David C. Lao and Jose C. Lao vs. Dionisio Lao, G.R. No.

170585, October 6, 2008

Facts:
IS the mere inclusion as shareholder in the General Information Sheet of a corporation sufficient
proof that one is a shareholder in such corporation?

On October 15, 1998, petitioners David and Jose Lao filed a petition with the Securities and
Exchange Commission (SEC) against respondent Dionisio Lao, president of Pacific Foundry
Shop Corporation (PFSC). Petitioners prayed for a declaration as stockholders and directors of
PFSC, issuance of certificates of shares in their name and to be allowed to examine the
corporate books of PFSC.3

Petitioners claimed that they are stockholders of PFSC based on the General Information Sheet
filed with the SEC, in which they are named as stockholders and directors of the corporation.
Petitioner David Lao alleged that he acquired 446 shares in PFSC from his father, Lao Pong
Bao, which shares were previously purchased from a certain Hipolito Lao. Petitioner Jose Lao,
on the other hand, alleged that he acquired 333 shares from respondent Dionisio Lao himself. 4

Respondent denied petitioners' claim. He alleged that the inclusion of their names in the
corporation's General Information Sheet was inadvertently made. He also claimed that
petitioners did not acquire any shares in PFSC by any of the modes recognized by law, namely
subscription, purchase, or transfer. Since they were neither stockholders nor directors of PFSC,
petitioners had no right to be issued certificates or stocks or to inspect its corporate books. 5

On June 19, 2000, Republic Act 8799, otherwise known as the Securities Regulation Code, was
enacted, transferring jurisdiction over all intra-corporate disputes from the SEC to the RTC.
Pursuant to the law, the petition with the SEC was transferred to the RTC in Cebu City and
docketed as Civil Case No. CEB-25916-SRC. The case was consolidated with another intra-
corporate dispute, Civil Case No. CEB-25910-SRC, filed by the Heirs of Uy Lam Tiong against
respondent Dionisio Lao.

Issue:
whether or not petitioners are indeed stockholders of PFSC.

Ruling:

Petitioners failed to prove that they are shareholders of PSFC.

Petitioners insist that they are shareholders of PFSC. They claim purchasing shares in PFSC.
Petitioner David Lao alleges that he acquired 446 shares in the corporation from his father, Lao
Pong Bao, which shares were previously purchased from a certain Hipolito Lao. Petitioner Jose
Lao, on the other hand, alleges that he acquired 333 shares from respondent Dionisio Lao.

Records, however, disclose that petitioners have no certificates of shares in their name. A
certificate of stock is the evidence of a holder's interest and status in a corporation. It is a written
instrument signed by the proper officer of a corporation stating or acknowledging that the person
named in the document is the owner of a designated number of shares of its stock. 24 It is prima
facie evidence that the holder is a shareholder of a corporation.

1
Nor is there any written document that there was a sale of shares, as claimed by petitioners.
Petitioners did not present any deed of assignment, or any similar instrument, between Lao Pong
Bao and Hipolito Lao; or between Lao Pong Bao and petitioner David Lao. There is likewise no
deed of assignment between petitioner Jose Lao and private respondent Dionisio Lao.

Absent a written document, petitioners must prove, at the very least, possession of the
certificates of shares in the name of the alleged seller. Again, they failed to prove possession.
They failed to prove the due delivery of the certificates of shares of the sellers to them. Section
63 of the Corporation Code provides:

Sec. 63. Certificate of stock and transfer of shares. - The capital stock of stock
corporations shall be divided into shares for which certificates signed by the president or
vice-president, countersigned by the secretary or assistant secretary, and sealed with the
seal of the corporation shall be issued in accordance with the by-laws. Shares of stock so
issued are personal property and may be transferred by delivery of the certificate or
certificates indorsed by the owner or his attorney-in-fact or other person legally
authorized to make the transfer. No transfer, however, shall be valid, except as between
the parties, until the transfer is recorded in the books of the corporation so as to show the
names of the parties to the transaction, the date of the transfer, the number of the
certificate or certificates and the number of shares transferred.

In contrast, respondent was able to prove that he is the owner of the disputed shares. He had in
his possession the certificates of stocks of Hipolito Lao. The certificates of stocks were also
properly endorsed to him. More importantly, the transfer was duly registered in the stock and
transfer book of the corporation. Thus, as between the parties, respondent has proven his right
over the disputed shares. As correctly ruled by the CA:

Au contraire, Dionisio C. Lao was able to show through competent evidence that he is
undeniably the owner of the disputed shares of stocks being claimed by David C. Lao. He
was able to validate that he has the physical possession of the certificates covering the
shares of Hipolito Lao. Notably, it was Hipolito Lao who properly endorsed said
certificates to herein Dionisio Lao and that such transfer was registered in PFSC's Stock
and Transfer Book. These circumstances are more in accord with the valid transfer
contemplated by Section 63 of the Corporation Code.25

The mere inclusion as shareholder of petitioners in the General Information Sheet of

PFSC is insufficient proof that they are shareholders of the company.

Petitioners bank heavily on the General Information Sheet submitted by PFSC to the SEC in
which they were named as shareholders of PFSC. They claim that respondent is now estopped
from contesting the General Information Sheet.

While it may be true that petitioners were named as shareholders in the General Information
Sheet submitted to the SEC, that document alone does not conclusively prove that they are
shareholders of PFSC. The information in the document will still have to be correlated with the
corporate books of PFSC. As between the General Information Sheet and the corporate books, it
is the latter that is controlling. As correctly ruled by the CA:

We agree with the trial court that mere inclusion in the General Information Sheets as
stockholders and officers does not make one a stockholder of a corporation, for this may
have come to pass by mistake, expediency or negligence. As professed by respondent-
appellee, this was done merely to comply with the reportorial requirements with the SEC.
This maybe against the law but "practice, no matter how long continued, cannot give rise
to any vested right."

2
 If a transferee of shares of stock who failed to register such transfer in the Stock and
Transfer Book of the Corporation could not exercise the rights granted unto him by law as
stockholder, with more reason that such rights be denied to a person who is not a
stockholder of a corporation. Petitioners-appellants never secured such a standing as
stockholders of PFSC and consequently, their petition should be denied. 26

It should be stressed that the burden of proof is on petitioners to show that they are shareholders
of PFSC. This is so because they do not have any certificates of shares in their name. Moreover,
they do not appear in the corporate books as registered shareholders. If they had certificates of
shares, the burden would have been with PFSC to prove that they are not shareholders of the
corporation.

As discussed, petitioners failed to hurdle their burden. There is no written document evidencing
their claimed purchase of shares. We note that petitioners agreed to submit their case for
decision based merely on the documents on record. Hence, no testimonial evidence was
presented to prove the alleged purchase of shares. Absent any documentary or testimonial
evidence, the bare assertion of petitioners that they are shareholders cannot prevail.

3
Simny Guy, et. al. vs. The Hon. Ofelia Calo, G.R. No. 189486, Sept. 5, 2012

Facts:

With 519,997 shares of stock as reflected in Stock Certificate Nos. 004-014, herein respondent
Gilbert G. Guy (Gilbert) practically owned almost 80 percent of the 650,000 subscribed capital
stock of GoodGold Realty & Development Corporation (GoodGold), one of the multi-million
1

corporations which Gilbert claimed to have established in his 30s. GoodGold’s remaining shares
were divided among Francisco Guy (Francisco) with 130,000 shares, Simny Guy (Simny),
Benjamin Lim and Paulino Delfin Pe, with one share each, respectively. Gilbert is the son of
spouses Francisco and Simny. Simny, one of the petitioners, however, alleged that it was she
and her husband who established GoodGold, putting the bulk of its shares under Gilbert’s name.
She claimed that with their eldest son, Gaspar G. Guy (Gaspar), having entered the Focolare
Missionary in 1970s, renouncing worldly possessions, she and Francisco put the future of the
2

Guy group of companies in Gilbert’s hands. Gilbert was expected to bring to new heights their
family multi-million businesses and they, his parents, had high hopes in him.

Simny further claimed that upon the advice of their lawyers, upon the incorporation of GoodGold,
they issued stock certificates reflecting the shares held by each stockholder duly signed by
Francisco as President and Atty. Emmanuel Paras as Corporate Secretary, with corresponding
blank endorsements at the back of each certificate – including Stock Certificate Nos. 004-014
under Gilbert’s name. These certificates were all with Gilbert’s irrevocable endorsement and
3

power of attorney to have these stocks transferred in the books of corporation. All of these
4

certificates were always in the undisturbed possession of the spouses Francisco and Simny,
including Stock Certificate Nos. 004-014. 5

In 1999, the aging Francisco instructed Benjamin Lim, a nominal shareholder of GoodGold and
his trusted employee, to collaborate with Atty. Emmanuel Paras, to redistribute GoodGold’s
shareholdings evenly among his children, namely, Gilbert, Grace Guy-Cheu (Grace), Geraldine
Guy (Geraldine), and Gladys Guy (Gladys), while maintaining a proportionate share for himself
and his wife, Simny. 6

Accordingly, some of GoodGold’s certificates were cancelled and new ones were issued to
represent the redistribution of GoodGold’s shares of stock. The new certificates of stock were
signed by Francisco and Atty. Emmanuel Paras, as President and Corporate Secretary,
respectively.

In September 2004, or five years after the redistribution of GoodGold’s shares of stock, Gilbert
filed with the Regional Trial Court (RTC) of Manila, a Complaint for the "Declaration of Nullity of
Transfers of Shares in GoodGold and of General Information Sheets and Minutes of Meeting,
and for Damages with Application for a Preliminary Injunctive Relief," against his mother, Simny,
and his sisters, Geraldine, Grace, and Gladys. Gilbert alleged, among others, that no stock
8

certificate ever existed; that his signature at the back of the spurious Stock Certificate Nos. 004-
9

014 which purportedly endorsed the same and that of the corporate secretary, Emmanuel Paras,
at the obverse side of the certificates were forged, and, hence, should be nullified.10

Gilbert alleged that he never signed any document which would justify and support the transfer of
his shares to his siblings and that he has in no way, disposed, alienated, encumbered, assigned
or sold any or part of his shares in GoodGold. He also denied the existence of the certificates of
14

stocks. According to him, "there were no certificates of stocks under his name for the shares of
stock subscribed by him were never issued nor delivered to him from the time of the inception of
the corporation."15

4
Gilbert added that the Amended General Information Sheets (GIS) of GoodGold for the years
2000 to 2004 which his siblings submitted to the Securities and Exchange Commission (SEC)
were spurious as these did not reflect his true shares in the corporation which supposedly totaled
to 595,000 shares; that no valid stockholders’ annual meeting for the year 2004 was held, hence
16

proceedings taken thereon, including the election of corporate officers were null and void; and,
17

that his siblings are foreign citizens, thus, cannot own more than forty percent of the authorized
capital stock of the corporation. 18

Ruling:

When a stock certificate is endorsed

in blank by the owner thereof, it
constitutes what is termed as "street
certificate," so that upon its face, the
holder is entitled to demand its
transfer his name from the issuing
corporation.

With Gilbert’s failure to allege specific acts of fraud in his complaint and his failure to rebut the
NBI report, this Court pronounces, as a consequence thereof, that the signatures appearing on
the stock certificates, including his blank endorsement thereon were authentic. With the stock
certificates having been endorsed in blank by Gilbert, which he himself delivered to his parents,
the same can be cancelled and transferred in the names of herein petitioners.

In Santamaria v. Hongkong and Shanghai Banking Corp., this Court held that when a stock
61

certificate is endorsed in blank by the owner thereof, it constitutes what is termed as "street
certificate," so that upon its face, the holder is entitled to demand its transfer into his name from
the issuing corporation. Such certificate is deemed quasi-negotiable, and as such the transferee
thereof is justified in believing that it belongs to the holder and transferor.
1âwphi1

While there is a contrary ruling, as an exception to the general rule enunciated above, what the
Court held in Neugene Marketing Inc., et al., v CA, where stock certificates endorsed in blank
62

were stolen from the possession of the beneficial owners thereof constraining this Court to
declare the transfer void for lack of delivery and want of value, the same cannot apply to Gilbert
because the stock certificates which Gilbert endorsed in blank were in the undisturbed
possession of his parents who were the beneficial owners thereof and who themselves as such
owners caused the transfer in their names. Indeed, even if Gilbert’s parents were not the
beneficial owners, an endorsement in blank of the stock certificates coupled with its delivery,
entitles the holder thereof to demand the transfer of said stock certificates in his name from the
issuing corporation. 63

Interestingly, Gilbert also used the above discussed reasons as his arguments in Gilbert Guy v.
Court of Appeals, et a.l, a case earlier decided by this Court. In that petition, Lincoln Continental,
64

a corporation purportedly owned by Gilbert, filed with the RTC, Branch 24, Manila, a Complaint
for Annulment of the Transfer of Shares of Stock against Gilbert’s siblings, including his mother,
Simny. The complaint basically alleged that Lincoln Continental owns 20,160 shares of stock of
Northern Islands; and that Gilbert’s siblings, in order to oust him from the management of
Northern Islands, falsely transferred the said shares of stock in his sisters’ names. This Court
65

dismissed Gilbert’s petition and ruled in favor of his siblings viz:

5
Teng v. Securities and Exchange Commission, G.R. No. 184332, February 17, 2016

Facts:

This case has its origin in G.R. No. 1297774 entitled TCL Sales Corporation and Anna
Teng v. Hon. Court of Appeals and Ting Ping Lay. Herein respondent Ting Ping
purchased 480 shares of TCL Sales Corporation (TCL) from Peter Chiu (Chiu) on
February 2, 1979; 1,400 shares on September 22, 1985 from his brother Teng Ching
Lay (Teng Ching), who was also the president and operations manager of TCL; and
1,440 shares from Ismaelita Maluto (Maluto) on September 2, 1989. 5

Upon Teng Ching's death in 1989, his son Henry Teng (Henry) took over the
management of TCL. To protect his shareholdings with TCL, Ting Ping on August 31,
1989 requested TCL's Corporate Secretary, herein petitioner Teng, to enter the
transfer in the Stock and Transfer Book of TCL for the proper recording of his
acquisition. Lie also demanded the issuance of new certificates of stock in his favor.
TCL and Teng, however, refused despite repeated demands. Because of their refusal,
Ting Ping filed a petition for mandamus with the SEC against TCL and Teng,
docketed as SEC Case No. 3900.

After the finality of the Court's decision, the SEC issued a writ of execution
addressed to the Sheriff of the Regional Trial Court (RTC) of Manila. Teng, however,
filed on February 4, 2004 a complaint for interpleader with the RTC of Manila, Branch
46, docketed as Civil Case No. 02-102776, where Teng sought to compel Henry and
Ting Ping to interplead and settle the issue of ownership over the 1,400 shares,
which were previously owned by Teng Ching. Thus, the deputized sheriff held in
abeyance the further implementation of the writ of execution pending outcome of
Civil Case No. 02-102776.

Issue:

whether the surrender of the certificates of stock is a requisite before registration of

the transfer may be made in the corporate books and for the issuance of new
certificates in its stead.

Ruling:

Teng argues, among others, that the CA erred when it held that the surrender of
Maluto's stock certificates is not necessary before their registration in the corporate
books and before the issuance of new stock certificates. She contends that prior to
registration of stocks in the corporate books, it is mandatory that the stock
certificates are first surrendered because a corporation will be liable to a bona
fide holder of the old certificate if, without demanding the said certificate, it issues a
new one.

