Constitution is not a self-executing provision and requires an
issued a report proposing that ANSCOR be assessed for deficiency withholding tax-atimplementing legislation for its enforcement.
source, pursuant to Sections 53 and 54 of the 1939 Revenue Code for the year 1968
||| (Gamboa v. Teves, G.R. No. 176579, [June 28, 2011], 668 PHIL 1-118)

and the second quarter of 1969 based on the transactions of exchange and

With regard to the exchange of shares, the Court ruled that the exchange of common

redemption of stocks. Subsequently, ANSCOR filed a petition for review with the Court

with preferred shares is not taxable because it produces no realized income to the

of Tax Appeals assailing the tax assessments on the redemptions and exchange of

subscriber but only a modification of the subscriber's rights and privileges which is not

stocks. In its decision, the CTA reversed the BIR's ruling after finding sufficient

a flow of wealth for tax purposes. IHcTDA

evidence to overcome the prima facie correctness of the questioned assessments. In

a petition for review, the Court of Appeals affirmed the ruling of the CTA. Hence, the

SYLLABUS

present petition. The issue is whether ANSCOR's redemption of stocks from its

1.TAXATION; PRESIDENTIAL DECREE NO. 67; NOT BEING A TAXPAYER, A

stockholders as well as the exchange of common shares can be considered as

WITHHOLDING AGENT LIKE THE PRIVATE RESPONDENT IS NOT PROTECTED

equivalent to the distribution of taxable dividend making the proceeds thereof taxable

BY THE AMNESTY UNDER THE DECREE. An income taxpayer covers all persons

under the provisions Section 83 (B) of the 1939 Revenue Act. SHECcT

who derive taxable income. ANSCOR was assessed by petitioner for deficiency

The Supreme Court modified the decision of the Court of Appeals in that ANSCOR'S
redemption of 82,752.5 stock dividends is herein considered as essentially equivalent
to a distribution of taxable dividends for which it is liable for the withholding tax-atsource. While the Board Resolutions authorizing the redemptions state only one
purpose

withholding tax under Section 53 and 54 of the 1939 Code. As such, it is being held
liable in its capacity as a withholding agent and not in its personality as a taxpayer. In
the operation of the withholding tax system, the withholding agent is the payor, a
separate entity acting no more than an agent of the government for the collection of
the tax in order to ensure its payments; the payer is the taxpayer he is the person
subject to tax impose by law; and the payee is the taxing authority. In other words, the

reduction of foreign exchange remittances in case cash dividends are declared. Said

withholding agent is merely a tax collector, not a taxpayer. Under the withholding

purpose was not given credence by the court in case at bar. Records show that

system, however, the agent- payor becomes a payee by fiction of law. His (agent)

despite the existence of enormous corporate profits no cash dividends were ever

liability is direct and independent from the taxpayer, because the income tax is still

declared by ANSCOR from 1945 until the BIR started making assessments in the

impose on and due from the latter. The agent is not liable for the tax as no wealth

early 1970's. Although a corporation under certain exceptions, has the prerogative

flowed into him he earned no income. The Tax Code only makes the agent

when to issue dividends, yet when no cash dividends are issued for about three

personally liable for the tax arising from the breach of its legal duty to withhold as

decades, this circumstance negate the legitimacy of ANSCOR's alleged purposes.

distinguish from its duty to pay tax since: "the government's cause of action against

the withholding agent is not for the collection of income tax, but for the enforcement of

"filipinization" plan cannot be considered legitimate as it was not implemented until the

the withholding provision of Section 53 of the Tax Code,compliance with which is

BIR started making assessments on the proceeds of the redemption. Such corporate

imposed on the withholding agent and not upon the taxpayer." Not being a taxpayer, a

plan was not stated in nor supported by any Board Resolution but a mere afterthought

withholding agent, like ANSCOR in this transaction is not protected by the amnesty

interposed by the counsel of ANSCOR. Being a separate entity, the corporation can

under the decree. Codal provisions on withholding tax are mandatory and must be

act only through its Board of Directors. The Board Resolutions authorizing the

complied with by the withholding agent. The taxpayer should not answer for the non-

redemptions state only one purpose reduction of foreign exchange remittances in

performance by the withholding agent of its legal duty to withhold unless there is

case cash dividends are declared. Not even this purpose can be given credence.

collusion or bad faith. The former could not be deemed to have evaded the tax had the

Records show that despite the existence of enormous corporate profits no cash

withholding agent performed its duty. This could be the situation for which the amnesty

dividend was ever declared by ANSCOR from 1945 until the BIR started making

decree was intended. Thus, to curtail tax evasion and give tax evaders a chance to

assessments in the early 1970's. Although a corporation under certain exceptions, has

reform, it was deemed administratively feasible to grant tax amnesty in certain

the prerogative when to issue dividends, yet when no cash dividends was issued for

instances. In addition, a "tax amnesty, much like a tax exemption, is never favored nor

about three decades, this circumstances negates the legitimacy of ANSCOR's alleged

presumed in law and if granted by a statute, the terms of the amnesty like that of a tax

purposes. Moreover, to issue stock dividends is to increase the shareholdings of

exemption must be construed

ANSCOR's foreign stockholders contrary to its "filipinization" plan. This would also
increase rather than reduce their need for foreign exchange remittances in case of

strictly against the taxpayer and liberally in favor of the taxing authority." The rule on
strictissimi juris equally applies. So that, any doubt in the application of an amnesty
law/decree should be resolved in favor of the taxing authority.

cash dividend declaration, considering that ANSCOR is a family corporation where the
majority shares at the time of redemptions were held by Don Andres' foreign heirs.
Secondly, assuming arguendo, that those business purposes are legitimate, the same
cannot be valid excuse for the imposition of tax. Otherwise, the taxpayer's liability to

2.ID.; NATIONAL INTERNAL REVENUE CODE OF 1939; TAX ON STOCK

pay income tax would be made to depend upon a third person who did not earn the

DIVIDENDS; REDEMPTION AND CANCELLATION; PURPOSES INVOKED BY

income being taxed. Furthermore, even if the said purposes support the redemption

PRIVATE RESPONDENT CORPORATION, UNDER THE FACTS OF THE PRESENT

and justify the issuance of stock dividends, the same has no bearing whatsoever on

CASE ARE NO EXCUSE FOR ITS TAX LIABILITY; REASON. First, the alleged

the imposition of the tax herein assessed because the proceeds of the redemption are

deemed taxable dividends since it was shown that income was generated therefrom.

to income tax which is required to be withheld at source. The 1997 Tax Code may

Thirdly, ANSCOR argued that to treat as 'taxable dividend' the proceeds of the

have altered the situation but it does not change this disposition.

redeemed stock dividends would be to impose on such stock an undisclosed lien and
would be extremely unfair to intervening purchasers, i.e. those who buys the stock
dividends after their issuance. Such argument, however, bears no relevance in this
case as no intervening buyer is involved. And even if there is an intervening buyer, it is
necessary to look into the factual milieu of the case if income was realized from the
transaction. Again, we reiterate that the dividend equivalence test depends on such
"time and manner" of the transaction and its net effect. The undisclosed lien may be
unfair to a subsequent stock buyer who has no capital interest in the company. But the
unfairness may not be true to an original subscriber like Don Andres, who holds stock
dividends as gains from his investments. The subsequent buyer who buys stock
dividends is investing capital. It just so happen that what he bought is stock dividends.
The effect of its (stock dividends) redemption from that subsequent buyer is merely to
return

3.ID.; ID.; ID.; THE EXCHANGE OF COMMON WITH PREFERRED SHARES IN

CASE AT BAR IS NOT TAXABLE; IT PRODUCES NO REALIZED INCOME TO THE
SUBSCRIBER BUT ONLY A MODIFICATION OF THE SUBSCRIBER'S RIGHTS AND
PRIVILEGES WHICH IS NOT A FLOW OF WEALTH FOR TAX PURPOSES. Both
the Tax Court and the Court of Appeals found that ANSCOR reclassified its shares into
common and preferred, and that parts of the common shares of the Don Andres
estate and all of Doa Carmen's shares were exchanged for the whole 150,000
preferred shares. Thereafter, both the Don Andres estate and Doa Carmen remained
as corporate subscribers except that their subscriptions now include preferred shares.
There was no change in their proportional interest after the exchange. There was no
cash flow. Both stocks had the same par value. Under the facts herein, any difference
in their market value would be immaterial at the time of exchange because no income
is yet realized it was a mere corporate paper transaction. It would have been
different, if the exchange transaction resulted into a flow of wealth, in which case

his capital subscription, which is income if redeemed from the original subscriber. After
considering the manner and the circumstances by which the issuance and redemption
of stock dividends were made, there is no other conclusion but that the proceeds
thereof are essentially considered equivalent to a distribution of taxable dividends. As
"taxable dividend" under Section 83(b), it is part of the "entire income" subject to tax
under Section 22 in relation to Section 21 of the 1939 Code. Moreover, under Section
29(a) of said Code, dividends are included in "gross income." As income, it is subject

income tax may be imposed. Reclassification of shares does not always bring any
substantial alteration in the subscriber's proportional interest. But the exchange is
different there would be a shifting of the balance of stock features, like priority in
dividend declarations or absence of voting rights. Yet neither the reclassification nor
exchange per se, yields realize income for tax purposes. A common stock represents
the residual ownership interest in the corporation. It is a basic class of stock ordinarily

and usually issued without extraordinary rights or privileges and entitles the

considered as "essentially equivalent to a distribution of taxable dividends" under

shareholder to a pro rata division of profits. Preferred stocks are those which entitle

Section 83(b) of the 1939 Internal Revenue Act. 3

the shareholder to some priority on dividends and asset distribution. Both shares are
part of the corporation's capital stock. Both stockholders are no different from ordinary

The undisputed facts are as follows: cdlex

investors who take on the same investment risks. Preferred and common

Sometime in the 1930s, Don Andres Soriano, a citizen and resident of the United

shareholders participate in the same venture, willing to share in the profits and losses

States, formed the corporation "A. Soriano Y Cia", predecessor of ANSCOR, with a

of the enterprise. Moreover, under the doctrine of equality of shares all stocks

P1,000,000.00 capitalization divided into 10,000 common shares at a par value of

issued by the corporation are presumed equal with the same privileges and liabilities,

P100/share. ANSCOR is wholly owned and controlled by the family of Don Andres,

provided that the Articles of Incorporation is silent on such differences. In this case,

who are all non-resident aliens. 4 In 1937, Don Andres subscribed to 4,963 shares of

the exchange of shares, without more, produces no realized income to the subscriber.

the 5,000 shares originally issued. 5

There is only a modification of the subscriber's rights and privileges which is not a
flow of wealth for tax purposes. The

On September 12, 1945, ANSCOR's authorized capital stock was increased to

P2,500,000.00 divided into 25,000 common shares with the same par value. Of the
additional 15,000 shares, only 10,000 was issued which were all subscribed by Don

issue of taxable dividend may arise only once a subscriber disposes of his entire
Andres, after the other stockholders waived in favor of the former their pre-emptive
interest and not when there is still maintenance of proprietary interest. CHEIcS
rights to subscribe to the new issues. 6 This increased his subscription to 14,963
DECISION

common shares. 7 A month later, 8 Don Andres transferred 1,250 shares each to his
two sons, Jose and Andres, Jr., as their initial investments in ANSCOR. 9 Both sons

MARTINEZ, J p:

Petitioner Commissioner of Internal Revenue (CIR) seeks the reversal of the decision
of the Court of Appeals (CA) 1 which affirmed the ruling of the Court of Tax Appeals
(CTA) 2 that private respondent A. Soriano Corporation's (hereinafter ANSCOR)
redemption and exchange of the stocks of its foreign stockholders cannot be

are foreigners. 10

By 1947, ANSCOR declared stock dividends. Other stock dividend declarations were
made between 1949 and December 20, 1963. 11 On December 30, 1964 Don Andres
died. As of that date, the records revealed that he has a total shareholdings of
185,154 shares 12 50,495 of which are original issues and the balance of 134,659

shares as stock dividend declarations. 13 Correspondingly, one-half of that

On June 30, 1968, pursuant to a Board Resolution, ANSCOR redeemed 28,000

shareholdings or 92,577 14 shares were transferred to his wife, Doa Carmen

common shares from the Don Andres' estate. By November 1968, the Board further

Soriano, as her conjugal share. The other half formed part of his estate. 15

increased ANSCOR's capital stock to P75M divided into 150,000 preferred shares and
600,000 common shares. 27 About a year later, ANSCOR again redeemed 80,000

A day after Don Andres died, ANSCOR increased its capital stock to P20M 16 and in
1966 further increased it to P30M. 17 In the same year (December 1966), stock
dividends worth

common shares from the Don Andres' estate, 28 further reducing the latter's common
shareholdings to 19,727. As stated in the Board Resolutions, ANSCOR's business
purpose for both redemptions of stocks is to partially retire said stocks as treasury
shares in order to reduce the company's foreign exchange remittances in case cash

46,290 and 46,287 shares were respectively received by the Don Andres estate 18

dividends are declared. 29

and Doa Carmen from ANSCOR. Hence, increasing their accumulated shareholdings
to 138,867 and 138,864 19 common shares each. 20

In 1973, after examining ANSCOR's books of account and records, Revenue

examiners issued a report proposing that ANSCOR be assessed for deficiency

On December 28, 1967, Doa Carmen requested a ruling from the United States

withholding tax-at- source, pursuant to Sections 53 and 54 of the 1939 Revenue

Internal Revenue Service (IRS), inquiring if an exchange of common with preferred

Code, 30 for the year 1968 and the second quarter of 1969 based on the transactions

shares may be considered as a tax avoidance scheme 21 under Section 367 of the

of exchange and redemption of stocks. 31 The Bureau of Internal Revenue (BIR)

1954 U.S. Revenue Act. 22 By January 2, 1968, ANSCOR reclassified its existing

made the corresponding assessments despite the claim of ANSCOR that it availed of

300,000 common shares into 150,000 common and 150,000 preferred shares. 23

the tax amnesty under Presidential Decree (P.D.) 23 32 which were amended by
P.D.'s 67 and 157. 33 However, petitioner ruled that the invoked decrees do not cover

In a letter-reply dated February 1968, the IRS opined that the exchange is only a
Sections 53 and 54 in relation to Article 83(b) of the 1939 Revenue Act under which
recapitalization scheme and not tax avoidance. 24 Consequently, 25 on March 31,
ANSCOR was assessed. 34 ANSCOR's subsequent protest on the assessments was
1968 Doa Carmen exchanged her whole 138,864 common shares for 138,860 of the
denied in 1983 by petitioner. 35
newly reclassified preferred shares. The estate of Don Andres in turn, exchanged
11,140 of its common shares, for the remaining 11,140 preferred shares, thus

Subsequently, ANSCOR filed a petition for review with the CTA assailing the tax

reducing its (the estate) common shares to 127,727. 26

assessments on the redemptions and exchange of stocks. In its decision, the Tax

Court reversed petitioner's ruling, after finding sufficient evidence to overcome the

Section applies to stock dividends which is the bulk of stocks that ANSCOR

prima facie correctness of the questioned assessments. 36 In a petition for review, the

redeemed. Further, petitioner claims that under the "net effect test," the estate of Don

CA, as mentioned, affirmed the ruling of the CTA. 37 Hence, this petition. cdll

Andres gained from the redemption. Accordingly, it was the duty of ANSCOR to
withhold the tax-at-source arising from the two transactions, pursuant to Section 53

The bone of contention is the interpretation and application of Section 83(b) of the
1939 Revenue Act 38 which provides:

"Sec. 83.Distribution of dividends or assets by corporations.

and 54 of the 1939 Revenue Act. 39

ANSCOR, however, avers that it has no duty to withhold any tax either from the Don
Andres estate or from Doa Carmen based on the two transactions, because the
same were done for legitimate business purposes which are (a) to reduce its foreign

(b)Stock dividends A stock dividend representing the transfer of surplus to capital

account shall not be subject to tax. However, if a corporation cancels or redeems

exchange remittances in the event the company would declare cash dividends, 40 and
to (b) subsequently "filipinized" ownership of ANSCOR, as allegedly envisioned by

stock issued as a dividend at such time and in such manner as to make the
distribution and cancellation or redemption, in whole or in part, essentially equivalent
to the distribution of a taxable dividend, the amount so distributed in redemption or
cancellation of the stock shall be considered as taxable income to the extent it

Don Andres. 41 It likewise invoked the amnesty provisions of P.D. 67.

We must emphasize that the application of Sec. 83(b) depends on the special factual
circumstances of each case. 42 The findings of facts of a special court (CTA)

represents a distribution of earnings or profits accumulated after March first, nineteen

hundred and thirteen." (Italics supplied).

exercising particular expertise on the subject of tax, generally binds this Court, 43
considering that it is substantially similar to the findings of the CA which is the final

Specifically, the issue is whether ANSCOR's redemption of stocks from its stockholder

arbiter of questions of facts. 44 The issue in this case does not only deal with facts but

as well as the exchange of common with preferred shares can be considered as

whether the law applies to a particular set of facts. Moreover, this Court is not

"essentially equivalent to the distribution of taxable dividend," making the proceeds

necessarily bound by the lower courts' conclusions of law drawn from such facts. 45

thereof taxable under the provisions of the above-quoted law.

AMNESTY:
Petitioner contends that the exchange transaction is tantamount to "cancellation''
under Section 83(b) making the proceeds thereof taxable. It also argues that the said

We will deal first with the issue of tax amnesty. Section 1 of P.D. 67 46 provides:

and 54 of the 1939 Code. As such, it is being held liable in its capacity as a
withholding agent and not in its personality as a taxpayer.

"1.In all cases of voluntary disclosures of previously untaxed income and/or wealth
such as earnings, receipts, gifts, bequests or any other acquisitions from any source
whatsoever which are taxable under the National Internal Revenue Code, as
amended, realized here or abroad by any taxpayer, natural or juridical; the collection

In the operation of the withholding tax system, the withholding agent is the payor, a
separate entity acting no more than an agent of the government for the collection of
the tax 48 in order to ensure its payments; 49 the payer is the taxpayer he is the

of all internal revenue taxes including the increments or penalties or account of nonpayment as well as all civil, criminal or administrative liabilities arising from or incident
to such disclosures under the National Internal Revenue Code, the Revised Penal

person subject to tax imposed by law; 50 and the payee is the taxing authority. 51 In
other words, the withholding agent is merely a tax collector, not a taxpayer. Under the

Code, the Anti-Graft and Corrupt Practices Act, the Revised Administrative Code, the

withholding system, however, the agent-payor becomes a payee by fiction of law. His

Civil Service laws and regulations, laws and regulations on Immigration and

(agent) liability is direct and independent from the taxpayer, 52 because the income

Deportation, or any other applicable law or proclamation, are hereby condoned and, in

tax is still imposed on and due from the latter. The agent is not liable for the tax as no

lieu thereof, a tax of ten (10%) per centum on such previously untaxed income or

wealth flowed into him he earned no income. The Tax Code only makes the agent

wealth is hereby imposed, subject to the following conditions: (conditions omitted)

personally liable for the tax 53 arising from the breach of its legal duty to withhold as

[Emphasis supplied].

distinguished from its duty to pay tax since:

The decree condones "the collection of all internal revenue taxes including the

"the government's cause of action against the withholding agent is not for the

increments or penalties or account of non-payment as well as all civil, criminal or

collection of income tax, but for the enforcement of the withholding provision of

administrative liabilities arising from or incident to" (voluntary) disclosures under the

Section 53 of the Tax Code,compliance with which is imposed on the withholding

NIRC of previously untaxed income and/or wealth "realized here or abroad by any

agent and not upon the taxpayer." 54

taxpayer, natural or juridical."

May the withholding agent, in such capacity, be deemed a taxpayer for it to avail of the
amnesty? An income taxpayer covers all persons who derive taxable income. 47

Not being a taxpayer, a withholding agent, like ANSCOR in this transaction, is not

ANSCOR was assessed by petitioner for deficiency withholding tax under Sections 53

protected by the amnesty under the decree.

