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[G.R. No. 100883. December 2, 1991.

] and taxpayer, and particularly as a member of the House of


Representatives, comes under the definition that a proper party is
CONGRESSMAN ENRIQUE T. GARCIA (Second District of one who has sustained or is in danger of sustaining an injury as a
Bataan), Petitioner, v. THE EXECUTIVE SECRETARY, THE result of the act complained of.
NATIONAL ECONOMIC AND DEVELOPMENT AUTHORITY, THE
BOARD OF INVESTMENTS, THE SECURITIES AND EXCHANGE 4. ID.; COURTS; POLICY TO AVOID RULING ON CONSTITUTIONAL
COMMISSION, and THE BUREAU OF TRADE REGULATION QUESTION; RATIONALE. The policy of the courts is to avoid
AND CONSUMER PROTECTION, Respondents. Senator ruling on constitutional questions and to presume that the acts of
VICENTE T. PATERNO and PHILIPPINE ASSOCIATION OF the political departments are valid in the absence of a clear and
BATTERY MANUFACTURERS, intervenors. unmistakable showing to the contrary. To doubt is to sustain. This
presumption is based on the doctrine of separation of powers which
Abraham C. La Vina for Petitioner. enjoins upon each department a becoming respect for the acts of
the other departments. The theory is that as the joint act of
Padilla, Jimenez, Kintanar and Asuncion Law Firm for Congress and the President of the Philippines, a law has been
PABMA. carefully studied and determined to be in accordance with the
fundamental law before it was finally enacted.
Demaree J.B. Raval and Jhosep Y. Lopez for Sen. V. Paterno.
5. POLITICAL LAW; POLITICAL QUESTION; WISDOM OR EFFICACY
OF AN ACT OF CONGRESS, BEYOND THE COMPETENCE OF
COURTS; MUST BE ADDRESSED TO THE LEGISLATURE. What we
SYLLABUS see here is a debate on the wisdom or the efficacy of the Act, but
this is a matter on which we are not competent to rule. As Cooley
observed: "Debatable questions are for the legislature to decide.
The courts do not sit to resolve the merits of conflicting issues." In
Angara v. Electoral Commission, Justice Laurel made it clear that
1. REMEDIAL LAW; ACTIONS; REQUISITES OF A JUDICIAL
"the judiciary does not pass upon questions of wisdom, justice or
INQUIRY INTO A CONSTITUTIONAL QUESTION. The requisites of
expediency of legislation." And fittingly so for in the exercise of
a judicial inquiry into a constitutional question are to wit: (1) there
judicial power, we are allowed only "to settle actual controversies
must be an actual case of controversy; (2) the constitutional
involving rights which are legally demandable and enforceable,"
question must be raised by a proper party; (3) the constitutional
and may not annul an act of the political departments simply
question must be raised at the earliest opportunity; and (4) the
because we feel it is unwise or impractical.
resolution of the constitutional question must be necessary to the
decision of the case.
6. ID.; ID.; COURTS MAY DETERMINE EXISTENCE OF GRAVE
ABUSE OF DISCRETION ON THE PART OF ANY BRANCH OF THE
2. ID.; ID.; CONTROVERSY; MUST NOT BE CONJECTURAL OR
GOVERNMENT, CASE AT BAR. It is true that, under the expanded
ANTICIPATORY. We agree that there is at this point no actual
concept of the political question, we may now also "determine
case or controversy, particularly because of the absence of the
whether or not there has been a grave abuse of discretion
implementing rules that are supposed to carry the Act into effect. A
amounting to lack or excess of jurisdiction on the part of any
controversy must be one that is appropriate or "ripe" for
branch or instrumentality of the Government." We find, however,
determination, not conjectural or anticipatory.
that that irregularity does not exist in the case at bar.

3. ID.; ID.; PROPER PARTY, DEFINED. The petitioner, as a citizen


investments are not in areas covered by the list, such investments
are not detrimental to but are good for the national
economy.chanrobles law library
DECISION
The petitioner attacks List A as not a true negative list in the strict
sense of the term. It would merely enumerate areas of activities
already reserved to Philippine nationals by mandate of the
CRUZ, J.: Constitution and specific laws. List B would contain areas of
activities and enterprises already regulated according to law and
includes small and medium-sized domestic market enterprises or
export enterprises which utilize raw materials from depleting
The petitioner challenges RA 7042 on the ground that it defeats the natural resources with paid-in equity capital of less than the
constitutional policy of developing a self-reliant and independent equivalent of US$500,000.00. In other words, "small to medium"
national economy effectively controlled by Filipinos and the are reserved to Philippine nationals; in effect Filipinos are not
protection of Filipino enterprises against unfair foreign competition encouraged to go big. List C would merely contain areas of
and trade practices. He claims that the law abdicates all regulation investment in which "existing enterprises already serve adequately
of foreign enterprises in this country and gives them unfair the needs of the economy and the consumers and do not need
advantages over local investments which are practically elbowed further foreign investments." The category of "existing enterprises"
out in their own land with the complicity of their own government. should be qualified by the term "Filipino." Otherwise, List C would
protect existing foreign enterprises as well.
Specifically, he argues that under Section 5 of the said law a
foreign investor may do business in the Philippines or invest in a The petitioner also attacks Section 9 because if a Philippine
domestic enterprise up to 100% of its capital without need of prior national believes that an area of investment should be included in
approval. All that it has to do is register with the Securities and List C, the burden is on him to show that the criteria enumerated in
Exchange Commission or the Bureau of Trade Regulation and said section are met.
Consumer Protection in the case of a single proprietorship. The said
section makes certain that "the SEC or BTRCP, as the case may be, It is alleged that Articles 2, 32, & 35 of the Omnibus Investments
shall not impose any limitations on the extent of foreign ownership Code of 1982 are done away with by RA 7042. It is also argued
in an enterprise additional to those provided in this Act."cralaw that by repealing Articles 49, 50, 54 and 56 of the 1987 Omnibus
virtua1aw library Investments Code, RA No. 7042 further abandons the regulation of
foreign investments by doing away with important requirements for
Furthermore, Section 7 provides that "non-Philippine nationals may doing business in the Philippines.
own up to one hundred percent (100%) of domestic market
enterprises unless foreign ownership therein is prohibited or limited Finally, the petitioner claims that the transitory provisions of RA
by existing law or the Foreign Investment Negative List under 7042, which allow practically unlimited entry of foreign investments
Section 8 hereof." The provision for a Foreign Investment Negative for three years, subject only to a supposed Transitory Foreign
List in Section 8 does not satisfy the constitutional mandate for the Investment Negative List, not only completely deregulates foreign
government to regulate and exercise authority over foreign investments but would place Filipino enterprises at a fatal
investments. The system of negative list abandons the positive disadvantage in their own country.
aspect of regulation and exercise of authority over foreign
investments. In effect, it assumes that so long as foreign In his Comment, the Solicitor General counters that the phrase
"without need of prior approval" applies to equity restrictions alone.
This is well explained by the fact that prior to the effectivity of RA The Act opens the door to foreign investments only after securing
7042, Article 46 of the Omnibus Investments Code of 1987 (EO No. to Filipinos their rights and interests over the national economy.
226), provided that a non-Philippine national could, without need of
prior authority from the Board of Investments (BOI), invest in: (1) The provisions of the Constitution and other specific laws (which
any enterprise registered under Book I (Investments with would be used as a basis for List A) regulate or limit the extent of
Incentives); and (2) enterprises not registered under Book I, to the foreign ownership in enterprises engaged in areas of activity
extent that the total investment of the non-Philippine national did reserved for Filipinos. To insist otherwise would be tantamount to
not exceed 40% of the outstanding capital. On the other hand, saying that those laws are useless and should therefore be erased
under Article 47 thereof, if an investment by a non-Philippine from the statute books.
national in an enterprise not registered under Book I was such that
the total participation by non-Philippine nationals in the The fact that List B contains areas already regulated pursuant to
outstanding capital thereof exceeded 40%, prior authority from the law already makes it clear that it is regulatory. It channels efforts
BOI was required. at promoting foreign investments to bigger enterprises where there
is an acute lack of Filipino capital. However, this should not be
With the effectivity of RA 7042, a certain layer of bureaucracy has construed as a scheme to discourage Filipino enterprises from
been removed, specifically, the case-to-case authorization by BOI. going into big enterprises. On the contrary, the scheme is for
Furthermore, with the introduction of the Negative List under foreign investments to supplement Filipino capital in big
Sections 8 & 15, the areas of investments not open to foreign enterprises.
investors are already determined and outlined; hence, registration
with the SEC or BTRCP, as the case may be, is now the initial step Activities which do not adequately meet the needs of the
to be taken by foreign investors.chanrobles virtual lawlibrary consumers should not be included in List C so as to allow healthy
competition. Otherwise, consumers would be at the mercy of
This registration constitutes regulation and exercise of authority unscrupulous producers. Foreign corporations already doing
over foreign investments. Under SEC and BTRCP rules and business in the Philippines under a valid license prior to the
regulations, foreign investors must first comply with certain enactment of RA 7042 necessarily come within the protection of
requirements before they can be issued a license to do business in the law.
the Philippines. The SEC has PD 902-A, as amended, and BP 68 for
its governing laws. Pertinent provisions of these laws are contained The Solicitor General adds that Section 9 provides for the criteria to
in the SEC Licensing Procedure of Foreign Corporations. For BTRCP, be used by NEDA in determining the areas of investment for
the applicable laws are EO No. 133 in conjunction with EO No. 913. inclusion in List C. The petition for inclusion therein requires "a
public hearing at which affected parties will have the opportunity to
Section 7 of RA 7042 allows non-Philippine nationals to own up to show whether the petitioner industry adequately serves the
100% of domestic market enterprises only in areas of investments economy and the consumers." But this does not mean that the Act
outside the prohibitions and limitations imposed by law to protect is shifting the burden of proof to Filipino enterprises while
Filipino ownership and interest. Furthermore, the Foreign deregulating foreign investments at the same time. On the
Investment Negative List under Section 8 reserves to Filipinos contrary, this provision is designed to protect the consumers as not
sensitive areas of investments. List C prohibits foreign investors all existing enterprises satisfy the criteria for inclusion in List C. The
from engaging in areas of activities where existing enterprises requisite proof and public hearing under Section 9 are, therefore,
already serve adequately the needs of the economy and the necessary to prevent detriment to the economy and the
consumer. consumers.chanrobles law library : red
principles involved in the interest of a speedier disposition of the
Regarding the alleged elimination of certain rules in the Code, the case. A considerable portion of the petition, and this is also true of
Solicitor General stresses that Section 16 of the Act provides that the reply (if not more so), sounds too much like specifying that is
only "Articles forty-four (44) to fifty-six (56) of Book II of EO No. better addressed to a political audience than to a court of justice.
226 are repealed." The approval by the BOI and the other Much valuable time would have been saved in the presentation of a
regulatory requirements set forth in the afore mentioned articles leaner, strictly legal tract.
were purposely removed because the determination of the areas of
investment open to foreign investors is made easy by the Foreign Coming first to the procedural objections to the petition, we agree
Investment Negative List formulated and recommended by NEDA that there is at this point no actual case or controversy, particularly
following the process and criteria provided in Sections 8 & 9 of the because of the absence of the implementing rules that are
Act. supposed to carry the Act into effect. A controversy must be one
that is appropriate or "ripe" for determination, not conjectural or
Concluding, he argues that the Transitory Foreign Investment anticipatory. We hold, however, that the petitioner, as a citizen and
Negative List is not imaginary. In fact, it practically includes the taxpayer, and particularly as a member of the House of
same areas of investment reserved to Filipinos under Section 5. Representatives, comes under the definition that a proper party is
Moreover, during the transitory period, "SEC shall disallow one who has sustained or is in danger of sustaining an injury as a
registration of the applying non-Philippine national if the existing result of the act complained of. 2 We will also hold that the
joint venture enterprises, particularly the Filipino partners therein, constitutional question has not been raised tardily but in fact, as
can reasonably prove they are capable to make the investment just remarked, prematurely.chanrobles virtual lawlibrary
needed for the domestic market activities to be undertaken by the
competing applicant."cralaw virtua1aw library On the merits, we find that the constitutional challenge must be
rejected for failure to show that there is an indubitable ground for
Allowed to intervene, Senator Vicente T. Paterno, * raises it, not to say even a necessity to resolve it. The policy of the courts
substantially the same points stressed by the Solicitor General in is to avoid ruling on constitutional questions and to presume that
defense of the Act and amplifies the argument that the Act does the acts of the political departments are valid in the absence of a
not deregulate foreign investments to the disadvantage of the clear and unmistakable showing to the contrary. To doubt is to
Filipino entrepreneur. He discusses at length the different sustain. This presumption is based on the doctrine of separation of
regulatory requirements for doing business in the Philippines and powers which enjoins upon each department a becoming respect
explains the over-all strategy embodied in the Act to develop a for the acts of the other departments. The theory is that as the
self-reliant economy, as well as the provisions designed to promote joint act of confers and the President of the Philippines, a law has
full employment for Filipinos. He also suggests that the been carefully studied and determined to be in accordance with the
constitutional challenge should be rejected outright for non- fundamental law before it was finally enacted.
compliance with the requisites of a judicial inquiry into a
constitutional question, to wit: (1) there must be an actual cases or In the case at bar, the law is challenged on broad constitutional
controversy; (2) the constitutional question must be raised by a principles and the proposition that the Filipino investor is unduly
proper party; (3) the constitutional question must be raised at the discriminated against in his own land. Due process is invoked. The
earliest opportunity; and (4) the resolution of the constitutional provisions on nationalism are cited. Economic dependency is
question must be necessary to the decision of the case. 1 deplored. In the light, however, of the explanation given by the
Solicitor General and of the Intervenor in their respective
The court has carefully gone over the petition and wryly observes Comments, we hold that the cause of unconstitutionality has not
that it could have been pruned and limited to the strictly legal been proved by the petitioner. On the contrary, we are satisfied
that the Act does not violate any of the constitutional provisions ERIKS PTE. LTD., petitioner, vs. COURT OF APPEALS and
the petitioner has mentioned. DELFIN F. ENRIQUEZ, JR., respondents.

What we see here is a debate on the wisdom or the efficacy of the DECISION
Act, but this is a matter on which we are not competent to rule. As
PANGANIBAN, J.:
Cooley observed: "Debatable questions are for the legislature to
decide. The courts do not sit to resolve the merits of conflicting
Is a foreign corporation which sold its products sixteen times
issues." 3 In Angara v. Electoral Commission, 4 Justice Laurel made
over a five-month period to the same Filipino buyer without first
it clear that "the judiciary does not pass upon questions of wisdom, obtaining a license to do business in the Philippines, prohibited
justice or expediency of legislation." And fittingly so for in the from maintaining an action to collect payment therefor in Philippine
exercise of judicial power, we are allowed only "to settle actual courts? In other words, is such foreign corporation doing business
controversies involving rights which are legally demandable and in the Philippines without the required license and thus barred
enforceable," 5 and may not annul an act of the political access to our court system?
departments simply because we feel it is unwise or impractical. It
This is the main issue presented for resolution in the instant
is true that, under the expanded concept of the political question,
petition for review, which seeks the reversal of the Decision [1] of
we may now also "determine whether or not there has been a
the Court of Appeals, Seventh Division, promulgated on January
grave abuse of discretion amounting to lack or excess of
25, 1995, in CA-G.R. CV No. 41275 which affirmed, for want of
jurisdiction on the part of any branch or instrumentality of the capacity to sue, the trial courts dismissal of the collection suit
Government." 6 We find, however, that irregularity does not exist instituted by petitioner.
in the case at bar.

The petitioner is commended for his high civic spirit and his zeal in
The Facts
the protection of the Filipino investors against unfair foreign
competition. His painstaking study and analysis of the Foreign
Investments Act of 1991 reveals not only his nationalistic fervor Petitioner Eriks Pte. Ltd. is a non-resident foreign corporation
but also an impressive grasp of this complex subject. But his views engaged in the manufacture and sale of elements used in sealing
are expressed in the wrong forum. The Court is not a political pumps, valves and pipes for industrial purposes, valves and control
arena. His objections to the law are better heard by his colleagues equipment used for industrial fluid control and PVC pipes and
in the Congress of the Philippines, who have the power to rewrite fittings for industrial uses. In its complaint, it alleged that:[2]
it, if they so please, in the fashion he suggests.
(I)t is a corporation duly organized and existing under the laws of
WHEREFORE, the petition is DISMISSED, without any the Republic of Singapore with address at 18 Pasir Panjang Road
pronouncement as to costs. It is so ordered #09-01, PSA Multi-Storey Complex, Singapore 0511. It is not
licensed to do business in the Philippines and i(s) not so engaged
and is suing on an isolated transaction for which it has capacity to
sue x x x. (par. 1, Complaint; p. 1, Record)
--------------------------
On various dates covering the period January 17 -- August 16,
1989, private respondent Delfin Enriquez, Jr., doing business under
the name and style of Delrene EB Controls Center and/or EB
[G.R. No. 118843. February 6, 1997] Karmine Commercial, ordered and received from petitioner various
elements used in sealing pumps, valves, pipes and control
equipment, PVC pipes and fittings. The ordered materials were a Motion to Dismiss, contending that petitioner corporation had no
delivered via airfreight under the following invoices:[3] legal capacity to sue. In an Order dated March 8, 1993, [5] the trial
court dismissed the action on the ground that petitioner is a foreign
Date Invoice No. AWB No. corporation doing business in the Philippines without a license. The
17 Jan 89 27065 618-7496-2941 dispositive portion of said order reads:[6]
24 Feb 89 27738 618-7553-6672
02 Mar 89 27855 (freight & hand-
WHEREFORE, in view of the foregoing, the motion to dismiss is
ling charges per
hereby GRANTED and accordingly, the above-entitled case is
03 Mar 89 27876 Inv. 27738)
hereby DISMISSED.
03 Mar 89 27877 618-7553-7501
10 Mar 89 28046 618-7553-7501
618-7578-3256/ SO ORDERED.
21 Mar 89 28258 618-7578-3481
14 Apr 89 28901 618-7578-4634 On appeal, respondent Court affirmed said order as it deemed
19 Apr 89 29001 618-7741-7631 the series of transactions between petitioner corporation and
16 Aug 89 31669 Self-collect private respondent not to be an isolated or casual
(handcarried by buyer) transaction. Thus, respondent Court likewise found petitioner to be
without legal capacity to sue, and disposed of the appeal as
21 Mar 89 28257 618-7578-4634 follows:[7]
04 Apr 89 28601 618-7741-7605
14 Apr 89 28900 618-7741-7631 WHEREFORE, the appealed Order should be, as it is hereby
25 Apr 89 29127 618-7741-9720 AFFIRMED. The complaint is dismissed. No costs.
02 May 89 29232 (By seafreight)
05 May 89 29332 618-7796-3255 SO ORDERED.
15 May 89 29497 (Freight & hand-
ling charges per Hence, this petition.
Inv. 29127)
31 May 89 29844
618-7796-5646
The Issue

Total
The main issue in this petition is whether petitioner-corporation
may maintain an action in Philippine courts considering that it has
The transfers of goods were perfected in Singapore, for private no license to do business in the country. The resolution of this issue
respondents account, F.O.B. Singapore, with a 90-day credit depends on whether petitioners business with private respondent
term. Subsequently, demands were made by petitioner upon may be treated as isolated transactions.
private respondent to settle his account, but the latter
Petitioner insists that the series of sales made to private
failed/refused to do so.
respondent would still constitute isolated transactions despite the
On August 28, 1991, petitioner corporation filed with the number of invoices covering several separate and distinct items
Regional Trial Court of Makati, Branch 138,[4] Civil Case No. 91- sold and shipped over a span of four to five months, and that an
2373 entitled Eriks Pte. Ltd. vs. Delfin Enriquez, Jr. for the recovery affirmation of respondent Courts ruling would result in injustice and
of S$41,939.63 or its equivalent in Philippine currency, plus unjust enrichment.
interest thereon and damages. Private respondent responded with
Private respondent counters that to declare petitioner as Philippines or who in any calendar year stay in the
possessing capacity to sue will render nugatory the provisions of country for a period or periods totalling one hundred
the Corporation Code and constitute a gross violation of our eight(y) (180) days or more; participating in the
laws. Thus, he argues, petitioner is undeserving of legal protection. management, supervision or control of any domestic
business, firm, entity or corporation in the Philippines;
and any other act or acts that imply a continuity of
The Courts Ruling commercial dealings or arrangements, and contemplate
to that extent the performance of acts or works, or the
The petition has no merit. exercise of some of the functions normally incident to,
and in progressive prosecution of, commercial gain or of
The Concept of Doing Business the purpose and object of the business organization:
Provided, however, That the phrase doing business shall
The Corporation Code provides: not be deemed to include mere investment as a
shareholder by a foreign entity in domestic corporations
duly registered to do business, and/or the exercise of
Sec. 133. Doing business without a license. - No foreign
rights as such investor; nor having a nominee director
corporation transacting business in the Philippines without a
or officer to represent its interests in such corporation;
license, or its successors or assigns, shall be permitted to maintain
nor appointing a representative or distributor domiciled
or intervene in any action, suit or proceeding in any court or
in the Philippines which transacts business in its own
administrative agency of the Philippines; but such corporation may
name and for its own account. (underscoring supplied)
be sued or proceeded against before Philippine courts or
administrative tribunals on any valid cause of action recognized In the durable case of The Mentholatum Co. vs.
under Philippine laws. Mangaliman, this Court discoursed on the test to determine
whether a foreign company is doing business in the Philippines,
The aforementioned provision prohibits, not merely absence of thus:[10]
the prescribed license, but it also bars a foreign corporation doing
business in the Philippines without such license access to our x x x The true test, however, seems to be whether the foreign
courts.[8] A foreign corporation without such license is not ipso corporation is continuing the body or substance of the business or
facto incapacitated from bringing an action. A license is necessary enterprise for which it was organized or whether it has
only if it is transacting or doing business in the country. substantially retired from it and turned it over to another. (Traction
Cos. v. Collectors of Int. Revenue [C.C.A., Ohio], 223 F. 984,
However, there is no definitive rule on what constitutes doing,
987.] The term implies a continuity of commercial dealings and
engaging in, or transacting business. The Corporation Code itself
arrangements, and contemplates, to that extent, the performance
does not define such terms. To fill the gap, the evolution of its
of acts or works or the exercise of some of the functions normally
statutory definition has produced a rather all-encompassing
incident to, and in progressive prosecution of, the purpose and
concept in Republic Act No. 7042[9] in this wise:
object of its organization.] (sic) (Griffin v. Implement Dealers Mut.
Fire Ins. Co., 241 N.W. 75, 77; Pauline Oil & Gas Co. v. Mutual Tank
SEC. 3. Definitions. - As used in this Act: Line Co., 246 P. 851, 852, 118 Okl. 111; Automotive Material Co. v.
American Standard Metal Products Corp., 158 N.E. 698, 703, 327
xxx xxx xxx III. 367.)
(d) the phrase doing business shall include soliciting
orders, service contracts, opening offices, whether The accepted rule in jurisprudence is that each case must be
called liaison offices or branches; appointing judged in the light of its own environmental circumstances.[11] It
representatives or distributors domiciled in the should be kept in mind that the purpose of the law is to subject the
foreign corporation doing business in the Philippines to the it can be clearly gleaned from the four-month period of
jurisdiction of our courts. It is not to prevent the foreign transactions between appellant and appellee that it was a
corporation from performing single or isolated acts, but to bar it continuing business relationship, which would, without doubt,
from acquiring a domicile for the purpose of business without first constitute doing business without a license. For all intents and
taking the steps necessary to render it amenable to suits in the purposes, appellant corporation is doing or transacting business in
local courts. the Philippines without a license and that, therefore, in accordance
with the specific mandate of Section 144 of the Corporation Code,
The trial court held that petitioner-corporation was doing it has no capacity to sue. (addition ours)
business without a license, finding that:[12]
We find no reason to disagree with both lower courts. More
The invoices and delivery receipts covering the period of (sic) from than the sheer number of transactions entered into, a clear and
January 17, 1989 to August 16, 1989 cannot be treated to mean a unmistakable intention on the part of petitioner to continue the
singular and isolated business transaction that is temporary in body of its business in the Philippines is more than apparent. As
character.Granting that there is no distributorship agreement alleged in its complaint, it is engaged in the manufacture and sale
between herein parties, yet by the mere fact that plaintiff, each of elements used in sealing pumps, valves, and pipes for industrial
time that the defendant posts an order delivers the items as purposes, valves and control equipment used for industrial fluid
evidenced by the several invoices and receipts of various dates control and PVC pipes and fittings for industrial use. Thus, the sale
only indicates that plaintiff has the intention and desire to repeat by petitioner of the items covered by the receipts, which are part
the (sic) said transaction in the future in pursuit of its ordinary and parcel of its main product line, was actually carried out in the
business. Furthermore, and if the corporation is doing that for progressive prosecution of commercial gain and the pursuit of the
which it was created, the amount or volume of the business done is purpose and object of its business, pure and simple. Further, its
immaterial and a single act of that character may constitute doing grant and extension of 90-day credit terms to private respondent
business. (See p. 603, Corp. Code, De Leon - 1986 Ed.). for every purchase made, unarguably shows an intention to
continue transacting with private respondent, since in the usual
Respondent Court affirmed this finding in its assailed Decision course of commercial transactions, credit is extended only to
with this explanation:[13] customers in good standing or to those on whom there is an
intention to maintain long-term relationship. This being so, the
existence of a distributorship agreement between the parties, as
x x x Considering the factual background as laid out above, the
alleged but not proven by private respondent, would, if duly
transaction cannot be considered as an isolated one. Note that
established by competent evidence, be merely corroborative, and
there were 17 orders and deliveries (only sixteen per our count)
failure to sufficiently prove said allegation will not significantly
over a four-month period. The appellee (private respondent) made
affect the finding of the courts below. Nor our own ruling. It is
separate orders at various dates. The transactions did not consist
precisely upon the set of facts above-detailed that we concur with
of separate deliveries for one single order. In the case at bar, the
respondent Court that petitioner corporation was doing business in
transactions entered into by the appellant with the appellee are a
the country.
series of commercial dealings which would signify an intent on the
part of the appellant (petitioner) to do business in the Philippines Equally important is the absence of any fact or circumstance
and could not by any stretch of the imagination be considered an which might tend even remotely to negate such intention to
isolated one, thus would fall under the category of doing business. continue the progressive prosecution of petitioners business
activities in this country. Had private respondent not turned out to
Even if We were to view, as contended by the appellant, that be a bad risk, in all likelihood petitioner would have indefinitely
the transactions which occurred between January to August 1989, continued its commercial transactions with him, and not
constitute a single act or isolated business transaction, this being surprisingly, in ever increasing volumes.
the ordinary business of appellant corporation, it can be said to be
illegally doing or transacting business without a license. x x x Here
Thus, we hold that the series of transactions in question could By this judgment, we are not foreclosing petitioners right to
not have been isolated or casual transactions. What is collect payment. Res judicata does not set in a case dismissed for
determinative of doing business is not really the number or the lack of capacity to sue, because there has been no determination
quantity of the transactions, but more importantly, the intention of on the merits.[16] Moreover, this Court has ruled that subsequent
an entity to continue the body of its business in the country. The acquisition of the license will cure the lack of capacity at the time
number and quantity are merely evidence of such intention. The of the execution of the contract.[17]
phrase isolated transaction has a definite and fixed meaning, i.e. a
transaction or series of transactions set apart from the common The requirement of a license is not meant to put foreign
corporations at a disadvantage. Rather, the doctrine of lack of
business of a foreign enterprise in the sense that there is no
intention to engage in a progressive pursuit of the purpose and capacity to sue is based on considerations of sound public policy.
[18]
Thus, it has been ruled in Home Insurance that:[19]
object of the business organization. Whether a foreign corporation
is doing business does not necessarily depend upon the frequency
of its transactions, but more upon the nature and character of the x x x The primary purpose of our statute is to compel a foreign
transactions.[14] corporation desiring to do business within the state to submit itself
to the jurisdiction of the courts of this state. The statute was not
Given the facts of this case, we cannot see how petitioners intended to exclude foreign corporations from the state. x x x x The
business dealings will fit the category of isolated transactions better reason, the wiser and fairer policy, and the greater weight
considering that its intention to continue and pursue the corpus of lie with those decisions which hold that where, as here, there is a
its business in the country had been clearly established. It has not prohibition with a penalty, with no express or implied declarations
presented any convincing argument with equally convincing respecting the validity of enforceability of contracts made by
evidence for us to rule otherwise. qualified foreign corporations, the contracts x x x are enforceable x
x x upon compliance with the law.(Peter & Burghard Stone Co. v.
Carper, 172 N.E. 319 [1930].)
Incapacitated to Maintain Suit
While we agree with petitioner that the country needs to
develop trade relations and foster friendly commercial relations
Accordingly and ineluctably, petitioner must be held to be with other states, we also need to enforce our laws that regulate
incapacitated to maintain the action a quo against private the conduct of foreigners who desire to do business here. Such
respondent. strangers must follow our laws and must subject themselves to
reasonable regulation by our government.
It was never the intent of the legislature to bar court access to
a foreign corporation or entity which happens to obtain an isolated WHEREFORE, premises considered, the instant petition is
order for business in the Philippines. Neither, did it intend to shield hereby DENIED and the assailed Decision is AFFIRMED.
debtors from their legitimate liabilities or obligations. [15] But it
cannot allow foreign corporations or entities which conduct regular SO ORDERED.
business any access to courts without the fulfillment by such
corporations of the necessary requisites to be subjected to our
governments regulation and authority. By securing a license, the
foreign entity would be giving assurance that it will abide by the [G.R. No. 154618. April 14, 2004]
decisions of our courts, even if adverse to it.

