G.R. No.

177131 June 7, 2011

BOY SCOUTS OF THE PHILIPPINES, Petitioner,

vs.
COMMISSION ON AUDIT, Respondent.

DECISION

LEONARDO-DE CASTRO, J.:

The jurisdiction of the Commission on Audit (COA) over the Boy Scouts of the Philippines (BSP) is
the subject matter of this controversy that reached us via petition for prohibition1 filed by the BSP
under Rule 65 of the 1997 Rules of Court. In this petition, the BSP seeks that the COA be prohibited
from implementing its June 18, 2002 Decision,2 its February 21, 2007 Resolution,3 as well as all
other issuances arising therefrom, and that all of the foregoing be rendered null and void. 4

Antecedent Facts and Background of the Case

This case arose when the COA issued Resolution No. 99-0115 on August 19, 1999 ("the COA
Resolution"), with the subject "Defining the Commission’s policy with respect to the audit of the Boy
Scouts of the Philippines." In its whereas clauses, the COA Resolution stated that the BSP was
created as a public corporation under Commonwealth Act No. 111, as amended by Presidential
Decree No. 460 and Republic Act No. 7278; that in Boy Scouts of the Philippines v. National Labor
Relations Commission,6 the Supreme Court ruled that the BSP, as constituted under its charter, was
a "government-controlled corporation within the meaning of Article IX(B)(2)(1) of the Constitution";
and that "the BSP is appropriately regarded as a government instrumentality under the 1987
Administrative Code."7 The COA Resolution also cited its constitutional mandate under Section 2(1),
Article IX (D). Finally, the COA Resolution reads:

NOW THEREFORE, in consideration of the foregoing premises, the COMMISSION PROPER HAS
RESOLVED, AS IT DOES HEREBY RESOLVE, to conduct an annual financial audit of the Boy
Scouts of the Philippines in accordance with generally accepted auditing standards, and express an
opinion on whether the financial statements which include the Balance Sheet, the Income Statement
and the Statement of Cash Flows present fairly its financial position and results of operations.

xxxx

BE IT RESOLVED FURTHERMORE, that for purposes of audit supervision, the Boy Scouts of the
Philippines shall be classified among the government corporations belonging to the Educational,
Social, Scientific, Civic and Research Sector under the Corporate Audit Office I, to be audited,
similar to the subsidiary corporations, by employing the team audit approach.8 (Emphases supplied.)

The BSP sought reconsideration of the COA Resolution in a letter9 dated November 26, 1999 signed
by the BSP National President Jejomar C. Binay, who is now the Vice President of the Republic,
wherein he wrote:

It is the position of the BSP, with all due respect, that it is not subject to the Commission’s jurisdiction
on the following grounds:

1. We reckon that the ruling in the case of Boy Scouts of the Philippines vs. National Labor
Relations Commission, et al. (G.R. No. 80767) classifying the BSP as a government-
 controlled corporation is anchored on the "substantial Government participation" in the
National Executive Board of the BSP. It is to be noted that the case was decided when the
BSP Charter is defined by Commonwealth Act No. 111 as amended by Presidential Decree
460.

However, may we humbly refer you to Republic Act No. 7278 which amended the BSP’s charter
after the cited case was decided. The most salient of all amendments in RA No. 7278 is the
alteration of the composition of the National Executive Board of the BSP.

The said RA virtually eliminated the "substantial government participation" in the National Executive
Board by removing: (i) the President of the Philippines and executive secretaries, with the exception
of the Secretary of Education, as members thereof; and (ii) the appointment and confirmation power
of the President of the Philippines, as Chief Scout, over the members of the said Board.

The BSP believes that the cited case has been superseded by RA 7278. Thereby weakening the
case’s conclusion that the BSP is a government-controlled corporation (sic). The 1987
Administrative Code itself, of which the BSP vs. NLRC relied on for some terms, defines
government-owned and controlled corporations as agencies organized as stock or non-stock
corporations which the BSP, under its present charter, is not.

Also, the Government, like in other GOCCs, does not have funds invested in the BSP. What RA
7278 only provides is that the Government or any of its subdivisions, branches, offices, agencies
and instrumentalities can from time to time donate and contribute funds to the BSP.

xxxx

Also the BSP respectfully believes that the BSP is not "appropriately regarded as a government
instrumentality under the 1987 Administrative Code" as stated in the COA resolution. As defined by
Section 2(10) of the said code, instrumentality refers to "any agency of the National Government, not
integrated within the department framework, vested with special functions or jurisdiction by law,
endowed with some if not all corporate powers, administering special funds, and enjoying
operational autonomy, usually through a charter."

The BSP is not an entity administering special funds. It is not even included in the DECS National
Budget. x x x

It may be argued also that the BSP is not an "agency" of the Government. The 1987 Administrative
Code, merely referred the BSP as an "attached agency" of the DECS as distinguished from an
actual line agency of departments that are included in the National Budget. The BSP believes that
an "attached agency" is different from an "agency." Agency, as defined in Section 2(4) of the
Administrative Code, is defined as any of the various units of the Government including a
department, bureau, office, instrumentality, government-owned or controlled corporation or local
government or distinct unit therein.

Under the above definition, the BSP is neither a unit of the Government; a department which refers
to an executive department as created by law (Section 2[7] of the Administrative Code); nor a
bureau which refers to any principal subdivision or unit of any department (Section 2[8],
Administrative Code).10

Subsequently, requests for reconsideration of the COA Resolution were also made separately by
Robert P. Valdellon, Regional Scout Director, Western Visayas Region, Iloilo City and Eugenio F.
Capreso, Council Scout Executive of Calbayog City.11
In a letter12 dated July 3, 2000, Director Crescencio S. Sunico, Corporate Audit Officer (CAO) I of the
COA, furnished the BSP with a copy of the Memorandum13 dated June 20, 2000 of Atty. Santos M.
Alquizalas, the COA General Counsel. In said Memorandum, the COA General Counsel opined that
Republic Act No. 7278 did not supersede the Court’s ruling in Boy Scouts of the Philippines v.
National Labor Relations Commission, even though said law eliminated the substantial government
participation in the selection of members of the National Executive Board of the BSP. The
Memorandum further provides:

Analysis of the said case disclosed that the substantial government participation is only one (1) of
the three (3) grounds relied upon by the Court in the resolution of the case. Other considerations
include the character of the BSP’s purposes and functions which has a public aspect and the
statutory designation of the BSP as a "public corporation". These grounds have not been deleted by
R.A. No. 7278. On the contrary, these were strengthened as evidenced by the amendment made
relative to BSP’s purposes stated in Section 3 of R.A. No. 7278.

On the argument that BSP is not appropriately regarded as "a government instrumentality" and
"agency" of the government, such has already been answered and clarified. The Supreme Court has
elucidated this matter in the BSP case when it declared that BSP is regarded as, both a
"government-controlled corporation with an original charter" and as an "instrumentality" of the
Government. Likewise, it is not disputed that the Administrative Code of 1987 designated the BSP
as one of the attached agencies of DECS. Being an attached agency, however, it does not change
its nature as a government-controlled corporation with original charter and, necessarily, subject to
COA audit jurisdiction. Besides, Section 2(1), Article IX-D of the Constitution provides that COA shall
have the power, authority, and duty to examine, audit and settle all accounts pertaining to the
revenue and receipts of, and expenditures or uses of funds and property, owned or held in trust by,
or pertaining to, the Government, or any of its subdivisions, agencies or instrumentalities, including
government-owned or controlled corporations with original charters.14

Based on the Memorandum of the COA General Counsel, Director Sunico wrote:

In view of the points clarified by said Memorandum upholding COA Resolution No. 99-011, we have
to comply with the provisions of the latter, among which is to conduct an annual financial audit of the
Boy Scouts of the Philippines.15

In a letter dated November 20, 2000 signed by Director Amorsonia B. Escarda, CAO I, the COA
informed the BSP that a preliminary survey of its organizational structure, operations and accounting
system/records shall be conducted on November 21 to 22, 2000.16

Upon the BSP’s request, the audit was deferred for thirty (30) days. The BSP then filed a Petition for
Review with Prayer for Preliminary Injunction and/or Temporary Restraining Order before the COA.
This was denied by the COA in its questioned Decision, which held that the BSP is under its audit
jurisdiction. The BSP moved for reconsideration but this was likewise denied under its questioned
Resolution.17

This led to the filing by the BSP of this petition for prohibition with preliminary injunction and
temporary restraining order against the COA.

The Issue

As stated earlier, the sole issue to be resolved in this case is whether the BSP falls under the COA’s
audit jurisdiction.
The Parties’ Respective Arguments

The BSP contends that Boy Scouts of the Philippines v. National Labor Relations Commission is
inapplicable for purposes of determining the audit jurisdiction of the COA as the issue therein was
the jurisdiction of the National Labor Relations Commission over a case for illegal dismissal and
unfair labor practice filed by certain BSP employees.18

While the BSP concedes that its functions do relate to those that the government might otherwise
completely assume on its own, it avers that this alone was not determinative of the COA’s audit
jurisdiction over it. The BSP further avers that the Court in Boy Scouts of the Philippines v. National
Labor Relations Commission "simply stated x x x that in respect of functions, the BSP is akin to a
public corporation" but this was not synonymous to holding that the BSP is a government corporation
or entity subject to audit by the COA. 19

The BSP contends that Republic Act No. 7278 introduced crucial amendments to its charter; hence,
the findings of the Court in Boy Scouts of the Philippines v. National Labor Relations Commission
are no longer valid as the government has ceased to play a controlling influence in it. The BSP
claims that the pronouncements of the Court therein must be taken only within the context of that
case; that the Court had categorically found that its assets were acquired from the Boy Scouts of
America and not from the Philippine government, and that its operations are financed chiefly from
membership dues of the Boy Scouts themselves as well as from property rentals; and that "the BSP
may correctly be characterized as non-governmental, and hence, beyond the audit jurisdiction of the
COA." It further claims that the designation by the Court of the BSP as a government agency or
instrumentality is mere obiter dictum.20

The BSP maintains that the provisions of Republic Act No. 7278 suggest that "governance of BSP
has come to be overwhelmingly a private affair or nature, with government participation restricted to
the seat of the Secretary of Education, Culture and Sports."21 It cites Philippine Airlines Inc. v.
Commission on Audit22 wherein the Court declared that, "PAL, having ceased to be a government-
owned or controlled corporation is no longer under the audit jurisdiction of the COA."23 Claiming that
the amendments introduced by Republic Act No. 7278 constituted a supervening event that changed
the BSP’s corporate identity in the same way that the government’s privatization program changed
PAL’s, the BSP makes the case that the government no longer has control over it; thus, the COA
cannot use the Boy Scouts of the Philippines v. National Labor Relations Commission as its basis for
the exercise of its jurisdiction and the issuance of COA Resolution No. 99-011.24 The BSP further
claims as follows:

It is not far-fetched, in fact, to concede that BSP’s funds and assets are private in character. Unlike
ordinary public corporations, such as provinces, cities, and municipalities, or government-owned and
controlled corporations, such as Land Bank of the Philippines and the Development Bank of the
Philippines, the assets and funds of BSP are not derived from any government grant. For its
operations, BSP is not dependent in any way on any government appropriation; as a matter of fact, it
has not even been included in any appropriations for the government. To be sure, COA has not
alleged, in its Resolution No. 99-011 or in the Memorandum of its General Counsel, that BSP
received, receives or continues to receive assets and funds from any agency of the government. The
foregoing simply point to the private nature of the funds and assets of petitioner BSP.

xxxx

As stated in petitioner’s third argument, BSP’s assets and funds were never acquired from the
government. Its operations are not in any way financed by the government, as BSP has never been
included in any appropriations act for the government. Neither has the government invested funds
with BSP. BSP, has not been, at any time, a user of government property or funds; nor have
properties of the government been held in trust by BSP. This is precisely the reason why, until this
time, the COA has not attempted to subject BSP to its audit jurisdiction. x x x.25

To summarize its other arguments, the BSP contends that it is not a government-owned or
controlled corporation; neither is it an instrumentality, agency, or subdivision of the government.

In its Comment,26 the COA argues as follows:

1. The BSP is a public corporation created under Commonwealth Act No. 111 dated October
31, 1936, and whose functions relate to the fostering of public virtues of citizenship and
patriotism and the general improvement of the moral spirit and fiber of the youth. The
manner of creation and the purpose for which the BSP was created indubitably prove that it
is a government agency.

2. Being a government agency, the funds and property owned or held in trust by the BSP are
subject to the audit authority of respondent Commission on Audit pursuant to Section 2 (1),
Article IX-D of the 1987 Constitution.

3. Republic Act No. 7278 did not change the character of the BSP as a government-owned
or controlled corporation and government instrumentality.27

The COA maintains that the functions of the BSP that include, among others, the teaching to the
youth of patriotism, courage, self-reliance, and kindred virtues, are undeniably sovereign functions
enshrined under the Constitution and discussed by the Court in Boy Scouts of the Philippines v.
National Labor Relations Commission. The COA contends that any attempt to classify the BSP as a
private corporation would be incomprehensible since no less than the law which created it had
designated it as a public corporation and its statutory mandate embraces performance of sovereign
functions.28

The COA claims that the only reason why the BSP employees fell within the scope of the Civil
Service Commission even before the 1987 Constitution was the fact that it was a government-owned
or controlled corporation; that as an attached agency of the Department of Education, Culture and
Sports (DECS), the BSP is an agency of the government; and that the BSP is a chartered institution
under Section 1(12) of the Revised Administrative Code of 1987, embraced under the term
government instrumentality.29

The COA concludes that being a government agency, the funds and property owned or held by the
BSP are subject to the audit authority of the COA pursuant to Section 2(1), Article IX (D) of the 1987
Constitution.

In support of its arguments, the COA cites The Veterans Federation of the Philippines (VFP) v.
Reyes,30 wherein the Court held that among the reasons why the VFP is a public corporation is that
its charter, Republic Act No. 2640, designates it as one. Furthermore, the COA quotes the Court as
saying in that case:

In several cases, we have dealt with the issue of whether certain specific activities can be classified
as sovereign functions. These cases, which deal with activities not immediately apparent to be
sovereign functions, upheld the public sovereign nature of operations needed either to promote
social justice or to stimulate patriotic sentiments and love of country.
xxxx

Petitioner claims that its funds are not public funds because no budgetary appropriations or
government funds have been released to the VFP directly or indirectly from the DBM, and because
VFP funds come from membership dues and lease rentals earned from administering government
lands reserved for the VFP.

The fact that no budgetary appropriations have been released to the VFP does not prove that it is a
private corporation. The DBM indeed did not see it fit to propose budgetary appropriations to the
VFP, having itself believed that the VFP is a private corporation. If the DBM, however, is mistaken as
to its conclusion regarding the nature of VFP's incorporation, its previous assertions will not prevent
future budgetary appropriations to the VFP. The erroneous application of the law by public officers
does not bar a subsequent correct application of the law.31(Citations omitted.)

The COA points out that the government is not precluded by law from extending financial support to
the BSP and adding to its funds, and that "as a government instrumentality which continues to
perform a vital function imbued with public interest and reflective of the government’s policy to
stimulate patriotic sentiments and love of country, the BSP’s funds from whatever source are public
funds, and can be used solely for public purpose in pursuance of the provisions of Republic Act No.
[7278]."32

The COA claims that the fact that it has not yet audited the BSP’s funds may not bar the subsequent
exercise of its audit jurisdiction.

The BSP filed its Reply33 on August 29, 2007 maintaining that its statutory designation as a "public
corporation" and the public character of its purpose and functions are not determinative of the COA’s
audit jurisdiction; reiterating its stand that Boy Scouts of the Philippines v. National Labor Relations
Commission is not applicable anymore because the aspect of government ownership and control
has been removed by Republic Act No. 7278; and concluding that the funds and property that it
either owned or held in trust are not public funds and are not subject to the COA’s audit jurisdiction.

Thereafter, considering the BSP’s claim that it is a private corporation, this Court, in a
Resolution34 dated July 20, 2010, required the parties to file, within a period of twenty (20) days from
receipt of said Resolution, their respective comments on the issue of whether Commonwealth Act
No. 111, as amended by Republic Act No. 7278, is constitutional.

In compliance with the Court’s resolution, the parties filed their respective Comments.

In its Comment35 dated October 22, 2010, the COA argues that the constitutionality of
Commonwealth Act No. 111, as amended, is not determinative of the resolution of the present
controversy on the COA’s audit jurisdiction over petitioner, and in fact, the controversy may be
resolved on other grounds; thus, the requisites before a judicial inquiry may be made, as set forth in
Commissioner of Internal Revenue v. Court of Tax Appeals,36 have not been fully met.37 Moreover,
the COA maintains that behind every law lies the presumption of constitutionality.38 The COA
likewise argues that contrary to the BSP’s position, repeal of a law by implication is not
favored.39 Lastly, the COA claims that there was no violation of Section 16, Article XII of the 1987
Constitution with the creation or declaration of the BSP as a government corporation. Citing
Philippine Society for the Prevention of Cruelty to Animals v. Commission on Audit,40 the COA further
alleges:

The true criterion, therefore, to determine whether a corporation is public or private is found in the
totality of the relation of the corporation to the State. If the corporation is created by the State as the
latter’s own agency or instrumentality to help it in carrying out its governmental functions, then that
corporation is considered public; otherwise, it is private. x x x.41

For its part, in its Comment42 filed on December 3, 2010, the BSP submits that its charter,
Commonwealth Act No. 111, as amended by Republic Act No. 7278, is constitutional as it does not
violate Section 16, Article XII of the Constitution. The BSP alleges that "while [it] is not a public
corporation within the purview of COA’s audit jurisdiction, neither is it a private corporation created
by special law falling within the ambit of the constitutional prohibition x x x."43 The BSP further
alleges:

Petitioner’s purpose is embodied in Section 3 of C.A. No. 111, as amended by Section 1 of R.A. No.
7278, thus:

xxxx

A reading of the foregoing provision shows that petitioner was created to advance the interest of the
youth, specifically of young boys, and to mold them into becoming good citizens. Ultimately, the
creation of petitioner redounds to the benefit, not only of those boys, but of the public good or
welfare. Hence, it can be said that petitioner’s purpose and functions are more of a public rather than
a private character. Petitioner caters to all boys who wish to join the organization without any
distinction. It does not limit its membership to a particular class of boys. Petitioner’s members are
trained in scoutcraft and taught patriotism, civic consciousness and responsibility, courage, self-
reliance, discipline and kindred virtues, and moral values, preparing them to become model citizens
and outstanding leaders of the country.44

The BSP reiterates its stand that the public character of its purpose and functions do not place it
within the ambit of the audit jurisdiction of the COA as it lacks the government ownership or control
that the Constitution requires before an entity may be subject of said jurisdiction.45 It avers that it
merely stated in its Reply that the withdrawal of government control is akin to privatization, but it
does not necessarily mean that petitioner is a private corporation.46The BSP claims that it has a
unique characteristic which "neither classifies it as a purely public nor a purely private
corporation";47 that it is not a quasi-public corporation; and that it may belong to a different class
altogether.48

The BSP claims that assuming arguendo that it is a private corporation, its creation is not contrary to
the purpose of Section 16, Article XII of the Constitution; and that the evil sought to be avoided by
said provision is inexistent in the enactment of the BSP’s charter,49 as, (i) it was not created for any
pecuniary purpose; (ii) those who will primarily benefit from its creation are not its officers but its
entire membership consisting of boys being trained in scoutcraft all over the country; (iii) it caters to
all boys who wish to join the organization without any distinction; and (iv) it does not limit its
membership to a particular class or group of boys. Thus, the enactment of its charter confers no
special privilege to particular individuals, families, or groups; nor does it bring about the danger of
granting undue favors to certain groups to the prejudice of others or of the interest of the country,
which are the evils sought to be prevented by the constitutional provision involved.50

Finally, the BSP states that the presumption of constitutionality of a legislative enactment prevails
absent any clear showing of its repugnancy to the Constitution.51

The Ruling of the Court

After looking at the legislative history of its amended charter and carefully studying the applicable
laws and the arguments of both parties, we find that the BSP is a public corporation and its funds are
subject to the COA’s audit jurisdiction.

The BSP Charter (Commonwealth Act No. 111, approved on October 31, 1936), entitled "An Act to
Create a Public Corporation to be Known as the Boy Scouts of the Philippines, and to Define its
Powers and Purposes" created the BSP as a "public corporation" to serve the following public
interest or purpose:

Sec. 3. The purpose of this corporation shall be to promote through organization and cooperation
with other agencies, the ability of boys to do useful things for themselves and others, to train them in
scoutcraft, and to inculcate in them patriotism, civic consciousness and responsibility, courage, self-
reliance, discipline and kindred virtues, and moral values, using the method which are in common
use by boy scouts.

Presidential Decree No. 460, approved on May 17, 1974, amended Commonwealth Act No. 111 and
provided substantial changes in the BSP organizational structure. Pertinent provisions are quoted
below:

Section II. Section 5 of the said Act is also amended to read as follows:

The governing body of the said corporation shall consist of a National Executive Board composed of
(a) the President of the Philippines or his representative; (b) the charter and life members of the Boy
Scouts of the Philippines; (c) the Chairman of the Board of Trustees of the Philippine Scouting
Foundation; (d) the Regional Chairman of the Scout Regions of the Philippines; (e) the Secretary of
Education and Culture, the Secretary of Social Welfare, the Secretary of National Defense, the
Secretary of Labor, the Secretary of Finance, the Secretary of Youth and Sports, and the Secretary
of Local Government and Community Development; (f) an equal number of individuals from the
private sector; (g) the National President of the Girl Scouts of the Philippines; (h) one Scout of
Senior age from each Scout Region to represent the boy membership; and (i) three representatives
of the cultural minorities. Except for the Regional Chairman who shall be elected by the Regional
Scout Councils during their annual meetings, and the Scouts of their respective regions, all members
of the National Executive Board shall be either by appointment or cooption, subject to ratification and
confirmation by the Chief Scout, who shall be the Head of State. Vacancies in the Executive Board
shall be filled by a majority vote of the remaining members, subject to ratification and confirmation by
the Chief Scout. The by-laws may prescribe the number of members of the National Executive Board
necessary to constitute a quorum of the board, which number may be less than a majority of the
whole number of the board. The National Executive Board shall have power to make and to amend
the by-laws, and, by a two-thirds vote of the whole board at a meeting called for this purpose, may
authorize and cause to be executed mortgages and liens upon the property of the corporation.

Subsequently, on March 24, 1992, Republic Act No. 7278 further amended Commonwealth Act No.
111 "by strengthening the volunteer and democratic character" of the BSP and reducing government
representation in its governing body, as follows:

Section 1. Sections 2 and 3 of Commonwealth Act. No. 111, as amended, is hereby amended to
read as follows:

"Sec. 2. The said corporation shall have the powers of perpetual succession, to sue and be sued; to
enter into contracts; to acquire, own, lease, convey and dispose of such real and personal estate,
land grants, rights and choses in action as shall be necessary for corporate purposes, and to accept
and receive funds, real and personal property by gift, devise, bequest or other means, to conduct
fund-raising activities; to adopt and use a seal, and the same to alter and destroy; to have offices
and conduct its business and affairs in Metropolitan Manila and in the regions, provinces, cities,
municipalities, and barangays of the Philippines, to make and adopt by-laws, rules and regulations
not inconsistent with this Act and the laws of the Philippines, and generally to do all such acts and
things, including the establishment of regulations for the election of associates and successors, as
may be necessary to carry into effect the provisions of this Act and promote the purposes of said
corporation: Provided, That said corporation shall have no power to issue certificates of stock or to
declare or pay dividends, its objectives and purposes being solely of benevolent character and not
for pecuniary profit of its members.

"Sec. 3. The purpose of this corporation shall be to promote through organization and cooperation
with other agencies, the ability of boys to do useful things for themselves and others, to train them in
scoutcraft, and to inculcate in them patriotism, civic consciousness and responsibility, courage, self-
reliance, discipline and kindred virtues, and moral values, using the method which are in common
use by boy scouts."

Sec. 2. Section 4 of Commonwealth Act No. 111, as amended, is hereby repealed and in lieu
thereof, Section 4 shall read as follows:

"Sec. 4. The President of the Philippines shall be the Chief Scout of the Boy Scouts of the
Philippines."

Sec. 3. Sections 5, 6, 7 and 8 of Commonwealth Act No. 111, as amended, are hereby amended to
read as follows:

"Sec. 5. The governing body of the said corporation shall consist of a National Executive Board, the
members of which shall be Filipino citizens of good moral character. The Board shall be composed
of the following:

"(a) One (1) charter member of the Boy Scouts of the Philippines who shall be elected by the
members of the National Council at its meeting called for this purpose;

"(b) The regional chairmen of the scout regions who shall be elected by the representatives
of all the local scout councils of the region during its meeting called for this purpose:
Provided, That a candidate for regional chairman need not be the chairman of a local scout
council;

"(c) The Secretary of Education, Culture and Sports;

"(d) The National President of the Girl Scouts of the Philippines;

"(e) One (1) senior scout, each from Luzon, Visayas and Mindanao areas, to be elected by
the senior scout delegates of the local scout councils to the scout youth forums in their
respective areas, in its meeting called for this purpose, to represent the boy scout
membership;

"(f) Twelve (12) regular members to be elected by the members of the National Council in its
meeting called for this purpose;

"(g) At least ten (10) but not more than fifteen (15) additional members from the private
sector who shall be elected by the members of the National Executive Board referred to in
 the immediately preceding paragraphs (a), (b), (c), (d), (e) and (f) at the organizational
meeting of the newly reconstituted National Executive Board which shall be held immediately
after the meeting of the National Council wherein the twelve (12) regular members and the
one (1) charter member were elected.

xxxx

"Sec. 8. Any donation or contribution which from time to time may be made to the Boy Scouts of the
Philippines by the Government or any of its subdivisions, branches, offices, agencies or
instrumentalities or by a foreign government or by private, entities and individuals shall be expended
by the National Executive Board in pursuance of this Act.

The BSP as a Public Corporation under Par. 2, Art. 2 of the Civil Code

There are three classes of juridical persons under Article 44 of the Civil Code and the BSP, as
presently constituted under Republic Act No. 7278, falls under the second classification. Article 44
reads:

Art. 44. The following are juridical persons:

(1) The State and its political subdivisions;

(2) Other corporations, institutions and entities for public interest or purpose created
by law; their personality begins as soon as they have been constituted according to
law;

(3) Corporations, partnerships and associations for private interest or purpose to which the
law grants a juridical personality, separate and distinct from that of each shareholder, partner
or member. (Emphases supplied.)

The BSP, which is a corporation created for a public interest or purpose, is subject to the law
creating it under Article 45 of the Civil Code, which provides:

Art. 45. Juridical persons mentioned in Nos. 1 and 2 of the preceding article are governed by
the laws creating or recognizing them.

Private corporations are regulated by laws of general application on the subject.

Partnerships and associations for private interest or purpose are governed by the provisions of this
Code concerning partnerships. (Emphasis and underscoring supplied.)

The purpose of the BSP as stated in its amended charter shows that it was created in order to
implement a State policy declared in Article II, Section 13 of the Constitution, which reads:

ARTICLE II - DECLARATION OF PRINCIPLES AND STATE POLICIES

Section 13. The State recognizes the vital role of the youth in nation-building and shall promote and
protect their physical, moral, spiritual, intellectual, and social well-being. It shall inculcate in the youth
patriotism and nationalism, and encourage their involvement in public and civic affairs.
Evidently, the BSP, which was created by a special law to serve a public purpose in pursuit of a
constitutional mandate, comes within the class of "public corporations" defined by paragraph 2,
Article 44 of the Civil Code and governed by the law which creates it, pursuant to Article 45 of the
same Code.

The BSP’s Classification Under the Administrative Code of 1987

The public, rather than private, character of the BSP is recognized by the fact that, along with the
Girl Scouts of the Philippines, it is classified as an attached agency of the DECS under Executive
Order No. 292, or the Administrative Code of 1987, which states:

TITLE VI – EDUCATION, CULTURE AND SPORTS

Chapter 8 – Attached Agencies

SEC. 20. Attached Agencies. – The following agencies are hereby attached to the Department:

xxxx

(12) Boy Scouts of the Philippines;

(13) Girl Scouts of the Philippines.

The administrative relationship of an attached agency to the department is defined in the

Administrative Code of 1987 as follows:

BOOK IV
THE EXECUTIVE BRANCH

Chapter 7 – ADMINISTRATIVE RELATIONSHIP

SEC. 38. Definition of Administrative Relationship. – Unless otherwise expressly stated in the Code
or in other laws defining the special relationships of particular agencies, administrative relationships
shall be categorized and defined as follows:

xxxx

(3) Attachment. – (a) This refers to the lateral relationship between the department or its equivalent
and the attached agency or corporation for purposes of policy and program coordination. The
coordination may be accomplished by having the department represented in the governing board of
the attached agency or corporation, either as chairman or as a member, with or without voting rights,
if this is permitted by the charter; having the attached corporation or agency comply with a system of
periodic reporting which shall reflect the progress of programs and projects; and having the
department or its equivalent provide general policies through its representative in the board, which
shall serve as the framework for the internal policies of the attached corporation or agency.
(Emphasis ours.)

As an attached agency, the BSP enjoys operational autonomy, as long as policy and program
coordination is achieved by having at least one representative of government in its governing board,
which in the case of the BSP is the DECS Secretary. In this sense, the BSP is not under government
control or "supervision and control." Still this characteristic does not make the attached chartered
agency a private corporation covered by the constitutional proscription in question.

Art. XII, Sec. 16 of the Constitution refers to "private corporations" created by government for
proprietary or economic/business purposes

At the outset, it should be noted that the provision of Section 16 in issue is found in Article XII of the
Constitution, entitled "National Economy and Patrimony." Section 1 of Article XII is quoted as follows:

SECTION 1. The goals of the national economy are a more equitable distribution of opportunities,
income, and wealth; a sustained increase in the amount of goods and services produced by the
nation for the benefit of the people; and an expanding productivity as the key to raising the quality of
life for all, especially the underprivileged.

The State shall promote industrialization and full employment based on sound agricultural
development and agrarian reform, through industries that make full and efficient use of human and
natural resources, and which are competitive in both domestic and foreign markets. However, the
State shall protect Filipino enterprises against unfair foreign competition and trade practices.

In the pursuit of these goals, all sectors of the economy and all regions of the country shall be given
optimum opportunity to develop. Private enterprises, including corporations, cooperatives, and
similar collective organizations, shall be encouraged to broaden the base of their ownership.

The scope and coverage of Section 16, Article XII of the Constitution can be seen from the
aforementioned declaration of state policies and goals which pertains to national economy and
patrimony and the interests of the people in economic development.

Section 16, Article XII deals with "the formation, organization, or regulation of private
corporations,"52 which should be done through a general law enacted by Congress, provides for an
exception, that is: if the corporation is government owned or controlled; its creation is in the interest
of the common good; and it meets the test of economic viability. The rationale behind Article XII,
Section 16 of the 1987 Constitution was explained in Feliciano v. Commission on Audit,53 in the
following manner:

The Constitution emphatically prohibits the creation of private corporations except by a general law
applicable to all citizens. The purpose of this constitutional provision is to ban private corporations
created by special charters, which historically gave certain individuals, families or groups special
privileges denied to other citizens.54 (Emphasis added.)

It may be gleaned from the above discussion that Article XII, Section 16 bans the creation of "private
corporations" by special law. The said constitutional provision should not be construed so as to
prohibit the creation of public corporations or a corporate agency or instrumentality of the
government intended to serve a public interest or purpose, which should not be measured on the
basis of economic viability, but according to the public interest or purpose it serves as envisioned by
paragraph (2), of Article 44 of the Civil Code and the pertinent provisions of the Administrative Code
of 1987.

The BSP is a Public Corporation Not Subject to the Test of Government Ownership or Control and
Economic Viability
The BSP is a public corporation or a government agency or instrumentality with juridical personality,
which does not fall within the constitutional prohibition in Article XII, Section 16, notwithstanding the
amendments to its charter. Not all corporations, which are not government owned or controlled, are
ipso facto to be considered private corporations as there exists another distinct class of corporations
or chartered institutions which are otherwise known as "public corporations." These corporations are
treated by law as agencies or instrumentalities of the government which are not subject to the tests
of ownership or control and economic viability but to different criteria relating to their public
purposes/interests or constitutional policies and objectives and their administrative relationship to the
government or any of its Departments or Offices.

Classification of Corporations Under Section 16, Article XII of the Constitution on National Economy
and Patrimony

The dissenting opinion of Associate Justice Antonio T. Carpio, citing a line of cases, insists that the
Constitution recognizes only two classes of corporations: private corporations under a general law,
and government-owned or controlled corporations created by special charters.

We strongly disagree. Section 16, Article XII should not be construed so as to prohibit Congress
from creating public corporations. In fact, Congress has enacted numerous laws creating public
corporations or government agencies or instrumentalities vested with corporate powers. Moreover,
Section 16, Article XII, which relates to National Economy and Patrimony, could not have tied the
hands of Congress in creating public corporations to serve any of the constitutional policies or
objectives.

In his dissent, Justice Carpio contends that this ponente introduces "a totally different species of
corporation, which is neither a private corporation nor a government owned or controlled
corporation" and, in so doing, is missing the fact that the BSP, "which was created as a non-stock,
non-profit corporation, can only be either a private corporation or a government owned or controlled
corporation."

Note that in Boy Scouts of the Philippines v. National Labor Relations Commission, the BSP, under
its former charter, was regarded as both a government owned or controlled corporation with original
charter and a "public corporation." The said case pertinently stated:

While the BSP may be seen to be a mixed type of entity, combining aspects of both public and
private entities, we believe that considering the character of its purposes and its functions, the
statutory designation of the BSP as "a public corporation" and the substantial participation of the
Government in the selection of members of the National Executive Board of the BSP, the BSP, as
presently constituted under its charter, is a government-controlled corporation within the meaning of
Article IX (B) (2) (1) of the Constitution.

We are fortified in this conclusion when we note that the Administrative Code of 1987 designates the
BSP as one of the attached agencies of the Department of Education, Culture and Sports ("DECS").
An "agency of the Government" is defined as referring to any of the various units of the Government
including a department, bureau, office, instrumentality, government-owned or -controlled corporation,
or local government or distinct unit therein. "Government instrumentality" is in turn defined in the
1987 Administrative Code in the following manner:

Instrumentality - refers to any agency of the National Government, not integrated within the
department framework, vested with special functions or jurisdiction by law, endowed with some if not
all corporate powers, administering special funds, and enjoying operational autonomy usually
through a charter. This term includes regulatory agencies, chartered institutions and government-
owned or controlled corporations.

The same Code describes a "chartered institution" in the following terms:

Chartered institution - refers to any agency organized or operating under a special charter, and
vested by law with functions relating to specific constitutional policies or objectives. This term
includes the state universities and colleges, and the monetary authority of the State.

We believe that the BSP is appropriately regarded as "a government instrumentality" under the 1987
Administrative Code.

It thus appears that the BSP may be regarded as both a "government controlled corporation with an
original charter" and as an "instrumentality" of the Government within the meaning of Article IX (B)
(2) (1) of the Constitution. x x x.55(Emphases supplied.)

The existence of public or government corporate or juridical entities or chartered institutions by

legislative fiat distinct from private corporations and government owned or controlled corporation is
best exemplified by the 1987 Administrative Code cited above, which we quote in part:

Sec. 2. General Terms Defined. – Unless the specific words of the text, or the context as a whole, or
a particular statute, shall require a different meaning:

xxxx

(10) "Instrumentality" refers to any agency of the National Government, not integrated within the
department framework, vested with special functions or jurisdiction by law, endowed with some if not
all corporate powers, administering special funds, and enjoying operational autonomy, usually
through a charter. This term includes regulatory agencies, chartered institutions and government-
owned or controlled corporations. 


xxxx

(12) "Chartered institution" refers to any agency organized or operating under a special charter, and
vested by law with functions relating to specific constitutional policies or objectives. This term
includes the state universities and colleges and the monetary authority of the State.

(13) "Government-owned or controlled corporation" refers to any agency organized as a stock or

non-stock corporation, vested with functions relating to public needs whether governmental or
proprietary in nature, and owned by the Government directly or through its instrumentalities either
wholly, or, where applicable as in the case of stock corporations, to the extent of at least fifty-one
(51) per cent of its capital stock: Provided, That government-owned or controlled corporations may
be further categorized by the Department of the Budget, the Civil Service Commission, and the
Commission on Audit for purposes of the exercise and discharge of their respective powers,
functions and responsibilities with respect to such corporations.

Assuming for the sake of argument that the BSP ceases to be owned or controlled by the
government because of reduction of the number of representatives of the government in the BSP
Board, it does not follow that it also ceases to be a government instrumentality as it still retains all
the characteristics of the latter as an attached agency of the DECS under the Administrative Code.
Vesting corporate powers to an attached agency or instrumentality of the government is not
constitutionally prohibited and is allowed by the above-mentioned provisions of the Civil Code and
the 1987 Administrative Code.

Economic Viability and Ownership and Control Tests Inapplicable to Public Corporations

As presently constituted, the BSP still remains an instrumentality of the national government. It is a
public corporation created by law for a public purpose, attached to the DECS pursuant to its Charter
and the Administrative Code of 1987. It is not a private corporation which is required to be owned or
controlled by the government and be economically viable to justify its existence under a special law.

The dissent of Justice Carpio also submits that by recognizing "a new class of public corporation(s)"
created by special charter that will not be subject to the test of economic viability, the constitutional
provision will be circumvented.

However, a review of the Record of the 1986 Constitutional Convention reveals the intent of the
framers of the highest law of our land to distinguish between government corporations performing
governmental functions and corporations involved in business or proprietary functions:

THE PRESIDENT. Commissioner Foz is recognized.

MR. FOZ. Madam President, I support the proposal to insert "ECONOMIC VIABILITY" as one of the
grounds for organizing government corporations. x x x.

MR. OPLE. Madam President, the reason for this concern is really that when the government
creates a corporation, there is a sense in which this corporation becomes exempt from the test of
economic performance. We know what happened in the past. If a government corporation loses,
then it makes its claim upon the taxpayers’ money through new equity infusions from the
government and what is always invoked is the common good. x x x

Therefore, when we insert the phrase "ECONOMIC VIABILITY" together with the "common good,"
this becomes a restraint on future enthusiasts for state capitalism to excuse themselves from the
responsibility of meeting the market test so that they become viable. x x x.

xxxx

THE PRESIDENT. Commissioner Quesada is recognized.

MS. QUESADA. Madam President, may we be clarified by the committee on what is meant by
economic viability?

THE PRESIDENT. Please proceed.

MR. MONSOD. Economic viability normally is determined by cost-benefit ratio that takes into
consideration all benefits, including economic external as well as internal benefits. These are what
they call externalities in economics, so that these are not strictly financial criteria. Economic viability
involves what we call economic returns or benefits of the country that are not quantifiable in financial
terms. x x x.

xxxx
MS. QUESADA. So, would this particular formulation now really limit the entry of government
corporations into activities engaged in by corporations?