Codal provisions on withholding tax are mandatory and must be complied with by the

ANSCOR was assessed under Sections 53 and 54 of the 1939 Tax Code.Thus, by

withholding agent. 55 The taxpayer should not answer for the non-performance by the

specific provision of law, it is not covered by the amnesty.

withholding agent of its legal duty to withhold unless there is collusion or bad faith. The
former could not be deemed to have evaded the tax had the withholding agent
performed its duty. This could be the situation for which the amnesty decree was

TAX ON STOCK DIVIDENDS

General Rule

intended. Thus, to curtail tax evasion and give tax evaders a chance to reform, 56 it
was deemed administratively feasible to grant tax amnesty in certain instances. In

Section 83(b) of the 1939 NIRC was taken from Section 115(g)(1) of the U.S. Revenue

addition, a "tax amnesty, much like a tax exemption, is never favored nor presumed in

Code of 1928. 60 It laid down the general rule known as the 'proportionate test' 61

law and if granted by a statute, the terms of the amnesty like that of a tax exemption

wherein stock dividends once issued form part of the capital and, thus, subject to

must be construed strictly against the taxpayer and liberally in favor of the taxing

income tax. 62 Specifically, the general rule states that:

authority." 57 The rule on strictissimi juris equally applies. 58 So that, any doubt in the
application of an amnesty law/decree should be resolved in favor of the taxing

"A stock dividend representing the transfer of surplus to capital account shall not be
subject to tax." cdasia

authority.

Furthermore, ANSCOR's claim of amnesty cannot prosper. The implementing rules of

P.D. 370 which expanded amnesty on previously untaxed income under P.D. 23 is
very explicit, to wit:

Having been derived from a foreign law, resort to the jurisprudence of its origin may
shed light. Under the US Revenue Code, this provision originally referred to "stock
dividends" only, without any exception. Stock dividends, strictly speaking, represent

"Section 4.Cases not covered by amnesty. The following cases are not covered by

capital and do not constitute income to its recipient. 63 So that the mere issuance

the amnesty subject of these regulations:

thereof is not yet subject to income tax 64 as they are nothing but an "enrichment

xxx xxx xxx

through increase in value of capital investment." 65 As capital, the stock dividends

postpone the realization of profits because the "fund represented by the new stock

(2)Tax liabilities with or without assessments, on withholding tax at source provided

under Sections 53 and 54 of the National Internal Revenue Code, as amended; 59

has been transferred from surplus to capital and no longer available for actual
distribution." 66 Income in tax law is "an amount of money coming to a person within a

specified time, whether as payment for services, interest, or profit from investment."

Corporate earnings would be distributed under the guise of its initial capitalization by

67 It means cash or its equivalent. 68 It is gain derived and severed from capital, 69

declaring the stock dividends previously issued and later redeem said dividends by

from labor or from both combined 70 so that to tax a stock dividend would be to tax

paying cash to the stockholder. This process of issuance-redemption amounts to a

a capital increase rather than the income. 71 In a loose sense, stock dividends issued

distribution of taxable cash dividends which was just delayed so as to escape the tax.

by the corporation, are considered unrealized gain, and cannot be subjected to

It becomes a convenient technical strategy to avoid the effects of taxation.

income tax until that gain has been realized. Before the realization, stock dividends
are nothing but a representation of an interest in the corporate properties. 72 As
capital, it is not yet subject to income tax. It should be noted that capital and income
are different. Capital is wealth or fund; whereas income is profit or gain or the flow of
wealth. 73 The determining factor for the imposition of income tax is whether any gain
or profit was derived from a transaction. 74

Thus, to plug the loophole the exempting clause was added. It provides that the
redemption or cancellation of stock dividends, depending on the "time" and "manner" it
was made, is "essentially equivalent to a distribution of taxable dividends," making the
proceeds thereof "taxable income" "to the extent it represents profits". The exception
was designed to prevent the issuance and cancellation or redemption of stock
dividends, which

The Exception

"However, if a corporation cancels or redeems stock issued as a dividend at such time

and in such manner as to make the distribution and cancellation or redemption, in
whole or in part, essentially equivalent to the distribution of a taxable dividend, the
amount so distributed in redemption or cancellation of the stock shall be considered
as taxable income to the extent it represents a distribution of earnings or profits
accumulated after March first, nineteen hundred and thirteen." (Emphasis supplied).

In a response to the ruling of the American Supreme Court in the case of Eisner v.

is fundamentally not taxable, from being made use of as a device for the actual
distribution of cash dividends, which is taxable. 76 Thus, cdtai

"the provision had the obvious purpose of preventing a corporation from avoiding
dividend tax treatment by distributing earnings to its shareholders in two transactions
a pro rata stock dividend followed by a pro rata redemption that would have the
same economic consequences as a simple dividend." 77

Macomber 75 (that pro rata stock dividends are not taxable income), the exempting

Although redemption and cancellation are generally considered capital transactions,

clause above quoted was added because corporations found a loophole in the original

as such, they are not subject to tax. However, it does not necessarily mean that a

provision. They resorted to devious means to circumvent the law and evade the tax.

shareholder may not realize a taxable gain from such transactions. 78 Simply put,

depending on the circumstances, the proceeds of redemption of stock dividends are

5)the presence of a substantial surplus 87 and a generous supply of cash which

essentially distribution of cash dividends, which when paid becomes the absolute

invites suspicion as does a meager policy in relation both to current earnings and

property of the stockholder. Thereafter, the latter becomes the exclusive owner thereof

accumulated surplus, 88

and can exercise the freedom of choice. 79 Having realized gain from that
redemption, the income earner cannot escape income tax. 80

As qualified by the phrase "such time and in such manner," the exception was not
intended to characterize as taxable dividend every distribution of earnings arising from
the redemption of stock dividends. 81 So that, whether the amount distributed in the
redemption should be treated as the equivalent of a "taxable dividend" is a question of

REDEMPTION AND CANCELLATION

For the exempting clause of Section 83(b) to apply, it is indispensable that: (a) there is
redemption or cancellation; (b) the transaction involves stock dividends and (c) the
"time and manner" of the transaction makes it "essentially equivalent to a distribution
of taxable dividends." Of these, the most important is the third. cda

fact, 8 2 which is determinable on "the basis of the particular facts of the transaction in
question." 83 No decisive test can be used to determine the application of the

Redemption is repurchase, a reacquisition of stock by a corporation which issued the

exemption under Section 83(b). The use of the words "such manner" and "essentially

stock 89 in exchange for property, whether or not the acquired stock is cancelled,

equivalent" negative any idea that a weighted formula can resolve a crucial issue

retired or held in the treasury. 90 Essentially, the corporation gets back some of its

Should the distribution be treated as taxable dividend. 84 On this aspect, American

stock, distributes cash or property to the shareholder in payment for the stock, and

courts developed certain recognized criteria, which includes the following: 85

continues in business as before. The redemption of stock dividends previously issued

is used as a veil for the constructive distribution of cash dividends. In the instant case,

1)the presence or absence of real business purpose,

2)the amount of earnings and profits available for the declaration of a regular dividend
and the corporation's past record with respect to the declaration of dividends,

there is no dispute that ANSCOR redeemed shares of stocks from a stockholder (Don
Andres) twice (28,000 and 80,000 common shares). But where did the shares
redeemed come from? If its source is the original capital subscriptions upon
establishment of the corporation or from initial capital investment in an existing

3)the effect of the distribution as compared with the declaration of regular dividend,

enterprise, its redemption to the concurrent value of acquisition may not invite the
application of Sec. 83(b) under the 1939 Tax Code,as it is not income but a mere

4)the lapse of time between issuance and redemption, 86

return of capital. On the contrary, if the redeemed shares are from stock dividend

evade payment of tax? It is necessary to determine the "net effect" of the transaction

declarations other than as initial capital investment, the proceeds of the redemption is

between the shareholder- income taxpayer and the acquiring (redeeming) corporation.

additional wealth, for it is not merely a return of capital but a gain thereon.

97 The "net effect" test is not

It is not the stock dividends but the proceeds of its redemption that may be deemed as
taxable dividends. Here, it is undisputed that at the time of the last redemption, the
original common shares owned by the estate were only 25,247.5. 91 This means that
from the total of 108,000 shares redeemed from the estate, the balance of 82,752.5
(108,000 less 25,247.5) must have come from stock dividends. Besides, in the
absence of evidence to the contrary, the Tax Code presumes that every distribution of
corporate property, in whole or in part, is made out of corporate profits, 92 such as
stock dividends. The capital cannot be distributed in the form of redemption of stock
dividends without violating the trust fund doctrine wherein the capital stock,
property and other assets of the corporation are regarded as equity in trust for the

evidence or testimony to be considered; it is rather an inference to be drawn or a

conclusion to be reached. 98 It is also important to know whether the issuance of
stock dividends was dictated by legitimate business reasons, the presence of which
might negate a tax evasion plan. 99 lexlib

The issuance of stock dividends and its subsequent redemption must be separate,
distinct, and not related, for the redemption to be considered a legitimate tax scheme.
100 Redemption cannot be used as a cloak to distribute corporate earnings. 101
Otherwise, the apparent intention to avoid tax becomes doubtful as the intention to
evade becomes manifest. It has been ruled that:

payment of the corporate creditors. 93 Once capital, it is always capital. 94 That

doctrine was intended for the protection of corporate creditors. 95

"[A]n operation with no business or corporate purpose is a mere devise which put
on the form of a corporate reorganization as a disguise for concealing its real

With respect to the third requisite, ANSCOR redeemed stock dividends issued just 2 to

character, and the sole object and accomplishment of which was the consummation of

3 years earlier. The time alone that lapsed from the issuance to the redemption is not

a preconceived plan, not to reorganize a business or any part of a business, but to

a sufficient indicator to determine taxability. It is a must to consider the factual

transfer a parcel of corporate shares to a stockholder." 102

circumstances as to the manner of both the issuance and the redemption. The "time"
element is a factor to show a device to evade tax and the scheme of cancelling or
redeeming the same shares is a method usually adopted to accomplish the end
sought. 96 Was this transaction used as a "continuing plan," "device" or "artifice" to

Depending on each case, the exempting provision of Sec. 83(b) of the 1939 Code
may not be applicable if the redeemed shares were issued with bona fide business
purpose, 103 which is judged after each and every step of the transaction have been

considered and the whole transaction does not amount to a tax evasion scheme.

to why or how the

ANSCOR invoked two reasons to justify the redemptions (1) the alleged
"filipinization" program and (2) the reduction of foreign exchange remittances in case
cash dividends are declared. The Court is not concerned with the wisdom of these
purposes but on their relevance to the whole transaction which can be inferred from
the outcome thereof. Again, it is the "net effect rather than the motives and plans of
the taxpayer or his corporation" 104 that is the fundamental guide in administering
Sec. 83(b). This tax provision is aimed at the result. 105 It also applies even if at the
time of the issuance of the stock dividend, there was no intention to redeem it as a
means of distributing profit or avoiding tax on dividends. 106 The existence of
legitimate business purposes in support of the redemption of stock dividends is
immaterial in income taxation. It has no relevance in determining "dividend
equivalence". 107 Such purposes may be material only upon the issuance of the stock
dividends. The test of taxability under the exempting clause, when it provides "such
time and manner" as would make the redemption "essentially equivalent to the
distribution of a taxable dividend", is whether the redemption resulted into a flow of
wealth. If no wealth is realized from the redemption, there may not be a dividend
equivalence treatment. In the metaphor of Eisner v. Macomber, income is not deemed
"realize" until the fruit has fallen or been plucked from the tree.

The three elements in the imposition of income tax are: (1) there must be gain or
profit, (2) that the gain or profit is realized or received, actually or constructively, 108
and (3) it is not exempted by law or treaty from income tax. Any business purpose as

income was earned by the taxpayer is not a requirement. Income tax is assessed on
income received from any property, activity or service that produces the income
because the Tax Code stands as an indifferent neutral party on the matter of where
income comes from. 109

As stated above, the test of taxability under the exempting clause of Section 83(b) is,
whether income was realized through the redemption of stock dividends. The
redemption converts into money the stock dividends which become a realized profit or
gain and consequently, the stockholder's separate property. 110 Profits derived from
the capital invested cannot escape income tax. As realized income, the proceeds of
the redeemed stock dividends can be reached by income taxation regardless of the
existence of any business purpose for the redemption. Otherwise, to rule that the said
proceeds are exempt from income tax when the redemption is supported by legitimate
business reasons would defeat the very purpose of imposing tax on income. Such
argument would open the door for income earners not to pay tax so long as the
person from whom the income was derived has legitimate business reasons. In other
words, the payment of tax under the exempting clause of Section 83(b) would be
made to depend not on the income of the taxpayer, but on the business purposes of a
third party (the corporation herein) from whom the income was earned. This is absurd,
illogical and impractical considering that the Bureau of Internal Revenue (BIR) would
be pestered with instances in determining the legitimacy of business reasons that

every income earner may interpose. It is not administratively feasible and cannot

it was

therefore be allowed. cdasia

The ruling in the American cases cited and relied upon by ANSCOR that "the
redeemed shares are the equivalent of dividend only if the shares were not issued for
genuine business purposes", 111 or the "redeemed shares have been issued by a
corporation bona fide" 112 bears no relevance in determining the non-taxability of the
proceeds of redemption. ANSCOR, relying heavily and applying said cases, argued
that so long as the redemption is supported by valid corporate purposes the proceeds
are not subject to tax. 113 The adoption by the courts below 114 of such argument is
misleading if not misplaced. A review of the cited American cases shows that the
presence or absence of "genuine business purposes" may be material with respect to
the issuance or declaration of stock dividends but not on its subsequent redemption.
The issuance and the redemption of stocks are two different transactions. Although
the existence of legitimate corporate purposes may justify a corporation's acquisition
of its own shares under Section 41 of the Corporation Code, 115 such purposes
cannot excuse the stockholder from the effects of taxation arising from the
redemption. If the issuance of stock dividends is part of a tax evasion plan and thus,
without legitimate business reasons, the redemption becomes suspicious which may
call for the application of the exempting clause. The substance of the whole

not implemented until the BIR started making assessments on the proceeds of the
redemption. Such corporate plan was not stated in nor supported by any Board
Resolution but a mere afterthought interposed by the counsel of ANSCOR. Being a
separate entity, the corporation can act only through its Board of Directors. 117 The
Board Resolutions authorizing the redemptions state only one purpose reduction of
foreign exchange remittances in case cash dividends are declared. Not even this
purpose can be given credence. Records show that despite the existence of
enormous corporate profits no cash dividend was ever declared by ANSCOR from
1945 until the BIR started making assessments in the early 1970's. Although a
corporation under certain exceptions, has the prerogative when to issue dividends, yet
when no cash dividends was issued for about three decades, this circumstance
negates the legitimacy of ANSCOR's alleged purposes. Moreover, to issue stock
dividends is to increase the shareholdings of ANSCOR's foreign stockholders contrary
to its "filipinization" plan. This would also increase rather than reduce their need for
foreign exchange remittances in case of cash dividend declaration, considering that
ANSCOR is a family corporation where the majority shares at the time of redemptions
were held by Don Andres' foreign heirs.

transaction, not its form, usually controls the tax consequences. 116
Secondly, assuming arguendo, that those business purposes are legitimate, the same
The two purposes invoked by ANSCOR, under the facts of this case are no excuse for
its tax liability. First, the alleged "filipinization" plan cannot be considered legitimate as

cannot be a valid excuse for the imposition of tax. Otherwise, the taxpayer's liability to

pay income tax would be made to depend upon a third person who did not earn the

proceeds thereof are essentially considered equivalent to a distribution of taxable

income being taxed. Furthermore, even if the said purposes support the redemption

dividends. As "taxable

and justify the issuance of stock dividends, the same has no bearing whatsoever on
the imposition of the tax herein assessed because the proceeds of the redemption are
deemed taxable dividends since it was shown that income was generated therefrom.

Thirdly, ANSCOR argued that to treat as 'taxable dividend' the proceeds of the
redeemed stock dividends would be to impose on such stock an undisclosed lien and
would be extremely unfair to intervening purchasers, i.e. those who buys the stock
dividends after their issuance. 118 Such argument, however, bears no relevance in

dividend" under Section 83(b), it is part of the "entire income" subject to tax under
Section 22 in relation to Section 21 120 of the 1939 Code. Moreover, under Section
29(a) of said Code, dividends are included in "gross income". As income, it is subject
to income tax which is required to be withheld at source. The 1997 Tax Code may
have altered the situation but it does not change this disposition.

EXCHANGE OF COMMON WITH PREFERRED SHARES 121

this case as no intervening buyer is involved. And even if there is an intervening buyer,
it is necessary to look into the factual milieu of the case if income was realized from

Exchange is an act of taking or giving one thing for another 122 involving reciprocal

the transaction. Again, we reiterate that the dividend equivalence test depends on

transfer 123 and is generally considered as a taxable transaction. The exchange of

such "time and manner" of the transaction and its net effect. The undisclosed lien 119

common stocks with preferred stocks, or preferred for common or a combination of

may be unfair to a subsequent stock buyer who has no capital interest in the company.

either for both, may not produce a recognized gain or loss, so long as the provisions

But the unfairness may not be true to an original subscriber like Don Andres, who

of Section 83(b) is not applicable. This is true in a trade between two (2) persons as

holds stock dividends as gains from his investments. The subsequent buyer who buys

well as a trade between a stockholder and a corporation. In general, this trade must

stock dividends is investing capital. It just so happen that what he bought is stock

be parts of merger, transfer to controlled corporation, corporate acquisitions or

dividends. The effect of its (stock dividends) redemption from that subsequent buyer is

corporate reorganizations. No taxable gain or loss may be recognized on exchange of

merely to return his capital subscription, which is income if redeemed from the original

property, stock or securities related to reorganizations. 124

subscriber. cdasia
Both the Tax Court and the Court of Appeals found that ANSCOR reclassified its
After considering the manner and the circumstances by which the issuance and

shares into common and preferred, and that parts of the common shares of the Don

redemption of stock dividends were made, there is no other conclusion but that the

Andres estate and all of Doa Carmen's shares were exchanged for the whole

150,000 preferred shares. Thereafter, both the Don Andres estate and Doa Carmen
remained as corporate subscribers except that their subscriptions now include
preferred shares. There was no change in their proportional interest after the
exchange. There was no cash flow. Both stocks had the same par value. Under the
facts herein, any difference in their market value would be immaterial at the time of
exchange because no income is yet realized it was a mere corporate paper
transaction. It would have been different, if the exchange transaction resulted into a
flow of wealth, in which case income tax may be imposed. 125

Reclassification of shares does not always bring any substantial alteration in the
subscriber's proportional interest. But the exchange is different there would be a
shifting of the balance of stock features, like priority in dividend declarations or
absence of voting rights. Yet neither the reclassification nor exchange per se, yields
realize income for tax purposes. A common stock represents the residual ownership

by the corporation are presumed equal with the same privileges and liabilities,
provided that the Articles of Incorporation is silent on such differences. 129 cdasia

In this case, the exchange of shares, without more, produces no realized income to
the subscriber. There is only a modification of the subscriber's rights and privileges
which is not a flow of wealth for tax purposes. The issue of taxable dividend may arise
only once a subscriber disposes of his entire interest and not when there is still
maintenance of proprietary interest. 130

WHEREFORE, premises considered, the decision of the Court of Appeals is

MODIFIED in that ANSCOR's redemption of 82,752.5 stock dividends is herein
considered as essentially equivalent to a distribution of taxable dividends for which it is
LIABLE for the withholding tax-at-source. The decision is AFFIRMED in all other
respects.

interest in the corporation. It is a basic class of stock ordinarily and usually issued
without extraordinary rights or privileges and entitles the shareholder to a pro rata

SO ORDERED.Davide, Jr., C.J., Melo, Kapunan and Pardo, JJ., concur.

division of profits. 126 Preferred stocks are those which entitle the shareholder to

||| (Commissioner of Internal Revenue v. Court of Appeals, G.R. No. 108576, [January
20, 1999], 361 PHIL 103-134)

some priority on dividends and asset distribution. 127

Both shares are part of the corporation's capital stock. Both stockholders are no

EN BANC

different from ordinary investors who take on the same investment risks. Preferred and
common shareholders participate in the same venture, willing to share in the profits
and losses of the enterprise. 128 Moreover, under the doctrine of equality of shares
all stocks issued

[G.R. Nos. 177857-58. September 17, 2009.]

PHILIPPINE COCONUT PRODUCERS FEDERATION, INC. (COCOFED), MANUEL

V. DEL ROSARIO, DOMINGO P. ESPINA, SALVADOR P. BALLARES, JOSELITO A.

Dividend Rate The SMC Board of Directors shall have the sole discretion to declare

MORALEDA, PAZ M. YASON, VICENTE A. CADIZ, CESARIA DE LUNA TITULAR,

dividends on the Series 1 Preferred Shares as redeemed by SMC, the dividend rate

and RAYMUNDO C. DE VILLA, petitioners, vs. REPUBLIC OF THE PHILIPPINES,

respondent.

shall be at a fixed rate of 8% per annum, payable quarterly and calculated by

reference to the issue price.