6
On the other hand, Ting Ping contends that Section 63 of the Corporation Code does
not require the surrender of the stock certificate to the corporation, nor make such
surrender an indispensable condition before any transfer of shares can be registered
in the books of the corporation. Ting Ping considers Section 63 as a permissive mode
of transferring shares in the corporation. Citing Rural Bank of Salinas, Inc. v.
CA,32 he claims that the only limitation imposed by Section 63 is when the
corporation holds any unpaid claim against the shares intended to be transferred.
Thus, for as long as the shares of stock are validly transferred, the corporate
secretary has the ministerial duty to register the transfer of such shares in the books
of the corporation, especially in this case because no less than this Court has
affirmed the validity of the transfer of the shares in favor of Ting Ping.

To restate the basics -

A certificate of stock is a written instrument signed by the proper officer of a

corporation stating or acknowledging that the person named in the document is the
owner of a designated number of shares of its stock. It is prima facie evidence that
the holder is a shareholder of a corporation.34 A certificate, however, is merely a
tangible evidence of ownership of shares of stock. 35 It is not a stock in the
corporation and merely expresses the contract between the corporation and the
stockholder.36 The shares of stock evidenced by said certificates, meanwhile, are
regarded as property and the owner of such shares may, as a general rule, dispose
of them as he sees fit, unless the corporation has been dissolved, or unless the right
to do so is properly restricted, or the owner's privilege of disposing of his shares has
been hampered by his own action.37

Section 63 of the Corporation Code prescribes the manner by which a share of stock
may be transferred. Said provision is essentially the same as Section 35 of the old
Corporation Law, which, as held in Fleisher v. Botica Nolasco Co.,38 defines the
nature, character and transferability of shares of stock. Fleisher also stated that the
provision on the transfer of shares of stocks contemplates no restriction as to whom
they may be transferred or sold. As owner of personal property, a shareholder is at
liberty to dispose of them in favor of whomsoever he pleases, without any other
limitation in this respect, than the general provisions of law. 39

Section 63 provides:

Sec. 63. Certificate of stock and transfer of shares. - The capital stock of stock
corporations shall be divided into shares for which certificates signed by the
president or vice president, countersigned by the secretary or assistant secretary,
and sealed with the seal of the corporation shall be issued in accordance with the
by-laws. Shares of stock so issued are personal property and may be
transferred by delivery of the certificate or certificates indorsed by the
owner or his attorney-in-fact or other person legally authorized to make the
transfer. No transfer, however, shall be valid, except as between the parties, until
the transfer is recorded in the books of the corporation showing the names of
the parties to the transaction, the date of the transfer, the number of the certificate
or certificates and the number of shares transferred.

No shares of stock against which the corporation holds any unpaid claim shall be
transferable in the books of the corporation. (Emphasis and underscoring ours)

7
Under the provision, certain minimum requisites must be complied with for there to
be a valid transfer of stocks, to wit: (a) there must be delivery of the stock
certificate; (b) the certificate must be endorsed by the owner or his attorney-in-fact
or other persons legally authorized to make the transfer; and (c) to be valid against
third parties, the transfer must be recorded in the books of the corporation. 40cralawred

It is the delivery of the certificate, coupled with the endorsement by the owner or his
duly authorized representative that is the operative act of transfer of shares from
the original owner to the transferee.41 The Court even emphatically declared in Fil-
Estate Golf and Development, Inc., et al. v. Vertex Sales and Trading, Inc. 42 that in
"a sale of shares of stock, physical delivery of a stock certificate is one of the
essential requisites for the transfer of ownership of the stocks purchased." 43 The
delivery contemplated in Section 63, however, pertains to the delivery of the
certificate of shares by the transferor to the transferee, that is, from the
original stockholder named in the certificate to the person or entity the stockholder
was transferring the shares to, whether by sale or some other valid form of absolute
conveyance of ownership.44 "[S]hares of stock may be transferred by delivery to
the transferee of the certificate properly indorsed. Title may be vested in the
transferee by the delivery of the duly indorsed certificate of stock." 45

It is thus clear that Teng's position - that Ting Ping must first surrender Chiu's and
Maluto's respective certificates of stock before the transfer to Ting Ping may be
registered in the books of the corporation -does not have legal basis. The delivery or
surrender adverted to by Teng, i.e., from Ting Ping to TCL, is not a requisite before
the conveyance may be recorded in its books. To compel Ting Ping to deliver to the
corporation the certificates as a condition for the registration of the transfer would
amount to a restriction on the right of Ting Ping to have the stocks transferred to his
name, which is not sanctioned by law. The only limitation imposed by Section 63 is
when the corporation holds any unpaid claim against the shares intended to be
transferred.

In the same vein, Teng cannot refuse registration of the transfer on the pretext that
the photocopies of Maluto's certificates of stock submitted by Ting Ping covered only
1,305 shares and not 1,440. As earlier stated, the respective duties of the
corporation and its secretary to transfer stock are purely ministerial.

Nevertheless, to be valid against third parties and the corporation, the transfer must
be recorded or registered in the books of corporation. There are several reasons why
registration of the transfer is necessary: one, to enable the transferee to exercise all
the rights of a stockholder;53 two, to inform the corporation of any change in share
ownership so that it can ascertain the persons entitled to the rights and subject to
the liabilities of a stockholder;54 and three, to avoid fictitious or fraudulent
transfers,55 among others. Thus, in Chita Giian v. Samahang Magsasaka, Inc.,56 the
Court stated that the only safe way to accomplish the hypothecation of share of
stock is for the transferee [a creditor, in this case] to insist on the assignment and
delivery of the certificate and to obtain the transfer of the legal title to him on the
books of the corporation by the cancellation of the certificate and the issuance of a
new one to him.57 In this case, given the Court's decision in G.R. No. 129777,

8
registration of the transfer of Chiu's and Maluto's shares in Ting Ping's favor is a
mere formality in confirming the latter's status as a stockholder of TCL.

Upon registration of the transfer in the books of the corporation, the transferee may
now then exercise all the rights of a stockholder, which include the right to have
stocks transferred to his name.59 In Ponce v. Alsons Cement Corporation,60 the Court
stated that "[f]rom the corporation's point of view, the transfer is not effective until
it is recorded. Unless and until such recording is made[,] the demand for the
issuance of stock certificates to the alleged transferee has no legal basis, x x x [T]he
stock and transfer book is the basis for ascertaining the persons entitled to the
rights and subject to the liabilities of a stockholder. Where a transferee is not yet
recognized as a stockholder, the corporation is under no specific legal duty to issue
stock certificates in the transferee's name."61

The manner of issuance of certificates of stock is generally regulated by the

corporation's by-laws. Section 47 of the Corporation Code states: "a private
corporation may provide in its by-laws for x x x the manner of issuing stock
certificates." Section 63, meanwhile, provides that "[t]he capital stock of stock
corporations shall be divided into shares for which certificates signed by the
president or vice president, countersigned by the secretary or assistant secretary,
and sealed with the seal of the corporation shall be issued in accordance with the
by-laws." In Bitong v. CA,62 the Court outlined the procedure for the issuance of new
certificates of stock in the name of a transferee:

The surrender of the original certificate of stock is necessary before the issuance of a
new one so that the old certificate may be cancelled. A corporation is not bound and
cannot be required to issue a new certificate unless the original certificate is
produced and surrendered.64 Surrender and cancellation of the old certificates serve
to protect not only the corporation but the legitimate shareholder and the public as
well, as it ensures that there is only one document covering a particular share of
stock.

In the case at bench, Ting Ping manifested from the start his intention to surrender
the subject certificates of stock to facilitate the registration of the transfer and for
the issuance of new certificates in his name. It would be sacrificing substantial
justice if the Court were to grant the petition simply because Ting Ping is yet to
surrender the subject certificates for cancellation instead of ordering in this case
such surrender and cancellation, and the issuance of new ones in his name. 65

On the other hand, Teng, and TCL for that matter, have already deterred for so long
Ting Ping's enjoyment of his rights as a stockholder. As early as 1989, Ting Ping
already requested Teng to enter the transfer of the subject shares in TCL's Stock and
Transfer Book; in 2001, the Court, in G.R. No. 129777, resolved Ting Ping's rights as
a valid transferee and shareholder; in 2006, the SEC ordered partial execution of the
judgment; and in 2008, the CA affirmed the SEC's order of execution. The Court will
not allow Teng and TCL to frustrate Ting Ping's rights any longer. Also, the Court will
not dwell on the other issues raised by Teng as it becomes irrelevant in light of the
Court's disquisition.

9
Insigne vs. Abra Valley Colleges, Inc., G.R. No. 204089, July 29, 2015

Facts:

Petitioners Grace Borgoña Insigne, Diosdado Borgoña, Osbourne Borgoña, Imelda Borgoña
Rivera, Aristotle Borgoña are siblings of the full blood. Respondent Francis Borgoña (Francis) is
their older half-blood brother. The petitioners are the children of the late Pedro Borgoña (Pedro)
by his second wife, Teresita Valeros, while Francis was Pedro’s son by his first wife, Humvelina
Avila. In his lifetime, Pedro was the founder, president and majority stockholder of respondent
3

Abra Valley Colleges, Inc. (Abra Valley), a stock corporation. After Pedro’s death, Francis
succeeded him as the president of Abra Valley. 4

On March 26, 2002, the petitioners, along with their brother Romulo Borgoña and Elmer Reyes,
filed a complaint (with application for preliminary injunction) and damages in the RTC against
Abra Valley (docketed as Special Civil Action Case No. 2070), praying, among others, that the
5

RTC direct Abra Valley to allow them to inspect its corporate books and records, and the minutes
of meetings, and to provide them with its financial statements 6

Due to Abra Valley’s failure to file its responsive pleading within the reglementary period provided
in the Interim Rules of Procedure Governing Intra-Corporate Controversies, the RTC rendered
7

judgment on May 7, 2002 in favor of the petitioners, disposing thusly:

8

In its answer, Abra Valley raised the following special and affirmative defenses, to wit:

18. Inasmuch as the originals of the above enumerated certificates of stock are still in
names of the original owners, it is the conclusion that the transfers or transactions, if any,
that may have transpired between said owners and plaintiffs are not yet recorded and
registered with the corporation issuing the same;

19. If said transaction or transfer was already registered, the stock certificates in the
name of the assignor, transferor or indorses should have been cancelled and replaced
with stock certificates in the name of the assignee, transferee or indorsee;

20. The stocks certificate submitted by the plaintiffs are still not in their respective names,
but still in the name of the supposed assignors, transferors or indorsers.

xxxx

23. To avail of the rights of stockholders, the plaintiffs must present stock certificates
already in their names, and not in the names of other persons; 16

On his part, Francis averred similar special and affirmative defenses, to wit:

10. From the Annexes of the amended complaint filed by plaintiffs, it appears that not one
of them is a stockholder of record of the Abra Valley Colleges, Inc.;

11. Be that as it is, plaintiffs are not vested with the rights to vote, to notice, to inspect, to
call for an annual meeting or demand the conduct of one, and such other rights and
privileges inherent and available only to stockholders of record;

12. From the copies of Stock Certificate attached to the AMENDED COMPLAINT, some
of the plaintiffs are mere assignees or indorsees, and that the other plaintiffs are not even
assignees or indorsee;

10
 13. And the right of an assignee or indorsee of a stock certificate is limited only to the
issuance of stock certificate in his or her name, after the requirements and conditions are
complied with;

Issue:
whether or not the petitioners were bona fide stockholders of Abra Valley.

Ruling:
Petitioners were stockholders of Abra Valley

Secondly, the petitioners, assuming that they bore the burden of proving their status as
stockholders of Abra Valley, nonetheless discharged their burden despite their non-production of
the stock certificates.

A stock certificate is prima facie evidence that the holder is a shareholder of the corporation, but
28

the possession of the certificate is not the sole determining factor of one’s stock ownership. A
certificate of stock is merely: –

x x x the paper representative or tangible evidence of the stock itself and of the various interests
therein. The certificate is not stock in the corporation but is merely evidence of the
holder's interest and status in the corporation, his ownership of the share represented
thereby, but is not in law the equivalent of such ownership. It expresses the contract
between the corporation and the stockholder, but it is not essential to the existence of a share in
stock or the creation of the relation of shareholder to the corporation. (Emphasis supplied.)
29

To establish their stock ownership, the petitioners actually turned over to the trial court through
their Compliance and Manifestation submitted on April 7, 2010 the various documents showing
their ownership of Abra Valley’s shares, specifically: the official receipts of their payments for
30

their subscriptions of the shares of Abra Valley; and the copies duly certified by the Securities
and Exchange Commission (SEC) stating that Abra Valley had issued shares in favor of the
petitioners, such as the issuance of part of authorized and unissued capital stock; the letter dated
June 17, 1987; the secretary’s certificate dated June 17, 1987; and the general information
sheet.

And, thirdly, the petitioners adduced competent proof showing that the respondents had allowed
the petitioners to become members of the Board of Directors. According to the Minutes of the
Annual Meeting of Directors and Stockholders of the Abra Valley College of January 29, 1989,
which was among the documents submitted to the trial court on April 7, 2010 through
the Compliance and Manifestation, the petitioners attended the annual meeting of January 29,
1989 as stockholders of Abra Valley, and participated in the election of the Board of Directors at
which some of them were chosen as members. Considering that Section 23 of the Corporation
Code requires every director to be the holder of at least one share of capital stock of the
corporation of which he is a director, the respondents would not have then allowed any of the
petitioners to be elected to sit in the Board of Directors as members unless they believed that the
petitioners so elected were not disqualified for lack of stock ownership. Neither did the
respondents thereafter assail their acts as Board Directors. Conformably with the doctrine of
estoppel, the respondents could no longer deny the petitioners’ status as stockholders of Abra
Valley. The application of the doctrine of estoppel, which is based on public policy, fair dealing,
good faith and justice, is only appropriate because the purpose of the doctrine is to forbid one
from speaking against his own act, representations, or commitments to the injury of another to
whom he directed such act, representations, or commitments, and who reasonably relied
thereon. The doctrine springs from equitable principles and the equities in the case, and is
designed to aid the law in the administration of justice where without its aid injustice might result.

11
The Court has applied the doctrine wherever and whenever special circumstances of the case so
demanded. 31

Under the circumstances, the dismissal of Special Civil Action Case No. 2070 on June 28, 2010
on the basis that "the documents presented are not Stock Certificates as boldly announced by
the plaintiff’s counsel, hence, plaintiffs failed to comply with the order of the Court dated March 8,
2010" was unwarranted and unreasonable. Although Section 3, Rule 17 of the Rules of
Court expressly empowers the trial court to dismiss the complaint motu proprio or upon motion
32

of the defendant if, for no justifiable cause, the plaintiff fails to comply with any order of the court,
the power to dismiss is not to wielded indiscriminately, but only when the non-compliance
constitutes a willful violation of an order of consequence to the action. Dismissal of the action can
be grossly oppressive if it is based on noncompliance with the most trivial order of the court
considering that the dismissal equates to "an adjudication upon the merits, unless otherwise
declared by the court." A line of demarcation must be drawn between an order whose non-
33

compliance impacts on the case, and an order whose noncompliance causes little effect on the
case. For example, the non-compliance of an order to the plaintiff to amend his complaint to
implead an indispensable party as defendant should be sanctioned with dismissal with prejudice
unless the non-compliance was upon justifiable cause, like such party not within the jurisdiction
of the court.

12
Florete, Jr. vs. Florete, G.R. No. 174909 & 177275, January 20, 2016

Facts:

A stockholder may suffer from a wrong done to or involving a corporation, but this
does not vest in the aggrieved stockholder a sweeping license to sue in his or her
own capacity. The determination of the stockholder's appropriate remedy�whether
it is an individual suit, a class suit, or a derivative suit�hinges on the object of the
wrong done. When the object of the wrong done is the corporation itself or "the
whole body of its stock and property without any severance or distribution among
individual holders,"1 it is a derivative suit, not an individual suit or
class/representative suit, that a stockholder must resort to.