AGILENT TECHNOLOGIES SINGAPORE (PTE)


Other Remedy Still Available
LTD., petitioner, vs. INTEGRATED SILICON
TECHNOLOGY PHILIPPINES CORPORATION, TEOH
KIANG HONG, TEOH KIANG SENG, ANTHONY CHOO, docketed as Civil Case No. 3110-01-C. It alleged
JOANNE KATE M. DELA CRUZ, JEAN KAY M. DELA CRUZ that Agilent breached the parties oral agreement to extend
and ROLANDO T. NACILLA, respondents. the VAASA. Integrated Silicon thus prayed that defendant be
ordered to execute a written extension of the VAASA for a period of
DECISION five years as earlier assured and promised; to comply with the
extended VAASA; and to pay actual, moral, exemplary damages
YNARES-SANTIAGO, J.: and attorneys fees.[9]

This petition for review assails the Decision dated August 12, On June 1, 2001, summons and a copy of the complaint were
2002 of the Court of Appeals in CA-G.R. SP No. 66574, which served on Atty. Ramon Quisumbing, who returned these processes
dismissed Civil Case No. 3123-2001-C and annulled and set aside on the claim that he was not the registered agent of Agilent. Later,
the Order dated September 4, 2001 issued by the Regional Trial he entered a special appearance to assail the courts jurisdiction
Court of Calamba, Laguna, Branch 92. over the person of Agilent.

Petitioner Agilent Technologies Singapore (Pte.), Ltd. (Agilent) On July 2, 2001, Agilent filed a separate complaint against
is a foreign corporation, which, by its own admission, is not Integrated Silicon, Teoh Kang Seng, Teoh Kiang Gong,
licensed to do business in the Philippines.[1] Respondent Integrated Anthony Choo, Joanne Kate M. dela Cruz, Jean Kay M. dela Cruz
Silicon Technology Philippines Corporation (Integrated Silicon) is a and Rolando T. Nacilla,[10] for Specific Performance, Recovery of
private domestic corporation, 100% foreign owned, which is Possession, and Sum of Money with Replevin, Preliminary
engaged in the business of manufacturing and assembling Mandatory Injunction, and Damages, before the Regional Trial
electronics components.[2] Respondents Teoh Kiang Court, Calamba, Laguna, Branch 92, docketed as Civil Case No.
Hong, Teoh Kiang Seng and Anthony Choo, Malaysian nationals, are 3123-2001-C. Agilent prayed that a writ of replevin or, in the
current members of Integrated Silicons board of directors, while alternative, a writ of preliminary mandatory injunction, be issued
Joanne Kate M. dela Cruz, Jean Kay M. dela Cruz, and Rolando ordering defendants to immediately return and deliver to plaintiff
T. Nacilla are its former members.[3] its equipment, machineries and the materials to be used for fiber-
optic components which were left in the plant of Integrated
The juridical relation among the various parties in this case can Silicon. It further prayed that defendants be ordered to pay actual
be traced to a 5-year Value Added Assembly Services Agreement and exemplary damages and attorneys fees.[11]
(VAASA), entered into on April 2, 1996 between Integrated Silicon
and the Hewlett-Packard Singapore (Pte.) Respondents filed a Motion to Dismiss in Civil Case No. 3123-
Ltd., Singapore Components Operation (HP-Singapore).[4] Under 2001-C,[12] on the grounds of lack of Agilents legal capacity to sue;
the terms of the VAASA, Integrated Silicon was to locally
[13]
litis pendentia;[14] forum shopping;[15] and failure to state a
manufacture and assemble fiber optics for export to HP- cause of action.[16]
Singapore. HP-Singapore, for its part, was to consign raw materials On September 4, 2001, the trial court denied the Motion to
to Integrated Silicon; transport machinery to the plant of Dismiss and granted petitioner Agilents application for a writ
Integrated Silicon; and pay Integrated Silicon the purchase price of of replevin.[17]
the finished products.[5] The VAASA had a five-year term, beginning
on April 2, 1996, with a provision for annual renewal by mutual Without filing a motion for reconsideration, respondents filed a
written consent.[6] On September 19, 1999, with the consent of petition for certiorari with the Court of Appeals.[18]
Integrated Silicon,[7] HP-Singapore assigned all its rights and In the meantime, upon motion filed by respondents, Judge
obligations in the VAASA to Agilent.[8] Antonio S. Pozas of Branch 92 voluntarily inhibited himself in Civil
On May 25, 2001, Integrated Silicon filed a complaint for Case No. 3123-2001-C. The case was re-raffled and assigned to
Specific Performance and Damages against Agilent and its officers Branch 35, the same branch where Civil Case No. 3110-2001-C is
Tan Bian Ee, Lim Chin Hong, Tey Boon Teck and Francis Khor, pending.
On August 12, 2002, the Court of Appeals granted respondents (2) whether or not the Court of Appeals committed reversible error
petition for certiorari, set aside the assailed Order of the trial court in dismissing Civil Case No. 3123-2001-C.
dated September 4, 2001, and ordered the dismissal of Civil Case
No. 3123-2001-C. We find merit in the petition.
The Court of Appeals, citing the case
Hence, the instant petition raising the following errors:
of Malayang Manggagawa sa ESSO v. ESSO Standard Eastern, Inc.,
I. [20]
held that the lower court had no jurisdiction over Civil Case No.
3123-2001-C because of the pendency of Civil Case No. 3110-
THE COURT OF APPEALS COMMITTED REVERSIBLE ERROR IN NOT 2001-C and, therefore, a motion for reconsideration was not
DISMISSING RESPONDENTS PETITION FOR CERTIORARI FOR necessary before resort to a petition for certiorari. This was error.
RESPONDENTS FAILURE TO FILE A MOTION FOR
Jurisdiction is fixed by law. Batas Pambansa Blg. 129 vests
RECONSIDERATION BEFORE RESORTING TO THE REMEDY OF
jurisdiction over the subject matter of Civil Case No. 3123-2001-C
CERTIORARI.
in the RTC.[21]

II. The Court of Appeals ruling that the assailed Order issued by
the RTC of Calamba, Branch 92, was a nullity for lack of jurisdiction
THE COURT OF APPEALS COMMITTED REVERSIBLE ERROR IN due to litis pendentia and forum shopping, has no legal
ANNULLING AND SETTING ASIDE THE TRIAL COURTS ORDER basis. The pendency of another action does not strip a court of the
DATED 4 SEPTEMBER 2001 AND ORDERING THE DISMISSAL OF jurisdiction granted by law.
CIVIL CASE NO. 3123-2001-C BELOW ON THE GROUND OF LITIS The Court of Appeals further ruled that a Motion for
PENDENTIA, ON ACCOUNT OF THE PENDENCY OF CIVIL CASE NO. Reconsideration was not necessary in view of the urgent necessity
3110-2001-C. in this case. We are not convinced. In the case of Bache and Co.
(Phils.), Inc. v. Ruiz,[22] relied on by the Court of Appeals, it was
III. held that time is of the essence in view of the tax assessments
sought to be enforced by respondent officers of the Bureau of
THE COURT OF APPEALS COMMITTED REVERSIBLE ERROR IN Internal Revenue against petitioner corporation, on account of
ANNULLING AND SETTING ASIDE THE TRIAL COURTS ORDER which immediate and more direct action becomes necessary. Tax
DATED 4 SEPTEMBER 2001 AND ORDERING THE DISMISSAL OF assessments in that case were based on documents seized by
CIVIL CASE NO. 3123-2001-C BELOW ON THE GROUND OF FORUM virtue of an illegal search, and the deprivation of the right to due
SHOPPING, ON ACCOUNT OF THE PENDENCY OF CIVIL CASE NO. process tainted the entire proceedings with illegality. Hence, the
3110-2001-C. urgent necessity of preventing the enforcement of the tax
assessments was patent. Respondents, on the other hand, cite the
IV. case of Geronimo v. Commission on Elections,[23] where the urgent
necessity of resolving a disqualification case for a position in local
THE COURT OF APPEALS COMMITTED REVERSIBLE ERROR IN government warranted the expeditious resort to certiorari. In the
ORDERING THE DISMISSAL OF CIVIL CASE NO. 323-2001-C case at bar, there is no analogously urgent circumstance which
BELOW INSTEAD OF ORDERING IT CONSOLIDATED WITH CIVIL would necessitate the relaxation of the rule on a Motion for
CASE NO. 3110-2001-C.[19] Reconsideration.
Indeed, none of the exceptions for dispensing with a Motion for
The two primary issues raised in this petition: (1) whether or Reconsideration is present here. None of the following cases cited
not the Court of Appeals committed reversible error in giving due by respondents serves as adequate basis for their procedural lapse.
course to respondents petition, notwithstanding the failure to file a
Motion for Reconsideration of the September 4, 2001 Order; and
In Vigan Electric Light Co., Inc. v. Public Service Commission, regardless of which party is successful, amount
[24]
the questioned order was null and void for failure of respondent to res judicata in the other.[28]
tribunal to comply with due process requirements;
in Matanguihan v. Tengco,[25] the questioned order was a patent The Court of Appeals correctly appreciated the identity of
parties in Civil Cases No. 3123-2001-C and 3110-2001-C. Well-
nullity for failure to acquire jurisdiction over the defendants, which
fact the records plainly disclosed; and in National Electrification settled is the rule that lis pendens requires only substantial, and
not absolute, identity of parties. [29] There is substantial identity of
Administration v. Court of Appeals,[26] the questioned orders were
void for vagueness. No such patent nullity is evident in the Order parties when there is a community of interest between a party in
the first case and a party in the second case, even if the latter was
issued by the trial court in this case.Finally, while urgency may be a
ground for dispensing with a Motion for Reconsideration, in the not impleaded in the first case.[30] The parties in these cases are
vying over the interests of the two opposing corporations; the
case of Vivo v. Cloribel,[27] cited by respondents, the slow progress
of the case would have rendered the issues moot had a motion for individuals are only incidentally impleaded, being the natural
persons purportedly accused of violating these corporations rights.
reconsideration been availed of. We find no such urgent
circumstance in the case at bar. Likewise, the fact that the positions of the parties are
reversed, i.e., the plaintiffs in the first case are the defendants in
Respondents, therefore, availed of a premature remedy when
they immediately raised the matter to the Court of Appeals the second case or vice versa, does not negate the identity of
parties for purposes of determining whether the case is dismissible
on certiorari; and the appellate court committed reversible error
when it took cognizance of respondents petition instead of on the ground of litis pendentia.[31]
dismissing the same outright. The identity of parties notwithstanding, litis pendentia does not
We come now to the substantive issues of the petition. obtain in this case because of the absence of the second and third
requisites. The rights asserted in each of the cases involved are
Litis pendentia is a Latin term which literally means a pending separate and distinct; there are two subjects of controversy
suit. It is variously referred to in some decisions presented for adjudication; and two causes of action are clearly
as lis pendens and auter action pendant. While it is normally involved. The fact that respondents instituted a prior action for
connected with the control which the court has on a property Specific Performance and Damages is not a ground for defeating
involved in a suit during the continuance proceedings, it is more the petitioners action for Specific Performance, Recovery of
interposed as a ground for the dismissal of a civil action pending in Possession, and Sum of Money with Replevin, Preliminary
court. Mandatory Injunction, and Damages.
Litis pendentia as a ground for the dismissal of a civil action In Civil Case No. 3110-2001-C filed by respondents, the issue
refers to that situation wherein another action is pending between is whether or not there was a breach of an oral promise to renew of
the same parties for the same cause of action, such that the the VAASA. The issue in Civil Case No. 3123-2001-C, filed by
second action becomes unnecessary and petitioner, is whether petitioner has the right to take possession of
vexatious. For litis pendentia to be invoked, the concurrence of the the subject properties. Petitioners right of possession is founded on
following requisites is necessary: the ownership of the subject goods, which ownership is not
disputed and is not contingent on the extension or non-extension
(a) identity of parties or at least such as represent the of the VAASA. Hence, the replevin suit can validly be tried even
same interest in both actions; while the prior suit is being litigated in the Regional Trial Court.
(b) identity of rights asserted and reliefs prayed for, Possession of the subject properties is not an issue in Civil
the reliefs being founded on the same facts; and Case No. 3110-2001-C. The reliefs sought by respondent
(c) the identity in the two cases should be such that the Integrated Silicon therein are as follows: (1) execution of a written
judgment that may be rendered in one would, extension or renewal of the VAASA; (2) compliance with the
extended VAASA; and (3) payment of overdue accounts, damages,
and attorneys fees. The reliefs sought by petitioner Agilentin Civil We now proceed to the issue of forum shopping.
Case No. 3123-2001-C, on the other hand, are as follows: (1)
The test for determining whether a party violated the rule
issuance of a Writ of Replevin or Writ of Preliminary Mandatory
Injunction; (2) recovery of possession of the subject properties; against forum-shopping was laid down in the case of Buan v.
Lopez.[34] Forum shopping exists where the elements
(3) damages and attorneys fees.
of litispendentia are present, or where a final judgment in one case
Concededly, some items or pieces of evidence may be will amount to res judicata in the final other. There being
admissible in both actions. It cannot be said, however, no litis pendentia in this case, a judgment in the said case will not
that exactly the same evidence will support the decisions in both, amount to res judicata in Civil Case No. 3110-2001-C, and
since the legally significant and controlling facts in each case are respondents contention on forum shopping must likewise fail.
entirely different. Although the VAASA figures prominently in both
We are not unmindful of the afflictive consequences that may
suits, Civil Case No. 3110-2001-C is premised on a purported
breach of an oral obligation to extend the VAASA, and damages be suffered by both petitioner and respondents if replevin is
granted by the trial court in Civil Case No. 3123-2001-C. If
arising out of Agilents alleged failure to comply with such purported
extension. Civil Case No. 3123-2001-C, on the other hand, is respondent Integrated Silicon eventually wins Civil Case No. 3110-
2001-C, and the VAASAs terms are extended, petitioner
premised on a breach of the VAASA itself, and damages arising
to Agilent out of that purported breach. corporation will have to comply with its obligations thereunder,
which would include the consignment of properties similar to those
It necessarily follows that the third requisite it may recover by way of replevin in Civil Case No. 3123-2001-
for litis pendentia is also absent. The following are the elements C. However, petitioner will also suffer an injustice if denied the
of res judicata: remedy of replevin, resort to which is not only allowed but
encouraged by law.
(a) The former judgment must be final;
Respondents argue that since Agilent is an unlicensed foreign
(b) The court which rendered judgment must have corporation doing business in the Philippines, it lacks the legal
jurisdiction over the parties and the subject matter; capacity to file suit.[35] The assailed acts of petitioner Agilent,
(c) It must be a judgment on the merits; and purportedly in the nature of doing business in the Philippines, are
the following: (1) mere entering into the VAASA, which is a service
(d) There must be between the first and second actions contract;[36] (2) appointment of a full-time representative in
identity of parties, subject matter, and cause of action. Integrated Silicon, to oversee and supervise the production
[32]
of Agilents products;[37] (3) the appointment by Agilent of six full-
In this case, any judgment rendered in one of the actions will time staff members, who were permanently stationed at Integrated
not amount to res judicata in the other action. There being Silicons facilities in order to inspect the finished goods for Agilent;
different causes of action, the decision in one case will not
[38]
and (4) Agilents participation in the management, supervision
constitute res judicata as to the other. and control of Integrated Silicon, [39] including instructing Integrated
Silicon to hire more employees to meet Agilents increasing
Of course, a decision in one case may, to a certain extent, production needs,[40] regularly performing quality audit, evaluation
affect the other case. This, however, is not the test to determine and supervision of Integrated Silicons employees, [41] regularly
the identity of the causes of action. Whatever difficulties or performing inventory audit of raw materials to be used by
inconvenience may be entailed if both causes of action are pursued Integrated Silicon, which was also required to provide weekly
on separate remedies, the proper solution is not the dismissal inventory updates to Agilent,[42] and providing and dictating
order of the Court of Appeals. The possible consolidation of said Integrated Silicon on the daily production schedule, volume and
cases, as well as stipulations and appropriate modes of discovery, models of the products to manufacture and ship for Agilent.[43]
may well be considered by the court below to subserve not only
procedural expedience but, more important, the ends of justice.[33] A foreign corporation without a license is not ipso
facto incapacitated from bringing an action in Philippine courts. A
license is necessary only if a foreign corporation is transacting or required license, it can sue before Philippine courts on any
doing business in the country. The Corporation Code provides: transaction.
The challenge to Agilents legal capacity to file suit hinges on
Sec. 133. Doing business without a license. No foreign corporation
whether or not it is doing business in the Philippines. However,
transacting business in the Philippines without a license, or its
there is no definitive rule on what constitutes doing, engaging in,
successors or assigns, shall be permitted to maintain or intervene
or transacting business in the Philippines, as this Court observed in
in any action, suit or proceeding in any court or administrative
the case of Mentholatum v. Mangaliman.[50] The Corporation Code
agency of the Philippines; but such corporation may be sued or
itself is silent as to what acts constitute doing or transacting
proceeded against before Philippine courts or administrative
business in the Philippines.
tribunals on any valid cause of action recognized under Philippine
laws. Jurisprudence has it, however, that the term implies a
continuity of commercial dealings and arrangements, and
The aforementioned provision prevents an unlicensed foreign contemplates, to that extent, the performance of acts or works or
corporation doing business in the Philippines from accessing our the exercise of some of the functions normally incident to or in
courts. progressive prosecution of the purpose and subject of its
organization.[51]
In a number of cases, however, we have held that an
unlicensed foreign corporation doing business in In Mentholatum,[52] this Court discoursed on the two general
the Philippines may bring suit in Philippine courts against a tests to determine whether or not a foreign corporation can be
Philippine citizen or entity who had contracted with and benefited considered as doing business in the Philippines. The first of these is
from said corporation.[44] Such a suit is premised on the doctrine the substance test, thus:[53]
of estoppel. A party is estopped from challenging the personality of
a corporation after having acknowledged the same by entering into The true test [for doing business], however, seems to be whether
a contract with it. This doctrine of estoppel to deny corporate the foreign corporation is continuing the body of the business or
existence and capacity applies to foreign as well as domestic enterprise for which it was organized or whether it has
corporations.[45] The application of this principle prevents a person substantially retired from it and turned it over to another.
contracting with a foreign corporation from later taking advantage
of its noncompliance with the statutes chiefly in cases where such The second test is the continuity test, expressed thus:[54]
person has received the benefits of the contract.[46]
The principles regarding the right of a foreign corporation to The term [doing business] implies a continuity of commercial
bring suit in Philippine courts may thus be condensed in four dealings and arrangements, and contemplates, to that extent, the
statements: (1) if a foreign corporation does business in the performance of acts or works or the exercise of some of the
Philippines without a license, it cannot sue before the Philippine functions normally incident to, and in the progressive prosecution
courts;[47] (2) if a foreign corporation is not doing business in the of, the purpose and object of its organization.
Philippines, it needs no license to sue before Philippine courts on an
isolated transaction or on a cause of action entirely independent of Although each case must be judged in light of its attendant
any business transaction[48]; (3) if a foreign corporation does circumstances, jurisprudence has evolved several guiding principles
business in the Philippines without a license, a Philippine citizen or for the application of these tests. For instance, considering that it
entity which has contracted with said corporation may transacted with its Philippine counterpart for seven years, engaging
be estopped from challenging the foreign corporations corporate in futures contracts, this Court concluded that the foreign
personality in a suit brought before Philippine courts;[49] and (4) if a corporation in Merrill Lynch Futures, Inc. v. Court of Appeals and
foreign corporation does business in the Philippines with the Spouses Lara,[55] was doing business in the Philippines.
In Commissioner of Internal Revenue v. Japan Airlines (JAL),[56] the
Court held that JAL was doing business in the Philippines, i.e., its
commercial dealings in the country were continuous despite the Philippines; and any other act or acts that imply a continuity of
fact that no JAL aircraft landed in the country as it sold tickets in commercial dealings or arrangements, and contemplate to that
the Philippines through a general sales agent, and opened a extent the performance of acts or works, or the exercise of some of
promotions office here as well. the functions normally incident to, and in the progressive
prosecution of, commercial gain or of the purpose and object of the
In General Corp. of the Phils. v. Union Insurance Society of business organization.
Canton and Firemans Fund Insurance,[57] a foreign insurance
corporation was held to be doing business in the Philippines, as it
An analysis of the relevant case law, in conjunction with
appointed a settling agent here, and issued 12 marine insurance
Section 1 of the Implementing Rules and Regulations of the FIA (as
policies. We held that these transactions were not isolated or
amended by Republic Act No. 8179), would demonstrate that the
casual, but manifested the continuity of the foreign corporations
acts enumerated in the VAASA do not constitute doing business in
conduct and its intent to establish a continuous business in the
the Philippines.
country. In Eriks PTE Ltd. v. Court of Appeals and Enriquez,[58] the
foreign corporation sold its products to a Filipino buyer who Section 1 of the Implementing Rules and Regulations of the
ordered the goods 16 times within an eight-month FIA (as amended by Republic Act No. 8179) provides that the
period. Accordingly, this Court ruled that the corporation was doing following shall not be deemed doing business:
business in the Philippines, as there was a clear intention on its
part to continue the body of its business here, despite the relatively (1) Mere investment as a shareholder by a foreign entity in
short span of time involved. Communication Materials and Design, domestic corporations duly registered to do business,
Inc., et al. v. Court of Appeals, ITEC, et al. [59] and Top-Weld and/or the exercise of rights as such investor;
Manufacturing v. ECED, IRTI, et al.[60] both involved the License (2) Having a nominee director or officer to represent its
and Technical Agreement and Distributor Agreement of foreign interest in such corporation;
corporations with their respective local counterparts that were the
primary bases for the Courts ruling that the foreign corporations (3) Appointing a representative or distributor domiciled in
were doing business in the Philippines. [61] In particular, the Court the Philippines which transacts business in the
cited the highly restrictive nature of certain provisions in the representatives or distributors own name and account;
agreements involved, such that, as stated in Communication
(4) The publication of a general advertisement through
Materials, the Philippine entity is reduced to a mere extension or
any print or broadcast media;
instrument of the foreign corporation. For example,
in Communication Materials, the Court deemed the No Competing (5) Maintaining a stock of goods in the Philippines solely
Product provision of the Representative Agreement therein for the purpose of having the same processed by
restrictive.[62] another entity in the Philippines;
The case law definition has evolved into a statutory definition, (6) Consignment by a foreign entity of equipment with a
having been adopted with some qualifications in various pieces of local company to be used in the processing of products
legislation. The Foreign Investments Act of 1991 (the FIA; Republic for export;
Act No. 7042, as amended), defines doing business as follows:
(7) Collecting information in the Philippines; and
Sec. 3, par. (d). The phrase doing business shall include soliciting (8) Performing services auxiliary to an existing isolated
orders, service contracts, opening offices, whether called liaison contract of sale which are not on a continuing basis,
offices or branches; appointing representatives or distributors such as installing in the Philippines machinery it has
domiciled in the Philippines or who in any calendar year stay in the manufactured or exported to the Philippines, servicing
country for a period or periods totaling one hundred eighty (180) the same, training domestic workers to operate it, and
days or more; participating in the management, supervision or similar incidental services.
control of any domestic business, firm, entity, or corporation in the
By and large, to constitute doing business, the activity to be CARPIO MORALES,
undertaken in the Philippines is one that is for profit-making.[63] TINGA, and
VELASCO, JR., JJ.
By the clear terms of the VAASA, Agilents activities in the
Philippines were confined to (1) maintaining a stock of goods in the
Philippines solely for the purpose of having the same processed by GTVL MANUFACTURING Promulgated:
Integrated Silicon; and (2) consignment of equipment with INDUSTRIES, INC.,
Integrated Silicon to be used in the processing of products for Respondent. May 28, 2007
export. As such, we hold that, based on the evidence presented x--------------------------------------------------------------------------
thus far, Agilent cannot be deemed to be doing business in ---------------x
the Philippines. Respondents contention that Agilent lacks the legal
capacity to file suit is therefore devoid of merit. As a foreign
corporation not doing business in the Philippines, it needed no DECISION
license before it can sue before our courts.
Finally, as to Agilents purported failure to state a cause of
action against the individual respondents, we likewise rule in favor CARPIO, J.:
of petitioner. A Motion to Dismiss hypothetically admits all the
allegations in the Complaint, which plainly alleges that these
individual respondents had committed or permitted the commission The Case
of acts prejudicial to Agilent. Whether or not these individuals had
divested themselves of their interests in Integrated Silicon, or are
no longer members of Integrated Silicons Board of Directors, is a Before the Court is a petition for review [1] of the 18
matter of defense best threshed out during trial.
April 2001 Decision[2] of the Court of Appeals in CA-G.R. CV No.
WHEREFORE, PREMISES CONSIDERED, the petition is
GRANTED. The Decision of the Court of Appeals in CA-G.R. SP No. 66236. The Court of Appeals affirmed the Order[3] of the Regional
66574 dated August 12, 2002, which dismissed Civil Case No. Trial Court, Branch 258, Paraaque City (trial court) dismissing the
3123-2001-C, is REVERSED and SET ASIDE. The Order
dated September 4, 2001 issued by the Regional Trial Court complaint for sum of money filed by B. Van Zuiden Bros., Ltd.
of Calamba, Laguna, Branch 92, in Civil Case No. 3123-2001-C, is (petitioner) against GTVL Manufacturing Industries, Inc.
REINSTATED. Agilents application for a Writ of Replevin is
GRANTED. (respondent).