JOVITO R. SALONGA, WIGBERTO E. TAADA, OSCAR F. SANTOS, ANA

Dividend Rate Step Up Unless the Series 1 Preferred Shares are redeemed by

THERESIA HONTIVEROS, and TEOFISTO L. GUINGONA III, oppositors-intervenors.

SMC, the Dividend Rate shall be adjusted at the end of the fifth year to the higher of
(a) the Dividend Rate or (b) the prevailing 10-year PDSTF rate plus a spread of 300

RESOLUTION

VELASCO, JR., J p:

bps.

Optional Redemption and Purchase SMC has the option, but not the obligation, to
redeem all or part of the Series 1 Preferred Shares on the third anniversary from the

For consideration is the Urgent Motion to Approve the Conversion of the SMC
Common Shares into SMC Series 1 Preferred Shares dated July 24, 2009 (Motion)

Issue Date or on any Dividend Date thereafter at a redemption price equal to the Issue
price of the Preferred Shares plus all cumulated and unpaid cash dividends. HTSaEC

interposed by petitioners Philippine Coconut Producers Federation, Inc., et al.

(collectively, COCOFED). COCOFED seeks the Court's approval of the conversion of
753,848,312 Class "A" and Class "B" common shares of San Miguel Corporation

Preference in the event of the liquidation of SMC The Series 1 Preferred Shares
shall have preference over the common shares.

(SMC) registered in the names of Coconut Industry Investment Fund and the so-called

Selling costs All selling costs pertaining to the Common Shares shall be borne by

"14 Holding Companies" (collectively known as "CIIF companies") into 753,848,312

the common shareholders. . . . (Emphasis added.)

SMC Series 1 Preferred Shares (hereinafter, the Conversion).

COCOFED proposes to constitute a trust fund to be known as the "Coconut Industry
SMC's conversion or stock exchange offer is embodied in its Information Statement 1

Trust Fund (CITF) for the Benefit of the Coconut Farmers", with respondent Republic,

and yields the following relevant features:

acting through the Philippine Coconut Authority (PCA), as trustee. As proposed, the

Instrument Peso denominated, perpetual, cumulative, non-voting preferred shares

with a par value of Php5.00 per share and Issue Price of Php75 per share.

constitution of the CITF shall be subject to terms and conditions which, for the most
part, reiterate the features of SMC's conversion offer, albeit specific reference is made

to the shares of the 14 CIIF companies. Among the terms and conditions are the

a period of three (3) years the SMC Series 1 Preferred Shares, the redemption shall in

following:

no case be less than the Issue Price of Seventy Five Pesos (P75.00) per share plus
unpaid cumulative dividends.

Standard 1. There must be a prior approval by this Honorable Court in this instant
case G.R. No. 177857-58 entitled "COCOFED, et al. vs. Republic of the Philippines",
of the conversion of the sequestered SMC Common Shares, Both Class "A" and Class
"B", registered in the respective names of the 14 CIIF Holding Companies, into SMC
Series 1 Preferred Shares.

xxx xxx xxx

Standard 8. Upon written appointment to the Board of Governors of the [PCA] of the
three (3) nominees submitted to the President of the Philippines by the [COCOFED],
as required by PD 1468, a trust fund is thereby automatically created to be identified

Standard 2. The SMC shares to be exchanged are all the shares of stock of SMC that

and known as the "Coconut Industry Trust Fund (CITF) For the Benefit of the Coconut

are presently sequestered and registered in the respective names of the 14 CIIF

Farmers" and the trustee of the Coconut Industry Trust fund shall be: "The Republic of

Holding Companies in the total number of 753,848,312, both Class "A" and Class "B"

the Philippines Acting Through the Philippine Coconut Authority for the Benefit of the

shares . . . (hereinafter, collectively referred to as the "SMC Common Shares").

Coconut Farmers". CDHaET

xxx xxx xxx

Standard 9. The initial capital of the [CITF] shall be the SMC Series 1 Preferred
Shares that will be issued by SMC as herein described.

Standard 4. The SMC Common Shares shall be converted at an exchange ratio of one
(1) SMC Series 1 Preferred Share (hereinafter, "SMC Series 1 Preferred Share") for

Standard 10. Within ten (10) days from and after the date of the final approval by this

every one (1) SMC Common Share tendered. Each SMC Series 1 Preferred Share

Honorable Court of the Conversion, the Republic of the Philippines, acting through the

shall have a par value of (P5.00) per share and an Issue Price of Seventy Five Pesos

Presidential Commission on Good Government through its duly authorized Chairman,

per share (P75.00). Dividends on the SMC Series 1 Preferred Share shall be

shall deliver to SMC these documents.

cumulative and with dividend rate of 8% per annum computed on the Issue Price of

xxx xxx xxx

Seventy Five Pesos (P75.00) per share.

Standard 11. As the issuer, SMC shall within a reasonable period from a trade, or
xxx xxx xxx

Standard 6. If and when SMC exercises its right, but not an obligation, to redeem after

exchange, of the SMC Common Shares into 753,848,312 SMC Series 1 Preferred
Shares through the facilities of the Philippine Stock Exchange, deliver duly- signed
and issued SMC Series 1 Preferred Stock Certificate(s) in the name of "The Republic

of the Philippines acting though the Philippine Coconut Authority as Trustee of the

farmers", being the governmental agency designated by law to implement projects for

Coconut Industry Trust Fund (CITF) For the Benefit of the Coconut Farmers".

the coconut industry. TAIEcS

Standard 12. Upon compliance by the SMC with its reciprocal obligations according to

c. Twenty percent (20%) To the [COCOFED], in its capacity as the duly recognized

the terms and intent of the approval by this Honorable Court, then it shall acquire

organization of the coconut farmers with the highest membership.

absolute ownership of the SMC Common Shares free from all liens, writs, demands,
or claims . . . .

d. Twenty percent (20%) To the PCA Accredited Other Coconut Farmers'

organizations The trustee shall disburse this allocation to each and all of those PCA

Standard 13. The trustee of the [CITF] shall have no authority to sell, dispose, assign,

Accredited Other Coconut Farmers Organizations.

encumber or otherwise impair the value of the SMC Series 1 Preferred Shares, unless
the same are redeemed by SMC in accordance with its Articles of Incorporation, as
amended.

Standard 16. In the event of redemption of the SMC Series 1 Preferred Shares,
whether in full or in part, the proceeds of such redemption shall form part of the capital
of the [CITF] which the Trustee shall invest, within a period of forty eight (48) hours
from receipt of the proceeds of such redemption, and reinvest in these permissible

Standard 14. For purposes of ascertaining . . . the identities and addresses of coconut

investments . . . . 2

farmers, the beneficiaries of the developmental projects herein authorized to be

financed, a ground survey of coconut farmers as presently defined, or hereafter

To the basic motion, respondent Republic filed its Comment questioning COCOFED's

defined, by the [PCA], shall be conducted by the [PCA] . . . .

personality to seek the Court's approval of the desired conversion. Respondent

Standard 15. Thirty (30) days after the receipt of any dividend paid on the SMC Series
1 preferred Shares, the net proceeds . . . shall be disbursed by the Trustee in favor of
these entities in these proportions:

Republic also disputes COCOFED's right to impose and prescribe terms and
conditions on the proposed conversion, maintaining that the CIIF SMC common
shares are sequestered assets and are incustodia legis under Presidential
Commission on Good Government's (PCGG's) administration. It postulates that, owing

a. Forty percent (40%) Coconut Industry Trust Fund constituted under Paragraph
11, Standard 8 and Standard 9 hereof which the Trustee should invest and re-invest

to the sequestrated status of the said common shares, only PCGG has the authority to
approve the proposed conversion and seek the necessary Court approval. In this

only in the permissible investments authorized under Paragraph 11, Standard 16.
connection, respondent Republic cites Republic v. Sandiganbayan 3 where the
b. Twenty percent (20%) To the (PCA) "in trust and for the benefit of the coconut

coconut levy funds were declared as prima facie public funds, thus reinforcing its

position that only PCGG, a government agency, can ask for approval of the

September 2, 2009, requesting the Office of the Solicitor General (OSG) to seek

conversion.

approval of this Court for the proposed conversion. 5 By way of relief, respondent
Republic prayed that the PCGG be allowed to proceed and effect the conversion.

On September 4, 2009, Jovito R. Salonga and four others sought leave to intervene.
Attached to the motion was their Comment/Opposition-in-Intervention, asserting that
"the government bears the burden of showing that the conversion is indubitably
advantageous to the public interest or will result in clear and material benefit. Failure

ECDHIc

On the preliminary issue as to the proper party to seek the imprimatur on the
conversion, the Court rules that it is the PCGG, not COCOFED, that is authorized to
seek the approval of the Court of the Series 1 preferred shares conversion.

of the government to carry the burden means that the current status of the
sequestered stocks should be maintained pending final disposition of G.R. Nos.

As records show, PCGG sequestered the 753,848,312 SMC common shares

177857-58". They further postulate that "even assuming that the proposal to convert

registered in the name of CIIF companies on April 7, 1986. 6 From that time on, these

the SMC shares is beneficial to the government, it cannot pursue the exchange offer

sequestered shares became subject to the management, supervision, and control of

because it is without power to exercise acts of strict dominion over the sequestered

PCGG, pursuant to Executive Order No. (EO) 1, Series of 1986, creating that

shares". Lastly, they argue that "the proposed conversion . . . is not only not

commission and vesting it with the following powers:

advantageous to the public interest but is in fact positively disadvantageous".

On September 4, 2009, respondent Republic filed a Supplemental Comment in which

Sec. 3. The Commission shall have the power and authority: xxx xxx xxx

(b) To sequester or place or cause to be placed under its control or possession any

it cited the Partial Summary Judgment rendered by the Sandiganbayan on May 27,

building or office wherein any ill-gotten wealth or properties may be found, and any

2004 in Civil Case No. 33-F, declaring the Republic as owner, in trust for the coconut

records pertaining thereto, in order to prevent their destruction, concealment or

farmers, of the subject CIIF SMC shares (27%). The same comment also referred to

disappearance which would frustrate or hamper the investigation or otherwise prevent

Resolution No. 365-2009 passed on August 28, 2009 by the United Coconut Planters

the Commission from accomplishing its task.

Bank (UCPB) Board of Directors expressing the sense that "the proposed conversion
of the CIIF SMC common shares to SMC Series I preferred shares is financially
beneficial". 4 Reference was also made to PCGG Resolution 2009-037-756 dated

(c) To provisionally take over in the public interest or to prevent its disposal or
dissipation, business enterprises and properties taken over by the government of

3. Respondents have judicially admitted that the sequestered shares were purchased
the Marcos Administration or by entities or persons close to former President Marcos,

with public funds.

until the transactions leading to such acquisition by the latter can be disposed of by
the appropriate authorities.

xxx xxx xxx6. The very laws governing coconut levies recognize their public character.
8

Eventually, the coconut levy funds that were used to acquire the sequestered CIIF
SMC common shares in question were peremptorily determined to be prima facie
public funds. The Court, in Republic v. COCOFED, 7 elucidated on the nature of the

xxx xxx xxx2. Coconut Funds Are Levied for the Benefit of the Coconut Industry and
Its

coconut levy funds:

Farmers.

Coconut Levy Funds Are Prima Facie Public Funds

xxx xxx xxx

To avoid misunderstanding and confusion, this Court will even be more categorical
and positive than its earlier pronouncements: the coconut levy funds are not only

And explaining the PCGG's authority to vote the sequestered shares acquired from
the coconut levy, the Court further wrote:

affected with public interest; they are, in fact, prima facie public funds.

Public funds are those moneys belonging to the State or to any political subdivision of

Having Been Acquired With Public Funds, UCPB Shares Belong, Prima Facie, to the

the State; more specifically, taxes, customs duties and moneys raised by operation of

Government CSTHca

law for the support of the government or for the discharge of its obligations.
Undeniably, coconut levy funds satisfy this general definition of public funds, because

Having shown that the coconut levy funds are not only affected with public interest, but

of the following reasons: ASDCaI

are in fact prima facie public funds, this Court believes that the government should be
allowed to vote the questioned shares, because they belong to it as the prima facie

1. Coconut levy funds are raised with the use of the police and taxing powers of the

beneficial and true owner.

State.
As stated at the beginning, voting is an act of dominion that should be exercised by
2. They are levies imposed by the State for the benefit of the coconut industry and its

the share owner. One of the recognized rights of an owner is the right to vote at

farmers.

meetings of the corporation. The right to vote is classified as the right to control. Voting

rights may be for the purpose of, among others, electing or removing directors,

may authorize. However, funds in the hands of a receiver may be invested only by

amending a charter, or making or amending by laws. Because the subject UCPB

order of the court upon the written consent of all the parties to the action.

shares were acquired with government funds, the government becomes their prima
facie beneficial and true owner.

No action may be filed by or against a receiver without leave of the court which
appointed him. (Emphasis supplied.)

Ownership includes the right to enjoy, dispose of, exclude and recover a thing without
limitations other than those established by law or by the owner. . . . And the right to
vote shares is a mere incident of ownership. In the present case, the government has
been shown to be the prima facie owner of the funds used to purchase the shares.
Hence, it should be allowed the rights and privileges flowing from such fact. 9

And in Republic v. Sandiganbayan, 11 the Court observed that "the PCGG's power to
sequester alleged ill-gotten properties is likened to the provisional remedies of
preliminary attachment or receivership which are always subject to the control of the
court".

Time and again, the Court has likened sequestration to preliminary attachment and
receivership under Rules 57 and 59 of the Rules of Court and has accordingly applied
the said rules to sequestration cases. So it was that in Republic v. Sandiganbayan 10

The PCGG, therefore, as the "receiver" of sequestered assets and in consonance

with its duty under EO 1, Series of 1986, to protect and preserve them, has the power

the Court noted that the powers and duties of the PCGG as conservator and protector
of sequestered assets are virtually the same as those possessed by a receiver under

to exercise acts of dominion provided that those acts are approved by the proper

Rule 59, Section 6:

court.

SEC. 6. General powers of receiver. Subject to the control of the court in which the
action or proceeding is pending, a receiver shall have the power to bring and defend,
in such capacity, actions in his own name; to take and keep possession of the property

TIaDHE

From the foregoing discussion, it is clear that it is the PCGG not COCOFED or the
CIIF companies that has the right and/or authority during sequestration to seek this

in controversy; to receive rents; to collect debts due to himself as receiver or to the

fund, property, estate, person, or corporation of which he is the receiver; to compound
for and compromise the same; to make transfers; to pay outstanding debts; to divide
the money and other property that shall remain among the persons legally entitled to
receive the same; and generally to do such acts respecting the property as the court

Court's approval for the proposed conversion. Consequently, the terms and conditions
sought by COCOFED for the conversion are not material to the proposed conversion.
At most, COCOFED's prayer for approval of the conversion reflects its conformity to
said transfiguration.

After a circumspect evaluation of the incident at bar, we resolve to approve the

No doubt shares of stock are not the safest of investments, moored as they are on the

conversion, taking into account certain circumstances and hard economic realities as

ever changing worldwide and local financial conditions. The proposed conversion

discussed below:

would provide better protection either to the government or to the eventually declared
real stock owners, depending on the final ruling on the ownership issue. In the event

Contrary to the assertion of intervenors Salonga, et al., respondent Republic has

satisfactorily demonstrated that the conversion will redound to the clear advantage

SMC suffers serious financial reverses in the short or long term and seeks insolvency
protection, the owners of the preferred shares, being considered creditors,

and material benefit of the eventual owner of the CIIF SMC shares in question.

Positive action must be taken in order to preserve the value of the sequestered CIIF

shall have, vis--vis common stock shareholders, preference in the corporate assets

SMC common shares. The worldwide economic crisis that started last year affected

of the insolvent or dissolved corporation. In the case of the SMC Series 1 Preferred

the Philippines and adversely impacted on several banks and financial institutions,

Shares, these preferential features are made available to buyers of said shares and

resulting in billions of loses. The Philippine Stock Exchange Index retreated by a

are amply protected in the investment. 12

record 12.3% on October 27, 2008, the biggest single day fall since July 24, 1987.
This year, 2009, the recorded index of 2,859 has not regained the pre-October 27,
2008 level of 3,837.89.

More importantly, the conversion will ensure a higher cumulative and fixed dividend
rate of 8% per annum computed at an issue price of PhP75 per share, a yield not
currently available to common shareholders. The OSG succinctly explained the

Moreover, the CIIF SMC shares traded in the local bourse have substantially dropped

undeniable advantages to be gained from the conversion, thus: TSacAE

in value in the last two (2) years. The SMC Class "A" shares, which commanded the
unit price of PhP48 per share as of November 6, 2008, were trading at PhP57.50 in

Assuming that the data contained in the SMC Information Sheet is accurate and true,
the closing prices of SMC Common Class "A" and "B" Shares, as of June 1, 2009, are

2007 and PhP65 in 2006. SMC Class "B" shares, on the other hand, which fetched a
price of PhP49 per share on November 6, 2008, were priced at PhP61 in 2007 and

Fifty-three pesos and 50/100 (P53.50) and Fifty-four Pesos (P54.00), respectively. The
proposed conversion into Series 1 Preferred Shares would give said share an issue

PhP74.50 in 2006. As of June 1, 2009, Class "A" and Class "B" common shares of

price of seventy-five pesos (P75.00) per share. Corollarily, while the current SMC

CIIF SMC closed at PhP53.50 and PhP54 per unit, respectively. CIIF SMC share

Common shares have no fixed dividend rate, the Series 1 Preferred Shares have a

prices may decline over the years.

determined dividend rate of eight percent (8%) per annum. On these points alone, the

benefits to the shareholders are clearly quantifiable.

Further still, the SMC Series 1 Preferred Shares are deemed cumulative. As a

The redemption value of the preferred shares depends upon and is actually tied up
with the issue price plus all the cumulated and unpaid dividends. This redemption

cumulative share with preference in the payment of dividends, it is entitled to cumulate

the dividends in those years where no dividend is declared. Thus, if a cumulative

feature is envisaged to effectively eliminate the market volatility risks on the side of the

share is entitled to 10% of par value as cumulative dividend yearly, where no

share owners. Undoubtedly, these are clear advantages and benefits that inure to the

dividends are declared in 1989, 1990 and 1991 because there are no profits, and
dividends are declared in 1992 because of surplus or unrestricted earnings, the holder

share owners who, on one hand, prefer a stable dividend yield on their investments
and, on the other hand, want security from the uncertainty of market forces over which

of the preferred cumulative shares is entitled to receive 40% of par value as his
cumulative dividends for the years 1989 to 1991.

The declaration of dividends is still generally subject to the discretion of the board but

they do not have control.

Recent developments saw SMC venturing and diversifying into several huge projects

once dividends are declared, the cumulative preferred shareholders are entitled to

(i.e., oil, power, telecommunications), business moves which understandably have

receive the dividends for the years when no declaration was made. When dividends

caused some critics to raise the concern over a possible prejudice to the CIIF SMC

are declared, cumulative dividends must be paid regardless of the year in which they

common shares presently under sequestration should such investments turn sour. A

are earned. Therefore, holders of the converted preferred shares are assured of

number of people claim these new acquisitions are likely to dissipate the assets of

accumulated annual dividends. 13 (Emphasis added.)

SMC. Some sectors ratiocinate that the huge capital investments poured into these

As it were, the issue price of PhP75 per share represents a 40% premium, more or
less, over the prevailing market price, i.e., about PhP54 per share, of the CIIF SMC
common shares as of June 1, 2009. The 40% premium amply covers the "block" and
"control" features of the CIIF SMC common shares. These shares below 33.33% are,

projects may substantially erode SMC's profitability in the next few years, resulting in
diminished dividends declaration. The proposed conversion will address the concerns
and allay the fears of well meaning sectors, and insulate and protect the sequestered
CIIF SMC shares from potential damage or loss. SCDaHc

to many, not even considered vested with "control" premium. It can be safely assumed

Moreover, the conversion may be viewed as a sound business strategy to preserve

that the issue price of PhP75 per share was based on an independent valuation of the

and conserve the value of the government's interests in CIIF SMC shares.

CIIF SMC shares, a requisite usually prescribed as a prelude to Board approval.