Spouses Marcelino Florete, Sr. and Salome Florete (now both deceased) had four (4)
children: Marcelino Florete, Jr. (Marcelino, Jr.), Maria Elena Muyco (Ma. Elena),
Rogelio Florete, Sr. (Rogelio, Sr.), and Teresita Menchavez (Teresita), now
deceased.5 chanroblesvirtuallawlibrary

People's Broadcasting Service, Inc. (People's Broadcasting) is a private corporation

authorized to operate, own, maintain, install, and construct radio and television
stations in the Philippines.6 In its incorporation on March 8, 1966,7 it had an
authorized capital stock of P250,000.00 divided into 2,500 shares at PI00.00 par
value per share.8

Twenty-five percent (25%) of the corporation's authorized capital stock were then
subscribed to as follows:

Stockholder Number of Shares

Marcelino Florete, Sr. (Marcelino, Sr.) 250 shares
Salome Florete (Salome) 100 shares
Ricardo Berlin (Berlin) 50 shares
Pacifico Sudario (Sudario) 50 shares
Atty. Santiago Divinagracia (Divinagracia), now 50 shares10
deceased9

On November 17, 1967, Berlin and Sudario resigned from their positions as General
Manager and Station Supervisor, respectively. 11 Berlin and Sudario each transferred
20 shares to Raul Muyco and Estrella Mirasol. 12 chanroblesvirtuallawlibrary

Salome died on November 22, 1980.13 Marcelino, Sr. suffered a stroke on July 12,
1982, which left him paralyzed and bedridden until his death on October 3,
1990.14 After Marcelino, Sr.'s stroke, their son, Rogelio, Sr. started managing the
affairs of People's Broadcasting.15 chanroblesvirtuallawlibrary

13
In October 1993, People's Broadcasting sought the services of the accounting and
auditing firm Sycip Gorres Velayo and Co. in order to determine the ownership of
equity in the corporation.16 On November 2, 1994, Sycip Gorres Velayo and Co.
submitted a report detailing the movements of the corporation's shares from
November 23, 1967 to December 8, 1989.

There were no other transactions affecting the interest of the beneficial stockholders
up to October 31, 1993 except transfers to and from designated nominees[.] 19 chanroblesvirtuallawlibrary

Even as it tracked the movements of shares, Sycip Gorres Velayo and Co. declined to
give a categorical statement on equity ownership as People's Broadcasting's
corporate records were incomplete.

In the meantime, Rogelio, Sr. transferred a portion of his shareholdings to the

members of his immediate family, namely: Imelda Florete, Rogelio Florete, Jr., and
Margaret Ruth Florete, as well as to Diamel Corporation, a corporation owned by
Rogelio, Sr.'s family.

On June 23, 2003, Marcelino, Jr., Ma. Elena, and Raul Muyco (Marcelino, Jr. Group)
filed before the Regional Trial Court a Complaint25 for Declaration of Nullity of
Issuances, Transfers and Sale of Shares in People's Broadcasting Service, Inc. and
All Posterior Subscriptions and Increases thereto with Damages 26 against Diamel
Corporation, Rogelio, Sr., Imelda Florete, Margaret Florete, and Rogelio Florete, Jr.
(Rogelio, Sr. Group).

The Marcelino, Jr. Group insists that they have sufficiently established causes of
action accruing to them and against the Rogelio, Sr. Group. 55 They add that they
have impleaded all indispensable parties.56 Thus, they claim that it was an error for
the Regional Trial Court to dismiss their Complaint. They assert that a resolution of
the case on the merits must ensue.

For the issuance of 1,250 shares to Consolidated Broadcasting System, Inc., the
Marcelino, Jr. Group argues that Board Resolution No. 4 dated August 5, 1982, the
basis for the issuance of the 1,250 shares in favor of Consolidated Broadcasting
System, Inc., was a forgery: it was simulated, unauthorized, and issued without a
quorum as required under Section 25 of the Corporation Code. 58 They add that
Salome, who allegedly transferred her 10 shares to complete the 1,250 share
transfer, was already dead at the time of the alleged transfer on September 1,
1982.59 The Marcelino, Jr. Group claims that no member of the Board attended the
meeting referred to in Board Resolution No. 4.60 They further allege that the
signature of Marcelino, Sr. in Board Resolution No. 4 is a forgery. 61 They argue that
Marcelino, Sr. could not have attended the meeting on August 5, 1982 because from
July 12, 1982 to August 26, 1982,62 he was confined in Gov. B. Lopez Memorial
Hospital for quadriparesis and motor aphasia.63 They also supplied the trial court
with specimen signatures of Marcelino, Sr. to prove that the signature appearing on
Board Resolution No. 4 was forged.64 chanroblesvirtuallawlibrary

14
The Marcelino, Jr. Group alleges that from the time Marcelino, Sr. suffered a stroke
on July 12, 1982 until his death on October 3, 1990, he was no longer capable of
giving consent because of his quadriparesis and motor aphasia. 65 As they
emphasized, "[q]uadriparesis means weakness of the upper and lower extremities
with spasticity and tremors. Motor aphasia means that the patient could not
communicate, unable to talk, nor responds [sic] to question or simple
commands."66 Thus, they conclude that all of the issuances of shares in favor of
Marcelino, Sr. and all of the transfers of shares to and from Marcelino, Sr. from July
12, 1982 are void for lack of consent.

Ruling:

The sufficiency of the Marcelino, Jr. Group's plea for relief, through their Complaint
for Declaration of Nullity of Issuances, Transfers and Sale of Shares in People's
Broadcasting Service, Inc. and All Posterior Subscriptions and Increases thereto with
Damages,81 hinges on a characterization of the suit or action they initiated. This
characterization requires a determination of the cause of action through which the
Marcelino, Jr. Group came to court for relief. It will, thus, clarify the parties who
must be included in their action and the procedural and substantive requirements
they must satisfy if their action is to prosper.

A stockholder suing on account of wrongful or fraudulent corporate actions

(undertaken through directors, associates, officers, or other persons) may sue in any
of three (3) capacities: as an individual; as part of a group or specific class of
stockholders; or as a representative of the corporation.

Villamor further explained that a derivative suit "is an action filed by stockholders to
enforce a corporate action."84 A derivative suit, therefore, concerns "a wrong to the
corporation itself."85 The real party in interest is the corporation, not the
stockholders filing the suit. The stockholders are technically nominal parties but are
nonetheless the active persons who pursue the action for and on behalf of the
corporation.

Remedies through derivative suits are not expressly provided for in our
statutes�more specifically, in the Corporation Code and the Securities Regulation
Code�but they are "impliedly recognized when the said laws make corporate
directors or officers liable for damages suffered by the corporation and its
stockholders for violation of their fiduciary duties." 86 They are intended to afford
reliefs to stockholders in instances where those responsible for running the affairs of
a corporation would not otherwise act:

However, in cases of mismanagement where the wrongful acts are committed by the
directors or trustees themselves, a stockholder or member may find that he has no
redress because the former are vested by law with the right to decide whether or
not the corporation should sue, and they will never be willing to sue themselves. The
corporation would thus be helpless to seek remedy. Because of the frequent

15
occurrence of such a situation, the common law gradually recognized the right of a
stockholder to sue on behalf of a corporation in what eventually became known as a
"derivative suit." It has been proven to be an effective remedy of the minority
against the abuses of management. Thus, an individual stockholder is permitted to
institute a derivative suit on behalf of the corporation wherein he holds stock in
order to protect or vindicate corporate rights, whenever officials of the corporation
refuse to sue or are the ones to be sued or hold the control of the corporation. In
such actions, the suing stockholder is regarded as the nominal party, with the
corporation as the party in interest.87 chanrobleslaw

The distinction between individual and class/representative suits on one hand and
derivative suits on the other is crucial. These are not discretionary alternatives. The
fact that stockholders suffer from a wrong done to or involving a corporation does
not vest in them a sweeping license to sue in their own capacity. The recognition of
derivative suits as a vehicle for redress distinct from individual and representative
suits is an acknowledgment that certain wrongs may be addressed only through acts
brought for the corporation:

Although in most every case of wrong to the corporation, each stockholder is

necessarily affected because the value of his interest therein would be impaired, this
fact of itself is not sufficient to give him an individual cause of action since the
corporation is a person distinct and separate from him, and can and should itself sue
the wrongdoer.

The avenues for relief are, thus, mutually exclusive. The determination of the
appropriate remedy hinges on the object of the wrong done. When the object is a
specific stockholder or a definite class of stockholders, an individual suit or
class/representative suit must be resorted to. When the object of the wrong done is
the corporation itself or "the whole body of its stock and property without any
severance or distribution among individual holders," 91 it is a derivative suit that a
stockholder must resort to.

Villamor recalls the requisites for filing derivative suits:

Rule 8, Section 1 of the Interim Rules of Procedure for Intra Corporate Controversies
(Interim Rules) provides the five (5) requisites for filing derivative suits: ChanRoblesVirtualawlibrary

SECTION 1. Derivative action.�A stockholder or member may bring an action in

the name of a corporation or association, as the case may be, provided, that:

(1) He was a stockholder or member at the time the acts or transactions subject of the
action occurred and at the time the action was filed;
(2) He exerted all reasonable efforts, and alleges the same with particularity in the
complaint, to exhaust all remedies available under the articles of incorporation,
by-laws, laws or rules governing the corporation or partnership to obtain the relief
he desires;
(3) No appraisal rights are available for the act or acts complained of; and
(4) The suit is not a nuisance or harassment suit.

16
In case of nuisance or harassment suit, the court shall forthwith dismiss the case.
The fifth requisite for filing derivative suits, while not included in the enumeration, is
implied in the first paragraph of Rule 8, Section 1 of the Interim Rules: The action
brought by the stockholder or member must be "in the name of [the] corporation or
association. . . ." This requirement has already been settled in jurisprudence.

Thus, in Western Institute of Technology, Inc., et al. v. Salas, et al, this court said
that "[a]mong the basic requirements for a derivative suit to prosper is that the
minority shareholder who is suing for and on behalf of the corporation must allege in
his complaint before the proper forum that he is suing on a derivative cause of
action on behalf of the corporation and all other shareholders similarly situated who
wish to join [him]." ...

Moreover, it is important that the corporation be made a party to the

case.94 (Citations omitted)

These are the same conditions in this case. What the Marcelino, Jr. Group asks is the
complete reversal of a number of corporate acts undertaken by People'
Broadcasting's different boards of directors. These boards supposedly engaged in
outright fraud or, at the very least, acted in such a manner that amounts to wanton
mismanagement of People's Broadcasting's affairs. The ultimate effect of the remedy
they seek is the reconfiguration of People's Broadcasting's capital structure.

The remedies that the Marcelino, Jr. Group seeks are for People's Broadcasting itself
to avail. Ordinarily, these reliefs may be unavailing because objecting stockholders
such as those in the Marcelino, Jr. Group do not hold the controlling interest in
People's Broadcasting. This is precisely the situation that the rule permitting
derivative suits contemplates: minority shareholders having no other recourse
"whenever the directors or officers of the corporation refuse to sue to vindicate the
rights of the corporation or are the ones to be sued and are in control of the
corporation."124chanroblesvirtuallawlibrary

The Marcelino, Jr. Group points to violations of specific provisions of the Corporation
Code that supposedly attest to how their rights as stockholders have been
besmirched. However, this is not enough to sustain a claim that the Marcelino, Jr.
Group initiated a valid individual or class suit. To reiterate, whether stockholders
suffer from a wrong done to or involving a corporation does not readily vest in them
a sweeping license to sue in their own capacity.

17
The specific provisions adverted to by the Marcelino, Jr. Group signify alleged
wrongdoing committed against the corporation itself and not uniquely to those
stockholders who now comprise the Marcelino, Jr. Group. A violation of Sections 23
and 25 of the Corporation Code�on how decision-making is vested in the board of
directors and on the board's quorum requirement�implies that a decision was
wrongly made for the entire corporation, not just with respect to a handful of
stockholders. Section 65 specifically mentions that a director's or officer's liability for
the issuance of watered stocks in violation of Section 62 is solidary "to the
corporation and its creditors," not to any specific stockholder. Transfers of shares
made in violation of the registration requirement in Section 63 are invalid and, thus,
enable the corporation to impugn the transfer. Notably, those in the Marcelino, Jr.
Group have not shown any specific interest in, or unique entitlement or right to, the
shares supposedly transferred in violation of Section 63.

Also, the damage inflicted upon People's Broadcasting's individual stockholders, if

any, was indiscriminate. It was not unique to those in the Marcelino, Jr. Group. It
pertained to "the whole body of [People's Broadcasting's] stock." 125 Accordingly, it
was upon People's Broadcasting itself that the causes of action now claimed by the
Marcelino Jr. Group accrued. While stockholders in the Marcelino, Jr. Group were
permitted to seek relief, they should have done so not in their unique capacity as
individuals or as a group of stockholders but in place of the corporation itself
through a derivative suit. As they, instead, sought relief in their individual capacity,
they did so bereft of a cause of action. Likewise, they did so without even the
slightest averment that the requisites for the filing of a derivative suit, as spelled out
in Rule 8, Section 1 of the Interim Rules of Procedure for Intra-Corporate
Controversies, have been satisfied. Since the Complaint lacked a cause of action and
failed to comply with the requirements of the Marcelino, Jr. Group's vehicle for relief,
it was only proper for the Complaint to have been dismissed.

Metropolitan Bank & Trust Co. vs. Salazar Realty Corp., G.R. No. 218738, March 9, 2022

Facts:

18
 Petitioner Metrobank and respondent Salazar Realty Corporation (SARC) are both Philippine
corporations. Metrobank is engaged in the banking business,6 while SARC is engaged in the real
estate business.7 Also involved in the events preceding the present litigation is another
Philippine corporation, Tacloban RAS Construction Corporation (Tacloban RAS).

On November 5, 2001, SARC filed an action for quieting of title and nullification of contracts
against Metrobank before the RTC of Tacloban City.8 The petition was docketed as Civil Case
No. 2001-11-164.9 SARC alleged that:

1) Based on its latest filings at the time of the filing of the petition, SARC had the following
officers, who also composed its board of directors:10 Raymund A. Salazar, President; Ramon
Ve. Salazar, Vice President; Ralph A. Salazar,11 Secretary; Rosemarie A. Salazar, Treasurer;
Consuelo A. Salazar,12 Member, Board of Directors.

2) On October 6, 1992, Tacloban RAS obtained a loan from Metrobank in the amount of ten
million pesos (P10,000,000.00).13 On January 9, 1996, the loan amount was increased to twelve
million pesos (P12,000,000.00); and on October 6, 1999 it was further increased to eighteen
million five hundred thousand pesos (P18,500,000.00).14 This final amount was reflected in a
promissory note executed on October 6, 1999 between Tacloban RAS and Metrobank, which
was signed by Consuelo and Ralph as president and corporate secretary, respectively, of
Tacloban RAS.15 To secure the loan, Metrobank and SARC entered into a mortgage contract on
January 9, 1996, with Consuelo and Ralph still signing, this time on behalf of SARC.16 The
mortgage covered five parcels of land located in Tacloban City, which were all registered in the
name of SARC.17 The mortgage was likewise amended to cover the final amount of the loan.18

3) Meanwhile, on March 30, 1995, Ramon Ve. Salazar, SARC's Vice President and director,
passed away. Consuelo likewise passed away on October 21, 2001. The vacancies left by their
passing were left unfilled.19

4) The remaining directors of SARC, including Ralph, issued a board resolution approving
the mortgage of the five SARC-owned lots to secure the loan obligation of Tacloban RAS.20

5) Tacloban RAS defaulted on the loan, prompting Metrobank to initiate extrajudicial

foreclosure proceedings before the RTC of Tacloban City.21 Metrobank emerged as the winning
bidder in the auction sale.22 Upon issuance of the certificate of sale23 and filing of the affidavit of
consolidation of ownership,24 SARC's certificates of title were cancelled and new ones were
issued in Metrobank's favor.25

6) Upon hearing about the auction sale, Ramon Ang Salazar, Jr., Robert Ang Salazar, Roger
Ang Salazar and Rosemarie Salazar Fernandez (hereinafter referred to as Ramon et al.) as
incorporators and stockholders acting in behalf of SARC, immediately checked the status of the
disputed lands with the Register of Deeds. They discovered that SARC's certificates of title had
been cancelled.26 In response, Ramon et al. registered an adverse claim on the new certificates
of title that were issued to Metrobank.27

7) In view of the SARC board's inaction and tacit approval of the unauthorized encumbrance
and subsequent loss of the corporation's real properties, Ramon et al. filed the present suit on
SARC's behalf.