No pronouncement as to costs. The Facts


SO ORDERED.

On 13 July 1999, petitioner filed a complaint for sum of money


B. VAN ZUIDEN BROS., LTD., G.R. No. 147905
Petitioner, against respondent, docketed as Civil Case No. 99-0249. The
Present: pertinent portions of the complaint read:

QUISUMBING, J., 1. Plaintiff, ZUIDEN, is a corporation, incorporated


Chairperson, under the laws of Hong Kong. x x x ZUIDEN is not
-versus- CARPIO, engaged in business in the Philippines, but is suing
before the Philippine Courts, for the reasons
Instead of filing an answer, respondent filed a Motion
hereinafter stated.
to Dismiss[5] on the ground that petitioner has no legal capacity to
xxxx
sue. Respondent alleged that petitioner is doing business in the
3. ZUIDEN is engaged in the importation and Philippines without securing the required license. Accordingly,
exportation of several products, including lace petitioner cannot sue before Philippine courts.
products.

4. On several occasions, GTVL purchased lace After an exchange of several pleadings[6] between the parties, the
products from [ZUIDEN].
trial court issued an Order on 10 November 1999 dismissing the
5. The procedure for these purchases, as per the complaint.
instructions of GTVL, was that ZUIDEN delivers the
products purchased by GTVL, to a certain Hong Kong
corporation, known as Kenzar Ltd. (KENZAR), On appeal, the Court of Appeals sustained the trial courts dismissal
x x x and the products are then considered as sold,
upon receipt by KENZAR of the goods purchased by of the complaint.
GTVL.
KENZAR had the obligation to deliver the products to
the Philippines and/or to follow whatever instructions Hence, this petition.
GTVL had on the matter.

Insofar as ZUIDEN is concerned, upon delivery of the The Court of Appeals Ruling
goods to KENZAR in Hong Kong, the transaction is
concluded; and GTVL became obligated to pay the
agreed purchase price. In affirming the dismissal of the complaint, the Court of Appeals
relied on Eriks Pte., Ltd. v. Court of Appeals.[7] In that case, Eriks,
xxxx
7. However, commencing October 31, 1994 up to the an unlicensed foreign corporation, sought to collect US$41,939.63
present, GTVL has failed and refused to pay the from a Filipino businessman for goods which he purchased and
agreed purchase price for several deliveries ordered
received on several occasions from January to May 1989. The
by it and delivered by ZUIDEN, as above-mentioned.
transfers of goods took place in Singapore, for the Filipinos
xxxx
account, F.O.B. Singapore, with a 90-day credit term. Since the
9. In spite [sic] of said demands and in spite [sic] of transactions involved were not isolated, this Court found Eriks to be
promises to pay and/or admissions of liability, GTVL
doing business in the Philippines. Hence, this Court upheld the
has failed and refused, and continues to fail and
refuse, to pay the overdue amount of U.S. dismissal of the complaint on the ground that Eriks has no capacity
$32,088.02 [inclusive of interest].[4]
to sue.
The Court of Appeals noted that in Eriks, while the deliveries of the
The petition is meritorious.
goods were perfected in Singapore, this Court still found Eriks to be
engaged in business in the Philippines. Thus, the Court of Appeals
Section 133 of the Corporation Code provides:
concluded that the place of delivery of the goods (or the place
where the transaction took place) is not material in determining Doing business without license. No foreign
corporation transacting business in the Philippines
whether a foreign corporation is doing business in the without a license, or its successors or assigns, shall
Philippines. The Court of Appeals held that what is material are the be permitted to maintain or intervene in any action,
suit or proceeding in any court or administrative
proponents to the transaction, as well as the parties to be agency of the Philippines; but such corporation may
benefited and obligated by the transaction. be sued or proceeded against before Philippine
courts or administrative tribunals on any valid cause
of action recognized under Philippine laws.
In this case, the Court of Appeals found that the parties entered
into a contract of sale whereby petitioner sold lace products to The law is clear. An unlicensed foreign corporation doing business

respondent in a series of transactions. While petitioner delivered in the Philippines cannot sue before Philippine courts. On the other

the goods in Hong Kong to Kenzar, Ltd. (Kenzar), another Hong hand, an unlicensed foreign corporation not doing business in the

Kong company, the party with whom petitioner transacted was Philippines can sue before Philippine courts.

actually respondent, a Philippine corporation, and not Kenzar. The


Court of Appeals believed Kenzar is merely a shipping In the present controversy, petitioner is a foreign corporation which

company. The Court of Appeals concluded that the delivery of the claims that it is not doing business in the Philippines. As such, it

goods in Hong Kong did not exempt petitioner from being needs no license to institute a collection suit against respondent

considered as doing business in the Philippines. before Philippine courts.

The Issue Respondent argues otherwise. Respondent insists that petitioner is


doing business in the Philippines without the required

The sole issue in this case is whether petitioner, an unlicensed license. Hence, petitioner has no legal capacity to sue before

foreign corporation, has legal capacity to sue before Philippine Philippine courts.

courts. The resolution of this issue depends on whether petitioner


is doing business in the Philippines. Under Section 3(d) of Republic Act No. 7042 (RA 7042) or The
Foreign Investments Act of 1991, the phrase doing business

The Ruling of the Court includes:


x x x soliciting orders, service contracts, opening
dealings, the perfection and consummation of these transactions
offices, whether called liaison offices or branches;
appointing representatives or distributors domiciled were done outside the Philippines.[8]
in the Philippines or who in any calendar year stay in
the country for a period or periods totalling one
hundred eighty (180) days or more; participating in In its complaint, petitioner alleged that it is engaged in the
the management, supervision or control of any importation and exportation of several products, including lace
domestic business, firm, entity or corporation in the
Philippines; and any other act or acts that imply a products. Petitioner asserted that on several occasions, respondent
continuity of commercial dealings or arrangements, purchased lace products from it. Petitioner also claimed that
and contemplate to that extent the performance of
acts or works, or the exercise of some of the respondent instructed it to deliver the purchased goods to Kenzar,
functions normally incident to, and in progressive which is a Hong Kong company based in Hong
prosecution of, commercial gain or of the purpose
and object of the business organization: Provided, Kong. Upon Kenzars receipt of the goods, the products were
however, That the phrase doing business shall not be considered sold. Kenzar, in turn, had the obligation to deliver the
deemed to include mere investment as a shareholder
by a foreign entity in domestic corporations duly lace products to the Philippines. In other words, the sale of lace
registered to do business, and/or the exercise of products was consummated in Hong Kong.
rights as such investor; nor having a nominee
director or officer to represent its interests in such
corporation; nor appointing a representative or As earlier stated, the series of transactions between petitioner and
distributor domiciled in the Philippines which
transacts business in its own name and for its own respondent transpired and were consummated in Hong Kong. [9] We
account. also find no single activity which petitioner performed here in the
The series of transactions between petitioner and respondent Philippines pursuant to its purpose and object as a business
cannot be classified as doing business in the Philippines under organization.[10] Moreover, petitioners desire to do business within
Section 3(d) of RA 7042. An essential condition to be considered as the Philippines is not discernible from the allegations of the
doing business in the Philippines is the actual performance of complaint or from its attachments. Therefore, there is no basis for
specific commercial acts within the territory of the Philippines for ruling that petitioner is doing business in the Philippines.
the plain reason that the Philippines has no jurisdiction over
commercial acts performed in foreign territories. Here, there is no In Eriks, respondent therein alleged the existence of a
showing that petitioner performed within the Philippine territory the distributorship agreement between him and the foreign
specific acts of doing business mentioned in Section 3(d) of RA corporation. If duly established, such distributorship agreement
7042. Petitioner did not also open an office here in the Philippines, could support respondents claim that petitioner was indeed doing
appoint a representative or distributor, or manage, supervise or business in the Philippines. Here, there is no such or similar
control a local business. While petitioner and respondent entered agreement between petitioner and respondent.
into a series of transactions implying a continuity of commercial
We disagree with the Court of Appeals ruling that the proponents importing countries. Such a legal concept will have a deleterious
to the transaction determine whether a foreign corporation is doing effect not only on Philippine exports, but also on global trade.
business in the Philippines, regardless of the place of delivery or
place where the transaction took place. To accede to such theory To be doing or transacting business in the Philippines for purposes
makes it possible to classify, for instance, a series of transactions of Section 133 of the Corporation Code, the foreign corporation
between a Filipino in the United States and an American company must actually transact business in the Philippines, that is, perform
based in the United States as doing business in the Philippines, specific business transactions within the Philippine territory on a
even when these transactions are negotiated and consummated continuing basis in its own name and for its own account. Actual
only within the United States. transaction of business within the Philippine territory is an essential
requisite for the Philippines to acquire jurisdiction over a foreign
An exporter in one country may export its products to many corporation and thus require the foreign corporation to secure a
foreign importing countries without performing in the importing Philippine business license. If a foreign corporation does not
countries specific commercial acts that would constitute doing transact such kind of business in the Philippines, even if it exports
business in the importing countries. The mere act of exporting from its products to the Philippines, the Philippines has no jurisdiction to
ones own country, without doing any specific commercial act within require such foreign corporation to secure a Philippine business
the territory of the importing country, cannot be deemed as doing license.
business in the importing country. The importing country does not Considering that petitioner is not doing business in the Philippines,
acquire jurisdiction over the foreign exporter who has not it does not need a license in order to initiate and maintain a
performed any specific commercial act within the territory of the collection suit against respondent for the unpaid balance of
importing country. Without jurisdiction over the foreign exporter, respondents purchases.
the importing country cannot compel the foreign exporter to secure
a license to do business in the importing country.

Otherwise, Philippine exporters, by the mere act alone of exporting


their products, could be considered by the importing countries to
be doing business in those countries. This will require Philippine WHEREFORE, we GRANT the petition. We REVERSE the Decision
exporters to secure a business license in every foreign country dated 18 April 2001 of the Court of Appeals in CA-G.R. CV No.
where they usually export their products, even if they do not 66236. No costs.
perform any specific commercial act within the territory of such
clause of the Letter of Credit, NMC was permitted to draw up to
SO ORDERED.
$500,000 representing the minimum price of the contract upon
ARGILL, INC., G.R. No. 168266 presentation of some documents.
etitioner,
Present: The contract was amended three times: first, on 11 January 1990,
increasing the purchase price of the molasses to $47.50 per metric
CARPIO, J., Chairperson, ton;[3] second, on 18 June 1990, reducing the quantity of the
BRION, molasses to 10,500 metric tons and increasing the price to $55 per
versus - ABAD, metric ton;[4] and third, on 22 August 1990, providing for the
VILLARAMA, JR.,* and shipment of 5,250 metric tons of molasses on the last half of
PEREZ, JJ. December 1990 through the first half of January 1991, and the
balance of 5,250 metric tons on the last half of January 1991
through the first half of February 1991. [5] The third amendment
NTRA STRATA ASSURANCE Promulgated: also required NMC to put up a performance bond equivalent to
ORPORATION, $451,500, which represents the value of 10,500 metric tons of
Respondent. March 15, 2010 molasses computed at $43 per metric ton. The performance bond
x----------------------------------------- was intended to guarantee NMCs performance to deliver the
---------x molasses during the prescribed shipment periods according to the
terms of the amended contract.

In compliance with the terms of the third amendment of the


DECISION contract, respondent Intra Strata Assurance Corporation
(respondent) issued on 10 October 1990 a performance bond [6] in
the sum of P11,287,500 to guarantee NMCs delivery of the 10,500
CARPIO, J.: tons of molasses, and a surety bond[7] in the sum of P9,978,125 to
guarantee the repayment of downpayment as provided in the
contract.
The Case
NMC was only able to deliver 219.551 metric tons of molasses out
of the agreed 10,500 metric tons. Thus, petitioner sent demand
This petition for review[1] assails the 26 May 2005 Decision [2] of the letters to respondent claiming payment under the performance and
surety bonds. When respondent refused to pay, petitioner filed on
Court of Appeals in CA-G.R. CV No. 48447.
12 April 1991 a complaint[8] for sum of money against NMC and
respondent.
The Facts
Petitioner, NMC, and respondent entered into a compromise
agreement,[9] which the trial court approved in its Decision[10] dated
Petitioner Cargill, Inc. (petitioner) is a corporation organized and
13 December 1991. The compromise agreement provides that NMC
existing under the laws of the State of Delaware, United States of
would pay petitioner P3,000,000 upon signing of the compromise
America. Petitioner and Northern Mindanao Corporation (NMC)
agreement and would deliver to petitioner 6,991 metric tons of
executed a contract dated 16 August 1989 whereby NMC agreed to
molasses from 16-31 December 1991. However, NMC still failed to
sell to petitioner 20,000 to 24,000 metric tons of molasses, to be
comply with its obligation under the compromise agreement.
delivered from 1 Januaryto 30 June 1990 at the price of $44 per
Hence, trial proceeded against respondent.
metric ton. The contract provides that petitioner would open a
Letter of Credit with the Bank of Philippine Islands. Under the red
On 23 November 1994, the trial court rendered a decision, 1. Whether petitioner is doing or transacting
the dispositive portion of which reads: business in the Philippines in contemplation of
the law and established jurisprudence;
WHEREFORE, judgment is rendered in favor of
2. Whether respondent is estopped from invoking
plaintiff [Cargill, Inc.], ordering defendant INTRA
the defense that petitioner has no legal capacity
STRATA ASSURANCE CORPORATION to solidarily pay
to sue in the Philippines;
plaintiff the total amount of SIXTEEN MILLION NINE
HUNDRED NINETY-THREE THOUSAND AND TWO
3. Whether petitioner is seeking a review of the
HUNDRED PESOS (P16,993,200.00), Philippine
findings of fact of the Court of Appeals; and
Currency, with interest at the legal rate from October
10, 1990 until fully paid, plus attorneys fees in the
sum of TWO HUNDRED THOUSAND PESOS
(P200,000.00), Philippine Currency and the costs of
the suit.
4. Whether the advance payment of $500,000 was
released to NMC without the submission of the
supporting documents required
in the contract and the red clause Letter of
The Counterclaim of Intra Strata Assurance Corporation is hereby
Credit from which said amount was drawn.[12]
dismissed for lack of merit.

SO ORDERED.[11]
The Ruling of the Court

On appeal, the Court of Appeals reversed the trial courts decision We find the petition meritorious.
and dismissed the complaint. Hence, this petition.
Doing Business in the Philippines and Capacity to Sue
The Court of Appeals Ruling

The Court of Appeals held that petitioner does not have the The principal issue in this case is whether petitioner, an unlicensed
capacity to file this suit since it is a foreign corporation doing
foreign corporation, has legal capacity to sue before Philippine
business in the Philippines without the requisite license. The Court
of Appeals held that petitioners purchases of molasses were in courts. Under Article 123[13] of the Corporation Code, a foreign
pursuance of its basic business and not just mere isolated and
corporation must first obtain a license and a certificate from the
incidental transactions.
appropriate government agency before it can transact business in
the Philippines. Where a foreign corporation does business in
The Issues
the Philippines without the proper license, it cannot maintain any
Petitioner raises the following issues: action or proceeding before Philippine courts as provided
underSection 133 of the Corporation Code:
Sec. 133. Doing business without a license. No those activities which are not deemed doing business. Section 3(d)
foreign corporation transacting business in the of RA 7042 states:
Philippines without a license, or its successors or
assigns, shall be permitted to maintain or intervene
[T]he phrase doing business shall include soliciting
in any action, suit or proceeding in any court or
orders, service contracts, opening offices, whether
administrative agency of the Philippines; but such
called liaison offices or branches; appointing
corporation may be sued or proceeded against before
representatives or distributors domiciled in the
Philippine courts or administrative tribunals on any
Philippines or who in any calendar year stay in the
valid cause of action recognized under Philippine
country for a period or periods totalling one hundred
laws.
eighty (180) days or more; participating in the
management, supervision or control of any domestic
Thus, the threshold question in this case is whether petitioner was business, firm, entity or corporation in the
doing business in the Philippines. The Corporation Code provides no Philippines; and any other act or acts that imply a
definition for the phrase doing business. Nevertheless, Section 1 of continuity of commercial dealings or arrangements,
Republic Act No. 5455 (RA 5455),[14] provides that: and contemplate to that extent the performance of
acts or works, or the exercise of some of the
x x x the phrase doing business shall include functions normally incident to, and in progressive
soliciting orders, purchases, service contracts, prosecution of, commercial gain or of the purpose
opening offices, whether called liaison offices or and object of the business organization: Provided,
branches; appointing representatives or distributors however, That the phrase doing business shall not be
who are domiciled in the Philippines or who in any deemed to include mere investment as a shareholder
calendar year stay in the Philippines for a period or by a foreign entity in domestic corporations duly
periods totalling one hundred eighty days or more; registered to do business, and/or the exercise of
participating in the management, supervision or rights as such investor; nor having a nominee
control of any domestic business firm, entity or director or officer to represent its interests in such
corporation in the Philippines; and any other act or corporation; nor appointing a representative or
acts that imply a continuity of commercial distributor domiciled in the Philippines which
dealings or arrangements, and contemplate to transacts business in its own name and for its own
that extent the performance of acts or works, account.
or the exercise of some of the functions
normally incident to, and in progressive
prosecution of, commercial gain or of the Since respondent is relying on Section 133 of the Corporation Code
purpose and object of the business
to bar petitioner from maintaining an action in Philippine courts,
organization. (Emphasis supplied)
respondent bears the burden of proving that petitioners business
activities in the Philippines were not just casual or occasional, but
This is also the exact definition provided under Article 44 of the
so systematic and regular as to manifest continuity and
Omnibus Investments Code of 1987.
permanence of activity to constitute doing business in the
Republic Act No. 7042 (RA 7042), otherwise known as the Foreign Philippines. In this case, we find that respondent failed to prove
Investments Act of 1991, which repealed Articles 44-56 of Book II
of the Omnibus Investments Code of 1987, enumerated not only that petitioners activities in the Philippines constitute doing
the acts or activities which constitute doing business but also business as would prevent it from bringing an action.
The Implementing Rules and Regulations of RA 7042 provide under
The determination of whether a foreign corporation is doing Section 1(f), Rule I, that doing business does not include the
business in the Philippines must be based on the facts of each following acts:
case.[15] In the case of Antam Consolidated, Inc. v. CA,[16] in which
a foreign corporation filed an action for collection of sum of money
1. Mere investment as a shareholder by a foreign
against petitioners therein for damages and loss sustained for the
entity in domestic corporations duly registered to do
latters failure to deliver coconut crude oil, the Court emphasized
business, and/or the exercise of rights as such
the importance of the element of continuity of commercial activities
investor;
to constitute doing business in the Philippines. The Court held:
In the case at bar, the transactions entered into by 2. Having a nominee director or officer to represent its interests in
the respondent with the petitioners are not a series such corporation;
of commercial dealings which signify an intent on the
3. Appointing a representative or distributor domiciled in
part of the respondent to do business in the
the Philippines which transacts business in the representative's or
Philippines but constitute an isolated one which does
distributor's own name and account;
not fall under the category of doing business. The
records show that the only reason why the 4. The publication of a general advertisement through any print or
respondent entered into the second and third broadcast media;
transactions with the petitioners was because it
5. Maintaining a stock of goods in the Philippines solely for the
wanted to recover the loss it sustained from the
purpose of having the same processed by another entity in
failure of the petitioners to deliver the crude coconut
the Philippines;
oil under the first transaction and in order to give the
latter a chance to make good on their obligation. 6. Consignment by a foreign entity of equipment with a local
xxx company to be used in the processing of products for export;
7. Collecting information in the Philippines; and
x x x The three seemingly different transactions were
entered into by the parties only in an effort to fulfill 8. Performing services auxiliary to an existing isolated contract of
the basic agreement and in no way indicate an intent sale which are not on a continuing basis, such as installing in the
on the part of the respondent to engage in a Philippines machinery it has manufactured or exported to the
continuity of transactions with petitioners which will Philippines, servicing the same, training domestic workers to
categorize it as a foreign corporation doing business operate it, and similar incidental services.
in the Philippines.[17]

Similarly, in this case, petitioner and NMC amended their contract Most of these activities do not bring any direct receipts or profits to
three times to give a chance to NMC to deliver to petitioner the the foreign corporation, consistent with the ruling of this Court
molasses, considering that NMC already received the minimum in National Sugar Trading Corp. v. CA[18]that activities within
price of the contract. There is no showing that the transactions Philippine jurisdiction that do not create earnings or profits to the
between petitioner and NMC signify the intent of petitioner to foreign corporation do not constitute doing business in the
establish a continuous business or extend Philippines.[19] In that case, the Court held that it would be
its operations in the Philippines. inequitable for the National Sugar Trading Corporation, a state-
owned corporation, to evade payment of a legitimate indebtedness
performing in the importing countries specific
owing to the foreign corporation on the plea that the latter should
commercial acts that would constitute doing business
have obtained a license first before perfecting a contract with the in the importing countries. The mere act of exporting
from ones own country, without doing any specific
Philippine government. The Court emphasized that the foreign
commercial act within the territory of the importing
corporation did not sell sugar and derive income from the country, cannot be deemed as doing business in the
Philippines, but merely purchased sugar from the Philippine importing country. The importing country does not
require jurisdiction over the foreign exporter who has
government and allegedly paid for it in full. not yet performed any specific commercial act within
the territory of the importing country. Without
In this case, the contract between petitioner and NMC involved the jurisdiction over the foreign exporter, the importing
country cannot compel the foreign exporter to secure
purchase of molasses by petitioner from NMC. It was NMC, the a license to do business in the importing country.
domestic corporation, which derived income from the transaction
Otherwise, Philippine exporters, by the mere act alone of exporting
and not petitioner. To constitute doing business, the activity their products, could be considered by the importing countries to
undertaken in the Philippines should involve profit-making. be doing business in those countries. This will require Philippine
exporters to secure a business license in every foreign country
[20]
Besides, under Section 3(d) of RA 7042, soliciting purchases where they usually export their products, even if they do not
has been deleted from the enumeration of acts or activities which perform any specific commercial act within the territory of such
importing countries. Such a legal concept will have deleterious
constitute doing business. effect not only on Philippine exports, but also on global trade.