MR. MONSOD. Yes, because it is also consistent with the economic philosophy that this
Commission approved – that there should be minimum government participation and intervention in
the economy.

MS. QUESDA. Sometimes this Commission would just refer to Congress to provide the particular
requirements when the government would get into corporations. But this time around, we specifically
mentioned economic viability. x x x.

MR. VILLEGAS. Commissioner Ople will restate the reason for his introducing that amendment.

MR. OPLE. I am obliged to repeat what I said earlier in moving for this particular amendment jointly
with Commissioner Foz. During the past three decades, there had been a proliferation of
government corporations, very few of which have succeeded, and many of which are now
earmarked by the Presidential Reorganization Commission for liquidation because they failed the
economic test. x x x.

xxxx

MS. QUESADA. But would not the Commissioner say that the reason why many of the government-
owned or controlled corporations failed to come up with the economic test is due to the management
of these corporations, and not the idea itself of government corporations? It is a problem of efficiency
and effectiveness of management of these corporations which could be remedied, not by eliminating
government corporations or the idea of getting into state-owned corporations, but improving
management which our technocrats should be able to do, given the training and the experience.

MR. OPLE. That is part of the economic viability, Madam President.

MS. QUESADA. So, is the Commissioner saying then that the Filipinos will benefit more if these
government-controlled corporations were given to private hands, and that there will be more goods
and services that will be affordable and within the reach of the ordinary citizens?

MR. OPLE. Yes. There is nothing here, Madam President, that will prevent the formation of a
government corporation in accordance with a special charter given by Congress. However, we are
raising the standard a little bit so that, in the future, corporations established by the government will
meet the test of the common good but within that framework we should also build a certain standard
of economic viability.

xxxx

THE PRESIDENT. Commissioner Padilla is recognized.

MR. PADILLA. This is an inquiry to the committee. With regard to corporations created by a special
charter for government-owned or controlled corporations, will these be in the pioneer fields or in
places where the private enterprise does not or cannot enter? Or is this so general that these
government corporations can compete with private corporations organized under a general law?

MR. MONSOD. Madam President, x x x. There are two types of government corporations – those
that are involved in performing governmental functions, like garbage disposal, Manila waterworks,
and so on; and those government corporations that are involved in business functions. As we said
earlier, there are two criteria that should be followed for corporations that want to go into business.
First is for government corporations to first prove that they can be efficient in the areas of their
proper functions. This is one of the problems now because they go into all kinds of activities but are
not even efficient in their proper functions. Secondly, they should not go into activities that the
private sector can do better.

MR. PADILLA. There is no question about corporations performing governmental functions or

functions that are impressed with public interest. But the question is with regard to matters that are
covered, perhaps not exhaustively, by private enterprise. It seems that under this provision the only
qualification is economic viability and common good, but shall government, through government-
controlled corporations, compete with private enterprise?

MR. MONSOD. No, Madam President. As we said, the government should not engage in activities
that private enterprise is engaged in and can do better. x x x.56 (Emphases supplied.)

Thus, the test of economic viability clearly does not apply to public corporations dealing with
governmental functions, to which category the BSP belongs. The discussion above conveys the
constitutional intent not to apply this constitutional ban on the creation of public corporations where
the economic viability test would be irrelevant. The said test would only apply if the corporation is
engaged in some economic activity or business function for the government.

It is undisputed that the BSP performs functions that are impressed with public interest. In fact,
during the consideration of the Senate Bill that eventually became Republic Act No. 7278, which
amended the BSP Charter, one of the bill’s sponsors, Senator Joey Lina, described the BSP as
follows:

Senator Lina. Yes, I can only think of two organizations involving the masses of our youth, Mr.
President, that should be given this kind of a privilege – the Boy Scouts of the Philippines and the
Girl Scouts of the Philippines. Outside of these two groups, I do not think there are other groups
similarly situated.

The Boy Scouts of the Philippines has a long history of providing value formation to our young, and
considering how huge the population of the young people is, at this point in time, and also
considering the importance of having an organization such as this that will inculcate moral
uprightness among the young people, and further considering that the development of these young
people at that tender age of seven to sixteen is vital in the development of the country producing
good citizens, I believe that we can make an exception of the Boy Scouting movement of the
Philippines from this general prohibition against providing tax exemption and privileges.57

Furthermore, this Court cannot agree with the dissenting opinion which equates the changes
introduced by Republic Act No. 7278 to the BSP Charter as clear manifestation of the intent of
Congress "to return the BSP to the private sector." It was not the intent of Congress in enacting
Republic Act No. 7278 to give up all interests in this basic youth organization, which has been its
partner in forming responsible citizens for decades.

In fact, as may be seen in the deliberation of the House Bills that eventually resulted to Republic Act
No. 7278, Congress worked closely with the BSP to rejuvenate the organization, to bring it back to
its former glory reached under its original charter, Commonwealth Act No. 111, and to correct the
perceived ills introduced by the amendments to its Charter under Presidential Decree No. 460. The
BSP suffered from low morale and decrease in number because the Secretaries of the different
departments in government who were too busy to attend the meetings of the BSP’s National
Executive Board ("the Board") sent representatives who, as it turned out, changed from meeting to
meeting. Thus, the Scouting Councils established in the provinces and cities were not in touch with
what was happening on the national level, but they were left to implement what was decided by the
Board.58

A portion of the legislators’ discussion is quoted below to clearly show their intent:

HON. DEL MAR. x x x I need not mention to you the value and the tremendous good that the Boy
Scout Movement has done not only for the youth in particular but for the country in general. And that
is why, if we look around, our past and present national leaders, prominent men in the various fields
of endeavor, public servants in government offices, and civic leaders in the communities all over the
land, and not only in our country but all over the world many if not most of them have at one time or
another been beneficiaries of the Scouting Movement. And so, it is along this line, Mr. Chairman,
that we would like to have the early approval of this measure if only to pay back what we owe much
to the Scouting Movement. Now, going to the meat of the matter, Mr. Chairman, if I may just – the
Scouting Movement was enacted into law in October 31, 1936 under Commonwealth Act No. 111. x
x x [W]e were acknowledged as the third biggest scouting organization in the world x x x. And to our
mind, Mr. Chairman, this erratic growth and this decrease in membership [number] is because of the
bad policy measures that were enunciated with the enactment or promulgation by the President
before of Presidential Decree No. 460 which we feel is the culprit of the ills that is flagging the Boy
Scout Movement today. And so, this is specifically what we are attacking, Mr. Chairman, the
disenfranchisement of the National Council in the election of the national board. x x x. And so, this is
what we would like to be appraised of by the officers of the Boy [Scouts] of the Philippines whom we
are also confident, have the best interest of the Boy Scout Movement at heart and it is in this spirit,
Mr. Chairman, that we see no impediment towards working together, the Boy Scout of the
Philippines officers working together with the House of Representatives in coming out with a
measure that will put back the vigor and enthusiasm of the Boy Scout Movement. x x x.59 (Emphasis
ours.)

The following is another excerpt from the discussion on the House version of the bill, in the
Committee on Government Enterprises:

HON. AQUINO: x x x Well, obviously, the two bills as well as the previous laws that have created the
Boy Scouts of the Philippines did not provide for any direct government support by way of
appropriation from the national budget to support the activities of this organization. The point here is,
and at the same time they have been subjected to a governmental intervention, which to their mind
has been inimical to the objectives and to the institution per se, that is why they are seeking
legislative fiat to restore back the original mandate that they had under Commonwealth Act 111.
Such having been the experience in the hands of government, meaning, there has been negative
interference on their part and inasmuch as their mandate is coming from a legislative fiat, then
shouldn’t it be, this rhetorical question, shouldn’t it be better for this organization to seek a mandate
from, let’s say, the government the Corporation Code of the Philippines and register with the SEC as
non-profit non-stock corporation so that government intervention could be very very minimal. Maybe
that’s a rhetorical question, they may or they may not answer, ano. I don’t know what would be the
benefit of a charter or a mandate being provided for by way of legislation versus a registration with
the SEC under the Corporation Code of the Philippines inasmuch as they don’t get anything from the
government anyway insofar as direct funding. In fact, the only thing that they got from government
was intervention in their affairs. Maybe we can solicit some commentary comments from the
resource persons. Incidentally, don’t take that as an objection, I’m not objecting. I’m all for the
objectives of these two bills. It just occurred to me that since you have had very bad experience in
the hands of government and you will always be open to such possible intervention even in the
future as long as you have a legislative mandate or your mandate or your charter coming from
legislative action.
xxxx

MR. ESCUDERO: Mr. Chairman, there may be a disadvantage if the Boy Scouts of the Philippines
will be required to register with the SEC. If we are registered with the SEC, there could be a danger
of proliferation of scout organization. Anybody can organize and then register with the SEC. If there
will be a proliferation of this, then the organization will lose control of the entire organization. Another
disadvantage, Mr. Chairman, anybody can file a complaint in the SEC against the Boy Scouts of the
Philippines and the SEC may suspend the operation or freeze the assets of the organization and
hamper the operation of the organization. I don’t know, Mr. Chairman, how you look at it but there
could be a danger for anybody filing a complaint against the organization in the SEC and the SEC
might suspend the registration permit of the organization and we will not be able to operate.

HON. AQUINO: Well, that I think would be a problem that will not be exclusive to corporations
registered with the SEC because even if you are government corporation, court action may be taken
against you in other judicial bodies because the SEC is simply another quasi-judicial body. But, I
think, the first point would be very interesting, the first point that you raised. In effect, what you are
saying is that with the legislative mandate creating your charter, in effect, you have been given some
sort of a franchise with this movement.

MR. ESCUDERO: Yes.

HON. AQUINO: Exclusive franchise of that movement?

MR. ESCUDERO: Yes.

HON. AQUINO: Well, that’s very well taken so I will proceed with other issues, Mr. Chairman. x x
x.60 (Emphases added.)

Therefore, even though the amended BSP charter did away with most of the governmental presence
in the BSP Board, this was done to more strongly promote the BSP’s objectives, which were not
supported under Presidential Decree No. 460. The BSP objectives, as pointed out earlier, are
consistent with the public purpose of the promotion of the well-being of the youth, the future leaders
of the country. The amendments were not done with the view of changing the character of the BSP
into a privatized corporation. The BSP remains an agency attached to a department of the
government, the DECS, and it was not at all stripped of its public character.

The ownership and control test is likewise irrelevant for a public corporation like the BSP. To
reiterate, the relationship of the BSP, an attached agency, to the government, through the DECS, is
defined in the Revised Administrative Code of 1987. The BSP meets the minimum statutory
requirement of an attached government agency as the DECS Secretary sits at the BSP Board ex
officio, thus facilitating the policy and program coordination between the BSP and the DECS.

Requisites for Declaration of Unconstitutionality Not Met in this Case

The dissenting opinion of Justice Carpio improperly raised the issue of unconstitutionality of certain
provisions of the BSP Charter. Even if the parties were asked to Comment on the validity of the BSP
charter by the Court, this alone does not comply with the requisites for judicial review, which were
clearly set forth in a recent case:

When questions of constitutional significance are raised, the Court can exercise its power of judicial
review only if the following requisites are present: (1) the existence of an actual and appropriate
case; (2) the existence of personal and substantial interest on the part of the party raising the
constitutional question; (3) recourse to judicial review is made at the earliest opportunity; and (4) the
constitutional question is the lis mota of the case.61(Emphasis added.)

Thus, when it comes to the exercise of the power of judicial review, the constitutional issue should
be the very lis mota, or threshold issue, of the case, and that it should be raised by either of the
parties. These requirements would be ignored under the dissent’s rather overreaching view of how
this case should have been decided. True, it was the Court that asked the parties to comment, but
the Court cannot be the one to raise a constitutional issue. Thus, the Court chooses to once more
exhibit restraint in the exercise of its power to pass upon the validity of a law.

Re: the COA’s Jurisdiction

Regarding the COA’s jurisdiction over the BSP, Section 8 of its amended charter allows the BSP to
receive contributions or donations from the government. Section 8 reads:

Section 8. Any donation or contribution which from time to time may be made to the Boy Scouts of
the Philippines by the Government or any of its subdivisions, branches, offices, agencies or
instrumentalities shall be expended by the Executive Board in pursuance of this Act. lawph!1

The sources of funds to maintain the BSP were identified before the House Committee on
Government Enterprises while the bill was being deliberated, and the pertinent portion of the
discussion is quoted below:

MR. ESCUDERO. Yes, Mr. Chairman. The question is the sources of funds of the organization.
First, Mr. Chairman, the Boy Scouts of the Philippines do not receive annual allotment from the
government. The organization has to raise its own funds through fund drives and fund campaigns or
fund raising activities. Aside from this, we have some revenue producing projects in the organization
that gives us funds to support the operation. x x x From time to time, Mr. Chairman, when we have
special activities we request for assistance or financial assistance from government agencies, from
private business and corporations, but this is only during special activities that the Boy Scouts of the
Philippines would conduct during the year. Otherwise, we have to raise our own funds to support the
organization.62

The nature of the funds of the BSP and the COA’s audit jurisdiction were likewise brought up in said
congressional deliberations, to wit:

HON. AQUINO: x x x Insofar as this organization being a government created organization, in fact, a
government corporation classified as such, are your funds or your finances subjected to the COA
audit?

MR. ESCUDERO: Mr. Chairman, we are not. Our funds is not subjected. We don’t fall under the
jurisdiction of the COA.

HON. AQUINO: All right, but before were you?

MR. ESCUDERO: No, Mr. Chairman.

MR. JESUS: May I? As historical backgrounder, Commonwealth Act 111 was written by then
Secretary Jorge Vargas and before and up to the middle of the Martial Law years, the BSP was
receiving a subsidy in the form of an annual… a one draw from the Sweepstakes. And, this was the
case also with the Girl Scouts at the Anti-TB, but then this was… and the Boy Scouts then because
of this funding partly from government was being subjected to audit in the contributions being made
in the part of the Sweepstakes. But this was removed later during the Martial Law years with the
creation of the Human Settlements Commission. So the situation right now is that the Boy Scouts
does not receive any funding from government, but then in the case of the local councils and this
legislative charter, so to speak, enables the local councils even the national headquarters in view of
the provisions in the existing law to receive donations from the government or any of its
instrumentalities, which would be difficult if the Boy Scouts is registered as a private corporation with
the Securities and Exchange Commission. Government bodies would be estopped from making
donations to the Boy Scouts, which at present is not the case because there is the Boy Scouts
charter, this Commonwealth Act 111 as amended by PD 463.

xxxx

HON. AMATONG: Mr. Chairman, in connection with that.

THE CHAIRMAN: Yeah, Gentleman from Zamboanga.

HON. AMATONG: There is no auditing being made because there’s no money put in the
organization, but how about donated funds to this organization? What are the remedies of the
donors of how will they know how their money are being spent?

MR. ESCUDERO: May I answer, Mr. Chairman?

THE CHAIRMAN: Yes, gentleman.

MR. ESCUDERO: The Boy Scouts of the Philippines has an external auditor and by the charter we
are required to submit a financial report at the end of each year to the National Executive Board. So
all the funds donated or otherwise is accounted for at the end of the year by our external auditor. In
this case the SGV.63

Historically, therefore, the BSP had been subjected to government audit in so far as public funds had
been infused thereto. However, this practice should not preclude the exercise of the audit jurisdiction
of COA, clearly set forth under the Constitution, which pertinently provides:

Section 2. (1) The Commission on Audit shall have the power, authority, and duty to examine, audit,
and settle all accounts pertaining to the revenue and receipts of, and expenditures or uses of funds
and property, owned or held in trust by, or pertaining to, the Government, or any of its subdivisions,
agencies, or instrumentalities, including government-owned and controlled corporations with original
charters, and on a post-audit basis: (a) constitutional bodies, commissions and offices that have
been granted fiscal autonomy under this Constitution; (b) autonomous state colleges and
universities; (c) other government-owned or controlled corporations with original charters and their
subsidiaries; and (d) such non-governmental entities receiving subsidy or equity, directly or
indirectly, from or through the Government, which are required by law of the granting institution to
submit to such audit as a condition of subsidy or equity. x x x. 64

Since the BSP, under its amended charter, continues to be a public corporation or a government
instrumentality, we come to the inevitable conclusion that it is subject to the exercise by the COA of
its audit jurisdiction in the manner consistent with the provisions of the BSP Charter.

WHEREFORE, premises considered, the instant petition for prohibition is DISMISSED. SO.
G.R. No. 176579 June 28, 2011

WILSON P. GAMBOA, Petitioner,

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

DECISION

CARPIO, J.:

The Case

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

The Antecedents

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

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

In 1999, First Pacific, a Bermuda-registered, Hong Kong-based investment firm, acquired the
remaining 54 percent of the outstanding capital stock of PTIC. On 20 November 2006, the Inter-
Agency Privatization Council (IPC) of the Philippine Government announced that it would sell the
111,415 PTIC shares, or 46.125 percent of the outstanding capital stock of PTIC, through a public
bidding to be conducted on 4 December 2006. Subsequently, the public bidding was reset to 8
December 2006, and only two bidders, Parallax Venture Fund XXVII (Parallax) and Pan-Asia
Presidio Capital, submitted their bids. Parallax won with a bid of ₱25.6 billion or US$510 million.
Thereafter, First Pacific announced that it would exercise its right of first refusal as a PTIC
stockholder and buy the 111,415 PTIC shares by matching the bid price of Parallax. However, First
Pacific failed to do so by the 1 February 2007 deadline set by IPC and instead, yielded its right to
PTIC itself which was then given by IPC until 2 March 2007 to buy the PTIC shares. On 14 February
2007, First Pacific, through its subsidiary, MPAH, entered into a Conditional Sale and Purchase
Agreement of the 111,415 PTIC shares, or 46.125 percent of the outstanding capital stock of PTIC,
with the Philippine Government for the price of ₱25,217,556,000 or US$510,580,189. The sale was
completed on 28 February 2007.

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

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

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

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

During the 8 December 2006 bidding, Parallax Capital Management LP emerged as the highest
bidder with a bid of ₱25,217,556,000. The government notified First Pacific, the majority owner of
PTIC shares, of the bidding results and gave First Pacific until 1 February 2007 to exercise its right
of first refusal in accordance with PTIC’s Articles of Incorporation. First Pacific announced its
intention to match Parallax’s bid.

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

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

Respondent Manuel V. Pangilinan admits the following facts: (a) the IPC conducted a public bidding
for the sale of 111,415 PTIC shares or 46 percent of the outstanding capital stock of PTIC (the
remaining 54 percent of PTIC shares was already owned by First Pacific and its affiliates); (b)
Parallax offered the highest bid amounting to ₱25,217,556,000; (c) pursuant to the right of first
refusal in favor of PTIC and its shareholders granted in PTIC’s Articles of Incorporation, MPAH, a
First Pacific affiliate, exercised its right of first refusal by matching the highest bid offered for PTIC
shares on 13 February 2007; and (d) on 28 February 2007, the sale was consummated when MPAH
paid IPC ₱25,217,556,000 and the government delivered the certificates for the 111,415 PTIC
shares. Respondent Pangilinan denies the other allegations of facts of petitioner.

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

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

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

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

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

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

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

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

The Ruling of the Court

The petition is partly meritorious.

Petition for declaratory relief treated as petition for mandamus

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

While direct resort to this Court may be justified in a petition for prohibition,11 the Court shall
nevertheless refrain from discussing the grounds in support of the petition for prohibition since on 28
February 2007, the questioned sale was consummated when MPAH paid IPC ₱25,217,556,000 and
the government delivered the certificates for the 111,415 PTIC shares.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Definition of the Term "Capital" in

Section 11, Article XII of the 1987 Constitution

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

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

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

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

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

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

Father Joaquin G. Bernas, S.J., a leading member of the 1986 Constitutional Commission, reminds
us that the Filipinization provision in the 1987 Constitution is one of the products of the spirit of
nationalism which gripped the 1935 Constitutional Convention.25 The 1987 Constitution "provides for
the Filipinization of public utilities by requiring that any form of authorization for the operation of
public utilities should be granted only to ‘citizens of the Philippines or to corporations or associations
organized under the laws of the Philippines at least sixty per centum of whose capital is owned by
such citizens.’ The provision is [an express] recognition of the sensitive and vital position of
public utilities both in the national economy and for national security."26 The evident purpose
of the citizenship requirement is to prevent aliens from assuming control of public utilities, which may
be inimical to the national interest.27 This specific provision explicitly reserves to Filipino citizens
control of public utilities, pursuant to an overriding economic goal of the 1987 Constitution: to
"conserve and develop our patrimony"28 and ensure "a self-reliant and independent national
economy effectively controlled by Filipinos."29

Any citizen or juridical entity desiring to operate a public utility must therefore meet the minimum
nationality requirement prescribed in Section 11, Article XII of the Constitution. Hence, for a
corporation to be granted authority to operate a public utility, at least 60 percent of its "capital" must
be owned by Filipino citizens.
The crux of the controversy is the definition of the term "capital." Does the term "capital" in Section
11, Article XII of the Constitution refer to common shares or to the total outstanding capital stock
(combined total of common and non-voting preferred shares)?

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

Petitioners-in-intervention basically reiterate petitioner’s arguments and adopt petitioner’s definition

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

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

In particular, respondent Nazareno’s Memorandum, consisting of 73 pages, harps mainly on the

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

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

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

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

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

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

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

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

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

xxxx

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

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

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

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

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

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

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

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

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

xxxx

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

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

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

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

Sec. 6. Classification of shares. - The shares of stock of stock corporations may be divided into
classes or series of shares, or both, any of which classes or series of shares may have such rights,
privileges or restrictions as may be stated in the articles of incorporation: Provided, That no share
may be deprived of voting rights except those classified and issued as "preferred" or
"redeemable" shares, unless otherwise provided in this Code: Provided, further, That there
shall always be a class or series of shares which have complete voting rights. Any or all of the
shares or series of shares may have a par value or have no par value as may be provided for in the
articles of incorporation: Provided, however, That banks, trust companies, insurance companies,
public utilities, and building and loan associations shall not be permitted to issue no-par value shares
of stock.

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

Shares of capital stock issued without par value shall be deemed fully paid and non-assessable and
the holder of such shares shall not be liable to the corporation or to its creditors in respect thereto:
Provided; That shares without par value may not be issued for a consideration less than the value of
five (₱5.00) pesos per share: Provided, further, That the entire consideration received by the
corporation for its no-par value shares shall be treated as capital and shall not be available for
distribution as dividends.

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

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

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

1. Amendment of the articles of incorporation;

 2. Adoption and amendment of by-laws;

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

4. Incurring, creating or increasing bonded indebtedness;

5. Increase or decrease of capital stock;

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

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

Code; and

8. Dissolution of the corporation.

Except as provided in the immediately preceding paragraph, the vote necessary to approve a
particular corporate act as provided in this Code shall be deemed to refer only to stocks with voting
rights.

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

Considering that common shares have voting rights which translate to control, as opposed to
preferred shares which usually have no voting rights, the term "capital" in Section 11, Article XII of
the Constitution refers only to common shares. However, if the preferred shares also have the right
to vote in the election of directors, then the term "capital" shall include such preferred shares
because the right to participate in the control or management of the corporation is exercised through
the right to vote in the election of directors. In short, the term "capital" in Section 11, Article XII of
the Constitution refers only to shares of stock that can vote in the election of directors.

This interpretation is consistent with the intent of the framers of the Constitution to place in the hands
of Filipino citizens the control and management of public utilities. As revealed in the deliberations of
the Constitutional Commission, "capital" refers to the voting stock or controlling interest of a
corporation, to wit:

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

MR. VILLEGAS. That is right.

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

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

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

MR. VILLEGAS. That is right.

MR. NOLLEDO. Thank you.

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

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

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

MR. VILLEGAS. Yes.48

xxxx

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

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

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

MR. VILLEGAS. Yes.

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

MR. VILLEGAS. That is right.

MR. AZCUNA. But the control can be with the foreigners even if they are the minority. Let us
say 40 percent of the capital is owned by them, but it is the voting capital, whereas, the
Filipinos own the nonvoting shares. So we can have a situation where the corporation is
controlled by foreigners despite being the minority because they have the voting capital. That
is the anomaly that would result here.
MR. BENGZON. No, the reason we eliminated the word "stock" as stated in the 1973 and 1935
Constitutions is that according to Commissioner Rodrigo, there are associations that do not
have stocks. That is why we say "CAPITAL."

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

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

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

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

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

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

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

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

Compliance with the required Filipino ownership of a corporation shall be determined on the
basis of outstanding capital stock whether fully paid or not, but only such stocks which are
generally entitled to vote are considered.
For stocks to be deemed owned and held by Philippine citizens or Philippine nationals, mere
legal title is not enough to meet the required Filipino equity. Full beneficial ownership of the
stocks, coupled with appropriate voting rights is essential. Thus, stocks, the voting rights of
which have been assigned or transferred to aliens cannot be considered held by Philippine
citizens or Philippine nationals.

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

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

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

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

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

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

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

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

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

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

Moreover, the Dividend Declarations of PLDT for 2009,57 as submitted to the SEC, shows that per
share the SIP58preferred shares earn a pittance in dividends compared to the common shares. PLDT
declared dividends for the common shares at ₱70.00 per share, while the declared dividends for the
preferred shares amounted to a measly ₱1.00 per share.59 So the preferred shares not only cannot
vote in the election of directors, they also have very little and obviously negligible dividend earning
capacity compared to common shares.

As shown in PLDT’s 2010 GIS,60 as submitted to the SEC, the par value of PLDT common shares is
₱5.00 per share, whereas the par value of preferred shares is ₱10.00 per share. In other words,
preferred shares have twice the par value of common shares but cannot elect directors and have
only 1/70 of the dividends of common shares. Moreover, 99.44% of the preferred shares are owned
by Filipinos while foreigners own only a minuscule 0.56% of the preferred shares.61 Worse, preferred
shares constitute 77.85% of the authorized capital stock of PLDT while common shares constitute
only 22.15%.62 This undeniably shows that beneficial interest in PLDT is not with the non-voting
preferred shares but with the common shares, blatantly violating the constitutional requirement of 60
percent Filipino control and Filipino beneficial ownership in a public utility.

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

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

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

Incidentally, the fact that PLDT common shares with a par value of ₱5.00 have a current stock
market value of ₱2,328.00 per share,64 while PLDT preferred shares with a par value of ₱10.00 per
share have a current stock market value ranging from only ₱10.92 to ₱11.06 per share,65 is a glaring
confirmation by the market that control and beneficial ownership of PLDT rest with the common
shares, not with the preferred shares.

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

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

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

constitutional mandate, the presumption now is that all provisions of the constitution are self-
executing. If the constitutional provisions are treated as requiring legislation instead of self-
executing, the legislature would have the power to ignore and practically nullify the mandate of the
fundamental law. This can be cataclysmic. That is why the prevailing view is, as it has always been,
that —
. . . in case of doubt, the Constitution should be considered self-executing rather than non-self-
executing. . . . Unless the contrary is clearly intended, the provisions of the Constitution
should be considered self-executing, as a contrary rule would give the legislature discretion
to determine when, or whether, they shall be effective. These provisions would be subordinated
to the will of the lawmaking body, which could make them entirely meaningless by simply refusing to
pass the needed implementing statute. (Emphasis supplied)

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

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

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

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

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

To treat Section 11, Article XII of the Constitution as not self-executing would mean that since the
1935 Constitution, or over the last 75 years, not one of the constitutional provisions expressly
reserving specific areas of investments to corporations, at least 60 percent of the "capital" of which is
owned by Filipinos, was enforceable. In short, the framers of the 1935, 1973 and 1987 Constitutions
miserably failed to effectively reserve to Filipinos specific areas of investment, like the operation by
corporations of public utilities, the exploitation by corporations of mineral resources, the ownership
by corporations of real estate, and the ownership of educational institutions. All the legislatures that
convened since 1935 also miserably failed to enact legislations to implement these vital
constitutional provisions that determine who will effectively control the national economy, Filipinos or
foreigners. This Court cannot allow such an absurd interpretation of the Constitution.
This Court has held that the SEC "has both regulatory and adjudicative functions."69 Under its
regulatory functions, the SEC can be compelled by mandamus to perform its statutory duty when it
unlawfully neglects to perform the same. Under its adjudicative or quasi-judicial functions, the SEC
can be also be compelled by mandamus to hear and decide a possible violation of any law it
administers or enforces when it is mandated by law to investigate such violation. 1awphi1

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

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

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

SO ORDERED.

SEPARATE DISSENTING OPINION

VELASCO, JR., J.:

With due respect, I dissent.

A summary of the pertinent facts is as follows:

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

firm, was granted an initial 50-year charter and the right to establish a telephone network by Act No.
3436 on November 28, 1928.1
In 1969, American-owned General Telephone and Electronics Corporation (GTE), a major
shareholder of PLDT, sold 26% of PLDT’s equity to Philippine Telecommunications Investment
Corporation (PTIC).2 PTIC was incorporated on November 9, 1967 and is engaged in the business of
investment holdings. It held 26,034,263 of PLDT shares, or 13.847% of the total outstanding
common stocks of PLDT.3

In 1977, Prime Holdings Inc. (PHI) was incorporated and 100% owned by the Conjuangco group.
Subsequently, PHI became the owner of 111,415 shares or 46.125% of PTIC by virtue of three (3)
Deeds of Assignment executed by Ramon Cojuangco and Luis Tirso Rivilla.4

On May 9, 1986, the 111,415 PTIC shares held by PHI were sequestered by the Presidential
Commission on Good Government (PCGG) pursuant to Executive Order No. 1.5 Later, this Court
declared the said shares to be owned by the Republic of the Philippines.6

In 1999, First Pacific Company Limited (First Pacific), a Bermuda-registered, Hong Kong-based
investment firm, acquired the remaining 54% equity of PTIC.7

Thereafter, the government decided to sell its 46.1% stake in PTIC (equivalent to 6.4% indirect stake
in PLDT), designating the Privatization Council of the Philippine Government as the disposition
entity. On December 8, 2006, a public bidding was held where Singapore-based Parallax Capital
Management LP (Parallax) emerged as the highest bidder with an offer of PhP 25,217,556,000.8

On January 31, 2007, the House of Representatives Committee on Good Government conducted a
public hearing on the particulars of the impending sale. Finance Secretary Margarito Teves, Finance
Undersecretary John Sevilla, PCGG Chairperson Camilo Sabio, Commissioners Narciso Nario and
Nick Conti, Securities and Exchange Commission (SEC) General Counsel Vernette Umali-Paco,
Philippine Stock Exchange (PSE) Chairperson Jose Vitug and President Francisco Ed Lim,
Development Bank of the Philippines (DBP) President Reynaldo David and Director Miguel Romero
all attended the hearing.9

In Report No. 2270, the House Committee on Good Government concluded that: (1) the auction of
the government’s PTIC shares bore due diligence, transparency and conformity with existing legal
procedures; and (2) First Pacific’s intended acquisition of the government’s PTIC shares resulting in
its 100% ownership in PTIC will not violate the 40% constitutional limit on foreign ownership of a
public utility since PTIC held only 13.847% of the total outstanding common stocks of PLDT.10

Subsequently, the government informed First Pacific of the results of the bidding and gave it until
February 1, 2007 to exercise its right of first refusal as provided under PTIC’s Articles of
Incorporation. Consequently, First Pacific announced that it would match Parallax’s bid.11 However,
First Pacific failed to raise the money for the purchase by the February 1, 2007 deadline and,
instead, yielded the right to PTIC itself. The deadline was then reset to March 2, 2007.12

On February 14, 2007, First Pacific, through its subsidiary, Metro Pacific Assets Holdings Inc.
(MPAH), entered into a Conditional Sale and Purchase Agreement with the government for the
latter’s 46.1% stake in PTIC at the price of PhP 25,217,556,000.13 The acquisition was completed on
February 28, 2007.

On the same date, Wilson Gamboa (Gamboa) filed the instant petition for prohibition, injunction,
declaratory relief and declaration of nullity of sale of the 111,415 shares of PTIC. He argues that: (1)
the consummation of the impending sale of 111,415 shares to First Pacific violates the constitutional
limitation on foreign ownership of a public utility; (2) respondents committed grave abuse of
discretion by allowing the sale of PTIC shares to First Pacific; (3) respondents have made a
complete misrepresentation of the impending sale by saying that it does not breach the constitutional
limitation on foreign ownership of a public utility; and (4) the sale of common shares to foreigners in
excess of 40% of the entire subscribed common capital stock violates the 1987 Philippine
Constitution.14

After a careful examination of the facts and law applicable to the case, I submit that the petition
should be dismissed.

At the outset, it is strikingly clear that the petition suffers from several jurisdictional and procedural
defects.

Petitioner Has No Locus Standi

Petitioner Gamboa claims that he filed the petition in his capacity as a "nominal shareholder of PLDT
and as [a] taxpayer."15 However, these claims do not clothe him with the requisite legal standing to
bring this suit.

The Rules of Court specifically requires that "[e]very action must be prosecuted or defended in the
name of the real party in interest."16 A real party in interest is defined as the "party who stands to be
benefited or injured by the judgment in the suit, or the party entitled to the avails of the suit."

Petitioner has failed to allege any interest in the 111,415 PTIC shares nor in any of the previous
purchase contracts he now seeks to annul. He is neither a shareholder of PTIC nor of First Pacific.
Also, he has not alleged that he was an interested bidder in the government’s auction sale of the
PTIC shares. Finally, he has not shown how, as a nominal shareholder of PLDT, he stands to benefit
from the annulment of the sale of the 111,415 PTIC shares or of any of the sales of the PLDT
common shares held by foreigners. In fine, petitioner has not shown any real interest substantial
enough to give him the requisite locus standi to question the sale of the government’s PTIC shares
to First Pacific.

Likewise, petitioner’s assertion that he has standing to bring the suit as a "taxpayer" must fail. In
Gonzales v. Narvasa, We discussed that "a taxpayer is deemed to have the standing to raise a
constitutional issue when it is established that public funds have been disbursed in alleged
contravention of the law or the Constitution."17 In this case, no public funds have been disbursed. In
fact, the opposite has happened––there is an inflow of funds into the government coffers.

Evidently, petitioner Gamboa has no legal standing to bring the present petition before this Court.

This Court Has No Jurisdiction

Petitioner Gamboa filed four (4) different petitions before this Court––declaratory relief, annulment,
prohibition and injunction. However, all of these actions are not within the exclusive and/or original
jurisdiction of the Supreme Court.

Article VII of the 1987 Constitution, particularly Section 5(1), in relation to Sec. 5(5), enumerates the
instances where this Court exercises original jurisdiction:

Article VIII

Section 5. The Supreme Court shall have the following powers:

(1) Exercise original jurisdiction over cases affecting ambassadors, other public ministers and
consuls, and over petitions for certiorari, prohibition, mandamus, quo warranto, and habeas corpus.

xxxx

(5) Promulgate rules concerning the protection and enforcement of constitutional rights, pleading,
practice, and procedure in all courts, the admission to the practice of law, the integrated bar, and
legal assistance to the under-privileged. Such rules shall provide a simplified and inexpensive
procedure for the speedy disposition of cases, shall be uniform for all courts of the same grade, and
shall not diminish, increase, or modify substantive rights. Rules of procedure of special courts and
quasi-judicial bodies shall remain effective unless disapproved by the Supreme Court.

Accordingly, this Court promulgated the Rules of Court, Sec. 1, Rule 56 of which states:

RULE 56
Original Cases

Section 1. Original cases cognizable. – Only petitions for certiorari, prohibition, mandamus, quo
warranto, habeas corpus, disciplinary proceedings against members of the judiciary and attorneys,
and cases affecting ambassadors, other public ministers and consuls may be filed originally in the
Supreme Court.

Based on the foregoing provisos, it is patently clear that petitions for declaratory relief, annulment of
sale and injunction do not fall within the exclusive original jurisdiction of this Court.

First, the court with the proper jurisdiction for declaratory relief is the Regional Trial Court (RTC).
Sec. 1, Rule 63 of the Rules of Court stresses that an action for declaratory relief is within the
exclusive original jurisdiction of the RTC, viz:

Any person interested under a deed, will, contract or other written instrument, whose rights are
affected by a statute, executive order or regulation, ordinance, or any other governmental regulation
may, before breach or violation thereof, bring an action in the appropriate Regional Trial Court to
determine any question of construction or validity arising, and for a declaration of his rights or duties,
thereunder. (Emphasis supplied.)

An action for declaratory relief also requires the following: (1) a justiciable controversy between
persons whose interests are adverse; (2) the party seeking the relief has a legal interest in the
controversy; and (3) the issue is ripe for judicial determination.18 As previously discussed, petitioner
lacks any real interest in this action; thus, no justiciable controversy between adverse interests
exists.

Further, the Rules of Court also requires that "[a]ll persons who have or claim any interest which
would be affected by the declaration shall be made parties."19 The failure to implead all persons with
a claim or interest in the subject matter of the petition for declaratory relief is a jurisdictional defect. 20

What is more, an action for declaratory relief requires that it be filed before "the breach or violation of
the statute, deed, contract, etc. to which it refers. Where the law or contract has already been
contravened prior to the filing of an action for declaratory relief, the court can no longer assume
jurisdiction over the action."21 Here, petitioner himself points out the fact that, using the common
stockholding basis, the 40% maximum foreign ownership limit on PLDT was already violated long
before the sale of the PTIC shares by the government.22 In addition, the sale itself has already been
consummated. This only means that an action for declaratory relief is no longer proper.

Despite this, the ponencia decided to treat the petition for declaratory relief as one for mandamus,
citing the rule that "where the petition has far-reaching implications and raises questions that should
be resolved, it may be treated as one for mandamus."23 However, such rule is not absolute. In
Macasiano v. National Housing Authority,24 the Court explicitly stated that the exercise of such
discretion, whether to treat a petition for declaratory relief as one for mandamus, presupposes that
the petition is otherwise viable or meritorious. As I shall discuss subsequently in the substantive
portion of this opinion, the petition in this case is clearly not viable or meritorious.

Moreover, one of the reasons pointed out by the Court in Macasiono when it refused to treat the
petition for declaratory relief as one for mandamus was that the petitioner lacked the proper standing
to file the petition. Thus, the petition was subsequently dismissed. This is exactly similar to the
instant case. As previously explained, petitioner has no legal standing to bring the present petition
before this Court. He failed to show any real interest in the case substantial enough to give him the
required legal standing to question the sale of the PTIC shares of the government to First Pacific.