Preservation is attained by fixing the value today at a significant premium over the

market price and ensuring that such value is not going to decline despite negative

In their Comment/Opposition in Intervention, intervenors Salonga, et al., however,

market conditions. Conservation is realized thru an improvement in the earnings value

assert that the proposed conversion is positively disadvantageous to

via the 8% per annum dividends versus the uncertain and most likely lower dividends
on common shares.

A fixed dividend rate of 8% per annum translates to PhP6 per preferred share or a
guaranteed yearly dividend of PhP4,523,308,987.20 for the entire sequestered CIIF
SMC shares. The figures jibe with the estimate made by intervenors Salonga, et al. 14
Compare this amount to the dividends declared for common shares for the recent past
years which are in the vicinity of PhP1.40 per unit share or a total amount of
PhP1,055,387,636.80 per annum. The whopping difference is around PhP3.5 billion
annually or PhP10.5 billion in three (3) years. On a year-to-year basis, the difference
reflects an estimated increase of 77% in dividend earnings. With the bold investments
of SMC in various lines of business, there is no assurance of substantial earnings in
the coming years. There may even be no earnings. The modest dividends that accrue
to the common shares in the recent years may be a thing of the past and may even be
obliterated by poor or unstable performance in the initial years of operation of newlyacquired ventures.

In the light of the above findings, the Court holds that respondent Republic has
satisfactorily hurdled the onus of showing that the conversion is advantageous to the
public interest or will result in clear and material benefit to the eventually declared
stock owners, be they the coconut farmers or the government itself.

respondent. They label the conversion as a "devious compromise favorable only to

COCOFED and Cojuangco, Jr." This allegation is simply conjectural. No evidence of
the alleged compromise was presented, as it was only COCOFED that initiated the
proposal for conversion.

The claim that the Cojuangco, Jr. group will be able to oust the government nominees
from the SMC Board, buy the sequestered shares without encumbrances, and do so
with SMC funds is inaccurate and even speculative. Intervenors completely miss the
point. The genuine issue is whether or not the desired conversion will be beneficial
and advantageous to the government or the eventual owners of the shares. The
perceived full control by Cojuangco, Jr. over SMC after the common shares are
released from sequestration is hardly relevant to the propriety of the conversion.
Intervenors have not been able to demonstrate how the domination of SMC by
Cojuangco, Jr., if that should come to pass, will prejudice or impair the interests of
respondent Republic in the preferred shares. The more important consideration in the
exercise at hand is the preservation and conservation of the preferred shares and the
innumerable benefits and substantial financial gains that will redound to the owner of
these shares.

The conversion, so intervenors claim, will result in the loss of voting rights of PCGG in

SMC and enable Cojuangco, Jr. to acquire the sequestered shares, without

billion common shares to PhP3.39 billion common shares and PhP1.11 billion Series 1

encumbrances, using SMC funds. This is incorrect. The common shares after

Preferred Shares. The conversion in question is a legitimate exercise of corporate

conversion and release from sequestration become treasury stocks or shares.

Treasury shares under Sec. 9 of the Corporation Code (Batas Pambansa Blg. 68) are
"shares of stock which have been issued and fully paid for, but subsequently

powers under the Corporation Code. The shares in question will not be acquired with
SMC funds but by reason of the reconfiguration of said shares to preferred shares.

reacquired by the issuing corporation by purchase, redemption, donation or through

some other lawful means. Such shares may again be disposed of for a reasonable

The Court can perhaps take judicial notice of the government's enunciated policy to

price fixed by the board of directors". HcTIDC

reduce, if not eliminate, its exposure to business. The PCGG has held on to the
sequestered shares for more than 20 years and this may be the opportune time to do

A treasury share or stock, which may be common or preferred, may be used for a
variety of corporate purposes, such as for a stock bonus plan for management and
employees or for acquiring another company. It may be held indefinitely, resold or

away with its participation in SMC, especially considering the claim that the
sequestration of the CIIF SMC common shares has frightened away investors and
stunted growth of the company.

retired. While held in the company's treasury, the stock earns no dividends and has no
vote in company affairs. 15 Thus, the CIIF common shares that would become

The only interest of PCGG in SMC is to protect the CIIF SMC common shares from

treasury shares are not entitled to voting rights. And should conversion push through,

dissipation. PCGG is neither tasked to bar Cojuangco, Jr., or any individual for that

SMC, not Cojuangco, Jr., becomes the owner of the reacquired sequestered CIIF

matter, from securing domination of the SMC Board, nor avert Cojuangco, Jr.'s

SMC common shares. Should SMC opt, however, to sell said shares in the future,

acquisition of the CIIF SMC common shares once released from sequestration. Even

prospective buyers, including possibly Cojuangco, Jr., have to put up their own money

if the conversion is approved, nothing can prevent the government from prosecuting

to acquire said common shares. Thus, it is erroneous for intervenors to say that

the people whom intervenors tag as responsible for "greasing the government and the

Cojuangco, Jr., with the use of SMC funds, will be acquiring the CIIF SMC common

coconut farmers of billions of pesos".

shares.
On the other hand, COCOFED does not stand to benefit from the conversion,
It bears to stress that it was SMC which amended its articles of incorporation,

because portions of the dividends or proceeds from the redemption cannot be

reclassifying the existing composition of the authorized capital stock from PhP4.5

allocated directly to proposed beneficiaries, as this will be contrary to Sec. 2 of

Presidential Decree No. (PD) 961, 16 as amended by PD 1468. In addition, the

the shares.

preferred shares which will be placed in the names of the CIIF companies, or the
dividends derived from said shares, shall remain as sequestered assets until final
resolution of the ownership issue.

Intervenors suggest a deferment of any action on the conversion until the CIIF SMC
shares ownership issue is settled. The General Offer of conversion, originally expiring
on August 24, 2009, was extended up to September 21, 2009. Availment of the
conversion calls for immediate action. Almost all of the parties-in-interest
COCOFED, UCPB as administrator of the CIIF, and respondent Republic through
PCGG have in one way or another signified their assent to the conversion. HSaIDc

Lest it be overlooked, the decision on whether to proceed with the conversion or defer
action thereon until final adjudication of the issue of ownership over the sequestered
shares properly pertains to the executive branch, represented by the PCGG. Just as it
cannot look into the wisdom behind the enactment of a law, the Court cannot question
the wisdom and reasons behind the decision of the executive branch to ask for the
conversion of the common shares to preferred shares. Else, the Court would be
trenching on the well-settled doctrine of separation of powers. The cardinal postulate
explains that the three branches must discharge their respective functions within the
limits of authority conferred by the Constitution. Under the principle of separation of

It has not successfully been demonstrated, however, how the alleged eventual

powers, neither Congress, the President, nor the Judiciary may encroach on fields

ownership by Cojuangco, Jr. of the sequestered shares will prejudice the interests of

allocated to the other branches of government. The legislature is generally limited to

respondent Republic in the preferred shares. It cannot likewise be figured out what

the enactment of laws, the executive to the enforcement of laws, and the judiciary to

distinct benefits the government will obtain if the common shares are converted to

their interpretation and application to cases and controversies. 17

preferred shares or used in another manner after final resolution of the ownership
issue.

Jurisprudence is well-established that the courts cannot intervene or interfere with

executive or legislative discretion exercised within constitutional limits. In JG Summit

The indicated advantages of conversion, if accomplished now, will surely make up for

Holdings, Inc. v. Court of Appeals, 18 the Court explained:

the apprehensions arising from the possible domination by Cojuangco, Jr. of the SMC
in the future. The primordial consideration is that the shares be shielded from

The discretion to accept or reject a bid and award contracts is vested in the
Government agencies entrusted with that function. The discretion given to the

dissipation and potential risks that may arise from uncertainty of market and business
conditions. The conversion will ensure stable share value and enhanced earnings of

authorities on this matter is of such wide latitude that the Courts will not interfere
therewith, unless it is apparent that it is used as a shield to a fraudulent award

(Jalandoni v. NARRA, 108 Phil. 486 [1960]). . . . The exercise of this discretion is a

has been made in grave abuse of discretion.

policy decision that necessitates prior inquiry, investigation, comparison, evaluation,

and deliberation. This task can best be discharged by the Government agencies . . . .

In Francisco, Jr. v. UEM-MARA Philippines Corporation, 20 the Court elucidated the

The role of the Courts is to ascertain whether a branch or instrumentality of the

co-equal status of the three branches of government:

Government has transgressed its constitutional boundaries. But the Courts will not
interfere with executive or legislative discretion exercised within those boundaries.
Otherwise, it strays into the realm of policy decision- making.

Considering the co-equal status of the three branches of government, courts may not
tread into matters requiring the exercise of discretion of a functionary or office in the
executive and legislative branches, unless it is clearly shown that the government

It is only upon a clear showing of grave abuse of discretion that the Courts will set

official or office concerned abused his or its discretion. . . .

aside the award of a contract made by a government entity. Grave abuse of discretion
implies a capricious, arbitrary and whimsical exercise of power (Filinvest Credit Corp.

Furthermore,

v. Intermediate Appellate Court, No. 65935, 30 September 1988, 166 SCRA 155). The

". . . courts, as a rule, refuse to interfere with proceedings undertaken by

abuse of discretion must be so patent and gross as to amount to an evasion of

administrative bodies or officials in the exercise of administrative functions. This is so

positive duty or to a virtual refusal to perform a duty enjoined by law, as to act at all in

because such bodies are generally better equipped technically to decide

contemplation of law, where the power is exercised in an arbitrary and despotic

administrative questions and that non-legal factors, such as government policy on the

manner by reason of passion or hostility (Litton Mills, Inc. v. Galleon Trader, Inc., et al.,

matter, are usually involved in the decisions." (Emphasis supplied.)

L-40867, 26 July 1988, 163 SCRA 489). (Emphasis supplied.) HSCATc

Corollary to the principle of separation of powers is the doctrine of primary jurisdiction
In Ledesma v. Court of Appeals, 19 the Court added:

that the courts will DEFER to the decisions of the administrative offices and agencies

. . . [A] court is without power to directly decide matters over which full discretionary

by reason of their expertise and experience in the matters assigned to them.

authority has been delegated to the legislative or executive branch

Administrative decisions on matters within the jurisdiction of administrative bodies are

to be respected and can only be set aside on proof of grave abuse of discretion, fraud,
or error of law. 21

of the government. It is not empowered to substitute its judgment for that of Congress
or of the President. It may, however, look into the question of whether such exercise

The only instance when the Courts ought to interfere is when a department or an

agency has acted with grave abuse of discretion or violated a law. A circumspect

economic viability of the proposed SMC share conversion was affirmed and endorsed

review of the pleadings and evidence extant on record shows that the PCGG

to the PCGG and CIIF 14 Holding Companies for appropriate action;

approved the conversion only after it conducted an in-depth inquiry, thorough study,

WHEREAS, apart from the legal issues surrounding the CIIF SMC shares and

and judicious evaluation of the pros and cons of the proposed conversion. PCGG took
into consideration the following:

considering the immediate concern to preserve the value of the said shares, taking
into account the current global financial crisis and its effects on the Philippine financial

(1) Resolution of the UCPB Board of Directors approved during its July 20, 2009

situation, and as recommended by the UCPB-TBG, the proposed SMC share

special meeting, where it categorically decided and concluded that it is financially

conversion is financially and economically advantageous;

beneficial to convert the CIIF SMC shares as offered by the SMC.

(2) Resolution No. 365-2009 of the UCPB Board of Directors issued on August 28,
2009 reiterating its position that the proposed conversion is financially beneficial, thus:

WHEREAS, in addition, given the dynamic market environment, when the shares are
converted, the shareholders will no longer gain from any profits or suffer from any
losses resulting from the change in business strategy of SMC, or from any change in
the economic situation or market developments;

WHEREAS, in its regular meeting on June 26, 2009, the UCPB Board of Directors
instructed the UCPB-TBG to undertake a study on the financial and economic viability
of the proposed SMC share conversion; EaHcDS

BE IT RESOLVED, That, based on the facts and circumstances prevailing as of even

date and the results of the study conducted by the UCPB-TBG, UCPB, as the
administrator of the CIIF and in compliance with its mandate under PD 1468,
concluded that it is financially beneficial to convert the CIIF SMC shares as offered by

WHEREAS, the UCPB Board of Directors in a special meeting on July 16, 2009 noted

the San Miguel Corporation. (Emphasis supplied.)

and referred to the PCGG and CIIF 14 Holding Companies for appropriate action
UCPB-TBG's study on the financial and economic viability of the proposed SMC share

(3) The Department of Finance, through Secretary Margarito B. Teves, upon the

conversion, which states that, ". . . it would be more advantageous to convert the

recommendation of the Development Bank of the Philippines, confirmed that the CIIF

CIIF's SMC common shares to the proposed SMC Series "1" Preferred Shares.";

SMC shares conversion is financially and economically advantageous and that it shall

WHEREAS, during a special meeting on July 20, 2009 among the UCPB committee,
PCGG and CIIF 14 Holding Companies, UCPB-TBG's study on the financial and

work for the best interest of the farmers who are the ultimate and beneficial owners of
said shares.

(4) The letter of the OSG dated July 30, 2009 opined that the proposed conversion is
legally allowable as long as PCGG approval is obtained, thus:

have no stated maturity.

3. Should SMC decide not to redeem the Series 1 preferred shares at the end of the

Parenthetically, . . . our Office received a copy of COCOFED, et al.'s Urgent Motion To

fifth year from Issue Date, the Dividend Rate will be adjusted to the higher of 8% per

Approve the Conversion of the SMC Common Share Into SMC Series 1 Preferred

annum, and the prevailing 10-year Philippine Dealing System Treasury Fixing (PDST-

Shares dated July 24, 2009. Attached therewith is the SMC Notice of Regular Meeting

F) Rate plus a spread of up to 300 basis points. This is an advantage because there is

and Information Statement dated July 23, 2009 which discusses and compares the

the opportunity for the Series 1 Preferred Shareholders to enjoy a higher dividend

common shares and Series 1 preferred shares. As can be gleaned from the . . .

rate.

Information Statement dated July 23, 2009, the advantages

4. The Series 1 preferred shares have preference over common shares upon
liquidation.

of conversion of the common shares to Series 1 preferred shares are as follows:

5. The Series 1 preferred shares shall be listed with the Philippine Stock Exchange
AIDcTE

1. The Series 1 preferred shares shall be entitled to receive cash dividends upon

within one year from issue date which should provide liquidity to the issue.

On the other hand, the disadvantages to the conversion are as follows:

declaration made at the sole option of the Board of Directors, fixed at 8% per annum
as determined by Management. On the other hand, there is no fixed dividend rate for

1. Holders of Series 1 preferred shares will have no voting rights except as provided

common shares. Further, no dividend shall be declared and paid to holders of

by law. Thus, the PCGG's representatives in the SMC Board will have been effectively

common shares unless cash dividends shall have been declared and paid to all

removed from participating in the management of the SMC.

holders of the Series 1 preferred shares. Moreover, the Series 1 preferred shares are
cumulative, which means that should dividend payments get delayed, it would

2. Series 1 preferred shares have no maturing date as these are perpetual shares.

eventually be paid in the future. This feature is not available for common shareholders.

There is no definite assurance that the SMC will exercise its option of redemption.

2. The Series 1 preferred shares are redeemable in whole or in part, at the sole option

3. Holders of the Series 1 preferred shares shall not be entitled to any participation or

of the Company (SMC), at the end of three (3) years from the Issue Date or on any

share in the retained earnings remaining after dividend payment shall have been

Dividend Payment Date thereafter, at the price equal to the Issue Price plus any

made on Series 1 preferred shares.

accumulated unpaid cash dividends. Series 1 preferred shares are also perpetual or

4. There is no expiry date on the SMC's option to redeem the Series 1 Preferred

NOW, THEREFORE, be it RESOLVED, as it is hereby RESOLVED, that the

Shares. Should market interest rates fall below the Dividend Rate, on or after the 3rd

Commission hereby APPROVES, as it is hereby APPROVED, the conversion of the

anniversary from Issue Date, the SMC may exercise the option to redeem the Series 1

CIIF owned common shares, as well as the PCGG ITF-CARP common shares,

Preferred Shares. DHaECI

including the qualifying shares issued to PCGG/government nominee-directors in San

Miguel Corporation (SMC), to Series "1" Preferred Shares, PURSUANT to the

It is also our considered view that the conversion of the CIIF SMC common shares to
SMC Series 1 preferred shares does not take them away from the jurisdiction of the
courts. In conversion, the SMC common shares are merely reclassified into SMC
Series 1 preferred shares without changing the proportional interest of the stockholder

confirmation of the Department of Finance (DOF) and legal opinion of the Office of the
Solicitor General (OSG), and SUBJECT to the conditions set forth in the said OSG
opinion and requests of the OSG to seek the approval of the Honorable Supreme
Court for the said proposed conversion. (Emphasis supplied.)

in San Miguel Corporation. Verily, the conversion of the SMC common shares to SMC
Series 1 preferred shares does not involve a change in the condition of said shares.

The conversion of the SMC common shares to SMC Series 1 preferred shares and its
eventual redemption is legally allowable as long as the approval of the PCGG is
obtained for the amendment of the Articles of Incorporation of SMC, to allow the

The approval by the PCGG, for respondent Republic, of the conversion is a policy
decision which cannot be interfered with in the absence of a showing or proof, as
here, that PCGG committed grave abuse of discretion.

In the similar Palm Avenue Realty Development Corporation v. PCGG, 22 the Court

creation of the proposed preferred share with its various features. As long as the
PCGG approval is obtained, the exercise of the redemption feature of the SMC in
accordance with the Amended Articles of Incorporation would not constitute a "sale" of
the sequestered asset that is prohibited.

ruled that the approval by PCGG of the sale of the sequestered shares of petitioner
corporations allegedly owned and controlled by Kokoy Romualdez was legal and
could not be the subject of a writ of certiorari or prohibition, absent proof that PCGG
committed a grave abuse of discretion. The price of PhP 29 per share approved by the

Hence, on September 2, 2009, the PCGG issued Resolution No. 2009-037-756

PCGG was even below the prevailing price of PhP 43 per share.

approving the proposed conversion:

The Court ratiocinated in that case, thus: DACaTI
WHEREAS, guided by the foregoing, the Commission interposes no objection to the
conversion of the CIIF shares in SMC, as well as the PCGG ITF-CARP shares,

It was no doubt in the light of these undeniable actualities, and in an attempt to

including the qualifying shares issued to PCGG/government nominee- directors, to

discharge its responsibility to preserve the sequestered stock and put an end to its

Series "1" Preferred shares.

continuing and inexorable depreciation, that the PCGG performed the acts now

subject of attack in the case at bar. Upon these facts and considerations, it cannot be
said that the PCGG acted beyond the scope of the power conferred upon it by law.