To be doing or transacting business in the


Philippines for purposes of Section 133 of the
Other factors which support the finding that petitioner is not doing Corporation Code, the foreign corporation
business in the Philippines are: (1) petitioner does not have an must actually transact business in the
Philippines, that is, perform specific business
office in the Philippines; (2) petitioner imports products from the transactions within the Philippine territory on a
Philippines through its non-exclusive local broker, whose authority continuing basis in its own name and for its
own account. Actual transaction of business
to act on behalf of petitioner is limited to soliciting purchases of within the Philippine territory is an essential
products from suppliers engaged in the sugar trade in the requisite for the Philippines to to acquire
jurisdiction over a foreign corporation and thus
Philippines; and (3) the local broker is an independent contractor require the foreign corporation to secure a
and not an agent of petitioner.[21] Philippine business license. If a foreign
corporation does not transact such kind of business
in the Philippines, even if it exports its products to
As explained by the Court in B. Van Zuiden Bros., Ltd. v. GTVL the Philippines, the Philippines has no jurisdiction to
require such foreign corporation to secure a
Marketing Industries, Inc.:[22]
Philippine business license.[23] (Emphasis supplied)

An exporter in one country may export its products


to many foreign importing countries without
In the present case, petitioner is a foreign company merely
Present:
importing molasses from a Philipine exporter. A foreign company
- versus -
that merely imports goods from a Philippine exporter, without
opening an office or appointing an agent in the Philippines, is not
VELASCO, JR., J., Chairperson
doing business in the Philippines.
PERALTA,
Review of Findings of Fact
DESIGN INTERNATIONAL ABAD,
The Supreme Court may review the findings of fact of the Court of SELECTIONS, INC.,
Respondent. MENDOZA, and
Appeals which are in conflict with the findings of the trial court.
[24]
We find that the Court of Appeals finding that petitioner was
doing business is not supported by evidence. PERLAS-BERNABE, JJ.

Furthermore, a review of the records shows that the trial court was
correct in holding that the advance payment of $500,000 was
released to NMC in accordance with the conditions provided
under the red clause Letter of Credit from which said amount was
drawn. The Head of the International Operations Department of the Promulgated:
Bank of Philippine Islands testified that the bank would not have
paid the beneficiary if the required documents were not complete.
It is a requisite in a documentary credit transaction that the
documents should conform to the terms and conditions of the letter
April 18, 2012
of credit; otherwise, the bank will not pay. The Head of the
International Operations Department of the Bank of Philippine
x--------------------------------------------------------------------------
Islands also testified that they received reimbursement from the
---------------x
issuing bank for the $500,000 withdrawn by NMC. [25] Thus,
respondent had no legitimate reason to refuse payment under the
DECISION
performance and surety bonds when NMC failed to perform its part
under its contract with petitioner.
MENDOZA, J.:
WHEREFORE , we GRANT the petition. We REVERSE the
Decision dated 26 May 2005 of the Court of Appeals in CA-G.R. CV
No. 48447. We REINSTATE the Decision dated 23 November 1994 This is a petition for review on certiorari under Rule 45
of the trial court. assailing the March 31, 2005 Decision [1] of the Court of
Appeals (CA) which affirmed the May 29, 2000 Order [2]of the
SO ORDERED. Regional Trial Court, Branch 60, Makati City (RTC), dismissing the
STEELCASE, INC., G.R. No. 171995 complaint for sum of money in Civil Case No. 99-122
Petitioner,
entitled Steelcase, Inc. v. Design International Selections, Inc.
Philippines except through DISI; (2) the dismissal of the complaint
for lack of merit; and (3) the payment of actual, moral and
The Facts exemplary damages together with attorneys fees and expenses of
litigation. DISI alleged that the complaint failed to state a cause of
Petitioner Steelcase, Inc. (Steelcase) is a foreign corporation action and to contain the required allegations on Steelcases
existing under the laws of Michigan, United States of capacity to sue in the Philippines despite the fact that it (Steelcase)
America (U.S.A.), and engaged in the manufacture of office was doing business in the Philippines without the required license
furniture with dealers worldwide.[3] Respondent Design to do so. Consequently, it posited that the complaint should be
International Selections, Inc. (DISI) is a corporation existing under dismissed because of Steelcases lack of legal capacity to sue in
Philippine Laws and engaged in the furniture business, including Philippine courts.
the distribution of furniture. [4]

On March 3, 1999, Steelcase filed its Motion to Admit


Sometime in 1986 or 1987, Steelcase and DISI orally entered into Amended Complaint[8] which was granted by the RTC, through then
a dealership agreement whereby Steelcase granted DISI the right Acting Presiding Judge Roberto C. Diokno, in its Order [9] dated April
to market, sell, distribute, install, and service its products to end- 26, 1999. However, Steelcase sought to further amend its
user customers within the Philippines. The business relationship complaint by filing a Motion to Admit Second Amended
continued smoothly until it was terminated sometime in January Complaint [10]
on March 13, 1999.
1999 after the agreement was breached with neither party
admitting any fault.[5] In his Order[11] dated November 15, 1999, Acting Presiding
Judge Bonifacio Sanz Maceda dismissed the complaint, granted the
On January 18, 1999, Steelcase filed a complaint [6]
for sum of TRO prayed for by DISI, set aside the April 26, 1999 Order of the
money against DISI alleging, among others, that DISI had an RTC admitting the Amended Complaint, and denied Steelcases
unpaid account of US$600,000.00. Steelcase prayed that DISI be Motion to Admit Second Amended Complaint. The RTC stated that
ordered to pay actual or compensatory damages, exemplary in requiring DISI to meet the Dealer Performance Expectation and
damages, attorneys fees, and costs of suit. in terminating the dealership agreement with DISI based on its
failure to improve its performance in the areas of business
In its Answer with Compulsory Counterclaims [7]
dated planning, organizational structure, operational effectiveness, and
February 4, 1999, DISI sought the following: (1) the issuance of a efficiency, Steelcase unwittingly revealed that it participated in the
temporary restraining order (TRO) and a writ of preliminary operations of DISI. It then concluded that Steelcase was doing
injunction to enjoin Steelcase from selling its products in the business in the Philippines, as contemplated by Republic
Act (R.A.) No. 7042 (The Foreign Investments Act of 1991), and products to the Philippines through Modernform Group Company
since it did not have the license to do business in the country, it Limited (Modernform), as evidenced by an Ocean Bill of Lading;
was barred from seeking redress from our courts until it obtained and (4) going beyond the mere appointment of DISI as a dealer by
the requisite license to do so. Its determination was further making several impositions on management and operations of
bolstered by the appointment by Steelcase of a representative in DISI. Thus, the CA ruled that Steelcase was barred from access to
the Philippines. Finally, despite a showing that DISI transacted with our courts for being a foreign corporation doing business here
the local customers in its own name and for its own account, it was without the requisite license to do so.
of the opinion that any doubt in the factual environment should be
resolved in favor of a pronouncement that a foreign corporation
was doing business in the Philippines, considering the twelve-year
period that DISI had been distributing Steelcase products in the Steelcase filed a motion for reconsideration but it was
Philippines. denied by the CA in its Resolution dated March 23, 2006.[13]

Steelcase moved for the reconsideration of the questioned Hence, this petition.
Order but the motion was denied by the RTC in its May 29,
2000 Order.[12] The Issues

Aggrieved, Steelcase elevated the case to the CA by way of Steelcase filed the present petition relying on the following
appeal, assailing the November 15, 1999 and May 29, 2000 Orders grounds:
of the RTC. On March 31, 2005, the CA rendered its Decision
affirming the RTC orders, ruling that Steelcase was a foreign
I
corporation doing or transacting business in the Philippines without THE COURT OF APPEALS COMMITTED
REVERSIBLE ERROR WHEN IT FOUND THAT
a license. The CA stated that the following acts of Steelcase
STEELCASE HAD BEEN DOING BUSINESS IN
showed its intention to pursue and continue the conduct of its THE PHILIPPINES WITHOUT A LICENSE.
business in the Philippines: (1) sending a letter to Phinma,
II
informing the latter that the distribution rights for its products
would be established in the near future and directing other THE COURT OF APPEALS COMMITTED
REVERSIBLE ERROR IN NOT FINDING THAT
questions about orders for Steelcase products to Steelcase RESPONDENT WAS ESTOPPED FROM
International; (2) cancelling orders from DISIs customers, CHALLENGING STEELCASES LEGAL CAPACITY

particularly Visteon, Phils., Inc. (Visteon); (3) continuing to send its


TO SUE, AS AN AFFIRMATIVE DEFENSE IN ITS
formers appointed local distributor, transacted business in its own
ANSWER.
name and for its own account. Specifically, Steelcase contends that
it was DISI that sold Steelcases furniture directly to the end-users
The issues to be resolved in this case are: or customers who, in turn, directly paid DISI for the furniture they
bought. Steelcase further claims that DISI, as a non-exclusive
(1) Whether or not Steelcase is doing business in dealer in the Philippines, had the right to market, sell, distribute
the Philippines without a license; and and service Steelcase products in its own name and for its own
account. Hence, DISI was an independent distributor of Steelcase
(2) Whether or not DISI is estopped from challenging the products, and not a mere agent or conduit of Steelcase.
Steelcases legal capacity to sue.
On the other hand, DISI argues that it was appointed by Steelcase
The Courts Ruling
as the latters exclusive distributor of Steelcase products. DISI
likewise asserts that it was not allowed by Steelcase to transact
The Court rules in favor of the petitioner.
business in its own name and for its own account as Steelcase
dictated the manner by which it was to conduct its business,
including the management and solicitation of orders from
customers, thereby assuming control of its operations. DISI further
Steelcase is an
unlicensed foreign insists that Steelcase treated and considered DISI as a mere
corporation NOT conduit, as evidenced by the fact that Steelcase itself directly sold
doing business in the
Philippines its products to customers located in the Philippines who were
classified as part of their global accounts. DISI cited other
established circumstances which prove that Steelcase was doing
Anent the first issue, Steelcase argues that Section 3(d) of
business in the Philippines including the following: (1) the sale and
R.A. No. 7042 or the Foreign Investments Act of
delivery by Steelcase of furniture to Regus, a Philippine client,
1991 (FIA) expressly states that the phrase doing business
through Modernform, a Thai corporation allegedly controlled by
excludes the appointment by a foreign corporation of a local
Steelcase; (2) the imposition by Steelcase of certain requirements
distributor domiciled in the Philippines which transacts business in
over the management and operations of DISI; (3) the
its own name and for its own account. Steelcase claims that it was
representations made by Steven Husak as Country Manager of
not doing business in the Philippines when it entered into a
Steelcase; (4) the cancellation by Steelcase of orders placed by
dealership agreement with DISI where the latter, acting as the
Philippine clients; and (5) the expression by Steelcase of its desire
acts or works, or the exercise of some of the
to maintain its business in the Philippines. Thus, Steelcase has no
functions normally incident to, and in progressive
legal capacity to sue in Philippine Courts because it was doing prosecution of, commercial gain or of the purpose
and object of the business organization: Provided,
business in the Philippines without a license to do so.
however, That the phrase doing business shall
not be deemed to include mere investment as a
The Court agrees with the petitioner. shareholder by a foreign entity in domestic
corporations duly registered to do business, and/or
the exercise of rights as such investor; nor having a
The rule that an unlicensed foreign corporations doing business in nominee director or officer to represent its interests
in such corporation; nor appointing a
the Philippine do not have the capacity to sue before the local representative or distributor domiciled in the
courts is well-established. Section 133 of the Corporation Code of Philippines which transacts business in its own
name and for its own account; (Emphases
the Philippines explicitly states: supplied)

Sec. 133. Doing business without a license. - No


foreign corporation transacting business in the
Philippines without a license, or its successors or This definition is supplemented by its Implementing Rules and
assigns, shall be permitted to maintain or intervene Regulations, Rule I, Section 1(f) which elaborates on the meaning
in any action, suit or proceeding in any court or
administrative agency of the Philippines; but such of the same phrase:
corporation may be sued or proceeded against before
Philippine courts or administrative tribunals on any f. Doing business shall include soliciting orders,
valid cause of action recognized under Philippine service contracts, opening offices, whether liaison
laws. offices or branches; appointing representatives or
distributors, operating under full control of the
foreign corporation, domiciled in the Philippines or
The phrase doing business is clearly defined in Section 3(d) of R.A. who in any calendar year stay in the country for a
period totalling one hundred eighty [180] days or
No. 7042 (Foreign Investments Act of 1991), to wit: more; participating in the management, supervision
or control of any domestic business, firm, entity or
d) The phrase doing business shall include soliciting corporation in the Philippines; and any other act or
orders, service contracts, opening offices, whether acts that imply a continuity of commercial dealings
called liaison offices or branches; appointing or arrangements, and contemplate to that extent the
representatives or distributors domiciled in the performance of acts or works, or the exercise of
Philippines or who in any calendar year stay in the some of the functions normally incident to and in
country for a period or periods totalling one hundred progressive prosecution of commercial gain or of the
eighty (180) days or more; participating in the purpose and object of the business organization.
management, supervision or control of any domestic
business, firm, entity or corporation in the
Philippines; and any other act or acts that imply a The following acts shall not be deemed doing
continuity of commercial dealings or arrangements, business in the Philippines:
and contemplate to that extent the performance of
1. Mere investment as a shareholder by a foreign
distributes products, other than those of the foreign corporation,
entity in domestic corporations duly registered to do
business, and/or the exercise of rights as such for its own name and its own account, the latter cannot be
investor;
considered to be doing business in the Philippines.[14] It should be
kept in mind that the determination of whether a foreign
2. Having a nominee director or officer to represent
its interest in such corporation; corporation is doing business in the Philippines must be judged in
light of the attendant circumstances.[15]
3. Appointing a representative or distributor
domiciled in the Philippines which transacts
business in the representative's or distributor's In the case at bench, it is undisputed that DISI was founded in
own name and account; 1979 and is independently owned and managed by the spouses
Leandro and Josephine Bantug.[16] In addition to Steelcase
4. The publication of a general advertisement
through any print or broadcast media; products, DISI also distributed products of other companies
including carpet tiles, relocatable walls and theater settings.[17] The
5. Maintaining a stock of goods in
the Philippines solely for the purpose of having the dealership agreement between Steelcase and DISI had been
same processed by another entity in the Philippines; described by the owner himself as:

6. Consignment by a foreign entity of equipment xxx basically a buy and sell arrangement whereby
with a local company to be used in the processing of we would inform Steelcase of the volume of the
products for export; products needed for a particular project and
Steelcase would, in turn, give special quotations or
discounts after considering the value of the entire
7. Collecting information in the Philippines; and package. In making the bid of the project, we would
then add out profit margin over Steelcases
8. Performing services auxiliary to an existing prices.After the approval of the bid by the client, we
isolated contract of sale which are not on a would thereafter place the orders to Steelcase. The
continuing basis, such as installing in the Philippines latter, upon our payment, would then ship the goods
machinery it has manufactured or exported to the to the Philippines, with us shouldering the freight
Philippines, servicing the same, training domestic charges and taxes.[18] [Emphasis supplied]
workers to operate it, and similar incidental
services. (Emphases supplied)

This clearly belies DISIs assertion that it was a mere conduit

From the preceding citations, the appointment of a distributor in through which Steelcase conducted its business in the

the Philippines is not sufficient to constitute doing business unless country. From the preceding facts, the only reasonable conclusion

it is under the full control of the foreign corporation. On the other that can be reached is that DISI was an independent contractor,

hand, if the distributor is an independent entity which buys and


distributing various products of Steelcase and of other companies, DISIs assertions. As such, Steelcase cannot be deemed to have
acting in its own name and for its own account. been doing business in the Philippinesthrough Modernform.
The CA, in finding Steelcase to be unlawfully engaged in business
in the Philippines, took into consideration the delivery by Steelcase
Finally, both the CA and DISI rely heavily on the Dealer
of a letter to Phinma informing the latter that the distribution rights
Performance Expectation required by Steelcase of its distributors to
for its products would be established in the near future, and also its
prove that DISI was not functioning independently from Steelcase
cancellation of orders placed by Visteon. The foregoing acts were
because the same imposed certain conditions pertaining to
apparently misinterpreted by the CA. Instead of supporting the
business planning, organizational structure, operational
claim that Steelcase was doing business in the country, the said
effectiveness and efficiency, and financial stability. It is actually
acts prove otherwise. It should be pointed out that no sale was
logical to expect that Steelcase, being one of the major
concluded as a result of these communications. Had Steelcase
manufacturers of office systems furniture, would require its dealers
indeed been doing business in the Philippines, it would have readily
to meet several conditions for the grant and continuation of a
accepted and serviced the orders from the abovementioned
distributorship agreement. The imposition of minimum standards
Philippine companies. Its decision to voluntarily cease to sell its
concerning sales, marketing, finance and operations is nothing
products in the absence of a local distributor indicates its refusal to
more than an exercise of sound business practice to increase sales
engage in activities which might be construed as doing business.
and maximize profits for the benefit of both Steelcase and its
distributors. For as long as these requirements do not impinge on a
Another point being raised by DISI is the delivery and sale of
distributors independence, then there is nothing wrong with placing
Steelcase products to a Philippine client by Modernform allegedly
reasonable expectations on them.
an agent of Steelcase. Basic is the rule in corporation law that a
All things considered, it has been sufficiently demonstrated
corporation has a separate and distinct personality from its
that DISI was an independent contractor which sold Steelcase
stockholders and from other corporations with which it may be
products in its own name and for its own account. As a result,
connected.[19] Thus, despite the admission by Steelcase that it
Steelcase cannot be considered to be doing business in
owns 25% of Modernform, with the remaining 75% being owned
the Philippines by its act of appointing a distributor as it falls under
and controlled by Thai stockholders,[20] it is grossly insufficient to
one of the exceptions under R.A. No. 7042.
justify piercing the veil of corporate fiction and declare that
Modernform acted as the alter ego of Steelcase to enable it to
DISI is
improperly conduct business in the Philippines. The records are estopped from
challenging
bereft of any evidence which might lend even a hint of credence to
Steelcases
legal capacity
If indeed Steelcase had been doing business in
to sue
the Philippines without a license, DISI would nonetheless be
estopped from challenging the formers legal capacity to sue.
Regarding the second issue, Steelcase argues that assuming
arguendo that it had been doing business in the Philippines without
It cannot be denied that DISI entered into a dealership
a license, DISI was nonetheless estopped from challenging
agreement with Steelcase and profited from it for 12 years from
Steelcases capacity to sue in the Philippines. Steelcase claims that
1987 until 1999. DISI admits that it complied with its obligations
since DISI was aware that it was doing business in the Philippines
under the dealership agreement by exerting more effort and
without a license and had benefited from such business, then DISI
making substantial investments in the promotion of Steelcase
should be estopped from raising the defense that Steelcase lacks
products. It also claims that it was able to establish a very good
the capacity to sue in the Philippines by reason of its doing
reputation and goodwill for Steelcase and its products, resulting in
business without a license.
the establishment and development of a strong market for
Steelcase products in the Philippines. Because of this, DISI was
On the other hand, DISI argues that the doctrine of estoppel
very proud to be awarded the Steelcase International Performance
cannot give Steelcase the license to do business in
Award for meeting sales objectives, satisfying customer needs,
the Philippines or permission to file suit in the Philippines. DISI
managing an effective company and making a profit.[21]
claims that when Steelcase entered into a dealership agreement
with DISI in 1986, it was not doing business in the Philippines. It
Unquestionably, entering into a dealership agreement with
was after such dealership was put in place that it started to do
Steelcase charged DISI with the knowledge that Steelcase was not
business without first obtaining the necessary license. Hence,
licensed to engage in business activities in the Philippines. This
estoppel cannot work against it. Moreover, DISI claims that it
Court has carefully combed the records and found no proof that,
suffered as a result of Steelcases doing business and that it never
from the inception of the dealership agreement in 1986 until
benefited from the dealership and, as such, it cannot be estopped
September 1998, DISI even brought to Steelcases attention that it
from raising the issue of lack of capacity to sue on the part of
was improperly doing business in the Philippines without a
Steelcase.
license. It was only towards the latter part of 1998 that DISI
deemed it necessary to inform Steelcase of the impropriety of the
The argument of Steelcase is meritorious.
conduct of its business without the requisite Philippine license. It
should, however, be noted that DISI only raised the issue of the
absence of a license with Steelcase after it was informed that it
non habere debet no person ought to derive
owed the latter US$600,000.00 for the sale and delivery of its
any advantage of his own wrong. This is as it
products under their special credit arrangement. should be for as mandated by law, every
person must in the exercise of his rights and in
the performance of his duties, act with justice,
give everyone his due, and observe honesty
By acknowledging the corporate entity of Steelcase and and good faith.

entering into a dealership agreement with it and even benefiting


Concededly, corporations act through agents,
from it, DISI is estopped from questioning Steelcases existence like directors and officers. Corporate dealings must
and capacity to sue. This is consistent with the Courts ruling be characterized by utmost good faith and fairness.
Corporations cannot just feign ignorance of the legal
in Communication Materials and Design, Inc. v. Court of rules as in most cases, they are manned by
Appeals[22] where it was written: sophisticated officers with tried management skills
and legal experts with practiced eye on legal
problems. Each party to a corporate transaction is
Notwithstanding such finding that ITEC is expected to act with utmost candor and fairness and,
doing business in the country, petitioner is thereby allow a reasonable proportion between
nonetheless estopped from raising this fact to bar benefits and expected burdens. This is a norm which
ITEC from instituting this injunction case against it. should be observed where one or the other is a
foreign entity venturing in a global market.
A foreign corporation doing business in
the Philippines may sue in Philippine Courts xxx
although not authorized to do business here
against a Philippine citizen or entity who had
contracted with and benefited by said
corporation. To put it in another way, a party is
estopped to challenge the personality of a By entering into the "Representative
corporation after having acknowledged the Agreement" with ITEC, petitioner is charged with
same by entering into a contract with it. And the knowledge that ITEC was not licensed to engage in
doctrine of estoppel to deny corporate existence business activities in the country, and is thus
applies to a foreign as well as to domestic estopped from raising in defense such incapacity of
corporations. One who has dealt with a corporation ITEC, having chosen to ignore or even presumptively
of foreign origin as a corporate entity is estopped to take advantage of the same.[23] (Emphases supplied)
deny its corporate existence and capacity: The
principle will be applied to prevent a person
contracting with a foreign corporation from later
taking advantage of its noncompliance with the The case of Rimbunan Hijau Group of Companies v. Oriental
statutes chiefly in cases where such person has Wood Processing Corporation[24] is likewise instructive:
received the benefits of the contract.
Respondents unequivocal admission of the
The rule is deeply rooted in the time- transaction which gave rise to the complaint
honored axiom of Commodum ex injuria sua establishes the applicability of estoppel against it.
Rule 129, Section 4 of the Rules on Evidence corporations is particularly reprehensible considering
provides that a written admission made by a party in that in requiring a license, the law never intended to
the course of the proceedings in the same case does prevent foreign corporations from performing single
not require proof. We held in the case of Elayda v. or isolated acts in this country, or to favor domestic
Court of Appeals, that an admission made in the corporations who renege on their obligations to
pleadings cannot be controverted by the party foreign firms unwary enough to engage in solitary
making such admission and are conclusive as to him. transactions with them. Rather, the law was intended
Thus, our consistent pronouncement, as held in to bar foreign corporations from acquiring a domicile
cases such as Merril Lynch Futures v. Court of for the purpose of business without first taking the
Appeals, is apropos: steps necessary to render them amenable to suits in
the local courts. It was to prevent the foreign
companies from enjoying the good while
The rule is that a party is estopped to
disregarding the bad.
challenge the personality of a
corporation after having acknowledged
the same by entering into a contract with As a matter of principle, this Court will
it. And the doctrine of estoppel to deny not step in to shield defaulting local companies
corporate existence applies to foreign as from the repercussions of their business
well as to domestic corporations; one dealings. While the doctrine of lack of capacity
who has dealt with a corporation of to sue based on failure to first acquire a local
foreign origin as a corporate entity is license may be resorted to in meritorious cases,
estopped to deny its existence and it is not a magic incantation. It cannot be called
capacity. The principle will be applied to upon when no evidence exists to support its
prevent a person contracting with a invocation or the facts do not warrant its
foreign corporation from later taking application. In this case, that the respondent is
advantage of its noncompliance with the estopped from challenging the petitioners capacity to
statutes, chiefly in cases where such sue has been conclusively established, and the
person has received the benefits of the forthcoming trial before the lower court should weigh
contract . . . instead on the other defenses raised by the
respondent.[25] (Emphases supplied)
All things considered, respondent can no
longer invoke petitioners lack of capacity to sue in
this jurisdiction. Considerations of fair play dictate As shown in the previously cited cases, this Court has time
that after having contracted and benefitted from its
and again upheld the principle that a foreign corporation doing
business transaction with Rimbunan, respondent
should be barred from questioning the latters lack of business in the Philippines without a license may still sue before
license to transact business in the Philippines.
the Philippine courts a Filipino or a Philippine entity that had
derived some benefit from their contractual arrangement because
In the case of Antam Consolidated, Inc. v.
CA, this Court noted that it is a common ploy of the latter is considered to be estopped from challenging the
defaulting local companies which are sued by personality of a corporation after it had acknowledged the said
unlicensed foreign corporations not engaged in
business in the Philippines to invoke the latters lack corporation by entering into a contract with it.[26]
of capacity to sue. This practice of domestic
ordered REINSTATED and the case is REMANDED to the RTC for
In Antam Consolidated, Inc. v. Court of Appeals, [27]
this
appropriate action.
Court had the occasion to draw attention to the common ploy of
invoking the incapacity to sue of an unlicensed foreign corporation
SO ORDERED.
utilized by defaulting domestic companies which seek to avoid the
suit by the former. The Court cannot allow this to continue by
always ruling in favor of local companies, despite the injustice to
the overseas corporation which is left with no available remedy. WILSON P. GAMBOA, G.R. No. 176579