Further, a petition for mandamus is premature if there are administrative remedies available to
petitioner.25 Under the doctrine of primary administrative jurisdiction, "courts cannot or will not
determine a controversy where the issues for resolution demand the exercise of sound
administrative discretion requiring the special knowledge, experience, and services of the
administrative tribunal to determine technical and intricate matters of fact. In other words, if a case is
such that its determination requires the expertise, specialized training and knowledge of an
administrative body, relief must first be obtained in an administrative proceeding before resort to the
courts is had even if the matter may well be within their proper jurisdiction."26 Along with this, the
doctrine of exhaustion of administrative remedies also requires that where an administrative remedy
is provided by statute relief must be sought by exhausting this remedy before the courts will act.27

In the instant case, the power and authority to determine compliance with the Constitution lies with
the SEC. Under Section 17(4) of the Corporation Code, the SEC has the power to approve or reject
the Articles of Incorporation of any corporation where "the required percentage of ownership of the
capital stock to be owned by citizens of the Philippines has not been complied with as required by
existing laws or the Constitution." Similarly, under Section 5 of the Securities Regulation Code, the
SEC is conferred with the power to suspend or revoke the franchise or certificate of registration of
corporations upon any of the grounds provided by law.28 It bears stressing that the SEC also has the
power to investigate violations of the Securities Regulation Code and its Amended Rules. With this,
it is clear that petitioner failed to invoke the primary jurisdiction of the SEC with respect to this
matter.

Additionally, the petition contains numerous questions of fact which is not allowed in a petition for
mandamus.29Hence, based on the foregoing, a petition for mandamus is evidently improper.

Second, since an action for annulment of sale is an ordinary civil action incapable of pecuniary
estimation,30 it also falls within the exclusive original jurisdiction of the RTC.31

Lastly, although this Court, the CA, and the RTC have "concurrent jurisdiction to issue writs of
certiorari, prohibition, mandamus, quo warranto, habeas corpus and injunction, such concurrence
does not give the petitioner unrestricted freedom of choice of court forum."32 The doctrine of
hierarchy of courts dictates that when jurisdiction is shared concurrently with different courts, the
proper suit should first be filed with the lower-ranking court. Failure to do so is sufficient cause for
the dismissal of a petition.33
In Santiago v. Vasquez,34 the Court took the opportunity to explain why the blatant disregard of the
hierarchy of courts is frowned upon, to wit:

x x x We discern in the proceedings in this case a propensity on the part of petitioner, and, for that
matter, the same may be said of a number of litigants who initiate recourses before us, to disregard
the hierarchy of courts in our judicial system by seeking relief directly from this Court despite the fact
that the same is available in the lower courts in the exercise of their original or concurrent
jurisdiction, or is even mandated by law to be sought therein. This practice must be stopped, not only
because of the imposition upon the precious time of this Court but also because of the inevitable and
resultant delay, intended or otherwise, in the adjudication of the case which often has to be
remanded or referred to the lower court as the proper forum under the rules of procedure, or as
better equipped to resolve the issues since this Court is not a trier of facts. We, therefore, reiterate
the judicial policy that this Court will not entertain direct resort to it unless the redress desired cannot
be obtained in the appropriate courts or where exceptional and compelling circumstances justify
availment of a remedy within and calling for the exercise of our primary jurisdiction.

In the instant case, petitioner should have filed the petition for injunction and prohibition with the trial
courts. Petitioner failed to show any exceptional or compelling circumstance to justify the exception
to the rule of hierarchy of courts. Thus, absent such justification, the rule must be upheld.

In fact, in Fernandez v. Cojuangco,35 which also involved a similar issue, questioning the issuance of
PLDT’s common shares to Smart and NTT’s stockholders on the ground, among others, that such
issuance of shares violated the 40% foreign ownership constitutional restriction for public utilities,
this Court issued a Resolution dismissing the petition filed with it for disregarding the hierarchy of
courts.

More importantly, the function of a writ of prohibition is to prevent the performance of an act which is
yet to be done. It is not intended to provide a remedy for acts already performed.36 The rationale
behind this was discussed in Cabanero v. Torres,37 citing U.S. v. Hoffman,38 viz:

The writ of prohibition, as its name imports, is one which commands the person to whom it is
directed not to do something which, by the suggested to the relator, the court is informed he is about
to do. If the thing be already done, it is manifest the writ of prohibition cannot undo it, for that would
require an affirmative act; and the only effect to a writ of prohibition is to suspend all action, and to
prevent any further proceeding in the prohibited direction.

As previously pointed out, the sale by the government of the PTIC shares had already been
completed. Thus, the Petition for Prohibition has become moot. As a result, this Court has no
obligation to entertain the petition.

Finally, it should be noted that the non-joinder of ordinary civil actions with special civil actions is
elementary in remedial law. Sec. 5, Rule 2 of the Rules specifically prohibits the joining of special
civil actions or actions governed by special rules with ordinary civil actions.39 In this case, petitioner
violated this basic rule when he joined several special civil actions, prohibition and declaratory relief,
and the ordinary civil actions for annulment and injunction.

Violation of Due Process

It is a fundamental guarantee in the Constitution that "[n]o person shall be deprived of life, liberty or
property without due process of law."40 Due process has two aspects: substantive and procedural.
Substantive due process is a prohibition of arbitrary laws, while procedural due process is a
guarantee of procedural fairness.41 Here, what petitioner asks of this Court is a finding of a violation
of both substantive and procedural due process.

Sec. 11, Art. XII of the Constitution contemplates of two situations: first, where the applicant of a
franchise is a natural person, he must be a Filipino citizen; and second, where the applicant is a
juridical person, 60% of its capital must be owned by Filipino citizens. In the first scenario, only one
person and one property is involved, i.e., the Filipino citizen and his or her franchise. In the second,
two different property holders and two different properties are involved, i.e., the public utility
company holding its franchise and the shareholders owning the capital of the utility company.
However, in both situations, Sec. 11 imposes a qualification for the retention of property on just one
property holder, the franchise holder, as a condition for keeping his or its franchise. It imposes no
nationality qualification on the shareholders of the utility company as a condition for keeping their
shares in the utility company. Thus, if a utility company or the franchise holder fails to maintain the
nationality qualification, only its franchise should be revoked.

In J.G. Summit Holdings, Inc. v. CA,42 this Court had the chance to rule on a similar set of facts. In
that case, We refused to annul the sale of the government’s shares despite the petitioner’s claim that
it would breach the maximum 40% foreign ownership limit found in the Constitution. According to the
Court:

x x x In fact, it can even be said that if the foreign shareholdings of a landholding corporation
exceeds 40%, it is not the foreign stockholders’ ownership of the shares which is adversely affected
but the capacity of the corporation to own land – that is, the corporation becomes disqualified to own
land. This finds support under the basic corporate law principle that the corporation and its
stockholders are separate juridical entities. In this vein, the right of first refusal over shares pertains
to the shareholders whereas the capacity to own land pertains to the corporation. Hence, the fact
that PHILSECO owns land cannot deprive stockholders of their right of first refusal. No law
disqualifies a person from purchasing shares in a landholding corporation even if the latter will
exceed the allowed foreign equity, what the law disqualifies is the corporation from owning land.
(Emphasis supplied.)

Certainly, the Court has differentiated the two property owners and their properties. Confusing the
two would result in "an unreasonable curtailment of property rights without due process of law."43

Furthermore, procedural due process requires that before any of the common shares in excess of
the 40% maximum foreign ownership limit can be taken, all the shareholders have to be given notice
and a trial should be held before their shares are taken. This means that petitioner should have
impleaded all the foreign natural and juridical shareholders of PLDT so that they can be heard. The
foreign shareholders are considered as an "indispensable party" or one who:

has such an interest in the controversy or subject matter that a final adjudication cannot be made, in
his absence, without injuring or affecting that interest[;] a party who has not only an interest in the
subject matter of the controversy, but also has an interest of such nature that a final decree cannot
be made without affecting his interest or leaving the controversy in such a condition that its final
determination may be wholly inconsistent with equity and good conscience. It has also been
considered that an indispensable party is a person in whose absence there cannot be a
determination between the parties already before the court which is effective, complete, or equitable.
Further, an indispensable party is one who must be included in an action before it may properly go
forward.44
At the same time, the Rules of Court explicitly requires the joinder of indispensable parties or
"[p]arties in interest without whom no final determination can be had."45 This is mandatory. As held in
Pepsico, Inc. v. Emerald Pizza, Inc.,46 their absence renders all actions of the court null and void, viz:

x x x x Their presence is necessary to vest the court with jurisdiction, which is "the authority to hear
and determine a cause, the right to act in a case." Thus, without their presence to a suit or
proceeding, judgment of a court cannot attain real finality. The absence of an indispensable party
renders all subsequent actions of the court null and void for want of authority to act, not only as to
the absent parties but even as to those present. (Emphasis supplied.)

In this case, petitioner failed to implead all the indispensable parties. Accordingly, in the absence of
such indispensable parties, this Court is wanting in authority to act or rule on the present petition.

Ultimately, the present petition partakes of a collateral attack on PLDT’s franchise as a public utility
with petitioner pleading as ground PLDT’s alleged breach of the 40% limit on foreign equity. Such is
not allowed. As discussed in PLDT v. National Telecommunications Commission,47 a franchise is a
property right that can only be questioned in a direct proceeding:

x x x A franchise is a property right and cannot be revoked or forfeited without due process of law.
The determination of the right to the exercise of a franchise, or whether the right to enjoy such
privilege has been forfeited by non-user, is more properly the subject of the prerogative writ of quo
warranto, the right to assert which, as a rule, belongs to the State "upon complaint or otherwise" x x
x the reason being that the abuse of a franchise is a public wrong and not a private injury. A
forfeiture of a franchise will have to be declared in a direct proceeding for the purpose brought by the
State because a franchise is granted by law and its unlawful exercise is primarily a concern of
Government.

Hence, due process requires that for the revocation of franchise a petition for quo warranto be filed
directly attacking the franchise itself.

Evidently, the petition is patently flawed and the petitioner availed himself of the wrong remedies.
These jurisdictional and procedural grounds, by themselves, are ample enough to warrant the
dismissal of the petition. Granting arguendo that the petition is sufficient in substance and form, it will
still suffer the same fate.

The Proper Definition of "Capital"

Petitioner’s main substantive issue revolves around the proper definition of the word "capital" found
in Section 11, Article 12 of the Constitution. The said section reads:

Section 11. No franchise, certificate, or any other form of authorization for the operation of a public
utility shall be granted except to citizens of the Philippines or to corporations or associations
organized under the laws of the Philippines, at least sixty per centum of whose capital is owned by
such citizens; nor shall such franchise, certificate, or authorization be exclusive in character or for a
longer period than fifty years. Neither shall any such franchise or right be granted except under the
condition that it shall be subject to amendment, alteration, or repeal by the Congress when the
common good so requires. The State shall encourage equity participation in public utilities by the
general public. The participation of foreign investors in the governing body of any public utility
enterprise shall be limited to their proportionate share in its capital, and all the executive and
managing officers of such corporation or association must be citizens of the Philippines. (Emphasis
supplied.)
He argues that the framers of the Constitution intended the word "capital" to be limited to voting
shares alone and not the total outstanding capital stock (combined total of voting and non-voting
shares). Specifically, he contends that the term "capital" refers only to shares of stock that can vote
in the election of the members of the Board of Directors. The question is, is this the proper
definition?

The ponencia resolved this in the affirmative and held that the term "capital" only refers to voting
shares since these are the shares that "have voting rights which translate to control"48, i.e., the right
to elect directors who ultimately control or manage the corporation. Generally, these are referred to
as "common" shares. However, he clarified that if preferred shares also have the right to vote in the
election of the members of the Board of Directors, then the term "capital" shall also include such
preferred shares. Further, the ponencia maintains that "mere legal title is insufficient to meet the
required Filipino equity," but that "full beneficial ownership of the stocks coupled with appropriate
voting rights" is required.49

I beg to disagree with the ponencia’s resolution of this issue for the following reasons:

First, contrary to pronouncement of the ponencia, the intent of the framers of the Constitution was
not to limit the application of the word "capital" to voting or common shares alone. In fact, the
Records of the Constitutional Commission reveal that even though the UP Law Center proposed the
phrase "voting stock or controlling interest," the framers of the Constitution did not adopt this but
instead used the word "capital," viz:

MR. BENGZON. We would also like to indicate that perhaps the better term in order to avoid any
conflict or misinterpretations would be the use of the phrase "capital stock."

MR. NATIVIDAD. Capital stock?

MR. SUAREZ. We will discuss that on the committee level because precisely, there were three
criteria that were submitted. One of them is with reference to the authorized capital stock; the
second would be with respect to the voting rights; and the third would be with respect to the
management. And so, again, we would like to inform the members that the Committee is still trying
to polish this particular provision.50

xxxx

MR. FOZ. Mr. Vice-President, in Sections 3 and 9,51 the provision on equity is both 60 percent, but I
notice that this is now different from the provision in the 1973 Constitution in that the basis for the
equity provision is voting stock or controlling interest instead of the usual capital percentage as
provided for in the 1973 Constitution. We would like to know what the difference would be between
the previous and the proposed provisions regarding equity interest.

MR. VILLEGAS. Commissioner Suarez will answer that.

MR. SUAREZ. Thank you.

As a matter of fact, this particular portion is still being reviewed by this Committee. In Section 1,
Article XIII of the 1935 Constitution, the wording is that the percentage should be based on the
capital which is owned by such citizens. In the proposed draft, this phrase was proposed: "voting
stock or controlling interest." This was a plan submitted by the UP Law Center.
Three days ago, we had an early morning breakfast conference with the members of the UP Law
Center and precisely, we were seeking clarification regarding the difference. We would have three
criteria to go by: One would be based on capital, which is capital stock of the corporation,
authorized, subscribed or paid up, as employed under the 1935 and the 1973 Constitution. The idea
behind the introduction of the phrase "voting stock or controlling interest" was precisely to avoid the
perpetration of dummies, Filipino dummies of multinationals. It is theoretically possible that a
situation may develop where these multinational interests would not really be only 40 percent but will
extend beyond that in the matter of voting because they could enter into what is known as a voting
trust or voting agreement with the rest of the stockholders and, therefore, notwithstanding the fact
that on record their capital extent is only up to 40-percent interest in the corporation, actually, they
would be managing and controlling the entire company. That is why the UP Law Center members
suggested that we utilize the words "voting interest" which would preclude multinational control in the
matter of voting, independent of the capital structure of the corporation. And then they also added
the phrase "controlling interest" which up to now they have not been able to successfully define the
exact meaning of. x x x And as far as I am concerned, I am not speaking in behalf of the Committee,
I would feel more comfortable if we go back to the wording of the 1935 and the 1973 Constitution,
that is to say, the 60-40 percentage could be based on the capital stock of the corporation.

MR. FOZ. I understand that that was the same view of Dean Carale who does not agree with the
other on this panel at the UP Law Center regarding the percentage of the ratio.

MR. Suarez. That is right. Dean Carale shares my sentiment about this matter.

MR. BENGZON. I also share the sentiment of Commissioner Suarez in that respect. So there are
already two in the Committee who want to go back to the wording of the 1935 and the 1973
Constitution.52

xxxx

MR. TREÑAS. Madam President, may I propose an amendment on line 14 of Section 3 by deleting
therefrom "whose voting stock and controlling interest." And in lieu thereof, insert the CAPITAL so
the line should read: "associations at least sixty percent of the CAPITAL is owned by such citizens.

MR. VILLEGAS. We accept the amendment.

MR. TREÑAS. Thank you.

THE PRESIDENT. The amendment of Commissioner Treñas on line 14 has been accepted by the
Committee.

Is there any objection? (Silence) The Chair hears none; the amendment is approved.53

xxxx

MR. VILLEGAS. Yes, Commissioner Davide has accepted the word "CAPITAL" in place of "voting
stock or controlling interest." This is an amendment already accepted by the Committee.54 x x x x

xxxx

MR. NOLLEDO. Thank you, Madam President.

I would like to propound some questions to the chairman and members of the committee. I have
here a copy of the approved provisions on Article on the National Economy and Patrimony. On page
2, the first two lines are with respect to the Filipino and foreign equity and I said: "At least sixty
percent of whose capital or controlling interest is owned by such citizen."

I notice that this provision was amended by Commissioner Davide by changing "voting stocks" to
"CAPITAL," but I still notice that there appears the term "controlling interest" which seems to refer to
associations other than corporations and it is merely 50 percent plus one percent which is less than
60 percent. Besides, the wordings may indicate that the 60 percent may be based not only on capital
but also on controlling interest; it could mean 60 percent or 51 percent.

Before I propound the final question, I would like to make a comment in relation to Section 15 since
they are related to each other. I notice that in Section 15, there still appears the phrase "voting stock
or controlling interest." The term "voting stocks" as the basis of the Filipino equity means that if 60
percent of the voting stocks belong to Filipinos, foreigners may not own more than 40 percent of the
capital as long as the 40 percent or the excess thereof will cover nonvoting stock. This is aside from
the fact that under the Corporation Code, even nonvoting shares can vote on certain instances.
Control over investments may cover aspects of management and participation in the fruits of
production or exploitation.

So, I hope the committee will consider favorably my recommendation that instead of using
"controlling interests," we just use "CAPITAL" uniformly in cases where foreign equity is permitted by
law, because the purpose is really to help the Filipinos in the exploitation of natural resources and in
the operation of public utilities. I know the committee, at its own instance, can make the amendment.

What does the committee say?

MR. VILLEGAS. We completely agree with the Commissioner’s views. Actually, it was really an
oversight. We did decide on the word "CAPITAL." I think it was the opinion of the majority that the
phrase "controlling interest" is ambiguous.

So, we do accept the Commissioner’s proposal to eliminate the phrase "or controlling interest" in all
the provisions that talk about foreign participation. (Emphasis supplied.)

MR. NOLLEDO. Not only in Section 3, but also with respect to Section 15.

Thank you very much.55

Undoubtedly, the framers of the Constitution decided to use the word "capital" in all provisions that
talk about foreign participation and intentionally left out the phrase "voting stocks" or "controlling
interest." Cassus Omissus Pro Omisso Habendus Est––a person, object or thing omitted must have
been omitted intentionally. In this case, the intention of the framers of the Constitution is very clear––
to omit the phrases "voting stock" and "controlling interest."

Evidently, the framers of the Constitution were more comfortable with going back to the wording of
the 1935 and 1973 Constitutions, which is to use the 60-40 percentage for the basis of the capital
stock of the corporation. Additionally, the phrases "voting stock or controlling interest" were also
initially used in Secs. 256 and 10,57 Article XII of the 1987 Constitution. These provisions involve the
development of natural resources and certain investments. However, after much debate, they were
also replaced with the word "capital" alone. All of these were very evident in the aforementioned
deliberations.
Much more significant is the fact that a comprehensive examination of the constitutional
deliberations in their entirety will reveal that the framers of the Constitution themselves understood
that the word capital includes both voting and non-voting shares and still decided to use "capital"
alone, to wit:

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

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

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

MR. VILLEGAS. Yes.

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

MR. VILLEGAS. That is right.

xxxx

MR. AZCUNA. Yes, but what I mean is that the control should be with the Filipinos.

MR. BENGZON. Yes, that is understood.

MR. AZCUNA. Yes, because if we just say "sixty percent of whose capital is owned by the Filipinos,"
the capital may be voting or non-voting.

MR. BENGZON. That is correct.58

xxxx

MR. GARCIA. Thank you very much, Madam President.

I would like to propose the following amendment on Section 3, line 14 on page 2. I propose to
change the word "sixty" to SEVENTY-FIVE. So, this will read: "or it may enter into co-production,
joint venture, production sharing agreements with Filipino citizens or corporations or associations at
least SEVENTY-FIVE percent of whose CAPITAL stock or controlling interest is owned by such
citizens."

MR. VILLEGAS. This is just a correction. I think Commissioner Azcuna is not insisting on the
retention of the phrase "controlling interest," so we will retain "CAPITAL" to go back really to the
1935 and 1973 formulations.59 (Emphasis supplied.)

To emphasize, by using the word "capital," the framers of the Constitution adopted the definition or
interpretation that includes all types of shares, whether voting or non-voting.

The fundamental principle in the construction of constitutional provisions is "to give the intent to the
framers of the organic law and the people adopting it. The intention to which force is to be given is
that which is embodied and expressed in the constitutional provisions themselves."60 Generally, "in
construing constitutional provisions which are ambiguous or of doubtful meaning, the courts may
consider the debates in the constitutional convention as throwing light on the intent of the framers of
the Constitution. It is true that the intent of the convention is not controlling by itself, but as its
proceeding was preliminary to the adoption by the people of the Constitution the understanding of
the convention as to what was meant by the terms of the constitutional provision which was the
subject of the deliberation, goes a long way toward explaining the understanding of the people when
they ratified it."61

Second, the ponencia also points to the provisions of the Foreign Investments Act of 1991 (FIA),62 as
a reinforcement of the interpretation of the word "capital" as only referring to those shares entitled to
vote. However, a careful examination of its provisions would reveal otherwise.

Section 3(a) of the FIA, as amended, defines the term "Philippine national" as:

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

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

The ponencia failed to see the fact that the FIA specifically has the phrase "entitled to vote" after the
phrase "total outstanding capital stock." Logically, this means that interpreting the phrase "total
outstanding capital stock" alone connotes the inclusion of all types of shares under the term "capital"
and not just those that are entitled to vote. By adding the phrase "entitled to vote," the FIA sought to
distinguish between the shares that can vote and those that cannot. Thus, it is very clear that even
the FIA itself supports the definition of the term "capital" as including all types of shares.

As a matter of fact, in the Senate deliberations of the FIA, Senator Angara pointed out that the word
"capital," as used in the 1987 Constitution, includes all types of shares:

Senator Angara. x x x x

Before I leave that point, Mr. President, as we know, the constitutional test is capital. That means,
equity investment, not control. Would this control test then now become an additional requirement to
the constitutional requirement?

Senator Paterno. Well, this is an amplification of the constitutional stipulation, Mr. President. It is a
definition, by law, of what is contained in the Constitution.
Senator Angara. No, Mr. President, because the Constitution requires 60 percent of capital. That
means, whether voting or nonvoting, 60 percent of that must belong to Filipinos. Whereas, under this
proposed definition, it is only the voting shares that we require to be 60 percent owned.

Senator Paterno. Yes.

Senator Angara. So, my question is: Would this requirement of control be in addition to what the
Constitution imposes?

Senator Paterno. No, this would be the definition of what the Constitution requires. We are saying
that it is the capital stock outstanding and entitled to vote. It is the definition of capital as maintained
by the Constitution.

Senator Angara. On the contrary, I am saying that the constitutional test is capital, which is
distinguished from capital stock entitled to vote. Capital means equity which can be voting or
nonvoting, common or preferred. That is the constitutional test.63 x x x (Emphasis supplied.)

Moreover, it is a well-settled rule of statutory construction that a statute should be construed

whenever possible in a manner that will avoid conflict with the Constitution.64 Where a statute is
reasonably susceptible of two constructions, one constitutional and the other unconstitutional, the
construction in favor of its constitutionality should be adopted.

In this case, the FIA should be read in harmony with the Constitution. Since the Constitution only
provides for a single requirement for the operation of a public utility under Sec. 11, i.e., 60% capital
must be Filipino-owned, a mere statute cannot add another requirement. Otherwise, such statute
may be considered unconstitutional.

Accordingly, the phrase "entitled to vote" should not be interpreted to be limited to common shares
alone or those shares entitled to vote in the election of members of the Board of Directors. It should
also include those deemed non-voting because they also have voting rights. Sec. 6 of the
Corporation Code65 grants voting rights to holders of shares of a corporation on certain key
fundamental corporate matters despite being classified as non-voting in the articles of incorporation.
These are:

1. Amendment of the articles of incorporation;

2. Adoption and amendment of by-laws;

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

4. Incurring, creating or increasing bonded indebtedness;

5. Increase or decrease of capital stock;

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

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

Code; and

8. Dissolution of the corporation.

Clearly, the shares classified as non-voting are also entitled to vote under these circumstances.

In fact, the FIA did not say "entitled to vote in the management affairs of the corporation" or "entitled
to vote in the election of the members of the Board of Directors." Verily, where the law does not
distinguish, neither should We. Hence, the proper interpretation of the phrase "entitled to vote" under
the FIA should be that it applies to all shares, whether classified as voting or non-voting shares.
Such construction is in fact in harmony with the fundamental law of the land.

Stockholders, whether holding voting or non-voting stocks, have all the rights, powers and privileges
of ownership over their stocks. This necessarily includes the right to vote because such is inherent in
and incidental to the ownership of corporate stocks, and as such is a property right.66

Additionally, control is another inherent right of ownership.67 The circumstances enumerated in Sec.
6 of the Corporation Code clearly evince this. It gives voting rights to the stocks deemed as non-
voting as to fundamental and major corporate changes. Thus, the issue should not only dwell on the
daily management affairs of the corporation but also on the equally important fundamental changes
that may need to be voted on. On this, the "non-voting" shares also exercise control, together with
the voting shares.

Consequently, the fact that only holders of common shares can elect a corporation’s board of
directors does not mean that only such holders exercise control over the corporation. Particularly,
the control exercised by the board of directors over the corporation, by virtue of the corporate entity
doctrine, is totally distinct from the corporation’s stockholders and any power stockholders have over
the corporation as owners.

It is settled that when the activity or business of a corporation falls within any of the partly
nationalized provisions of the Constitution or a special law, the "control test" must also be applied to
determine the nationality of a corporation on the basis of the nationality of the stockholders who
control its equity.

The control test was laid down by the Department of Justice (DOJ) in its Opinion No. 18 dated
January 19, 1989. It determines the nationality of a corporation with alien equity based on the
percentage of capital owned by Filipino citizens. It reads:

Shares belonging to corporations or partnerships at least 60% of the capital of which is owned by
Filipino citizens shall be considered as Philippine nationality, but if the percentage of Filipino
ownership in the corporation or partnership is less than 60% only the number of shares
corresponding to such percentage shall be counted as of Philippine nationality.68

In a catena of opinions, the SEC, "the government agency tasked with the statutory duty to enforce
the nationality requirement prescribed in Section 11, Article XII of the Constitution on the ownership
of public utilities,"69 has consistently applied the control test.70

The FIA likewise adheres to the control test. This intent is evident in the May 21, 1991 deliberations
of the Bicameral Conference Committee (Committees on Economic Affairs of the Senate and House
of Representatives), to wit:

CHAIRMAN TEVES. x x x On definition of terms, Ronnie, would you like anything to say here on the
definition of terms of Philippine national?
HON. RONALDO B. ZAMORA. I think we’ve – we have already agreed that we are adopting here
the control test. Wasn’t that the result of the –

CHAIRMAN PATERNO. No. I thought that at the last meeting, I have made it clear that the Senate
was not able to make a decision for or against the grandfather rule and the control test, because we
had gone into caucus and we had voted but later on the agreement was rebutted and so we had to
go back to adopting the wording in the present law which is not clearly, by its language, a control test
formulation.

HON. ANGARA. Well, I don’t know. Maybe I was absent, Ting, when that happened but my
recollection is that we went into caucus, we debated [the] pros and cons of the control versus the
grandfather rule and by actual vote the control test bloc won. I don’t know when subsequent
rejection took place, but anyway even if the – we are adopting the present language of the law I think
by interpretation, administrative interpretation, while there may be some differences at the beginning,
the current interpretation of this is the control test. It amounts to the control test.

CHAIRMAN TEVES. That’s what I understood, that we could manifest our decision on the control
test formula even if we adopt the wordings here by the Senate version.

xxxx

CHAIRMAN PATERNO. The most we can do is to say that we have explained – is to say that
although the House Panel wanted to adopt language which would make clear that the control test is
the guiding philosophy in the definition of [a] Philippine national, we explained to them the situation
in the Senate and said that we would be – was asked them to adopt the present wording of the law
cognizant of the fact that the present administrative interpretation is the control test interpretation.
But, you know, we cannot go beyond that.71

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

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

This intent is even more apparent in the Implementing Rules and Regulations (IRR) of the FIA. In
defining a "Philippine national," Section 1(b) of the IRR of the FIA categorically states that for the
purposes of determining the nationality of a corporation the control test should be applied.72

The cardinal rule in the interpretation of laws is to ascertain and give effect to the intention of the
legislator.73Therefore, the legislative intent to apply the control test in the determination of nationality
must be given effect.

Significantly, in applying the control test, the SEC has consistently ruled that the determination of the
nationality of the corporation must be based on the entire outstanding capital stock, which includes
both voting and non-voting shares. One such ruling can be found in an Opinion dated November 21,
1989 addressed to Atty. Reynaldo G. Geronimo, to wit:

As to the basis of computation of the 60-40 percentage nationality requirement under existing laws
(whether it should be based on the number of shares or the aggregate amount in pesos of the par
value of the shares), the following definitions of corporate terms are worth mentioning.
"The term capital stock signifies the aggregate of the shares actually subscribed". (11 Fletcher, Cyc.
Corps. (1971 Rev. Vol.) sec. 5082, citing Goodnow v. American Writing Paper Co., 73 NJ Eq. 692,
69 A 1014 aff'g 72 NJ Eq. 645, 66 A, 607).

"Capital stock means the capital subscribed (the share capital)". (Ibid., emphasis supplied).

"In its primary sense a share of stock is simply one of the proportionate integers or units, the sum of
which constitutes the capital stock of corporation. (Fletcher, sec. 5083).

The equitable interest of the shareholder in the property of the corporation is represented by the
term stock, and the extent of his interest is described by the term shares. The expression shares of
stock when qualified by words indicating number and ownership expresses the extent of the owner's
interest in the corporate property (Ibid, Sec. 5083, emphasis supplied).

Likewise, in all provisions of the Corporation Code the stockholders’ right to vote and receive
dividends is always determined and based on the "outstanding capital stock", defined as follows:

"SECTION 137. Outstanding capital stock defined. — The term "outstanding capital stock" as used
in this Code, means the total shares of stock issued to subscribers or stockholders, whether or not
fully or partially paid (as long as there is a binding subscription agreement, except treasury shares."

The computation, therefore, should be based on the total outstanding capital stock, irrespective of
the amount of the par value of the shares.

Again in SEC Opinion dated December 22, 2004 addressed to Atty. Priscilla B. Valer, the SEC
reiterated the application of the control test to the total outstanding capital stock irrespective of the
amount of the par value of shares, viz:

"Under the ‘control concept’, the nationality of the corporation depends on the nationality of the
controlling stockholders. In determining the nationality of a corporation under the ‘control test’, the
following ruling was adopted by the Commission:

xxxx

Hence, we confirm your view that the test for compliance with the nationality requirement is based
on the total outstanding capital stock irrespective of the amount of the par value of
shares.74 (Emphasis supplied.)

More importantly, the SEC defined "capital" as to include both voting and non-voting in the
determination of the nationality of a corporation, to wit:

In view of the foregoing, it is opined that the term "capital" denotes the sum total of the shares
subscribed and paid by the shareholders, or secured to be paid, irrespective of their nomenclature to
be issued by the corporation in the conduct of its operation. Hence, non-voting preferred shares are
considered in the computation of the 60-40% Filipino-alien equity requirement of certain economic
activities under the Constitution.75 (Emphasis supplied.)

In fact, the issue in the present case was already answered by the SEC in its Opinion dated
February 15, 1988. The opinion was issued as an answer to the query––"Would it be legal for
foreigners to own more than 40% of the common shares but not more than 40% of the total
outstanding capital stock which would include both common and non-voting preferred shares?" This
is exactly the question in this case. The SEC ruled in the affirmative and stated:

The pertinent provision of the Philippine Constitution under Article XII, Section 7, reads in part thus:

"No franchise, certificate, or any form of authorization for the operation of a public utility shall be
granted except to citizens of the Philippines, or to corporations or associations organized under the
laws of the Philippines at least sixty per centum of whose capital is owned by such citizens. . ." x x x

The issue raised on your letter zeroes in on the meaning of the word "capital" as used in the above
constitutional provision.

Anent thereto, please be informed that the term "capital" as applied to corporations, refers to the
money, property or means contributed by stockholders as the form or basis for the business or
enterprise for which the corporation was formed and generally implies that such money or property
or means have been contributed in payment for stock issued to the contributors. (United Grocers,
Ltd. v. United States F. Supp. 834, cited in 11 Fletcher, Cyc. Corp., 1986, rev. vol., sec. 5080 at 18).
As further ruled by the court, "capital of a corporation is the fund or other property, actually or
potentially in its possession, derived or to be derived from the sale by it of shares of its stock or his
exchange by it for property other than money. This fund includes not only money or other property
received by the corporation for shares of stock but all balances of purchase money, or installments,
due the corporation for shares of stock sold by it, and all unpaid subscriptions for shares." (Williams
v. Brownstein, 1F. 2d 470, cited in 11 Fletcher, Cyc. Corp., 1058 rev. vol., sec. 5080, p. 21).

The term "capital" is also used synonymously with the words "capital stock", as meaning the amount
subscribed and paid-in and upon which the corporation is to conduct its operation. (11 Fletcher, Cyc.
Corp. 1986, rev. vol., sec. 5080 at 15). And, as held by the court in Haggard v. Lexington Utilities
Co., (260 Ky 251, 84 SW 2d 84, cited in 11 Fletcher, Cyc. Corp., 1958 rev. vol., sec. 5079 at
17), "The capital stock of a corporation is the amount paid-in by its stockholders in money, property
or services with which it is to conduct its business, and it is immaterial how the stock is classified,
whether as common or preferred."

The Commission, in a previous opinion, ruled that the term ‘capital’ denotes the sum total of the
shares subscribed and paid by the shareholders or served to be paid, irrespective of their
nomenclature. (Letter to Supreme Technotronics Corporation, dated April 14, 1987).

Hence, your query is answered in the affirmative.76 (Emphasis supplied.)

This opinion was reiterated in another Opinion dated July 16, 1996 addressed to Mr. Mitsuhiro
Otsuki:

Relative to the second issue, "In the absence of special provisions the holders of preferred stock in a
corporation are in precisely the same position, both with respect to the corporation itself and with
respect to the creditors of the corporation, as the holders of common stock, except only that they are
entitled to receive dividends on their shares, to the extent guaranteed or agreed upon, before any
dividends can be paid to the holders of common stock. x x x. Accordingly, as a general rule, they are
considered in the computation of the 60-40% Filipino-alien equity percentage requirement, unless
the law covering the type of business to be undertaken provides otherwise. (Emphasis supplied.)

In Opinion No. 32-03 dated June 2, 2003 addressed to Commissioner Armi Jane R. Borje, the SEC
likewise held that the word "capital" as used in Sec. 11, Art. XII of the 1987 Constitution refers to the
entire outstanding capital stock, regardless of its share classification, viz:
Please note that Article XII, Section 11 of the Philippine Constitution provides:

"No franchise, certificate, or any other form of authorization for the operation of a public utility shall
be granted except to citizens of the Philippines or to corporations or associations organized under
the laws of the Philippines at least sixty per centum of whose capital is owned by such citizens…"

The legal capacity of the corporation to acquire franchise, certificate, or authority for the operation of
a public utility is regulated by the aforequoted Constitutional provision, which requires that at least
sixty per centum (60%) of the capital of such corporation be owned by citizens of the Philippines.
However, such provision does not qualify whether the required ownership of "capital" shall be that of
the voting or non-voting, common or preferred. Hence, it should be interpreted to refer to the sum
total of the outstanding capital stock, irrespective of the nomenclature or classification as common,
preferred, voting or non-voting. (Emphasis supplied.)

In the same way, the SEC has also adopted the same interpretation of the word "capital" to various
laws or statutes imposing a minimum on Filipino ownership. In an Opinion dated November 11, 1988
addressed to Mr. Nito Doria, which involved Executive Order No. 226, otherwise known as the
Omnibus Investments Code of 1987, the SEC stated:

For permitted and permissible investments, the maximum percentage of control allowable to foreign
investors is found in Sections 46 and 47 of the Omnibus Investments Code of 1987, copy enclosed.
In relation thereto, "Outstanding capital stock" refers to the total shares issued to subscribers or
stockholders, whether or not fully or partially paid, except treasury shares. (Section 137, Corporation
Code of the Philippines), and it is immaterial how the stock is classified, whether as common or
preferred, (SEC Opinions, dated June 13, 1988, April 14, 1987, and February 15, 1988).

Again, in an Opinion dated October 16, 1981 addressed to Atty. Jose A. Bañez which involved
Republic Act No. 1180, otherwise known as the Retail Trade Nationalization Law, the SEC opined
that the issuance of preferred shares to a foreigner will disqualify the corporation from engaging in
retail trade, because the law provides that "no association, partnership, or corporation the capital of
which is not wholly owned by citizens of the Philippines, shall engage directly or indirectly in the
retail business."77 The SEC held:

Your client will lose its character of being one hundred percent (100%) Filipino-owned if said
Japanese entity is allowed to subscribe to its preferred shares. The issuance of shares to an alien
will reduce the ownership of Filipino citizens to less than the required percentage based on the
outstanding capital stock of the corporation, regardless of the fact that said shares are non-voting
and non-convertible.

Please be advised that under the Retail Trade Nationalization Law (R.A. 1180), "No association,
partnership, or corporation the capital of which is not wholly owned by citizens of the Philippines,
shall engage directly or indirectly in the retail business."

Notably, the foregoing Opinion was rendered before the promulgation of the 1987 Constitution.
Thus, it must be assumed that the framers of the Constitution were aware of the administrative
interpretation of the word "capital" and that they also adhered to the same interpretation when they
re-adopted it in the 1987 Constitution from the 1935 and 1973 Constitutions. As held in Laxamana v.
Baltazar, "[w]here a statute has received a contemporaneous and practical interpretation and the
statute as interpreted is re-enacted, the practical interpretation is accorded greater weight than it
ordinarily receives, and is regarded as presumptively the correct interpretation of the law. The rule
here is based upon the theory that the legislature is acquainted with the contemporaneous
interpretation of a statute, especially when made by an administrative body or executive officers
charged with the duty of administering or enforcing the law, and therefore impliedly adopts the
interpretation upon re-enactment."78

Without a doubt, the SEC’s definition of the word "capital" has been consistently applied to include
the entire outstanding capital stock of a corporation, irregardless of whether it is common or
preferred or voting or non-voting.

This contemporaneous construction of the SEC is entitled to great respect and weight especially
since it is consistent with the Constitutional Commission’s intention to use the term "capital" as
applying to all shares, whether common or preferred. It is well to reiterate the principle of
contemporaneous construction and the reason why it is entitled to great respect, viz:

x x x As far back as In re Allen, (2 Phil. 630) a 1903 decision, Justice McDonough, as ponente, cited
this excerpt from the leading American case of Pennoyer v. McConnaughy, decided in 1891: "The
principle that the contemporaneous construction of a statute by the executive officers of the
government, whose duty it is to execute it, is entitled to great respect, and should ordinarily control
the construction of the statute by the courts, is so firmly embedded in our jurisprudence that no
authorities need be cited to support it.’ (Ibid, 640. Pennoyer v. McConnaughly is cited in 140 US 1.
The excerpt is on p. 23 thereof. Cf. Government v. Municipality of Binalonan, 32 Phil, 634 [1915])
There was a paraphrase by Justice Malcolm of such a pronouncement in Molina v. Rafferty, (37 Phil.
545) a 1918 decision:" Courts will and should respect the contemporaneous construction placed
upon a statute by the executive officers whose duty it is to enforce it, and unless such interpretation
is clearly erroneous will ordinarily be controlled thereby. (Ibid, 555) Since then, such a doctrine has
been reiterated in numerous decisions.79(Emphasis supplied.)