These contentions are specious. While it is conceded that the price differential of

Indeed, it would appear that its acts were motivated and guided by the law creating it

PhP21 is an unrealized gain, the clear financial advantage derived from the

and prescribing its powers, functions, duties and responsibilities. Neither can it be said

transaction is not the price differential but the guaranteed 8% dividend per annum

that it acted with grave abuse of discretion. It evidently considered and assessed the

based on the issue price of PhP75 per share as compared to a much lower dividend

facts, the conflicting positions of the parties concerned, and the options open to it,
before taking the course of action that it did. The possibility that it has erred cannot, to

rate that common shares may earn. Worse, there may even be no dividends for the
common shares after distribution of the dividends to the holders of the preferred

be sure, be completely eliminated. As above stated, it is entirely possible that a better

bargain might have been struck with someone else. What cannot be denied is that the
arrangement actually adopted and implemented has resulted in the satisfactory
reconciliation of the conflicting facts in the case and the preservation of the stock for
the benefit of the party that may finally be adjudged by competent court to be the
owner thereof, and to a certain extent, to the advantage of numerous employees.

shares in the event of poor or weak business performance. In addition, unless the
Series 1 Preferred Shares are redeemed at the end of the fifth year from issue date,
the dividend rate of 8% shall be increased based on the following formula:

[T]he dividend rate shall be adjusted to the higher of (i) the Dividend Rate, and (ii) the
prevailing 10-year PDST-F Rate (or such successor benchmark rate) as displayed

The petitioners have failed to demonstrate that respondent PCGG has acted without

under the heading "Bid Yield" as published on the PDEx Page (or such successor

or in excess of the authority granted to it by law, or with grave abuse of discretion, or

page) of Bloomberg (or such successor electronic service provider) at approximately

that it had exercised judicial or quasi-judicial functions in this case, correctible by

11:30 a.m. Manila time on the date corresponding to the end of the fifth year from the

certiorari. The Court thus finds itself bereft of any justification to issue the prerogative

Issue Date (or if not available, the PDST-F Rate on the banking day prior to such date,

writ of certiorari or prohibition that petitioners seek. (Emphasis supplied.)

or if still not available, the nearest preceding date on which the PDST-F Rate is
available, but if such nearest preceding date is more than five days prior to the date

Salonga, et al. question the position of respondent Republic that the benefits derived

corresponding to the end of the fifth year from the Issue Date, the Board of Directors

from the conversion are clearly quantifiable. As they claim, the price differential of

at its reasonable discretion shall determine the appropriate substitute rate), plus a

PhP21 per share is only profit on paper and at the price of losing membership in the

spread of up to 300 basis points, in either case calculated in respect of each share by

SMC Board. Moreover, they point out that the dividends to be distributed to the
common shares may even be higher than the guaranteed 8% dividends.

reference to the Issue Price. 23 aDIHTE

Undoubtedly, the holders of preferred shares will have distinct advantages over

common shareholders.

shares may have such rights, privileges or restrictions as may be stated in the articles
of incorporation: Provided, That no share may be deprived of voting rights except

By relinquishing its voting rights in the SMC Board through the conversion, the

those classified and issues as "preferred" or "redeemable" shares, unless otherwise

government, it is argued, would be surrendering its final arsenal in combating the

provided in this Code: Provided, further, That there shall always be a class or series of

maneuverings to frustrate the recovery of ill-gotten wealth. It may, as feared, be

shares which have complete voting rights.

rendered helpless in preventing an impending peril of a "lurking dissipation".

This contention has no merit.

The mere presence of four (4) PCGG nominated directors in the SMC Board does not

xxx xxx xxx

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

mean it can prevent board actions that are viewed to fritter away the company assets.
Even under the status quo, PCGG has no controlling sway in the SMC Board, let

1. Amendment of the articles of incorporation;

alone a veto power at 24% of the stockholdings. In relinquishing the voting rights, the
2. Adoption and amendment of by-laws;
government, through PCGG, is not in reality ceding control.
3. Sale, lease, exchange, mortgage, pledge or other disposition of all or substantially
Moreover, PCGG has ample powers to address alleged strategies to thwart recovery

all of the corporation property;

of ill-gotten wealth. Thus, the loss of voting rights has no significant effect on PCGG's
function to recover ill-gotten wealth or prevent dissipation of sequestered assets.

It is also not correct to say that the holders of the preferred shares lose all their voting

4. Incurring, creating or increasing bonded indebtedness; AcICHD

5. Increase or decrease of capital stock;

rights. Sec. 6 of the Corporation Code provides for the situations where non- voting

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

shares like preferred shares are granted voting rights, viz.:

corporations;

7. Investment of corporate funds in another corporation or business in accordance

Section 6.Classification of shares. The shares of stock in corporations may be
divided into classes or series of shares, or both, any of which classes or series of

with this Code; and

8. Dissolution of the corporation.

Except as provided in the immediately preceding paragraph, the vote necessary to

approve a particular corporate act as provided in this Code shall be deemed to refer
only to stocks with voting rights.

Thus, the loss of four (4) board seats would not in reality prejudice the rights and
interests of the holders of the preferred shares. And such loss is compensated by the
tremendous financial gains and benefits and enormous protection from loss or
deterioration of the value of the CIIF SMC shares. The advantages accorded to the
preferred shares are undeniable, namely: the significant premium in the price being

In addition, the holders of the preferred shares retain the right to dissent and demand

offered; the preference enjoyed in the dividends as well as in the liquidation of assets;

payment of the fair value of their shares, to wit:

and the voting rights still retained by preferred shares in major corporate actions. All

Sec. 81. Instances of appraisal right. Any stockholder of a corporation shall have
the right to dissent and demand payment of the fair value of his shares in the following

things considered, conversion to preferred shares would best serve the interests and
rights of the government or the eventual owner of the CIIF SMC shares.

instances:
It is likewise postulated that the dividends distributed to the common shares may end
1. In case any amendment to the articles of incorporation has the effect of changing or

up higher than 8% guaranteed to preferred shares. This assumption is speculative.

restricting the rights of any stockholders or class of shares, or of

With the huge investments SMC poured into several big ticket projects, it is unlikely

authorizing preferences in any respect superior to those of outstanding shares of any

class, or of extending or shortening the term of corporate existence;

that there will be much earnings left to be distributed to common shareholders. And to
reiterate, the decision to convert is best left to the sound business discretion of the
government agencies concerned. DAcSIC

2. In case of sale, lease, exchange, transfer, mortgage, pledge or other disposition of

all or substantially all of the corporate property and assets as provided in this Code,

Salonga, et al. also argue that the proposed redemption is a right to buy the preferred

and

shares at less than the market value. That the market value of the preferred shares
may be higher than the issue price of PhP75 per share at the time of redemption is

3. In case of merger or consolidation.

possible. But then the opposite scenario is also possible. Again, the Court need not
Lastly, the preferred shares will be placed under sequestration and management of

delve into policy decisions of government agencies because of their expertise and

PCGG. It has powers to protect and preserve the sequestered preferred shares even

special knowledge of these matters. Suffice it to say that all indications show that SMC

if there are no government-nominated directors in the SMC Board.

will redeem said preferred shares in the third year and not later because the dividend

rate of 8% it has to pay on said shares is higher than the interest it will pay to the

Salonga, et al. also contend that PCGG cannot pursue the exchange offer of SMC for

banks in case it simply obtains a loan. When market prices of shares are low, it is

want of power to exercise acts of strict dominion over the sequestered shares.

possible that interest rate on loans will likewise be low. On the other hand, if SMC has
available cash, it would be prudent for it to use such cash to redeem the shares than

This is incorrect.

place it in a regular bank deposit which will earn lower interests. It is plainly expensive

The Court, to be sure, has not barred the conversion of any sequestered common

and costly for SMC to keep on paying the 8% dividend rate annually in the hope that

shares of a corporation into preferred shares. It may be argued that the conversion

the market value of the shares will go up before it redeems the shares. Likewise, the

scheme under consideration may later on be treated as an indirect sale of the

conclusion that respondent Republic will suffer a loss corresponding to the difference

common shares from the registered owner to another person if and when SMC

between a

decides to redeem the Series 1 preferred shares on the third anniversary from the

high market value and the issue price does not take into account the dividends to be
earned by the preferred shares for the three years prior to redemption. The
guaranteed PhP6 per share dividend multiplied by three years will amount to PhP18. If

issue date of the preferred shares. Still, given the circumstances of the pending
incident, the Court can validly allow the proposed conversion in accordance with Rule
57, Sec. 11, in relation to Rule 59, Sec. 6 of the Rules of Court. Sec. 11 reads:

one adds PhP18 to the issue price of PhP75, then the holders of the preferred shares

SEC. 11. When attached property may be sold after levy on attachment and before

will have actually attained a price of PhP93 which hews closely to the speculative

entry of judgment. Whenever it shall be made to appear to the court in which the

PhP100 per share price indicated by movants-intervenors. In effect, there will not be

action is pending, upon hearing with notice to both parties, that the property attached

much prejudice to respondent on the assumption that the speculative PhP100 per

is perishable, or that the interests of all the parties to the action will be subserved by

share will be attained.

the sale thereof, the court may order such property to be sold at public auction in such
manner as it may direct, and the proceeds of such sale to be deposited in court to

On the issue of the net dividends accruing to COCOFED, the Court rules that the

abide the judgment in the action. (Emphasis supplied.) IaAEHD

dividends shall be placed in escrow either at the Land Bank of the Philippines or at the
Republic v. Sandiganbayan 24 teaches that sequestration is akin to preliminary
Development Bank of the Philippines in the name of respondent Republic and not
attachment or receivership, thus:
COCOFED.
As thus described, sequestration, freezing and provisional takeover are akin to the

provisional remedy of preliminary attachment, or receivership. . . . By attachment, a

sequestered assets, the proper court, where the case involving the sequestered asset

sheriff seizes property of a defendant in a civil suit so that it may stand as security for

is pending, may, nevertheless, issue a positive and definite order authorizing the sale

the satisfaction of any judgment that may be obtained, and not disposed of, or

of said assets. As we held in Republic v. Sandiganbayan:

dissipated, or lost intentionally or otherwise, pending the action. . . . By receivership,

property, real or personal, which is subject of litigation, is placed in the possession and

Our temporary restraining order lifting the Sandiganbayan restraining order did not, by

control of a receiver appointed by the Court, who shall conserve it pending final

any stretch of the imagination, authorize PCGG to sell the Falcon aircraft. A definite

determination of the title or right of possession

and positive order of a court is needed before the jet plane may be sold. The proper
procedure after the lifting of the restraining order was for PCGG to go to

over it. . . . All these remedies sequestration, freezing, provisional, takeover,

attachment and receivership are provisional, temporary, designed for particular
exigencies, attended by no character of permanency or finality, and always subject to

Sandiganbayan and ask for formal authority to sell the aircraft. 26 . . .

The ruling in Republic v. Sandiganbayan voiding the sale by PCGG of a sequestered

jet does not apply squarely to the incident at bar, because PCGG did not, in that case,

the control of the issuing court or agency. (Emphasis supplied.)

seek court approval before the sale. Moreover, PCGG was not able to provide any
Even if the conversion-cum-redemption partakes of an indirect sale, PCGG can be

justification for the seizure of the jet from the lessee. In the pending incident before the

allowed to approve the conversion in line with our ruling in Palm Avenue Realty

Court, it has long been settled that the CIIF SMC common shares were bought by

Development Corporation, 25 subject to the approval of the Court.

what have been declared as prima facie public funds. Thus, the sequestration is
justified. More importantly, respondent Republic, as contained in the Supplemental

Evidently, as long as the interests of all the parties will be subserved by the sale of the
sequestered properties, the Court may allow the properties to be sold. More so, the
Rules would allow the mere conversion of the shares of stock given the evident benefit

Comment filed by the OSG dated September 4, 2009, has adopted Resolution No.
2009-037-756 approving the conversion of the shares, and has prayed for the
approval by the Court of such conversion.

that all the parties would receive from such conversion that far outweighs any
perceived disadvantage. Thus, the Court is clearly empowered to allow the conversion

In sum, the conversion of the CIIF SMC Common Shares to Series 1 Preferred Shares

herein pressed by the PCGG. aIAcCH

should be approved in the best interests of everyone concerned including the

government and the Filipino people.

While the PCGG, as sequestrator, does not exercise acts of ownership over

Once the subject conversion is accomplished, the preferred shares shall remain in

The net dividend earnings and/or redemption proceeds from the Series 1 Preferred

custodia legis and their ownership shall be subject to final ownership determination

Shares shall be deposited in an escrow account with the Land Bank of the Philippines
or the Development Bank of the Philippines.

by the Court. In addition, the preferred shares shall be registered in the name of the
CIIF companies until the final adjudication of the issue as to the true and legal owners
of said shares. Unless and until the ownership issue shall have been resolved with
finality, said preferred shares shall remain under sequestration and PCGG
management. 27

WHEREFORE, the Court APPROVES the conversion of the 753,848,312 SMC

Common Shares registered in the name of CIIF companies to SMC SERIES 1

Respondent Republic, thru the PCGG, is hereby directed to cause the CIIF
companies, including their respective directors, officers, employees, agents, and all
other persons acting in their behalf, to perform such acts and execute such
documents as required to effectuate the conversion of the common shares into SMC
Series 1 Preferred Shares, within ten (10) days from receipt of this Resolution.

Once the conversion is accomplished, the SMC Common Shares previously

registered in the names of the CIIF companies shall be released from sequestration.

PREFERRED SHARES of 753,848,312, the converted shares to be registered in the

names of CIIF companies in accordance with the terms and conditions specified in the

SO ORDERED.Puno, C.J., Ynares-Santiago, Corona, Chico-Nazario, Nachura,

conversion offer set forth in SMC's Information Statement and appended as Annex "A"

Bersamin, Del

of COCOFED's Urgent Motion to Approve the Conversion of the CIIF SMC Common
Castillo and Abad, JJ., concur.Quisumbing and Carpio, JJ., are on official leave.
Shares into SMC Series 1 Preferred Shares. The preferred shares shall remain in
Carpio Morales, J., please see dissenting opinion. Leonardo-De Castro and Peralta,
custodia legis and their ownership shall be subject to the final ownership
JJ., took no part. Brion, J., joins the dissent of J. Conchita Carpio Morales.
determination of the Court. Until the ownership issue has been resolved, the preferred
shares in the name of the CIIF companies shall be placed under sequestration and
Separate Opinions CARPIO MORALES, J., dissenting:
PCGG management. CAHaST

Petitioner Philippine Coconut Producers Federation, Inc. (Cocofed) and its individual
co-petitioners filed an Urgent Motion to Approve the Conversion of the San Miguel

Corporation (SMC) Common Shares into SMC Series 1 Preferred Shares of July 24,

redeem all or part of the Series 1 Preferred Shares on the third anniversary from the

2009 (Motion).

Issue Date or on any Dividend Date thereafter at a redemption price equal to the Issue
Price of the Preferred Shares plus all cumulated and unpaid cash dividends".

Involved in the conversion into Series 1 Preferred Shares are 753,848,312 Class "A"
and "B" common shares of SMC registered in the name of the Coconut Industry

The majority opinion observes that the share prices of Class "A" and "B" common

Investment Fund (CIIF) Holding Companies representing around 24% of the total

shares of SMC have been declining for the past three years, and closed in the local

SMC voting shares.

bourse at P53.50 and P54 as of June 1, 2009 compared to their 2006 prices of P65
and P74.50, respectively. With the conversion, the issue price is pegged at P75.

A trustee is not allowed by law to dispose of or deal with the trust assets below the

DEScaT

actual market value

If at the time of redemption, however, the prevailing market price is higher than the
The subject block of shares is sufficient to elect four of the 15 members of the SMC
Board of Directors. There is always a premium or added intrinsic value whenever a
block of shares that is sufficient to elect a director is transacted. The owner of such

issue price, then the redemption price is below the actual market price. In such
instance and for apparent reasons, SMC could readily exercise its option. The PCGG
would then be disposing of the trust assets below the actual market value.

block of shares will not dispose them of at the same price per share. The conversion
value for the shares should include a professional valuation of the premium that

If the reverse situation occurs, SMC could forego its option on the third year and

should be part of the consideration and factored in the actual market price.

exercise it on a future dividend date. SMC's availment of its optional redemption and
purchase is thus risk-free.

Without considering the premium inherent in this block of shares, the subject block of
shares would be perpetually locked or impounded to a value much lower than the

A trustee and conservator, of whom the highest degree of diligence and rectitude is

actual market value. In effect, the PCGG would be downgrading the value of the trust

required, is not allowed by law to dispose of the assets held in trust below the actual

assets.

Moreover, one of the features of the conversion is an optional redemption and

purchase. The terms provide that "SMC has the option, but not the obligation, to

market value. The redemption price should be the issue price or the then prevailing

market price, whichever is higher, plus any unpaid cumulative dividends.

represented by the PCGG, filed a Supplemental Comment reiterating its prayer for the
approval of the present motion.

There is nothing urgent with the Urgent Motion

The majority opinion thus points out that the Republic, through the Office of the
Petitioners denominated their Motion as urgent, albeit the original draft Resolutionbasis of this Court's deliberative discussion, did not state the pressing need for the
approval of the conversion. And considering that as of April 11, 2008, the Republic

Solicitor General (OSG) and the PCGG, prays for the approval of the proposed
conversion although it questions the personality of the Cocofed as movant. The assent
of the parties, however, does not reduce the Court into a mere stamping pad. IHEDAT

already filed its Comment on the Petition, there is no basis for the Court to
immediately act on the motion to preserve the value of the SMC common shares or to

The majority opinion concedes that all incidents arising from the sequestration case

protect the interest of the rightful owners pendente lite.

are always subject to the control of the court. The power to control the proceedings
refers to the issuance of ancillary orders or writs to effectuate its judgment. 1

Since the case already reached this Court on its terminal phase, it is incredulous for
the parties to devise on the drawing board a scheme that will last beyond the next

It extends not only to the principal causes of action, i.e., the recovery of ill-gotten

three years when a final decision is forthcoming in the next few months. The rhetorical

wealth, but also to all incidents arising from, incidental to, or related to, such cases,

speculation over the business climate during the remaining period of the final leg of

such as the dispute over the sale of the shares, the propriety of the issuance of

the case is inconsequential compared to the assumption of greater risks from the

ancillary writs or provisional remedies relative thereto, and the sequestration thereof. 2

conversion of the shares. The fleeting calvary of momentary waiting outweighs the

Indeed, the court has ample power to make such interlocutory orders as may be

eternal condemnation of a shortchanged transaction.

necessary to ensure that its judgment would not be rendered ineffective. 3

After the filing of the present Urgent Motion and the circulation by the ponente of the

The principle is not a license, however, for the Court to issue every order the parties

original draft Resolution thereon, the undersigned in her Reflections observed that the

commonly deem fit. Recall that the remedies are intended to be preservative or

draft Resolution "effectively bars the PCGG from objecting to or even renegotiating the
terms and conditions of the conversion".

In the final Resolution, the ponente relates that respondent Republic, this time

As earlier stated, the subject block of shares is sufficient to elect four directors. The
majority opinion discusses that the only disadvantage of the conversion scheme is the
conservative in nature, so that in any event, the assets may be returned to the rightful

loss of the voting rights that common shareholders have. 7 It dismisses this loss by

owner as far as possible in the same condition as it was at the time of sequestration. 4

resorting to sophistry and instead vividly depicts a financial windfall.

In the present case, the rightful owner's business options would be tied with the terms
Once the conversion is accomplished, the Republic surrenders its final arsenal in
and conditions of the conversion.
combating the maneuverings to frustrate the recovery of ill-gotten wealth.
The majority opinion relies on Republic v. Sandiganbayan 5 on the Court's power to
The right to vote the sequestered shares, when proper under the circumstances, may
sanction a sale of a sequestered asset. There is no dispute that a proper court
only be exercised within the parameters and context of the stated purposes of
authority is a condition sine qua non to the sale of a sequestered property. The Court
sequestration or provisional takeover, i.e., to prevent the dispersion or undue disposal
in said case added, however, that the PCGG may perform such acts of strict
of the corporate assets. 8 CTSAaH
ownership only as may necessarily be required by or result from the exercise of its
vested power to vote on the sequestered shares of stock of a corporation; and

Republic v. COCOFED 9 further elucidates this essential right. The Court therein

secondly, such act is essential to the attainment of the PCGG's stated purpose for

explained that the PCGG generally cannot perform acts of strict ownership including

sequestration, i.e., to prevent the dissipation of the corporate assets. 6

the right to vote the sequestered shares and elect members of the board of directors.
The only conceivable exception is in a case of takeover of a business belonging to the

Far from complying with the strict and limited interpretation of the exercise of acts of
government or whose capital comes from public funds but which landed in private
ownership, the proposed conversion sells out the only recognized means by which the
hands. There are two clear "public character" exceptions: (a) where government
PCGG may exercise future acts of strict ownership (i.e., through the right to vote) and,
shares are taken over by private persons/entities who/which registered them in their
as will be discussed hereafter, bargains away the safeguard against the dissipation of
own names, and (b) where the capitalization or shares that were acquired with public
corporate assets.
funds but somehow landed in private hands. The prima facie beneficial
The right to vote the sequestered shares to avoid dissipation of assets

preference in the liquidation of assets, there is nothing left to prevent the SMC from
diluting its corporate assets, diversifying into risky ventures, 10 and consequently
depreciating the market value of the shares. After all, SMC could not be forced to
redeem the shares at the issue price of P75 when the market value is plummeting. Of
course, there is that preference in the liquidation of assets that it can go after. By that
owner should be given the privilege of enjoying the rights flowing from the prima facie

time, the percentage in the total shareholdings may remain the same, but its

fact of ownership. When the sequestered shares are alleged to have been acquired

equivalence in pecuniary terms, however, would have been watered down or

with ill-gotten wealth, then the "two-tiered test" is applied, to wit: (a) there is prima

devaluated.

facie evidence showing that the said shares are ill-gotten and thus belong to the state,
and (b) there is immediate danger of dissipation thus necessitating their continued
sequestration and voting by the PCGG while the main issue pends.