Petitioner,
During this period of financial difficulty, our nation greatly
needs to attract more foreign investments and encourage trade
Present:
between the Philippines and other countries in order to rebuild and
strengthen our economy. While it is essential to uphold the sound
public policy behind the rule that denies unlicensed foreign
- versus -
corporations doing business in the Philippines access to our courts,
CORONA, C.J.,
it must never be used to frustrate the ends of justice by becoming
an all-encompassing shield to protect unscrupulous domestic FINANCE SECRETARY MARGARITO B. CARPIO,
TEVES, FINANCE UNDERSECRETARY
enterprises from foreign entities seeking redress in our country. To
JOHN P. SEVILLA, AND VELASCO, JR.,
do otherwise could seriously jeopardize the desirability of COMMISSIONER RICARDO ABCEDE OF
the Philippines as an investment site and would possibly have the THE PRESIDENTIAL COMMISSION ON LEONARDO-DE CASTRO,
GOOD GOVERNMENT (PCGG) IN
deleterious effect of hindering trade between Philippine companies THEIR CAPACITIES AS CHAIR AND
BRION,
and international corporations. MEMBERS, RESPECTIVELY, OF THE
PRIVATIZATION COUNCIL,
PERALTA,
CHAIRMAN ANTHONI SALIM OF FIRST
WHEREFORE, the March 31, 2005 Decision of the Court of
PACIFIC CO., LTD. IN HIS CAPACITY BERSAMIN,
AS DIRECTOR OF METRO PACIFIC
Appeals and its March 23, 2006 Resolution are
ASSET HOLDINGS INC., CHAIRMAN DEL CASTILLO,
hereby REVERSED and SET ASIDE. The dismissal order of the MANUEL V. PANGILINAN OF
PHILIPPINE LONG DISTANCE ABAD,
Regional Trial Court dated November 15, 1999 is hereby set TELEPHONE COMPANY (PLDT) IN HIS
CAPACITY AS MANAGING DIRECTOR VILLARAMA, JR.,
aside. Steelcases Amended Complaint is herebyOF FIRST PACIFIC CO., LTD.,
PRESIDENT NAPOLEON L. NAZARENO PEREZ,
OF PHILIPPINE LONG DISTANCE
TELEPHONE COMPANY, CHAIR FE MENDOZA, and
BARIN OF THE SECURITIES
EXCHANGE COMMISSION, and PABLITO V. SANIDAD and Promulgated:
SERENO, JJ.
PRESIDENT FRANCIS LIM OF THE
PHILIPPINE STOCK EXCHANGE, ARNO V. SANIDAD,

Respondents. Petitioners-in-Intervention. June 28, 2011

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

DECISION

CARPIO, J.:

The Case

This is an original petition for prohibition, injunction, declaratory


relief and declaration of nullity of the sale of shares of stock of
Philippine Telecommunications Investment Corporation (PTIC) by
the government of the Republic of the Philippines to Metro Pacific
Assets Holdings, Inc. (MPAH), an affiliate of First Pacific Company
Limited (First Pacific).
The Antecedents Thereafter, First Pacific announced that it would exercise its right of
first refusal as a PTIC stockholder and buy the 111,415 PTIC
shares by matching the bid price of Parallax. However, First Pacific
failed to do so by the 1 February 2007 deadline set by IPC and
The facts, according to petitioner Wilson P. Gamboa, a stockholder instead, yielded its right to PTIC itself which was then given by IPC
of Philippine Long Distance Telephone Company (PLDT), are as until 2 March 2007 to buy the PTIC shares. On 14 February 2007,
follows:1 First Pacific, through its subsidiary, MPAH, entered into a
Conditional Sale and Purchase Agreement of the 111,415 PTIC
shares, or 46.125 percent of the outstanding capital stock of PTIC,
with the Philippine Government for the price of P25,217,556,000 or
US$510,580,189. The sale was completed on 28 February 2007.
On 28 November 1928, the Philippine Legislature enacted Act No.
3436 which granted PLDT a franchise and the right to engage in
telecommunications business. In 1969, General Telephone and
Electronics Corporation (GTE), an American company and a major
PLDT stockholder, sold 26 percent of the outstanding common Since PTIC is a stockholder of PLDT, the sale by the Philippine
shares of PLDT to PTIC. In 1977, Prime Holdings, Inc. (PHI) was Government of 46.125 percent of PTIC shares is actually an
incorporated by several persons, including Roland Gapud and Jose indirect sale of 12 million shares or about 6.3 percent of the
Campos, Jr. Subsequently, PHI became the owner of 111,415 outstanding common shares of PLDT. With the sale, First
shares of stock of PTIC by virtue of three Deeds of Assignment Pacifics common shareholdings in PLDT increased from 30.7
executed by PTIC stockholders Ramon Cojuangco and percent to 37 percent, thereby increasing the common
Luis Tirso Rivilla. In 1986, the 111,415 shares of stock of PTIC held shareholdings of foreigners in PLDT to about 81.47
by PHI were sequestered by the Presidential Commission on Good percent. This violates Section 11, Article XII of the 1987 Philippine
Government (PCGG). The 111,415 PTIC shares, which represent Constitution which limits foreign ownership of the capital of a public
about 46.125 percent of the outstanding capital stock of PTIC, utility to not more than 40 percent.3
were later declared by this Court to be owned by the Republic of
the Philippines.2

On the other hand, public respondents Finance


Secretary Margarito B. Teves, Undersecretary John P. Sevilla, and
In 1999, First Pacific, a Bermuda-registered, Hong Kong-based PCGG Commissioner Ricardo Abcede allege the following relevant
investment firm, acquired the remaining 54 percent of the facts:
outstanding capital stock of PTIC. On 20 November 2006, the
Inter-Agency Privatization Council (IPC) of the Philippine
Government announced that it would sell the 111,415 PTIC shares,
or 46.125 percent of the outstanding capital stock of PTIC, through On 9 November 1967, PTIC was incorporated and had since
a public bidding to be conducted on 4 December 2006. engaged in the business of investment holdings. PTIC held
Subsequently, the public bidding was reset to 8 December 2006, 26,034,263 PLDT common shares, or 13.847 percent of the total
and only two bidders, Parallax Venture Fund XXVII (Parallax) and PLDT outstanding common shares. PHI, on the other hand, was
Pan-Asia Presidio Capital, submitted their bids. Parallax won with a incorporated in 1977, and became the owner of 111,415 PTIC
bid of P25.6 billion or US$510 million. shares or 46.125 percent of the outstanding capital stock of PTIC
by virtue of three Deeds of Assignment executed by
Ramon Cojuangco and Luis Tirso Rivilla. In 1986, the 111,415 PTIC outstanding common shares of PLDT.5 On 28 February 2007,
shares held by PHI were sequestered by the PCGG, and First Pacific completed the acquisition of the 111,415 shares of
subsequently declared by this Court as part of the ill-gotten wealth stock of PTIC.
of former President Ferdinand Marcos. The sequestered PTIC
shares were reconveyed to the Republic of the Philippines in
accordance with this Courts decision4 which became final
and executory on 8 August 2006. Respondent Manuel V. Pangilinan admits the following facts: (a) the
IPC conducted a public bidding for the sale of 111,415 PTIC shares
The Philippine Government decided to sell the 111,415 PTIC or 46 percent of the outstanding capital stock of PTIC (the
shares, which represent 6.4 percent of the outstanding common remaining 54 percent of PTIC shares was already owned by First
shares of stock of PLDT, and designated the Inter-Agency Pacific and its affiliates); (b) Parallax offered the highest bid
Privatization Council (IPC), composed of the Department of Finance amounting to P25,217,556,000; (c) pursuant to the right of first
and the PCGG, as the disposing entity. An invitation to bid was refusal in favor of PTIC and its shareholders granted in PTICs
published in seven different newspapers from 13 to 24 November Articles of Incorporation, MPAH, a First Pacific affiliate, exercised its
2006. On 20 November 2006, a pre-bid conference was held, and right of first refusal by matching the highest bid offered for PTIC
the original deadline for bidding scheduled on 4 December 2006 shares on 13 February 2007; and (d) on 28 February 2007, the
was reset to 8 December 2006. The extension was published in sale was consummated when MPAH paid IPC P25,217,556,000 and
nine different newspapers. the government delivered the certificates for the 111,415 PTIC
shares. Respondent Pangilinan denies the other allegations of facts
of petitioner.

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 On 28 February 2007, petitioner filed the instant petition for
shares, of the bidding results and gave First Pacific until 1 February prohibition, injunction, declaratory relief, and declaration of nullity
2007 to exercise its right of first refusal in accordance with PTICs of sale of the 111,415 PTIC shares. Petitioner claims, among
Articles of Incorporation. First Pacific announced its intention to others, that the sale of the 111,415 PTIC shares would result in an
match Parallaxs bid. increase in First Pacifics common shareholdings in PLDT from 30.7
percent to 37 percent, and this, combined with Japanese
NTT DoCoMos common shareholdings in PLDT, would result to a
total foreign common shareholdings in PLDT of 51.56 percent which
On 31 January 2007, the House of Representatives (HR) is over the 40 percent constitutional limit.6 Petitioner asserts:
Committee on Good Government conducted a public hearing on the
particulars of the then impending sale of the 111,415 PTIC shares.
Respondents Teves and Sevilla were among those who attended
the public hearing. The HR Committee Report No. 2270 concluded If and when the sale is completed, First Pacifics equity in
that: (a) the auction of the governments 111,415 PTIC shares bore PLDT will go up from 30.7 percent to 37.0 percent of its
due diligence, transparency and conformity with existing legal common or voting- stockholdings, x x x. Hence, the
procedures; and (b) First Pacifics intended acquisition of the consummation of the sale will put the two largest foreign
governments 111,415 PTIC shares resulting in First Pacifics investors in PLDT First Pacific and Japans NTT DoCoMo,
100% ownership of PTIC will not violate the 40 percent which is the worlds largest wireless telecommunications
constitutional limit on foreign ownership of a public utility firm, owning 51.56 percent of PLDT common equity.
since PTIC holds only 13.847 percent of the total x x x With the completion of the sale, data culled from the
official website of the New York Stock Exchange
(www.nyse.com) showed that those foreign entities, which
own at least five percent of common equity, will collectively
own 81.47 percent of PLDTs common equity. x x x
The Issue
x x x as the annual disclosure reports, also
referred to as Form 20-K reports x x x which
PLDT submitted to the New York Stock
Exchange for the period 2003-2005, revealed
that First Pacific and several other foreign
entities breached the constitutional limit of 40
percent ownership as early as 2003. x x x7 This Court is not a trier of facts. Factual questions such as those
raised by petitioner,9 which indisputably demand a thorough
examination of the evidence of the parties, are generally beyond
this Courts jurisdiction. Adhering to this well-settled principle, the
Court shall confine the resolution of the instant controversy solely
Petitioner raises the following issues: (1) whether the on the threshold and purely legal issue of whether the term
consummation of the then impending sale of 111,415 PTIC shares capital in Section 11, Article XII of the Constitution refers to the
to First Pacific violates the constitutional limit on foreign ownership total common shares only or to the total outstanding capital stock
of a public utility; (2) whether public respondents committed grave (combined total of common and non-voting preferred shares) of
abuse of discretion in allowing the sale of the 111,415 PTIC shares PLDT, a public utility.
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
The Ruling of the Court

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


Motion for Leave to Intervene and Admit Attached Petition-in- The petition is partly meritorious.
Intervention. In the Resolution of 28 August 2007, the Court
granted the motion and noted the Petition-in-Intervention.

Petition for declaratory relief treated as petition for


mandamus
Petitioners-in-intervention join petitioner Wilson Gamboa x x x in
seeking, among others, to enjoin and/or nullify the sale by
respondents of the 111,415 PTIC shares to First Pacific or assignee.
Petitioners-in-intervention claim that, as PLDT subscribers, they At the outset, petitioner is faced with a procedural barrier. Among
have a stake in the outcome of the controversy x x x where the the remedies petitioner seeks, only the petition for prohibition is
Philippine Government is completing the sale of government owned within the original jurisdiction of this court, which however is not
assets in [PLDT], unquestionably a public utility, in violation of the exclusive but is concurrent with the Regional Trial Court and the
nationality restrictions of the Philippine Constitution. Court of Appeals. The actions for declaratory relief,10 injunction,
and annulment of sale are not embraced within the original
jurisdiction of the Supreme Court. On this ground alone, the In Alliance of Government Workers v. Minister of Labor,14 the Court
petition could have been dismissed outright. similarly brushed aside the procedural infirmity of the petition for
declaratory relief and treated the same as one for mandamus.
In Alliance, the issue was whether the government unlawfully
excluded petitioners, who were government employees, from the
While direct resort to this Court may be justified in a petition for enjoyment of rights to which they were entitled under the law.
prohibition,11 the Court shall nevertheless refrain from discussing Specifically, the question was: Are the branches, agencies,
the grounds in support of the petition for prohibition since on 28 subdivisions, and instrumentalities of the Government, including
February 2007, the questioned sale was consummated when MPAH government owned or controlled corporations included among the
paid IPC P25,217,556,000 and the government delivered the four employers under Presidential Decree No. 851 which are
certificates for the 111,415 PTIC shares. required to pay their employees x x x a thirteenth (13th) month
pay x x x ? The Constitutional principle involved therein affected all
government employees, clearly justifying a relaxation of the
technical rules of procedure, and certainly requiring the
interpretation of the assailed presidential decree.
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 short, it is well-settled that this Court may treat a petition for
declaratory relief as one for mandamus if the issue involved has
far-reaching implications. As this Court held in Salvacion:

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 The Court has no original and exclusive jurisdiction over a
banking law. In that case, which involved the crime of rape petition for declaratory relief. However, exceptions to
committed by a foreign tourist against a Filipino minor and the this rule have been recognized. Thus, where the
execution of the final judgment in the civil case for damages on the petition has far-reaching implications and raises
tourists dollar deposit with a local bank, the Court declared Section questions that should be resolved, it may be treated
113 of Central Bank Circular No. 960, exempting foreign currency as one for mandamus.15 (Emphasis supplied)
deposits from attachment, garnishment or any other order or
process of any court, inapplicable due to the peculiar circumstances
of the case. The Court held that injustice would result especially to
a citizen aggrieved by a foreign guest like accused x x x that would
negate Article 10 of the Civil Code which provides that in case of
doubt in the interpretation or application of laws, it is presumed In the present case, petitioner seeks primarily the interpretation of
that the lawmaking body intended right and justice to prevail. The the term capital in Section 11, Article XII of the Constitution. He
Court therefore required respondents Central Bank of the prays that this Court declare that the term capital refers to
Philippines, the local bank, and the accused to comply with the writ common shares only, and that such shares constitute the sole basis
of execution issued in the civil case for damages and to release the in determining foreign equity in a public utility. Petitioner further
dollar deposit of the accused to satisfy the judgment. asks this Court to declare any ruling inconsistent with such
interpretation unconstitutional.
The interpretation of the term capital in Section 11, Article XII of Despite its far-reaching implications to the national economy, this
the Constitution has far-reaching implications to the national purely legal issue has remained unresolved for over 75 years since
economy. In fact, a resolution of this issue will determine whether the 1935 Constitution. There is no reason for this Court to evade
Filipinos are masters, or second class citizens, in their own country. this ever recurring fundamental issue and delay again defining the
What is at stake here is whether Filipinos or foreigners will term capital, which appears not only in Section 11, Article XII of
have effective control of the national economy. Indeed, if ever the Constitution, but also in Section 2, Article XII on co-production
there is a legal issue that has far-reaching implications to the and joint venture agreements for the development of our natural
entire nation, and to future generations of Filipinos, it is resources,19 in Section 7, Article XII on ownership of private
the threshhold legal issue presented in this case. lands,20 in Section 10, Article XII on the reservation of certain
investments to Filipino citizens,21 in Section 4(2), Article XIV on the
ownership of educational institutions,22 and in Section 11(2), Article
XVI on the ownership of advertising companies.23
The Court first encountered the issue on the definition of the term
capital in Section 11, Article XII of the Constitution in the case
of Fernandez v. Cojuangco, docketed as G.R. No. 157360.16 That
case involved the same public utility (PLDT) and substantially the
same private respondents. Despite the importance and novelty of
the constitutional issue raised therein and despite the fact that the Petitioner has locus standi
petition involved a purely legal question, the Court declined to
resolve the case on the merits, and instead denied the same for
disregarding the hierarchy of courts.17 There, petitioner Fernandez
assailed on a pure question of law the Regional Trial Courts
There is no dispute that petitioner is a stockholder of PLDT. As
Decision of 21 February 2003 via a petition for review under Rule
such, he has the right to question the subject sale, which he claims
45. The Courts Resolution, denying the petition, became final on 21
to violate the nationality requirement prescribed in Section 11,
December 2004.
Article XII of the Constitution. If the sale indeed violates the
Constitution, then there is a possibility that PLDTs franchise could
The instant petition therefore presents the Court with another be revoked, a dire consequence directly affecting petitioners
opportunity to finally settle this purely legal issue which is of interest as a stockholder.
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 More importantly, there is no question that the instant petition
Constitution, a self-reliant and independent national raises matters of transcendental importance to the public. The
economy effectively controlled by Filipinos.18 Besides, in the light fundamental and threshold legal issue in this case, involving the
of vague and confusing positions taken by government agencies on national economy and the economic welfare of the Filipino people,
this purely legal issue, present and future foreign investors in this far outweighs any perceived impediment in the legal personality of
country deserve, as a matter of basic fairness, a categorical ruling the petitioner to bring this action.
from this Court on the extent of their participation in the capital of
public utilities and other nationalized businesses.
In Chavez v. PCGG,24 the Court upheld the right of a citizen to Clearly, since the instant petition, brought by a citizen, involves
bring a suit on matters of transcendental importance to the public, matters of transcendental public importance, the petitioner has the
thus: requisite locus standi.

In Taada v. Tuvera, the Court asserted that when the issue Definition of the Term Capital in
concerns a public right and the object of mandamus is to
obtain the enforcement of a public duty, the people are Section 11, Article XII of the 1987 Constitution
regarded as the real parties in interest; and because it is
sufficient that petitioner is a citizen and as such is
interested in the execution of the laws, he need not show
that he has any legal or special interest in the result of the
Section 11, Article XII (National Economy and Patrimony) of the
action. In the aforesaid case, the petitioners sought to enforce
1987 Constitution mandates the Filipinization of public utilities, to
their right to be informed on matters of public concern, a right then
wit:
recognized in Section 6, Article IV of the 1973 Constitution, in
connection with the rule that laws in order to be valid and
enforceable must be published in the Official Gazette or otherwise
effectively promulgated. In ruling for the petitioners legal standing,
the Court declared that the right they sought to be enforced is a
public right recognized by no less than the fundamental law of the
land. Section 11. No franchise, certificate, or any other form
of authorization for the operation of a public utility
Legaspi v. Civil Service Commission, while reiterating Taada, shall be granted except to citizens of the Philippines
further declared that when a mandamus proceeding involves or to corporations or associations organized under
the assertion of a public right, the requirement of personal the laws of the Philippines, at least sixty per centum
interest is satisfied by the mere fact that petitioner is a of whose capital is owned by such citizens; nor shall
citizen and, therefore, part of the general public which such franchise, certificate, or authorization be exclusive in
possesses the right. character or for a longer period than fifty years. Neither
shall any such franchise or right be granted except under
Further, in Albano v. Reyes, we said that while expenditure of the condition that it shall be subject to amendment,
public funds may not have been involved under the questioned alteration, or repeal by the Congress when the common
contract for the development, management and operation of the good so requires. The State shall encourage equity
Manila International Container Terminal, public interest [was] participation in public utilities by the general public. The
definitely involved considering the important role [of the participation of foreign investors in the governing body of
subject contract] . . . in the economic development of the any public utility enterprise shall be limited to their
country and the magnitude of the financial consideration proportionate share in its capital, and all the executive and
involved. We concluded that, as a consequence, the disclosure managing officers of such corporation or association must
provision in the Constitution would constitute sufficient authority be citizens of the Philippines. (Emphasis supplied)
for upholding the petitioners standing. (Emphasis supplied)
The above provision substantially reiterates Section 5, Article XIV any individual, firm, or corporation, except under the
of the 1973 Constitution, thus: condition that it shall be subject to amendment, alteration,
or repeal by the Congress when the public interest so
requires. (Emphasis supplied)

Section 5. No franchise, certificate, or any other form


of authorization for the operation of a public utility
shall be granted except to citizens of the Philippines
or to corporations or associations organized under
the laws of the Philippines at least sixty per centum Father Joaquin G. Bernas, S.J., a leading member of the 1986
of the capital of which is owned by such citizens, nor Constitutional Commission, reminds us that
shall such franchise, certificate, or authorization be the Filipinization provision in the 1987 Constitution is one of the
exclusive in character or for a longer period than fifty years. products of the spirit of nationalism which gripped the 1935
Neither shall any such franchise or right be granted except Constitutional Convention.25 The 1987 Constitution provides for
under the condition that it shall be subject to amendment, the Filipinization of public utilities by requiring that any form of
alteration, or repeal by the National Assembly when the authorization for the operation of public utilities should be granted
public interest so requires. The State shall encourage equity only to citizens of the Philippines or to corporations or associations
participation in public utilities by the general public. The organized under the laws of the Philippines at least sixty per
participation of foreign investors in the governing body of centum of whose capital is owned by such citizens. The provision
any public utility enterprise shall be limited to their is [an express] recognition of the sensitive and vital
proportionate share in the capital thereof. (Emphasis position of public utilities both in the national economy and
supplied) for national security.26 The evident purpose of the citizenship
requirement is to prevent aliens from assuming control of public
utilities, which may be inimical to the national interest.27 This
specific provision explicitly reserves to Filipino citizens control of
public utilities, pursuant to an overriding economic goal of the 1987
Constitution: to conserve and develop our patrimony28 and ensure
a self-reliant and independent national
economy effectively controlled by Filipinos.29
The foregoing provision in the 1973 Constitution reproduced
Section 8, Article XIV of the 1935 Constitution, viz:

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
Section 8. No franchise, certificate, or any other form
a corporation to be granted authority to operate a public utility, at
of authorization for the operation of a public utility
least 60 percent of its capital must be owned by Filipino citizens.
shall be granted except to citizens of the Philippines
or to corporations or other entities organized under
the laws of the Philippines sixty per centum of the
capital of which is owned by citizens of the
Philippines, nor shall such franchise, certificate, or The crux of the controversy is the definition of the term capital.
authorization be exclusive in character or for a longer period Does the term capital in Section 11, Article XII of the Constitution
than fifty years. No franchise or right shall be granted to
refer to common shares or to the total outstanding capital stock and the supposed violation of the due process rights of the affected
(combined total of common and non-voting preferred shares)? foreign common shareholders. Respondent Nazareno does not deny
petitioners allegation of foreigners dominating the common
shareholdings of PLDT. Nazarenostressed mainly that the
petition seeks to divest foreign common shareholders
Petitioner submits that the 40 percent foreign equity limitation in purportedly exceeding 40% of the total common
domestic public utilities refers only to common shares because shareholdings in PLDT of their ownership over their shares.
such shares are entitled to vote and it is through voting that Thus, the foreign natural and juridical PLDT shareholders must
control over a corporation is exercised. Petitioner posits that the be impleaded in this suit so that they can be
term capital in Section 11, Article XII of the Constitution refers to heard.34 Essentially, Nazareno invokes denial of due process on
the ownership of common capital stock subscribed and behalf of the foreign common shareholders.
outstanding, which class of shares alone, under the corporate set-
up of PLDT, can vote and elect members of the board of directors.
It is undisputed that PLDTs non-voting preferred shares are held
mostly by Filipino citizens.30 This arose from Presidential Decree While Nazareno does not introduce any definition of the term
No. 217,31 issued on 16 June 1973 by then President Ferdinand capital, he states that among the factual assertions that need
Marcos, requiring every applicant of a PLDT telephone line to to be established to counter petitioners allegations is the
subscribe to non-voting preferred shares to pay for the investment uniform interpretation by government agencies (such as the
cost of installing the telephone line.32 SEC), institutions and corporations (such as the Philippine
National Oil Company-Energy Development Corporation or
PNOC-EDC) of including both preferred shares and common
shares in controlling interest in view of testing compliance
Petitioners-in-intervention basically reiterate petitioners arguments with the 40% constitutional limitation on foreign ownership
and adopt petitioners definition of the term capital.33 Petitioners-in- in public utilities.35
intervention allege that the approximate foreign ownership of
common capital stock of PLDT x x x already amounts to at least
63.54% of the total outstanding common stock, which means that
foreigners exercise significant control over PLDT, patently violating Similarly, respondent Manuel V. Pangilinan does not define the term
the 40 percent foreign equity limitation in public utilities prescribed capital in Section 11, Article XII of the Constitution. Neither does
by the Constitution. he refute petitioners claim of foreigners holding more than 40
percent of PLDTs common shares. Instead,
respondent Pangilinan focuses on the procedural flaws of the
petition and the alleged violation of the due process rights of
Respondents, on the other hand, do not offer any definition of the foreigners. Respondent Pangilinan emphasizes in his Memorandum
term capital in Section 11, Article XII of the Constitution. More (1) the absence of this Courts jurisdiction over the petition; (2)
importantly, private respondents Nazareno and Pangilinan of PLDT petitioners lack of standing; (3) mootness of the petition; (4) non-
do not dispute that more than 40 percent of the common shares of availability of declaratory relief; and (5) the denial of due process
PLDT are held by foreigners. rights. Moreover, respondent Pangilinan alleges that the issue
should be whether owners of shares in PLDT as well as owners of
shares in companies holding shares in PLDT may be required to
relinquish their shares in PLDT and in those companies without any
law requiring them to surrender their shares and also without
In particular, respondent Nazarenos Memorandum, consisting of 73 notice and trial.
pages, harps mainly on the procedural infirmities of the petition
In the earlier case of Fernandez v. Cojuangco, petitioner Fernandez
who claimed to be a stockholder of record of PLDT, contended that
Respondent Pangilinan further asserts that Section 11, [Article the term capital in the 1987 Constitution refers to shares entitled
XII of the Constitution] imposes no nationality requirement to vote or the common shares. Fernandez explained thus:
on the shareholders of the utility company as a condition for
keeping their shares in the utility company. According to him,
Section 11 does not authorize taking one persons property (the
shareholders stock in the utility company) on the basis of another The forty percent (40%) foreign equity limitation in public
partys alleged failure to satisfy a requirement that is a condition utilities prescribed by the Constitution refers to ownership of
only for that other partys retention of another piece of property shares of stock entitled to vote, i.e., common shares,
(the utility company being at least 60% Filipino-owned to keep its considering that it is through voting that control is being
franchise).36 exercised. x x x

The OSG, representing public respondents Obviously, the intent of the framers of the Constitution in
Secretary Margarito Teves, Undersecretary John P. Sevilla, imposing limitations and restrictions on fully nationalized
Commissioner Ricardo Abcede, and Chairman Fe Barin, is likewise and partially nationalized activities is for Filipino nationals to
silent on the definition of the term capital. In its be always in control of the corporation undertaking said
Memorandum37 dated 24 September 2007, the OSG also limits its activities. Otherwise, if the Trial Courts ruling upholding
discussion on the supposed procedural defects of the petition, i.e. respondents arguments were to be given credence, it would
lack of standing, lack of jurisdiction, non-inclusion of interested be possible for the ownership structure of a public utility
parties, and lack of basis for injunction. The OSG does not present corporation to be divided into one percent (1%) common
any definition or interpretation of the term capital in Section 11, stocks and ninety-nine percent (99%) preferred stocks.
Article XII of the Constitution. The OSG contends that the petition Following the Trial Courts ruling adopting respondents
actually partakes of a collateral attack on PLDTs franchise as a arguments, the common shares can be owned entirely by
public utility, which in effect requires a full-blown trial where all the foreigners thus creating an absurd situation wherein
parties in interest are given their day in court.38 foreigners, who are supposed to be minority shareholders,
control the public utility corporation.

Respondent Francisco Ed Lim, impleaded as President and Chief


Executive Officer of the Philippine Stock Exchange (PSE), does not xxxx
also define the term capital and seeks the dismissal of the petition
on the following grounds: (1) failure to state a cause of action
against Lim; (2) the PSE allegedly implemented its rules and
required all listed companies, including PLDT, to make proper and
Thus, the 40% foreign ownership limitation should be
timely disclosures; and (3) the reliefs prayed for in the petition
interpreted to apply to both the beneficial ownership and
would adversely impact the stock market.
the controlling interest.
xxxx

On the other hand, respondents therein, Antonio O. Cojuangco,


Manuel V. Pangilinan, Carlos A. Arellano, Helen Y.
Clearly, therefore, the forty percent (40%) foreign equity Dee, Magdangal B. Elma, Mariles Cacho-Romulo,
limitation in public utilities prescribed by the Constitution Fr. Bienvenido F. Nebres, Ray C. Espinosa, Napoleon L. Nazareno,
refers to ownership of shares of stock entitled to vote, i.e., Albert F. Del Rosario, and Orlando B. Vea, argued that the term
common shares. Furthermore, ownership of record of capital in Section 11, Article XII of the Constitution includes
shares will not suffice but it must be shown that the legal preferred shares since the Constitution does not distinguish among
and beneficial ownership rests in the hands of Filipino classes of stock, thus:
citizens. Consequently, in the case of petitioner PLDT, since
it is already admitted that the voting interests of foreigners
which would gain entry to petitioner PLDT by the acquisition
of SMART shares through the Questioned Transactions is 16. The Constitution applies its foreign ownership limitation on
equivalent to 82.99%, and the nominee arrangements the corporations capital, without distinction as to classes of
between the foreign principals and the Filipino owners is shares. x x x
likewise admitted, there is, therefore, a violation of Section
11, Article XII of the Constitution.

Parenthetically, the Opinions dated February 15, 1988 and In this connection, the Corporation Code which was already
April 14, 1987 cited by the Trial Court to support the in force at the time the present (1987) Constitution was
proposition that the meaning of the word capital as used in drafted defined outstanding capital stock as follows:
Section 11, Article XII of the Constitution allegedly refers to
the sum total of the shares subscribed and paid-in by the
shareholder and it allegedly is immaterial how the stock is
classified, whether as common or preferred, cannot stand in
the face of a clear legislative policy as stated in the FIA Section 137. Outstanding capital stock defined. The term
which took effect in 1991 or way after said opinions were outstanding capital stock, as used in this Code, means the
rendered, and as clarified by the above-quoted total shares of stock issued under binding subscription
Amendments. In this regard, suffice it to state that as agreements to subscribers or stockholders, whether or not
between the law and an opinion rendered by an fully or partially paid, except treasury shares.
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. Section 137 of the Corporation Code also does not
distinguish between common and preferred shares, nor
exclude either class of shares, in determining the
outstanding capital stock (the capital) of a corporation.
In the same vein, the SECs construction of Section 11, Consequently, petitioners suggestion to reckon PLDTs
Article XII of the Constitution is at best merely advisory for foreign equity only on the basis of PLDTs outstanding
it is the courts that finally determine what a law means.39 common shares is without legal basis. The language of the
Constitution should be understood in the sense it has in
common use.
xxxx shares, or both, any of which classes or series of shares
may have such rights, privileges or restrictions as may be
stated in the articles of incorporation: Provided, That no
share may be deprived of voting rights except those
17. But even assuming that resort to the proceedings of the classified and issued as preferred or redeemable
Constitutional Commission is necessary, there is nothing in shares, unless otherwise provided in this Code:
the Record of the Constitutional Commission (Vol. III) which Provided, further, That there shall always be a class or
petitioner misleadingly cited in the Petition x x x which series of shares which have complete voting rights. Any or
supports petitioners view that only common shares should all of the shares or series of shares may have a par value or
form the basis for computing a public utilitys foreign equity. 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
xxxx
building and loan associations shall not be permitted to
issue no-par value shares of stock.

Preferred shares of stock issued by any corporation may be


18. In addition, the SEC the government agency primarily given preference in the distribution of the assets of the
responsible for implementing the Corporation Code, and corporation in case of liquidation and in the distribution of
which also has the responsibility of ensuring compliance dividends, or such other preferences as may be stated in
with the Constitutions foreign equity restrictions as regards the articles of incorporation which are not violative of the
nationalized activities x x x has categorically ruled that both provisions of this Code: Provided, That preferred shares of
common and preferred shares are properly considered in stock may be issued only with a stated par value. The Board
determining outstanding capital stock and the nationality of Directors, where authorized in the articles of
composition thereof.40 incorporation, may fix the terms and conditions of preferred
shares of stock or any series thereof: Provided, That such
terms and conditions shall be effective upon the filing of a
certificate thereof with the Securities and Exchange
Commission.

We agree with petitioner and petitioners-in-intervention. The term Shares of capital stock issued without par value shall be
capital in Section 11, Article XII of the Constitution refers only to deemed fully paid and non-assessable and the holder of
shares of stock entitled to vote in the election of directors, and such shares shall not be liable to the corporation or to its
thus in the present case only to common shares,41 and not to the creditors in respect thereto: Provided; That shares without
total outstanding capital stock comprising both common and non- par value may not be issued for a consideration less than
voting preferred shares. the value of five (P5.00) pesos per share: Provided, further,
That the entire consideration received by the corporation for
The Corporation Code of the Philippines42 classifies shares as its no-par value shares shall be treated as capital and shall
common or preferred, thus: not be available for distribution as dividends.

A corporation may, furthermore, classify its shares for the


purpose of insuring compliance with constitutional or legal
Sec. 6. Classification of shares. - The shares of stock of requirements.
stock corporations may be divided into classes or series of
Except as otherwise provided in the articles of incorporation is exercised through his vote in the election of directors because it
and stated in the certificate of stock, each share shall be is the board of directors that controls or manages the
equal in all respects to every other share. corporation.44 In the absence of provisions in the articles of
incorporation denying voting rights to preferred shares, preferred
Where the articles of incorporation provide for non-voting shares have the same voting rights as common shares. However,
shares in the cases allowed by this Code, the holders of preferred shareholders are often excluded from any control, that is,
such shares shall nevertheless be entitled to vote on the deprived of the right to vote in the election of directors and on
following matters: other matters, on the theory that the preferred shareholders are
merely investors in the corporation for income in the same manner
1. Amendment of the articles of incorporation; as bondholders.45 In fact, under the Corporation Code only
preferred or redeemable shares can be deprived of the right to
vote.46 Common shares cannot be deprived of the right to vote in
2. Adoption and amendment of by-laws;
any corporate meeting, and any provision in the articles of
incorporation restricting the right of common shareholders to vote
3. Sale, lease, exchange, mortgage, pledge or other is invalid.47
disposition of all or substantially all of the corporate
property;

4. Incurring, creating or increasing bonded


Considering that common shares have voting rights which translate
indebtedness;
to control, as opposed to preferred shares which usually have no
voting rights, the term capital in Section 11, Article XII of the
5. Increase or decrease of capital stock; Constitution refers only to common shares. However, if the
preferred shares also have the right to vote in the election of
6. Merger or consolidation of the corporation with directors, then the term capital shall include such preferred shares
another corporation or other corporations; because the right to participate in the control or management of
the corporation is exercised through the right to vote in the
7. Investment of corporate funds in another election of directors. In short, the term capital in Section 11,
corporation or business in accordance with this Code; Article XII of the Constitution refers only to shares of stock
and that can vote in the election of directors.

8. Dissolution of the corporation.

Except as provided in the immediately preceding paragraph, This interpretation is consistent with the intent of the framers of
the vote necessary to approve a particular corporate act as the Constitution to place in the hands of Filipino citizens the control
provided in this Code shall be deemed to refer only to and management of public utilities. As revealed in the deliberations
stocks with voting rights. of the Constitutional Commission, capital refers to the voting stock
or controlling interest of a corporation, to wit:

MR. NOLLEDO. In Sections 3, 9 and 15, the Committee


Indisputably, one of the rights of a stockholder is the right to stated local or Filipino equity and foreign equity; namely,
participate in the control or management of the corporation.43 This
60-40 in Section 3, 60-40 in Section 9 and 2/3-1/3 in Corporation Code, does the Committee adopt the
Section 15. grandfather rule?

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

MR. NOLLEDO. In teaching law, we are always faced with


this question: Where do we base the equity requirement, is MR. NOLLEDO. Therefore, we need additional Filipino
it on the authorized capital stock, on the subscribed capital capital?
stock, or on the paid-up capital stock of a corporation? Will
the Committee please enlighten me on this?

MR. VILLEGAS. Yes.48

MR. VILLEGAS. We have just had a long discussion with the


members of the team from the UP Law Center who provided
us a draft. The phrase that is contained here which we xxxx
adopted from the UP draft is 60 percent of voting
stock.
MR. AZCUNA. May I be clarified as to that portion that was
accepted by the Committee.

MR. NOLLEDO. That must be based on the subscribed


capital stock, because unless declared delinquent, unpaid
MR. VILLEGAS. The portion accepted by the Committee is
capital stock shall be entitled to vote.
the deletion of the phrase voting stock or controlling
interest.

MR. VILLEGAS. That is right.


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

With respect to an investment by one corporation in another MR. VILLEGAS. Yes.


corporation, say, a corporation with 60-40 percent equity
invests in another corporation which is permitted by the
MR. AZCUNA. So if the Davide amendment is lost, we are interpretation of the term capital, as referring to controlling
stuck with 60 percent of the capital to be owned by citizens. interest or shares entitled to vote, is the definition of a Philippine
national in the Foreign Investments Act of 1991,50 to wit:

MR. VILLEGAS. That is right.


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

MR. AZCUNA. But the control can be with the


foreigners even if they are the minority. Let us say 40 a. The term Philippine national shall mean a citizen of the
percent of the capital is owned by them, but it is the Philippines; or a domestic partnership or association wholly
voting capital, whereas, the Filipinos own the owned by citizens of the Philippines; or a corporation
nonvoting shares. So we can have a situation where organized under the laws of the Philippines of which
the corporation is controlled by foreigners despite at least sixty percent (60%) of the capital stock
being the minority because they have the voting outstanding and entitled to vote is owned and held by
capital. That is the anomaly that would result here. 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
MR. BENGZON. No, the reason we eliminated the word is wholly owned by Filipinos or a trustee of funds for pension
stock as stated in the 1973 and 1935 Constitutions is or other employee retirement or separation benefits, where
that according to Commissioner Rodrigo, there are the trustee is a Philippine national and at least sixty percent
associations that do not have stocks. That is why we (60%) of the fund will accrue to the benefit of Philippine
say CAPITAL. nationals: Provided, That where a corporation and its non-
Filipino stockholders own stocks in a Securities and
Exchange Commission (SEC) registered enterprise, at least
sixty percent (60%) of the capital stock outstanding and
entitled to vote of each of both corporations must be owned
MR. AZCUNA. We should not eliminate the phrase and held by citizens of the Philippines and at least sixty
controlling interest. 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)
MR. 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 Regulations of the Foreign Investments
Act of 1991 provide:

Thus, 60 percent of the capital assumes, or should result


in, controlling interest in the corporation. Reinforcing this
b. Philippine national shall mean a citizen of the Philippines Individuals or juridical entities not meeting the
or a domestic partnership or association wholly owned by aforementioned qualifications are considered as non-
the citizens of the Philippines; or a corporation organized Philippine nationals. (Emphasis supplied)
under the laws of the Philippines of which at least
sixty percent [60%] of the capital stock outstanding
and entitled to vote is owned and held by citizens of
the Philippines; or a trustee of funds for pension or other
employee retirement or separation benefits, where the
trustee is a Philippine national and at least sixty percent
[60%] of the fund will accrue to the benefit of the Philippine
nationals; Provided,that where a corporation its non-Filipino
stockholders own stocks in a Securities and Exchange
Commission [SEC] registered enterprise, at least sixty
percent [60%] of the capital stock outstanding and entitled
to vote 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 Mere legal title is insufficient to meet the 60 percent Filipino-owned
the corporation shall be considered a Philippine national. capital required in the Constitution. Full beneficial ownership of 60
The control test shall be applied for this purpose. percent of the outstanding capital stock, coupled with 60 percent of
the voting rights, is required. The legal and beneficial ownership of
60 percent of the outstanding capital stock must rest in the hands
of Filipino nationals in accordance with the constitutional mandate.
Compliance with the required Filipino ownership of a Otherwise, the corporation is considered as non-Philippine
corporation shall be determined on the basis of national[s].
outstanding capital stock whether fully paid or not,
but only such stocks which are generally entitled to
vote are considered.
Under Section 10, Article XII of the Constitution, Congress may
reserve to citizens of the Philippines or to corporations or
associations at least sixty per centum of whose capital is owned by
For stocks to be deemed owned and held by such citizens, or such higher percentage as Congress
Philippine citizens or Philippine nationals, mere legal may prescribe, certain areas of investments. Thus, in numerous
title is not enough to meet the required Filipino laws Congress has reserved certain areas of investments to Filipino
equity. Full beneficial ownership of the stocks, citizens or to corporations at least sixty percent of the capital of
coupled with appropriate voting rights is essential. which is owned by Filipino citizens. Some of these laws are: (1)
Thus, stocks, the voting rights of which have been Regulation of Award of Government Contracts or R.A. No. 5183;
assigned or transferred to aliens cannot be (2) Philippine Inventors Incentives Act or R.A. No. 3850; (3)
considered held by Philippine citizens or Philippine Magna Carta for Micro, Small and Medium Enterprises or R.A. No.
nationals. 6977; (4) Philippine Overseas Shipping Development Act or R.A.
No. 7471; (5) Domestic Shipping Development Act of 2004 or R.A.
No. 9295; (6) Philippine Technology Transfer Act of 2009 or R.A.
No. 10055; and (7) Ship Mortgage Decree or P.D. No. 1521. Hence,
the term capital in Section 11, Article XII of the Constitution is
also used in the same context in numerous lawsreserving The example given is not theoretical but can be found in the real
certain areas of investments to Filipino citizens. world, and in fact exists in the present case.

To construe broadly the term capital as the total outstanding Holders of PLDT preferred shares are explicitly denied of the right
capital stock, including both common and non-voting preferred to vote in the election of directors. PLDTs Articles of Incorporation
shares, grossly contravenes the intent and letter of the Constitution expressly state that the holders of Serial Preferred Stock shall
that the State shall develop a self-reliant and independent national not be entitled to vote at any meeting of the stockholders
economy effectively controlled by Filipinos. A broad definition for the election of directors or for any other purpose or
unjustifiably disregards who owns the all-important voting stock, otherwise participate in any action taken by the corporation or its
which necessarily equates to control of the public utility. stockholders, or to receive notice of any meeting of stockholders.51

We shall illustrate the glaring anomaly in giving a broad definition On the other hand, holders of common shares are granted the
to the term capital. Let us assume that a corporation has 100 exclusive right to vote in the election of directors. PLDTs Articles of
common shares owned by foreigners and 1,000,000 non-voting Incorporation52 state that each holder of Common Capital Stock
preferred shares owned by Filipinos, with both classes of share shall have one vote in respect of each share of such stock held by
having a par value of one peso (P1.00) per share. Under the broad him on all matters voted upon by the stockholders, and the
definition of the term capital, such corporation would be considered holders of Common Capital Stock shall have the exclusive
compliant with the 40 percent constitutional limit on foreign equity right to vote for the election of directors and for all other
of public utilities since the overwhelming majority, or more than purposes.53
99.999 percent, of the total outstanding capital stock is Filipino
owned. This is obviously absurd.

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


directors, meaning only common shareholders exercise control over
In the example given, only the foreigners holding the common PLDT. Conversely, holders of preferred shares, who have no voting
shares have voting rights in the election of directors, even if they rights in the election of directors, do not have any control over
hold only 100 shares. The foreigners, with a minuscule equity of PLDT. In fact, under PLDTs Articles of Incorporation, holders of
less than 0.001 percent, exercise control over the public utility. On common shares have voting rights for all purposes, while holders of
the other hand, the Filipinos, holding more than 99.999 percent of preferred shares have no voting right for any purpose whatsoever.
the equity, cannot vote in the election of directors and hence, have
no control over the public utility. This starkly circumvents the intent
of the framers of the Constitution, as well as the clear language of
the Constitution, to place the control of public utilities in the hands It must be stressed, and respondents do not dispute, that
of Filipinos. It also renders illusory the State policy of an foreigners hold a majority of the common shares of PLDT. In fact,
independent national economy effectively controlled by Filipinos. based on PLDTs 2010 General Information Sheet (GIS),54which is a
document required to be submitted annually to the Securities and
Exchange Commission,55 foreigners hold 120,046,690 common
shares of PLDT whereas Filipinos hold only 66,750,622 common
shares.56 In other words, foreigners hold 64.27% of the total
number of PLDTs common shares, while Filipinos hold only 35.73%. authority to operate a public utility. The undisputed fact that the
Since holding a majority of the common shares equates to control, PLDT preferred shares, 99.44% owned by Filipinos, are non-voting
it is clear that foreigners exercise control over PLDT. Such amount and earn only 1/70 of the dividends that PLDT common shares
of control unmistakably exceeds the allowable 40 percent limit on earn, grossly violates the constitutional requirement of 60 percent
foreign ownership of public utilities expressly mandated in Section Filipino control and Filipino beneficial ownership of a public utility.
11, Article XII of the Constitution.
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
Moreover, the Dividend Declarations of PLDT for 2009,57 as 11, Article XII of the Constitution that [n]o franchise, certificate, or
submitted to the SEC, shows that per share the SIP58 preferred any other form of authorization for the operation of a public utility
shares earn a pittance in dividends compared to the common shall be granted except to x x x corporations x x x organized under
shares. PLDT declared dividends for the common shares at P70.00 the laws of the Philippines, at least sixty per centum of whose
per share, while the declared dividends for the preferred shares capital is owned by such citizens x x x.
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. To repeat, (1) foreigners own 64.27% of the common shares of
PLDT, which class of shares exercises the sole right to vote in the
election of directors, and thus exercise control over PLDT; (2)
Filipinos own only 35.73% of PLDTs common shares, constituting a
As shown in PLDTs 2010 GIS,60 as submitted to the SEC, the par minority of the voting stock, and thus do not exercise control over
value of PLDT common shares is P5.00 per share, whereas the par PLDT; (3) preferred shares, 99.44% owned by Filipinos, have no
value of preferred shares is P10.00 per share. In other words, voting rights; (4) preferred shares earn only 1/70 of the dividends
preferred shares have twice the par value of common shares but that common shares earn;63 (5) preferred shares have twice the
cannot elect directors and have only 1/70 of the dividends of par value of common shares; and (6) preferred shares constitute
common shares. Moreover, 99.44% of the preferred shares are 77.85% of the authorized capital stock of PLDT and common
owned by Filipinos while foreigners own only a minuscule 0.56% of shares only 22.15%. This kind of ownership and control of a public
the preferred shares.61 Worse, preferred shares constitute 77.85% utility is a mockery of the Constitution.
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 Incidentally, the fact that PLDT common shares with a par value
requirement of 60 percent Filipino control and Filipino beneficial of P5.00 have a current stock market value of P2,328.00 per
ownership in a public utility. share,64 while PLDT preferred shares with a par value of P10.00 per
share have a current stock market value ranging from only P10.92
to P11.06 per share,65 is a glaring confirmation by the market that
control and beneficial ownership of PLDT rest with the common
The legal and beneficial ownership of 60 percent of the outstanding shares, not with the preferred shares.
capital stock must rest in the hands of Filipinos in accordance with
the constitutional mandate. Full beneficial ownership of 60 percent
of the outstanding capital stock, coupled with 60 percent of the
voting rights, is constitutionally required for the States grant of
Indisputably, construing the term capital in Section 11, Article XII Constitution should be considered self-executing, as a
of the Constitution to include both voting and non-voting shares contrary rule would give the legislature discretion to
will result in the abject surrender of our telecommunications determine when, or whether, they shall be effective.
industry to foreigners, amounting to a clear abdication of the These provisions would be subordinated to the will of the
States constitutional duty to limit control of public utilities to lawmaking body, which could make them entirely
Filipino citizens. Such an interpretation certainly runs counter to meaningless by simply refusing to pass the needed
the constitutional provision reserving certain areas of investment to implementing statute. (Emphasis supplied)
Filipino citizens, such as the exploitation of natural resources as
well as the ownership of land, educational institutions and
advertising businesses. The Court should never open to foreign
control what the Constitution has expressly reserved to Filipinos for
that would be a betrayal of the Constitution and of the national
interest. The Court must perform its solemn duty to defend and
uphold the intent and letter of the Constitution to ensure, in the
words of the Constitution, a self-reliant and independent national
economy effectively controlled by Filipinos.