Similarly, the Corporation Code defines "outstanding capital stock" as the "total shares of stock
issued."80 It does not distinguish between common and preferred shares. It includes all types of
shares.

Since foreigners hold 64.27% of to the total number of PLDT’s common shares which are entitled to
select the Board of Directors, the ponencia claims foreigners will elect the majority of the Board of
Director in PLDT and, hence, have control over the company.

This is incorrect.

First of all, it has been established that the word "capital" in the phrase "corporation or associations
organized under the laws of the Philippines, at least sixty per centum of whose ‘capital’ is owned by
such citizens" under Sec. 11, Art. XII of the 1987 Constitution means both common or preferred
shares or voting or non-voting shares. This phrase is qualified by the last sentence of Sec. 11, which
reads:

x x x x The participation of foreign investors in the governing body of any public utility enterprise
shall be limited to their proportionate share in its capital, and all the executive and managing officers
of such corporation or association must be citizens of the Philippines. (Emphasis supplied.)

The aforequoted constitutional provision is unequivocal––it limits the participation of the foreign
investors in the governing body to their proportionate share in the capital of the corporation.
Participation is "the act of taking part in something."81 Accordingly, it includes the right to elect or
vote for in the election of the members of the Board of Directors. However, this right to participate in
the election is restricted by the first sentence of Sec. 11 such that their right cannot exceed their
proportionate share in the capital, i.e., 40%. In other words, the right of foreign investors to elect the
members of the Board of Directors cannot exceed the voting rights of the 40% of the common
shares, even though their ownership of common shares may exceed 40%. Thus, since they can only
vote up to 40% of the common shares of the corporation, they will never be in a position to elect
majority of the members of the Board of Directors. Consequently, control over the membership of the
Board of Directors will always be in the hands of Filipino stockholders although they actually own
less than 50% of the common shares.

Let Us apply the foregoing principles to the situation of PLDT. Granting without admitting that
foreigners own 64.27% of PLDT’s common shares and say they own 40% of the total number of
common and preferred shares, still they can only vote up to 40% of the common shares of PLDT
since their participation in the election of the Board of Directors (the governing body of the
corporation) is limited by the 40% ownership of the capital under the first sentence of Sec. 11, Art.
XII of the Constitution. The foreigners can only elect members of the Board of Directors based on
their 40% ownership of the common shares and their directors will only constitute the minority. In no
instance can the foreigners obtain the majority seats in the Board of Directors.

Further, the 2010 General Information Sheet (GIS) of PLDT reveals that among the thirteen (13)
members of the Board of Directors, only two (2) are foreigners. It also reveals that the foreign
investors only own 13.71% of the capital of PLDT.82

Obviously, the nomination and election committee of PLDT uses the 40% cap on the foreign
ownership of the capital which explains why the foreigners only have two (2) members in the Board
of Directors. It is apparent that the 64.27% ownership by foreigners of the common shares cannot be
used to elect the majority of the Board of Directors. The fact that the proportionate share of the
foreigners in the capital (voting and non-voting shares or common and preferred shares) is even less
than 40%, then they are only entitled to voting rights equivalent to the said proportionate share in the
capital and in the process elect only a smaller number of directors. This is the reality in the instant
case. Hence, the majority control of Filipinos over the management of PLDT is, at all times, assured.

This intent to limit the participation of the foreign investors in the governing body of the corporation
was solidified in Commonwealth Act No. 108, otherwise known as the Anti-Dummy Law. Sec. 2-A of
the aforementioned law, as amended, provides in part:

x x x Provided, finally, that the election of aliens as members of the Board of Directors of governing
body of corporations or associations engaging in partially nationalized activity shall be allowed in
proportion to their allowable participation or share in the capital of such entities.

The view that the definition of the word "capital" is limited to common or voting shares alone would
certainly have the effect of removing the 60-40% nationality requirement on the non-voting shares.
This would then give rise to a situation wherein foreign interest would not really be limited to only
40% but may even extend beyond that because foreigners could also own the entire 100% of the
preferred or non-voting shares. As a result, Filipinos will no longer have effective ownership of the
corporate assets which may include lands. This is because the actual Filipino equity constitutes only
a minority of the entire outstanding capital stock. Therefore, the company would then be technically
owned by foreigners since the actual ownership of at least 60% of the entire outstanding capital
stock would be left to the hands of the foreigners. Allowing this to happen would violate and
circumvent the purpose for which the provision in the Constitution was created.83

This situation was the subject matter of the Opinion dated December 27, 1995 addressed to Mr.
George Lavidia where the SEC opined that for the computation of the required minimum 60%
Filipino ownership in a land owning corporation, both voting and preferred non-voting shares must
be included, to wit:
The [law] does not qualify whether the required ownership of "capital stock" are voting or non-voting.
Hence, it should be interpreted to mean the sum total of the capital stock subscribed, irrespective of
their nomenclature and whether or not they are voting or non-voting. The use of the phrase "capital
stock belongs" connotes that in order to comply with the Filipino nationality requirement for land
ownership, it is necessary that the criterion of "beneficial ownership" should be met, not merely the
control of the corporation.

To construe the 60-40% equity requirement is merely based on the voting shares, disregarding the
preferred non-voting shares, not on the total outstanding subscribed capital stock, would give rise to
a situation where the actual foreign interest would not really be only 40% but may extend beyond
that because they could also own even the entire preferred non-voting shares. In this situation,
Filipinos may have the control in the operation of the corporation by way of voting rights, but have no
effective ownership of the corporate assets which include lands, because the actual Filipino equity
constitutes only a minority of the entire outstanding capital stock. Therefore, in essence, the
company, although controlled by Filipinos, is beneficially owned by foreigners since the actual
ownership of at least 60% of the entire outstanding capital stocks would be in the hands of
foreigners. Allowing this situation would open the floodgates to circumvention of the intent of the law
to make the Filipinos the principal beneficiaries in the ownership of Philippine alienable lands.

xxxx

Thus, for purpose of "land ownership", non-voting preferred shares should be included in the
computation of the statutory 60-40% Filipino-alien equity requirement. To rule otherwise would result
in the emergence of foreign beneficial ownership of land, thereby defeating the purpose of the law.
On the other hand, to view the equity ratio as determined on the basis of the entire outstanding
capital stock would be to uphold the unequivocal purpose of the above-cited law of ensuring Filipino
rightful domination of land ownership. (Emphasis supplied.)

Clearly, applying the ponencia’s definition of the word "capital" will give rise to a greater anomaly
because it will result in the foreigner’s obtaining beneficial ownership over the corporation, which is
contrary to the provisions of the Constitution; whereas interpreting "capital" to include both voting
and non-voting shares will result in giving both legal and beneficial ownership of the corporation to
the Filipinos.

In the event that the word "capital" is construed as limited to common or voting shares only, it should
not have any retroactive effect. Reliance in good faith on the opinions issued by the SEC, the
regulating body in charged with the duty to enforce the nationality required by the Constitution,
should not prejudice any one, especially not the foreign investors. Giving such interpretation
retroactive effect is tantamount to violation of due process and would impact negatively on the
various foreign investments already present in the country. Accordingly, such construction should
only be applied prospectively.

In sum, the Constitution requires that 60% of the capital be owned by Filipinos. It further requires
that the foreign ownership of capital be limited to 40%, as well as its participation in the governing
body of the public utility corporation be limited to its proportionate share in the capital which cannot
exceed 40% thereof. As a result, control over the Board of Directors and full beneficial ownership of
60% of the capital stock of the corporation are secured in the hands of the Filipinos.

I, therefore, vote to DISMISS the petition.

PRESBITERO J. VELASCO, JR.

Associate Justice
G.R. Nos. 148263 and 148271-72 April 21, 2009

ARMANDO DAVID, Petitioner,

vs.
NATIONAL FEDERATION OF LABOR UNION and MARIVELES APPAREL
CORPORATION, Respondents.

DECISION

CARPIO, J.:

The Case

This is a petition for review on certiorari1 assailing the Joint Decision2 dated 29 February 2000 and
the Resolution3dated 27 March 2001 of the Court of Appeals (appellate court) in CA-G.R. SP Nos.
54404-06. The appellate court affirmed the Decision4 dated 17 June 1994 of Labor Arbiter Isabel
Panganiban-Ortiguerra (Arbiter Ortiguerra) in RAB-III-08-5198-93 where petitioner Armando David
(David) was held solidarily liable, along with Mariveles Apparel Corporation (MAC) and MAC
Chairman of the Board Antonio Carag (Carag), for money claims of the employees of MAC.

The Facts

The present case arose from the same circumstances as Antonio C. Carag v. National Labor
Relations Commission, et al.5

MAC hired David as IMPEX and Treasury Manager on 16 September 1988. David began serving as
MAC’s President in May 1990. David served as President in the nature of a nominee as he did not
own any of MAC’s shares. David tendered his irrevocable resignation from MAC on 30 September
1993. David’s resignation was made effective on 15 October 1993.

In a complaint for illegal dismissal dated 12 August 1993, National Federation of Labor Unions
(NAFLU) and Mariveles Apparel Corporation Labor Union (MACLU) alleged that MAC ceased
operations on 8 July 1993 without prior notice to its employees. MAC allegedly gave notice of its
closure on the same day that it ceased operations. MACLU and NAFLU further alleged that, at the
time of MAC’s closure, employees who had rendered one to two weeks work were not paid their
corresponding salaries.

Arbiter Ortiguerra immediately summoned the parties for settlement of the case. However, MAC
failed to appear before Arbiter Ortiguerra. MAC’s non-appearance compelled Arbiter Ortiguerra to
declare the case submitted for resolution based on the pleadings.

On 3 January 1994, MACLU and NAFLU filed their position paper wherein MACLU and NAFLU also
moved to implead Carag and David to guarantee satisfaction of any judgment award in MACLU and
NAFLU’s favor.

Atty. Joshua Pastores, as MAC’s counsel, submitted a position paper dated 21 February 1994 and
argued that Carag and David should not be held liable because MAC is owned by a consortium of
banks. Carag’s and David’s ownership of MAC shares only served to qualify them to serve as
officers in MAC.

The Ruling of the Labor Arbiter

Arbiter Ortiguerra proceeded to render her Decision on 17 June 1994 without further proceedings or
submissions from the parties. Arbiter Ortiguerra granted MACLU and NAFLU’s motion to implead
Carag and David, as well as declared Carag and David solidarily liable with MAC to complainants.
Pertinent portions of Arbiter Ortiguerra’s decision are quoted below:

The complainants claim that Atty. Antonio Carag and Mr. Armando David should be held jointly and
severally liable with respondent corporation [MAC]. This bid is premised on the belief that the
impleader of the aforesaid officers will guarantee payment of whatever may be adjudged in
complainants’ favor by virtue of this case. It is a basic principle in law that corporations have
personality [sic] distinct and separate from the stockholders. This concept is known as corporate
fiction. Normally, officers acting for and in behalf of a corporation are not held personally liable for
the obligation of the corporation. In instances where corporate officers dismissed employees in bad
faith or wantonly violate labor standard laws or when the company had already ceased operations
and there is no way by which a judgment in favor of employees could be satisfied, corporate officers
can be held jointly and severally liable with the company. This Office after a careful consideration of
the factual backdrop of the case is inclined to grant complainants’ prayer for the impleader of Atty.
Antonio Carag and Mr. Armando David, to assure that valid claims of employees would not be
defeated by the closure of [MAC].

xxxx

WHEREFORE, premises considered, judgment is hereby rendered declaring respondents jointly and
severally guilty of illegal closure and they are hereby ordered as follows:

1. To pay complainants’ separation pay computed on the basis of one (1) month for every
year of service, a fraction of six (6) months to be considered as one (1) year in the total
amount of ₱49,101,621.00; and

2. To pay complainants attorney’s fees in an amount equivalent to 10% of the judgment

award.

The claims for moral, actual and exemplary damages are dismissed for lack of evidence.

SO ORDERED.6

David claimed that he was not notified of Arbiter Ortiguerra’s decision. David alleged that it was only
during a chance encounter with Carag that he learned of Arbiter Ortiguerra’s decision against him.
Neither did David know that MAC filed an appeal on his behalf before the NLRC.

David then filed a petition for certiorari under Rule 65, docketed as G.R. No. 118880, before this
Court. We also consolidated David’s petition with that of MACLU and NAFLU (G.R. No. 118880) and
of MAC and Carag (G.R. No. 118820). On 12 July 1999, after all the parties had filed their
memoranda, we referred the consolidated cases to the appellate court in accordance with our
decision in St. Martin Funeral Home v. NLRC.7 MAC, Carag, and David filed separate petitions
before the appellate court.

David asked the appellate court to rule on whether the labor arbiter acquired jurisdiction over his
person. David emphasized that he was impleaded as a party respondent not in a separate order
prior to the promulgation of the decision, but in the decision itself. David also questioned his solidary
liability with his co-respondents.
 The Ruling of the Appellate Court

In its Joint Decision dated 29 February 2000, the appellate court affirmed the decision of Arbiter
Ortiguerra and the resolution of the NLRC. The appellate court stated that "petitioner DAVID cannot
just evade his liability by the simple expedien[ce] of alleging that he had not affirmed nor adopted the
position paper filed by petitioner MAC."8 David’s resignation from MAC took place only on 15
October 1993, long after MAC’s closure took place. According to the appellate court, this meant that
David willfully and knowingly assented to the unlawful closure of the company without any notice to
the employees. David was thus solidarily liable, along with MAC and Carag, for the unpaid wages of
MAC’s employees.

The dispositive portion of the appellate court’s decision reads as follows:

IN VIEW WHEREOF, the petitions are DISMISSED. The decision of Labor Arbiter Isabel
Panganiban-Ortiguerra dated June 17, 1994, and the Resolution dated January 5, 1995, issued by
the National Labor Relations Commission are hereby AFFIRMED. As a consequence of dismissal,
the temporary restraining order issued on March 2, 1995, by the Third Division of the Supreme Court
is LIFTED. Costs against petitioners.

SO ORDERED.9

The appellate court denied David’s motion for reconsideration in a Resolution promulgated on 27
March 2001.

The Issues

David raises the following issues before this Court:

1. Whether or not in finding petitioner guilty of illegal closure and making him personally
liable for payment of private respondent’s claims, petitioner had been afforded due process
of law as guaranteed by the 1987 Constitution?

2. Whether or not the Labor Court has acquired jurisdiction over the person of petitioner by
ordering him to be impleaded as a party respondent in the course of the proceedings not
through a separate order prior to the promulgation of its decision, but through the decision
itself, under which, petitioner was adjudged to be jointly and severally liable to pay the
monetary award with the original respondent?

3. Whether or not the Labor Arbiter has acted with grave abuse of discretion in adjudging
petitioner to be jointly and severally liable with his co-respondents on the sole ground that
the valid claims of the employees should not be defeated by the closure of the corporation?10

The Ruling of the Court

The petition has merit. The issues raised by David can be limited to denial of due process and the
propriety of David’s solidary liability.

Denial of Due Process

The proceedings before the Labor Arbiter deprived David of due process. MACLU and NAFLU filed
their complaint against MAC on 12 August 1993. Arbiter Ortiguerra’s decision shows that MACLU,
NAFLU, and MAC were the only parties summoned to a conference for a possible settlement.
Because of MAC’s failure to appear, Arbiter Ortiguerra deemed the case submitted for resolution.
David’s resignation from MAC took effect on 15 October 1993. NAFLU and MACLU moved to
implead Carag and David for the first time only in their position paper dated 3 January 1994. David
did not receive any summons and had no knowledge of the decision against him. The records of the
present case fail to show any order from Arbiter Ortiguerra summoning David to attend the
preliminary conference. Despite this lack of summons, in her Decision dated 17 June 1994, Arbiter
Ortiguerra not only granted MACLU and NAFLU’s motion to implead Carag and David, she also held
Carag and David solidarily liable with MAC.

Arbiter Ortiguerra’s zeal to rule in favor of MACLU and NAFLU should have been tempered by
observance of due process. Like Carag, David was "not issued summons, not accorded a
conciliatory conference, not ordered to submit a position paper, not accorded a hearing, not given an
opportunity to present his evidence, and not notified that the case was submitted for
resolution."11 Unlike Carag, David did not even know that Arbiter Ortiguerra issued a decision against
him. David was not even able to file an appeal before the NLRC. David’s participation in the present
case, albeit belated, questioned his inclusion in the decisions of the tribunals below. David’s
protestations are not without basis, as can be seen from Sections 2,12 3,13 4,14 5(b),15 and 11(c)16 of
Rule V of the New Rules of Procedure of the NLRC.17

The records of the case show that NAFLU and MACLU moved to implead Carag and David for the
first time only in their position paper dated 3 January 1994. Arbiter Ortiguerra’s decision shows that
MACLU, NAFLU, and MAC were the only parties summoned to a conference for a possible
settlement. Therefore, at the time of the conference, David was not yet a party to the case. The
position paper subsequently filed by MAC was filed at a time when David had already resigned from
MAC. David’s knowledge of a labor case against MAC did not serve the same purpose as a
summons. David did not receive any summons and had no knowledge of the decision against him.

The Labor Arbiter and the NLRC did not have jurisdiction over David. This utter lack of jurisdiction
voids any liability of David for any monetary award or judgment in favor of MACLU and NAFLU.

Corporate President’s Solidary Liability

Assuming arguendo that the NLRC and the Labor Arbiter had jurisdiction over David, we rule that it
was still improper to hold David liable for MAC’s obligations to its employees.

Arbiter Ortiguerra held David liable for MAC’s debts pursuant to Article 212(e) of the Labor Code,
which reads:

‘Employer’ includes any person acting in the interest of an employer, directly or indirectly. The term
shall not include any labor organization or any of its officers or agents except when acting as
employer. 1avvphi1

However, Article 212(e) of the Labor Code, by itself, does not make a corporate officer personally
liable for the debts of the corporation because Section 31 of the Corporation Code is still the
governing law on personal liability of officers for the debts of the corporation. Section 31 of the
Corporation Code provides:

Liability of directors, trustees or officers. — Directors or trustees who willfully and knowingly vote for
or assent to patently unlawful acts of the corporation or who are guilty of gross negligence or bad
faith in directing the affairs of the corporation or acquire any personal or pecuniary interest in conflict
with their duty as such directors, or trustees shall be liable jointly and severally for all damages
resulting therefrom suffered by the corporation, its stockholders or members and other persons. x x x

There was no showing of David willingly and knowingly voting for or assenting to patently unlawful
acts of the corporation, or that David was guilty of gross negligence or bad faith.

WHEREFORE, we GRANT the petition. We SET ASIDE the Joint Decision dated 29 February 2000
and the Resolution dated 27 March 2001 of the Court of Appeals in CA-G.R. SP Nos. 54404-06.

SO ORDERED.
G.R. No. 121413 January 29, 2001

PHILIPPINE COMMERCIAL INTERNATIONAL BANK (formerly INSULAR BANK OF ASIA AND

AMERICA),petitioner,
vs.
COURT OF APPEALS and FORD PHILIPPINES, INC. and CITIBANK, N.A., respondents.

G.R. No. 121479 January 29, 2001

FORD PHILIPPINES, INC., petitioner-plaintiff,

vs.
COURT OF APPEALS and CITIBANK, N.A. and PHILIPPINE COMMERCIAL INTERNATIONAL
BANK, respondents.

G.R. No. 128604 January 29, 2001

FORD PHILIPPINES, INC., petitioner,

vs.
CITIBANK, N.A., PHILIPPINE COMMERCIAL INTERNATIONAL BANK and COURT OF
APPEALS, respondents.

QUISUMBING, J.:

These consolidated petitions involve several fraudulently negotiated checks.

The original actions a quo were instituted by Ford Philippines to recover from the drawee bank,
CITIBANK, N.A. (Citibank) and collecting bank, Philippine Commercial International Bank (PCIBank)
[formerly Insular Bank of Asia and America], the value of several checks payable to the
Commissioner of Internal Revenue, which were embezzled allegedly by an organized syndicate. 1âwphi1.nêt

G.R. Nos. 121413 and 121479 are twin petitions for review of the March 27, 1995 Decision1 of the
Court of Appeals in CA-G.R. CV No. 25017, entitled "Ford Philippines, Inc. vs. Citibank, N.A. and
Insular Bank of Asia and America (now Philipppine Commercial International Bank), and the August
8, 1995 Resolution,2 ordering the collecting bank, Philippine Commercial International Bank, to pay
the amount of Citibank Check No. SN-04867.

In G.R. No. 128604, petitioner Ford Philippines assails the October 15, 1996 Decision3 of the Court
of Appeals and its March 5, 1997 Resolution4 in CA-G.R. No. 28430 entitled "Ford Philippines, Inc.
vs. Citibank, N.A. and Philippine Commercial International Bank," affirming in toto the judgment of
the trial court holding the defendant drawee bank, Citibank, N.A., solely liable to pay the amount of
P12,163,298.10 as damages for the misapplied proceeds of the plaintiff's Citibanl Check Numbers
SN-10597 and 16508.

I. G.R. Nos. 121413 and 121479

The stipulated facts submitted by the parties as accepted by the Court of Appeals are as follows:
"On October 19, 1977, the plaintiff Ford drew and issued its Citibank Check No. SN-04867 in
the amount of P4,746,114.41, in favor of the Commissioner of Internal Revenue as payment
of plaintiff;s percentage or manufacturer's sales taxes for the third quarter of 1977.

The aforesaid check was deposited with the degendant IBAA (now PCIBank) and was
subsequently cleared at the Central Bank. Upon presentment with the defendant Citibank,
the proceeds of the check was paid to IBAA as collecting or depository bank.

The proceeds of the same Citibank check of the plaintiff was never paid to or received by the
payee thereof, the Commissioner of Internal Revenue.

As a consequence, upon demand of the Bureau and/or Commissioner of Internal Revenue,

the plaintiff was compelled to make a second payment to the Bureau of Internal Revenue of
its percentage/manufacturers' sales taxes for the third quarter of 1977 and that said second
payment of plaintiff in the amount of P4,746,114.41 was duly received by the Bureau of
Internal Revenue.

It is further admitted by defendant Citibank that during the time of the transactions in
question, plaintiff had been maintaining a checking account with defendant Citibank; that
Citibank Check No. SN-04867 which was drawn and issued by the plaintiff in favor of the
Commissioner of Internal Revenue was a crossed check in that, on its face were two parallel
lines and written in between said lines was the phrase "Payee's Account Only"; and that
defendant Citibank paid the full face value of the check in the amount of P4,746,114.41 to
the defendant IBAA.

It has been duly established that for the payment of plaintiff's percentage tax for the last
quarter of 1977, the Bureau of Internal Revenue issued Revenue Tax Receipt No. 18747002,
dated October 20, 1977, designating therein in Muntinlupa, Metro Manila, as the authorized
agent bank of Metrobanl, Alabang branch to receive the tax payment of the plaintiff.

On December 19, 1977, plaintiff's Citibank Check No. SN-04867, together with the Revenue
Tax Receipt No. 18747002, was deposited with defendant IBAA, through its Ermita Branch.
The latter accepted the check and sent it to the Central Clearing House for clearing on the
samd day, with the indorsement at the back "all prior indorsements and/or lack of
indorsements guaranteed." Thereafter, defendant IBAA presented the check for payment to
defendant Citibank on same date, December 19, 1977, and the latter paid the face value of
the check in the amount of P4,746,114.41. Consequently, the amount of P4,746,114.41 was
debited in plaintiff's account with the defendant Citibank and the check was returned to the
plaintiff.

Upon verification, plaintiff discovered that its Citibank Check No. SN-04867 in the amount of
P4,746,114.41 was not paid to the Commissioner of Internal Revenue. Hence, in separate
letters dated October 26, 1979, addressed to the defendants, the plaintiff notified the latter
that in case it will be re-assessed by the BIR for the payment of the taxes covered by the
said checks, then plaintiff shall hold the defendants liable for reimbursement of the face
value of the same. Both defendants denied liability and refused to pay.

In a letter dated February 28, 1980 by the Acting Commissioner of Internal Revenue
addressed to the plaintiff - supposed to be Exhibit "D", the latter was officially informed,
among others, that its check in the amount of P4, 746,114.41 was not paid to the
government or its authorized agent and instead encashed by unauthorized persons, hence,
plaintiff has to pay the said amount within fifteen days from receipt of the letter. Upon advice
 of the plaintiff's lawyers, plaintiff on March 11, 1982, paid to the Bureau of Internal Revenue,
the amount of P4,746,114.41, representing payment of plaintiff's percentage tax for the third
quarter of 1977.

As a consequence of defendant's refusal to reimburse plaintiff of the payment it had made

for the second time to the BIR of its percentage taxes, plaintiff filed on January 20, 1983 its
original complaint before this Court.

On December 24, 1985, defendant IBAA was merged with the Philippine Commercial
International Bank (PCI Bank) with the latter as the surviving entity.

Defendant Citibank maintains that; the payment it made of plaintiff's Citibank Check No. SN-
04867 in the amount of P4,746,114.41 "was in due course"; it merely relied on the clearing
stamp of the depository/collecting bank, the defendant IBAA that "all prior indorsements
and/or lack of indorsements guaranteed"; and the proximate cause of plaintiff's injury is the
gross negligence of defendant IBAA in indorsing the plaintiff's Citibank check in question.

It is admitted that on December 19, 1977 when the proceeds of plaintiff's Citibank Check No.
SN-048867 was paid to defendant IBAA as collecting bank, plaintiff was maintaining a
checking account with defendant Citibank."5

Although it was not among the stipulated facts, an investigation by the National Bureau of
Investigation (NBI) revealed that Citibank Check No. SN-04867 was recalled by Godofredo Rivera,
the General Ledger Accountant of Ford. He purportedly needed to hold back the check because
there was an error in the computation of the tax due to the Bureau of Internal Revenue (BIR). With
Rivera's instruction, PCIBank replaced the check with two of its own Manager's Checks (MCs).
Alleged members of a syndicate later deposited the two MCs with the Pacific Banking Corporation.

Ford, with leave of court, filed a third-party complaint before the trial court impleading Pacific
Banking Corporation (PBC) and Godofredo Rivera, as third party defendants. But the court
dismissed the complaint against PBC for lack of cause of action. The course likewise dismissed the
third-party complaint against Godofredo Rivera because he could not be served with summons as
the NBI declared him as a "fugitive from justice".

On June 15, 1989, the trial court rendered its decision, as follows:

"Premises considered, judgment is hereby rendered as follows:

"1. Ordering the defendants Citibank and IBAA (now PCI Bank), jointly and severally,
to pay the plaintiff the amount of P4,746,114.41 representing the face value of
plaintiff's Citibank Check No. SN-04867, with interest thereon at the legal rate
starting January 20, 1983, the date when the original complaint was filed until the
amount is fully paid, plus costs;

"2. On defendant Citibank's cross-claim: ordering the cross-defendant IBAA (now

PCI Bank) to reimburse defendant Citibank for whatever amount the latter has paid
or may pay to the plaintiff in accordance with next preceding paragraph;

"3. The counterclaims asserted by the defendants against the plaintiff, as well as that
asserted by the cross-defendant against the cross-claimant are dismissed, for lack of
merits; and
 "4. With costs against the defendants.

SO ORDERED."6

Not satisfied with the said decision, both defendants, Citibank and PCIBank, elevated their
respective petitions for review on certiorari to the Courts of Appeals. On March 27, 1995, the
appellate court issued its judgment as follows:

"WHEREFORE, in view of the foregoing, the court AFFIRMS the appealed decision with
modifications.

The court hereby renderes judgment:

1. Dismissing the complaint in Civil Case No. 49287 insofar as defendant Citibank
N.A. is concerned;

2. Ordering the defendant IBAA now PCI Bank to pay the plaintiff the amount of
P4,746,114.41 representing the face value of plaintiff's Citibank Check No. SN-
04867, with interest thereon at the legal rate starting January 20, 1983, the date
when the original complaint was filed until the amount is fully paid;

3. Dismissing the counterclaims asserted by the defendants against the plaintiff as

well as that asserted by the cross-defendant against the cross-claimant, for lack of
merits.

Costs against the defendant IBAA (now PCI Bank).

IT IS SO ORDERED."7

PCI Bank moved to reconsider the above-quoted decision of the Court of Appeals, while Ford filed a
"Motion for Partial Reconsideration." Both motions were denied for lack of merit.

Separately, PCIBank and Ford filed before this Court, petitions for review by certiorari under Rule
45.

In G.R. No. 121413, PCIBank seeks the reversal of the decision and resolution of the Twelfth
Division of the Court of Appeals contending that it merely acted on the instruction of Ford and such
casue of action had already prescribed.

PCIBank sets forth the following issues for consideration:

I. Did the respondent court err when, after finding that the petitioner acted on the check
drawn by respondent Ford on the said respondent's instructions, it nevertheless found the
petitioner liable to the said respondent for the full amount of the said check.

II. Did the respondent court err when it did not find prescription in favor of the petitioner.8

In a counter move, Ford filed its petition docketed as G.R. No. 121479, questioning the same
decision and resolution of the Court of Appeals, and praying for the reinstatement in toto of the
decision of the trial court which found both PCIBank and Citibank jointly and severally liable for the
loss.
In G.R. No. 121479, appellant Ford presents the following propositions for consideration:

I. Respondent Citibank is liable to petitioner Ford considering that:

1. As drawee bank, respondent Citibank owes to petitioner Ford, as the drawer of the
subject check and a depositor of respondent Citibank, an absolute and contractual
duty to pay the proceeds of the subject check only to the payee thereof, the
Commissioner of Internal Revenue.

2. Respondent Citibank failed to observe its duty as banker with respect to the
subject check, which was crossed and payable to "Payee's Account Only."

3. Respondent Citibank raises an issue for the first time on appeal; thus the same
should not be considered by the Honorable Court.

4. As correctly held by the trial court, there is no evidence of gross negligence on the
part of petitioner Ford.9

II. PCI Bank is liable to petitioner Ford considering that:

1. There were no instructions from petitioner Ford to deliver the proceeds of the
subject check to a person other than the payee named therein, the Commissioner of
the Bureau of Internal Revenue; thus, PCIBank's only obligation is to deliver the
proceeds to the Commissioner of the Bureau of Internal Revenue.10

2. PCIBank which affixed its indorsement on the subject check ("All prior indorsement
and/or lack of indorsement guaranteed"), is liable as collecting bank.11

3. PCIBank is barred from raising issues of fact in the instant proceedings.12

4. Petitioner Ford's cause of action had not prescribed.13

II. G.R. No. 128604

The same sysndicate apparently embezzled the proceeds of checks intended, this time, to settle
Ford's percentage taxes appertaining to the second quarter of 1978 and the first quarter of 1979.

The facts as narrated by the Court of Appeals are as follows:

Ford drew Citibank Check No. SN-10597 on July 19, 1978 in the amount of P5,851,706.37
representing the percentage tax due for the second quarter of 1978 payable to the Commissioner of
Internal Revenue. A BIR Revenue Tax Receipt No. 28645385 was issued for the said purpose.

On April 20, 1979, Ford drew another Citibank Check No. SN-16508 in the amount of
P6,311,591.73, representing the payment of percentage tax for the first quarter of 1979 and payable
to the Commissioner of Internal Revenue. Again a BIR Revenue Tax Receipt No. A-1697160 was
issued for the said purpose.

Both checks were "crossed checks" and contain two diagonal lines on its upper corner between,
which were written the words "payable to the payee's account only."
The checks never reached the payee, CIR. Thus, in a letter dated February 28, 1980, the BIR,
Region 4-B, demanded for the said tax payments the corresponding periods above-mentioned.

As far as the BIR is concernced, the said two BIR Revenue Tax Receipts were considered "fake and
spurious". This anomaly was confirmed by the NBI upon the initiative of the BIR. The findings forced
Ford to pay the BIR a new, while an action was filed against Citibank and PCIBank for the recovery
of the amount of Citibank Check Numbers SN-10597 and 16508.

The Regional Trial Court of Makati, Branch 57, which tried the case, made its findings on the modus
operandi of the syndicate, as follows:

"A certain Mr. Godofredo Rivera was employed by the plaintiff FORD as its General Ledger
Accountant. As such, he prepared the plaintiff's check marked Ex. 'A' [Citibank Check No.
Sn-10597] for payment to the BIR. Instead, however, fo delivering the same of the payee, he
passed on the check to a co-conspirator named Remberto Castro who was a pro-manager of
the San Andres Branch of PCIB.* In connivance with one Winston Dulay, Castro himself
subsequently opened a Checking Account in the name of a fictitious person denominated as
'Reynaldo reyes' in the Meralco Branch of PCIBank where Dulay works as Assistant
Manager.

After an initial deposit of P100.00 to validate the account, Castro deposited a worthless Bank
of America Check in exactly the same amount as the first FORD check (Exh. "A",
P5,851,706.37) while this worthless check was coursed through PCIB's main office enroute
to the Central Bank for clearing, replaced this worthless check with FORD's Exhibit 'A' and
accordingly tampered the accompanying documents to cover the replacement. As a result,
Exhibit 'A' was cleared by defendant CITIBANK, and the fictitious deposit account of
'Reynaldo Reyes' was credited at the PCIB Meralco Branch with the total amount of the
FORD check Exhibit 'A'. The same method was again utilized by the syndicate in profiting
from Exh. 'B' [Citibank Check No. SN-16508] which was subsequently pilfered by Alexis
Marindo, Rivera's Assistant at FORD.

From this 'Reynaldo Reyes' account, Castro drew various checks distributing the sahres of
the other participating conspirators namely (1) CRISANTO BERNABE, the mastermind who
formulated the method for the embezzlement; (2) RODOLFO R. DE LEON a customs broker
who negotiated the initial contact between Bernabe, FORD's Godofredo Rivera and PCIB's
Remberto Castro; (3) JUAN VASTILLO who assisted de Leon in the initial arrangements; (4)
GODOFREDO RIVERA, FORD's accountant who passed on the first check (Exhibit "A") to
Castro; (5) REMERTO CASTRO, PCIB's pro-manager at San Andres who performed the
switching of checks in the clearing process and opened the fictitious Reynaldo Reyes
account at the PCIB Meralco Branch; (6) WINSTON DULAY, PCIB's Assistant Manager at its
Meralco Branch, who assisted Castro in switching the checks in the clearing process and
facilitated the opening of the fictitious Reynaldo Reyes' bank account; (7) ALEXIS
MARINDO, Rivera's Assistant at FORD, who gave the second check (Exh. "B") to Castro; (8)
ELEUTERIO JIMENEZ, BIR Collection Agent who provided the fake and spurious revenue
tax receipts to make it appear that the BIR had received FORD's tax payments.

Several other persons and entities were utilized by the syndicate as conduits in the
disbursements of the proceeds of the two checks, but like the aforementioned participants in
the conspiracy, have not been impleaded in the present case. The manner by which the said
funds were distributed among them are traceable from the record of checks drawn against
the original "Reynaldo Reyes" account and indubitably identify the parties who illegally
benefited therefrom and readily indicate in what amounts they did so."14
On December 9, 1988, Regional Trial Court of Makati, Branch 57, held drawee-bank, Citibank, liable
for the value of the two checks while adsolving PCIBank from any liability, disposing as follows:

"WHEREFORE, judgment is hereby rendered sentencing defendant CITIBANK to reimburse

plaintiff FORD the total amount of P12,163,298.10 prayed for in its complaint, with 6%
interest thereon from date of first written demand until full payment, plus P300,000.00
attorney's fees and expenses litigation, and to pay the defendant, PCIB (on its counterclaim
to crossclaim) the sum of P300,000.00 as attorney's fees and costs of litigation, and pay the
costs.

SO ORDERED."15

Both Ford and Citibank appealed to the Court of Appeals which affirmed, in toto, the decision of the
trial court. Hence, this petition.

Petitioner Ford prays that judgment be rendered setting aside the portion of the Court of Appeals
decision and its resolution dated March 5, 1997, with respect to the dismissal of the complaint
against PCIBank and holding Citibank solely responsible for the proceeds of Citibank Check
Numbers SN-10597 and 16508 for P5,851,706.73 and P6,311,591.73 respectively.

Ford avers that the Court of Appeals erred in dismissing the complaint against defendant PCIBank
considering that:

I. Defendant PCIBank was clearly negligent when it failed to exercise the diligence required
to be exercised by it as a banking insitution.

II. Defendant PCIBank clearly failed to observe the diligence required in the selection and
supervision of its officers and employees.

III. Defendant PCIBank was, due to its negligence, clearly liable for the loss or damage
resulting to the plaintiff Ford as a consequence of the substitution of the check consistent
with Section 5 of Central Bank Circular No. 580 series of 1977.

IV. Assuming arguedo that defedant PCIBank did not accept, endorse or negotiate in due
course the subject checks, it is liable, under Article 2154 of the Civil Code, to return the
money which it admits having received, and which was credited to it its Central bank
account.16

The main issue presented for our consideration by these petitions could be simplified as follows: Has
petitioner Ford the right to recover from the collecting bank (PCIBank) and the drawee bank
(Citibank) the value of the checks intended as payment to the Commissioner of Internal Revenue?
Or has Ford's cause of action already prescribed?

Note that in these cases, the checks were drawn against the drawee bank, but the title of the person
negotiating the same was allegedly defective because the instrument was obtained by fraud and
unlawful means, and the proceeds of the checks were not remitted to the payee. It was established
that instead of paying the checks to the CIR, for the settlement of the approprite quarterly
percentage taxes of Ford, the checks were diverted and encashed for the eventual distribution
among the mmbers of the syndicate. As to the unlawful negotiation of the check the applicable law is
Section 55 of the Negotiable Instruments Law (NIL), which provides:
 "When title defective -- The title of a person who negotiates an instrument is defective within
the meaning of this Act when he obtained the instrument, or any signature thereto, by fraud,
duress, or fore and fear, or other unlawful means, or for an illegal consideration, or when he
negotiates it in breach of faith or under such circumstances as amount to a fraud."

Pursuant to this provision, it is vital to show that the negotiation is made by the perpetator in breach
of faith amounting to fraud. The person negotiating the checks must have gone beyond the authority
given by his principal. If the principal could prove that there was no negligence in the performance of
his duties, he may set up the personal defense to escape liability and recover from other parties
who. Though their own negligence, alowed the commission of the crime.

In this case, we note that the direct perpetrators of the offense, namely the embezzlers belonging to
a syndicate, are now fugitives from justice. They have, even if temporarily, escaped liability for the
embezzlement of millions of pesos. We are thus left only with the task of determining who of the
present parties before us must bear the burden of loss of these millions. It all boils down to
thequestion of liability based on the degree of negligence among the parties concerned.