It bears noting that what sequestration is guarding against is more on the dissipation
of the corporate assets than the decrease of the share value. The law cannot possibly
control the infinite market forces affecting the value of the stocks, but it can see to it

It was in that immediately-cited case that the Court ruled that for purposes of

that the corporate assets that these stocks represent remain intact.

determining the right to vote the shares pendente lite, the coconut levy funds are not
only affected with public interest; they are, in fact, prima facie public funds. The crucial
question left, for purposes of exercising the right to vote, is whether there is immediate

I, therefore, vote to DENY the Urgent Motion. TcCEDS

||| (Philippine Coconut Producers Federation, Inc. v. Republic, G.R. Nos. 177857-58
(Resolution), [September 17, 2009], 616 PHIL 94-141)

danger of dissipation.

In the present case, in the event of an immediate danger of dissipation after the
proposed conversion, the Republic can no longer move to vote the sequestered
shares and prevent the impending peril. In case the conversion pushes through, the

FIRST DIVISION

[G.R. No. 182729. September 29, 2010.]

hands of the Republic are tied and helpless in the face of a lurking dissipation.
KUKAN INTERNATIONAL CORPORATION, petitioner, vs. HON. AMOR REYES, in
While the promise of financial gains is alluring with the fixed dividend rate of 8% and

her capacity as Presiding Judge of the Regional Trial Court of Manila, Branch 21, and

ROMEO M. MORALES, doing business under the name and style "RM Morales

installation of signages in a building being constructed in Makati City. Morales

Trophies and Plaques," respondents.

tendered the winning bid and was awarded the PhP5 million contract. Some of the
items in the project award were later excluded resulting in the corresponding reduction

VELASCO, JR., J p:

DECISION

of the contract price to PhP3,388,502. Despite his compliance with his contractual
undertakings, Morales was only paid the amount of PhP1,976,371.07, leaving a
balance of PhP1,412,130.93, which Kukan, Inc. refused to pay despite demands.

The Case

This Petition for Review on Certiorari under Rule 45 seeks to nullify and reverse the
January 23, 2008 Decision 1 and the April 16, 2008 Resolution 2 rendered by the

Shortchanged, Morales filed a Complaint 6 with the RTC against Kukan, Inc. for a sum
of money, the case docketed as Civil Case No. 99-93173 and eventually raffled to
Branch 17 of the court.

Court of Appeals (CA) in CA-G.R. SP No. 100152. DETcAH

Following the joinder of issues after Kukan, Inc. filed an answer with counterclaim, trial
The assailed CA decision affirmed the March 12, 2007 3 and June 7, 2007 4 Orders of
the Regional Trial Court (RTC) of Manila, Branch 21, in Civil Case No. 99- 93173,
entitled Romeo M. Morales, doing business under the name and style RM Morales
Trophies and Plaques v. Kukan, Inc. In the said orders, the RTC disregarded the

ensued. However, starting November 2000, Kukan, Inc. no longer appeared and
participated in the proceedings before the trial court, prompting the RTC to declare
Kukan, Inc. in default and paving the way for Morales to present his evidence ex
parte.

separate corporate identities of Kukan, Inc. and Kukan International Corporation and
declared them to be one and the same entity. Accordingly, the RTC held Kukan

On November 28, 2002, the RTC rendered a Decision finding for Morales and against

International Corporation, albeit not impleaded in the underlying complaint of Romeo

Kukan, Inc., disposing as follows:

M. Morales, liable for the judgment award decreed in a Decision dated November 28,
2002 5 in favor of Morales and against Kukan, Inc.

The Facts

WHEREFORE, consistent with Section 5, Rule 18 of the 1997 Rules of Civil

Procedure, and by preponderance of evidence, judgment is hereby rendered in favor
of the plaintiff, ordering Kukan, Inc.:

1. to pay the sum of ONE MILLION TWO HUNDRED ONE THOUSAND SEVEN
Sometime in March 1998, Kukan, Inc. conducted a bidding for the supply and

HUNDRED TWENTY FOUR PESOS (P1,201,724.00) with legal interest at 12% per

with the properties under the name or in the possession of KIC, it being alleged that

annum from February 17, 1999 until full payment;

both corporations are but one and the same entity. KIC opposed Morales'

2. to pay the sum of FIFTY THOUSAND PESOS (P50,000.00) as moral damages;

motion. By Order of May 29, 2003 9 as reiterated in a subsequent order, the court
3. to pay the sum of TWENTY THOUSAND PESOS (P20,000.00) as reasonable
attorney's fees; and

4. to pay the sum of SEVEN THOUSAND NINE HUNDRED SIXTY PESOS and SIX
CENTAVOS (P7,960.06) as litigation expenses.

denied the omnibus motion.

In a bid to establish the link between KIC and Kukan, Inc., and thus determine the true
relationship between the two, Morales filed a Motion for Examination of Judgment
Debtors dated May 4, 2005. In this motion Morales sought that subpoena be issued

For lack of factual foundation, the counterclaim is DISMISSED.

IT IS SO ORDERED. 7

against the primary stockholders of Kukan, Inc., among them Michael Chan, a.k.a.
Chan Kai Kit. This too was denied by the trial court in an Order dated May 24, 2005.
10

After the above decision became final and executory, Morales moved for and secured
a writ of execution 8 against Kukan, Inc. The sheriff then levied upon various personal

Morales then sought the inhibition of the presiding judge, Eduardo B. Peralta, Jr., who

properties found at what was supposed to be Kukan, Inc.'s office at Unit 2205, 88

eventually granted the motion. The case was re-raffled to Branch 21, presided by

Corporate Center, Salcedo Village, Makati City. Alleging that it owned the properties

public respondent Judge Amor Reyes. AEITDH

thus levied and that it was a different corporation from Kukan, Inc., Kukan International
Corporation (KIC) filed an Affidavit of Third-Party Claim. Notably, KIC was incorporated
in August 2000, or shortly after Kukan, Inc. had stopped participating in Civil Case No.
99-93173.

In reaction to the third party claim, Morales interposed an Omnibus Motion dated April
30, 2003. In it, Morales prayed, applying the principle of piercing the veil of corporate
fiction, that an order be issued for the satisfaction of the judgment debt of Kukan, Inc.

Before the Manila RTC, Branch 21, Morales filed a Motion to Pierce the Veil of
Corporate Fiction to declare KIC as having no existence separate from Kukan, Inc.
This time around, the RTC, by Order dated March 12, 2007, granted the motion, the
dispositive portion of which reads:

WHEREFORE, premises considered, the motion is hereby GRANTED. The Court

hereby declares as follows:

1. defendant Kukan, Inc. and newly created Kukan International Corp. as one and the

Hence, the instant petition for review, with the following issues KIC raises for the

same corporation;

Court's consideration:

2. the levy made on the properties of Kukan International Corp. is hereby valid;

1. There is no legal basis for the [CA] to resolve and declare that petitioner's

3. Kukan International Corp. and Michael Chan are jointly and severally liable to pay
the amount awarded to plaintiff pursuant to the decision of November [28], 2002 which
has long been final and executory.

Constitutional Right to Due Process was not violated by the public respondent in
rendering the Orders dated March 12, 2007 and June 7, 2007 and in declaring
petitioner to be liable for the judgment obligations of the corporation "Kukan, Inc." to
private respondent as petitioner is a stranger to the case and was never made a

SO ORDERED.

party in the case before the trial court nor was it ever served a summons and a copy
of the complaint.

From the above order, KIC moved but was denied reconsideration in another Order
dated June 7, 2007.

2. There is no legal basis for the [CA] to resolve and declare that the Orders dated
March 12, 2007 and June 7, 2007 rendered by public respondent declaring the

KIC went to the CA on a petition for certiorari to nullify the aforesaid March 12 and

petitioner liable to the judgment obligations of the corporation "Kukan, Inc." to private

June 7, 2007 RTC Orders.

respondent are valid as said orders of the public respondent modify and/or amend the
trial court's final and executory decision rendered on November 28, 2002.

On January 23, 2008, the CA rendered the assailed decision, the dispositive portion of
which states:

3. There is no legal basis for the [CA] to resolve and declare that the Orders dated
March 12, 2007 and June 7, 2007 rendered by public respondent declaring the

WHEREFORE, premises considered, the petition is hereby DENIED and the assailed

petitioner [KIC] and the corporation "Kukan, Inc." as one and the same, and, therefore,

Orders dated March 12, 2007 and June 7, 2007 of the court a quo are both

the Veil of Corporate Fiction between them be pierced as the procedure undertaken

AFFIRMED. No costs.

by public respondent which the [CA] upheld is not sanctioned by the Rules of Court
and/or established jurisprudence enunciated by this Honorable Supreme Court. 12

SO ORDERED. 11The CA later denied KIC's motion for reconsideration in the

assailed resolution.

In gist, the issues to be resolved boil down to the question of, first, whether the trial
court can, after the judgment against Kukan, Inc. has attained finality, execute it

against the property of KIC; second, whether the trial court acquired jurisdiction over

branch has a general supervisory control over its processes in the execution of its

KIC; and third, whether the trial and appellate courts correctly applied, under the

judgment with a right to determine every question of fact and law which may be

premises, the principle of piercing the veil of corporate fiction.

involved in the execution."

The Ruling of the Court

The court's supervisory control does not, however, extend as to authorize the
alteration or amendment of a final and executory decision, save for certain recognized

The petition is meritorious.

First Issue: Against Whom Can a Final and Executory Judgment Be Executed

exceptions, among which is the correction of clerical errors. Else, the court violates the
principle of finality of judgment and its immutability, concepts which the Court, in Tan v.
Timbal, 15 defined:

The preliminary question that must be answered is whether or not the trial court can,
after adjudging Kukan, Inc. liable for a sum of money in a final and executory
judgment, execute such judgment debt against the property of KIC.

As we held in Industrial Management International Development Corporation vs.

NLRC:

It is an elementary principle of procedure that the resolution of the court in a given

The poser must be answered in the negative.

issue as embodied in the dispositive part of a decision or order is the controlling factor
as to settlement of rights of the parties. Once a decision or order becomes final and

In Carpio v. Doroja, 13 the Court ruled that the deciding court has supervisory control

executory, it is removed from the power or jurisdiction of the court which rendered it to

over the execution of its judgment:

further alter or amend it. It thereby becomes immutable and unalterable and any
amendment or alteration which substantially affects a final and executory judgment is

A case in which an execution has been issued is regarded as still pending so that all

null and void for lack of jurisdiction, including the entire proceedings held for that

proceedings on the execution are proceedings in the suit. There is no question that

purpose. An order of execution which varies the tenor of the judgment or exceeds the

the court which rendered the judgment has a general supervisory control over its

terms thereof is a nullity. (Emphasis supplied.)

process of execution, and this power carries with it the right to determine every
question of fact and law which may be involved in the execution. EaISTD

Republic v. Tango 16 expounded on the same principle and its exceptions:

We reiterated the above holding in Javier v. Court of Appeals 14 in this wise: "The said

Deeply ingrained in our jurisprudence is the principle that a decision that has acquired

finality becomes immutable and unalterable. As such, it may no longer be modified in

1. to pay the sum of ONE MILLION TWO HUNDRED ONE THOUSAND SEVEN

any respect even if the modification is meant to correct erroneous conclusions of fact

HUNDRED TWENTY FOUR PESOS (P1,201,724.00) with legal interest at 12% per

or law and whether it will be made by the court that rendered it or by the highest court

annum from February 17, 1999 until full payment;

of the land. . . .
2. to pay the sum of FIFTY THOUSAND PESOS (P50,000.00) as moral damages;
The doctrine of finality of judgment is grounded on the fundamental principle of public
policy and sound practice that, at the risk of occasional error, the judgment of courts
and the award of quasi-judicial agencies must become final on some

3. to pay the sum of TWENTY THOUSAND PESOS (P20,000.00) as reasonable

attorney's fees; and

4. to pay the sum of SEVEN THOUSAND NINE HUNDRED SIXTY PESOS and SIX
definite date fixed by law. The only exceptions to the general rule are the correction of

CENTAVOS (P7,960.06) as litigation expenses.

clerical errors, the so-called nunc pro tunc entries which cause no prejudice to any
party, void judgments, and whenever circumstances transpire after the finality of the
decision which render its execution unjust and inequitable. None of the exceptions
obtains here to merit the review sought. (Emphasis added.)

xxx xxx xxx (Emphasis supplied.)

As may be noted, the above decision, in unequivocal terms, directed Kukan, Inc. to
pay the aforementioned awards to Morales. Thus, making KIC, thru the medium of a

So, did the RTC, in breach of the doctrine of immutability and inalterability of

writ of execution, answerable for the above judgment liability is a clear case of altering

judgment, order the execution of its final decision in a manner as would amount to its

a decision, an instance of granting relief not contemplated in the decision sought to be

prohibited alteration or modification?

executed. And the change does not fall under any of the recognized exceptions to the
doctrine of finality and immutability of judgment. It is a settled rule that a writ of

We repair to the dispositive portion of the final and executory RTC decision.

execution must conform to the fallo of the judgment; as an inevitable corollary, a writ

Pertinently, it provides:

beyond the terms of the judgment is a nullity. 17

WHEREFORE, consistent with Section 5, Rule 18 of the 1997 Rules of Civil

Procedure, and by preponderance of evidence, judgment is hereby rendered in favor
of the plaintiff, ordering Kukan, Inc.:

Thus, on this ground alone, the instant petition can already be granted. Nonetheless,
an examination of the other issues raised by KIC would be proper. HSAcaE

Second Issue: Propriety of the RTC Assuming Jurisdiction over KIC

the service of summons upon them or through their voluntary appearance in court and
their submission to its authority. (Emphasis supplied.)

The next issue turns on the validity of the execution the trial court authorized against
KIC and its property, given that it was neither made a party nor impleaded in Civil

In the fairly recent Palma v. Galvez, 24 the Court reiterated its holding in Orion

Case No. 99-93173, let alone served with summons. In other words, did the trial court

Security Corporation, stating: "[I]n civil cases, the trial court acquires jurisdiction over

acquire jurisdiction over KIC?

the person of the defendant either by the service of summons or by the latter's
voluntary appearance and submission to the authority of the former."

In the assailed decision, the appellate court deemed KIC to have voluntarily submitted
itself to the jurisdiction of the trial court owing to its filing of four (4) pleadings adverted

The court's jurisdiction over a party-defendant resulting from his voluntary submission

to earlier, namely: (a) the Affidavit of Third-Party Claim; 18 (b) the Comment and

to its authority is provided under Sec. 20, Rule 14 of the Rules, which states:

Opposition to Plaintiff's Omnibus Motion; 19 (c) the Motion for Reconsideration of the

Section 20. Voluntary appearance. The defendant's voluntary appearance in the

RTC Order dated March 12, 2007; 20 and (d) the Motion for Leave to Admit Reply. 21

actions shall be equivalent to service of summons. The inclusion in a motion to

The CA, citing Section 20, Rule 14 of the Rules of Court, stated that "the procedural

dismiss of other grounds aside from lack of jurisdiction over the person of the

rule on service of summons can be waived by voluntary submission to the court's

defendant shall not be deemed a voluntary appearance.

jurisdiction through any form of appearance by the party or its counsel." 22

To be sure, the CA's ruling that any form of appearance by the party or its counsel is
We cannot give imprimatur to the appellate court's appreciation of the thrust of Sec.

deemed as voluntary appearance finds support in the kindred Republic v. Ker & Co.,

20, Rule 14 of the Rules in concluding that the trial court acquired jurisdiction over

Ltd. 25 and De Midgely v. Ferandos. 26

KIC.

Orion Security Corporation v. Kalfam Enterprises, Inc. 23 explains how courts acquire
jurisdiction over the parties in a civil case:

Republic and De Midgely, however, have already been modified if not altogether
superseded 27 by La Naval Drug Corporation v. Court of Appeals, 28 wherein the
Court essentially ruled and elucidated on the current view in our jurisdiction, to wit: "[A]

Courts acquire jurisdiction over the plaintiffs upon the filing of the complaint. On the
other hand, jurisdiction over the defendants in a civil case is acquired either through

special appearance before the court challenging its jurisdiction over the person
through a motion to dismiss even if the movant invokes other grounds is not

tantamount to estoppel or a waiver by the movant of his objection to jurisdiction over

relief consistent with that position.

his person; and such is not constitutive of a voluntary submission to the jurisdiction of
the court." 29

In the instant case, KIC was not made a party-defendant in Civil Case No. 99- 93173.
Even if it is conceded that it raised affirmative defenses through its aforementioned
pleadings, KIC never abandoned its challenge, however implicit, to the RTC's
jurisdiction over its person. The challenge was subsumed in KIC's primary assertion
that it was not the same entity as Kukan, Inc. Pertinently, in its Comment and
Opposition to Plaintiff's Omnibus Motion dated May 20, 2003, KIC entered its "special
but not voluntary appearance" alleging therein that it was a different entity and has a
separate legal personality from Kukan, Inc. And KIC would consistently reiterate this

Third Issue: Piercing the Veil of Corporate Fiction

The third and main issue in this case is whether or not the trial and appellate courts
correctly applied the principle of piercing the veil of corporate entity called also as
disregarding the fiction of a separate juridical personality of a corporation to support
a conclusion that Kukan, Inc. and KIC are but one and the same corporation with
respect to the contract award referred to at the outset. This principle finds its context
on the postulate that a corporation is an artificial being invested with a personality
separate and distinct from those of the stockholders and from other corporations to
which it may be connected or related. 31

assertion in all its pleadings, thus effectively resisting all along the RTC's jurisdiction of

In Pantranco Employees Association (PEA-PTGWO) v. National Labor Relations

its person. It cannot be overemphasized that KIC could not file before the RTC a

Commission, 32 the Court revisited the subject principle of piercing the veil of

motion to dismiss and its attachments in Civil Case No. 99-93173, precisely because

corporate fiction and wrote:

KIC was neither impleaded nor served with summons. Consequently, KIC could only
assert and claim through its affidavits, comments, and motions filed by special
appearance before the RTC that it is separate and distinct from Kukan, Inc.
Under the doctrine of "piercing the veil of corporate fiction," the court looks at the
Following La Naval Drug Corporation, 30 KIC cannot be deemed to have waived its

corporation as a mere collection of individuals or an aggregation of persons

objection to the court's lack of jurisdiction over its person. It would defy logic to say

undertaking business as a group, disregarding the separate juridical personality of the

that KIC unequivocally submitted itself to the jurisdiction of the RTC when it strongly

corporation unifying the group. Another formulation of this doctrine is that when two

asserted that it and Kukan, Inc. are different entities. In the scheme of things

business enterprises are owned, conducted and controlled by the same parties, both

obtaining, KIC had no other option but to insist on its separate identity and plead for

law and equity will, when necessary to protect the rights of third parties, disregard the

legal fiction that two corporations are distinct entities and treat them as identical or as

violated its right to due process when, in the execution of its November 28, 2002

one and the same.

Decision, the court authorized the issuance of the writ against KIC for Kukan, Inc.'s
Whether the separate personality of the corporation should be pierced hinges on
obtaining facts appropriately pleaded or proved. However, any piercing of the

judgment debt, albeit KIC has never been a party to the underlying suit. As a

corporate veil has to be done with caution, albeit the Court will not hesitate to
disregard the corporate veil when it is misused or when necessary in the interest of

counterpoint, Morales argues that KIC's specific concern on due process and on the

justice. . . . (Emphasis supplied.)

validity of the writ to execute the RTC's November 28, 2002 Decision would be
The same principle was the subject and discussed in Rivera v. United Laboratories,

mooted

Inc.:
if it were established that KIC and Kukan, Inc. are indeed one and the same
While a corporation may exist for any lawful purpose, the law will regard it as an

corporation.

association of persons or, in case of two corporations, merge them into one, when its

HDCAaS

corporate legal entity is used as a cloak for fraud or illegality. This is the doctrine of
piercing the veil of corporate fiction. The doctrine applies only when such corporate

Morales' contention is untenable.

fiction is used to defeat public convenience, justify wrong, protect fraud, or defend
crime, or when it is made as a shield to confuse the legitimate issues, or where a

The principle of piercing the veil of corporate fiction, and the resulting treatment of two

corporation is the mere alter ego or business conduit of a person, or where the

related corporations as one and the same juridical person with respect to a given

corporation is so organized and controlled and its affairs are so conducted as to make

transaction, is basically applied only to determine established liability; 34 it is not

it merely an instrumentality, agency, conduit or adjunct of another corporation.