Section 11, Article XII of the Constitution, like other provisions of In Manila Prince Hotel, even the Dissenting Opinion of then
the Constitution expressly reserving to Filipinos specific areas of Associate Justice Reynato S. Puno, later Chief Justice, agreed that
investment, such as the development of natural resources and constitutional provisions are presumed to be self-executing. Justice
ownership of land, educational institutions and advertising Puno stated:
business, is self-executing. There is no need for legislation to
implement these self-executing provisions of the Constitution. The
rationale why these constitutional provisions are self-executing was
explained in Manila Prince Hotel v. GSIS,66 thus: Courts as a rule consider the provisions of the Constitution
as self-executing, rather than as requiring future legislation
x x x Hence, unless it is expressly provided that a legislative for their enforcement. The reason is not difficult to
act is necessary to enforce a constitutional mandate, the discern. For if they are not treated as self-executing,
presumption now is that all provisions of the constitution the mandate of the fundamental law ratified by the
are self-executing. If the constitutional provisions are sovereign people can be easily ignored and nullified
treated as requiring legislation instead of self-executing, the by Congress. Suffused with wisdom of the ages is the
legislature would have the power to ignore and practically unyielding rule that legislative actions may give
nullify the mandate of the fundamental law. This can be breath to constitutional rights but congressional
cataclysmic. That is why the prevailing view is, as it has inaction should not suffocate them.
always been, that

. . . in case of doubt, the Constitution should be considered


self-executing rather than non-self-executing. . . . Unless Thus, we have treated as self-executing the provisions in
the contrary is clearly intended, the provisions of the the Bill of Rights on arrests, searches and seizures, the
rights of a person under custodial investigation, the rights of To treat Section 11, Article XII of the Constitution as not self-
an accused, and the privilege against self-incrimination. It is executing would mean that since the 1935 Constitution, or over the
recognized that legislation is unnecessary to enable courts last 75 years, not one of the constitutional provisions expressly
to effectuate constitutional provisions guaranteeing the reserving specific areas of investments to corporations, at least 60
fundamental rights of life, liberty and the protection of percent of the capital of which is owned by Filipinos, was
property. The same treatment is accorded to constitutional enforceable. In short, the framers of the 1935, 1973 and 1987
provisions forbidding the taking or damaging of property for Constitutions miserably failed to effectively reserve to Filipinos
public use without just compensation. (Emphasis supplied) specific areas of investment, like the operation by corporations of
public utilities, the exploitation by corporations of mineral
resources, the ownership by corporations of real estate, and the
ownership of educational institutions. All the legislatures that
convened since 1935 also miserably failed to enact legislations to
implement these vital constitutional provisions that determine who
will effectively control the national economy, Filipinos or foreigners.
Thus, in numerous cases,67 this Court, even in the absence of
This Court cannot allow such an absurd interpretation of the
implementing legislation, applied directly the provisions of the
Constitution.
1935, 1973 and 1987 Constitutions limiting land ownership to
Filipinos. In Soriano v. Ong Hoo,68 this Court ruled:

This Court has held that the SEC has both regulatory and
adjudicative functions.69 Under its regulatory functions, the SEC
x x x As the Constitution is silent as to the effects or
can be compelled by mandamus to perform its statutory duty when
consequences of a sale by a citizen of his land to an alien,
it unlawfully neglects to perform the same. Under its adjudicative
and as both the citizen and the alien have violated the law,
or quasi-judicial functions, the SEC can be also be compelled by
none of them should have a recourse against the other, and
mandamus to hear and decide a possible violation of any law it
it should only be the State that should be allowed to
administers or enforces when it is mandated by law to investigate
intervene and determine what is to be done with the
such violation.
property subject of the violation. We have said that what
the State should do or could do in such matters is a matter
of public policy, entirely beyond the scope of judicial
authority. (Dinglasan, et al. vs. Lee Bun Ting, et al., 6 G. R.
No. L-5996, June 27, 1956.) While the legislature has Under Section 17(4)70 of the Corporation Code, the SEC has the
not definitely decided what policy should be followed regulatory function to reject or disapprove the Articles of
in cases of violations against the constitutional Incorporation of any corporation where the required percentage
prohibition, courts of justice cannot go beyond by of ownership of the capital stock to be owned by citizens of
declaring the disposition to be null and void the Philippines has not been complied with as required by
as violative of the Constitution. x x x (Emphasis existing laws or the Constitution. Thus, the SEC is the
supplied) government agency tasked with the statutory duty to enforce the
nationality requirement prescribed in Section 11, Article XII of the
Constitution on the ownership of public utilities. This Court, in a
petition for declaratory relief that is treated as a petition for
mandamus as in the present case, can direct the SEC to perform
its statutory duty under the law, a duty that the SEC has
apparently unlawfully neglected to do based on the 2010 GIS that NARRA NICKEL MINING AND DEVELOPMENT CORP., TESORO
respondent PLDT submitted to the SEC. MINING AND DEVELOPMENT, INC., AND MCARTHUR
MINING, INC., Petitioners, v. REDMONT CONSOLIDATED
Under Section 5(m) of the Securities Regulation Code,71 the SEC is MINES CORP., Respondent.
vested with the power and function to suspend or revoke, after
proper notice and hearing, the franchise or certificate of RESOLUTION
registration of corporations, partnerships or associations,
upon any of the grounds provided by law. The SEC is VELASCO JR., J.:
mandated under Section 5(d) of the same Code with the power and
function to investigate x x x the activities of persons to Beforethe Court is the Motion for Reconsideration of its April 21,
ensure compliance with the laws and regulations that SEC 2014 Decision, which denied the Petition for Review on Certiorari
administers or enforces. The GIS that all corporations are required under Rule 45 jointly interposed by petitioners Narra Nickel and
to submit to SEC annually should put the SEC on guard against Mining Development Corp. (Narra), Tesoro Mining and
violations of the nationality requirement prescribed in the Development, Inc. (Tesoro), and McArthur Mining Inc. (McArthur),
Constitution and existing laws. This Court can compel the SEC, in a and affirmed the October 1, 2010 Decision and February 15, 2011
petition for declaratory relief that is treated as a petition for Resolution of the Court of Appeals (CA) in CA-G.R. SP No. 109703.
mandamus as in the present case, to hear and decide a possible
violation of Section 11, Article XII of the Constitution in view of the Very simply, the challenged Decision sustained the appellate courts
ownership structure of PLDTs voting shares, as admitted by ruling that petitioners, being foreign corporations,are not entitled
respondents and as stated in PLDTs 2010 GIS that PLDT submitted to Mineral Production Sharing Agreements (MPSAs). In reaching its
to SEC. conclusion, this Court upheld with approval the appellate courts
finding that there was doubt as to petitioners nationality since a
100% Canadian-owned firm, MBMI Resources, Inc. (MBMI),
effectively owns60% of the common stocks of the petitioners by
WHEREFORE, we PARTLY GRANT the petition and rule that the owning equity interest of petitioners other majority corporate
term capital in Section 11, Article XII of the 1987 Constitution shareholders.
refers only to shares of stock entitled to vote in the election of
directors, and thus in the present case only to common shares, and In a strongly worded Motion for Reconsideration dated June 5,
not to the total outstanding capital stock (common and non-voting 2014, petitioners-movants argued, in the main, that the Courts
preferred shares). Respondent Chairperson of the Securities and Decision was not in accord with law and logic.In its September 2,
Exchange Commission is DIRECTED to apply this definition of the 2014 Comment, on the other hand, respondent Redmont
term capital in determining the extent of allowable foreign Consolidated Mines Corp. (Redmont) countered that petitioners
ownership in respondent Philippine Long Distance Telephone motion for reconsideration is nothing but a rehash of their
Company, and if there is a violation of Section 11, Article XII of the arguments and should, thus, be denied outright for being pro-
Constitution, to impose the appropriate sanctions under the law. forma. Petitioners have interposed on September 30, 2014 their
Reply to the respondents Comment.

After considering the parties positions, as articulated in their


SO ORDERED. respective submissions, We resolve to deny the motion for
reconsideration.
G.R. No. 195580, January 28, 2015 I.
The case has not been rendered moot and academic
academic case, if it finds that (a) there is a grave violation of the
Petitioners have first off criticized the Court for resolving in its Constitution; (b) the situation is of exceptional character and
Decision a substantive issue, which, as argued, has supposedly paramount public interest is involved; (c) the constitutional issue
been rendered moot by the fact that petitioners applications for raised requires formulation of controlling principles to guide the
MPSAs had already been converted to an application for a Financial bench, the bar, and the public; and (d) the case is capable of
Technical Assistance Agreement (FTAA), as petitioners have in fact repetition yet evading review.2] The Courts April 21, 2014 Decision
been granted an FTAA. Further, the nationality issue, so petitioners explained in some detail that all four (4) of the foregoing
presently claim, had been rendered moribund by the fact that circumstances are present in the case. If only to stress a point, we
MBMI had already divested itself and sold all its shareholdings in will do so again.
the petitioners, as well as in their corporate stockholders, to a
Filipino corporationDMCI Mining Corporation (DMCI). First, allowing the issuance of MPSAs to applicants that are owned
and controlled by a 100% foreign-owned corporation, albeit
As a counterpoint, respondent Redmont avers that the present through an intricate web of corporate layering involving alleged
case has not been rendered moot by the supposed issuance of an Filipino corporations, is tantamount to permitting a blatant violation
FTAA in petitioners favor as this FTAA was subsequently revoked of Section 2, Article XII of the Constitution. The Court simply
by the Office of the President (OP) and is currently a subject of a cannot allow this breach and inhibit itself from resolving the
petition pending in the Courts First Division. Redmont likewise controversy on the facile pretext that the case had already been
contends that the supposed sale of MBMIs interest in the rendered academic.
petitioners and in their holding companies is a question of fact
that is outside the Courts province to verify in a Rule 45 certiorari Second, the elaborate corporate layering resorted to by petitioners
proceedings. In any case, assuming that the controversy has been so as to make it appear that there is compliance with the minimum
rendered moot, Redmont claims that its resolution on the merits is Filipino ownership in the Constitution is deftly exceptional in
still justified by the fact that petitioners have violated a character. More importantly, the case is of paramount public
constitutional provision, the violation is capable of repetition yet interest, as the corporate layering employed by petitioners was
evading review, and the present case involves a matter of public evidently designed to circumvent the constitutional caveat allowing
concern. only Filipino citizens and corporations 60%-owned by Filipino
citizens to explore, develop, and use the countrys natural
Indeed, as the Court clarified in its Decision, the conversion of the resources.
MPSA application to one for FTAAs and the issuance by the OP of
an FTAA in petitioners favor are irrelevant. The OP itself has Third, the facts of the case, involving as they do a web of corporate
already cancelled and revoked the FTAA thus issued to petitioners. layering intended to go around the Filipino ownership requirement
Petitioners curiously have omitted this critical fact in their motion in the Constitution and pertinent laws, require the establishment of
for reconsideration. Furthermore, the supposed sale by MBMI of its a definite principle that will ensure that the Constitutional provision
shares in the petitioner-corporations and in their holding reserving to Filipino citizens or corporations at least sixty per
companies is not only a question of fact that this Court is without centum of whose capital is owned by such citizens be effectively
authority to verify, it also does not negate any violation of the enforced and complied with. The case, therefore, is an opportunity
Constitutional provisions previously committed before any such to establish a controlling principle that will guide the bench, the
sale. bar, and the public.

We can assume for the nonce that the controversy had indeed been Lastly, the petitioners actions during the lifetime and existence of
rendered moot by these two events. As this Court has time and the instant case that gave rise to the present controversy are
again declared, the moot and academic principle is not a magical capable of repetition yet evading review because, as shown by
formula that automatically dissuades courts in resolving a case.1 petitioners actions, foreign corporations can easily utilize dummy
The Court may still take cognizance of an otherwise moot and Filipino corporations through various schemes and stratagems to
skirt the constitutional prohibition against foreign mining in
Philippine soil. With that, the use of the Grandfather Rule as a supplement to
the Control Test is not proscribed by the Constitution or the
II. Philippine Mining Act of 1995.

The application of the Grandfather Rule is justified by the The Grandfather Rule implements the intent of
circumstances of the case to determine the nationality of the Filipinization provisions of the Constitution.
petitioners.
To reiterate, Sec. 2, Art. XII of the Constitution reserves the
To petitioners, the Courts application of the Grandfather Rule to exploration, development, and utilization of natural resources to
determine their nationality is erroneous and allegedly without basis Filipino citizens and corporations or associations at least sixty per
in the Constitution, the Foreign Investments Act of 1991 (FIA), the centum of whose capital is owned by such citizens. Similarly,
Philippine Mining Act of 1995,3 and the Rules issued by the Section 3(aq) of the Philippine Mining Act of 1995considers a
Securities and Exchange Commission (SEC). These laws and rules corporation xxx registered in accordance with law at least sixty
supposedly espouse the application of the Control Test in verifying per cent of the capital of which is owned by citizens of the
the Philippine nationality of corporate entities for purposes of Philippines as a person qualified to undertake a mining operation.
determining compliance with Sec. 2, Art. XII of the Constitution Consistent with this objective, the Grandfather Rule was originally
that only corporations or associations at least sixty per centum of conceived to look into the citizenship of the individuals who
whose capital is owned by such [Filipino] citizens may enjoy ultimately own and control the shares of stock of a corporation for
certain rights and privileges, like the exploration and development purposes of determining compliance with the constitutional
of natural resources. requirement of Filipino ownership.It cannot, therefore, be denied
that the framers of the Constitution have not foreclosed the
The application of the Grandfather Rule in the Grandfather Rule as a tool in verifying the nationality of
present case does not eschew the Control Test. corporations for purposes of ascertaining their right to participate
in nationalized or partly nationalized activities. The following
Clearly, petitioners have misread, and failed to appreciate the clear excerpts from the Record of the 1986 Constitutional Commission
import of, the Courts April 21, 2014 Decision. Nowhere in that suggest as much:chanRoblesvirtualLawlibrary
disposition did the Court foreclose the application of the Control
Test in determining which corporations may be considered as MR. NOLLEDO: In Sections 3, 9 and 15, the Committee stated
Philippine nationals. Instead, to borrow Justice Leonens term, the local or Filipino equity and foreign equity; namely, 60-40 in Section
Court used the Grandfather Rule as a supplement to the Control 3, 60-40 in Section 9, and 2/3-1/3 in Section 15.
Test so that the intent underlying the averted Sec.2, Art. XII of the
Constitution be given effect. The following excerpts of the April 21, MR. VILLEGAS: That is right.
2014 Decision cannot be clearer:chanRoblesvirtualLawlibrary
x xxx
In ending, the control test is still the prevailing mode of
determining whether or not a corporation is a Filipino MR. NOLLEDO: Thank you.
corporation, within the ambit of Sec. 2, Art. XII of the 1987
Constitution, entitled to undertake the exploration, development With respect to an investment by one corporation in another
and utilization of the natural resources of the Philippines. When in corporation, say, a corporation with 60-40 percent equity invests in
the mind of the Court, there is doubt, based on the another corporation which is permitted by the Corporation
attendant facts and circumstances of the case, in the 60-40 Code, does the Committee adopt the grandfather rule?
Filipino equity ownership in the corporation, then it may apply
the grandfather rule.(emphasis supplied)
MR. VILLEGAS: Yes, that is the understanding of the You allege that the structure of MMLs ownership in PHILSAGA is as
Committee. follows: (1) MML owns 40% equity in MEDC, while the 60% is
ostensibly owned by Philippine individual citizens who are actually
MMLs controlled nominees; (2) MEDC, in turn,owns 60% equity in
As further defined by Dean Cesar Villanueva, the Grandfather Rule
MOHC, while MML owns the remaining 40%; (3) Lastly, MOHC
is the method by which the percentage of Filipino equity in
owns 60% of PHILSAGA, while MML owns the remaining 40%. You
a corporation engaged in nationalized and/or partly nationalized
provide the following figure to illustrate this
areas of activities, provided for under the Constitution and other
structure:chanRoblesvirtualLawlibrary
nationalization laws, is computed, in cases where corporate
shareholders are present, by attributing the nationality of
xxxx
the second or even subsequent tier of ownership to
determine the nationality of the corporate
We note that the Constitution and the statute use the concept
shareholder.4 Thus, to arrive at the actual Filipino ownership and
Philippine citizens. Article III, Section 1 of the Constitution
control in a corporation, both the direct and indirect shareholdings
provides who are Philippine citizens: x x x This enumeration is
in the corporation are determined.
exhaustive. In other words, there can be no other Philippine
citizens other than those falling within the enumeration provided by
This concept of stock attribution inherent in the Grandfather Rule
the Constitution. Obviously, only natural persons are susceptible of
to determine the ultimate ownership in a corporation is observed
citizenship. Thus, for purposes of the Constitutional and statutory
by the Bureau of Internal Revenue (BIR) in applying Section 127
restrictions on foreign participation in the exploitation of mineral
(B)5 of the National Internal Revenue Code on taxes imposed on
resources, a corporation investing in a mining joint venture can
closely held corporations, in relation to Section 96 of the
never be considered as a Philippine citizen.
Corporation Code6 on close corporations. Thus, in BIR Ruling No.
148-10, Commissioner Kim Henares
The Supreme Court En Banc confirms this [in] Pedro R. Palting,
held:chanRoblesvirtualLawlibrary
vs. San Jose Petroleum [Inc.]. The Court held that a corporation
In the case of a multi-tiered corporation, the stock investing in another corporation engaged in a nationalized activity
attribution rule must be allowed to run continuously along cannot beconsidered as a citizen for purposes of the Constitutional
the chain of ownership until it finally reaches the individual provision restricting foreign exploitation of natural
stockholders. This is in consonance with the grandfather resources:chanRoblesvirtualLawlibrary
rule adopted in the Philippines under Section 96 of the
Corporation Code (Batas Pambansa Blg. 68) which provides that xxxx
notwithstanding the fact that all the issued stock of a corporation
are held by not more than twenty persons, among others, a Accordingly, we opine that we must look into the citizenship of the
corporation is nonetheless not to be deemed a close corporation individual stockholders, i.e. natural persons, of that investor-
when at least two thirds of its voting stock or voting rights is corporation in order to determine if the Constitutional and statutory
owned or controlled by another corporation which is not a close restrictions are complied with. If the shares of stock of the
corporation.7 immediate investor corporation is in turn held and controlled by
another corporation, then we must look into the citizenship of the
individual stockholders of the latter corporation. In other words,
In SEC-OGC Opinion No. 10-31 dated December 9, 2010 (SEC if there are layers of intervening corporations investing in a
Opinion 10-31),the SEC applied the Grandfather Rule even if the mining joint venture, we must delve into the citizenship of
corporation engaged in mining operation passes the 60-40 the individual stockholders of each corporation. This is the
requirement of the Control Test, viz:chanRoblesvirtualLawlibrary strict application of the grandfather rule, which the Commission has
been consistently applying prior to the 1990s.
Indeed, the framers of the Constitution intended for the however, Falcon Ridge paid nothing for this subscription while MBMI
grandfather rule to apply in case a 60%-40% Filipino- paid P2,500,000.00 out of its total subscription cost of
Foreign equity corporation invests in another corporation P3,998,000.00. Thus, pursuant to the afore-quoted DOJ Opinion,
engaging in an activity where the Constitution restricts the Grandfather Rule must be used.
foreign participation.
xxxx
xxxx
The avowed purpose of the Constitution is to place in the
Accordingly, under the structure you represented, the joint mining hands of Filipinos the exploitation of our natural resources.
venture is 87.04 % foreign owned, while it is only 12.96% owned Necessarily, therefore, the Rule interpreting the
by Philippine citizens. Thus, the constitutional requirement of 60% constitutional provision should not diminish that right
ownership by Philippine citizens is violated. (emphasis supplied) through the legal fiction of corporate ownership and control.
But the constitutional provision, as interpreted and practiced via
the 1967 SEC Rules, has favored foreigners contrary to the
Similarly, in the eponymous Redmont Consolidated Mines
command of the Constitution. Hence, the Grandfather Rule must
Corporation v. McArthur Mining Inc., et al.,8the SEC en
be applied to accurately determine the actual participation,
banc applied the Grandfather Rule despite the fact that the subject
both direct and indirect, of foreigners in a corporation
corporations ostensibly have satisfied the 60-40 Filipino equity
engaged in a nationalized activity or business.
requirement. The SEC en banc held that to attain the
Constitutional objective of reserving to Filipinos the
utilization of natural resources, one should not stop where The method employed in the Grandfather Rule of attributing the
the percentage of the capital stock is shareholdings of a given corporate shareholder to the second or
60%. Thus:chanRoblesvirtualLawlibrary even the subsequent tier of ownership hews with the rule that
the beneficial ownership of corporations engaged in
[D]oubt, we believe, exists in the instant case because the nationalized activities must reside in the hands of Filipino citizens.
foreign investor, MBMI, provided practically all the funds of Thus, even if the 60-40 Filipino equity requirement appears to
the remaining appellee-corporations. The records disclose have been satisfied, the Department of Justice (DOJ), in its Opinion
that: (1) Olympic Mines and Development Corporation (OMDC), a No. 144, S. of 1977, stated that an agreement that may distort
domestic corporation, and MBMI subscribed to 6,663 and 3,331 the actual economic or beneficial ownership of a mining
shares, respectively, out of the authorized capital stock of corporation may be struck down as violative of the
Madridejos; however, OMDC paid nothing for this subscription while constitutional requirement, viz:chanRoblesvirtualLawlibrary
MBMI paid P2,803,900.00 out of its total subscription cost of
P3,331,000.00; (2) Palawan Alpha South Resource Development In this connection, you raise the following specific
Corp. (Palawan Alpha), also a domestic corporation, and MBMI questions:chanRoblesvirtualLawlibrary
subscribed to 6,596 and 3,996 shares, respectively, out of the
authorized capital stock of Patricia Louise; however, Palawan Alpha 1. Can a Philippine corporation with 30% equity owned by
paid nothing for this subscription while MBMI paid P2,796,000.00 foreigners enter into a mining service contract with a foreign
out of its total subscription cost of P3,996,000.00; (3) OMDC and company granting the latter a share of not more than 40% from
MBMI subscribed to 6,663 and 3,331 shares, respectively, out of the proceeds of the operations?
the authorized capital stock of Sara Marie; however, OMDC paid
nothing for this subscription while MBMI paid P2,794,000.00 out of xxxx
its total subscription cost of P3,331,000.00; and (4) Falcon Ridge
Resources Management Corp. (Falcon Ridge), another domestic By law, a mining lease may be granted only to a Filipino
corporation, and MBMI subscribed to 5,997 and 3,998 shares, citizen, or to a corporation or partnership registered with
respectively, out of the authorized capital stock of San Juanico; the [SEC] at least 60% of the capital of which is owned by
Filipino citizens and possessing x x x. The sixty percent of which is owned by another domestic corporation with at least
Philippine equity requirement in mineral resource 60%-40% Filipino-Foreign Equity, while the remaining thirty
exploitation x x x is intended to insure, among other percent (30%) of the capital stock is owned by a foreign
purposes, the conservation of indigenous natural resources, corporation.
for Filipino posterity x x x. I think it is implicit in this provision,
even if it refers merely to ownership of stock in the corporation xxxx
holding the mining concession, that beneficial ownership of the
right to dispose, exploit, utilize, and develop natural This Department has had the occasion to rule in several opinions
resources shall pertain to Filipino citizens, and that the that it is implicit in the constitutional provisions, even if it refers
nationality requirement is not satisfied unless Filipinos are merely to ownership of stock in the corporation holding the land or
the principal beneficiaries in the exploitation of the natural resource concession, that the nationality requirement is
countrys natural resources. This criterion of beneficial not satisfied unless it meets the criterion of beneficial
ownership is tacitly adopted in Section 44 of P.D. No. 463, above- ownership, i.e. Filipinos are the principal beneficiaries in the
quoted, which limits the service fee in service contracts to 40% of exploration of natural resources (Op. No. 144, s. 1977; Op. No.
the proceeds of the operation, thereby implying that the 60-40 130, s. 1985), and that in applying the same the primordial
benefit-sharing ration is derived from the 60-40 equity requirement consideration is situs of control, whether in a stock or non-
in the Constitution. stock corporation (Op. No. 178, s. 1974). As stated in the
Register of Deeds vs. Ung Sui Si Temple (97 Phil. 58), obviously to
xxxx insure that corporations and associations allowed to acquire
agricultural land or to exploit natural resources shall be controlled
It is obvious that while payments to a service contractor may be by Filipinos. Accordingly, any arrangement which attempts to
justified as a service fee, and therefore, properly deductible from defeat the constitutional purpose should be eschewed (Op.
gross proceeds, the service contract could be employed as a No 130, s. 1985).
means of going about or circumventing the constitutional
limit on foreign equity participation and the obvious We are informed that in the registration of corporations with the
constitutional policy to insure that Filipinos retain beneficial [SEC], compliance with the sixty per centum requirement is being
ownership of our mineral resources. Thus, every service monitored by SEC under the Grandfather Rule a method by which
contract scheme has to be evaluated in its entirety, on a case to the percentage of Filipino equity in corporations engaged in
case basis, to determine reasonableness of the total service fee x nationalized and/or partly nationalized areas of activities provided
x x like the options available to the contractor to become equity for under the Constitution and other national laws is accurately
participant in the Philippine entity holding the concession, or to computed, and the diminution if said equity prevented (SEC Memo,
acquire rights in the processing and marketing stages. x x x S. 1976). The Grandfather Rule is applied specifically in
(emphasis supplied) cases where the corporation has corporate stockholders
with alien stockholdings, otherwise, if the rule is not
applied, the presence of such corporate stockholders could
The beneficial ownership requirement was subsequently used in
diminish the effective control of Filipinos.
tandem with the situs of control to determine the nationality of a
corporation in DOJ Opinion No. 84, S. of 1988, through the
Applying the Grandfather Rule in the instant case, the result is as
Grandfather Rule, despite the fact that both the investee and
investor corporations purportedly satisfy the 60-40 Filipino equity follows: xxx the total foreign equity in the investing corporation is
58% while the Filipino equity is only 42%, in the investing
requirement:9chanroblesvirtuallawlibrary
corporation, subject of your query, is disqualified from investing in
This refers to your request for opinion on whether or not there may real estate, which is a nationalized activity, as it does not meet the
be an investment in real estate by a domestic corporation (the 60%-40% Filipino-Foreign equity requirement under the
investing corporation) seventy percent (70%) of the capital stock Constitution.
the proposed structure, the foreign creditors would own 40% of the
This pairing of the concepts beneficial ownership and the situs of outstanding capital stock of the telecommunications company on a
control in determining what constitutes capital has been adopted direct basis, while the remaining 40% of shares would be
by this Court in Heirs of Gamboa v. Teves.10In its October 9, 2012 registered to a holding company that shall retain, on a direct basis,
Resolution, the Court clarified, thus:chanRoblesvirtualLawlibrary the other 60% equity reserved for Filipino citizens. Nonetheless,
the Court found the proposal non-compliant with the
This is consistent with Section 3 of the FIA which provides that Constitutional requirement of Filipino ownership as the
where 100% of the capital stock is held by a trustee of funds for proposed structure would give more than 60% of the ownership of
pension or other employee retirement or separation benefits, the the common shares of Bayantel to the foreign corporations,
trustee is a Philippine national if at least sixty percent (60%) of viz:chanRoblesvirtualLawlibrary
the fund will accrue to the benefit of Philippine nationals. Likewise,
Section 1(b) of the Implementing Rules of the FIA provides that In its Rehabilitation Plan, among the material financial
for stocks to be deemed owned and held by Philippine citizens or commitments made by respondent Bayantel is that its shareholders
Philippine nationals, mere legal title is not enough to meet the shall relinquish the agreed-upon amount of common stock[s] as
required Filipino equity. Full beneficial ownership of the stocks, payment to Unsecured Creditors as per the Term Sheet. Evidently,
coupled with appropriate voting rights, is essential. the parties intend to convert the unsustainable portion of
(emphasis supplied) respondents debt into common stocks, which have voting
rights. If we indulge petitioners on their proposal, the
Omnibus Creditors which are foreign corporations, shall
In emphasizing the twin requirements of beneficial ownership and
have control over 77.7% of Bayantel, a public utility
control in determining compliance with the required Filipino
company. This is precisely the scenario proscribed by the
equity in Gamboa, the en banc Court explicitly cited with approval
Filipinization provision of the Constitution. Therefore, the
the SEC en bancs application in Redmont Consolidated Mines,
Court of Appeals acted correctly in sustaining the 40% debt-to-
Corp. v. McArthur Mining, Inc., et al. of the Grandfather Rule, to
equity ceiling on conversion. (emphasis supplied)
wit:chanRoblesvirtualLawlibrary