8) The loan agreement is void because Consuelo is not a stockholder or officer of Tacloban
RAS, based on its incorporation papers filed with the SEC.28

9) The mortgage agreement and the foreclosure proceedings are void because Tacloban
RAS has no authority to use SARC's properties as collateral. Rather, the authorization for such
purpose was issued by the SARC board to a single proprietorship named RAS Construction,
which is an entity distinct and separate from Tacloban RAS.29

19
 10) SARC exceeded its corporate powers when it entered into a mortgage contract to secure
the obligation of a separate, distinct, and unrelated corporation. Tacloban RAS is not a subsidiary
of SARC. It likewise holds no shares or any other form of investment in the latter corporation.
Thus, the mortgage contract is void for being ultra vires insofar as SARC is concerned.30

11) SARC's principal corporate assets are limited to six (6) parcels of land. Consequently,
the mortgage of the five parcels in dispute, including the lot on which SARC's principal office is
located, constitutes an encumbrance of substantially all the assets of the corporation which must
be authorized by SARC's stockholders in a meeting for that purpose, pursuant to Section 40 of
the Corporation Code. Absent such authorization, the mortgage contract is null and void.31

12) SARC board and stockholder approvals for the mortgage contract and the amendments
thereto were not annotated on SARC's certificates of title, giving rise to the presumption that
neither the SARC board nor its stockholders approved said contract and the amendments
thereto.32

13) Metrobank failed to exercise due diligence when it extended an eighteen-million-peso

loan to Tacloban RAS, whose authorized capital stock was only three million pesos.
Furthermore, the loan was secured by properties owned by SARC, whose authorized capital
stock was only five million pesos. More importantly, Metrobank was guilty of negligence when it
failed to thoroughly investigate Consuelo and Ralph's authority to enter contracts and encumber
properties on behalf of Tacloban RAS and SARC.33

14) Assuming that the loan and mortgage contracts are valid and binding, the foreclosure
proceedings are nevertheless null and void, for the following reasons: a) Metrobank's petition for
foreclosure lacks several material details which render it fatally defective under A.M. No. 99-10-
05-0;34 b) SARC was not given personal notice of the foreclosure sale; c) the publication of the
notice of sale was defective because copies thereof were attached to the record only after the
auction sale had taken place, and notices of publication were not furnished for all instances of
publication, in violation of A.M. No. 99-10-05-0; d) there was only one bidder in the auction sale,
in violation of item 5 of A.M. No. 99-10-05-0; and e) Section 47 of Republic Act No. 8791 which
sets different redemption periods for natural and juridical persons is unconstitutional.35

Accordingly, SARC prayed that the cloud on its title be removed by: 1) nullifying the loan and
mortgage agreements between Metrobank and Tacloban RAS/SARC; 2) nullifying the
foreclosure proceedings initiated by Metrobank; and 3) cancelling the certificates of title issued to
Metrobank.

On February 13, 2002, Metrobank filed a Comment with Motion to Dismiss. It argued that
Ralph had authority to enter into the loan and mortgage agreements, and that the mortgaged
properties were personally owned by Ralph and Consuelo.37 Metrobank further alleged that
Consuelo personally bound herself as surety;38 and that the final amount of the loan was agreed
upon pursuant to a restructuring upon Ralph's request, with the approval of the boards of
directors of both Tacloban RAS and SARC.39

Metrobank also argued that SARC and its stockholders have no standing to seek the
cancellation of the loan and mortgage agreements since SARC is not a party thereto.40 It also
argued that the petition filed by SARC through Ramon et al. is in the nature of a derivative suit
which must be directed against SARC's officers, directors, or stockholders. Likewise, since the
petition is in the nature of a derivative suit, it is an intra-corporate controversy over which regular
courts like Branch 9 of the Tacloban City RTC have no jurisdiction.41 Metrobank thus prayed that
the petition be dismissed for lack of standing on the part of both Ramon et al. and SARC, and for
lack of jurisdiction.

In its Reply, SARC reiterated Ralph's lack of authority to bind Tacloban RAS and SARC. It
also disputed Metrobank's argument on standing, maintaining that the case was properly filed

20
against Metrobank, who was responsible for clouding its titles by initiating the foreclosure
proceedings.42 In the same vein, SARC also rejected Metrobank's characterization of the
petition as an intra-corporate controversy, arguing that the loan and mortgage contracts, as well
as the foreclosure proceedings, are clouds on SARC's title which may only be removed by the
RTC

Ruling:

A derivative suit is one of three kinds of suits that may be filed by a stockholder or member of
a corporation or association, viz.:

Suits by stockholders or members of a corporation based on wrongful or fraudulent acts of

directors or other persons may be classified into individual suits, class suits, and derivative suits.
Where a stockholder or member is denied the right of inspection, his suit would be individual
because the wrong is done to him personally and not to the other stockholders or the
corporation. Where the wrong is done to a group of stockholders, as where preferred
stockholders' rights are violated, a class or representative suit will be proper for the protection of
all stockholders belonging to the same group. But where the acts complained of constitute a
wrong to the corporation itself, then the cause of action belongs to the corporation and not to the
individual stockholder or member. Although in most every case of wrong to the corporation, each
stockholder is necessarily affected because the value of his interest therein would he impaired,
this fact of itself is not sufficient to give him an individual cause of action since the corporation is
a person distinct and separate from him, and can and should itself sue the wrongdoers.
Otherwise, not only would the theory of separate entity be violated, but there would be multiplicity
of suits as well as a violation of the priority rights of creditors. Furthermore, there is the difficulty
of determining the amount of damages that should be paid to each individual stockholder.

However, in cases of mismanagement where the wrongful acts committed by the directors
or trustees themselves, a stockholder or member may find that he has no redress
because the former are vested by law with the right to decide whether or not the
corporation should sue, and they will never be willing to sue themselves. The corporation
would thus be helpless to seek remedy. Because of the frequent occurrence of such a
situation, the common law gradually recognized the right of a stockholder to sue on
behalf of the corporation in what eventually became known as a "derivative suit." It has
been proven to be an effective remedy of the minority against abuses of
management. Thus, an individual stockholder is permitted to institute a derivative suit on
behalf of the corporation wherein he holds stock in order to protect or vindicate corporate
rights, whenever officials of the corporation refuse to sue or are the ones to be sued or
hold the control of the corporation. In such actions, the suing stockholder is regarded as the
nominal party, with the corporation as the party in interest.

In certain instances, however, the

stockholders may sue on behalf of
the corporation

As an exception to the foregoing rule, jurisprudence has recognized certain instances when
minority stockholders may bring suits on behalf of corporations. Where the board of directors
itself is a party to the wrong, either because it is the author thereof or because it refuses to take
remedial action, equity permits individual stockholders to seek redress. These actions have come
to be known as derivative suits. In Chua v. Court of Appeals, the Court defined a derivative suit
as "a suit by a shareholder to enforce a corporate cause of action."

In derivative suits, it is the corporation that is the victim of the wrong. As such, it is the
corporation that is properly regarded as the real party in interest, while the relator-stockholder is

21
merely a nominal party. The corporation must be impleaded so that the benefits of the suit
accrue to it and also because it must be barred from bringing a subsequent case against the
same defendants for the same cause of action. Stated otherwise, the judgment rendered in the
suit must constitute res judicata against the corporation, even though it refuses to sue through its
board of directors.

xxxx

The right of stockholders to bring derivative suits is not based on any provision of the Corporation
Code or the Securities Regulation Code, but is a right that is implied by the fiduciary duties that
directors owe corporations and stockholders. Derivative suits are, therefore, grounded not on
law, but on equity.73

Jurisprudence has developed three requisites for a derivative suit, which are first
enumerated together in the 1989 case of San Miguel Corporation v. Kahn:74

The requisites for a derivative suit are as follows:

a) the party bringing suit should be a shareholder as of the time of the act or transaction
complained of, the number of his shares not being material;

b) he has tried to exhaust intra-corporate remedies, i.e., has made a demand on the board of
directors for the appropriate relief but the latter has failed or refused to heed his plea;

c) the cause of action actually devolves on the corporation, the wrongdoing or harm having been,
or being caused to the corporation and not to the particular stockholder bringing the suit.75

This is the three-part test insisted upon by Metrobank; however, this test has been
superseded by Rule 8, Section 1 of the 2001 IRPIC, which obliquely defines a derivative suit, or
a derivative action, as an action brought by a stockholder or member in the name of a
corporation or association.76 That same provision states that such actions may be brought,
provided that the following requisites, which must be specifically alleged in the complaint,77 are
met:

(1) The party suing on the corporation or association's behalf was a stockholder or member at
the time the acts or transactions subject of the action occurred and at the time the action was
filed;

(2) Such party exerted all reasonable efforts, and alleges the same with particularity in the
complaint, to exhaust all remedies available under the articles of incorporation, by-laws, laws or
rules governing the corporation or partnership to obtain the relief he desires;

(3) No appraisal rights are available for the act or acts complained of; and

(4) The suit is not a nuisance or harassment suit.

(5) The suit must be brought in the name of the corporation.

22
Adapon vs. Medical Doctors, Inc., G.R. No. 229956, June 14, 2021

Facts:

On April 25, 2011,8 Dr. Benjamin D. Adapon (Dr. Adapon) filed a Complaint9 for himself and as a
minority stockholder of Computerized Imaging Institute, Inc. (CII) against Medical Doctors, Inc.
(Medical Doctors) for violation of the parties' non-compete agreement. Dr. Adapon is "a medical
expert in the field of Neuroradiology, Computed Tomography, diagnostic and therapeutic
Neuroangiography[.]"10 Medical Doctors, on the other hand, owns and operates the Makati
Medical Center.

In the late 1970s, Dr. Adapon was approached by Dr. Constantino P. Manahan, Dr. Raul G.
Fores and Dr. Romeo H. Gustillo,11 three of the incorporators, directors, and principal doctors of
Medical Doctors. They requested him to set up, operate, and head a computed tomography
facility for the Makati Medical Center.12 Even while already established in the United States, Dr.
Adapon heeded the call and set up the first computed tomography facility in the Philippines and
in Southeast Asia.13

On February 15, 1978, Medical Doctors and Dr. Adapon formally incorporated then Computed
Tomography Center, Inc., now en, with 60% of the outstanding capital stock belonging to Medical
Doctors and 40% owned by Dr. Adapon and his nominees. As the expert in computed
tomography, Dr. Adapon took charge of the Makati Medical Center's operations as its
president.14

The parties proceeded with their venture without any written formal agreement.15 Medical
Doctors referred patients who needed tomography to CII for its services. Medical Doctors billed,
collected, and remitted the payments of the patients to CII.16

In 1988, Dr. Adapon proposed to purchase magnetic resonance imaging equipment for CII to
enable it to offer additional services to patients of Makati Medical Center and expand its growing
business. Around the time, the parties also executed a Letter of Intent prepared by Medical
Doctors, containing a non-compete agreement

The arbitration panel shall be composed of three (3) arbitrators. Each party shall be entitled to
choose an arbitrator and the third arbitrator shall be a person mutually agreed upon by both
parties. Pending the result of the arbitration, the parties shall commit to maintain the status
quo.18

Dr. Adapon signed the Letter of Intent in November 1988, and Drs. Manahan, Gustilo, and Fores
signed on behalf of Medical Doctors.19 The parties still continued to conduct their business, with
Dr. Adapon heading CII, which provided tomography and MRI services for Makati Medical Center
patients.20

Ten years later, in 1998, Medical Doctors acquired and installed a 16-slice CT Scanner to be
used in the hospital's X-Ray Department. Dr. Adapon questioned this purchase for violating the
non-compete agreement.21 Drs. Manahan, Fores, and Gustilo supposedly assured him that his
concerns were unfounded and that the machine would only be used for charity patients.22

Yet, Dr. Adapon later learned that Medical Doctors also bought its own MRI machine and
instructed its employees to refer patients that needed computed tomography imaging and
magnetic imaging procedure to the hospital's own X-Ray Department instead of CII's facility. Dr.
Adapon claimed that this action created a false impression that the services offered in CII's
facility were inferior to that of the Makati Medical Center. Dr. Adapon called the attention of
Medical Doctors, but his complaints were ignored.23

23
In 2011, Medical Doctors installed a Siemens 128-slice CT Scanner, and an MRI Scanner in
2012, for the paying patients of the Makati Medical Center.24

To Dr. Adapon, all these acts signified Medical Doctors' intention to directly compete with the
services offered by CII, in violation of their non-compete agreement. Thus, he filed his
Complaint25 with a prayer for preliminary injunction or a temporary restraining order. He also
claimed that Medical Doctors failed to pay for past services rendered by CII to the hospital's
patients, and to reimburse CII for the damages on its equipment incurred during the hospital's
renovation.

Ruling:

The arbitral tribunal noted that this case is both a derivative suit and a direct action filed by
petitioner Dr. Adapon for damages against respondent. It further held that "a shareholder like
claimant Dr. Adapon may also sue in his personal capacity to enforce his rights as
shareholder."147

In Gochan v. Young,148 a stockholder's personal claim was considered permissible as an

additional cause of action in a derivative suit by that same stockholder, thus:

In the present case, the Complaint alleges all the components of a derivative suit. The
allegations of injury to the Spouses Uy can coexist with those pertaining to the corporation. The
personal injury suffered by the spouses cannot disqualify them from filing a derivative suit on
behalf of the corporation. It merely gives rise to an additional cause of action for damages
against the erring directors. This cause of action is also included in the Complaint filed before the
SEC.149

Significantly, one of the issues included m the arbitral Terms of Reference, which respondent
agreed to, was petitioner Dr. Adapon's personal claim for damages.150 Thus, it was within the
arbitral tribunal's power to determine his personal claims. Arbitrators may grant any relief that
they may deem just and equitable and within the scope of the parties' agreement.151

The arbitral tribunal determined from the evidence presented that respondent's operation of its
own tomography and MRI facility was indeed prejudicial to the interests not only of CII, but also
of petitioner Dr. Adapon. The non-compete agreement required both parties not to pursue their
own tomography and MRI services, but to centralize these works to CII.152 Thus, pursuant to
their agreement, respondent referred all computed tomography services to CII, while petitioner
Dr. Adapon devoted himself solely to the business of CII from 1978 to 1997.153

The arbitral tribunal found that respondent violated the non-compete agreement in bad faith,
when it bought: a CT Scanner in 1997, initially making it appear that it would be used for charity
patients, but later on using it for paying patients; another CT Scanner in 2011; and an MRI
System in 2012. To the arbitral tribunal, the damage respondent wrought on petitioners could not
be denied.154 Hence, it awarded compensatory damages in favor of petitioner Dr.
Adapon155 based on the profits earned by respondent from its tomography and MRI facility.156

Yet, the Court of Appeals held that the arbitral tribunal exceeded its authority in awarding
damages to petitioner Dr. Adapon for lack of cause of action, since the injury was supposedly
against CII.157

Again, the Special ADR Rules provide that in resolving the petition for enforcement or vacation of
an arbitral award, the court shall not disturb the arbitral tribunal's determination of facts and/or
interpretation of law.158

24
A commercial arbitration tribunal operates through contractual consent; hence, its findings of fact
and law are binding on the parties. Its errors are generally not correctible by the judiciary. The
arbitration laws and rules provide exclusive and limited exceptions to the autonomy of arbitral
awards.159 These grounds involve either the integrity of the award itself or the conduct of the
arbitration proceedings.