To disregard the separate juridical personality of a corporation, the wrongdoing must

available to confer on the court a jurisdiction it has not acquired, in the first place, over

be established clearly and convincingly. It cannot be presumed. 33 (Emphasis

a party not impleaded in a case. Elsewise put, a corporation not impleaded in a suit

supplied.)

cannot be subject to the court's process of piercing the veil of its corporate fiction. In
that situation, the court has not acquired jurisdiction over the corporation and, hence,

Now, as before the appellate court, petitioner KIC maintains that the RTC

any proceedings taken against that corporation and its property would infringe on its

over it. It was dragged to the case after it reacted to the improper execution of its

right to due process. Aguedo Agbayani, a recognized authority on Commercial Law,

properties and veritably hauled to court, not thru the usual process of service of

stated as much:

summons, but by mere motion of a party with whom it has no privity of contract and
after the decision in the main case had already become final and executory. As to the

23. Piercing the veil of corporate entity applies to determination of liability not of
jurisdiction. . . .

propriety of a plea for the application of the principle by mere motion, the following
excerpts are instructive:

This is so because the doctrine of piercing the veil of corporate fiction comes to play
only during the trial of the case after the court has already acquired jurisdiction over
the corporation. Hence, before this doctrine can be applied, based on the evidence
presented, it is imperative that the court must first have jurisdiction over the
corporation. 35 . . . (Emphasis supplied.)

Generally, a motion is appropriate only in the absence of remedies by regular

pleadings, and is not available to settle important questions of law, or to dispose of the
merits of the case. A motion is usually a proceeding incidental to an action, but it may
be a wholly distinct or independent proceeding. A motion in this sense is not within this
discussion even though the relief demanded is denominated an "order."

The implication of the above comment is twofold: (1) the court must first acquire
A motion generally relates to procedure and is often resorted to in order to correct
jurisdiction over the corporation or corporations involved before its or their separate

errors which have crept in along the line of the principal action's progress.

personalities are disregarded; and (2) the doctrine of piercing the veil of corporate
entity can only be raised during a full-blown trial over a cause of action duly
commenced involving parties duly brought under the authority of the court by way of
service of summons or what passes as such service.

Generally, where there is a procedural defect in a proceeding and no method under

statute or rule of court by which it may be called to the attention of the court, a motion
is an appropriate remedy. In many jurisdictions, the motion has replaced the common-

The issue of jurisdiction or the lack of it over KIC has already been discussed. Anent
the matter of the time and manner of raising the principle in question, it is undisputed

law pleas testing the sufficiency of the pleadings, and various common-law writs, such
as writ of error coram nobis and audita querela. In some cases, a motion may be one

that no full-blown trial involving KIC was had when the RTC disregarded the corporate

of several remedies available. For example, in some jurisdictions, a motion to vacate

veil of KIC. The reason for this actuality is simple and undisputed: KIC was not

an order is a remedy alternative to an appeal therefrom.

impleaded in Civil Case No. 99-93173 and that the RTC did not acquire jurisdiction
Statutes governing motions are given a liberal construction. 36 (Emphasis supplied.)

The bottom line issue of whether Morales can proceed against KIC for the judgment

As a general rule, courts should be wary of lifting the corporate veil between

debt of Kukan, Inc. assuming hypothetically that he can, applying the piercing the

corporations, however related. Philippine National Bank v. Andrada Electric

corporate veil principle resolves itself into the question of whether a mere motion is

Engineering Company 37 explains why:

the appropriate vehicle for such purpose.

A corporation is an artificial being created by operation of law. . . . It has a personality
Verily, Morales espouses the application of the principle of piercing the corporate veil
to hold KIC liable on theory that Kukan, Inc. was out to defraud him through the use of

separate and distinct from the persons composing it, as well as from any other legal
entity to which it may be related. This is basic.

the separate and distinct personality of another corporation, KIC. In net effect,

Equally well-settled is the principle that the corporate mask may be removed or the

Morales' adverted motion to pierce the veil of corporate fiction dated January 3, 2007

corporate veil pierced when the corporation is just an alter ego of a person or of

stated a new cause of action, i.e., for the liability of judgment debtor Kukan, Inc. to be

another corporation. For reasons of public policy and in the interest of justice,

borne by KIC on the alleged identity of the two corporations. This new cause of action
should be properly ventilated in another complaint and subsequent trial where the
doctrine of piercing the corporate veil can, if appropriate, be applied, based on the

the corporate veil will justifiably be impaled only when it becomes a shield for fraud,

evidence adduced. Establishing the claim of Morales and the corresponding liability of

illegality or inequity committed against third persons.

KIC for Kukan, Inc.'s indebtedness could hardly be the subject, under the premises, of

Hence, any application of the doctrine of piercing the corporate veil should be done

a mere motion interposed after the principal action against Kukan, Inc. alone had

with caution. A court should be mindful of the milieu where it is to be applied. It must

peremptorily been terminated. After all, a complaint is one where the plaintiff alleges

be certain that the corporate fiction was misused to such an extent that injustice,

causes of action. TaEIcS

fraud, or crime was committed against another, in disregard of its rights. The
wrongdoing must be clearly and convincingly established; it cannot be presumed.

In any event, the principle of piercing the veil of corporate fiction finds no application to

Otherwise, an injustice that was never unintended may result from an erroneous

the instant case.

application.

This Court has pierced the corporate veil to ward off a judgment credit, to avoid
inclusion of corporate assets as part of the estate of the decedent, to escape liability

arising from a debt, or to perpetuate fraud and/or confuse legitimate issues either to

In the instant case, however, the second and third factors are conspicuously absent.

promote or to shield unfair objectives or to cover up an otherwise blatant violation of

There is, therefore, no compelling justification for disregarding the fiction of corporate

the prohibition against forum-shopping. Only in these and similar instances may the
veil be pierced and disregarded. (Emphasis supplied.)

entity separating Kukan, Inc. from KIC. In applying the principle, both the RTC and the
CA miserably failed to identify the presence of the abovementioned factors. Consider:

In fine, to justify the piercing of the veil of corporate fiction, it must be shown by clear
and convincing proof that the separate and distinct personality of the corporation was

The RTC disregarded the separate corporate personalities of Kukan, Inc. and KIC

purposefully employed to evade a legitimate and binding commitment and perpetuate

based on the following premises and arguments:

a fraud or like wrongdoings. To be sure, the Court has, on numerous occasions, 38

applied the principle where a corporation is dissolved and its assets are transferred to

While it is true that a corporation has a separate and distinct personality from its
stockholder, director and officers, the law expressly provides for an exception. When

another to avoid a financial liability of the first corporation with the result that the
second corporation should be considered a continuation and successor of the first
entity.

Michael Chan, the Managing Director of defendant Kukan, Inc. (majority stockholder
of the newly formed corporation [KIC]) confirmed the award to plaintiff to supply and
install interior signages in the Enterprise Center he (Michael Chan, Managing Director
of defendant Kukan, Inc.) knew that there was no sufficient corporate funds to pay its

In those instances when the Court pierced the veil of corporate fiction of two
corporations, there was a confluence of the following factors:

1. A first corporation is dissolved;

obligation/account, thus implying bad faith on his part and fraud in contracting the
obligation. Michael Chan neither returned the interior signages nor tendered payment
to the plaintiff. This circumstance may warrant the piercing of the veil of corporation
fiction. Having been guilty of bad faith in the management of corporate matters the

2. The assets of the first corporation is transferred to a second corporation to avoid a

financial liability of the first corporation; and

3. Both corporations are owned and controlled by the same persons such that the

corporate trustee, director or officer may be held personally liable. . . .

Since fraud is a state of mind, it need not be proved by direct evidence but may be
inferred from the circumstances of the case. . . . [A]nd the circumstances are: the
signature of Michael Chan, Managing Director of Kukan, Inc. appearing in the

second corporation should be considered as a continuation and successor of the first

corporation.

confirmation of the award sent to the plaintiff; signature of Chan Kai Kit, a British
National appearing in the Articles of Incorporation and signature of Michael Chan also

a British National appearing in the Articles of Incorporation [of] Kukan International

obligation . . . worth more than three million pesos although it had only Php5,000.00

Corp. give the impression that they are one and the same person, that Michael Chan

paid-up capital; [KIC] was incorporated shortly before Kukan, Inc. suddenly ceased to

and Chan Kai Kit are both majority stockholders of Kukan International Corp. and

appear and participate in the trial; [KIC's] purpose is related and somewhat akin to that

Kukan, Inc. holding 40% of the stocks; that Kukan International Corp. is practically

of Kukan, Inc.; and in [KIC] Michael Chan, a.k.a. Chan Kai Kit, holds forty percent of

doing the same kind of business as that of Kukan, Inc. 39 (Emphasis supplied.)

the outstanding stocks, while he formerly held the same amount of stocks in Kukan,
Inc. These would lead to the inescapable conclusion that Kukan, Inc. committed

As is apparent from its disquisition, the RTC brushed aside the separate corporate

fraudulent representation by awarding to the private respondent the contract with full

existence of Kukan, Inc. and KIC on the main argument that Michael Chan owns 40%

knowledge that it was not in a position to comply with the obligation it had assumed

of the common shares of both corporations, obviously oblivious that overlapping stock

because of inadequate paid-up capital. It bears stressing that shareholders should in

ownership is a common business phenomenon. It must be remembered, however,

good faith put at the risk of the business, unencumbered capital reasonably adequate

that KIC's properties were the ones seized upon levy on execution and not that of

for its prospective liabilities. The capital should not be illusory or trifling compared with

Kukan, Inc. or of Michael Chan for that matter. Mere ownership by a single

the business to be done and the risk of loss. HIETAc

stockholder or by another corporation of a substantial block of shares of a corporation

Further, it is clear that [KIC] is a continuation and successor of Kukan, Inc. Michael

does not, standing alone, provide sufficient justification for disregarding the separate

Chan, a.k.a. Chan Kai Kit has the largest block of shares in both business enterprises.

corporate personality. 40 For this ground to hold sway in this case, there must be

The emergence of the former was cleverly timed with the hasty withdrawal of the latter

proof that Chan had control or complete dominion of Kukan and KIC's finances,

during the trial to avoid the financial liability that was eventually suffered by the latter.

policies, and business practices; he used such control to commit fraud; and the control

The two companies have a related business purpose. Considering these

was the proximate cause of the financial loss complained of by Morales. The absence
of any of the elements prevents the piercing of the corporate veil. 41 And indeed, the

circumstances, the obvious conclusion is that the creation of Kukan International

Corporation served as a device to evade the obligation incurred by Kukan, Inc. and
yet profit from the goodwill attained by the name "Kukan" by continuing to engage in

records do not show the presence of these elements.

On the other hand, the CA held:

the same line of business with the same list of clients. 42 (Emphasis supplied.)

Evidently, the CA found the meager paid-up capitalization of Kukan, Inc. and the
similarity of the business activities in which both corporations are engaged as a

In the present case, the facts disclose that Kukan, Inc. entered into a contractual

jumping board to its conclusion that the creation of KIC "served as a device to evade

the obligation incurred by Kukan, Inc." The appellate court, however, left a gaping hole

cannot be equated to the viability of a business concern, for the best test is the

by failing to demonstrate that Kukan, Inc. and its stockholders defrauded Morales. In

working capital which consists of the liquid assets of a given business relating to the

fine, there is no showing that the incorporation, and the separate and distinct

nature of the business concern.

personality, of KIC was used to defeat Morales' right to recover from Kukan, Inc.
Judging from the records, no serious attempt was made to levy on the properties of
Kukan, Inc. Morales could not, thus, validly argue that Kukan, Inc. tried to avoid
liability or had no property against which to proceed.

Morales further contends that Kukan, Inc.'s closure is evidenced by its failure to file its
2001 General Information Sheet (GIS) with the Securities and Exchange Commission.
However, such fact does not necessarily mean that Kukan, Inc. had altogether ceased
operations, as Morales would have this Court believe, for it is stated on the face of the
GIS that it is only upon a failure to file the corporate GIS for five (5) consecutive years
that non-operation shall be presumed.

The fact that Kukan, Inc. entered into a PhP3.3 million contract when it only had a
paid-up capital of PhP5,000 is not an indication of the intent on the part of its

Neither should the level of paid-up capital of Kukan, Inc. upon its incorporation be
viewed as a badge of fraud, for it is in compliance with Sec. 13 of the Corporation
Code, 43 which only requires a minimum paid-up capital of PhP5,000.

The suggestion that KIC is but a continuation and successor of Kukan, Inc., owned
and controlled as they are by the same stockholders, stands without factual basis. It is
true that Michael Chan, a.k.a. Chan Kai Kit, owns 40% of the outstanding capital stock
of both corporations. But such circumstance, standing alone, is insufficient to establish
identity. There must be at least a substantial identity of stockholders for both
corporations in order to consider this factor to be constitutive of corporate identity.

It would not avail Morales any to rely 44 on General Credit Corporation v. Alsons
Development and Investment Corporation. 45 General Credit Corporation is factually
not on all fours with the instant case. There, the common stockholders of the
corporations represented 90% of the outstanding capital stock of the companies,

management to defraud creditors. Paid-up capital is merely seed money to start a

corporation or a business entity. As in this case, it merely represented the
capitalization upon incorporation in 1997 of Kukan, Inc. Paid-up capitalization of
PhP5,000 is not and should not be taken as a reflection of the firm's capacity to meet
its recurrent and long-term obligations. It must be borne in mind that the equity portion

unlike here where Michael Chan merely represents 40% of the outstanding capital
stock of both KIC and Kukan, Inc., not even a majority of it. In that case, moreover,
evidence was adduced to support the finding that the funds of the second corporation
came from the first. Finally, there was proof in General Credit Corporation of complete
control, such that one corporation was a mere dummy or alter ego of the other, which

is absent in the instant case.

Kukan International Corporation. The RTC of Manila, Branch 21 is hereby directed to

execute the RTC Decision dated November 28, 2002 against Kukan, Inc. with

Evidently, the aforementioned case relied upon by Morales cannot justify the

reasonable dispatch.

application of the principle of piercing the veil of corporate fiction to the instant case.
As shown by the records, the name Michael Chan, the similarity of business activities

No costs.SO ORDERED.Corona, C.J., Carpio, * Leonardo-de Castro and Perez, JJ.,

engaged in, and incidentally the word "Kukan" appearing in the corporate names

concur.

provide the nexus between Kukan, Inc. and KIC. As illustrated, these circumstances

||| (Kukan International Corporation v. Reyes, G.R. No. 182729, [September 29, 2010],
646 PHIL 210-243)

are insufficient to establish the identity of KIC as the alter ego or successor of Kukan,
Inc.
EN BANC
It bears reiterating that piercing the veil of corporate fiction is frowned upon.
Accordingly, those who seek to pierce the veil must clearly establish that the separate

[G.R. No. L-19891. July 31, 1964.]

and distinct personalities of the corporations are set up to justify a wrong, protect
J.R.S. BUSINESS CORPORATION, J. R. DA SILVA and A. J. BELTRAN, petitioners,
fraud, or perpetrate a deception. In the concrete and on the assumption that the RTC
vs. IMPERIAL INSURANCE, INC., MACARIO M. OFILADA, Sheriff of Manila and Hon.
has validly acquired jurisdiction over the party concerned, Morales ought to have
AGUSTIN MONTESA, Judge of the Court of First Instance of Manila, respondents.
proved by convincing evidence that Kukan, Inc. was collapsed and thereafter KIC
purposely formed and operated to defraud him. Morales has not to us discharged his

Felipe N. Aurea for petitioners.Taada, Teehankee & Carreon for respondents Imperial

burden. SICDAa

Insurance, Inc.

SYLLABUS
WHEREFORE, the petition is hereby GRANTED. The CA's January 23, 2008 Decision
and April 16, 2008 Resolution in CA-G.R. SP No. 100152 are hereby REVERSED and
SET ASIDE. The levy placed upon the personal properties of Kukan International
Corporation is hereby ordered lifted and the personal properties ordered returned to

1. CORPORATION LAW; SECONDARY FRANCHISE; MESSENGER SERVICE.

The right to operate a messenger and delivery service by virtue of a legislative
enactment is a secondary franchise.

2. ID.; ID.; SUBJECT TO EXECUTION SALE. A secondary franchise is subject to

submitted their Answer, the parties entered into a Compromise Agreement, assisted

levy and sale on execution together with all the property necessary for the enjoyment

by their respective counsels, the pertinent portions of which recite:

thereof.
"1) WHEREAS, the DEFENDANTS admit and confess their joint and solitary
3. ID.; ID.; ID.; PROCEDURE. A secondary franchise and the property necessary
for its enjoyment can be sold under execution only when such sale is especially
decreed and ordered in the judgment and it becomes effective only when such sale is
confirmed by the Court after due notice.

indebtedness to the PLAINTIFF in the full sum of PESOS SIXTY- ONE THOUSAND
ONE HUNDRED SEVENTY-TWO AND 32/100 (P61,172.32), Philippine Currency,
itemized as follows:

a) Principal P50,000.00b) Interest at 12% per annum 5,706.14c) Liquidated damages

at 7% per annum 3,330.58 d) Costs of suit 135.60e) Attorney's fee 2,000.00

4. ID.; ID.; ID.; ID.; EFFECT OF ABSENCE OF SPECIAL DECREE. Where the
judgment does not contain any special decree making the franchise of a private

2) WHEREAS, the DEFENDANTS bind themselves, jointly and severally, and hereby

corporation answerable for its judgment debt, the inclusion of said corporation's

promise to pay their aforementioned obligations to the PLAINTIFF at its business

franchise, trade name and capital stocks in the execution sale of its properties has no
jurisdiction and such sale should be set aside in as far as it authorizes such levy and
sale.

address at 301-305 Banquero St., (Ground Floor), Regina Building, Escolta, Manila,
within sixty (60) days from March 16, 1962 or on or before May 14, 1962;

3) WHEREAS, in the event the DEFENDANTS FAIL to pay in full the total amount of
PESOS SIXTY ONE THOUSAND ONE HUNDRED SEVENTY- TWO AND 32/100

PAREDES, J p:

DECISION

(P61,172.32), Philippine Currency, for any reason whatsoever, on May 14, 1962, the
PLAINTIFF shall be entitled, as a matter of right, to move for the execution of the
decision to be rendered in the above- entitled case by this Honorable Court based on

Petitioner J. R. Da Silva, is the President of the J. R. S. Business Corporation, an

establishment duly franchised by the Congress of the Philippines, to conduct a
messenger and delivery express service. On July 12, 1961, the respondent Imperial

this COMPROMISE AGREEMENT."

On March 17, 1962, the lower court rendered judgment, embodying the contents of
the said compromise agreement, the dispositive portion of which reads

Insurance, Inc., presented with the CFI of Manila a complaint (Civ. Case No. 47520),
for sum of money against the petitioner corporation. After the defendants therein have

"WHEREFORE, the Court hereby approves the above-quoted compromise agreement

and renders judgment in accordance therewith, enjoining the parties to comply

Business Corporation, claiming that the capital stocks thereof, could not be levied

faithfully and strictly with the terms and conditions thereof, without special

upon and sold under execution. Under date of June 20, 1962, petitioner's counsel

pronouncement as to costs."

On May 15, 1962, one day after the date fixed in the compromise agreement, within
which the judgment debt would be paid, but was not, respondent Imperial Insurance
Inc., filed a "Motion for the Issuance of a Writ of Execution." On May 23, 1962, a Writ
of Execution was issued by respondent Sheriff of Manila and on May 26, 1962,
Notices of

presented a pleading captioned "Very Urgent Motion for Postponement of Public

Auction Sale and for Ruling on Motion for Release of Levy on the Business Name,
Right to Operate and Capital Stocks of JRS Business Corporation". The auction sale
was set for June 21, 1962. In said motion, petitioners alleged that the loan they had
applied for, was to be secured within the next ten (10) days, and they would be able to
discharge the judgment debt. Respondents opposed the said motion and on June 21,
1962, the lower court denied the motion for postponement of the auction sale.