Foremost, we must resolve whether the injured party, Ford, is guilty of the "imputed contributory
negligence" that would defeat its claim for reimbursement, bearing ing mind that its employees,
Godofredo Rivera and Alexis Marindo, were among the members of the syndicate.

Citibank points out that Ford allowed its very own employee, Godofredo Rivera, to negotiate the
checks to his co-conspirators, instead of delivering them to the designated authorized collecting
bank (Metrobank-Alabang) of the payee, CIR. Citibank bewails the fact that Ford was remiss in the
supervision and control of its own employees, inasmuch as it only discovered the syndicate's
activities through the information given by the payee of the checks after an unreasonable period of
time.

PCIBank also blames Ford of negligence when it allegedly authorized Godofredo Rivera to divert the
proceeds of Citibank Check No. SN-04867, instead of using it to pay the BIR. As to the subsequent
run-around of unds of Citibank Check Nos. SN-10597 and 16508, PCIBank claims that the
proximate cause of the damge to Ford lies in its own officers and employees who carried out the
fradulent schemes and the transactions. These circumstances were not checked by other officers of
the company including its comptroller or internal auditor. PCIBank contends that the inaction of Ford
despite the enormity of the amount involved was a sheer negligence and stated that, as between two
innocent persons, one of whom must suffer the consequences of a breach of trust, the one who
made it possible, by his act of negligence, must bear the loss.

For its part, Ford denies any negligence in the performance of its duties. It avers that there was no
evidence presented before the trial court showing lack of diligence on the part of Ford. And, citing
the case of Gempesaw vs. Court of Appeals,17 Ford argues that even if there was a finding therein
that the drawer was negligent, the drawee bank was still ordered to pay damages.

Furthermore, Ford contends the Godofredo rivera was not authorized to make any representation in
its behalf, specifically, to divert the proceeds of the checks. It adds that Citibank raised the issue of
imputed negligence against Ford for the first time on appeal. Thus, it should not be considered by
this Court.

On this point, jurisprudence regarding the imputed negligence of employer in a master-servant

relationship is instructive. Since a master may be held for his servant's wrongful act, the law imputes
to the master the act of the servant, and if that act is negligent or wrongful and proximately results in
injury to a third person, the negligence or wrongful conduct is the negligence or wrongful conduct of
the master, for which he is liable.18 The general rule is that if the master is injured by the negligence
of a third person and by the concuring contributory negligence of his own servant or agent, the
latter's negligence is imputed to his superior and will defeat the superior's action against the third
person, asuming, of course that the contributory negligence was the proximate cause of the injury
of which complaint is made.19

Accordingly, we need to determine whether or not the action of Godofredo Rivera, Ford's General
Ledger Accountant, and/or Alexis Marindo, his assistant, was the proximate cause of the loss or
damage. AS defined, proximate cause is that which, in the natural and continuous sequence,
unbroken by any efficient, intervening cause produces the injury and without the result would not
have occurred.20

It appears that although the employees of Ford initiated the transactions attributable to an organized
syndicate, in our view, their actions were not the proximate cause of encashing the checks payable
to the CIR. The degree of Ford's negligence, if any, could not be characterized as the proximate
cause of the injury to the parties.

The Board of Directors of Ford, we note, did not confirm the request of Godofredo Rivera to recall
Citibank Check No. SN-04867. Rivera's instruction to replace the said check with PCIBank's
Manager's Check was not in theordinary course of business which could have prompted PCIBank to
validate the same.

As to the preparation of Citibank Checks Nos. SN-10597 and 16508, it was established that these
checks were made payable to the CIR. Both were crossed checks. These checks were apparently
turned around by Ford's emploees, who were acting on their own personal capacity.

Given these circumstances, the mere fact that the forgery was committed by a drawer-payor's
confidential employee or agent, who by virtue of his position had unusual facilities for perpertrating
the fraud and imposing the forged paper upon the bank, does notentitle the bank toshift the loss to
the drawer-payor, in the absence of some circumstance raising estoppel against the drawer.21 This
rule likewise applies to the checks fraudulently negotiated or diverted by the confidential employees
who hold them in their possession.

With respect to the negligence of PCIBank in the payment of the three checks involved, separately,
the trial courts found variations between the negotiation of Citibank Check No. SN-04867 and the
misapplication of total proceeds of Checks SN-10597 and 16508. Therefore, we have to scrutinize,
separately, PCIBank's share of negligence when the syndicate achieved its ultimate agenda of
stealing the proceeds of these checks.

G.R. Nos. 121413 and 121479

Citibank Check No. SN-04867 was deposited at PCIBank through its Ermita Branch. It was coursed
through the ordinary banking transaction, sent to Central Clearing with the indorsement at the back
"all prior indorsements and/or lack of indorsements guaranteed," and was presented to Citibank for
payment. Thereafter PCIBank, instead of remitting the proceeds to the CIR, prepared two of its
Manager's checks and enabled the syndicate to encash the same.

On record, PCIBank failed to verify the authority of Mr. Rivera to negotiate the checks. The neglect
of PCIBank employees to verify whether his letter requesting for the replacement of the Citibank
Check No. SN-04867 was duly authorized, showed lack of care and prudence required in the
circumstances.
Furthermore, it was admitted that PCIBank is authorized to collect the payment of taxpayers in
behalf of the BIR. As an agent of BIR, PCIBank is duty bound to consult its principal regarding the
unwarranted instructions given by the payor or its agent. As aptly stated by the trial court, to wit:

"xxx. Since the questioned crossed check was deposited with IBAA [now PCIBank], which
claimed to be a depository/collecting bank of BIR, it has the responsibility to make sure that
the check in question is deposited in Payee's account only.

xxx xxx xxx

As agent of the BIR (the payee of the check), defendant IBAA should receive instructions
only from its principal BIR and not from any other person especially so when that person is
not known to the defendant. It is very imprudent on the part of the defendant IBAA to just rely
on the alleged telephone call of the one Godofredo Rivera and in his signature considering
that the plaintiff is not a client of the defendant IBAA."

It is a well-settled rule that the relationship between the payee or holder of commercial paper and the
bank to which it is sent for collection is, in the absence of an argreement to the contrary, that of
principal and agent.22 A bank which receives such paper for collection is the agent of the payee or
holder.23

Even considering arguendo, that the diversion of the amount of a check payable to the collecting
bank in behalf of the designated payee may be allowed, still such diversion must be properly
authorized by the payor. Otherwise stated, the diversion can be justified only by proof of authority
from the drawer, or that the drawer has clothed his agent with apparent authority to receive the
proceeds of such check.

Citibank further argues that PCI Bank's clearing stamp appearing at the back of the questioned
checks stating that ALL PRIOR INDORSEMENTS AND/OR LACK OF INDORSEMENTS
GURANTEED should render PCIBank liable because it made it pass through the clearing house and
therefore Citibank had no other option but to pay it. Thus, Citibank had no other option but to pay it.
Thus, Citibank assets that the proximate cause of Ford's injury is the gross negligence of PCIBank.
Since the questione dcrossed check was deposited with PCIBank, which claimed to be a
depository/collecting bank of the BIR, it had the responsibility to make sure that the check in
questions is deposited in Payee's account only.

Indeed, the crossing of the check with the phrase "Payee's Account Only," is a warning that the
check should be deposited only in the account of the CIR. Thus, it is the duty of the collecting bank
PCIBank to ascertain that the check be deposited in payee's account only. Therefore, it is the
collecting bank (PCIBank) which is bound to scruninize the check and to know its depositors before
it could make the clearing indorsement "all prior indorsements and/or lack of indorsement
guaranteed".

In Banco de Oro Savings and Mortgage Bank vs. Equitable Banking Corporation,24 we ruled:

"Anent petitioner's liability on said instruments, this court is in full accord with the ruling of the
PCHC's Board of Directors that:

'In presenting the checks for clearing and for payment, the defendant made an express
guarantee on the validity of "all prior endorsements." Thus, stamped at the back of the
checks are the defedant's clear warranty: ALL PRIOR ENDORSEMENTS AND/OR LACK
 OF ENDORSEMENTS GUARANTEED. Without such warranty, plaintiff would not have paid
on the checks.'

No amount of legal jargon can reverse the clear meaning of defendant's warranty. As the
warranty has proven to be false and inaccurate, the defendant is liable for any damage
arising out of the falsity of its representation."25

Lastly, banking business requires that the one who first cashes and negotiates the check must take
some percautions to learn whether or not it is genuine. And if the one cashing the check through
indifference or othe circumstance assists the forger in committing the fraud, he should not be
permitted to retain the proceeds of the check from the drawee whose sole fault was that it did not
discover the forgery or the defect in the title of the person negotiating the instrument before paying
the check. For this reason, a bank which cashes a check drawn upon another bank, without
requiring proof as to the identity of persons presenting it, or making inquiries with regard to them,
cannot hold the proceeds against the drawee when the proceeds of the checks were afterwards
diverted to the hands of a third party. In such cases the drawee bank has a right to believe that the
cashing bank (or the collecting bank) had, by the usual proper investigation, satisfied itself of the
authenticity of the negotiation of the checks. Thus, one who encashed a check which had been
forged or diverted and in turn received payment thereon from the drawee, is guilty of negligence
which proximately contributed to the success of the fraud practiced on the drawee bank. The latter
may recover from the holder the money paid on the check.26

Having established that the collecting bank's negligence is the proximate cause of the loss, we
conclude that PCIBank is liable in the amount corresponding to the proceeds of Citibank Check No.
SN-04867.

G.R. No. 128604

The trial court and the Court of Appeals found that PCIBank had no official act in the ordinary course
of business that would attribute to it the case of the embezzlement of Citibank Check Numbers SN-
10597 and 16508, because PCIBank did not actually receive nor hold the two Ford checks at all.
The trial court held, thus:

"Neither is there any proof that defendant PCIBank contributed any official or conscious
participation in the process of the embezzlement. This Court is convinced that the switching
operation (involving the checks while in transit for "clearing") were the clandestine or hidden
actuations performed by the members of the syndicate in their own personl, covert and
private capacity and done without the knowledge of the defendant PCIBank…"27

In this case, there was no evidence presented confirming the conscious particiapation of PCIBank in
the embezzlement. As a general rule, however, a banking corporation is liable for the wrongful or
tortuous acts and declarations of its officers or agents within the course and scope of their
employment.28 A bank will be held liable for the negligence of its officers or agents when acting
within the course and scope of their employment. It may be liable for the tortuous acts of its officers
even as regards that species of tort of which malice is an essential element. In this case, we find a
situation where the PCIBank appears also to be the victim of the scheme hatched by a syndicate in
which its own management employees had particiapted.

The pro-manager of San Andres Branch of PCIBank, Remberto Castro, received Citibank Check
Numbers SN-10597 and 16508. He passed the checks to a co-conspirator, an Assistant Manager of
PCIBank's Meralco Branch, who helped Castro open a Checking account of a fictitious person
named "Reynaldo Reyes." Castro deposited a worthless Bank of America Check in exactly the same
amount of Ford checks. The syndicate tampered with the checks and succeeded in replacing the
worthless checks and the eventual encashment of Citibank Check Nos. SN 10597 and 16508. The
PCIBank Ptro-manager, Castro, and his co-conspirator Assistant Manager apparently performed
their activities using facilities in their official capacity or authority but for their personal and private
gain or benefit.

A bank holding out its officers and agents as worthy of confidence will not be permitted to profit by
the frauds these officers or agents were enabled to perpetrate in the apparent course of their
employment; nor will t be permitted to shirk its responsibility for such frauds, even though no benefit
may accrue to the bank therefrom. For the general rule is that a bank is liable for the fraudulent acts
or representations of an officer or agent acting within the course and apparent scope of his
employment or authority.29 And if an officer or employee of a bank, in his official capacity, receives
money to satisfy an evidence of indebetedness lodged with his bank for collection, the bank is liable
for his misappropriation of such sum.30

Moreover, as correctly pointed out by Ford, Section 531 of Central Bank Circular No. 580, Series of
1977 provides that any theft affecting items in transit for clearing, shall be for the account of sending
bank, which in this case is PCIBank.

But in this case, responsibility for negligence does not lie on PCIBank's shoulders alone.

The evidence on record shows that Citibank as drawee bank was likewise negligent in the
performance of its duties. Citibank failed to establish that its payment of Ford's checjs were made in
due course and legally in order. In its defense, Citibank claims the genuineness and due execution
of said checks, considering that Citibank (1) has no knowledge of any informity in the issuance of the
checks in question (2) coupled by the fact that said checks were sufficiently funded and (3) the
endorsement of the Payee or lack thereof was guaranteed by PCI Bank (formerly IBAA), thus, it has
the obligation to honor and pay the same.

For its part, Ford contends that Citibank as the drawee bank owes to Ford an absolute and
contractual duty to pay the proceeds of the subject check only to the payee thereof, the CIR. Citing
Section 6232 of the Negotiable Instruments Law, Ford argues that by accepting the instrument, the
acceptro which is Citibank engages that it will pay according to the tenor of its acceptance, and that
it will pay only to the payee, (the CIR), considering the fact that here the check was crossed with
annotation "Payees Account Only."

As ruled by the Court of Appeals, Citibank must likewise answer for the damages incurred by Ford
on Citibank Checks Numbers SN 10597 and 16508, because of the contractual relationship existing
between the two. Citibank, as the drawee bank breached its contractual obligation with Ford and
such degree of culpability contributed to the damage caused to the latter. On this score, we agree
with the respondent court's ruling.

Citibank should have scrutinized Citibank Check Numbers SN 10597 and 16508 before paying the
amount of the proceeds thereof to the collecting bank of the BIR. One thing is clear from the record:
the clearing stamps at the back of Citibank Check Nos. SN 10597 and 16508 do not bear any
initials. Citibank failed to notice and verify the absence of the clearing stamps. Had this been duly
examined, the switching of the worthless checks to Citibank Check Nos. 10597 and 16508 would
have been discovered in time. For this reason, Citibank had indeed failed to perform what was
incumbent upon it, which is to ensure that the amount of the checks should be paid only to its
designated payee. The fact that the drawee bank did not discover the irregularity seasonably, in our
view, consitutes negligence in carrying out the bank's duty to its depositors. The point is that as a
business affected with public interest and because of the nature of its functions, the bank is under
obligation to treat the accounts of its depositors with meticulous care, always having in mind the
fiduciary nature of their relationship.33

Thus, invoking the doctrine of comparative negligence, we are of the view that both PCIBank and
Citibank failed in their respective obligations and both were negligent in the selection and
supervision of their employees resulting in the encashment of Citibank Check Nos. SN 10597 AND
16508. Thus, we are constrained to hold them equally liable for the loss of the proceeds of said
checks issued by Ford in favor of the CIR.

Time and again, we have stressed that banking business is so impressed with public interest where
the trust and confidence of the public in general is of paramount umportance such that the
appropriate standard of diligence must be very high, if not the highest, degree of diligence.34 A
bank's liability as obligor is not merely vicarious but primary, wherein the defense of exercise of due
diligence in the selection and supervision of its employees is of no moment.35

Banks handle daily transactions involving millions of pesos.36 By the very nature of their work the
degree of responsibility, care and trustworthiness expected of their employees and officials is far
greater than those of ordinary clerks and employees.37 Banks are expected to exercise the highest
degree of diligence in the selection and supervision of their employees.38

On the issue of prescription, PCIBank claims that the action of Ford had prescribed because of its
inability to seek judicial relief seasonably, considering that the alleged negligent act took place prior
to December 19, 1977 but the relief was sought only in 1983, or seven years thereafter.

The statute of limitations begins to run when the bank gives the depositor notice of the payment,
which is ordinarily when the check is returned to the alleged drawer as a voucher with a statement of
his account,39 and an action upon a check is ordinarily governed by the statutory period applicable to
instruments in writing.40

Our laws on the matter provide that the action upon a written contract must be brought within ten
year from the time the right of action accrues.41 hence, the reckoning time for the prescriptive period
begins when the instrument was issued and the corresponding check was returned by the bank to its
depositor (normally a month thereafter). Applying the same rule, the cause of action for the recovery
of the proceeds of Citibank Check No. SN 04867 would normally be a month after December 19,
1977, when Citibank paid the face value of the check in the amount of P4,746,114.41. Since the
original complaint for the cause of action was filed on January 20, 1984, barely six years had lapsed.
Thus, we conclude that Ford's cause of action to recover the amount of Citibank Check No. SN
04867 was seasonably filed within the period provided by law.

Finally, we also find thet Ford is not completely blameless in its failure to detect the fraud. Failure on
the part of the depositor to examine its passbook, statements of account, and cancelled checks and
to give notice within a reasonable time (or as required by statute) of any discrepancy which it may in
the exercise of due care and diligence find therein, serves to mitigate the banks' liability by reducing
the award of interest from twelve percent (12%) to six percent (6%) per annum. As provided in
Article 1172 of the Civil Code of the Philippines, respondibility arising from negligence in the
performance of every kind of obligation is also demandable, but such liability may be regulated by
the courts, according to the circumstances. In quasi-delicts, the contributory negligence of the
plaintiff shall reduce the damages that he may recover.42

WHEREFORE, the assailed Decision and Resolution of the Court of Appeals in CA-G.R. CV No.
25017 are AFFIRMED. PCIBank, know formerly as Insular Bank of Asia and America, id declared
solely responsible for the loss of the proceeds of Citibank Check No SN 04867 in the amount
P4,746,114.41, which shall be paid together with six percent (6%) interest thereon to Ford
Philippines Inc. from the date when the original complaint was filed until said amount is fully paid.

However, the Decision and Resolution of the Court of Appeals in CA-G.R. No. 28430
are MODIFIED as follows: PCIBank and Citibank are adjudged liable for and must share the loss,
(concerning the proceeds of Citibank Check Numbers SN 10597 and 16508 totalling
P12,163,298.10) on a fifty-fifty ratio, and each bank is ORDERED to pay Ford Philippines Inc.
P6,081,649.05, with six percent (6%) interest thereon, from the date the complaint was filed until full
payment of said amount. 1âwphi1.nêt

Costs against Philippine Commercial International Bank and Citibank N.A.

SO ORDERED.
 G.R. No. 128690 January 21, 1999

ABS-CBN BROADCASTING CORPORATION, petitioner,

vs.
HONORABLE COURT OF APPEALS, REPUBLIC BROADCASTING CORP, VIVA PRODUCTION,
INC., and VICENTE DEL ROSARIO, respondents.

DAVIDE, JR., CJ.:

In this petition for review on certiorari, petitioner ABS-CBN Broadcasting Corp. (hereafter ABS-CBN)
seeks to reverse and set aside the decision 1 of 31 October 1996 and the resolution 2 of 10 March
1997 of the Court of Appeals in CA-G.R. CV No. 44125. The former affirmed with modification the
decision 3 of 28 April 1993 of the Regional Trial Court (RTC) of Quezon City, Branch 80, in Civil Case
No. Q-92-12309. The latter denied the motion to reconsider the decision of 31 October 1996.

The antecedents, as found by the RTC and adopted by the Court of Appeals, are as follows:

In 1990, ABS-CBN and Viva executed a Film Exhibition Agreement (Exh. "A")
whereby Viva gave ABS-CBN an exclusive right to exhibit some Viva films.
Sometime in December 1991, in accordance with paragraph 2.4 [sic] of said
agreement stating that —.

1.4 ABS-CBN shall have the right of first refusal to the next twenty-four (24) Viva
films for TV telecast under such terms as may be agreed upon by the parties hereto,
provided, however, that such right shall be exercised by ABS-CBN from the actual
offer in writing.

Viva, through defendant Del Rosario, offered ABS-CBN, through its vice-president
Charo Santos-Concio, a list of three(3) film packages (36 title) from which ABS-CBN
may exercise its right of first refusal under the afore-said agreement (Exhs. "1" par,
2, "2," "2-A'' and "2-B"-Viva). ABS-CBN, however through Mrs. Concio, "can tick off
only ten (10) titles" (from the list) "we can purchase" (Exh. "3" - Viva) and therefore
did not accept said list (TSN, June 8, 1992, pp. 9-10). The titles ticked off by Mrs.
Concio are not the subject of the case at bar except the film ''Maging Sino Ka Man."

For further enlightenment, this rejection letter dated January 06, 1992 (Exh "3" -
Viva) is hereby quoted:

6 January 1992

Dear Vic,

This is not a very formal business letter I am writing to you as I would like to express
my difficulty in recommending the purchase of the three film packages you are
offering ABS-CBN.

From among the three packages I can only tick off 10 titles we can purchase. Please
see attached. I hope you will understand my position. Most of the action pictures in
the list do not have big action stars in the cast. They are not for primetime. In line
with this I wish to mention that I have not scheduled for telecast several action
pictures in out very first contract because of the cheap production value of these
movies as well as the lack of big action stars. As a film producer, I am sure you
understand what I am trying to say as Viva produces only big action pictures.

In fact, I would like to request two (2) additional runs for these movies as I can only
schedule them in our non-primetime slots. We have to cover the amount that was
paid for these movies because as you very well know that non-primetime advertising
rates are very low. These are the unaired titles in the first contract.

1. Kontra Persa [sic].

2. Raider Platoon.

3. Underground guerillas

4. Tiger Command

5. Boy de Sabog

6. Lady Commando

7. Batang Matadero

8. Rebelyon

I hope you will consider this request of mine.

The other dramatic films have been offered to us before and have been rejected
because of the ruling of MTRCB to have them aired at 9:00 p.m. due to their very
adult themes.

As for the 10 titles I have choosen [sic] from the 3 packages please consider
including all the other Viva movies produced last year. I have quite an attractive offer
to make.

Thanking you and with my warmest regards.

(Signe
d)

Charo
Santos
-
Concio

On February 27, 1992, defendant Del Rosario approached ABS-CBN's Ms. Concio,
with a list consisting of 52 original movie titles (i.e. not yet aired on television)
including the 14 titles subject of the present case, as well as 104 re-runs (previously
aired on television) from which ABS-CBN may choose another 52 titles, as a total of
156 titles, proposing to sell to ABS-CBN airing rights over this package of 52
 originals and 52 re-runs for P60,000,000.00 of which P30,000,000.00 will be in cash
and P30,000,000.00 worth of television spots (Exh. "4" to "4-C" Viva; "9" -Viva).

On April 2, 1992, defendant Del Rosario and ABS-CBN general manager, Eugenio
Lopez III, met at the Tamarind Grill Restaurant in Quezon City to discuss the
package proposal of Viva. What transpired in that lunch meeting is the subject of
conflicting versions. Mr. Lopez testified that he and Mr. Del Rosario allegedly agreed
that ABS-CRN was granted exclusive film rights to fourteen (14) films for a total
consideration of P36 million; that he allegedly put this agreement as to the price and
number of films in a "napkin'' and signed it and gave it to Mr. Del Rosario (Exh. D;
TSN, pp. 24-26, 77-78, June 8, 1992). On the other hand, Del Rosario denied having
made any agreement with Lopez regarding the 14 Viva films; denied the existence of
a napkin in which Lopez wrote something; and insisted that what he and Lopez
discussed at the lunch meeting was Viva's film package offer of 104 films (52
originals and 52 re-runs) for a total price of P60 million. Mr. Lopez promising [sic]to
make a counter proposal which came in the form of a proposal contract Annex "C" of
the complaint (Exh. "1"·- Viva; Exh. "C" - ABS-CBN).

On April 06, 1992, Del Rosario and Mr. Graciano Gozon of RBS Senior vice-
president for Finance discussed the terms and conditions of Viva's offer to sell the
104 films, after the rejection of the same package by ABS-CBN.

On April 07, 1992, defendant Del Rosario received through his secretary, a
handwritten note from Ms. Concio, (Exh. "5" - Viva), which reads: "Here's the draft of
the contract. I hope you find everything in order," to which was attached a draft
exhibition agreement (Exh. "C''- ABS-CBN; Exh. "9" - Viva, p. 3) a counter-proposal
covering 53 films, 52 of which came from the list sent by defendant Del Rosario and
one film was added by Ms. Concio, for a consideration of P35 million. Exhibit "C"
provides that ABS-CBN is granted films right to 53 films and contains a right of first
refusal to "1992 Viva Films." The said counter proposal was however rejected by
Viva's Board of Directors [in the] evening of the same day, April 7, 1992, as Viva
would not sell anything less than the package of 104 films for P60 million pesos (Exh.
"9" - Viva), and such rejection was relayed to Ms. Concio.

On April 29, 1992, after the rejection of ABS-CBN and following several negotiations
and meetings defendant Del Rosario and Viva's President Teresita Cruz, in
consideration of P60 million, signed a letter of agreement dated April 24, 1992.
granting RBS the exclusive right to air 104 Viva-produced and/or acquired films (Exh.
"7-A" - RBS; Exh. "4" - RBS) including the fourteen (14) films subject of the present
case. 4

On 27 May 1992, ABS-CBN filed before the RTC a complaint for specific performance with a prayer
for a writ of preliminary injunction and/or temporary restraining order against private respondents
Republic Broadcasting Corporation 5 (hereafter RBS ), Viva Production (hereafter VIVA), and Vicente
Del Rosario. The complaint was docketed as Civil Case No. Q-92-12309.

On 27 May 1992, RTC issued a temporary restraining order 6 enjoining private respondents from
proceeding with the airing, broadcasting, and televising of the fourteen VIVA films subject of the
controversy, starting with the film Maging Sino Ka Man, which was scheduled to be shown on private
respondents RBS' channel 7 at seven o'clock in the evening of said date.
On 17 June 1992, after appropriate proceedings, the RTC issued an
order 7 directing the issuance of a writ of preliminary injunction upon ABS-CBN's posting of P35
million bond. ABS-CBN moved for the reduction of the bond, 8 while private respondents moved for
reconsideration of the order and offered to put up a counterbound. 9

In the meantime, private respondents filed separate answers with counterclaim. 10 RBS also set up a
cross-claim against VIVA..

On 3 August 1992, the RTC issued an order 11 dissolving the writ of preliminary injunction upon the
posting by RBS of a P30 million counterbond to answer for whatever damages ABS-CBN might
suffer by virtue of such dissolution. However, it reduced petitioner's injunction bond to P15 million as
a condition precedent for the reinstatement of the writ of preliminary injunction should private
respondents be unable to post a counterbond.

At the pre-trial 12 on 6 August 1992, the parties, upon suggestion of the court, agreed to explore the
possibility of an amicable settlement. In the meantime, RBS prayed for and was granted reasonable
time within which to put up a P30 million counterbond in the event that no settlement would be
reached.

As the parties failed to enter into an amicable settlement RBS posted on 1 October 1992 a
counterbond, which the RTC approved in its Order of 15 October 1992.13

On 19 October 1992, ABS-CBN filed a motion for reconsideration 14 of the 3 August and 15 October
1992 Orders, which RBS opposed. 15

On 29 October 1992, the RTC conducted a pre-trial. 16

Pending resolution of its motion for reconsideration, ABS-CBN filed with the Court of Appeals a
petition17challenging the RTC's Orders of 3 August and 15 October 1992 and praying for the
issuance of a writ of preliminary injunction to enjoin the RTC from enforcing said orders. The case
was docketed as CA-G.R. SP No. 29300.

On 3 November 1992, the Court of Appeals issued a temporary restraining order18 to enjoin the
airing, broadcasting, and televising of any or all of the films involved in the controversy.

On 18 December 1992, the Court of Appeals promulgated a decision 19 dismissing the petition in CA
-G.R. No. 29300 for being premature. ABS-CBN challenged the dismissal in a petition for review
filed with this Court on 19 January 1993, which was docketed as G.R. No. 108363.

In the meantime the RTC received the evidence for the parties in Civil Case No. Q-192-1209.
Thereafter, on 28 April 1993, it rendered a decision 20 in favor of RBS and VIVA and against ABS-
CBN disposing as follows:

WHEREFORE, under cool reflection and prescinding from the foregoing, judgments
is rendered in favor of defendants and against the plaintiff.

(1) The complaint is hereby dismissed;

(2) Plaintiff ABS-CBN is ordered to pay defendant RBS the following:

 a) P107,727.00, the amount of premium paid by RBS
to the surety which issued defendant RBS's bond to
lift the injunction;

b) P191,843.00 for the amount of print advertisement

for "Maging Sino Ka Man" in various newspapers;

c) Attorney's fees in the amount of P1 million;

d) P5 million as and by way of moral damages;

e) P5 million as and by way of exemplary damages;

(3) For defendant VIVA, plaintiff ABS-CBN is ordered to pay

P212,000.00 by way of reasonable attorney's fees.

(4) The cross-claim of defendant RBS against defendant VIVA is

dismissed.

(5) Plaintiff to pay the costs.

According to the RTC, there was no meeting of minds on the price and terms of the offer. The
alleged agreement between Lopez III and Del Rosario was subject to the approval of the VIVA
Board of Directors, and said agreement was disapproved during the meeting of the Board on 7 April
1992. Hence, there was no basis for ABS-CBN's demand that VIVA signed the 1992 Film Exhibition
Agreement. Furthermore, the right of first refusal under the 1990 Film Exhibition Agreement had
previously been exercised per Ms. Concio's letter to Del Rosario ticking off ten titles acceptable to
them, which would have made the 1992 agreement an entirely new contract.

On 21 June 1993, this Court denied21 ABS-CBN's petition for review in G.R. No. 108363, as no
reversible error was committed by the Court of Appeals in its challenged decision and the case had
"become moot and academic in view of the dismissal of the main action by the court a quo in its
decision" of 28 April 1993.

Aggrieved by the RTC's decision, ABS-CBN appealed to the Court of Appeals claiming that there
was a perfected contract between ABS-CBN and VIVA granting ABS-CBN the exclusive right to
exhibit the subject films. Private respondents VIVA and Del Rosario also appealed seeking moral
and exemplary damages and additional attorney's fees.

In its decision of 31 October 1996, the Court of Appeals agreed with the RTC that the contract
between ABS-CBN and VIVA had not been perfected, absent the approval by the VIVA Board of
Directors of whatever Del Rosario, it's agent, might have agreed with Lopez III. The appellate court
did not even believe ABS-CBN's evidence that Lopez III actually wrote down such an agreement on
a "napkin," as the same was never produced in court. It likewise rejected ABS-CBN's insistence on
its right of first refusal and ratiocinated as follows:

As regards the matter of right of first refusal, it may be true that a Film Exhibition
Agreement was entered into between Appellant ABS-CBN and appellant VIVA under
Exhibit "A" in 1990, and that parag. 1.4 thereof provides:
 1.4 ABS-CBN shall have the right of first refusal to the next twenty-
four (24) VIVA films for TV telecast under such terms as may be
agreed upon by the parties hereto, provided, however, that such right
shall be exercised by ABS-CBN within a period of fifteen (15) days
from the actual offer in writing (Records, p. 14).

[H]owever, it is very clear that said right of first refusal in favor of ABS-CBN shall still
be subject to such terms as may be agreed upon by the parties thereto, and that the
said right shall be exercised by ABS-CBN within fifteen (15) days from the actual
offer in writing.

Said parag. 1.4 of the agreement Exhibit "A" on the right of first refusal did not fix the
price of the film right to the twenty-four (24) films, nor did it specify the terms thereof.
The same are still left to be agreed upon by the parties.

In the instant case, ABS-CBN's letter of rejection Exhibit 3 (Records, p. 89) stated
that it can only tick off ten (10) films, and the draft contract Exhibit "C" accepted only
fourteen (14) films, while parag. 1.4 of Exhibit "A'' speaks of the next twenty-four (24)
films.

The offer of V1VA was sometime in December 1991 (Exhibits 2, 2-A. 2-B; Records,
pp. 86-88; Decision, p. 11, Records, p. 1150), when the first list of VIVA films was
sent by Mr. Del Rosario to ABS-CBN. The Vice President of ABS-CBN, Ms. Charo
Santos-Concio, sent a letter dated January 6, 1992 (Exhibit 3, Records, p. 89) where
ABS-CBN exercised its right of refusal by rejecting the offer of VIVA.. As aptly
observed by the trial court, with the said letter of Mrs. Concio of January 6, 1992,
ABS-CBN had lost its right of first refusal. And even if We reckon the fifteen (15) day
period from February 27, 1992 (Exhibit 4 to 4-C) when another list was sent to ABS-
CBN after the letter of Mrs. Concio, still the fifteen (15) day period within which ABS-
CBN shall exercise its right of first refusal has already expired.22

Accordingly, respondent court sustained the award of actual damages consisting in the cost of print
advertisements and the premium payments for the counterbond, there being adequate proof of the
pecuniary loss which RBS had suffered as a result of the filing of the complaint by ABS-CBN. As to
the award of moral damages, the Court of Appeals found reasonable basis therefor, holding that
RBS's reputation was debased by the filing of the complaint in Civil Case No. Q-92-12309 and by the
non-showing of the film "Maging Sino Ka Man." Respondent court also held that exemplary damages
were correctly imposed by way of example or correction for the public good in view of the filing of the
complaint despite petitioner's knowledge that the contract with VIVA had not been perfected, It also
upheld the award of attorney's fees, reasoning that with ABS-CBN's act of instituting Civil Case No,
Q-92-1209, RBS was "unnecessarily forced to litigate." The appellate court, however, reduced the
awards of moral damages to P2 million, exemplary damages to P2 million, and attorney's fees to
P500, 000.00.

On the other hand, respondent Court of Appeals denied VIVA and Del Rosario's appeal because it
was "RBS and not VIVA which was actually prejudiced when the complaint was filed by ABS-CBN."

Its motion for reconsideration having been denied, ABS-CBN filed the petition in this case,
contending that the Court of Appeals gravely erred in

I
 . . . RULING THAT THERE WAS NO PERFECTED CONTRACT BETWEEN
PETITIONER AND PRIVATE RESPONDENT VIVA NOTWITHSTANDING
PREPONDERANCE OF EVIDENCE ADDUCED BY PETITIONER TO THE
CONTRARY.

II

. . . IN AWARDING ACTUAL AND COMPENSATORY DAMAGES IN FAVOR OF

PRIVATE RESPONDENT RBS.

III

. . . IN AWARDING MORAL AND EXEMPLARY DAMAGES IN FAVOR OF PRIVATE

RESPONDENT RBS.

IV

. . . IN AWARDING ATTORNEY'S FEES IN FAVOR OF RBS.

ABS-CBN claims that it had yet to fully exercise its right of first refusal over twenty-four titles under
the 1990 Film Exhibition Agreement, as it had chosen only ten titles from the first list. It insists that
we give credence to Lopez's testimony that he and Del Rosario met at the Tamarind Grill
Restaurant, discussed the terms and conditions of the second list (the 1992 Film Exhibition
Agreement) and upon agreement thereon, wrote the same on a paper napkin. It also asserts that the
contract has already been effective, as the elements thereof, namely, consent, object, and
consideration were established. It then concludes that the Court of Appeals' pronouncements were
not supported by law and jurisprudence, as per our decision of 1 December 1995 in Limketkai Sons
Milling, Inc. v. Court of Appeals, 23 which cited Toyota Shaw, Inc. v. Court of Appeals, 24 Ang Yu
Asuncion v. Court of Appeals, 25 and Villonco Realty Company v. Bormaheco. Inc.26

Anent the actual damages awarded to RBS, ABS-CBN disavows liability therefor. RBS spent for the
premium on the counterbond of its own volition in order to negate the injunction issued by the trial
court after the parties had ventilated their respective positions during the hearings for the purpose.
The filing of the counterbond was an option available to RBS, but it can hardly be argued that ABS-
CBN compelled RBS to incur such expense. Besides, RBS had another available option, i.e., move
for the dissolution or the injunction; or if it was determined to put up a counterbond, it could have
presented a cash bond. Furthermore under Article 2203 of the Civil Code, the party suffering loss or
injury is also required to exercise the diligence of a good father of a family to minimize the damages
resulting from the act or omission. As regards the cost of print advertisements, RBS had not
convincingly established that this was a loss attributable to the non showing "Maging Sino Ka Man";
on the contrary, it was brought out during trial that with or without the case or the injunction, RBS
would have spent such an amount to generate interest in the film.

ABS-CBN further contends that there was no clear basis for the awards of moral and exemplary
damages. The controversy involving ABS-CBN and RBS did not in any way originate from business
transaction between them. The claims for such damages did not arise from any contractual dealings
or from specific acts committed by ABS-CBN against RBS that may be characterized as wanton,
fraudulent, or reckless; they arose by virtue only of the filing of the complaint, An award of moral and
exemplary damages is not warranted where the record is bereft of any proof that a party acted
maliciously or in bad faith in filing an action. 27 In any case, free resort to courts for redress of wrongs
is a matter of public policy. The law recognizes the right of every one to sue for that which he
honestly believes to be his right without fear of standing trial for damages where by lack of sufficient
evidence, legal technicalities, or a different interpretation of the laws on the matter, the case would
lose ground. 28 One who makes use of his own legal right does no injury. 29 If damage results front the
filing of the complaint, it is damnum absque injuria. 30 Besides, moral damages are generally not
awarded in favor of a juridical person, unless it enjoys a good reputation that was debased by the
offending party resulting in social humiliation.31

As regards the award of attorney's fees, ABS-CBN maintains that the same had no factual, legal, or
equitable justification. In sustaining the trial court's award, the Court of Appeals acted in clear
disregard of the doctrines laid down in Buan v. Camaganacan 32 that the text of the decision should
state the reason why attorney's fees are being awarded; otherwise, the award should be disallowed.
Besides, no bad faith has been imputed on, much less proved as having been committed by, ABS-
CBN. It has been held that "where no sufficient showing of bad faith would be reflected in a party' s
persistence in a case other than an erroneous conviction of the righteousness of his cause,
attorney's fees shall not be recovered as cost." 33

On the other hand, RBS asserts that there was no perfected contract between ABS-CBN and VIVA
absent any meeting of minds between them regarding the object and consideration of the alleged
contract. It affirms that the ABS-CBN's claim of a right of first refusal was correctly rejected by the
trial court. RBS insist the premium it had paid for the counterbond constituted a pecuniary loss upon
which it may recover. It was obliged to put up the counterbound due to the injunction procured by
ABS-CBN. Since the trial court found that ABS-CBN had no cause of action or valid claim against
RBS and, therefore not entitled to the writ of injunction, RBS could recover from ABS-CBN the
premium paid on the counterbond. Contrary to the claim of ABS-CBN, the cash bond would prove to
be more expensive, as the loss would be equivalent to the cost of money RBS would forego in case
the P30 million came from its funds or was borrowed from banks.

RBS likewise asserts that it was entitled to the cost of advertisements for the cancelled showing of
the film "Maging Sino Ka Man" because the print advertisements were put out to announce the
showing on a particular day and hour on Channel 7, i.e., in its entirety at one time, not a series to be
shown on a periodic basis. Hence, the print advertisement were good and relevant for the particular
date showing, and since the film could not be shown on that particular date and hour because of the
injunction, the expenses for the advertisements had gone to waste.