In Fruehauf Electronics Philippines Corporation v. Technology Electronics Assembly and

Management Pacific Corporation,160 this Court held that the Court of Appeals breached the
bounds of its jurisdiction when it reviewed the substance of the arbitral award outside of the
permitted grounds under the arbitration laws:

The CA reversed the arbitral award — an action that it has no power to do — because it
disagreed with the tribunal's factual findings and application of the law. However, the alleged
incorrectness of the award is insufficient cause to vacate the award, given the State's policy of
upholding the autonomy of arbitral awards.

The CA passed upon questions such as: (1) whether or not TEAM effectively returned the
property upon the expiration of the lease; (2) whether or not TEAM was liable to pay rentals after
the expiration of the lease; and (3) whether or not TEAM was liable to pay Fruehauf damages
corresponding to the cost of repairs. These were the same questions that were specifically
submitted to the arbitral tribunal for its resolution.

. . . Courts are precluded from disturbing an arbitral tribunal's factual findings and interpretations
of law. The CA's ruling is an unjustified judicial intrusion in excess of its jurisdiction — a judicial
overreach.

....

Whether or not the arbitral tribunal correctly passed upon the issues is irrelevant. Regardless of
the amount of the sum involved in a case, a simple error of law remains a simple error of law.
Courts are precluded from revising the award in a particular way, revisiting the tribunal's findings
of fact or conclusions of law, or otherwise encroaching upon the independence of an arbitral
tribunal.161 (Emphasis in the original, citations omitted)

Respondent violated the arbitration agreement to "abide by the ruling of the panel of arbitrators"
by asking the Regional Trial Court to vacate the arbitral award.162 Moreover, a closer scrutiny of
its Petition to Vacate Arbitral Award reveals its intention to seek a full review of the arbitral
tribunal's findings of fact and law in the guise of an "excess of power." It raised the same points
and arguments raised before the arbitral tribunal: the non-enforceability of the Letter of Intent and
its non-compete clause, prescription, clean hands doctrine, rebus sic stantibus principle, restraint
of trade, and insufficiency of evidence to prove damages.

25
Paul Lee Tan, et. al. vs. Paul Sycip, et. al., August 17, 2006

Facts:

For stock corporations, the "quorum" referred to in Section 52 of the Corporation Code is based
on the number of outstanding voting stocks. For nonstock corporations, only those who are
actual, living members with voting rights shall be counted in determining the existence of a
quorum during members’ meetings. Dead members shall not be counted.

Petitioner Grace Christian High School (GCHS) is a nonstock, non-profit educational corporation
with fifteen (15) regular members, who also constitute the board of trustees. [4] During the annual
members’ meeting held on April 6, 1998, there were only eleven (11) [5] living member-trustees,
as four (4) had already died. Out of the eleven, seven (7) 6 attended the meeting through their
respective proxies. The meeting was convened and chaired by Atty. Sabino Padilla Jr. over the
objection of Atty. Antonio C. Pacis, who argued that there was no quorum. 7 In the meeting,
Petitioners Ernesto Tanchi, Edwin Ngo, Virginia Khoo, and Judith Tan were voted to replace the
four deceased member-trustees.

When the controversy reached the Securities and Exchange Commission (SEC), petitioners
maintained that the deceased member-trustees should not be counted in the computation of the
quorum because, upon their death, members automatically lost all their rights (including the right
to vote) and interests in the corporation.

SEC Hearing Officer Malthie G. Militar declared the April 6, 1998 meeting null and void for lack of
quorum. She held that the basis for determining the quorum in a meeting of members should be
their number as specified in the articles of incorporation, not simply the number of living
members. 8 She explained that the qualifying phrase "entitled to vote" in Section 24 9 of the
Corporation Code, which provided the basis for determining a quorum for the election of directors
or trustees, should be read together with Section 89. 10

The hearing officer also opined that Article III (2) 11 of the By-Laws of GCHS, insofar as it
prescribed the mode of filling vacancies in the board of trustees, must be interpreted in
conjunction with Section 29 12 of the Corporation Code. The SEC en banc denied the appeal of
petitioners and affirmed the Decision of the hearing officer in toto. 13 It found to be untenable their
contention that the word "members," as used in Section 52 14 of the Corporation Code, referred
only to the living members of a nonstock corporation. 15

As earlier stated, the CA dismissed the appeal of petitioners, because the Verification and
Certification of Non-Forum Shopping had been signed only by Atty. Sabino Padilla Jr. No Special
Power of Attorney had been attached to show his authority to sign for the rest of the petitioners.

Hence, this Petition.

Issue:

whether or not in NON-STOCK corporations, dead members should still be counted in

determination of quorum for purposed of conducting the Annual Members’ Meeting.

26
"Petitioners have maintained before the courts below that the DEAD members should no longer
be counted in computing quorum primarily on the ground that members’ rights are ‘personal and
non-transferable’ as provided in Sections 90 and 91 of the Corporation Code of the Philippines.

Ruling:

Section 52 of the Corporation Code states:

"Section 52. Quorum in Meetings. – Unless otherwise provided for in this Code or in the by-laws,
a quorum shall consist of the stockholders representing a majority of the outstanding capital
stock or a majority of the members in the case of non-stock corporations."

In stock corporations, the presence of a quorum is ascertained and counted on the basis of the
outstanding capital stock, as defined by the Code thus:

"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."
(Underscoring supplied)

Effect of the Death

of a Member or Shareholder

Having thus determined that the quorum in a members’ meeting is to be reckoned as the actual
number of members of the corporation, the next question to resolve is what happens in the event
of the death of one of them.

In stock corporations, shareholders may generally transfer their shares. Thus, on the death of a
shareholder, the executor or administrator duly appointed by the Court is vested with the legal
title to the stock and entitled to vote it. Until a settlement and division of the estate is effected, the
stocks of the decedent are held by the administrator or executor. 44

On the other hand, membership in and all rights arising from a nonstock corporation are personal
and non-transferable, unless the articles of incorporation or the bylaws of the corporation provide
otherwise. 45 In other words, the determination of whether or not "dead members" are entitled to
exercise their voting rights (through their executor or administrator), depends on those articles of
incorporation or bylaws.

Under the By-Laws of GCHS, membership in the corporation shall, among others, be terminated
by the death of the member. 46 Section 91 of the Corporation Code further provides that
termination extinguishes all the rights of a member of the corporation, unless otherwise provided
in the articles of incorporation or the bylaws.

Applying Section 91 to the present case, we hold that dead members who are dropped from the
membership roster in the manner and for the cause provided for in the By-Laws of GCHS are not
to be counted in determining the requisite vote in corporate matters or the requisite quorum for
the annual members’ meeting. With 11 remaining members, the quorum in the present case
should be 6. Therefore, there being a quorum, the annual members’ meeting, conducted with
six 47 members present, was valid.

Vacancy in the

27
Board of Trustees

As regards the filling of vacancies in the board of trustees, Section 29 of the Corporation Code
provides:

"SECTION 29. Vacancies in the office of director or trustee. -- Any vacancy occurring in the
board of directors or trustees other than by removal by the stockholders or members or by
expiration of term, may be filled by the vote of at least a majority of the remaining directors or
trustees, if still constituting a quorum; otherwise, said vacancies must be filled by the
stockholders in a regular or special meeting called for that purpose. A director or trustee so
elected to fill a vacancy shall be elected only for the unexpired term of his predecessor in office."

Undoubtedly, trustees may fill vacancies in the board, provided that those remaining still
constitute a quorum. The phrase "may be filled" in Section 29 shows that the filling of vacancies
in the board by the remaining directors or trustees constituting a quorum is merely permissive,
not mandatory. 48 Corporations, therefore, may choose how vacancies in their respective boards
may be filled up -- either by the remaining directors constituting a quorum, or by the stockholders
or members in a regular or special meeting called for the purpose. 49

The By-Laws of GCHS prescribed the specific mode of filling up existing vacancies in its board of
directors; that is, by a majority vote of the remaining members of the board. 50

While a majority of the remaining corporate members were present, however, the "election" of
the four trustees cannot be legally upheld for the obvious reason that it was held in an annual
meeting of the members, not of the board of trustees. We are not unmindful of the fact that the
members of GCHS themselves also constitute the trustees, but we cannot ignore the GCHS
bylaw provision, which specifically prescribes that vacancies in the board must be filled up by the
remaining trustees. In other words, these remaining member-trustees must sit as a board in
order to validly elect the new ones.

Indeed, there is a well-defined distinction between a corporate act to be done by the board and
that by the constituent members of the corporation. The board of trustees must act, not
individually or separately, but as a body in a lawful meeting. On the other hand, in their annual
meeting, the members may be represented by their respective proxies, as in the contested
annual members’ meeting of GCHS.

WHEREFORE, the Petition is partly GRANTED.The assailed Resolutions

28
Bangko Sentral ng Pilipinas vs. Campa, Jr., G.R. No. 185979, March 16, 2016

Facts:

Bankwise applied for a Special Liquidity Facility (SLF) loan from BSP sometime in
2000. BSP advised Bankwise to submit mortgages of properties owned by third
parties to secure its outstanding obligation to BSP. In compliance with the
requirement, Bankwise mortgaged some real properties belonging to third-party
mortgagors, as follows:

When Bankwise failed to pay its obligations to BSP, the latter applied for extra-
judicial foreclosure of the third-party mortgages. All mortgaged properties were sold
at public auction to BSP being the highest bidder and corresponding certificates of
sale were registered.

On 18 April 2006, Eduardo Ali�o (Ali�o) filed a Complaint 5 for specific

performance, novation of contracts and damages with application for Temporary
Restraining Order (TRO)/writ of preliminary injunction against BSP and Bankwise.
The case was docketed as Commercial Case No. 06-114866. Ali�o alleged that he
is a stockholder of VR Holdings, owning 10% of the outstanding shares of stock
therein. Ali�o averred that he allowed his properties to be used by Bankwise as
collateral for the SLF loan because Bankwise and VR Holdings 6 assured him that the
properties will be returned to him and that he will not be exposed to the risk of
foreclosure.7 According to Ali�o, BSP reassured him that it would allow Bankwise
to settle its outstanding obligation by way of dacion en pago

Ali�o claimed that BSP foreclosed his properties, among others, in callous
disregard of the fact that to date, it has in its hands no less than 11 original
duplicate certificates of title over various real properties offered by Bankwise
for dacion. Ali�o asserted that the value of the lots offered for dacion would be
more than sufficient to answer for the obligation of Bankwise. Ali�o also claimed
that Bankwise refused to honor its commitment to him; and that Bankwise and BSP
have allied together to deny the return to the third-party mortgagors of the
foreclosed properties.

29
Ruling:

Second, the unavailability of appraisal right as a requirement for derivative suits

does not apply in this case. A stockholder who dissents from certain corporate
actions has the right to demand payment of the fair value,of his or her shares. This
right, known as the right of appraisal, is expressly recognized in Section 81 of the
Corporation Code, to wit:

Section 81. Instances of appraisal right.- Any stockholder of a corporation shall have
the right to dissent and demand payment of the fair value of his shares in the
following instances:

1. In case any amendment to the articles of incorporation has the effect of changing
or restricting the rights of any stockholder or class of shares, or of authorizing
preferences in any respect superior to those of outstanding shares of any class, or of
extending or shortening the term of corporate existence;

2. In case of sale, lease, exchange, transfer, mortgage, pledge or other disposition

of all or substantially all of the corporate property and assets as provided in the
Code; and

3. In case of merger or consolidation.26

The appraisal right does not obtain in this case because the subject of the act
complained of is the private properties of a stockholder and not that of the
corporation.

Chua v. People, G.R. No. 216146, August 24, 2016

30
Facts:

[Joselyn] was a stockholder of Chua Tee Corporation of Manila. x x x [Alfredo] was the president
and chairman of the board, while [Tomas] was the corporate secretary and also a member of the
board of the same corporation. x x x [Mercedes] was the accountant/bookkeeper tasked with the
physical custody of the corporate records.

On or about August 24, 2000, Joselyn invoked her right as a stockholder pursuant to Section 74
of the Corporation Code to inspect the records of the books of the business transactions of the
corporation, the minutes of the meetings of the board of directors and stockholders, as well as
the financial statement[ s] of the corporation. She hired a lawyer to send demand letters to each
of the petitioners for her right to inspect to be heeded. However, she was denied of such right to
inspect.

Joselyn likewise hired the services of Mr. Abednego Velayo (Mr. Velayo) from the accounting
firm of Guzman Bocaling and Company to assist her in examining the books of the corporation.
Armed with a letter request[,] together with the list of schedules of audit materials, Mr. Velayo
and his group visited the corporation's premises for the supposed examination of the accounts.
However, the books of accounts were not formally presented to them and there was no list of
schedules[,] which would allow them to pursue their inspection. Mr. Velayo testified that they
failed to complete their objective of inspecting the books of accounts and examine the recorded
documents. (Citations omitted)
9

In the Complaint-Affidavit filed before the Quezon City Prosecutors' Office, Joselyn alleged that
despite written demands, the petitioners conspired in refusing without valid cause the exercise of
her right to inspect Chua Tee Corporation of Manila's (CTCM) business transactions records,
financial statements and minutes of the meetings of both the board of directors and
stockholders. 10

In their Counter Affidavits, the petitioners denied liability. They argued that the custody of the
11

records sought to be inspected by Joselyn did not pertain to them. Besides, the physical records
were merely kept inside the cabinets in the corporate office. Further, they did not prevent Joselyn
from inspecting the records. What happened was that Mercedes was severely occupied with
winding up the affairs of CTCM after it ceased operations. Joselyn and her lawyers then failed to
set up an appointment with Mercedes. Joselyn, through counsel, then sent demand letters to
inspect the records. Not long after, Joselyn filed two cases, one of which was civil and the other,
criminal, against the petitioners.

Issue:

propriety of their conviction for alleged violation of Section 74, in relation to Section 144, of the
Corporation Code.

Ruling:

31
Despite the expiration of CTCM's
corporate term in 1999, duties as
corporate officers still pertained to
the petitioners when Joselyn 's
complaint was filed in 2000.

Yu, et al. v. Yukayguan, et al. 48

instructs that:

[T]he corporation continues to be a body corporate for three (3) years after its dissolution for
purposes of prosecuting and defending suits by and against it and for enabling it to settle and
close its affairs, culminating in the disposition and distribution of its ,remaining assets. x x x The
termination of the life of a juridical entity does not by itself cause the extinction or diminution of
the rights and liabilities of such entity x x x nor those of its owners and creditors. x x x.
49

Further, as correctly pointed out by the OSG, Sections 122 and 145 of the Corporation Code
explicitly provide for the continuation of the body corporate for three years after dissolution. The
rights and remedies against, or liabilities of, the officers shall not be removed or impaired by
reason of the dissolution of the corporation. Corollarily then, a stockholder's right to inspect
corporate records subsists during the period of liquidation. Hence, Joselyn, as a stockholder, had
the right to demand for the inspection of records. Lodged upon the corporation is the
corresponding duty to allow the said inspection.