Sale were sent out for the auction of the personal properties of the petitioner J.R.S.
Business Corporation. On June 2, 1962, a Notice of Sale of the "whole capital stocks
of the defendants JRS Business Corporation, the business name, right of operation,
the whole assets, furnitures and equipments, the total liabilities, and Net Worth, books
of accounts, etc., etc." of the petitioner corporation was handed down. On June 9, the
petitioner, thru counsel, presented an "Urgent Petition for Postponement of Auction
Sale and for Release of Levy on the Business Name and Right to Operate of
Defendant JRS Business Corporation", stating that petitioners were busy negotiating
for a loan with which to pay the judgment debt; that the judgment was for money only
and, therefore, plaintiff (respondent Insurance Company) was not authorized to take
over and appropriate for its own use, the business name of the defendants; that the
right to operate under the franchise, was not transferable and could not be considered
a personal or immovable property, subject to levy and sale. On June 10, 1962, a
Supplemental Motion for Release of Execution, was filed by counsel of petitioner JRS

In the sale which was conducted in the premises of the JRS Business Corporation at
1341 Perez St., Paco, Manila, all the properties of said corporation contained in the
Notices of Sale dated May 26, 1962, and June 2, 1962 (the latter notice being for the
whole capital stocks of the defendant, JRS Business Corporation, the business name,
right of operation, the whole assets, furnitures and equipments, the total liabilities and
Net Worth, books of accounts, etc., etc., were bought by respondent Imperial
Insurance, Inc., for P10,000.00, which was the highest bid offered. Immediately after
the sale, respondent Insurance company took possession of the properties and
started running the affairs and operating the business of the JRS Business
Corporation. Hence, the present appeal. dctai

It would seem that the matters which need determination are (1) whether the
respondent Judge acted without or in excess of his jurisdiction or with grave abuse of
discretion in promulgating the Order of June 21, 1962, denying the motion for

postponement of the scheduled sale at public auction, of the properties of petitioner;

way is especially decreed and ordered in the judgment: And provided, further, That the

and (2) whether the business name or trade name, franchise (right to operate) and

sale shall not become effective until confirmed by the court after due notice." (Sec. 56,

capital stocks of the petitioner are properties or property rights which could be the
subject of levy, execution and sale.

The respondent Court's act of postponing the scheduled sale was within the discretion
of respondent judge, the exercise of which, one way or the other, did not constitute

Corporation Law.)

In the case of Gulf Refining Co. vs. Cleveland Trust Co., 108 So., 158, it was held
"The first question then for decision is the meaning of the word 'franchise' in the

statute.

grave abuse of discretion and/or excess of jurisdiction. There was a decision rendered
and the corresponding writ of execution was issued. Respondent Judge had
jurisdiction over the matter and erroneous conclusions of law or fact, if any, committed

'A franchise is a special privilege conferred by governmental authority, and which does
not belong to citizens of the country generally as a matter of common right . . . Its
meaning depends more or less upon the connection in which the word is employed

in the exercise of such jurisdiction are merely errors of judgment, not correctible by
certiorari (Villa Rey Transit vs. Bello, et al., L-18967, Apr. 23, 1963, and cases cited

and "the property and corporation to which it is applied. It may have different
significations."

therein.)
'For practical purposes, franchises, so far as relating to corporations, are divisible into
The corporation law, on forced sale of franchises, provides

(1) corporate or general franchises; and (2) special or secondary franchises. The
former is the franchise to exist as a corporation, while the latter, are certain rights and

"Any franchise granted to a corporation to collect tolls or to occupy, enjoy, or use

public property or any portion of the public domain or any right of way over public
property or the public domain, and any rights and privileges acquired under such
franchise may be levied upon and sold under execution, together with the property

privileges conferred upon existing corporations, such as the right to use the streets of
a municipality to lay pipes of tracks, erect poles or string wires' 2 Fletcher's Cyclopedia
Corp. Sec. 1148; 14 C. J. p. 160; Adams vs. Yazon & M. V. R. Co. 24 So. 200, 317, 28
So. 956, 77 Miss. 253, 60 L.R A. 33 et seq.

necessary for the enjoyment, the exercise of the powers, and the receipt of the
proceeds of such franchise or right of way, in the same manner and with like effect as

"The primary franchise of a corporation, that is, the right to exist as such, is vested 'in

any other property to satisfy any judgment against the corporation: Provided, That the

the individuals who compose the corporation and not in the corporation itself' (14 C.J.

sale of the franchise or right of way and the property necessary for the enjoyment, and

pp. 169, 161; Adams vs. Railroad, supra; 2 Fletcher's Cyclopedia Corp. Secs. 1153,

exercise of the powers, and the receipt of the proceeds of said franchise or right of

1158; 3 Thompson on Corporations [2d Ed.] Secs. 2863, 2864), and cannot be

conveyed in the absence of legislative authority so to do (14A C.J. 543, 557; 1

stated with respect to petitioner's trade name or business name and its capital stock.

Fletcher's Cyc. Corp. Sec. 1224; Memphis and L.R.R. Co. vs. Berry, 5 S. Ct. 299, 112

Incidentally, the trade name or business name corresponds to the initials of the

U.S. 609, 28 L. Ed 837; Vicksburg Waterworks Co. vs. Vicksburg, 26 S. Ct. 660, 202
U.S. 453, 50 L. Ed. 1102, 6 Ann. Cas. 253; Arthur vs. Commercial and Railroad Bank,

President of the petitioner corporation and there can be no serious dispute regarding
the fact that a trade name or business name and capital stock are necessarily

9 Smedes and M. 394, 48 Am. Dec. 719), but the special or secondary franchises of a
corporation are vested in the corporation and may ordinarily be conveyed or
mortgaged under a general power granted to a corporation to dispose of its property

included in the enjoyment of the franchise. Like that of franchise, the law mandates,
that property necessary for the enjoyment of said franchise, can only be sold to satisfy

(Adams vs. Railroad, supra; 14A C.J. 542, 557; 3 Thompson on Corp. [2d Ed.] Sec.

a judgment debt if the decision especially so provides. As We have stated heretofore,

2909), except such special or secondary franchises as are charged, with a public use

no such directive appears in the decision. Moreover, a trade name or business name

(2 Fletcher's Cyc. Corp. sec. 1225; 14A C.J. 544; 3 Thompson on Corp. [2d Ed.] sec.

cannot be sold separately from the franchise, and the capital stock of the petitioner

2908; Arthur vs. Commercial & R.R. Bank, supra; McAllister vs. Plant, 54 Miss. 106)."

corporation or any other corporation, for that matter, represents the interest and is the
property of stockholders in the corporation, who can only be deprived thereof in the

The right to operate a messenger and express delivery service, by virtue of a

manner provided by law (Therbee vs. Baker, 35 N.E. Eq. [8 Stew.] 501, 505; In re
legislative enactment, is admittedly a secondary franchise (R.A. No. 3260, entitled "An
Wells' Estate, 144 N.W. 174, 177, Wis. 294, cited in 6 Words and Phrases, 109).
Act granting the JRS Business Corporation a franchise to conduct a messenger and
express service)" and, as such, under our corporation law, is subject to levy and sale
on execution together and including all the property necessary for the enjoyment
thereof. The law however, indicates the procedure under which the same (secondary

It, therefore, results that the inclusion of the franchise, the trade name and/or business

franchise and the properties necessary for its enjoyment) may be sold under

name and the capital stock of the petitioner corporation, in the sale of the properties of

execution. Said franchise can be sold under execution, when such sale is especially

the JRS Business Corporation, has no justification. The sale of the properties of

decreed and ordered in the judgment and it becomes effective only when the sale is

petitioner corporation is set aside, in so far as it authorizes the levy and sale of its

confirmed by the Court after due notice (Sec. 56, Corp. Law). The compromise

franchise, trade name and capital stocks. Without pronouncement as to costs.

agreement and the judgment based thereon, do not contain any special decree or
order making the franchise answerable for the judgment debt. The same thing may be

Bengzon, C.J., Padilla, Bautista Angelo, Concepcion, Reyes, J.B.L., Regala and
Makalintal, JJ., concur.

||| (J.R.S. Business Corp. v. Imperial Insurance, Inc., G.R. No. L-19891, [July 31,
1964], 120 PHIL 618-625)

NTC that imposed such a fee. It is the legislature itself. Since Congress has the power
to exercise the State inherent powers of Police Power, Eminent Domain and Taxation,

THIRD DIVISION

[G.R. No. 127937. July 28, 1999.]

the distinction between police power and the power to tax, which could be significant if
the exercising authority were mere political subdivisions (since delegation by it to such
political subdivisions of one power does not necessarily include the other), would not

NATIONAL TELECOMMUNICATIONS COMMISSION, petitioner, vs. HONORABLE

be of any moment when, as in the case under consideration. Congress itself exercises

COURT OF APPEALS and PHILIPPINE LONG DISTANCE TELEPHONE COMPANY,

the power. All that is to be done would be to apply and enforce the law when

respondents.

sufficiently definitive and not constitutionally infirm.

The Solicitor General for respondents.Alampay Gatchalian Marvis Carranza and

3. ID.; CORPORATION LAW; CAPITAL DEFINED. The term "capital" and other

Alampay for private respondent.

terms used to describe the capital structure of a corporation are of universal

SYLLABUS

acceptance, and their usages have long been established in jurisprudence. Briefly,
capital refers to the value of the property or assets of a corporation.

1. MERCANTILE LAW; PUBLIC SERVICE ACT; SUPERVISION AND REGULATION

FEES; BASIS FOR COMPUTATION IS THE CAPITAL STOCK SUBSCRIBED OR
PAID. Succinct and clear is the ruling of this Court in the case of Philippine Long
Distance Telephone Company vs. Public Service Commission, 66 SCRA 341, that the

4. ID.; ID.; CAPITAL SUBSCRIBED; ELUCIDATED. The capital subscribed is the

total amount of the capital that persons (subscribers or shareholders) have agreed to
take

basis for computation of the fee to be charged by NTC on PLDT, is "the capital stock

and pay for, which need not necessarily be, and can be more than, the par value of

subscribed or paid and not, alternatively, the property and equipment. The law in point

the shares. In fine, it is the amount that the corporation receives, inclusive of the

is clear and categorical. There is no room for construction. It simply calls for

premiums if any, in consideration of the original issuance of the shares. In the case of

application. To repeat, the fee in question is based on the capital stock subscribed or

stock dividends, it is the amount that the corporation transfers from its surplus profit

paid, nothing less nothing more. AcSIDE

account to its capital account. It is the same amount that can loosely be termed as the

2. ID.; ID.; ID.; A LEGISLATIVE IMPOSITION. It bears stressing that it is not the

"trust fund" of the corporation.

5. ID.; ID.; TRUST FUND DOCTRINE; ELUCIDATED. The "Trust Fund" doctrine

consisted of Serial Preferred Stock amounting to P1,277,934,390.00 (Billion) and

considers this subscribed capital as a trust fund for the payment of the debts of the

Common Stock of P221,097,785 (Million) or a total of P1,499,032,175.00 (Billion).

corporation, to which the creditors may look for satisfaction. Until the liquidation of the

2. the amount of P9.0 Million as permit fee under Section 40 (f) of the PSA for the

corporation, no part of the subscribed capital may be returned or released to the

approval of the protestant's increase of its authorized capital stock from P2.7 Billion to

stockholder (except in the redemption of redeemable shares) without violating this

P4.5 Billion; and

principle. Thus, dividends must never impair the subscribed capital; subscription
commitments cannot be condoned or remitted; nor can the corporation buy its own
shares using the subscribed capital as the consideration therefor. DCATHS

3. the amounts of P12,261,600.00 and P33,472,030.00 as permit fees under Section

40 (g) of the PSA in connection with the Commission's decisions in NTC Cases Nos.
86-13 and 87-008 respectively, approving the Protestant's equity participation in the

DECISION

PURISIMA, J p:

At bar is a Petition for Review on Certiorari under Rule 45 of the Revised Rules of
Court seeking to modify the October 30, 1996 Decision 1 and the January 27, 1997
Resolution 2 of the Court of Appeals 3 in CA-G.R. SP No. 34063. cdtai

The antecedent facts that matter can be culled as follows:

Fiber Optic Interpacific Cable systems and X-5 Service Improvement and Expansion
Program." 4 LLphil

In its two letter-protests 5 dated February 23, 1988 and July 14, 1988, and position
papers 6 dated November 8, 1990 and March 12, 1991, respectively, the PLDT
challenged the aforesaid assessments, theorizing inter alia that:

"(a) The assessments were being made to raise revenues and not as mere
reimbursements for actual regulatory expenses in violation of the doctrine in PLDT vs.

Sometime in 1988, the National Telecommunications Commission (NTC) served on

the Philippine Long Distance Telephone Company (PLDT) the following assessment

PSC, 66 SCRA 341 [1975]; prcd

(b) The assessment under Section 40 (e) should only have been on the basis of the

notices and demands for payment:

par values of private respondent's outstanding capital stock;

"1. the amount of P7,495,161.00 as supervision and regulation fee under Section 40

(c) Petitioner has no authority to compel private respondent's payment of the

(e) of the PSA for the said year, 1988, computed at P0.50 per P100.00 of the

assessed fees under Section 40 (f) for the increase of its authorized capital stock

Protestant's (PLDT) outstanding capital stock as at December 31, 1987 which then

since petitioner did not render any supervisory or regulatory activity and incurred no

"WHEREFORE, the assailed decision and order of the respondent Commission dated

expenses in relation thereto. cdrep

September 29, 1993 and May 03, 1994, respectively, in NTC Case No. 90- 223 are
hereby MODIFIED. The Commission is ordered to recompute its assessments and

xxx xxx xxx" 7On September 29, 1993, the NTC rendered a Decision 8 in NTC Case

demands for payment from petitioner PLDT as follows:

No. 90-223, denying

A. For annual supervision and regulation fees (SRF) under Section 40 (e) of the Public
the protest of PLDT and disposing thus:

"FOR ALL THE FOREGOING, finding PLDT's protest to be without merit, the
Commission has no alternative but to uphold the law and DENIES the protest of

Service Act, as amended, they should be computed at fifty centavos for each one
hundred pesos or fraction thereof of the par value of the capital stock subscribed or
paid excluding stock dividends, premiums or capital in excess of par.

PLDT. Unless otherwise restrained by a competent court of law, the Common Carrier

B. For permit fees for the approval of petitioner's increase of authorized capital stock

Authorization Department (CCAD) is hereby directed to update its assessments and

under Section 40 (f) of the same Act, they should be computed at fifty for each one

collections on PLDT and all public telecommunications carriers for the payment of the

hundred pesos or fraction thereof, regardless of any regulatory service or expense

fees in accordance with the provisions of Section 40 (e) (f) and (g) of the Revised NTC

incurred by respondent."

Schedule of Fees and Charges.

On
This decision takes effect immediately.

November

20,

1996,

NTC

moved

for

partial

reconsideration

of

the

abovementioned

SO ORDERED."On October 22, 1993, PLDT interposed a Motion for Reconsideration,

9 which was denied

Decision, with respect to the basis of the assessment under Section 40(e), i.e., par
value of

by NTC in an Order 10 issued on May 3, 1994. Cdpr

the subscribed capital stock. It also sought a partial reconsideration of the fee of fifty
On May 12, 1994, PLDT appealed the aforesaid Decision to the Court of Appeals,
which came out with its questioned Decision of October 30, 1996, modifying the
disposition of NTC as follows:

(P0.50) centavos for the issuance or increasing of the capital stock under Section 40
(f). 11 LibLex

With the denial of its motions for reconsideration by the Resolution of the Court of

Appeals dated January 27, 1997, petitioner found its way to this Court via the present

power to tax, which could be significant if the exercising authority were mere political

Petition; posing as sole issue:

subdivisions (since delegation by it to such political subdivisions of one power does

not necessarily include the other), would not be of any moment when, as in the case

WHETHER THE COURT OF APPEALS ERRED IN HOLDING THAT THE

COMPUTATION OF SUPERVISION AND REGULATION FEES UNDER SECTION 40
(F) OF THE PUBLIC SERVICE ACT SHOULD BE BASED ON THE PAR VALUE OF

under consideration, Congress itself exercises the power. All that is to be done would
be to apply and enforce the law when sufficiently definitive and not constitutional

THE SUBSCRIBED CAPITAL STOCK.

infirm.

Simply put, the submission of NTC is that the fee under Section 40 (e) should be

The term "capital" and other terms used to describe the capital structure of a

based on the market value of PLDT's outstanding capital stock inclusive of stock

corporation are of universal acceptance, and their usages have long been established

dividends and premium, and not on the par value of PLDT's capital stock excluding

in jurisprudence. Briefly, capital refers to the value of the property or assets of a

stock dividends and premium, as contended by PLDT.

corporation. The capital subscribed is the total amount of the capital that persons
(subscribers or shareholders) have agreed to take and pay for, which need not

Succinct and clear is the ruling of this Court in the case of Philippine Long Distance

necessarily be, and can be more than, the par value of the shares. In fine, it is the

Telephone Company vs. Public Service Commission, 66 SCRA 341, that the basis for

amount that the corporation receives, inclusive of the premiums if any, in consideration

computation of the fee to be charged by NTC on PLDT, is "the capital stock

of the original issuance of the shares. In the case of stock dividends, it is the amount

subscribed or paid and not, alternatively, the property and equipment." llcd

that the corporation transfers from its surplus profit account to its capital account. It is

The law in point is clear and categorical. There is no room for construction. It simply
calls for application. To repeat, the fee in question is based on the capital stock
subscribed or paid, nothing less nothing more.

the same amount that can loosely be termed as the "trust fund" of the corporation. The
"Trust Fund" doctrine considers this subscribed capital as a trust fund for the payment
of the debts of the corporation, to which the creditors may look for satisfaction. Until
the liquidation of the corporation, no part of the subscribed capital may be returned or
released to the stockholder (except in the redemption of redeemable shares) without

It bears stressing that it is not the NTC that imposed such a fee. It is the legislature
itself. Since Congress has the power to exercise the State inherent powers of Police
Power, Eminent Domain and Taxation, the distinction between police power and the

violating this principle. Thus, dividends must never impair the subscribed capital;
subscription commitments cannot be condoned or remitted; nor can the corporation

buy its own shares using the subscribed capital as the consideration therefor. 12

disclosed or extant in the records before the Court. The only other item available is the

cdrep

amount assessed by petitioner from PLDT, which had been based on market value of
the outstanding capital stock on given dates. 14

In the same way that the Court in PLDT vs. PSC has rejected the "value of the
property and equipment" as being the proper basis for the fee imposed by Section

All things studiedly considered, and mindful of the aforesaid ruling of this Court in the

40(e) of the Public Service Act, as amended by Republic Act No. 3792, so also must

case of Philippine Long Distance Telephone Company vs. Public Service Commission,

the Court disallow the idea of computing the fee on "the par value of [PLDT's] capital

it should be reiterated that the proper basis for the computation of subject fee under

stock subscribed or paid excluding stock dividends, premiums, or capital in excess of

Section 40(e) of the Public Service Act, as amended by Republic Act No. 3792, is "the

par." Neither, however, is the assessment made by the National Telecommunications

capital stock subscribed or paid and not, alternatively, the property and equipment.

Commission on the basis of the market value of the subscribed or paid-in capital stock

dctai

acceptable since it is itself a deviation from the explicit language of the law.
WHEREFORE, the decision of the Court of Appeals, dated October 30, 1996, and its
From the pleadings on hand, it can be gleaned that the assessment for supervision

Resolution, dated January 27, 1997, in CA G.R. SP No. 34063, as well as the decision

and regulation fee under Section 40(e) made by NTC for 1988, computed at P0.50 per

of the National Telecommunication Commission, dated September 29, 1993, and

100 of PLDT's outstanding capital stock as of December 31, 1987, amounted to

Order, dated May 3, 1994, in NTC case No. 90-223, are hereby SET ASIDE and the

P7,495,161.00. The same was based on the amount of P1,277,934,390.00 of serial

National Telecommunication Commission is hereby ordered to make a re-computation

preferred

of

of the fee to be imposed on Philippine Long Distance Telephone Company on the

P1,499,032,175.00. The assessment was reported to include stock dividends,

basis of the latter's capital stock subscribed or paid and strictly in accordance with the

premium on issued common shares and premium on

foregoing disquisition and conclusion.

stocks

and

P221,097,785.00

of

common

stocks

or

total

No pronouncement as to costs.SO ORDERED.Romero, Vitug and Gonzaga-Reyes,

preferred shares converted into common stock. 13 The actual capital paid or the
amount of capital stock paid and for which PLDT received actual payments were not

JJ.,concur. Panganiban, J., took no part; former counsel of a party.

||| (National Telecommunications Commission v. Court of Appeals, G.R. No. 127937,
[July 28, 1999], 370 PHIL 538-546)