Significantly, the SEC en banc, which is the collegial body As shown by the quoted legislative enactments, administrative
statutorily empowered to issue rules and opinions on behalf of rulings, opinions, and this Courts decisions, the Grandfather Rule
SEC, has adopted the Grandfather Rule in determining not only finds basis, but more importantly, it implements the
compliance with the 60-40 ownership requirement in favor of Filipino equity requirement, in the Constitution.
Filipino citizens mandated by the Constitution for certain economic
activities. This prevailing SEC ruling, which the SEC correctly Application of the Grandfather
adopted to thwart any circumvention of the required Filipino Rule with the Control Test.
ownership and control, is laid down in the 25 March 2010 SEC
en banc ruling in Redmont Consolidated Mines, Corp. v. McArthur Admittedly, an ongoing quandary obtains as to the role of the
Mining, Inc., et al. xxx(emphasis supplied) Grandfather Rule in determining compliance with the minimum
Filipino equity requirement vis--vis the Control Test. This
Applying Gamboa, the Court, in Express Investments III Private confusion springs from the erroneous assumption that the use of
Ltd. v. Bayantel Communications, Inc.,11 denied the foreign one method forecloses the use of the other.
creditors proposal to convert part of Bayantels debts to common
shares of the company at a rate of 77.7%. Supposedly, the As exemplified by the above rulings, opinions, decisions and this
conversion of the debts to common shares by the foreign Courts April 21, 2014 Decision, the Control Test can be, as it has
creditors would be done, both directly and indirectly, in been, applied jointly with the Grandfather Rule to determine the
order to meet the control test principle under the FIA. Under observance of foreign ownership restriction in nationalized
economic activities. The Control Test and the Grandfather
Rule are not, as it were, incompatible ownership-determinant Law in relation to the minimum Filipino equity requirement in the
methods that can only be applied alternative to each other. Rather, Constitution, significant indicators of the dummy status have
these methods can, if appropriate, be used cumulatively in been recognized in view of reports that some Filipino investors or
the determination of the ownership and control of businessmen are being utilized or [are] allowing themselves to be
corporations engaged in fully or partly nationalized used as dummies by foreign investors specifically in joint ventures
activities, as the mining operation involved in this case or the for national resource exploitation. These indicators
operation of public utilities as in Gamboa or Bayantel. are:chanRoblesvirtualLawlibrary

The Grandfather Rule, standing alone, should not be used to 1. That the foreign investors provide practically all the funds for the
determine the Filipino ownership and control in a corporation, as it joint investment undertaken by these Filipino businessmen and
could result in an otherwise foreign corporation rendered qualified their foreign partner;chanrobleslaw
to perform nationalized or partly nationalized activities. Hence, it is
only when the Control Test is first complied with that the 2. That the foreign investors undertake to provide practically all the
Grandfather Rule may be applied. Put in another manner, if the technological support for the joint venture;chanrobleslaw
subject corporations Filipino equity falls below the threshold 60%,
the corporation is immediately considered foreign-owned, in which 3. That the foreign investors, while being minority stockholders,
case, the need to resort to the Grandfather Rule disappears. manage the company and prepare all economic viability studies.

On the other hand, a corporation that complies with the 60-40 Thus, In the Matter of the Petition for Revocation of the Certificate
Filipino to foreign equity requirement can be considered a of Registration of Linear Works Realty Development
Filipino corporation if there is no doubt as to who has the Corporation,13 the SEC held that when foreigners contribute
beneficial ownership and control of the corporation. In more capital to an enterprise, doubt exists as to the actual
that instance, there is no need for a dissection or further control and ownership of the subject corporation even if the
inquiry on the ownership of the corporate shareholders in both the 60% Filipino equity threshold is met. Hence, the SEC in that
investing and investee corporation or the application of the one ordered a further investigation, viz:chanRoblesvirtualLawlibrary
Grandfather Rule.12As a corollary rule, even if the 60-40 Filipino
to foreign equity ratio is apparently met by the subject or investee x x x The [SEC Enforcement and Prosecution Department (EPD)]
corporation, a resort to the Grandfather Rule is necessary maintained that the basis for determining the level of foreign
if doubt exists as to the locus of the beneficial ownership participation is the number of shares subscribed, regardless of the
and control. In this case, a further investigation as to the par value. Applying such an interpretation, the EPD rules that the
nationality of the personalities with the beneficial ownership and foreign equity participation in Linear works Realty Development
control of the corporate shareholders in both the investing and Corporation amounts to 26.41% of the corporations capital stock
investee corporations is necessary. since the amount of shares subscribed by foreign nationals is 1,795
only out of the 6,795 shares. Thus, the subject corporation is
As explained in the April 21, 2012 Decision, the doubt that compliant with the 40% limit on foreign equity
demands the application of the Grandfather Rule in addition to or in participation. Accordingly, the EPD dismissed the complaint, and
tandem with the Control Test is not confined to, or more bluntly, did not pursue any investigation against the subject corporation.
does not refer to the fact that the apparent Filipino ownership of
the corporations equity falls below the 60% threshold. xxxx
Rather, doubt refers to various indicia that the beneficial
ownership and control of the corporation do not in fact x x x [I]n this respect we find no error in the assailed order made
reside in Filipino shareholders but in foreign by the EPD. The EPD did not err when it did not take into account
stakeholders. As provided in DOJ Opinion No. 165, Series of the par value of shares in determining compliance with the
1984, which applied the pertinent provisions of the Anti-Dummy constitutional and statutory restrictions on foreign equity.cralawred
However, we are aware that some unscrupulous individuals corporations or the shares of which are not traded in the stock
employ schemes to circumvent the constitutional and exchanges.14 These limits comply with the requirement in Palting v.
statutory restrictions on foreign equity. In the present San Jose Petroleum , Inc.15that the application of the Grandfather
case, the fact that the shares of the Japanese nationals have Rule cannot go beyond the level of what is reasonable.
a greater par value but only have similar rights to those
held by Philippine citizens having much lower par value, is A doubt exists as to the extent of control and
highly suspicious. This is because a reasonable investor beneficial ownership of MBMI over the petitioners
would expect to have greater control and economic rights and their investing corporate stockholders.
than other investors who invested less capital than
him. Thus, it is reasonable to suspect that there may be secret In the Decision subject of this recourse, the Court applied the
arrangements between the corporation and the stockholders Grandfather Rule to determine the matter of true ownership and
wherein the Japanese nationals who subscribed to the shares control over the petitioners as doubt exists as to the actual extent
with greater par value actually have greater control and of the participation of MBMI in the equity of the petitioners and
economic rights contrary to the equality of shares based on the their investing corporations.
articles of incorporation.
We considered the following membership and control structures
With this in mind, we find it proper for the EPD to investigate the and like nuances:chanRoblesvirtualLawlibrary
subject corporation. The EPD is advised to avail of the
Commissions subpoena powers in order to gather sufficient Tesoro
evidence, and file the necessary complaint.
Supposedly Filipino corporation Sara Marie Mining, Inc. (Sara
Marie) holds 59.97% of the 10,000 common shares of petitioner
As will be discussed, even if at first glance the petitioners comply
Tesoro while the Canadian-owned company, MBMI, holds 39.98%
with the 60-40 Filipino to foreign equity ratio, doubt exists in the
of its shares.
present case that gives rise to a reasonable suspicion that the
Filipino shareholders do not actually have the requisite number of
control and beneficial ownership in petitioners Narra, Tesoro, and Name Nationality Number Amount Amount Paid
McArthur. Hence, a further investigation and dissection of the of Subscribed
extent of the ownership of the corporate shareholders through the Shares
Grandfather Rule is justified. Sara Marie Filipino 5,997 P5,997,000.00 P825,000.00
Mining, Inc.
Parenthetically, it is advanced that the application of the MBMI Canadian 3,998 P3,998,000.00 P1,878,174.60
Grandfather Rule is impractical as tracing the shareholdings to the Resources,
point when natural persons hold rights to the stocks may very well Inc.16
lead to an investigation ad infinitum. Suffice it to say in this regard
Lauro L. Filipino 1 P1,000.00 P1,000.00
that, while the Grandfather Rule was originally intended to trace
Salazar
the shareholdings to the point where natural persons hold the
shares, the SEC had already set up a limit as to the number of Fernando B. Filipino 1 P1,000.00 P1,000.00
corporate layers the attribution of the nationality of the corporate Esguerra
shareholders may be applied. Manuel A. Filipino P1,000.00 P1,000.00
Agcaoili 1
In a 1977 internal memorandum, the SEC suggested applying the
Grandfather Rule on two (2) levels of corporate relations for
publicly-held corporations or where the shares are traded in the Michael T. American 1 P1,000.00 P1,000.00
stock exchanges, and to three (3) levels for closely held Mason
Kenneth Canadian 1 P1,000.00 P1,000.00 The fact that MBMI had practically provided all the funds in
Cawkel Sara Marie and Tesoro creates serious doubt as to the true
extent of its (MBMI) control and ownership over both Sara
Total 10,000 P10,000,000.00 P2,708,174.60
Marie and Tesoro since, as observed by the SEC, a reasonable
investor would expect to have greater control and economic rights
than other investors who invested less capital than him. The
In turn, the Filipino corporation Olympic Mines & Development application of the Grandfather Rule is clearly called for, and as
Corp. (Olympic) holds 66.63% of Sara Maries shares while the shown below, the Filipinos control and economic benefits in
same Canadian company MBMI holds 33.31% of Sara Maries petitioner Tesoro (through Sara Marie) fall below the threshold
shares. Nonetheless, it is admitted that Olympic did not pay a 60%, viz:chanRoblesvirtualLawlibrary
single peso for its shares. On the contrary, MBMI paid for 99% of
the paid-up capital of Sara Marie. Filipino participation in petitioner Tesoro: 40.01%
66.67 (Filipino equity in Sara Marie) x59.97 (Sara Maries share in
Name Nationalit Numbe Amount Amount Paid Tesoro) = 39.98%
y r of Subscribed 100
Shares
Olympic Filipino 6,663 P6,663,000.00 P0.00 39.98% + .03% (shares of individual Filipino shareholders [SHs] in
Mines & Tesoro)
Developmen =40.01%
t Corp.17 =====
MBMI Canadian 3,331 P3,331,000.00 P2,794,000.0 Foreign participation in petitioner Tesoro: 59.99%
Resources, 0 33.33 (Foreign equity in Sara Marie) x 59.97 (Sara Maries share
Inc. in Tesoro) = 19.99%
Amanti Filipino 1 P1,000.00 P1,000.00 100
Limson
19.99% + 39.98% (MBMIs direct participation in Tesoro) + .02%
Fernando B. Filipino 1 P1,000.00 P1,000.00
(shares of foreign individual SHs in Tesoro)
Esguerra
= 59.99%
Lauro Salazar Filipino P1,000.00 P1,000.00 =====
1
With only 40.01% Filipino ownership in petitioner Tesoro, as
compared to 59.99% foreign ownership of its shares, it is clear that
Emmanuel G. Filipino P1,000.00 P1,000.00 petitioner Tesoro does not comply with the minimum Filipino equity
Hernando 1 requirement imposed in Sec. 2, Art. XII of the Constitution. Hence,
the appellate courts observation that Tesoro is a foreign
corporation not entitled to an MPSA is apt.
Michael T. American 1 P1,000.00 P1,000.00
Mason
McArthur
Kenneth Canadian 1 P1,000.00 P1,000.00
Cawkel Petitioner McArthur follows the corporate layering structure of
Total 10,000 P10,000,000.0 P2,800,000.0 Tesoro, as 59.97% of its 10, 000 common shares is owned by
0 0 supposedly Filipino Madridejos Mining Corporation (Madridejos),
while 39.98% belonged to the Canadian MBMI.
Name Nationality Number Amount Amount Paid Esguerra
of Subscribed Lauro Salazar Filipino 1 P1,000.00 P1,000.00
Shares
Emmanuel G. Filipino 1 P1,000.00 P1,000.00
Madridejos Filipino 5,997 P5,997,000.00 P825,000.00 Hernando
Mining
Michael T. American 1 P1,000.00 P1,000.00
Corporation
Mason
MBMI Canadian 3,998 P3,998,000.00 P1,878,174.60
Kenneth Canadian 1 P1,000.00 P1,000.00
Resources,
Cawkel
Inc.[18
Total 10,000 P10,000,000.0 P2,809,900.0
Lauro Salazar Filipino 1 P1,000.00 P1,000.00
0 0
Fernando B. Filipino 1 P1,000.00 P1,000.00
Esguerra
Manuel A. Filipino P1,000.00 P1,000.00 Again, the fact that MBMI had practically provided all the
Agcaoili 1 funds in Madridejos and McArthur creates serious doubt as
to the true extent of its control and ownership of MBMI over
Michael T. American 1 P1,000.00 P1,000.00 both Madridejos and McArthur. The application of the
Mason Grandfather Rule is clearly called for, and as will be shown below,
MBMI,along with the other foreign shareholders, breached the
Kenneth Canadian 1 P1,000.00 P1,000.00
maximum limit of 40% ownership in petitioner McArthur, rendering
Cawkel
the petitioner disqualified to an MPSA:chanRoblesvirtualLawlibrary
Total 10,000 P10,000,000.00 P2,708,174.60
Filipino participation in petitioner McArthur: 40.01%

In turn, 66.63% of Madridejos shares were held by Olympic while 66.67 (Filipino equity in Madridejos) x 59.97 (Madridejos share in
33.31% of its shares belonged to MBMI. Yet again, Olympic did not McArthur) = 39.98%
contribute to the paid-up capital of Madridejos and it was MBMI 100
that provided 99.79% of the paid-up capital of Madridejos.
39.98% + .03% (shares of individual Filipino SHs in McArthur)
Name Nationalit Numbe Amount Amount Paid =40.01%
y r of Subscribed =====
Shares
Foreign participation in petitioner McArthur: 59.99%
Olympic Filipino 6,663 P6,663,000.00 P0.00
Mines &
33.33 (Foreign equity in Madridejos) x 59.97 (Madridejos share
Developmen
in McArthur) = 19.99%
t Corp.19
100
MBMI Canadian 3,331 P3,331,000.00 P2,803,900.0
Resources, 0 19.99% + 39.98% (MBMIs direct participation in McArthur) + .
Inc. 02% (shares of foreign individual SHs in McArthur)
Amanti Filipino 1 P1,000.00 P1,000.00 = 59.99%
Limson =====
Fernando B. Filipino 1 P1,000.00 P1,000.00
As with petitioner Tesoro, with only 40.01% Filipino ownership in
petitioner McArthur, as compared to 59.99% foreign ownership of PLMDCs shares, in turn, were held by Palawan Alpha South
its shares, it is clear that petitioner McArthur does not comply with Resources Development Corporation (PASRDC), which subscribed
the minimum Filipino equity requirement imposed in Sec. 2, Art. to 65.96% of PLMDCs shares, and the Canadian MBMI, which
XII of the Constitution. Thus, the appellate court did not err in subscribed to 33.96% of PLMDCs shares.
holding that petitioner McArthur is a foreign corporation not
entitled to an MPSA. Name Nationalit Numbe Amount Amount Paid
y r of Subscribed
Narra Shares
Palawan Filipino 6,596 P6,596,000.00 P0
As for petitioner Narra, 59.97% of its shares belonged to Patricia
Alpha South
Louise Mining & Development Corporation (PLMDC), while Canadian
Resource
MBMI held 39.98% of its shares.
Developmen
t Corp.
Name Nationality Number Amount Amount Paid
MBMI Canadian 3,396 P3,396,000.00 P2,796,000.0
of Subscribed
Resources, 0
Shares
Inc.[21
Patricia Lousie Filipino 5,997 P5,997,000.00 P1,677,000.00
Higinio C. Filipino 1 P1,000.00 P1,000.00
Mining and
Mendoza, Jr.
Development
Corp. Fernando B. Filipino 1 P1,000.00 P1,000.00
Esguerra
MBMI Canadian 3,996 P3,996,000.00 P1,116,000.00
Resources, Henry E. Filipino 1 P1,000.00 P1,000.00
Inc.[20 Fernandez
Higinio C. Filipino 1 P1,000.00 P1,000.00 Ma. Elena A. Filipino 1 P1,000.00 P1,000.00
Mendoza, Jr. Bocalan
Henry E. Filipino 1 P1,000.00 P1,000.00 Michael T. American 1 P1,000.00 P1,000.00
Fernandez Mason
Ma. Elena A. Filipino 1 P1,000.00 P1,000.00 Robert L. Canadian 1 P1,000.00 P1,000.00
Bocalan McCurdy
Michael T. American 1 P1,000.00 P1,000.00 Manuel A. Filipino 1 P1,000.00 P1,000.00
Mason Agcaoili
Robert L. Canadian 1 P1,000.00 P1,000.00 Bayani H. Filipino 1 P1,000.00 P1,000.00
McCurdy Agabin
Manuel A. Filipino 1 P1,000.00 P1,000.00 Total 10,000 P10,000,000.0 P2,804,000.0
Agcaoili 0 0
Bayani H. Filipino 1 P1,000.00 P1,000.00
Agabin
Yet again, PASRDC did not pay for any of its subscribed shares,
Total 10,000 P10,000,000.00 P2,800,000.00
while MBMI contributed 99.75% of PLMDCs paid-up capital. This
fact creates serious doubt as to the true extent of MBMIs
control and ownership over both PLMDC and Narra since a assumed that all such shares have voting rights.22 It cannot
reasonable investor would expect to have greater control and therefore be gainsaid that the foregoing computation hewed with
economic rights than other investors who invested less capital than the pronouncements of Gamboa, as implemented by SEC
him. Thus, the application of the Grandfather Rule is justified. And Memorandum Circular No. 8, Series of 2013, (SEC Memo No.
as will be shown, it is clear that the Filipino ownership in petitioner 8)23Section 2 of which states:chanRoblesvirtualLawlibrary
Narrafalls below the limit prescribed in both the Constitution and
the Philippine Mining Act of 1995. Section 2. All covered corporations shall, at all times, observe the
constitutional or statutory requirement. For purposes of
Filipino participation in petitioner Narra: 39.64% determining compliance therewith, the required percentage of
Filipino ownership shall be applied to BOTH (a) the total
66.02 (Filipino equity in PLMDC) x 59.97 (PLMDCs share in Narra) outstanding shares of stock entitled to vote in the election of
= 39.59% directors; AND (b) the total number of outstanding shares of stock,
100 whether or not entitled to vote in the election of directors.

39.59% + .05% (shares of individual Filipino SHs in McArthur) In fact, there is no indication that herein petitioners issued any
=39.64% other class of shares besides the 10,000 common shares. Neither
==== is it suggested that the common shares were further divided into
Foreign participation in petitioner Narra: 60.36% voting or non-voting common shares. Hence, for purposes of this
case, items a) and b) in SEC Memo No. 8 both refer to the 10,000
33.98 (Foreign equity in PLMDC) x 59.97 (PLMDCs share in common shares of each of the petitioners, and there is no need to
Narra) = 20.38% separately apply the 60-40 ratio to any segment or part of the said
100 common shares.

20.38% + 39.96% (MBMIs direct participation in Narra) + .02% III.


(shares of foreign individual SHs in McArthur) In mining disputes, the POA has jurisdiction to pass upon
= 60.36% the nationality
===== of applications for MPSAs

Petitioners also scoffed at this Courts decision to uphold the


With 60.36% foreign ownership in petitioner Narra, as compared to
jurisdiction of the Panel of Arbitrators (POA) of the Department of
only 39.64% Filipino ownership of its shares, it is clear that
Environment and Natural Resources (DENR) since the POAs
petitioner Narra does not comply with the minimum Filipino equity
determination of petitioners nationalities is supposedly beyond its
requirement imposed in Section 2, Article XII of the Constitution.
limited jurisdiction, as defined in Gonzales v. Climax Mining
Hence, the appellate court did not err in holding that petitioner
Ltd.24 and Philex Mining Corp. v.
McArthur is a foreign corporation not entitled to an MPSA.
Zaldivia.25chanroblesvirtuallawlibrary
It must be noted that the foregoing determination and computation
The April 21, 2014 Decision did not dilute, much less overturn, this
of petitioners Filipino equity composition was based on
Courts pronouncements in either Gonzales or Philex Mining that
their common shareholdings, not preferred or redeemable
POAs jurisdiction is limited only to mining disputes which raise
shares. Section 6 of the Corporation Code of the Philippines
questions of fact, and not judicial questions cognizable by regular
explicitly provides that no share may be deprived of voting rights
courts of justice. However, to properly recognize and give effect to
except those classified as preferred or redeemable shares.
the jurisdiction vested in the POA by Section 77 of the Philippine
Further, as Justice Leonen puts it, there is no indication that any
Mining Act of 1995,26 and in parallel with this Courts ruling
of the shares x x x do not have voting rights, [thus] it must be
in Celestial Nickel Mining Exploration Corporation v. Macroasia
Corp.,27the Court has recognized in its Decision that in resolving to resolve the said dispute. POAs ruling on Redmonts assertion
disputes involving rights to mining areas and involving mineral that petitioners are foreign corporations not entitled to MPSA is but
agreements or permits, the POA has jurisdiction to make a necessary incident of its disposition of the mining dispute
a preliminary finding of the required nationality of the corporate presented before it, which is whether the petitioners are entitled to
applicant in order to determine its right to a mining area or a MPSAs.
mineral agreement.
Indeed, as the POA has jurisdiction to entertain disputes involving
There is certainly nothing novel or aberrant in this approach. In rights to mining areas, it necessarily follows that the POA likewise
ejectment and unlawful detainer cases, where the subject of wields the authority to pass upon the nationality issue involving
inquiry is possession de facto, the jurisdiction of the municipal trial petitioners, since the resolution of this issue is essential and
courts to make a preliminary adjudication regarding ownership of indispensable in the resolution of the main issue, i.e., the
the real property involved is allowed, but only for purposes of determination of the petitioners right to the mining areas through
ruling on the determinative issue of material possession. MPSAs.

The present case arose from petitioners MPSA applications, in WHEREFORE, We DENY the motion for reconsideration WITH
which they asserted their respective rights to the mining areas FINALITY. No further pleadings shall be entertained. Let entry of
each applied for. Since respondent Redmont, itself an applicant for judgment be made in due course.
exploration permits over the same mining areas, filed petitions for
the denial of petitioners applications, it should be clear that there SO ORDERED.
exists a controversy between the parties and it is POAs jurisdiction

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