Ma. Belen Flordeliza Ang-Abaya vs. Eduardo G. Ang, G.R. No. 178511, Dec. 4, 2008

32
Facts:

Vibelle Manufacturing Corporation (VMC) and Genato Investments, Inc. (Genato) (collectively
referred to as "the corporations") are family-owned corporations, where petitioners Ma. Belen
Flordeliza C. Ang-Abaya (Flordeliza), Francis Jason A. Ang (Jason), Vincent G. Genato
(Vincent), Hanna Zorayda A. Ang (Hanna) and private respondent Eduardo G. Ang (Eduardo)
are shareholders, officers and members of the board of directors.

Prior to the instant controversy, VMC, Genato, and Oriana Manufacturing Corporation (Oriana)
filed Civil Case No. 4257-MC, which is a case for damages with prayer for issuance of a
temporary restraining order (TRO) and/or writ of preliminary injunction against herein respondent
Eduardo, together with Michael Edward Chi Ang (Michael), and some other persons for allegedly
conniving to fraudulently wrest control/management of the corporations.5 Eduardo allegedly
borrowed substantial amounts of money from the said corporations without any intention to
repay; that he repeatedly demanded for increases in his monthly allowance and for more cash
advances contrary to existing corporate policies; that he harassed petitioner Flordeliza to transfer
and/or sell certain corporate and personal properties in order to pay off his personal obligations;
that he attempted to forcibly evict petitioner Jason from his office and claim it as his own; that he
interfered with and disrupted the daily business operations of the corporations; that Michael was
placed on preventive suspension due to prolonged absence without leave and commission of
acts of disloyalty such as carrying out orders of Eduardo which were detrimental to their
business, using privileged information and confidential documents/data obtained in his capacity
as Vice President of the corporations, and admitting to have sabotaged their distribution system
and operations.

During the pendency of Civil Case No. 4257-MC, particularly in July, 2004, Eduardo sought
permission to inspect the corporate books of VMC and Genato on account of petitioners’ alleged
failure and/or refusal to update him on the financial and business activities of these family
corporations.6 Petitioners denied the request claiming that Eduardo would use the information
obtained from said inspection for purposes inimical to the corporations’ interests, considering
that: "a) he is harassing and/or bullying the Corporation[s] into writing off P165,071,586.55 worth
of personal advances which he had unlawfully obtained in the past; b) he is unjustly demanding
that he be given the office currently occupied by Mr. Francis Jason Ang, the Vice-President for
Finance and Corporate Secretary; c) he is usurping the rights belonging exclusively to the
Corporation; and d) he is coercing and/or trying to inveigle the Directors and/or Officers of the
Corporation to give in to his baseless demands involving specific corporate assets."7

Because of petitioners’ refusal to grant his request to inspect the corporate books of VMC and
Genato, Eduardo filed an Affidavit-Complaint8 against petitioners Flordeliza and Jason, charging
them with violation (two counts) of Section 74, in relation to Section 144, of the Corporation Code
of the Philippines.9 Ma. Belinda G. Sandejas (Belinda), Vincent, and Hanna were subsequently
impleaded for likewise denying respondent’s request to inspect the corporate books.

Petitioners filed a Joint Counter-Affidavit praying for the dismissal of the complaint for lack of
factual and legal basis, or for the suspension of the same while Civil Case No. 4257-MC is still
pending resolution.10 They denied violating Section 74 of the Corporation Code and reiterated the
allegations contained in their complaint in Civil Case No. 4257-MC. Petitioners blamed Eduardo’s
lavish lifestyle, which is funded by personal loans and cash advances from the family
corporations. They alleged that Eduardo consistently pressured petitioner Flordeliza, his
daughter, to improperly transfer ownership of the corporations’ V.A.G. Building to him; 11 to
disregard the company policy prohibiting advances by shareholders; to unduly increase his
corporate monthly allowance; and to sell her Wack-Wack Golf proprietary share and use the
proceeds thereof to pay his personal financial obligations. When the proposed transfer of the
V.A.G. Building did not materialize, petitioners claim that Eduardo instituted an action to compel
the donation of said property to him.12 Furthermore, they claim that Eduardo attempted to forcibly
evict petitioner Jason from his office at VMC so he can occupy the same; that Eduardo and his

33
cohorts constantly created trouble by intervening in the daily operations of the corporations
without the knowledge or consent of the board of directors.

Issue:

WHETHER OR NOT THE HONORABLE JUSTICE SECRETARY COMMITTED GRAVE ABUSE

OF DISCRETION AMOUNTING TO LACK OR EXCESS OF JURISDICTION IN REVERSING
THE RESOLUTION OF THE MALABON CITY PROSECUTOR FINDING PROBABLE CAUSE
AGAINST PETITIONERS AFTER PRELIMINARY INVESTIGATION FOR VIOLATION OF
SECTION 74 OF THE CORPORATION CODE OF THE PHILIPPINES.

Ruling:

In order therefore for the penal provision under Section 144 of the Corporation Code to apply in a
case of violation of a stockholder or member’s right to inspect the corporate books/records as
provided for under Section 74 of the Corporation Code, the following elements must be present:

First. A director, trustee, stockholder or member has made a prior demand in writing for a copy of
excerpts from the corporation’s records or minutes;

Second. Any officer or agent of the concerned corporation shall refuse to allow the said director,
trustee, stockholder or member of the corporation to examine and copy said excerpts;

Third. If such refusal is made pursuant to a resolution or order of the board of directors or
trustees, the liability under this section for such action shall be imposed upon the directors or
trustees who voted for such refusal; and,

Fourth. Where the officer or agent of the corporation sets up the defense that the person
demanding to examine and copy excerpts from the corporation’s records and minutes has
improperly used any information secured through any prior examination of the records or minutes
of such corporation or of any other corporation, or was not acting in good faith or for a legitimate
purpose in making his demand, the contrary must be shown or proved.

Thus, in a criminal complaint for violation of Section 74 of the Corporation Code, the defense of
improper use or motive is in the nature of a justifying circumstance that would exonerate those
who raise and are able to prove the same. Accordingly, where the corporation denies inspection
on the ground of improper motive or purpose, the burden of proof is taken from the shareholder
and placed on the corporation.33 This being the case, it would be improper for the prosecutor,
during preliminary investigation, to refuse or fail to address the defense of improper use or
motive, given its express statutory recognition. In the past we have declared that if justifying
circumstances are claimed as a defense, they should have at least been raised during
preliminary investigation;34 which settles the view that the consideration and determination of
justifying circumstances as a defense is a relevant subject of preliminary investigation.

34
In Gokongwei, Jr. v. Securities and Exchange Commission,29 this Court explained the rationale
behind a stockholder's right to inspect corporate books, to wit:

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 quasi-ownership. 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. 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.30

In Republic v. Sandiganbayan,31 the Court declared that the right to inspect and/or examine the
records of a corporation under Section 74 of the Corporation Code is circumscribed by the
express limitation contained in the succeeding proviso, which states that:

[I]t shall be a defense to any action under this section that the person demanding to
examine and copy excerpts from the corporation's records and minutes has improperly
used any information secured through any prior examination of the records or minutes
of such corporation or of any other corporation, or was not acting in good faith or for a
legitimate purpose in making his demand. (Emphasis supplied)

Thus, contrary to Eduardo’s insistence, the stockholder’s right to inspect corporate books is not
without limitations. While the right of inspection was enlarged under the Corporation Code as
opposed to the old Corporation Law (Act No. 1459, as amended),

It is now expressly required as a condition for such examination that the one
requesting it must not have been guilty of using improperly any information secured
through a prior examination, or that the person asking for such examination must be
acting in good faith and for a legitimate purpose in making his demand. 32 (Emphasis
supplied)

Petitioners argue that Eduardo’s demand for an inspection of the corporations’ books is based on
the latter’s attempt in bad faith at having his more than P165 million advances from the
corporations written off; that Eduardo is unjustly demanding that he be given the office of Jason,
or the Vice Presidency for Finance and Corporate Secretary; that Eduardo is usurping rights
belonging exclusively to the corporations; and Eduardo’s attempts at coercing the corporations,
their directors and officers into giving in to his baseless demands involving specific corporate
assets. Specifically, petitioners accuse Eduardo of the following:

1. He is a spendthrift, using the family corporations’ resources to sustain his extravagant

lifestyle. During his incumbency as officer of VMC and Genato (from 1984 to 2000), he
was able to obtain massive amounts by way of cash advances from these corporations,
amounting to more than P165 million;

2. He is exercising undue pressure upon petitioners in order to acquire ownership,

through the forced execution of a deed of donation, over the VAG Building in San Juan,
which building belongs to Genato;

35
 3. He is putting pressure on the corporations, through their directors and officers, for the
latter to disregard their respective policies which prohibit the grant of cash advances to
stockholders.

4. At one time, he coerced Flordeliza for the latter to sell her Wack-Wack Golf Proprietary
Share;

5. In May 2003, without the requisite authority, he called a "stockholders’ meeting" to

demand an increase in his P140,000.00 monthly allowance from the corporation to
P250,000.00; demand a cash advance of US$10,000; and to demand that the
corporations shoulder the medical and educational expenses of his family as well as
those of the other stockholders;

6. In November 2003, he demanded that he be given an office within the corporations’

premises. In December 2003, he stormed the corporations’ common office, ordered the
employees to vacate the premises, summoned the directors to a meeting, and there he
berated them for not acting on his requests. In January 2004, he returned to the office,
demanding the transfer of the Accounting Department and for Jason to vacate his office
by the end of the month. He likewise left a letter which contained his demands. At the
end of January 2004, he returned, ordered the employees to leave the premises and
demanded that Jason surrender his office and vacate his desk. He did this no less than
four (4) times. As a result, the respective boards of directors of the corporations resolved
to ban him from the corporate premises;

7. He has been interfering in the everyday operations of VMC and Genato, usurping the
duties, rights and authority of the directors and officers thereof. He attempted to lease out
a warehouse within the VMC premises without the knowledge and consent of its directors
and officers; during the wake of the former President of VMC and Genato, he issued
instructions for the employees to close down operations for the whole duration of the
wake, against the corporate officers’ instructions to attend the wake by batch, so as not
to hamper business operations; he has caused chaos and confusion in VMC and Genato
as a result;41

8. He is out to sabotage the family corporations.42

These serious allegations are supported by official and other documents, such as board
resolutions, treasurer’s affidavits and written communication from the respondent Eduardo
himself, who appears to have withheld his objections to these charges. His silence virtually
amounts to an acquiescence.43 Taken together, all these serve to justify petitioners’ allegation
that Eduardo was not acting in good faith and for a legitimate purpose in making his demand for
inspection of the corporate books. Otherwise stated, there is lack of probable cause to support
the allegation that petitioners violated Section 74 of the Corporation Code in refusing
respondent’s request for examination of the corporation books.

36
Aderito Z. Yujuico, et. al. vs. Cezar Quiambao et. al., G.R. No. 180416, June 2, 2014

Facts:

The complaint accuses respondents and Casanova of violating Section 74 in relation to Section
144 of Batas Pambansa Blg. 68 or the Corporation Code. The petitioners premise such
accusation on the following factual allegations: 8

1. During the stockholders' meeting on 1 March 2004, Yujuico-as newly elected president
and chairman of STRADEC-demanded Quiambao for the turnover of the corporate
records of the company, particularly the accounting files, ledgers, journals and other
records of the corporation's business. Quiambao refused.

2. As it turns out, the corporate records of STRADEC were in the possession of

Casanova-the accountant of STRADEC. Casanova was keeping custody of the said
records on behalf of Quiambao, who allegedly needed the same as part of his defense in
a pending case in court.

3. After the 1 March 2004 stockholders' meeting, Quiambao and Casanova caused the
removal of the corporate records of STRADEC from the company's offices in Pasig City.

4. Upon his appointment as corporate secretary on 21 June 2004, Blando likewise

demanded Pilapil for the turnover of the stock and transfer book of STRADEC. Pilapil
refused.

5. Instead, on 25 June 2004, Pilapil proposed to Blando to have the stock and transfer
book deposited in a safety deposit box with Equitable PCI Bank, Kamias Road, Quezon
City. Blando acceded to the proposal and the stock and transfer book was deposited in a
safety deposit box with the bank identified. It was agreed that the safety deposit box may
only be opened in the presence of both Quiambao and Blando.

6. On 30 June 2004, however, Quiambao and Pilapil withdrew the stock and transfer
book from the safety deposit box and brought it to the offices of the Stradcom
Corporation (STRADCOM) in Quezon City. Quiambao thereafter asked Blando to
proceed to the STRADCOM offices. Upon arriving thereat, Quiambao pressured Blando
to make certain entries in the stock and transfer books. After making such entries, Blando
again demanded that he be given possession of the stock and transfer book. Quiambao
refused.

7. On 1 July 2004, Blando received an order dated 30 June 2004 issued by the RTC,
Branch 71, of Pasig City in Civil Case No. 70027, which directed him to cancel the entries
he made in the stock and transfer book. Hence, on even date, Blando wrote letters to
Quiambao and Pilapil once again demanding for the turnover of the stock and transfer
book. Pilapil replied thru a letter dated 2 July 2004 where he appeared to agree to
Blando's demand.

8. However, upon meeting with Pilapil and Quiambao, the latter still refused to turnover
the stock and transfer book to Blando. Instead, Blando was once again constrained to
agree to a proposal by Pilapil to have the stock and transfer book deposited with the
RTC, Branch 155, of Pasig City. The said court, however, refused to accept such deposit
on the ground that it had no place for safekeeping.

9. Since Quiambao and Pilapil still refused to turnover the stock and transfer book,
Blando again acceded to have the book deposited in a safety deposit box, this time, with
the Export and Industry Bank in San Miguel A venue, Pasig City.

37
Petitioners theorize that the refusal by the respondents and Casanova to turnover STRADEC's
corporate records and stock and transfer book violates their right, as stockholders, directors and
officers of the corporation, to inspect such records and book under Section 7 4 of the Corporation
Code. For such violation, petitioners conclude, respondents may be held criminally liable
pursuant to Section 144 of the Corporation Code.

Issue:

argue that the R TC made a legal blunder when it held that the refusal to allow inspection of the
stock and transfer book of a corporation is not a punishable offense under the Corporation Code.
Petitioners contend that such a refusal still amounts to a violation of Section 74 of the
Corporation Code, for which Section 144 of the same code prescribes a penalty.

Ruling:

The act of ref using to allow inspection of the

stock and transfer book of a corporation,
when done in violation of Section 74(4) of
the Corporation Code, is punishable as an
offense under Section 144 of the same code.

We first address the inaccurate pronouncement of the RTC.

Section 74 is the provision of the Corporation Code that deals with the books a corporation is
required to keep. It reads:

Section 74. Books to be kept; stock transfer agent. - Every corporation shall keep and carefully
preserve at its principal office a record of all business transactions and minutes of all meetings of
stockholders or members, or of the board of directors or trustees, in which shall be set forth in
detail the time and place of holding the meeting, how authorized, the notice given, whether the
meeting was regular or special, if special its object, those present and absent, and every act
done or ordered done at the meeting. Upon the demand of any director, trustee, stockholder or
member, the time when any director, trustee, stockholder or member entered or left the meeting
must be noted in the minutes; and on a similar demand, the yeas and nays must be taken on any
motion or proposition, and a record thereof carefully made. The protest of any director, trustee,
stockholder or member on any action or proposed action must be recorded in full on his demand.

The records of all business transactions of the corporation and the minutes of any meetings shall
be open to inspection by any director, trustee, stockholder or member of the corporation at
reasonable hours on business days and he may demand, in writing, for a copy of excerpts from
said records or minutes, at his expense.

Any officer or agent of the corporation who shall refuse to allow any director, trustees,
stockholder or member of the corporation to examine and copy excerpts from its records or
minutes, in accordance with the provisions of this Code, shall be liable to such director, trustee,
stockholder or member for damages, and in addition, shall be guilty of an offense which shall be
punishable under Section 144 of this Code: Provided, That if such refusal is made pursuant to a
resolution or order of the board of directors or trustees, the liability under this section for such
action shall be imposed upon the directors or trustees who voted for such refusal: and Provided,
further, That it shall be a defense to any action under this section that the person demanding to
examine and copy excerpts from the corporation's records and minutes has improperly used any

38
information secured through any prior examination of the records or minutes of such corporation
or of any other corporation, or was not acting in good faith or for a legitimate purpose in making
his demand.