As regards moral and exemplary damages, RBS asserts that ABS-CBN filed the case and secured
injunctions purely for the purpose of harassing and prejudicing RBS. Pursuant then to Article 19 and
21 of the Civil Code, ABS-CBN must be held liable for such damages. Citing Tolentino,34 damages
may be awarded in cases of abuse of rights even if the act done is not illicit and there is abuse of
rights were plaintiff institutes and action purely for the purpose of harassing or prejudicing the
defendant.

In support of its stand that a juridical entity can recover moral and exemplary damages, private
respondents RBS cited People v. Manero,35 where it was stated that such entity may recover moral
and exemplary damages if it has a good reputation that is debased resulting in social humiliation. it
then ratiocinates; thus:

There can be no doubt that RBS' reputation has been debased by ABS-CBN's acts in
this case. When RBS was not able to fulfill its commitment to the viewing public to
show the film "Maging Sino Ka Man" on the scheduled dates and times (and on two
occasions that RBS advertised), it suffered serious embarrassment and social
humiliation. When the showing was canceled, late viewers called up RBS' offices and
subjected RBS to verbal abuse ("Announce kayo nang announce, hindi ninyo naman
 ilalabas," "nanloloko yata kayo") (Exh. 3-RBS, par. 3). This alone was not something
RBS brought upon itself. it was exactly what ABS-CBN had planned to happen.

The amount of moral and exemplary damages cannot be said to be excessive. Two
reasons justify the amount of the award.

The first is that the humiliation suffered by RBS is national extent. RBS operations as
a broadcasting company is [sic] nationwide. Its clientele, like that of ABS-CBN,
consists of those who own and watch television. It is not an exaggeration to state,
and it is a matter of judicial notice that almost every other person in the country
watches television. The humiliation suffered by RBS is multiplied by the number of
televiewers who had anticipated the showing of the film "Maging Sino Ka Man" on
May 28 and November 3, 1992 but did not see it owing to the cancellation. Added to
this are the advertisers who had placed commercial spots for the telecast and to
whom RBS had a commitment in consideration of the placement to show the film in
the dates and times specified.

The second is that it is a competitor that caused RBS to suffer the humiliation. The
humiliation and injury are far greater in degree when caused by an entity whose
ultimate business objective is to lure customers (viewers in this case) away from the
competition. 36

For their part, VIVA and Vicente del Rosario contend that the findings of fact of the trial court and the
Court of Appeals do not support ABS-CBN's claim that there was a perfected contract. Such factual
findings can no longer be disturbed in this petition for review under Rule 45, as only questions of law
can be raised, not questions of fact. On the issue of damages and attorneys fees, they adopted the
arguments of RBS.

The key issues for our consideration are (1) whether there was a perfected contract between VIVA
and ABS-CBN, and (2) whether RBS is entitled to damages and attorney's fees. It may be noted that
the award of attorney's fees of P212,000 in favor of VIVA is not assigned as another error.

I.

The first issue should be resolved against ABS-CBN. A contract is a meeting of minds between two
persons whereby one binds himself to give something or to render some service to another 37 for a
consideration. there is no contract unless the following requisites concur: (1) consent of the
contracting parties; (2) object certain which is the subject of the contract; and (3) cause of the
obligation, which is established.38 A contract undergoes three stages:

(a) preparation, conception, or generation, which is the period of negotiation and

bargaining, ending at the moment of agreement of the parties;

(b) perfection or birth of the contract, which is the moment when the parties come to
agree on the terms of the contract; and

(c) consummation or death, which is the fulfillment or performance of the terms

agreed upon in the contract. 39

Contracts that are consensual in nature are perfected upon mere meeting of the minds, Once there
is concurrence between the offer and the acceptance upon the subject matter, consideration, and
terms of payment a contract is produced. The offer must be certain. To convert the offer into a
contract, the acceptance must be absolute and must not qualify the terms of the offer; it must be
plain, unequivocal, unconditional, and without variance of any sort from the proposal. A qualified
acceptance, or one that involves a new proposal, constitutes a counter-offer and is a rejection of the
original offer. Consequently, when something is desired which is not exactly what is proposed in the
offer, such acceptance is not sufficient to generate consent because any modification or variation
from the terms of the offer annuls the offer.40

When Mr. Del Rosario of VIVA met with Mr. Lopez of ABS-CBN at the Tamarind Grill on 2 April 1992
to discuss the package of films, said package of 104 VIVA films was VIVA's offer to ABS-CBN to
enter into a new Film Exhibition Agreement. But ABS-CBN, sent, through Ms. Concio, a counter-
proposal in the form of a draft contract proposing exhibition of 53 films for a consideration of P35
million. This counter-proposal could be nothing less than the counter-offer of Mr. Lopez during his
conference with Del Rosario at Tamarind Grill Restaurant. Clearly, there was no acceptance of
VIVA's offer, for it was met by a counter-offer which substantially varied the terms of the offer.

ABS-CBN's reliance in Limketkai Sons Milling, Inc. v. Court of

Appeals 41 and Villonco Realty Company v. Bormaheco, Inc., 42 is misplaced. In these cases, it was
held that an acceptance may contain a request for certain changes in the terms of the offer and yet
be a binding acceptance as long as "it is clear that the meaning of the acceptance is positively and
unequivocally to accept the offer, whether such request is granted or not." This ruling was, however,
reversed in the resolution of 29 March 1996, 43 which ruled that the acceptance of all offer must be
unqualified and absolute, i.e., it "must be identical in all respects with that of the offer so as to
produce consent or meeting of the minds."

On the other hand, in Villonco, cited in Limketkai, the alleged changes in the revised counter-offer
were not material but merely clarificatory of what had previously been agreed upon. It cited the
statement in Stuart v. Franklin Life Insurance Co.44 that "a vendor's change in a phrase of the offer to
purchase, which change does not essentially change the terms of the offer, does not amount to a
rejection of the offer and the tender of a counter-offer." 45However, when any of the elements of the
contract is modified upon acceptance, such alteration amounts to a counter-offer.

In the case at bar, ABS-CBN made no unqualified acceptance of VIVA's offer. Hence, they
underwent a period of bargaining. ABS-CBN then formalized its counter-proposals or counter-offer in
a draft contract, VIVA through its Board of Directors, rejected such counter-offer, Even if it be
conceded arguendo that Del Rosario had accepted the counter-offer, the acceptance did not bind
VIVA, as there was no proof whatsoever that Del Rosario had the specific authority to do so.

Under Corporation Code,46 unless otherwise provided by said Code, corporate powers, such as the
power; to enter into contracts; are exercised by the Board of Directors. However, the Board may
delegate such powers to either an executive committee or officials or contracted managers. The
delegation, except for the executive committee, must be for specific purposes, 47 Delegation to
officers makes the latter agents of the corporation; accordingly, the general rules of agency as to the
bindings effects of their acts would
apply. 48 For such officers to be deemed fully clothed by the corporation to exercise a power of the
Board, the latter must specially authorize them to do so. That Del Rosario did not have the authority
to accept ABS-CBN's counter-offer was best evidenced by his submission of the draft contract to
VIVA's Board of Directors for the latter's approval. In any event, there was between Del Rosario and
Lopez III no meeting of minds. The following findings of the trial court are instructive:

A number of considerations militate against ABS-CBN's claim that a contract was

perfected at that lunch meeting on April 02, 1992 at the Tamarind Grill.
FIRST, Mr. Lopez claimed that what was agreed upon at the Tamarind Grill referred
to the price and the number of films, which he wrote on a napkin. However, Exhibit
"C" contains numerous provisions which, were not discussed at the Tamarind Grill, if
Lopez testimony was to be believed nor could they have been physically written on a
napkin. There was even doubt as to whether it was a paper napkin or a cloth napkin.
In short what were written in Exhibit "C'' were not discussed, and therefore could not
have been agreed upon, by the parties. How then could this court compel the parties
to sign Exhibit "C" when the provisions thereof were not previously agreed upon?

SECOND, Mr. Lopez claimed that what was agreed upon as the subject matter of the
contract was 14 films. The complaint in fact prays for delivery of 14 films. But Exhibit
"C" mentions 53 films as its subject matter. Which is which If Exhibits "C" reflected
the true intent of the parties, then ABS-CBN's claim for 14 films in its complaint is
false or if what it alleged in the complaint is true, then Exhibit "C" did not reflect what
was agreed upon by the parties. This underscores the fact that there was no meeting
of the minds as to the subject matter of the contracts, so as to preclude perfection
thereof. For settled is the rule that there can be no contract where there is no object
which is its subject matter (Art. 1318, NCC).

THIRD, Mr. Lopez [sic] answer to question 29 of his affidavit testimony (Exh. "D")
states:

We were able to reach an agreement. VIVA gave us the exclusive

license to show these fourteen (14) films, and we agreed to pay Viva
the amount of P16,050,000.00 as well as grant Viva commercial slots
worth P19,950,000.00. We had already earmarked this P16,
050,000.00.

which gives a total consideration of P36 million (P19,950,000.00 plus

P16,050,000.00. equals P36,000,000.00).

On cross-examination Mr. Lopez testified:

Q. What was written in this napkin?

A. The total price, the breakdown the known Viva movies, the 7
blockbuster movies and the other 7 Viva movies because the price
was broken down accordingly. The none [sic] Viva and the seven
other Viva movies and the sharing between the cash portion and the
concerned spot portion in the total amount of P35 million pesos.

Now, which is which? P36 million or P35 million? This weakens ABS-CBN's claim.

FOURTH. Mrs. Concio, testifying for ABS-CBN stated that she transmitted Exhibit
"C" to Mr. Del Rosario with a handwritten note, describing said Exhibit "C" as a
"draft." (Exh. "5" - Viva; tsn pp. 23-24 June 08, 1992). The said draft has a well
defined meaning.

Since Exhibit "C" is only a draft, or a tentative, provisional or preparatory writing

prepared for discussion, the terms and conditions thereof could not have been
previously agreed upon by ABS-CBN and Viva Exhibit "C'' could not therefore legally
bind Viva, not having agreed thereto. In fact, Ms. Concio admitted that the terms and
conditions embodied in Exhibit "C" were prepared by ABS-CBN's lawyers and there
was no discussion on said terms and conditions. . . .

As the parties had not yet discussed the proposed terms and conditions in Exhibit
"C," and there was no evidence whatsoever that Viva agreed to the terms and
conditions thereof, said document cannot be a binding contract. The fact that Viva
refused to sign Exhibit "C" reveals only two [sic] well that it did not agree on its terms
and conditions, and this court has no authority to compel Viva to agree thereto.

FIFTH. Mr. Lopez understand [sic] that what he and Mr. Del Rosario agreed upon at
the Tamarind Grill was only provisional, in the sense that it was subject to approval
by the Board of Directors of Viva. He testified:

Q. Now, Mr. Witness, and after that Tamarind meeting ... the second
meeting wherein you claimed that you have the meeting of the minds
between you and Mr. Vic del Rosario, what happened?

A. Vic Del Rosario was supposed to call us up and tell us specifically

the result of the discussion with the Board of Directors.

Q. And you are referring to the so-called agreement which you wrote
in [sic] a piece of paper?

A. Yes, sir.

Q. So, he was going to forward that to the board of Directors for

approval?

A. Yes, sir. (Tsn, pp. 42-43, June 8, 1992)

Q. Did Mr. Del Rosario tell you that he will submit it to his Board for
approval?

A. Yes, sir. (Tsn, p. 69, June 8, 1992).

The above testimony of Mr. Lopez shows beyond doubt that he knew Mr. Del
Rosario had no authority to bind Viva to a contract with ABS-CBN until and unless its
Board of Directors approved it. The complaint, in fact, alleges that Mr. Del Rosario "is
the Executive Producer of defendant Viva" which "is a corporation." (par. 2,
complaint). As a mere agent of Viva, Del Rosario could not bind Viva unless what he
did is ratified by its Board of Directors. (Vicente vs. Geraldez, 52 SCRA 210; Arnold
vs. Willetsand Paterson, 44 Phil. 634). As a mere agent, recognized as such by
plaintiff, Del Rosario could not be held liable jointly and severally with Viva and his
inclusion as party defendant has no legal basis. (Salonga vs. Warner Barner [sic] ,
COLTA , 88 Phil. 125; Salmon vs. Tan, 36 Phil. 556).

The testimony of Mr. Lopez and the allegations in the complaint are clear admissions
that what was supposed to have been agreed upon at the Tamarind Grill between
Mr. Lopez and Del Rosario was not a binding agreement. It is as it should be
because corporate power to enter into a contract is lodged in the Board of Directors.
(Sec. 23, Corporation Code). Without such board approval by the Viva board,
 whatever agreement Lopez and Del Rosario arrived at could not ripen into a valid
contract binding upon Viva (Yao Ka Sin Trading vs. Court of Appeals, 209 SCRA
763). The evidence adduced shows that the Board of Directors of Viva rejected
Exhibit "C" and insisted that the film package for 140 films be maintained (Exh. "7-1"
- Viva ). 49

The contention that ABS-CBN had yet to fully exercise its right of first refusal over twenty-four films
under the 1990 Film Exhibition Agreement and that the meeting between Lopez and Del Rosario
was a continuation of said previous contract is untenable. As observed by the trial court, ABS-CBN
right of first refusal had already been exercised when Ms. Concio wrote to VIVA ticking off ten films,
Thus:

[T]he subsequent negotiation with ABS-CBN two (2) months after this letter was sent,
was for an entirely different package. Ms. Concio herself admitted on cross-
examination to having used or exercised the right of first refusal. She stated that the
list was not acceptable and was indeed not accepted by ABS-CBN, (TSN, June 8,
1992, pp. 8-10). Even Mr. Lopez himself admitted that the right of the first refusal
may have been already exercised by Ms. Concio (as she had). (TSN, June 8, 1992,
pp. 71-75). Del Rosario himself knew and understand [sic] that ABS-CBN has lost its
rights of the first refusal when his list of 36 titles were rejected (Tsn, June 9, 1992,
pp. 10-11) 50

II

However, we find for ABS-CBN on the issue of damages. We shall first take up actual damages.
Chapter 2, Title XVIII, Book IV of the Civil Code is the specific law on actual or compensatory
damages. Except as provided by law or by stipulation, one is entitled to compensation for actual
damages only for such pecuniary loss suffered by him as he has duly proved. 51 The indemnification
shall comprehend not only the value of the loss suffered, but also that of the profits that the obligee
failed to obtain. 52 In contracts and quasi-contracts the damages which may be awarded are
dependent on whether the obligor acted with good faith or otherwise, It case of good faith, the
damages recoverable are those which are the natural and probable consequences of the breach of
the obligation and which the parties have foreseen or could have reasonably foreseen at the time of
the constitution of the obligation. If the obligor acted with fraud, bad faith, malice, or wanton attitude,
he shall be responsible for all damages which may be reasonably attributed to the non-performance
of the obligation. 53 In crimes and quasi-delicts, the defendant shall be liable for all damages which
are the natural and probable consequences of the act or omission complained of, whether or not
such damages has been foreseen or could have reasonably been foreseen by the defendant.54

Actual damages may likewise be recovered for loss or impairment of earning capacity in cases of
temporary or permanent personal injury, or for injury to the plaintiff's business standing or
commercial credit.55

The claim of RBS for actual damages did not arise from contract, quasi-contract, delict, or quasi-
delict. It arose from the fact of filing of the complaint despite ABS-CBN's alleged knowledge of lack
of cause of action. Thus paragraph 12 of RBS's Answer with Counterclaim and Cross-claim under
the heading COUNTERCLAIM specifically alleges:

12. ABS-CBN filed the complaint knowing fully well that it has no cause of action
RBS. As a result thereof, RBS suffered actual damages in the amount of
P6,621,195.32. 56
Needless to state the award of actual damages cannot be comprehended under the above law on
actual damages. RBS could only probably take refuge under Articles 19, 20, and 21 of the Civil
Code, which read as follows:

Art. 19. 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 and good faith.

Art. 20. Every person who, contrary to law, wilfully or negligently causes damage to
another, shall indemnify the latter for tile same.

Art. 21. Any person who wilfully causes loss or injury to another in a manner that is
contrary to morals, good customs or public policy shall compensate the latter for the
damage.

It may further be observed that in cases where a writ of preliminary injunction is issued, the damages
which the defendant may suffer by reason of the writ are recoverable from the injunctive bond. 57 In
this case, ABS-CBN had not yet filed the required bond; as a matter of fact, it asked for reduction of
the bond and even went to the Court of Appeals to challenge the order on the matter, Clearly then, it
was not necessary for RBS to file a counterbond. Hence, ABS-CBN cannot be held responsible for
the premium RBS paid for the counterbond.

Neither could ABS-CBN be liable for the print advertisements for "Maging Sino Ka Man" for lack of
sufficient legal basis. The RTC issued a temporary restraining order and later, a writ of preliminary
injunction on the basis of its determination that there existed sufficient ground for the issuance
thereof. Notably, the RTC did not dissolve the injunction on the ground of lack of legal and factual
basis, but because of the plea of RBS that it be allowed to put up a counterbond.

As regards attorney's fees, the law is clear that in the absence of stipulation, attorney's fees may be
recovered as actual or compensatory damages under any of the circumstances provided for in
Article 2208 of the Civil Code. 58

The general rule is that attorney's fees cannot be recovered as part of damages because of the
policy that no premium should be placed on the right to litigate.59 They are not to be awarded every
time a party wins a suit. The power of the court to award attorney's fees under Article 2208 demands
factual, legal, and equitable justification.60Even when claimant is compelled to litigate with third
persons or to incur expenses to protect his rights, still attorney's fees may not be awarded where no
sufficient showing of bad faith could be reflected in a party's persistence in a case other than
erroneous conviction of the righteousness of his cause. 61

As to moral damages the law is Section 1, Chapter 3, Title XVIII, Book IV of the Civil Code. Article
2217 thereof defines what are included in moral damages, while Article 2219 enumerates the cases
where they may be recovered, Article 2220 provides that moral damages may be recovered in
breaches of contract where the defendant acted fraudulently or in bad faith. RBS's claim for moral
damages could possibly fall only under item (10) of Article 2219, thereof which reads:

(10) Acts and actions referred to in Articles 21, 26, 27, 28, 29, 30, 32, 34, and 35.

Moral damages are in the category of an award designed to compensate the claimant for actual
injury suffered. and not to impose a penalty on the wrongdoer.62 The award is not meant to enrich the
complainant at the expense of the defendant, but to enable the injured party to obtain means,
diversion, or amusements that will serve to obviate then moral suffering he has undergone. It is
aimed at the restoration, within the limits of the possible, of the spiritual status quo ante, and should
be proportionate to the suffering inflicted.63 Trial courts must then guard against the award of
exorbitant damages; they should exercise balanced restrained and measured objectivity to avoid
suspicion that it was due to passion, prejudice, or corruption on the part of the trial court. 64

The award of moral damages cannot be granted in favor of a corporation because, being an artificial
person and having existence only in legal contemplation, it has no feelings, no emotions, no senses,
It cannot, therefore, experience physical suffering and mental anguish, which call be experienced
only by one having a nervous system. 65 The statement in People v. Manero 66 and Mambulao
Lumber Co. v. PNB 67 that a corporation may recover moral damages if it "has a good reputation that
is debased, resulting in social humiliation" is an obiter dictum. On this score alone the award for
damages must be set aside, since RBS is a corporation.

The basic law on exemplary damages is Section 5, Chapter 3, Title XVIII, Book IV of the Civil Code.
These are imposed by way of example or correction for the public good, in addition to moral,
temperate, liquidated or compensatory damages. 68 They are recoverable in criminal cases as part of
the civil liability when the crime was committed with one or more aggravating circumstances; 69 in
quasi-contracts, if the defendant acted with gross negligence; 70 and in contracts and quasi-contracts,
if the defendant acted in a wanton, fraudulent, reckless, oppressive, or malevolent manner.71

It may be reiterated that the claim of RBS against ABS-CBN is not based on contract, quasi-contract,
delict, or quasi-delict, Hence, the claims for moral and exemplary damages can only be based on
Articles 19, 20, and 21 of the Civil Code.

The elements of abuse of right under Article 19 are the following: (1) the existence of a legal right or
duty, (2) which is exercised in bad faith, and (3) for the sole intent of prejudicing or injuring another.
Article 20 speaks of the general sanction for all other provisions of law which do not especially
provide for their own sanction; while Article 21 deals with acts contra bonus mores, and has the
following elements; (1) there is an act which is legal, (2) but which is contrary to morals, good
custom, public order, or public policy, and (3) and it is done with intent to injure. 72

Verily then, malice or bad faith is at the core of Articles 19, 20, and 21. Malice or bad faith implies a
conscious and intentional design to do a wrongful act for a dishonest purpose or moral
obliquity. 73 Such must be substantiated by evidence. 74

There is no adequate proof that ABS-CBN was inspired by malice or bad faith. It was honestly
convinced of the merits of its cause after it had undergone serious negotiations culminating in its
formal submission of a draft contract. Settled is the rule that the adverse result of an action does
not per se make the action wrongful and subject the actor to damages, for the law could not have
meant to impose a penalty on the right to litigate. If damages result from a person's exercise of a
right, it is damnum absque injuria.75

WHEREFORE, the instant petition is GRANTED. The challenged decision of the Court of Appeals in
CA-G.R. CV No, 44125 is hereby REVERSED except as to unappealed award of attorney's fees in
favor of VIVA Productions, Inc. 1âwphi1.nêt

No pronouncement as to costs.

SO ORDERED.
G.R. No. 108734 May 29, 1996

CONCEPT BUILDERS, INC., petitioner,

vs.
THE NATIONAL LABOR RELATIONS COMMISSION, (First Division); and Norberto Marabe;
Rodolfo Raquel, Cristobal Riego, Manuel Gillego, Palcronio Giducos, Pedro Aboigar,
Norberto Comendador, Rogelio Salut, Emilio Garcia, Jr., Mariano Rio, Paulina Basea, Alfredo
Albera, Paquito Salut, Domingo Guarino, Romeo Galve, Dominador Sabina, Felipe Radiana,
Gavino Sualibio, Moreno Escares, Ferdinand Torres, Felipe Basilan, and Ruben
Robalos, respondents.

HERMOSISIMA, JR., J.:p

The corporate mask may be lifted and the corporate veil may be pierced when a corporation is just but the alter ego of a person or of another
corporation. Where badges of fraud exist; where public convenience is defeated; where a wrong is sought to be justified thereby, the
corporate fiction or the notion of legal entity should come to naught. The law in these instances will regard the corporation as a mere
association of persons and, in case of two corporations, merge them into one.

Thus, where a sister corporation is used as a shield to evade a corporation's subsidiary liability for
damages, the corporation may not be heard to say that it has a personality separate and distinct
from the other corporation. The piercing of the corporate veil comes into play.

This special civil action ostensibly raises the question of whether the National Labor Relations
Commission committed grave abuse of discretion when it issued a "break-open order" to the sheriff
to be enforced against personal property found in the premises of petitioner's sister company.

Petitioner Concept Builders, Inc., a domestic corporation, with principal office at 355 Maysan Road,
Valenzuela, Metro Manila, is engaged in the construction business. Private respondents were
employed by said company as laborers, carpenters and riggers.

On November, 1981, private respondents were served individual written notices of termination of
employment by petitioner, effective on November 30, 1981. It was stated in the individual notices
that their contracts of employment had expired and the project in which they were hired had been
completed.

Public respondent found it to be, the fact, however, that at the time of the termination of private
respondent's employment, the project in which they were hired had not yet been finished and
completed. Petitioner had to engage the services of sub-contractors whose workers performed the
functions of private respondents.

Aggrieved, private respondents filed a complaint for illegal dismissal, unfair labor practice and non-
payment of their legal holiday pay, overtime pay and thirteenth-month pay against petitioner.

On December 19, 1984, the Labor Arbiter rendered judgment1 ordering petitioner to reinstate private
respondents and to pay them back wages equivalent to one year or three hundred working days.

On November 27, 1985, the National Labor Relations Commission (NLRC) dismissed the motion for
reconsideration filed by petitioner on the ground that the said decision had already become final and
executory.2
On October 16, 1986, the NLRC Research and Information Department made the finding that private
respondents' back wages amounted to P199,800.00.3

On October 29, 1986, the Labor Arbiter issued a writ of execution directing the sheriff to execute the
Decision, dated December 19, 1984. The writ was partially satisfied through garnishment of sums
from petitioner's debtor, the Metropolitan Waterworks and Sewerage Authority, in the amount of
P81,385.34. Said amount was turned over to the cashier of the NLRC.

On February 1, 1989, an Alias Writ of Execution was issued by the Labor Arbiter directing the sheriff
to collect from herein petitioner the sum of P117,414.76, representing the balance of the judgment
award, and to reinstate private respondents to their former positions.

On July 13, 1989, the sheriff issued a report stating that he tried to serve the alias writ of execution
on petitioner through the security guard on duty but the service was refused on the ground that
petitioner no longer occupied the premises.

On September 26, 1986, upon motion of private respondents, the Labor Arbiter issued a second
alias writ of execution.

The said writ had not been enforced by the special sheriff because, as stated in his progress report,
dated November 2, 1989:

1. All the employees inside petitioner's premises at 355 Maysan Road, Valenzuela, Metro Manila,
claimed that they were employees of Hydro Pipes Philippines, Inc. (HPPI) and not by respondent;

2. Levy was made upon personal properties he found in the premises;

3. Security guards with high-powered guns prevented him from removing the properties he had
levied upon.4

The said special sheriff recommended that a "break-open order" be issued to enable him to enter
petitioner's premises so that he could proceed with the public auction sale of the aforesaid personal
properties on November 7, 1989.

On November 6, 1989, a certain Dennis Cuyegkeng filed a third-party claim with the Labor Arbiter
alleging that the properties sought to be levied upon by the sheriff were owned by Hydro (Phils.), Inc.
(HPPI) of which he is the Vice-President.

On November 23, 1989, private respondents filed a "Motion for Issuance of a Break-Open Order,"
alleging that HPPI and petitioner corporation were owned by the same incorporator/stockholders.
They also alleged that petitioner temporarily suspended its business operations in order to evade its
legal obligations to them and that private respondents were willing to post an indemnity bond to
answer for any damages which petitioner and HPPI may suffer because of the issuance of the
break-open order.

In support of their claim against HPPI, private respondents presented duly certified copies of the
General Informations Sheet, dated May 15, 1987, submitted by petitioner to the Securities Exchange
Commission (SEC) and the General Information Sheet, dated May 25, 1987, submitted by HPPI to
the Securities and Exchange Commission.

The General Information Sheet submitted by the petitioner revealed the following:
 1. Breakdown of Subscribed Capital

Name of Stockholder Amount Subscribed

HPPI P 6,999,500.00

Antonio W. Lim 2,900,000.00

Dennis S. Cuyegkeng 300.00

Elisa C. Lim 100,000.00

Teodulo R. Dino 100.00

Virgilio O. Casino 100.00

2. Board of Directors

Antonio W. Lim Chairman

Dennis S. Cuyegkeng Member

Elisa C. Lim Member

Teodulo R. Dino Member

Virgilio O. Casino Member

3. Corporate Officers

Antonio W. Lim President

Dennis S. Cuyegkeng Assistant to the President

Elisa O. Lim Treasurer

Virgilio O. Casino Corporate Secretary

4. Principal Office

355 Maysan Road

Valenzuela, Metro Manila.5

On the other hand, the General Information Sheet of HPPI revealed the following:

1. Breakdown of Subscribed Capital

Name of Stockholder Amount Subscribed

 Antonio W. Lim P 400,000.00

Elisa C. Lim 57,700.00

AWL Trading 455,000.00

Dennis S. Cuyegkeng 40,100.00

Teodulo R. Dino 100.00

Virgilio O. Casino 100.00

2. Board of Directors

Antonio W. Lim Chairman

Elisa C. Lim Member

Dennis S. Cuyegkeng Member

Virgilio O. Casino Member

Teodulo R. Dino Member

3. Corporate Officers

Antonio W. Lim President

Dennis S. Cuyegkeng Assistant to the President

Elisa C. Lim Treasurer

Virgilio O. Casino Corporate Secretary

4. Principal Office

355 Maysan Road, Valenzuela, Metro Manila.6

On February 1, 1990, HPPI filed an Opposition to private respondents' motion for issuance of a
break-open order, contending that HPPI is a corporation which is separate and distinct from
petitioner. HPPI also alleged that the two corporations are engaged in two different kinds of
businesses, i.e., HPPI is a manufacturing firm while petitioner was then engaged in construction.

On March 2, 1990, the Labor Arbiter issued an Order which denied private respondents' motion for
break-open order.

Private respondents then appealed to the NLRC. On April 23, 1992, the NLRC set aside the order of
the Labor Arbiter, issued a break-open order and directed private respondents to file a bond.
Thereafter, it directed the sheriff to proceed with the auction sale of the properties already levied
upon. It dismissed the third-party claim for lack of merit.
Petitioner moved for reconsideration but the motion was denied by the NLRC in a Resolution, dated
December 3, 1992.

Hence, the resort to the present petition.

Petitioner alleges that the NLRC committed grave abuse of discretion when it ordered the execution
of its decision despite a third-party claim on the levied property. Petitioner further contends, that the
doctrine of piercing the corporate veil should not have been applied, in this case, in the absence of
any showing that it created HPPI in order to evade its liability to private respondents. It also
contends that HPPI is engaged in the manufacture and sale of steel, concrete and iron pipes, a
business which is distinct and separate from petitioner's construction business. Hence, it is of no
consequence that petitioner and HPPI shared the same premises, the same President and the same
set of officers and subscribers.7

We find petitioner's contention to be unmeritorious.

It is a fundamental principle of corporation law that a corporation is an entity separate and distinct
from its stockholders and from other corporations to which it may be connected.8 But, this separate
and distinct personality of a corporation is merely a fiction created by law for convenience and to
promote justice.9 So, when the notion of separate juridical personality is used to defeat public
convenience, justify wrong, protect fraud or defend crime, or is used as a device to defeat the labor
laws,10 this separate personality of the corporation may be disregarded or the veil of corporate fiction
pierced.11 This is true likewise when the corporation is merely an adjunct, a business conduit or an
alter ego of another corporation.12

The conditions under which the juridical entity may be disregarded vary according to the peculiar
facts and circumstances of each case. No hard and fast rule can be accurately laid down, but
certainly, there are some probative factors of identity that will justify the application of the doctrine of
piercing the corporate veil, to wit:

1. Stock ownership by one or common ownership of both corporations.

2. Identity of directors and officers.

3. The manner of keeping corporate books and records.

4. Methods of conducting the business.13

The SEC en banc explained the "instrumentality rule" which the courts have applied in disregarding
the separate juridical personality of corporations as follows:

Where one corporation is so organized and controlled and its affairs are conducted
so that it is, in fact, a mere instrumentality or adjunct of the other, the fiction of the
corporate entity of the "instrumentality" may be disregarded. The control necessary
to invoke the rule is not majority or even complete stock control but such domination
of instances, policies and practices that the controlled corporation has, so to speak,
no separate mind, will or existence of its own, and is but a conduit for its principal. It
must be kept in mind that the control must be shown to have been exercised at the
time the acts complained of took place. Moreover, the control and breach of duty
must proximately cause the injury or unjust loss for which the complaint is made.
The test in determining the applicability of the doctrine of piercing the veil of corporate fiction is as
follows:

1. Control, not mere majority or complete stock control, but complete domination, not
only of finances but of policy and business practice in respect to the transaction
attacked so that the corporate entity as to this transaction had at the time no
separate mind, will or existence of its own;

2. Such control must have been used by the defendant to commit fraud or wrong, to
perpetuate the violation of a statutory or other positive legal duty or dishonest and
unjust act in contravention of plaintiff's legal rights; and

3. The aforesaid control and breach of duty must proximately cause the injury or
unjust loss complained of.

The absence of any one of these elements prevents "piercing the corporate veil." In
applying the "instrumentality" or "alter ego" doctrine, the courts are concerned with
reality and not form, with how the corporation operated and the individual defendant's
relationship to that operation.14

Thus the question of whether a corporation is a mere alter ego, a mere sheet or paper corporation, a
sham or a subterfuge is purely one of fact.15

In this case, the NLRC noted that, while petitioner claimed that it ceased its business operations on
April 29, 1986, it filed an Information Sheet with the Securities and Exchange Commission on May
15, 1987, stating that its office address is at 355 Maysan Road, Valenzuela, Metro Manila. On the
other hand, HPPI, the third-party claimant, submitted on the same day, a similar information sheet
stating that its office address is at 355 Maysan Road, Valenzuela, Metro Manila.

Furthermore, the NLRC stated that:

Both information sheets were filed by the same Virgilio O. Casiño as the corporate
secretary of both corporations. It would also not be amiss to note that both
corporations had the same president, the same board of directors,
the same corporate officers, and substantially the same subscribers.

From the foregoing, it appears that, among other things, the respondent (herein
petitioner) and the third-party claimant shared the same address and/or premises.
Under this circumstances, (sic) it cannot be said that the property levied upon by the
sheriff were not of respondents.16

Clearly, petitioner ceased its business operations in order to evade the payment to private
respondents of back wages and to bar their reinstatement to their former positions. HPPI is
obviously a business conduit of petitioner corporation and its emergence was skillfully orchestrated
to avoid the financial liability that already attached to petitioner corporation.

The facts in this case are analogous to Claparols v. Court of Industrial Relations, 17 where we had
the occasion to rule:

Respondent court's findings that indeed the Claparols Steel and Nail Plant, which
ceased operation of June 30, 1957, was SUCCEEDED by the Claparols Steel
 Corporation effective the next day, July 1, 1957, up to December 7, 1962, when the
latter finally ceased to operate, were not disputed by petitioner. It is very clear that
the latter corporation was a continuation and successor of the first entity . . . . Both
predecessors and successor were owned and controlled by petitioner Eduardo
Claparols and there was no break in the succession and continuity of the same
business. This "avoiding-the-liability" scheme is very patent, considering that 90% of
the subscribed shares of stock of the Claparols Steel Corporation (the second
corporation) was owned by respondent . . . Claparols himself, and all the assets of
the dissolved Claparols Steel and Nail plant were turned over to the emerging
Claparols Steel Corporation.

It is very obvious that the second corporation seeks the protective shield of a
corporate fiction whose veil in the present case could, and should, be pierced as it
was deliberately and maliciously designed to evade its financial obligation to its
employees.

In view of the failure of the sheriff, in the case at bar, to effect a levy upon the property subject of the
execution, private respondents had no other recourse but to apply for a break-open order after the
third-party claim of HPPI was dismissed for lack of merit by the NLRC. This is in consonance with
Section 3, Rule VII of the NLRC Manual of Execution of Judgment which provides that:

Should the losing party, his agent or representative, refuse or prohibit the Sheriff or
his representative entry to the place where the property subject of execution is
located or kept, the judgment creditor may apply to the Commission or Labor Arbiter
concerned for a break-open order.

Furthermore, our perusal of the records shows that the twin requirements of due notice and hearing
were complied with. Petitioner and the third-party claimant were given the opportunity to submit
evidence in support of their claim.

Hence, the NLRC did not commit any grave abuse of discretion when it affirmed the break-open
order issued by the Labor Arbiter.

Finally, we do not find any reason to disturb the rule that factual findings of quasi-judicial agencies
supported by substantial evidence are binding on this Court and are entitled to great respect, in the
absence of showing of grave abuse of a discretion.18

WHEREFORE, the petition is DISMISSED and the assailed resolutions of the NLRC, dated April 23,
1992 and December 3, 1992, are AFFIRMED.

SO ORDERED.
G.R. No. 137592 December 12, 2001

ANG MGA KAANIB SA IGLESIA NG DIOS KAY KRISTO HESUS, H.S.K. SA BANSANG
PILIPINAS, INC.,petitioner,
vs.
IGLESIA NG DIOS KAY CRISTO JESUS, HALIGI AT SUHAY NG KATOTOHANAN, respondent.

YNARES-SANTIAGO, J.:

This is a petition for review assailing the Decision dated October 7, 1997 1 and the Resolution dated
February 16, 19992 of the Court of Appeals in CA-G.R. SP No. 40933, which affirmed the Decision of
the Securities and Exchange and Commission (SEC) in SEC-AC No. 539.3

Respondent Iglesia ng Dios Kay Cristo Jesus, Haligi at Suhay ng Katotohanan (Church of God in
Christ Jesus, the Pillar and Ground of Truth),4 is a non-stock religious society or corporation
registered in 1936. Sometime in 1976, one Eliseo Soriano and several other members of respondent
corporation disassociated themselves from the latter and succeeded in registering on March 30,
1977 a new non-stock religious society or corporation, named Iglesia ng Dios Kay Kristo Hesus,
Haligi at Saligan ng Katotohanan.

On July 16, 1979, respondent corporation filed with the SEC a petition to compel the Iglesia ng Dios
Kay Kristo Hesus, Haligi at Saligan ng Katotohanan to change its corporate name, which petition
was docketed as SEC Case No. 1774. On May 4, 1988, the SEC rendered judgment in favor of
respondent, ordering the Iglesia ng Dios Kay Kristo Hesus, Haligi at Saligan ng Katotohanan to
change its corporate name to another name that is not similar or identical to any name already used
by a corporation, partnership or association registered with the Commission.5No appeal was taken
from said decision.

It appears that during the pendency of SEC Case No. 1774, Soriano, et al., caused the registration
on April 25, 1980 of petitioner corporation, Ang Mga Kaanib sa Iglesia ng Dios Kay Kristo Hesus,
H.S.K, sa Bansang Pilipinas. The acronym "H.S.K." stands for Haligi at Saligan ng Katotohanan.6

On March 2, 1994, respondent corporation filed before the SEC a petition, docketed as SEC Case
No. 03-94-4704, praying that petitioner be compelled to change its corporate name and be barred
from using the same or similar name on the ground that the same causes confusion among their
members as well as the public.

Petitioner filed a motion to dismiss on the ground of lack of cause of action. The motion to dismiss
was denied. Thereafter, for failure to file an answer, petitioner was declared in default and
respondent was allowed to present its evidence ex parte.

On November 20, 1995, the SEC rendered a decision ordering petitioner to change its corporate
name. The dispositive portion thereof reads:

PREMISES CONSIDERED, judgment is hereby rendered in favor of the petitioner

(respondent herein).

Respondent Mga Kaanib sa Iglesia ng Dios Kay Kristo Jesus (sic), H.S.K. sa Bansang
Pilipinas (petitioner herein) is hereby MANDATED to change its corporate name to another
not deceptively similar or identical to the same already used by the Petitioner, any
corporation, association, and/or partnership presently registered with the Commission.
 Let a copy of this Decision be furnished the Records Division and the Corporate and Legal
Department [CLD] of this Commission for their records, reference and/or for whatever
requisite action, if any, to be undertaken at their end.