Stock corporations must also keep a book to be known as the "stock and transfer book'', in which
must be kept a record of all stocks in the names of the stockholders alphabetically arranged; the
installments paid and unpaid on all stock for which subscription has been made, and the date of
payment of any installment; a statement of every alienation, sale or transfer of stock made, the
date thereof, and by and to whom made; and such other entries as the by-laws may prescribe.
The stock and transfer book shall be kept in the principal office of the corporation or in the office
of its stock transfer agent and shall be open for inspection by any director or stockholder of the
corporation at reasonable hours on business days.

No stock transfer agent or one engaged principally in the business of registering transfers of
stocks in behalf of a stock corporation shall be allowed to operate in the Philippines unless he
secures a license from the Securities and Exchange Commission and pays a fee as may be fixed
by the Commission, which shall be renewable annually: Provided, That a stock corporation is not
precluded from performing or making transfer of its own stocks, in which case all the rules and
regulations imposed on stock transfer agents, except the payment of a license fee herein
provided, shall be applicable. (5 la and 32a; P.B. No. 268.) (Emphasis supplied)

Section 144 of the Corporation Code, on the other hand, is the general penal provision of the
Corporation Code. It reads:

Section 144. Violations of the Code. - Violations of any of the provisions of this Code or its
amendments not otherwise specifically penalized therein shall be punished by a fine of not less
than one thousand (₱1,000.00) pesos but not more than ten thousand (₱10,000.00) pesos or by
imprisonment for not less than thirty (30) days but not more than five (5) years, or both, in the
discretion of the court. If the violation is committed by a corporation, the same may, after notice
and hearing, be dissolved in appropriate proceedings before the Securities and Exchange
Commission: Provided, That such dissolution shall not preclude the institution of appropriate
action against the director, trustee or officer of the corporation responsible for said violation:
Provided, further, That nothing in this section shall be construed to repeal the other causes for
dissolution of a corporation provided in this Code. (190 112 a) (Emphasis supplied)

In the assailed Orders, the RTC expressed its opinion that the act of refusing to allow inspection
of the stock and transfer book, even though it may be a violation of Section 74(4), is not
punishable as an offense under the Corporation Code. In justifying this conclusion, the RTC
29

seemingly relied on the fact that, under Section 7 4 of the Corporation Code, the application of
Section 144 is expressly mentioned only in relation to the act of "refus[ing] to allow any director,
trustees, stockholder or member of the corporation to examine and copy excerpts from [the
corporation's] records or minutes" that excludes its stock and transfer book.

We do not agree.

While Section 74 of the Corporation Code expressly mentions the application of Section 144 only
in relation to the act of "refus[ing] to allow any director, trustees, stockholder or member of the
corporation to examine and copy excerpts from [the corporation's] records or minutes," the same
does not mean that the latter section no longer applies to any other possible violations of the
former section.

It must be emphasized that Section 144 already purports to penalize "[v]iolations" of "any
provision" of the Corporation Code "not otherwise specifically penalized therein." Hence, we find
inconsequential the fact that that Section 74 expressly mentions the application of Section 144
only to a specific act, but not with respect to the other possible violations of the former section.

39
Indeed, we find no cogent reason why Section 144 of the Corporation Code cannot be made to
apply to violations of the right of a stockholder to inspect the stock and transfer book of a
corporation under Section 74(4) given the already unequivocal intent of the legislature to
penalize violations of a parallel right, i.e., the right of a stockholder or member to examine the
other records and minutes of a corporation under Section 74(2). Certainly, all the rights
guaranteed to corporators under Section 7 4 of the Corporation Code are mandatory for the
corporation to respect. All such rights are just the same underpinned by the same policy
consideration of keeping public confidence in the corporate vehicle thru an assurance of
transparency in the corporation's operations.

Verily, we find inaccurate the pronouncement of the RTC that the act of refusing to allow
inspection of the stock and transfer book is not a punishable offense under the Corporation
Code. Such refusal, when done in violation of Section 74(4) of the Corporation Code, properly
falls within the purview of Section 144 of the same code and thus may be penalized as an
offense.

A criminal action based on the violation of a

stockholder's right to examine or inspect the
corporate records and the stock and transfer
book of a corporation under the second and
fourth paragraphs of Section 74 of the
Corporation Code can only be maintained
against corporate officers or any other persons
acting on behalf of such corporation.

The foregoing notwithstanding, and independently of the reasons provided therefor by the RTC,
we sustain the dismissal of Criminal Case No. 89724.

Criminal Case No. 89724 accuses respondents of denying petitioners' right to examine or inspect
the corporate records and the stock and transfer book of STRADEC. It is thus a criminal action
that is based on the violation of the second and fourth paragraphs of Section 7 4 of the
Corporation Code.

A perusal of the second and fourth paragraphs of Section 74, as well as the first paragraph of the
same section, reveal that they are provisions that obligates a corporation: they prescribe what
books or records a corporation is required to keep; where the corporation shall keep them;

and what are the other obligations of the corporation to its stockholders or members in relation to
such books and records. Hence, by parity of reasoning, the second and fourth paragraphs of
1âwphi1

Section 74, including the first paragraph of the same section, can only be violated by a
corporation.

It is clear then that a criminal action based on the violation of the second or fourth paragraphs of
Section 74 can only be maintained against corporate officers or such other persons that are
acting on behalf of the corporation. Violations of the second and fourth paragraphs of Section 74
contemplates a situation wherein a corporation, acting thru one of its officers or agents, denies
the right of any of its stockholders to inspect the records, minutes and the stock and transfer
book of such corporation.

The problem with the petitioners' complaint and the evidence that they submitted during
preliminary investigation is that they do not establish that respondents were acting on behalf of
STRADEC. Quite the contrary, the scenario painted by the complaint is that the respondents are
merely outgoing officers of STRADEC who, for some reason, withheld and refused to turn-over
the company records of STRADEC; that it is the petitioners who are actually acting on behalf of
STRADEC; and that STRADEC is actually merely trying to recover custody of the withheld
records.

40
In other words, petitioners are not actually invoking their right to inspect the records and the
stock and transfer book of STRADEC under the second and fourth paragraphs of Section 74.
What they seek to enforce is the proprietary right of STRADEC to be in possession of such
records and book. Such right, though certainly legally enforceable by other means, cannot be
enforced by a criminal prosecution based on a violation of the second and fourth paragraphs of
Section 74. That is simply not the situation contemplated by the second and fourth paragraphs of
Section 74 of the Corporation Code.

For this reason, we affirm the dismissal of Criminal Case No. 89724 for lack of probable cause

41
Terelay Investment and Dev. Corp. vs. Cecilia Teresita Yulo, G.R. No. 160924, Aug. 05, 2015

Facts:

Asserting her right as a stockholder, Cecilia Teresita Yulo wrote a letter, dated
September 14, 1999, addressed to Terelay Investment and Development
Corporation (TERELAY) requesting that she be allowed to examine its books and
records on September 17, 1999 at 1:30 o'clock in the afternoon at the latter's office
on the 25th floor, Citibank Tower, Makati City. In its reply-letter, dated September
15, 1999, TERELAY denied the request for inspection and instead demanded that she
show proof that she was a bona fide stockholder.

On September 16, 1999, Cecilia Yulo again sent another letter clarifying that her
request for examination of the corporate records was for the purpose of inquiring
into the financial condition of TERELAY and the conduct of its affairs by the principal
officers. The following day, Cecilia Yulo received a faxed letter from TERELAY's
counsel advising her not to continue with the inspection in order to avoid trouble.

On October 11, 1999, Cecilia Yulo filed with the Securities and Exchange
Commission (SEC), a Petition for Issuance of a Writ of Mandamus with prayer for
Damages against TERELAY, docketed as SEC Case No. 10-99-6433. In her petition,
she prayed that judgment be rendered ordering TERELAY to allow her to inspect its
corporate records, books of account and other financial records; to pay her actual
damages representing attorney's fees and litigation expenses of not less than One
Hundred Thousand Pesos (P100,000.00); to pay her exemplary damages; and to
pay the costs of the suit On May 16, 2000, in the preliminary conference held before
the SEC Hearing Officer, the parties agreed on the following:

Issue:

In this appeal, the petitioner insists that the CA committed serious error: (a) in
holding that the respondent was a stockholder entitled to inspect its books and
records, and allowing her to inspect its corporate records despite her shareholding
being a measly .001% interest

Ruling:

Secondly, the petitioner's submission that the respondent's "insignificant holding" of

only .001% of the petitioner's stockholding did not justify the granting of her
application for inspection of the corporate books and records is unwarranted.

The Corporation Code has granted to all stockholders the right to inspect the
corporate books and records, and in so doing has not required any specific amount
of interest for the exercise of the right to inspect. 15 Ubi lex non distinguit nee nos
distinguere debemos. When the law has made no distinction, we ought not to
recognize any distinction.

42
Neither could the petitioner arbitrarily deny the respondent's right to inspect the
corporate books and records on the basis that her inspection would be used for a
doubtful or dubious reason. Under Section 74, third paragraph, of the Corporation
Code, the only time when the demand to examine and copy the corporation's
records and minutes could be refused is when the corporation puts up as a defense
to any action that "the person demanding" had "improperly used any information
secured through any prior examination of the records or minutes of such corporation
or of any other corporation, or was not acting in good faith or for a legitimate
purpose in making his demand."

The right of the shareholder to inspect the books and records of the petitioner
should not be made subject to the condition of a showing of any particular dispute or
of proving any mismanagement or other occasion rendering an examination proper,
but if the right is to be denied, the burden of proof is upon the corporation to show
that the purpose of the shareholder is improper, by way of defense.

43
Phil. Associated Smelting and Refining Corp. vs. Pablito Lim, G.R. No. 172948, Oct. 05, 2016

Facts:

Philippine Associated Smelting and Refining Corporation (hereafter PASAR) is a

corporation duly organized and existing under the laws of the Philippines and is engaged in
copper smelting and refining.

On the other hand, Pablito Lim, Manuel Agcaoili and Consuelo Padilla (collectively referred
to as petitioners) were former senior officers and presently shareholders of PASAR holding
500 shares each.

An Amended Petition for Injunction and Damages with prayer for Preliminary Injunction
and/or Temporary Restraining Order, dated February 4, 2004 was filed by PASAR seeking to
restrain petitioners from demanding inspection of its confidential and inexistent records.

On February 23, 2004, petitioners moved for the dismissal of the petition on the following
grounds: 1) the petition states no cause of action; 2) the petition should be dismissed on
account of litis pendentia; 3) the petition is a nuisance or harassment suit; and 4) the
petition should be dismissed on account of improper venue.

On April 14, 2004, the RTC issued an Order granting PASAR's prayer for a writ of
preliminary injunction. The RTC held that the right to inspect book should not be denied to
the stockholders, however, the same may be restricted. The right to inspect should be
limited to the ordinary records as identified and classified by PASAR. Thus, pending the
determination of which records are confidential or inexistent, the petitioners should be
enjoined from inspecting the books. The dispositive portion of said Order states:

"WHEREFORE, let a writ of preliminary injunction be issued enjoining respondents Pablito

Lim, Manuel A. Agcaoili and Consuelo N. Padilla or their representatives from gaining
access to records of Philippine Associated Smelting and Refining Corporation which are
presently classified as either confidential or inexistent, until further orders from this Court.

Petitioner is required to execute a bond in the amount of FIVE HUNDRED THOUSAND

PESOS (P500,000.00) in favor of herein respondents to answer for all damages which the
latter may sustain by reason of the injunction should this Court, finally decide that
petitioner is not entitled thereto.

SO ORDERED."

On May 26, 2004, petitioners filed a Motion for Dissolution of the Writ of Preliminary
Injunction on the ground that the petition is insufficient. Petitioners claim that the
enforcement of the right to inspect book should be on the stockholders and not on PASAR.
Petitioners further claim that no irreparable injury is caused to PASAR which justifies the
issuance of the writ of preliminary injunction.

Petitioner argues that the right of a stockholder to inspect corporate books and records is
limited in that any demand must be made in good faith or for a legitimate purpose.

44
[20]
Respondents, however, have no legitimate purpose in this case.[21] If respondents gain
access to petitioner's confidential records, petitioner's trade secrets and other
confidential information will be used by its former officers to give undue commercial
[22]
advantage to third parties. Petitioner insists that to hold that objections to the right of
inspection can only be raised in an action for mandamus brought by the stockholder, would
[23]
leave a corporation helpless and without an adequate legal remedy. To leave the
corporation helpless negates the doctrine that where there is a right, there is a remedy for
[24]
its violation.

Petitioner argues that it has the right to protect itself against all forms of embarrassment
or harassment against its officers, including the filing of criminal cases against them.
[25]
Moreover, respondents' request for inspection of confidential corporate records and
documents violates and breaches petitioner's right to peaceful and continuous possession
[26]
of its confidential records and documents.

Petitioner further argues that respondents' Motion for Dissolution before the Court of
Appeals did not comply with Rule 58, Section 6 of the Rules of Court. Therefore, the Motion
[27]
should not have been granted. Likewise, respondents' Motion to Dismiss is a prohibited
pleading under Rule 1, Section 8 of the Interim Rules of Procedure Governing Intra-
[28] [29]
Corporate Controversies and should not have been granted. In any case, the Court
of Appeals should have remanded the case to the trial court for further disposition. [

Ruling:

The Corporation Code provides that a stockholder has the right to inspect the records of all
business transactions of the corporation and the minutes of any meeting at reasonable
hours on business days. The stockholder may demand in writing for a copy of excerpts
from these records or minutes, at his or her expense:

Title VIII
Corporate Books and Records

SECTION 74. Books to be Kept; Stock Transfer Agent. — Every corporation shall, at its
principal office, keep and carefully preserve a record of all business transactions, and
minutes of all meetings of stockholders or members, or of the board of directors or
trustees, in which shall be set forth in detail the time and place of holding the meeting,
how authorized, the notice given, whether the meeting was regular or special, if special its
object, those present and absent, and every act done or ordered done at the meeting. Upon
the demand of any director, trustee, stockholder or member, the time when any director,
trustee, stockholder or member entered or left the meeting must be noted in the minutes;
and on a similar demand, the yeas and nays must be taken on any motion or proposition,
and a record thereof carefully made. The protest of any director, trustee, stockholder or
member on any action or proposed action must be recorded in full on his demand.

45
The records of all business transactions of the corporation and the minutes of any
meetings shall be open to the inspection of any director, trustee, stockholder or member of
the corporation at reasonable hours on business days and he may demand, in writing, for a
copy of excerpts from said records or minutes, at his expense.