SO ORDERED.7

Petitioner appealed to the SEC En Banc, where its appeal was docketed as SEC-AC No. 539. In a
decision dated March 4, 1996, the SEC En Banc affirmed the above decision, upon a finding that
petitioner's corporate name was identical or confusingly or deceptively similar to that of respondent's
corporate name.8

Petitioner filed a petition for review with the Court of Appeals. On October 7, 1997, the Court of
Appeals rendered the assailed decision affirming the decision of the SEC En Banc. Petitioner's
motion for reconsideration was denied by the Court of Appeals on February 16, 1992.

Hence, the instant petition for review, raising the following assignment of errors:

THE HONORABLE COURT OF APPEALS ERRED IN CONCLUDING THAT PETITIONER HAS

NOT BEEN DEPRIVED OF ITS RIGHT TO PROCEDURAL DUE PROCESS, THE HONORABLE
COURT OF APPEALS DISREGARDED THE JURISPRUDENCE APPLICABLE TO THE CASE AT
BAR AND INSTEAD RELIED ON TOTALLY INAPPLICABLE JURISPRUDENCE.

II

THE HONORABLE COURT OF APPEALS ERRED IN ITS INTERPRETATION OF THE CIVIL

CODE PROVISIONS ON EXTINCTIVE PRESCRIPTION, THEREBY RESULTING IN ITS FAILURE
TO FIND THAT THE RESPONDENT'S RIGHT OF ACTION TO INSTITUTE THE SEC CASE HAS
SINCE PRESCRIBED PRIOR TO ITS INSTITUTION.

III

THE HONORABLE COURT OF APPEALS FAILED TO CONSIDER AND PROPERLY APPLY THE
EXCEPTIONS ESTABLISHED BY JURISPRUDENCE IN THE APPLICATION OF SECTION 18 OF
THE CORPORATION CODE TO THE INSTANT CASE.

IV

THE HONORABLE COURT OF APPEALS FAILED TO PROPERLY APPRECIATE THE SCOPE OF

THE CONSTITUTIONAL GUARANTEE ON RELIGIOUS FREEDOM, THEREBY FAILING TO
APPLY THE SAME TO PROTECT PETITIONER'S RIGHTS.9

Invoking the case of Legarda v. Court of Appeals,10 petitioner insists that the decision of the Court of
Appeals and the SEC should be set aside because the negligence of its former counsel of record,
Atty. Joaquin Garaygay, in failing to file an answer after its motion to dismiss was denied by the
SEC, deprived them of their day in court.

The contention is without merit. As a general rule, the negligence of counsel binds the client. This is
based on the rule that any act performed by a lawyer within the scope of his general or implied
authority is regarded as an act of his client.11 An exception to the foregoing is where the reckless or
gross negligence of the counsel deprives the client of due process of law. 12 Said exception,
however, does not obtain in the present case.

In Legarda v. Court of Appeals, the effort of the counsel in defending his client's cause consisted in
filing a motion for extension of time to file answer before the trial court. When his client was declared
in default, the counsel did nothing and allowed the judgment by default to become final and
executory. Upon the insistence of his client, the counsel filed a petition to annul the judgment with
the Court of Appeals, which denied the petition, and again the counsel allowed the denial to become
final and executory. This Court found the counsel grossly negligent and consequently declared as
null and void the decision adverse to his client.

The factual antecedents of the case at bar are different. Atty. Garaygay filed before the SEC a
motion to dismiss on the ground of lack of cause of action. When his client was declared in default
for failure to file an answer, Atty. Garaygay moved for reconsideration and lifting of the order of
default.13 After judgment by default was rendered against petitioner corporation, Atty. Garaygay filed
a motion for extension of time to appeal/motion for reconsideration, and thereafter a motion to set
aside the decision.14

Evidently, Atty. Garaygay was only guilty of simple negligence. Although he failed to file an answer
that led to the rendition of a judgment by default against petitioner, his efforts were palpably real,
albeit bereft of zeal.15

Likewise, the issue of prescription, which petitioner raised for the first time on appeal to the Court of
Appeals, is untenable. Its failure to raise prescription before the SEC can only be construed as a
waiver of that defense.16 At any rate, the SEC has the authority to de-register at all times and under
all circumstances corporate names which in its estimation are likely to spawn confusion. It is the duty
of the SEC to prevent confusion in the use of corporate names not only for the protection of the
corporations involved but more so for the protection of the public.17

Section 18 of the Corporation Code provides:

Corporate Name. — No corporate name may be allowed by the Securities and Exchange
Commission if the proposed name is identical or deceptively or confusingly similar to that of
any existing corporation or to any other name already protected by law or is patently
deceptive, confusing or is contrary to existing laws. When a change in the corporate name is
approved, the Commission shall issue an amended certificate of incorporation under the
amended name.

Corollary thereto, the pertinent portion of the SEC Guidelines on Corporate Names states:

(d) If the proposed name contains a word similar to a word already used as part of the firm
name or style of a registered company, the proposed name must contain two other words
different from the name of the company already registered;

Parties organizing a corporation must choose a name at their peril; and the use of a name similar to
one adopted by another corporation, whether a business or a nonprofit organization, if misleading or
likely to injure in the exercise of its corporate functions, regardless of intent, may be prevented by
the corporation having a prior right, by a suit for injunction against the new corporation to prevent the
use of the name.18
Petitioner claims that it complied with the aforecited SEC guideline by adding not only two but eight
words to their registered name, to wit: "Ang Mga Kaanib" and "Sa Bansang Pilipinas, Inc.," which,
petitioner argues, effectively distinguished it from respondent corporation.

The additional words "Ang Mga Kaanib" and "Sa Bansang Pilipinas, Inc." in petitioner's name are, as
correctly observed by the SEC, merely descriptive of and also referring to the members, or kaanib,
of respondent who are likewise residing in the Philippines. These words can hardly serve as an
effective differentiating medium necessary to avoid confusion or difficulty in distinguishing petitioner
from respondent. This is especially so, since both petitioner and respondent corporations are using
the same acronym — H.S.K.;19 not to mention the fact that both are espousing religious beliefs and
operating in the same place. Parenthetically, it is well to mention that the acronym H.S.K. used by
petitioner stands for "Haligi at Saligan ng Katotohanan."20

Then, too, the records reveal that in holding out their corporate name to the public, petitioner
highlights the dominant words "IGLESIA NG DIOS KAY KRISTO HESUS, HALIGI AT SALIGAN NG
KATOTOHANAN," which is strikingly similar to respondent's corporate name, thus making it even
more evident that the additional words "Ang Mga Kaanib" and "Sa Bansang Pilipinas, Inc.", are
merely descriptive of and pertaining to the members of respondent corporation.21

Significantly, the only difference between the corporate names of petitioner and respondent are the
words SALIGAN and SUHAY. These words are synonymous — both mean ground, foundation or
support. Hence, this case is on all fours with Universal Mills Corporation v. Universal Textile Mills,
Inc.,22 where the Court ruled that the corporate names Universal Mills Corporation and Universal
Textile Mills, Inc., are undisputably so similar that even under the test of "reasonable care and
observation" confusion may arise.

Furthermore, the wholesale appropriation by petitioner of respondent's corporate name cannot find
justification under the generic word rule. We agree with the Court of Appeals' conclusion that a
contrary ruling would encourage other corporations to adopt verbatim and register an existing and
protected corporate name, to the detriment of the public.

The fact that there are other non-stock religious societies or corporations using the names Church of
the Living God, Inc., Church of God Jesus Christ the Son of God the Head, Church of God in Christ
& By the Holy Spirit, and other similar names, is of no consequence. It does not authorize the use by
petitioner of the essential and distinguishing feature of respondent's registered and protected
corporate name.23

We need not belabor the fourth issue raised by petitioner. Certainly, ordering petitioner to change its
corporate name is not a violation of its constitutionally guaranteed right to religious freedom. In so
doing, the SEC merely compelled petitioner to abide by one of the SEC guidelines in the approval of
partnership and corporate names, namely its undertaking to manifest its willingness to change its
corporate name in the event another person, firm, or entity has acquired a prior right to the use of
the said firm name or one deceptively or confusingly similar to it.

WHEREFORE, in view of all the foregoing, the instant petition for review is DENIED. The appealed
decision of the Court of Appeals is AFFIRMED in toto.

SO ORDERED.
G.R. No. L-45911 April 11, 1979

JOHN GOKONGWEI, JR., petitioner,

vs.
SECURITIES AND EXCHANGE COMMISSION, ANDRES M. SORIANO, JOSE M. SORIANO,
ENRIQUE ZOBEL, ANTONIO ROXAS, EMETERIO BUNAO, WALTHRODE B. CONDE, MIGUEL
ORTIGAS, ANTONIO PRIETO, SAN MIGUEL CORPORATION, EMIGDIO TANJUATCO, SR., and
EDUARDO R. VISAYA, respondents.

De Santos, Balgos & Perez for petitioner.

Angara, Abello, Concepcion, Regala, Cruz Law Offices for respondents Sorianos

Siguion Reyna, Montecillo & Ongsiako for respondent San Miguel Corporation.

R. T Capulong for respondent Eduardo R. Visaya.

ANTONIO, J.:

The instant petition for certiorari, mandamus and injunction, with prayer for issuance of writ of
preliminary injunction, arose out of two cases filed by petitioner with the Securities and Exchange
Commission, as follows:

SEC CASE NO 1375

On October 22, 1976, petitioner, as stockholder of respondent San Miguel Corporation, filed with the
Securities and Exchange Commission (SEC) a petition for "declaration of nullity of amended by-
laws, cancellation of certificate of filing of amended by- laws, injunction and damages with prayer for
a preliminary injunction" against the majority of the members of the Board of Directors and San
Miguel Corporation as an unwilling petitioner. The petition, entitled "John Gokongwei Jr. vs. Andres
Soriano, Jr., Jose M. Soriano, Enrique Zobel, Antonio Roxas, Emeterio Bunao, Walthrode B. Conde,
Miguel Ortigas, Antonio Prieto and San Miguel Corporation", was docketed as SEC Case No. 1375.

As a first cause of action, petitioner alleged that on September 18, 1976, individual respondents
amended by bylaws of the corporation, basing their authority to do so on a resolution of the
stockholders adopted on March 13, 1961, when the outstanding capital stock of respondent
corporation was only P70,139.740.00, divided into 5,513,974 common shares at P10.00 per share
and 150,000 preferred shares at P100.00 per share. At the time of the amendment, the outstanding
and paid up shares totalled 30,127,047 with a total par value of P301,270,430.00. It was contended
that according to section 22 of the Corporation Law and Article VIII of the by-laws of the corporation,
the power to amend, modify, repeal or adopt new by-laws may be delegated to the Board of
Directors only by the affirmative vote of stockholders representing not less than 2/3 of the subscribed
and paid up capital stock of the corporation, which 2/3 should have been computed on the basis of
the capitalization at the time of the amendment. Since the amendment was based on the 1961
authorization, petitioner contended that the Board acted without authority and in usurpation of the
power of the stockholders.

As a second cause of action, it was alleged that the authority granted in 1961 had already been
exercised in 1962 and 1963, after which the authority of the Board ceased to exist.
As a third cause of action, petitioner averred that the membership of the Board of Directors had
changed since the authority was given in 1961, there being six (6) new directors.

As a fourth cause of action, it was claimed that prior to the questioned amendment, petitioner had all
the qualifications to be a director of respondent corporation, being a Substantial stockholder thereof;
that as a stockholder, petitioner had acquired rights inherent in stock ownership, such as the rights
to vote and to be voted upon in the election of directors; and that in amending the by-laws,
respondents purposely provided for petitioner's disqualification and deprived him of his vested right
as afore-mentioned hence the amended by-laws are null and void. 1

As additional causes of action, it was alleged that corporations have no inherent power to disqualify
a stockholder from being elected as a director and, therefore, the questioned act is ultra vires and
void; that Andres M. Soriano, Jr. and/or Jose M. Soriano, while representing other corporations,
entered into contracts (specifically a management contract) with respondent corporation, which was
allowed because the questioned amendment gave the Board itself the prerogative of determining
whether they or other persons are engaged in competitive or antagonistic business; that the portion
of the amended bylaws which states that in determining whether or not a person is engaged in
competitive business, the Board may consider such factors as business and family relationship, is
unreasonable and oppressive and, therefore, void; and that the portion of the amended by-laws
which requires that "all nominations for election of directors ... shall be submitted in writing to the
Board of Directors at least five (5) working days before the date of the Annual Meeting" is likewise
unreasonable and oppressive.

It was, therefore, prayed that the amended by-laws be declared null and void and the certificate of
filing thereof be cancelled, and that individual respondents be made to pay damages, in specified
amounts, to petitioner.

On October 28, 1976, in connection with the same case, petitioner filed with the Securities and
Exchange Commission an "Urgent Motion for Production and Inspection of Documents", alleging that
the Secretary of respondent corporation refused to allow him to inspect its records despite request
made by petitioner for production of certain documents enumerated in the request, and that
respondent corporation had been attempting to suppress information from its stockholders despite a
negative reply by the SEC to its query regarding their authority to do so. Among the documents
requested to be copied were (a) minutes of the stockholder's meeting field on March 13, 1961, (b)
copy of the management contract between San Miguel Corporation and A. Soriano Corporation
(ANSCOR); (c) latest balance sheet of San Miguel International, Inc.; (d) authority of the
stockholders to invest the funds of respondent corporation in San Miguel International, Inc.; and (e)
lists of salaries, allowances, bonuses, and other compensation, if any, received by Andres M.
Soriano, Jr. and/or its successor-in-interest.

The "Urgent Motion for Production and Inspection of Documents" was opposed by respondents,
alleging, among others that the motion has no legal basis; that the demand is not based on good
faith; that the motion is premature since the materiality or relevance of the evidence sought cannot
be determined until the issues are joined, that it fails to show good cause and constitutes continued
harrasment, and that some of the information sought are not part of the records of the corporation
and, therefore, privileged.

During the pendency of the motion for production, respondents San Miguel Corporation, Enrique
Conde, Miguel Ortigas and Antonio Prieto filed their answer to the petition, denying the substantial
allegations therein and stating, by way of affirmative defenses that "the action taken by the Board of
Directors on September 18, 1976 resulting in the ... amendments is valid and legal because the
power to "amend, modify, repeal or adopt new By-laws" delegated to said Board on March 13, 1961
and long prior thereto has never been revoked of SMC"; that contrary to petitioner's claim, "the vote
requirement for a valid delegation of the power to amend, repeal or adopt new by-laws is determined
in relation to the total subscribed capital stock at the time the delegation of said power is made, not
when the Board opts to exercise said delegated power"; that petitioner has not availed of his intra-
corporate remedy for the nullification of the amendment, which is to secure its repeal by vote of the
stockholders representing a majority of the subscribed capital stock at any regular or special
meeting, as provided in Article VIII, section I of the by-laws and section 22 of the Corporation law,
hence the, petition is premature; that petitioner is estopped from questioning the amendments on the
ground of lack of authority of the Board. since he failed, to object to other amendments made on the
basis of the same 1961 authorization: that the power of the corporation to amend its by-laws is
broad, subject only to the condition that the by-laws adopted should not be respondent corporation
inconsistent with any existing law; that respondent corporation should not be precluded from
adopting protective measures to minimize or eliminate situations where its directors might be
tempted to put their personal interests over t I hat of the corporation; that the questioned amended
by-laws is a matter of internal policy and the judgment of the board should not be interfered with:
That the by-laws, as amended, are valid and binding and are intended to prevent the possibility of
violation of criminal and civil laws prohibiting combinations in restraint of trade; and that the petition
states no cause of action. It was, therefore, prayed that the petition be dismissed and that petitioner
be ordered to pay damages and attorney's fees to respondents. The application for writ of
preliminary injunction was likewise on various grounds.

Respondents Andres M. Soriano, Jr. and Jose M. Soriano filed their opposition to the petition,
denying the material averments thereof and stating, as part of their affirmative defenses, that in
August 1972, the Universal Robina Corporation (Robina), a corporation engaged in business
competitive to that of respondent corporation, began acquiring shares therein. until September 1976
when its total holding amounted to 622,987 shares: that in October 1972, the Consolidated Foods
Corporation (CFC) likewise began acquiring shares in respondent (corporation. until its total holdings
amounted to P543,959.00 in September 1976; that on January 12, 1976, petitioner, who is president
and controlling shareholder of Robina and CFC (both closed corporations) purchased 5,000 shares
of stock of respondent corporation, and thereafter, in behalf of himself, CFC and Robina, "conducted
malevolent and malicious publicity campaign against SMC" to generate support from the stockholder
"in his effort to secure for himself and in representation of Robina and CFC interests, a seat in the
Board of Directors of SMC", that in the stockholders' meeting of March 18, 1976, petitioner was
rejected by the stockholders in his bid to secure a seat in the Board of Directors on the basic issue
that petitioner was engaged in a competitive business and his securing a seat would have subjected
respondent corporation to grave disadvantages; that "petitioner nevertheless vowed to secure a seat
in the Board of Directors at the next annual meeting; that thereafter the Board of Directors amended
the by-laws as afore-stated.

As counterclaims, actual damages, moral damages, exemplary damages, expenses of litigation and
attorney's fees were presented against petitioner.

Subsequently, a Joint Omnibus Motion for the striking out of the motion for production and inspection
of documents was filed by all the respondents. This was duly opposed by petitioner. At this juncture,
respondents Emigdio Tanjuatco, Sr. and Eduardo R. Visaya were allowed to intervene as oppositors
and they accordingly filed their oppositions-intervention to the petition.

On December 29, 1976, the Securities and Exchange Commission resolved the motion for
production and inspection of documents by issuing Order No. 26, Series of 1977, stating, in part as
follows:
 Considering the evidence submitted before the Commission by the petitioner and
respondents in the above-entitled case, it is hereby ordered:

1. That respondents produce and permit the inspection, copying and photographing,
by or on behalf of the petitioner-movant, John Gokongwei, Jr., of the minutes of the
stockholders' meeting of the respondent San Miguel Corporation held on March 13,
1961, which are in the possession, custody and control of the said corporation, it
appearing that the same is material and relevant to the issues involved in the main
case. Accordingly, the respondents should allow petitioner-movant entry in the
principal office of the respondent Corporation, San Miguel Corporation on January
14, 1977, at 9:30 o'clock in the morning for purposes of enforcing the rights herein
granted; it being understood that the inspection, copying and photographing of the
said documents shall be undertaken under the direct and strict supervision of this
Commission. Provided, however, that other documents and/or papers not heretofore
included are not covered by this Order and any inspection thereof shall require the
prior permission of this Commission;

2. As to the Balance Sheet of San Miguel International, Inc. as well as the list of
salaries, allowances, bonuses, compensation and/or remuneration received by
respondent Jose M. Soriano, Jr. and Andres Soriano from San Miguel International,
Inc. and/or its successors-in- interest, the Petition to produce and inspect the same is
hereby DENIED, as petitioner-movant is not a stockholder of San Miguel
International, Inc. and has, therefore, no inherent right to inspect said documents;

3. In view of the Manifestation of petitioner-movant dated November 29, 1976,

withdrawing his request to copy and inspect the management contract between San
Miguel Corporation and A. Soriano Corporation and the renewal and amendments
thereof for the reason that he had already obtained the same, the Commission takes
note thereof; and

4. Finally, the Commission holds in abeyance the resolution on the matter of

production and inspection of the authority of the stockholders of San Miguel
Corporation to invest the funds of respondent corporation in San Miguel International,
Inc., until after the hearing on the merits of the principal issues in the above-entitled
case.

This Order is immediately executory upon its approval. 2

Dissatisfied with the foregoing Order, petitioner moved for its reconsideration.

Meanwhile, on December 10, 1976, while the petition was yet to be heard, respondent corporation
issued a notice of special stockholders' meeting for the purpose of "ratification and confirmation of
the amendment to the By-laws", setting such meeting for February 10, 1977. This prompted
petitioner to ask respondent Commission for a summary judgment insofar as the first cause of action
is concerned, for the alleged reason that by calling a special stockholders' meeting for the aforesaid
purpose, private respondents admitted the invalidity of the amendments of September 18, 1976. The
motion for summary judgment was opposed by private respondents. Pending action on the motion,
petitioner filed an "Urgent Motion for the Issuance of a Temporary Restraining Order", praying that
pending the determination of petitioner's application for the issuance of a preliminary injunction
and/or petitioner's motion for summary judgment, a temporary restraining order be issued,
restraining respondents from holding the special stockholder's meeting as scheduled. This motion
was duly opposed by respondents.
On February 10, 1977, respondent Commission issued an order denying the motion for issuance of
temporary restraining order. After receipt of the order of denial, respondents conducted the special
stockholders' meeting wherein the amendments to the by-laws were ratified. On February 14, 1977,
petitioner filed a consolidated motion for contempt and for nullification of the special stockholders'
meeting.

A motion for reconsideration of the order denying petitioner's motion for summary judgment was filed
by petitioner before respondent Commission on March 10, 1977. Petitioner alleges that up to the
time of the filing of the instant petition, the said motion had not yet been scheduled for hearing.
Likewise, the motion for reconsideration of the order granting in part and denying in part petitioner's
motion for production of record had not yet been resolved.

In view of the fact that the annul stockholders' meeting of respondent corporation had been
scheduled for May 10, 1977, petitioner filed with respondent Commission a Manifestation stating that
he intended to run for the position of director of respondent corporation. Thereafter, respondents
filed a Manifestation with respondent Commission, submitting a Resolution of the Board of Directors
of respondent corporation disqualifying and precluding petitioner from being a candidate for director
unless he could submit evidence on May 3, 1977 that he does not come within the disqualifications
specified in the amendment to the by-laws, subject matter of SEC Case No. 1375. By reason
thereof, petitioner filed a manifestation and motion to resolve pending incidents in the case and to
issue a writ of injunction, alleging that private respondents were seeking to nullify and render
ineffectual the exercise of jurisdiction by the respondent Commission, to petitioner's irreparable
damage and prejudice, Allegedly despite a subsequent Manifestation to prod respondent
Commission to act, petitioner was not heard prior to the date of the stockholders' meeting.

Petitioner alleges that there appears a deliberate and concerted inability on the part of the SEC to
act hence petitioner came to this Court.

SEC. CASE NO. 1423

Petitioner likewise alleges that, having discovered that respondent corporation has been investing
corporate funds in other corporations and businesses outside of the primary purpose clause of the
corporation, in violation of section 17 1/2 of the Corporation Law, he filed with respondent
Commission, on January 20, 1977, a petition seeking to have private respondents Andres M.
Soriano, Jr. and Jose M. Soriano, as well as the respondent corporation declared guilty of such
violation, and ordered to account for such investments and to answer for damages.

On February 4, 1977, motions to dismiss were filed by private respondents, to which a consolidated
motion to strike and to declare individual respondents in default and an opposition ad abundantiorem
cautelam were filed by petitioner. Despite the fact that said motions were filed as early as February
4, 1977, the commission acted thereon only on April 25, 1977, when it denied respondents' motion to
dismiss and gave them two (2) days within which to file their answer, and set the case for hearing on
April 29 and May 3, 1977.

Respondents issued notices of the annual stockholders' meeting, including in the Agenda thereof,
the following:

6. Re-affirmation of the authorization to the Board of Directors by the stockholders at

the meeting on March 20, 1972 to invest corporate funds in other companies or
businesses or for purposes other than the main purpose for which the Corporation
has been organized, and ratification of the investments thereafter made pursuant
thereto.
By reason of the foregoing, on April 28, 1977, petitioner filed with the SEC an urgent motion for the
issuance of a writ of preliminary injunction to restrain private respondents from taking up Item 6 of
the Agenda at the annual stockholders' meeting, requesting that the same be set for hearing on May
3, 1977, the date set for the second hearing of the case on the merits. Respondent Commission,
however, cancelled the dates of hearing originally scheduled and reset the same to May 16 and 17,
1977, or after the scheduled annual stockholders' meeting. For the purpose of urging the
Commission to act, petitioner filed an urgent manifestation on May 3, 1977, but this notwithstanding,
no action has been taken up to the date of the filing of the instant petition.

With respect to the afore-mentioned SEC cases, it is petitioner's contention before this Court that
respondent Commission gravely abused its discretion when it failed to act with deliberate dispatch
on the motions of petitioner seeking to prevent illegal and/or arbitrary impositions or limitations upon
his rights as stockholder of respondent corporation, and that respondent are acting oppressively
against petitioner, in gross derogation of petitioner's rights to property and due process. He prayed
that this Court direct respondent SEC to act on collateral incidents pending before it.

On May 6, 1977, this Court issued a temporary restraining order restraining private respondents
from disqualifying or preventing petitioner from running or from being voted as director of respondent
corporation and from submitting for ratification or confirmation or from causing the ratification or
confirmation of Item 6 of the Agenda of the annual stockholders' meeting on May 10, 1977, or from
Making effective the amended by-laws of respondent corporation, until further orders from this Court
or until the Securities and Ex-change Commission acts on the matters complained of in the instant
petition.

On May 14, 1977, petitioner filed a Supplemental Petition, alleging that after a restraining order had
been issued by this Court, or on May 9, 1977, the respondent Commission served upon petitioner
copies of the following orders:

(1) Order No. 449, Series of 1977 (SEC Case No. 1375); denying petitioner's motion for
reconsideration, with its supplement, of the order of the Commission denying in part petitioner's
motion for production of documents, petitioner's motion for reconsideration of the order denying the
issuance of a temporary restraining order denying the issuance of a temporary restraining order, and
petitioner's consolidated motion to declare respondents in contempt and to nullify the stockholders'
meeting;

(2) Order No. 450, Series of 1977 (SEC Case No. 1375), allowing petitioner to run as a director of
respondent corporation but stating that he should not sit as such if elected, until such time that the
Commission has decided the validity of the bylaws in dispute, and denying deferment of Item 6 of
the Agenda for the annual stockholders' meeting; and

(3) Order No. 451, Series of 1977 (SEC Case No. 1375), denying petitioner's motion for
reconsideration of the order of respondent Commission denying petitioner's motion for summary
judgment;

It is petitioner's assertions, anent the foregoing orders, (1) that respondent Commission acted with
indecent haste and without circumspection in issuing the aforesaid orders to petitioner's irreparable
damage and injury; (2) that it acted without jurisdiction and in violation of petitioner's right to due
process when it decided en banc an issue not raised before it and still pending before one of its
Commissioners, and without hearing petitioner thereon despite petitioner's request to have the same
calendared for hearing , and (3) that the respondents acted oppressively against the petitioner in
violation of his rights as a stockholder, warranting immediate judicial intervention.
It is prayed in the supplemental petition that the SEC orders complained of be declared null and void
and that respondent Commission be ordered to allow petitioner to undertake discovery proceedings
relative to San Miguel International. Inc. and thereafter to decide SEC Cases No. 1375 and 1423 on
the merits.

On May 17, 1977, respondent SEC, Andres M. Soriano, Jr. and Jose M. Soriano filed their comment,
alleging that the petition is without merit for the following reasons:

(1) that the petitioner the interest he represents are engaged in business competitive and
antagonistic to that of respondent San Miguel Corporation, it appearing that the owns and controls a
greater portion of his SMC stock thru the Universal Robina Corporation and the Consolidated Foods
Corporation, which corporations are engaged in business directly and substantially competing with
the allied businesses of respondent SMC and of corporations in which SMC has substantial
investments. Further, when CFC and Robina had accumulated investments. Further, when CFC and
Robina had accumulated shares in SMC, the Board of Directors of SMC realized the clear and
present danger that competitors or antagonistic parties may be elected directors and thereby have
easy and direct access to SMC's business and trade secrets and plans;

(2) that the amended by law were adopted to preserve and protect respondent SMC from the clear
and present danger that business competitors, if allowed to become directors, will illegally and
unfairly utilize their direct access to its business secrets and plans for their own private gain to the
irreparable prejudice of respondent SMC, and, ultimately, its stockholders. Further, it is asserted that
membership of a competitor in the Board of Directors is a blatant disregard of no less that the
Constitution and pertinent laws against combinations in restraint of trade;

(3) that by laws are valid and binding since a corporation has the inherent right and duty to preserve
and protect itself by excluding competitors and antogonistic parties, under the law of self-
preservation, and it should be allowed a wide latitude in the selection of means to preserve itself;

(4) that the delay in the resolution and disposition of SEC Cases Nos. 1375 and 1423 was due to
petitioner's own acts or omissions, since he failed to have the petition to suspend, pendente lite the
amended by-laws calendared for hearing. It was emphasized that it was only on April 29, 1977 that
petitioner calendared the aforesaid petition for suspension (preliminary injunction) for hearing on
May 3, 1977. The instant petition being dated May 4, 1977, it is apparent that respondent
Commission was not given a chance to act "with deliberate dispatch", and

(5) that, even assuming that the petition was meritorious was, it has become moot and academic
because respondent Commission has acted on the pending incidents, complained of. It was,
therefore, prayed that the petition be dismissed.

On May 21, 1977, respondent Emigdio G, Tanjuatco, Sr. filed his comment, alleging that the petition
has become moot and academic for the reason, among others that the acts of private respondent
sought to be enjoined have reference to the annual meeting of the stockholders of respondent San
Miguel Corporation, which was held on may 10, 1977; that in said meeting, in compliance with the
order of respondent Commission, petitioner was allowed to run and be voted for as director; and that
in the same meeting, Item 6 of the Agenda was discussed, voted upon, ratified and confirmed.
Further it was averred that the questions and issues raised by petitioner are pending in the
Securities and Exchange Commission which has acquired jurisdiction over the case, and no hearing
on the merits has been had; hence the elevation of these issues before the Supreme Court is
premature.
Petitioner filed a reply to the aforesaid comments, stating that the petition presents justiciable
questions for the determination of this Court because (1) the respondent Commission acted without
circumspection, unfairly and oppresively against petitioner, warranting the intervention of this Court;
(2) a derivative suit, such as the instant case, is not rendered academic by the act of a majority of
stockholders, such that the discussion, ratification and confirmation of Item 6 of the Agenda of the
annual stockholders' meeting of May 10, 1977 did not render the case moot; that the amendment to
the bylaws which specifically bars petitioner from being a director is void since it deprives him of his
vested rights.

Respondent Commission, thru the Solicitor General, filed a separate comment, alleging that after
receiving a copy of the restraining order issued by this Court and noting that the restraining order did
not foreclose action by it, the Commission en banc issued Orders Nos. 449, 450 and 451 in SEC
Case No. 1375.

In answer to the allegation in the supplemental petition, it states that Order No. 450 which denied
deferment of Item 6 of the Agenda of the annual stockholders' meeting of respondent corporation,
took into consideration an urgent manifestation filed with the Commission by petitioner on May 3,
1977 which prayed, among others, that the discussion of Item 6 of the Agenda be deferred. The
reason given for denial of deferment was that "such action is within the authority of the corporation
as well as falling within the sphere of stockholders' right to know, deliberate upon and/or to express
their wishes regarding disposition of corporate funds considering that their investments are the ones
directly affected." It was alleged that the main petition has, therefore, become moot and academic.

On September 29,1977, petitioner filed a second supplemental petition with prayer for preliminary
injunction, alleging that the actuations of respondent SEC tended to deprive him of his right to due
process, and "that all possible questions on the facts now pending before the respondent
Commission are now before this Honorable Court which has the authority and the competence to act
on them as it may see fit." (Reno, pp. 927-928.)

Petitioner, in his memorandum, submits the following issues for resolution;

(1) whether or not the provisions of the amended by-laws of respondent corporation, disqualifying a
competitor from nomination or election to the Board of Directors are valid and reasonable;

(2) whether or not respondent SEC gravely abused its discretion in denying petitioner's request for
an examination of the records of San Miguel International, Inc., a fully owned subsidiary of San
Miguel Corporation; and

(3) whether or not respondent SEC committed grave abuse of discretion in allowing discussion of
Item 6 of the Agenda of the Annual Stockholders' Meeting on May 10, 1977, and the ratification of
the investment in a foreign corporation of the corporate funds, allegedly in violation of section 17-1/2
of the Corporation Law.

Whether or not amended by-laws are valid is purely a legal question which public interest requires to
be resolved —

It is the position of the petitioner that "it is not necessary to remand the case to respondent SEC for
an appropriate ruling on the intrinsic validity of the amended by-laws in compliance with the principle
of exhaustion of administrative remedies", considering that: first: "whether or not the provisions of the
amended by-laws are intrinsically valid ... is purely a legal question. There is no factual dispute as to
what the provisions are and evidence is not necessary to determine whether such amended by-laws
are valid as framed and approved ... "; second: "it is for the interest and guidance of the public that
an immediate and final ruling on the question be made ... "; third: "petitioner was denied due process
by SEC" when "Commissioner de Guzman had openly shown prejudice against petitioner ... ", and
"Commissioner Sulit ... approved the amended by-laws ex-parte and obviously found the same
intrinsically valid; and finally: "to remand the case to SEC would only entail delay rather than serve
the ends of justice."

Respondents Andres M. Soriano, Jr. and Jose M. Soriano similarly pray that this Court resolve the
legal issues raised by the parties in keeping with the "cherished rules of procedure" that "a court
should always strive to settle the entire controversy in a single proceeding leaving no root or branch
to bear the seeds of future ligiation", citing Gayong v. Gayos. 3 To the same effect is the prayer of
San Miguel Corporation that this Court resolve on the merits the validity of its amended by laws and
the rights and obligations of the parties thereunder, otherwise "the time spent and effort exerted by
the parties concerned and, more importantly, by this Honorable Court, would have been for naught
because the main question will come back to this Honorable Court for final resolution." Respondent
Eduardo R. Visaya submits a similar appeal.

It is only the Solicitor General who contends that the case should be remanded to the SEC for
hearing and decision of the issues involved, invoking the latter's primary jurisdiction to hear and
decide case involving intra-corporate controversies.

It is an accepted rule of procedure that the Supreme Court should always strive to settle the entire
controversy in a single proceeding, leaving nor root or branch to bear the seeds of future
litigation. 4 Thus, in Francisco v. City of Davao, 5 this Court resolved to decide the case on the merits
instead of remanding it to the trial court for further proceedings since the ends of justice would not be
subserved by the remand of the case. In Republic v. Security Credit and Acceptance Corporation, et
al., 6 this Court, finding that the main issue is one of law, resolved to decide the case on the merits
"because public interest demands an early disposition of the case", and in Republic v. Central Surety
and Insurance Company, 7 this Court denied remand of the third-party complaint to the trial court for
further proceedings, citing precedent where this Court, in similar situations resolved to decide the
cases on the merits, instead of remanding them to the trial court where (a) the ends of justice would
not be subserved by the remand of the case; or (b) where public interest demand an early
disposition of the case; or (c) where the trial court had already received all the evidence presented
by both parties and the Supreme Court is now in a position, based upon said evidence, to decide the
case on its merits. 8 It is settled that the doctrine of primary jurisdiction has no application where only
a question of law is involved. 8a Because uniformity may be secured through review by a single
Supreme Court, questions of law may appropriately be determined in the first instance by
courts. 8b In the case at bar, there are facts which cannot be denied, viz.: that the amended by-laws
were adopted by the Board of Directors of the San Miguel Corporation in the exercise of the power
delegated by the stockholders ostensibly pursuant to section 22 of the Corporation Law; that in a
special meeting on February 10, 1977 held specially for that purpose, the amended by-laws were
ratified by more than 80% of the stockholders of record; that the foreign investment in the Hongkong
Brewery and Distellery, a beer manufacturing company in Hongkong, was made by the San Miguel
Corporation in 1948; and that in the stockholders' annual meeting held in 1972 and 1977, all foreign
investments and operations of San Miguel Corporation were ratified by the stockholders.

II

Whether or not the amended by-laws of SMC of disqualifying a competitor from nomination or
election to the Board of Directors of SMC are valid and reasonable —
The validity or reasonableness of a by-law of a corporation in purely a question of law. 9 Whether the
by-law is in conflict with the law of the land, or with the charter of the corporation, or is in a legal
sense unreasonable and therefore unlawful is a question of law. 10 This rule is subject, however, to
the limitation that where the reasonableness of a by-law is a mere matter of judgment, and one upon
which reasonable minds must necessarily differ, a court would not be warranted in substituting its
judgment instead of the judgment of those who are authorized to make by-laws and who have
exercised their authority. 11

Petitioner claims that the amended by-laws are invalid and unreasonable because they were tailored
to suppress the minority and prevent them from having representation in the Board", at the same
time depriving petitioner of his "vested right" to be voted for and to vote for a person of his choice as
director.

Upon the other hand, respondents Andres M. Soriano, Jr., Jose M. Soriano and San Miguel
Corporation content that ex. conclusion of a competitor from the Board is legitimate corporate
purpose, considering that being a competitor, petitioner cannot devote an unselfish and undivided
Loyalty to the corporation; that it is essentially a preventive measure to assure stockholders of San
Miguel Corporation of reasonable protective from the unrestrained self-interest of those charged with
the promotion of the corporate enterprise; that access to confidential information by a competitor
may result either in the promotion of the interest of the competitor at the expense of the San Miguel
Corporation, or the promotion of both the interests of petitioner and respondent San Miguel
Corporation, which may, therefore, result in a combination or agreement in violation of Article 186 of
the Revised Penal Code by destroying free competition to the detriment of the consuming public. It is
further argued that there is not vested right of any stockholder under Philippine Law to be voted as
director of a corporation. It is alleged that petitioner, as of May 6, 1978, has exercised, personally or
thru two corporations owned or controlled by him, control over the following shareholdings in San
Miguel Corporation, vis.: (a) John Gokongwei, Jr. — 6,325 shares; (b) Universal Robina Corporation
— 738,647 shares; (c) CFC Corporation — 658,313 shares, or a total of 1,403,285 shares. Since the
outstanding capital stock of San Miguel Corporation, as of the present date, is represented by
33,139,749 shares with a par value of P10.00, the total shares owned or controlled by petitioner
represents 4.2344% of the total outstanding capital stock of San Miguel Corporation. It is also
contended that petitioner is the president and substantial stockholder of Universal Robina
Corporation and CFC Corporation, both of which are allegedly controlled by petitioner and members
of his family. It is also claimed that both the Universal Robina Corporation and the CFC Corporation
are engaged in businesses directly and substantially competing with the alleged businesses of San
Miguel Corporation, and of corporations in which SMC has substantial investments.

ALLEGED AREAS OF COMPETITION BETWEEN PETITIONER'S CORPORATIONS AND SAN

MIGUEL CORPORATION

According to respondent San Miguel Corporation, the areas of, competition are enumerated in its
Board the areas of competition are enumerated in its Board Resolution dated April 28, 1978, thus:

Product Line Estimated Market Share Total

1977 SMC Robina-CFC

Table Eggs 0.6% 10.0% 10.6%

Layer Pullets 33.0% 24.0% 57.0%
Dressed Chicken 35.0% 14.0% 49.0%
Poultry & Hog Feeds 40.0% 12.0% 52.0%
Ice Cream 70.0% 13.0% 83.0%
 Instant Coffee 45.0% 40.0% 85.0%
Woven Fabrics 17.5% 9.1% 26.6%

Thus, according to respondent SMC, in 1976, the areas of competition affecting SMC involved
product sales of over P400 million or more than 20% of the P2 billion total product sales of SMC.
Significantly, the combined market shares of SMC and CFC-Robina in layer pullets dressed chicken,
poultry and hog feeds ice cream, instant coffee and woven fabrics would result in a position of such
dominance as to affect the prevailing market factors.

It is further asserted that in 1977, the CFC-Robina group was in direct competition on product lines
which, for SMC, represented sales amounting to more than ?478 million. In addition, CFC-Robina
was directly competing in the sale of coffee with Filipro, a subsidiary of SMC, which product line
represented sales for SMC amounting to more than P275 million. The CFC-Robina group (Robitex,
excluding Litton Mills recently acquired by petitioner) is purportedly also in direct competition with
Ramie Textile, Inc., subsidiary of SMC, in product sales amounting to more than P95 million. The
areas of competition between SMC and CFC-Robina in 1977 represented, therefore, for SMC,
product sales of more than P849 million.

According to private respondents, at the Annual Stockholders' Meeting of March 18, 1976, 9,894
stockholders, in person or by proxy, owning 23,436,754 shares in SMC, or more than 90% of the
total outstanding shares of SMC, rejected petitioner's candidacy for the Board of Directors because
they "realized the grave dangers to the corporation in the event a competitor gets a board seat in
SMC." On September 18, 1978, the Board of Directors of SMC, by "virtue of powers delegated to it
by the stockholders," approved the amendment to ' he by-laws in question. At the meeting of
February 10, 1977, these amendments were confirmed and ratified by 5,716 shareholders owning
24,283,945 shares, or more than 80% of the total outstanding shares. Only 12 shareholders,
representing 7,005 shares, opposed the confirmation and ratification. At the Annual Stockholders'
Meeting of May 10, 1977, 11,349 shareholders, owning 27,257.014 shares, or more than 90% of the
outstanding shares, rejected petitioner's candidacy, while 946 stockholders, representing 1,648,801
shares voted for him. On the May 9, 1978 Annual Stockholders' Meeting, 12,480 shareholders,
owning more than 30 million shares, or more than 90% of the total outstanding shares. voted against
petitioner.

AUTHORITY OF CORPORATION TO PRESCRIBE QUALIFICATIONS OF DIRECTORS

EXPRESSLY CONFERRED BY LAW

Private respondents contend that the disputed amended by laws were adopted by the Board of
Directors of San Miguel Corporation a-, a measure of self-defense to protect the corporation from the
clear and present danger that the election of a business competitor to the Board may cause upon
the corporation and the other stockholders inseparable prejudice. Submitted for resolution, therefore,
is the issue — whether or not respondent San Miguel Corporation could, as a measure of self-
protection, disqualify a competitor from nomination and election to its Board of Directors.

It is recognized by an authorities that 'every corporation has the inherent power to adopt by-laws 'for
its internal government, and to regulate the conduct and prescribe the rights and duties of its
members towards itself and among themselves in reference to the management of its affairs. 12 At
common law, the rule was "that the power to make and adopt by-laws was inherent in every
corporation as one of its necessary and inseparable legal incidents. And it is settled throughout the
United States that in the absence of positive legislative provisions limiting it, every private
corporation has this inherent power as one of its necessary and inseparable legal incidents,
independent of any specific enabling provision in its charter or in general law, such power of self-
government being essential to enable the corporation to accomplish the purposes of its creation. 13
In this jurisdiction, under section 21 of the Corporation Law, a corporation may prescribe in its by-
laws "the qualifications, duties and compensation of directors, officers and employees ... " This must
necessarily refer to a qualification in addition to that specified by section 30 of the Corporation Law,
which provides that "every director must own in his right at least one share of the capital stock of the
stock corporation of which he is a director ... " In Government v. El Hogar, 14 the Court sustained the
validity of a provision in the corporate by-law requiring that persons elected to the Board of Directors
must be holders of shares of the paid up value of P5,000.00, which shall be held as security for their
action, on the ground that section 21 of the Corporation Law expressly gives the power to the
corporation to provide in its by-laws for the qualifications of directors and is "highly prudent and in
conformity with good practice. "

NO VESTED RIGHT OF STOCKHOLDER TO BE ELECTED DIRECTOR

Any person "who buys stock in a corporation does so with the knowledge that its affairs
are dominated by a majorityof the stockholders and that he impliedly contracts that the will of the
majority shall govern in all matters within the limits of the act of incorporation and lawfully enacted
by-laws and not forbidden by law." 15 To this extent, therefore, the stockholder may be considered to
have "parted with his personal right or privilege to regulate the disposition of his property which he
has invested in the capital stock of the corporation, and surrendered it to the will of the majority of his
fellow incorporators. ... It cannot therefore be justly said that the contract, express or implied,
between the corporation and the stockholders is infringed ... by any act of the former which is
authorized by a majority ... ." 16

Pursuant to section 18 of the Corporation Law, any corporation may amend its articles of
incorporation by a vote or written assent of the stockholders representing at least two-thirds of the
subscribed capital stock of the corporation If the amendment changes, diminishes or restricts the
rights of the existing shareholders then the disenting minority has only one right, viz.: "to object
thereto in writing and demand payment for his share." Under section 22 of the same law, the owners
of the majority of the subscribed capital stock may amend or repeal any by-law or adopt new by-
laws. It cannot be said, therefore, that petitioner has a vested right to be elected director, in the face
of the fact that the law at the time such right as stockholder was acquired contained the prescription
that the corporate charter and the by-law shall be subject to amendment, alteration and
modification. 17

It being settled that the corporation has the power to provide for the qualifications of its directors, the
next question that must be considered is whether the disqualification of a competitor from being
elected to the Board of Directors is a reasonable exercise of corporate authority.

A DIRECTOR STANDS IN A FIDUCIARY RELATION TO THE CORPORATION AND ITS

SHAREHOLDERS

Although in the strict and technical sense, directors of a private corporation are not regarded as
trustees, there cannot be any doubt that their character is that of a fiduciary insofar as the
corporation and the stockholders as a body are concerned. As agents entrusted with the
management of the corporation for the collective benefit of the stockholders, "they occupy a fiduciary
relation, and in this sense the relation is one of trust." 18 "The ordinary trust relationship of directors of
a corporation and stockholders", according to Ashaman v. Miller, 19 "is not a matter of statutory or
technical law. It springs from the fact that directors have the control and guidance of corporate affairs
and property and hence of the property interests of the stockholders. Equity recognizes that
stockholders are the proprietors of the corporate interests and are ultimately the only beneficiaries
thereof * * *.
Justice Douglas, in Pepper v. Litton, 20 emphatically restated the standard of fiduciary obligation of
the directors of corporations, thus:

A director is a fiduciary. ... Their powers are powers in trust. ... He who is in such
fiduciary position cannot serve himself first and his cestuis second. ... He cannot
manipulate the affairs of his corporation to their detriment and in disregard of the
standards of common decency. He cannot by the intervention of a corporate entity
violate the ancient precept against serving two masters ... He cannot utilize his inside
information and strategic position for his own preferment. He cannot violate rules of
fair play by doing indirectly through the corporation what he could not do so directly.
He cannot violate rules of fair play by doing indirectly though the corporation what he
could not do so directly. He cannot use his power for his personal advantage and to
the detriment of the stockholders and creditors no matter how absolute in terms that
power may be and no matter how meticulous he is to satisfy technical requirements.
For that power is at all times subject to the equitable limitation that it may not be
exercised for the aggrandizement, preference or advantage of the fiduciary to the
exclusion or detriment of the cestuis.

And in Cross v. West Virginia Cent, & P. R. R. Co., 21 it was said:

... A person cannot serve two hostile and adverse master, without detriment to one of
them. A judge cannot be impartial if personally interested in the cause. No more can
a director. Human nature is too weak -for this. Take whatever statute provision you
please giving power to stockholders to choose directors, and in none will you find any
express prohibition against a discretion to select directors having the company's
interest at heart, and it would simply be going far to deny by mere implication the
existence of such a salutary power

... If the by-law is to be held reasonable in disqualifying a stockholder in a competing company from
being a director, the same reasoning would apply to disqualify the wife and immediate member of
the family of such stockholder, on account of the supposed interest of the wife in her husband's
affairs, and his suppose influence over her. It is perhaps true that such stockholders ought not to be
condemned as selfish and dangerous to the best interest of the corporation until tried and tested. So
it is also true that we cannot condemn as selfish and dangerous and unreasonable the action of the
board in passing the by-law. The strife over the matter of control in this corporation as in many
others is perhaps carried on not altogether in the spirit of brotherly love and affection. The only test
that we can apply is as to whether or not the action of the Board is authorized and sanctioned by
law. ... . 22

These principles have been applied by this Court in previous cases.23

AN AMENDMENT TO THE CORPORATION BY-LAW WHICH RENDERS A STOCKHOLDER

INELIGIBLE TO BE DIRECTOR, IF HE BE ALSO DIRECTOR IN A CORPORATION WHOSE
BUSINESS IS IN COMPETITION WITH THAT OF THE OTHER CORPORATION, HAS BEEN
SUSTAINED AS VALID

It is a settled state law in the United States, according to Fletcher, that corporations have the power
to make by-laws declaring a person employed in the service of a rival company to be ineligible for
the corporation's Board of Directors. ... (A)n amendment which renders ineligible, or if elected,
subjects to removal, a director if he be also a director in a corporation whose business is in
competition with or is antagonistic to the other corporation is valid." 24This is based upon the principle
that where the director is so employed in the service of a rival company, he cannot serve both, but
must betray one or the other. Such an amendment "advances the benefit of the corporation and is
good." An exception exists in New Jersey, where the Supreme Court held that the Corporation Law
in New Jersey prescribed the only qualification, and therefore the corporation was not empowered to
add additional qualifications. 25 This is the exact opposite of the situation in the Philippines because
as stated heretofore, section 21 of the Corporation Law expressly provides that a corporation may
make by-laws for the qualifications of directors. Thus, it has been held that an officer of a corporation
cannot engage in a business in direct competition with that of the corporation where he is a director
by utilizing information he has received as such officer, under "the established law that a director or
officer of a corporation may not enter into a competing enterprise which cripples or injures the
business of the corporation of which he is an officer or director. 26

It is also well established that corporate officers "are not permitted to use their position of trust and
confidence to further their private interests." 27 In a case where directors of a corporation cancelled a
contract of the corporation for exclusive sale of a foreign firm's products, and after establishing a
rival business, the directors entered into a new contract themselves with the foreign firm for
exclusive sale of its products, the court held that equity would regard the new contract as an offshoot
of the old contract and, therefore, for the benefit of the corporation, as a "faultless fiduciary may not
reap the fruits of his misconduct to the exclusion of his principal. 28

The doctrine of "corporate opportunity" 29 is precisely a recognition by the courts that the fiduciary
standards could not be upheld where the fiduciary was acting for two entities with competing
interests. This doctrine rests fundamentally on the unfairness, in particular circumstances, of an
officer or director taking advantage of an opportunity for his own personal profit when the interest of
the corporation justly calls for protection. 30

It is not denied that a member of the Board of Directors of the San Miguel Corporation has access to
sensitive and highly confidential information, such as: (a) marketing strategies and pricing structure;
(b) budget for expansion and diversification; (c) research and development; and (d) sources of
funding, availability of personnel, proposals of mergers or tie-ups with other firms.

It is obviously to prevent the creation of an opportunity for an officer or director of San Miguel
Corporation, who is also the officer or owner of a competing corporation, from taking advantage of
the information which he acquires as director to promote his individual or corporate interests to the
prejudice of San Miguel Corporation and its stockholders, that the questioned amendment of the by-
laws was made. Certainly, where two corporations are competitive in a substantial sense, it would
seem improbable, if not impossible, for the director, if he were to discharge effectively his duty, to
satisfy his loyalty to both corporations and place the performance of his corporation duties above his
personal concerns.

Thus, in McKee & Co. v. First National Bank of San Diego, supra the court sustained as valid and
reasonable an amendment to the by-laws of a bank, requiring that its directors should not be
directors, officers, employees, agents, nominees or attorneys of any other banking corporation,
affiliate or subsidiary thereof. Chief Judge Parker, in McKee, explained the reasons of the court,
thus:

... A bank director has access to a great deal of information concerning the business
and plans of a bank which would likely be injurious to the bank if known to another
bank, and it was reasonable and prudent to enlarge this minimum disqualification to
include any director, officer, employee, agent, nominee, or attorney of any other bank
in California. The Ashkins case, supra, specifically recognizes protection against
rivals and others who might acquire information which might be used against the
interests of the corporation as a legitimate object of by-law protection. With respect to
 attorneys or persons associated with a firm which is attorney for another bank, in
addition to the direct conflict or potential conflict of interest, there is also the danger
of inadvertent leakage of confidential information through casual office discussions or
accessibility of files. Defendant's directors determined that its welfare was best
protected if this opportunity for conflicting loyalties and potential misuse and leakage
of confidential information was foreclosed.

In McKee the Court further listed qualificational by-laws upheld by the courts, as follows:

(1) A director shall not be directly or indirectly interested as a stockholder in any

other firm, company, or association which competes with the subject corporation.

(2) A director shall not be the immediate member of the family of any stockholder in
any other firm, company, or association which competes with the subject corporation,

(3) A director shall not be an officer, agent, employee, attorney, or trustee in any
other firm, company, or association which compete with the subject corporation.

(4) A director shall be of good moral character as an essential qualification to holding

office.

(5) No person who is an attorney against the corporation in a law suit is eligible for
service on the board. (At p. 7.)

These are not based on theorical abstractions but on human experience — that a person cannot
serve two hostile masters without detriment to one of them.

The offer and assurance of petitioner that to avoid any possibility of his taking unfair advantage of
his position as director of San Miguel Corporation, he would absent himself from meetings at which
confidential matters would be discussed, would not detract from the validity and reasonableness of
the by-laws here involved. Apart from the impractical results that would ensue from such
arrangement, it would be inconsistent with petitioner's primary motive in running for board
membership — which is to protect his investments in San Miguel Corporation. More important, such
a proposed norm of conduct would be against all accepted principles underlying a director's duty of
fidelity to the corporation, for the policy of the law is to encourage and enforce responsible corporate
management. As explained by Oleck: 31 "The law win not tolerate the passive attitude of directors ...
without active and conscientious participation in the managerial functions of the company. As
directors, it is their duty to control and supervise the day to day business activities of the company or
to promulgate definite policies and rules of guidance with a vigilant eye toward seeing to it that these
policies are carried out. It is only then that directors may be said to have fulfilled their duty of fealty to
the corporation."

Sound principles of corporate management counsel against sharing sensitive information with a
director whose fiduciary duty of loyalty may well require that he disclose this information to a
competitive arrival. These dangers are enhanced considerably where the common director such as
the petitioner is a controlling stockholder of two of the competing corporations. It would seem
manifest that in such situations, the director has an economic incentive to appropriate for the benefit
of his own corporation the corporate plans and policies of the corporation where he sits as director.

Indeed, access by a competitor to confidential information regarding marketing strategies and pricing
policies of San Miguel Corporation would subject the latter to a competitive disadvantage and
unjustly enrich the competitor, for advance knowledge by the competitor of the strategies for the
development of existing or new markets of existing or new products could enable said competitor to
utilize such knowledge to his advantage. 32

There is another important consideration in determining whether or not the amended by-laws are
reasonable. The Constitution and the law prohibit combinations in restraint of trade or unfair
competition. Thus, section 2 of Article XIV of the Constitution provides: "The State shall regulate or
prohibit private monopolies when the public interest so requires. No combinations in restraint of
trade or unfair competition shall be snowed."

Article 186 of the Revised Penal Code also provides:

Art. 186. Monopolies and combinations in restraint of trade. —The penalty of prision
correccional in its minimum period or a fine ranging from two hundred to six thousand
pesos, or both, shall be imposed upon:

1. Any person who shall enter into any contract or agreement or shall take part in any
conspiracy or combination in the form of a trust or otherwise, in restraint of trade or
commerce or to prevent by artificial means free competition in the market.

2. Any person who shag monopolize any merchandise or object of trade or

commerce, or shall combine with any other person or persons to monopolize said
merchandise or object in order to alter the price thereof by spreading false rumors or
making use of any other artifice to restrain free competition in the market.

3. Any person who, being a manufacturer, producer, or processor of any

merchandise or object of commerce or an importer of any merchandise or object of
commerce from any foreign country, either as principal or agent, wholesale or
retailer, shall combine, conspire or agree in any manner with any person likewise
engaged in the manufacture, production, processing, assembling or importation of
such merchandise or object of commerce or with any other persons not so similarly
engaged for the purpose of making transactions prejudicial to lawful commerce, or of
increasing the market price in any part of the Philippines, or any such merchandise
or object of commerce manufactured, produced, processed, assembled in or
imported into the Philippines, or of any article in the manufacture of which such
manufactured, produced, processed, or imported merchandise or object of
commerce is used.

There are other legislation in this jurisdiction, which prohibit monopolies and combinations in
restraint of trade. 33

Basically, these anti-trust laws or laws against monopolies or combinations in restraint of trade are
aimed at raising levels of competition by improving the consumers' effectiveness as the final arbiter
in free markets. These laws are designed to preserve free and unfettered competition as the rule of
trade. "It rests on the premise that the unrestrained interaction of competitive forces will yield the
best allocation of our economic resources, the lowest prices and the highest quality ... ." 34 they
operate to forestall concentration of economic power. 35 The law against monopolies and
combinations in restraint of trade is aimed at contracts and combinations that, by reason of the
inherent nature of the contemplated acts, prejudice the public interest by unduly restraining
competition or unduly obstructing the course of trade. 36

The terms "monopoly", "combination in restraint of trade" and "unfair competition" appear to have a
well defined meaning in other jurisdictions. A "monopoly" embraces any combination the tendency of
which is to prevent competition in the broad and general sense, or to control prices to the detriment
of the public. 37 In short, it is the concentration of business in the hands of a few. The material
consideration in determining its existence is not that prices are raised and competition actually
excluded, but that power exists to raise prices or exclude competition when desired. 38 Further, it
must be considered that the Idea of monopoly is now understood to include a condition produced by
the mere act of individuals. Its dominant thought is the notion of exclusiveness or unity, or the
suppression of competition by the qualification of interest or management, or it may be thru
agreement and concert of action. It is, in brief, unified tactics with regard to prices. 39

From the foregoing definitions, it is apparent that the contentions of petitioner are not in accord with
reality. The election of petitioner to the Board of respondent Corporation can bring about an illegal
situation. This is because an express agreement is not necessary for the existence of a combination
or conspiracy in restraint of trade. 40 It is enough that a concert of action is contemplated and that the
defendants conformed to the arrangements, 41 and what is to be considered is what the parties
actually did and not the words they used. For instance, the Clayton Act prohibits a person from
serving at the same time as a director in any two or more corporations, if such corporations are, by
virtue of their business and location of operation, competitors so that the elimination of competition
between them would constitute violation of any provision of the anti-trust laws. 42 There is here a
statutory recognition of the anti-competitive dangers which may arise when an individual
simultaneously acts as a director of two or more competing corporations. A common director of two
or more competing corporations would have access to confidential sales, pricing and marketing
information and would be in a position to coordinate policies or to aid one corporation at the expense
of another, thereby stifling competition. This situation has been aptly explained by Travers, thus:

The argument for prohibiting competing corporations from sharing even one director
is that the interlock permits the coordination of policies between nominally
independent firms to an extent that competition between them may be completely
eliminated. Indeed, if a director, for example, is to be faithful to both corporations,
some accommodation must result. Suppose X is a director of both Corporation A and
Corporation B. X could hardly vote for a policy by A that would injure B without
violating his duty of loyalty to B at the same time he could hardly abstain from voting
without depriving A of his best judgment. If the firms really do compete — in the
sense of vying for economic advantage at the expense of the other — there can
hardly be any reason for an interlock between competitors other than the
suppression of competition. 43 (Emphasis supplied.)

According to the Report of the House Judiciary Committee of the U. S. Congress on section 9 of the
Clayton Act, it was established that: "By means of the interlocking directorates one man or group of
men have been able to dominate and control a great number of corporations ... to the detriment of
the small ones dependent upon them and to the injury of the public. 44

Shared information on cost accounting may lead to price fixing. Certainly, shared information on
production, orders, shipments, capacity and inventories may lead to control of production for the
purpose of controlling prices.

Obviously, if a competitor has access to the pricing policy and cost conditions of the products of San
Miguel Corporation, the essence of competition in a free market for the purpose of serving the lowest
priced goods to the consuming public would be frustrated, The competitor could so manipulate the
prices of his products or vary its marketing strategies by region or by brand in order to get the most
out of the consumers. Where the two competing firms control a substantial segment of the market
this could lead to collusion and combination in restraint of trade. Reason and experience point to the
inevitable conclusion that the inherent tendency of interlocking directorates between companies that
are related to each other as competitors is to blunt the edge of rivalry between the corporations, to
seek out ways of compromising opposing interests, and thus eliminate competition. As respondent
SMC aptly observes, knowledge by CFC-Robina of SMC's costs in various industries and regions in
the country win enable the former to practice price discrimination. CFC-Robina can segment the
entire consuming population by geographical areas or income groups and change varying prices in
order to maximize profits from every market segment. CFC-Robina could determine the most
profitable volume at which it could produce for every product line in which it competes with SMC.
Access to SMC pricing policy by CFC-Robina would in effect destroy free competition and deprive
the consuming public of opportunity to buy goods of the highest possible quality at the lowest prices.

Finally, considering that both Robina and SMC are, to a certain extent, engaged in agriculture, then
the election of petitioner to the Board of SMC may constitute a violation of the prohibition contained
in section 13(5) of the Corporation Law. Said section provides in part that "any stockholder of more
than one corporation organized for the purpose of engaging in agriculture may hold his stock in such
corporations solely for investment and not for the purpose of bringing about or attempting to bring
about a combination to exercise control of incorporations ... ."

Neither are We persuaded by the claim that the by-law was Intended to prevent the candidacy of
petitioner for election to the Board. If the by-law were to be applied in the case of one stockholder
but waived in the case of another, then it could be reasonably claimed that the by-law was being
applied in a discriminatory manner. However, the by law, by its terms, applies to all stockholders.
The equal protection clause of the Constitution requires only that the by-law operate equally upon all
persons of a class. Besides, before petitioner can be declared ineligible to run for director, there
must be hearing and evidence must be submitted to bring his case within the ambit of the
disqualification. Sound principles of public policy and management, therefore, support the view that
a by-law which disqualifies a competition from election to the Board of Directors of another
corporation is valid and reasonable.

In the absence of any legal prohibition or overriding public policy, wide latitude may be accorded to
the corporation in adopting measures to protect legitimate corporation interests. Thus, "where the
reasonableness of a by-law is a mere matter of judgment, and upon which reasonable minds must
necessarily differ, a court would not be warranted in substituting its judgment instead of the judgment
of those who are authorized to make by-laws and who have expressed their authority. 45

Although it is asserted that the amended by-laws confer on the present Board powers to perpetua
themselves in power such fears appear to be misplaced. This power, but is very nature, is subject to
certain well established limitations. One of these is inherent in the very convert and definition of the
terms "competition" and "competitor". "Competition" implies a struggle for advantage between two or
more forces, each possessing, in substantially similar if not Identical degree, certain characteristics
essential to the business sought. It means an independent endeavor of two or more persons to
obtain the business patronage of a third by offering more advantageous terms as an inducement to
secure trade. 46 The test must be whether the business does in fact compete, not whether it is
capable of an indirect and highly unsubstantial duplication of an isolated or non-characteristics
activity. 47 It is, therefore, obvious that not every person or entity engaged in business of the same
kind is a competitor. Such factors as quantum and place of business, Identity of products and area of
competition should be taken into consideration. It is, therefore, necessary to show that petitioner's
business covers a substantial portion of the same markets for similar products to the extent of not
less than 10% of respondent corporation's market for competing products. While We here sustain
the validity of the amended by-laws, it does not follow as a necessary consequence that petitioner
is ipso facto disqualified. Consonant with the requirement of due process, there must be due hearing
at which the petitioner must be given the fullest opportunity to show that he is not covered by the
disqualification. As trustees of the corporation and of the stockholders, it is the responsibility of
directors to act with fairness to the stockholders.48Pursuant to this obligation and to remove any
suspicion that this power may be utilized by the incumbent members of the Board to perpetuate
themselves in power, any decision of the Board to disqualify a candidate for the Board of Directors
should be reviewed by the Securities behind Exchange Commission en banc and its decision shall
be final unless reversed by this Court on certiorari. 49 Indeed, it is a settled principle that where the
action of a Board of Directors is an abuse of discretion, or forbidden by statute, or is against public
policy, or is ultra vires, or is a fraud upon minority stockholders or creditors, or will result in waste,
dissipation or misapplication of the corporation assets, a court of equity has the power to grant
appropriate relief. 50

III

Whether or not respondent SEC gravely abused its discretion in denying petitioner's request for an
examination of the records of San Miguel International Inc., a fully owned subsidiary of San Miguel
Corporation —

Respondent San Miguel Corporation stated in its memorandum that petitioner's claim that he was
denied inspection rights as stockholder of SMC "was made in the teeth of undisputed facts that, over
a specific period, petitioner had been furnished numerous documents and information," to wit: (1) a
complete list of stockholders and their stockholdings; (2) a complete list of proxies given by the
stockholders for use at the annual stockholders' meeting of May 18, 1975; (3) a copy of the minutes
of the stockholders' meeting of March 18,1976; (4) a breakdown of SMC's P186.6 million investment
in associated companies and other companies as of December 31, 1975; (5) a listing of the salaries,
allowances, bonuses and other compensation or remunerations received by the directors and
corporate officers of SMC; (6) a copy of the US $100 million Euro-Dollar Loan Agreement of SMC;
and (7) copies of the minutes of all meetings of the Board of Directors from January 1975 to May
1976, with deletions of sensitive data, which deletions were not objected to by petitioner.

Further, it was averred that upon request, petitioner was informed in writing on September 18, 1976;
(1) that SMC's foreign investments are handled by San Miguel International, Inc., incorporated in
Bermuda and wholly owned by SMC; this was SMC's first venture abroad, having started in 1948
with an initial outlay of ?500,000.00, augmented by a loan of Hongkong $6 million from a foreign
bank under the personal guaranty of SMC's former President, the late Col. Andres Soriano; (2) that
as of December 31, 1975, the estimated value of SMI would amount to almost P400 million (3) that
the total cash dividends received by SMC from SMI since 1953 has amount to US $ 9.4 million; and
(4) that from 1972-1975, SMI did not declare cash or stock dividends, all earnings having been used
in line with a program for the setting up of breweries by SMI

These averments are supported by the affidavit of the Corporate Secretary, enclosing photocopies of
the afore-mentioned documents. 51

Pursuant to the second paragraph of section 51 of the Corporation Law, "(t)he record of all business
transactions of the corporation and minutes of any meeting shall be open to the inspection of any
director, member or stockholder of the corporation at reasonable hours."

The stockholder's right of inspection of the corporation's books and records is based upon their
ownership of the assets and property of the corporation. It is, therefore, an incident of ownership of
the corporate property, whether this ownership or interest be termed an equitable ownership, a
beneficial ownership, or a ownership. 52 This right is predicated upon the necessity of self-protection.
It is generally held by majority of the courts that where the right is granted by statute to the
stockholder, it is given to him as such and must be exercised by him with respect to his interest as a
stockholder and for some purpose germane thereto or in the interest of the corporation. 53 In other
words, the inspection has to be germane to the petitioner's interest as a stockholder, and has to be
proper and lawful in character and not inimical to the interest of the corporation. 54 In Grey v. Insular
Lumber, 55 this Court held that "the right to examine the books of the corporation must be exercised
in good faith, for specific and honest purpose, and not to gratify curiosity, or for specific and honest
purpose, and not to gratify curiosity, or for speculative or vexatious purposes. The weight of judicial
opinion appears to be, that on application for mandamus to enforce the right, it is proper for the court
to inquire into and consider the stockholder's good faith and his purpose and motives in seeking
inspection. 56 Thus, it was held that "the right given by statute is not absolute and may be refused
when the information is not sought in good faith or is used to the detriment of the corporation." 57 But
the "impropriety of purpose such as will defeat enforcement must be set up the corporation
defensively if the Court is to take cognizance of it as a qualification. In other words, the specific
provisions take from the stockholder the burden of showing propriety of purpose and place upon the
corporation the burden of showing impropriety of purpose or motive. 58 It appears to be the general
rule that stockholders are entitled to full information as to the management of the corporation and the
manner of expenditure of its funds, and to inspection to obtain such information, especially where it
appears that the company is being mismanaged or that it is being managed for the personal benefit
of officers or directors or certain of the stockholders to the exclusion of others." 59

While the right of a stockholder to examine the books and records of a corporation for a lawful
purpose is a matter of law, the right of such stockholder to examine the books and records of a
wholly-owned subsidiary of the corporation in which he is a stockholder is a different thing.

Some state courts recognize the right under certain conditions, while others do not. Thus, it has
been held that where a corporation owns approximately no property except the shares of stock of
subsidiary corporations which are merely agents or instrumentalities of the holding company, the
legal fiction of distinct corporate entities may be disregarded and the books, papers and documents
of all the corporations may be required to be produced for examination, 60 and that a writ of
mandamus, may be granted, as the records of the subsidiary were, to all incontents and purposes,
the records of the parent even though subsidiary was not named as a party. 61 mandamus was
likewise held proper to inspect both the subsidiary's and the parent corporation's books upon proof
of sufficient control or dominion by the parent showing the relation of principal or agent or something
similar thereto. 62

On the other hand, mandamus at the suit of a stockholder was refused where the subsidiary
corporation is a separate and distinct corporation domiciled and with its books and records in
another jurisdiction, and is not legally subject to the control of the parent company, although it owned
a vast majority of the stock of the subsidiary. 63Likewise, inspection of the books of an allied
corporation by stockholder of the parent company which owns all the stock of the subsidiary has
been refused on the ground that the stockholder was not within the class of "persons having an
interest." 64

In the Nash case, 65 The Supreme Court of New York held that the contractual right of former
stockholders to inspect books and records of the corporation included the right to inspect
corporation's subsidiaries' books and records which were in corporation's possession and control in
its office in New York."

In the Bailey case, 66 stockholders of a corporation were held entitled to inspect the records of a
controlled subsidiary corporation which used the same offices and had Identical officers and
directors.

In his "Urgent Motion for Production and Inspection of Documents" before respondent SEC,
petitioner contended that respondent corporation "had been attempting to suppress information for
the stockholders" and that petitioner, "as stockholder of respondent corporation, is entitled to copies
of some documents which for some reason or another, respondent corporation is very reluctant in
revealing to the petitioner notwithstanding the fact that no harm would be caused thereby to the
corporation." 67 There is no question that stockholders are entitled to inspect the books and records
of a corporation in order to investigate the conduct of the management, determine the financial
condition of the corporation, and generally take an account of the stewardship of the officers and
directors. 68

In the case at bar, considering that the foreign subsidiary is wholly owned by respondent San Miguel
Corporation and, therefore, under its control, it would be more in accord with equity, good faith and
fair dealing to construe the statutory right of petitioner as stockholder to inspect the books and
records of the corporation as extending to books and records of such wholly subsidiary which are in
respondent corporation's possession and control.

IV

Whether or not respondent SEC gravely abused its discretion in allowing the stockholders of
respondent corporation to ratify the investment of corporate funds in a foreign corporation

Petitioner reiterates his contention in SEC Case No. 1423 that respondent corporation invested
corporate funds in SMI without prior authority of the stockholders, thus violating section 17-1/2 of the
Corporation Law, and alleges that respondent SEC should have investigated the charge, being a
statutory offense, instead of allowing ratification of the investment by the stockholders.

Respondent SEC's position is that submission of the investment to the stockholders for ratification is
a sound corporate practice and should not be thwarted but encouraged.

Section 17-1/2 of the Corporation Law allows a corporation to "invest its funds in any other
corporation or business or for any purpose other than the main purpose for which it was organized"
provided that its Board of Directors has been so authorized by the affirmative vote of stockholders
holding shares entitling them to exercise at least two-thirds of the voting power. If the investment is
made in pursuance of the corporate purpose, it does not need the approval of the stockholders. It is
only when the purchase of shares is done solely for investment and not to accomplish the purpose of
its incorporation that the vote of approval of the stockholders holding shares entitling them to
exercise at least two-thirds of the voting power is necessary. 69

As stated by respondent corporation, the purchase of beer manufacturing facilities by SMC was an
investment in the same business stated as its main purpose in its Articles of Incorporation, which is
to manufacture and market beer. It appears that the original investment was made in 1947-1948,
when SMC, then San Miguel Brewery, Inc., purchased a beer brewery in Hongkong (Hongkong
Brewery & Distillery, Ltd.) for the manufacture and marketing of San Miguel beer thereat.
Restructuring of the investment was made in 1970-1971 thru the organization of SMI in Bermuda as
a tax free reorganization.

Under these circumstances, the ruling in De la Rama v. Manao Sugar Central Co., Inc.,
supra, appears relevant. In said case, one of the issues was the legality of an investment made by
Manao Sugar Central Co., Inc., without prior resolution approved by the affirmative vote of 2/3 of the
stockholders' voting power, in the Philippine Fiber Processing Co., Inc., a company engaged in the
manufacture of sugar bags. The lower court said that "there is more logic in the stand that if the
investment is made in a corporation whose business is important to the investing corporation and
would aid it in its purpose, to require authority of the stockholders would be to unduly curtail the
power of the Board of Directors." This Court affirmed the ruling of the court a quo on the matter and,
quoting Prof. Sulpicio S. Guevara, said:
 "j. Power to acquire or dispose of shares or securities. — A private corporation, in
order to accomplish is purpose as stated in its articles of incorporation, and subject to
the limitations imposed by the Corporation Law, has the power to acquire, hold,
mortgage, pledge or dispose of shares, bonds, securities, and other evidence of
indebtedness of any domestic or foreign corporation. Such an act, if done in
pursuance of the corporate purpose, does not need the approval of stockholders; but
when the purchase of shares of another corporation is done solely for investment
and not to accomplish the purpose of its incorporation, the vote of approval of the
stockholders is necessary. In any case, the purchase of such shares or securities
must be subject to the limitations established by the Corporations law; namely, (a)
that no agricultural or mining corporation shall be restricted to own not more than
15% of the voting stock of nay agricultural or mining corporation; and (c) that such
holdings shall be solely for investment and not for the purpose of bringing about a
monopoly in any line of commerce of combination in restraint of trade." The
Philippine Corporation Law by Sulpicio S. Guevara, 1967 Ed., p. 89) (Emphasis
supplied.)

40. Power to invest corporate funds. — A private corporation has the power to invest
its corporate funds "in any other corporation or business, or for any purpose other
than the main purpose for which it was organized, provide that 'its board of directors
has been so authorized in a resolution by the affirmative vote of stockholders holding
shares in the corporation entitling them to exercise at least two-thirds of the voting
power on such a propose at a stockholders' meeting called for that purpose,' and
provided further, that no agricultural or mining corporation shall in anywise be
interested in any other agricultural or mining corporation. When the investment is
necessary to accomplish its purpose or purposes as stated in its articles of
incorporation the approval of the stockholders is not necessary."" (Id., p. 108)
(Emphasis ours.) (pp. 258-259).

Assuming arguendo that the Board of Directors of SMC had no authority to make the assailed
investment, there is no question that a corporation, like an individual, may ratify and thereby render
binding upon it the originally unauthorized acts of its officers or other agents. 70 This is true because
the questioned investment is neither contrary to law, morals, public order or public policy. It is a
corporate transaction or contract which is within the corporate powers, but which is defective from a
supported failure to observe in its execution the. requirement of the law that the investment must be
authorized by the affirmative vote of the stockholders holding two-thirds of the voting power. This
requirement is for the benefit of the stockholders. The stockholders for whose benefit the
requirement was enacted may, therefore, ratify the investment and its ratification by said
stockholders obliterates any defect which it may have had at the outset. "Mere ultra vires acts", said
this Court in Pirovano, 71 "or those which are not illegal and void ab initio, but are not merely within
the scope of the articles of incorporation, are merely voidable and may become binding and
enforceable when ratified by the stockholders.

Besides, the investment was for the purchase of beer manufacturing and marketing facilities which is
apparently relevant to the corporate purpose. The mere fact that respondent corporation submitted
the assailed investment to the stockholders for ratification at the annual meeting of May 10, 1977
cannot be construed as an admission that respondent corporation had committed an ultra vires act,
considering the common practice of corporations of periodically submitting for the gratification of
their stockholders the acts of their directors, officers and managers.

WHEREFORE, judgment is hereby rendered as follows:

The Court voted unanimously to grant the petition insofar as it prays that petitioner be allowed to
examine the books and records of San Miguel International, Inc., as specified by him.

On the matter of the validity of the amended by-laws of respondent San Miguel Corporation, six (6)
Justices, namely, Justices Barredo, Makasiar, Antonio, Santos, Abad Santos and De Castro, voted
to sustain the validity per se of the amended by-laws in question and to dismiss the petition without
prejudice to the question of the actual disqualification of petitioner John Gokongwei, Jr. to run and if
elected to sit as director of respondent San Miguel Corporation being decided, after a new and
proper hearing by the Board of Directors of said corporation, whose decision shall be appealable to
the respondent Securities and Exchange Commission deliberating and acting en banc and ultimately
to this Court. Unless disqualified in the manner herein provided, the prohibition in the afore-
mentioned amended by-laws shall not apply to petitioner.

The afore-mentioned six (6) Justices, together with Justice Fernando, voted to declare the issue on
the validity of the foreign investment of respondent corporation as moot.

Chief Justice Fred Ruiz Castro reserved his vote on the validity of the amended by-laws, pending
hearing by this Court on the applicability of section 13(5) of the Corporation Law to petitioner.

Justice Fernando reserved his vote on the validity of subject amendment to the by-laws but
otherwise concurs in the result.

Four (4) Justices, namely, Justices Teehankee, Concepcion, Jr., Fernandez and Guerrero filed a
separate opinion, wherein they voted against the validity of the questioned amended bylaws and that
this question should properly be resolved first by the SEC as the agency of primary jurisdiction. They
concur in the result that petitioner may be allowed to run for and sit as director of respondent SMC in
the scheduled May 6, 1979 election and subsequent elections until disqualified after proper hearing
by the respondent's Board of Directors and petitioner's disqualification shall have been sustained by
respondent SEC en banc and ultimately by final judgment of this Court.

In resume, subject to the qualifications aforestated judgment is hereby rendered GRANTING the
petition by allowing petitioner to examine the books and records of San Miguel International, Inc. as
specified in the petition. The petition, insofar as it assails the validity of the amended by- laws and
the ratification of the foreign investment of respondent corporation, for lack of necessary votes, is
hereby DISMISSED. No costs.