Any officer or agent of the corporation who shall refuse to allow any director, trustee,
stockholder or member of the corporation to examine and copy excerpts from its records
or minutes, in accordance with the provisions of this Code, shall be liable to such director,
trustee, stockholder or member for damages, and in addition, shall be guilty of an offense
which shall be punishable under Section 144 of this Code: Provided, That if such refusal is
pursuant to a resolution or order of the Board of Directors or Trustees, the liability under
this section for such action shall be imposed upon the directors or trustees who voted for
such refusal: and Provided, further, That it shall be a defense to any action under this
section that the person demanding to examine and copy excerpts from the corporation's
records and minutes has improperly used any information secured through any prior
examination of the records or minutes of such corporation or of any other corporation, or
was not acting in good faith or for a legitimate purpose in making his demand. (Emphasis
supplied)

The right to inspect under Section 74 of the Corporation Code is subject to certain
limitations. However, these limitations are expressly provided as defenses in actions filed
under Section 74. Thus, this Court has held that a corporation's objections to the right to
inspect must be raised as a defense:

2) the person demanding to examine and copy excerpts from the corporation's records and
minutes has not improperly used any information secured through any previous
examination of the records of such corporation; and 3) the demand is made in good faith or
for a legitimate purpose. The latter two limitations, however, must be set up as a defense
by the corporation if it is to merit judicial cognizance. As such, and in the absence of
evidence, the PCGG cannot unilaterally deny a stockholder from exercising his statutory
right of inspection based on an unsupported and naked assertion that private respondent's
motive is improper or merely for curiosity or on the ground that the stockholder is not in
friendly terms with the corporation's officers.[55]

[56]
Gokongwei, Jr. v. Securities and Exchange Commission stresses that "impropriety of
purpose . . . must be set up the [sic] corporation defensively":

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 quasi-ownership. 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. In other words, the
inspection has to be germane to the petitioner's interest as a stockholder, and has to be

46
proper and lawful in character and not inimical to the interest of the corporation. In Grey
v. Insular Lumber, 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 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 hi
seeking inspection. 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." 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." 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."[57] (Emphasis supplied, citations omitted)

[58]
Terelay Investment and Development Corp. v. Yulo has held that although the
corporation may deny a stockholder's request to inspect corporate records, the
corporation must show that the purpose of the shareholder is improper by way of defense:

The right of the shareholder to inspect the books and records of the petitioner should not
be made subject to the condition of a showing of any particular dispute or of proving any
mismanagement or other occasion rendering an examination proper, but if the right is to
be denied, the burden of proof is upon the corporation to show that the purpose of the
shareholder is improper, by way of defense.

Among the purposes held to justify a demand for inspection are the following: (1) To
ascertain the financial condition of the company or the propriety of dividends; (2) the value
of the shares of stock for sale or investment; (3) whether there has been mismanagement;
(4) in anticipation of shareholders' meetings to obtain a mailing list of shareholders to
solicit proxies or influence voting; (5) to obtain information in aid of litigation with the
corporation or its officers as to corporate transactions. Among the improper purposes
which may justify denial of the right of inspection are: (1) Obtaining of information as to
business secrets or to aid a competitor; (2) to secure business "prospects" or investment
or advertising lists; (3) to find technical defects in corporate transactions in order to bring
"strike suits" for purposes of blackmail or extortion.

In general, however, officers and directors have no legal authority to close the office doors
against shareholders for whom they are only agents, and withhold from them the right to
inspect the books which furnishes the most effective method of gaining information which
the law has provided, on mere doubt or suspicion as to the motives of the shareholder.
While there is some conflict of authority, when an inspection by a shareholder is
contested, the burden is usually held to be upon the corporation to establish a probability
that the applicant is attempting to gain inspection for a purpose not connected with his
interests as a shareholder, or that his purpose is otherwise improper. The burden is not
upon the petitioner to show the propriety of his examination or that the refusal by the
officers or directors was wrongful, except under statutory provisions. [59] (Citations
omitted)

47
Among the actions that may be filed is an action for specific performance, damages,
petition for mandamus, or for violation of Section 74, in relation to Section 144 of the
Corporation Code, which provides:

SECTION 144. Violations of the Code. — Violations of any of the provisions of this Code or
its amendments not otherwise specifically penalized therein shall be punished by a fine of
not less than one thousand (P1,000.00) pesos but not more than ten thousand (P10,000.00)
pesos or by imprisonment for not less than thirty (30) days but not more than five (5) years,
or both, in the discretion of the court. If the violation is committed by a corporation, the
same may, after notice and hearing, be dissolved in appropriate proceedings before the
Securities and Exchange Commission: Provided, That such dissolution shall not preclude
the institution of appropriate action against the director, trustee or officer of the
corporation responsible for said violation: Provided, further, That nothing in this section
shall be construed to repeal the other causes for dissolution of a corporation provided in
this Code.

In this case, petitioner invokes its right to raise the limitations provided under Section 74
of the Corporation Code. However, petitioner provides scant legal basis to claim this right
because it does not raise the limitations as a matter of defense. As properly appreciated
by the Court of Appeals:

We agree. The act of PASAR in filing a petition for injunction with prayer for writ of
preliminary injunction is uncalled for. The petition is a pre-emptive action unjustly intended
to impede and restrain the stockholders' rights. If a stockholder demands the inspection of
corporate books, the corporation could refuse to heed to such demand. When the
corporation, through its officers, denies the stockholders of such right, the latter could
then go to court and enforce their rights. It is then that the corporation could set up its
defenses and the reasons for the denial of such right. Thus, the proper remedy available for
the enforcement of the right of inspection is undoubtedly the writ of mandamus to be filed
by the stockholders and not a petition for injunction filed by the corporation. [60]

Petitioner insists that the Court of Appeals erred in relying on Section 74 of the
Corporation Code. It claims that jurisprudence allows the corporation to prevent a
[61]
stockholder from inspecting records containing confidential information. Petitioner
[62]
cites W.G Philpotts v. Philippine Manufacturing Company:

In order that the rule above stated may not be taken in too sweeping a sense, we deem it
advisable to say that there are some things which a corporation may undoubtedly keep
secret, notwithstanding the right of inspection given by law to the stockholder; as, for
instance, where a corporation engaged in the business of manufacture, has acquired a
formula or process, not generally known, which has proved of utility to it in the
manufacture of its products. It is not our intention to declare that the authorities of the

48
corporation, and more particularly the Board of Directors, might not adopt measures for the
protection of such process from publicity.[63]

However, W.G Philpotts cannot support petitioner's contention since it involved a petition
for mandamus where the stockholder prayed to be allowed to exercise its right to inspect,
and the respondent's objections were raised as a defense. Nothing in W.G.
Philpotts grants a corporation a cause of action to enjoin the exercise of the right of
inspection by a stockholder.

The clear provision in Section 74 of the Corporation Code is sufficient authority to

conclude that an action for injunction and, consequently, a writ of preliminary injunction
filed by a corporation is generally unavailable to prevent stockholders from exercising their
right to inspection. Specifically, stockholders cannot be prevented from gaining access to
the (a) records of all business transactions of the corporation; and (b) minutes of any
meeting of stockholders or the board of directors, including their various committees and
subcommittees.

The grant of legal personality to a corporation is conditioned on its compliance with

certain obligations. Among these are its fiduciary responsibilities to its stockholders.
Providing stockholders with access to information is a fundamental basis for their
intelligent participation in the governance of the corporation as a business organization
that they partially own. The law is agnostic with respect to the amount of shares required.
Generally, each individual stockholder should be given reasonable access so that he or she
can assess or share his or her assessment of the management of the corporation with
other stockholders. The separate legal personality of a corporation is not so absolutely
separate that it divorces itself from its responsibility to its constituent owners.

The law takes into consideration the potential disparity in the financial legal resources
between the corporation and an ordinary stockholder. The phraseology of the text of the
law provides that access to the information mentioned in Section 74 of the Corporation
Code is mandatory. The presumption is that the corporation should provide access. If it has
basis for denial, then the corporation shoulders the risks of being sued and of successfully
raising the proper defenses. The corporation cannot immediately deploy its resources—
part of which is owned by the requesting stockholder—to put the owner on the defensive.

Specifically, corporations may raise their objections to the right of inspection through
affirmative defense in an ordinary civil action for specific performance or damages, or
[64]
through a comment (if one is required) in a petition for mandamus. The corporation or
defendant or respondent still carries the burden of proving (a) that the stockholder has
improperly used information before; (b) lack of good faith; or (c) lack of legitimate purpose.
[65]

Good faith and a legitimate purpose are presumed. It is the duty of the corporation to
allege and prove with sufficient evidence the facts that give rise to a claim of bad faith as
to the existence of an illegitimate purpose.

The confidentiality of business transactions is not a magical incantation that will defeat
the request of a stockholder to inspect the records. Although it is true that the business is
entitled to the protection of its trade secrets and other intellectual property rights, facts
must be pleaded to convince the court that a specific stockholder's request for inspection,
under certain conditions, would violate the corporation's own legal right.

Furthermore, the discomfort caused to the management of a corporation when a request

49
for inspection is claimed is part of the regular matters that a business wanting to ensure
good governance must endure. The range between discomfort and vexation is a broad one,
which may tend to be located in the personalities of those involved.

Certainly, by themselves, these are not sufficient factual basis to conclude bad faith on the
part of the requesting stockholder. Courts must be convinced that the scope or manner of
the request and the conditions under which it was made are so frivolous that the huge cost
to the business will, in equity, be unfair to the other stockholders. There is no iota of
evidence that this happened here.

Mindanao Savings and Loan Asso. vs. Edward Willkom, G.R. No. 178618 Oct. 11, 2010

Facts:

The First Iligan Savings and Loan Association, Inc. (FISLAI) and the Davao Savings and Loan
Association, Inc. (DSLAI) are entities duly registered with the Securities and Exchange
Commission (SEC) under Registry Nos. 34869 and 32388, respectively, primarily engaged in the
business of granting loans and receiving deposits from the general public, and treated as banks. 4

Sometime in 1985, FISLAI and DSLAI entered into a merger, with DSLAI as the surviving
corporation.5 The articles of merger were not registered with the SEC due to incomplete
documentation.6 On August 12, 1985, DSLAI changed its corporate name to MSLAI by way of an
amendment to Article 1 of its Articles of Incorporation, but the amendment was approved by the
SEC only on April 3, 1987.7

Meanwhile, on May 26, 1986, the Board of Directors of FISLAI passed and approved Board
Resolution No. 86-002, assigning its assets in favor of DSLAI which in turn assumed the former’s
liabilities.8

The business of MSLAI, however, failed. Hence, the Monetary Board of the Central Bank of the
Philippines ordered its closure and placed it under receivership per Monetary Board Resolution
No. 922 dated August 31, 1990. The Monetary Board found that MSLAI’s financial condition was
one of insolvency, and for it to continue in business would involve probable loss to its depositors

50
and creditors. On May 24, 1991, the Monetary Board ordered the liquidation of MSLAI, with PDIC
as its liquidator.9

It appears that prior to the closure of MSLAI, Uy filed with the RTC, Branch 3 of Iligan City, an
action for collection of sum of money against FISLAI, docketed as Civil Case No. 111-697. On
October 19, 1989, the RTC issued a summary decision in favor of Uy, directing defendants
therein (which included FISLAI) to pay the former the sum of ₱136,801.70, plus interest until full
payment, 25% as attorney’s fees, and the costs of suit. The decision was modified by the CA by
further ordering the third-party defendant therein to reimburse the payments that would be made
by the defendants. The decision became final and executory on February 21, 1992. A writ of
execution was thereafter issued.10

On April 28, 1993, sheriff Bantuas levied on six (6) parcels of land owned by FISLAI located in
Cagayan de Oro City, and the notice of sale was subsequently published. During the public
auction on May 17, 1993, Willkom was the highest bidder. A certificate of sale was issued and
eventually registered with the Register of Deeds of Cagayan de Oro City. Upon the expiration of
the redemption period, sheriff Bantuas issued the sheriff’s definite deed of sale. New certificates
of title covering the subject properties were issued in favor of Willkom. On September 20, 1994,
Willkom sold one of the subject parcels of land to Go.11

On June 14, 1995, MSLAI, represented by PDIC, filed before the RTC, Branch 41 of Cagayan de
Oro City, a complaint for Annulment of Sheriff’s Sale, Cancellation of Title and Reconveyance of
Properties against respondents.12 MSLAI alleged that the sale on execution of the subject
properties was conducted without notice to it and PDIC; that PDIC only came to know about the
sale for the first time in February 1995 while discharging its mandate of liquidating MSLAI’s
assets; that the execution of the RTC decision in Civil Case No. 111-697 was illegal and contrary
to law and jurisprudence, not only because PDIC was not notified of the execution sale, but also
because the assets of an institution placed under receivership or liquidation such as MSLAI
should be deemed in custodia legis and should be exempt from any order of garnishment, levy,
attachment, or execution.13

In answer, respondents averred that MSLAI had no cause of action against them or the right to
recover the subject properties because MSLAI is a separate and distinct entity from FISLAI. They
further contended that the "unofficial merger" between FISLAI and DSLAI (now MSLAI) did not
take effect considering that the merging companies did not comply with the formalities and
procedure for merger or consolidation as prescribed by the Corporation Code of the Philippines.
Finally, they claimed that FISLAI is still a SEC registered corporation and could not have been
absorbed by petitioner.

Issue:
(1) Was the merger between FISLAI and DSLAI (now MSLAI) valid and effective;

Ruling:

We answer both questions in the negative.

Ordinarily, in the merger of two or more existing corporations, one of the corporations survives
and continues the combined business, while the rest are dissolved and all their rights, properties,

51
and liabilities are acquired by the surviving corporation.20 Although there is a dissolution of the
absorbed or merged corporations, there is no winding up of their affairs or liquidation of their
assets because the surviving corporation automatically acquires all their rights, privileges, and
powers, as well as their liabilities.21

The merger, however, does not become effective upon the mere agreement of the constituent
corporations.22 Since a merger or consolidation involves fundamental changes in the corporation,
as well as in the rights of stockholders and creditors, there must be an express provision of law
authorizing them.23

The steps necessary to accomplish a merger or consolidation, as provided for in Sections

76,24 77,25 78,26 and 7927 of the Corporation Code, are:

(1) The board of each corporation draws up a plan of merger or consolidation. Such plan
must include any amendment, if necessary, to the articles of incorporation of the
surviving corporation, or in case of consolidation, all the statements required in the
articles of incorporation of a corporation.

(2) Submission of plan to stockholders or members of each corporation for approval. A

meeting must be called and at least two (2) weeks’ notice must be sent to all
stockholders or members, personally or by registered mail. A summary of the plan must
be attached to the notice. Vote of two-thirds of the members or of stockholders
representing two-thirds of the outstanding capital stock will be needed. Appraisal rights,
when proper, must be respected.

(3) Execution of the formal agreement, referred to as the articles of merger o[r]
consolidation, by the corporate officers of each constituent corporation. These take the
place of the articles of incorporation of the consolidated corporation, or amend the
articles of incorporation of the surviving corporation.

(4) Submission of said articles of merger or consolidation to the SEC for approval.

(5) If necessary, the SEC shall set a hearing, notifying all corporations concerned at least
two weeks before.

(6) Issuance of certificate of merger or consolidation.28

Clearly, the merger shall only be effective upon the issuance of a certificate of merger by the
SEC, subject to its prior determination that the merger is not inconsistent with the Corporation
Code or existing laws.29 Where a party to the merger is a special corporation governed by its own
charter, the Code particularly mandates that a favorable recommendation of the appropriate
government agency should first be obtained.30

In this case, it is undisputed that the articles of merger between FISLAI and DSLAI were not
registered with the SEC due to incomplete documentation. Consequently, the SEC did not issue
the required certificate of merger. Even if it is true that the Monetary Board of the Central Bank of
the Philippines recognized such merger, the fact remains that no certificate was issued by the
SEC. Such merger is still incomplete without the certification.

The issuance of the certificate of merger is crucial because not only does it bear out SEC’s
approval but it also marks the moment when the consequences of a merger take place. By
operation of law, upon the effectivity of the merger, the absorbed corporation ceases to exist but
its rights and properties, as well as liabilities, shall be taken and deemed transferred to and
vested in the surviving corporation.31

52
The same rule applies to consolidation which becomes effective not upon mere agreement of the
members but only upon issuance of the certificate of consolidation by the SEC. 32 When the SEC,
upon processing and examining the articles of consolidation, is satisfied that the consolidation of
the corporations is not inconsistent with the provisions of the Corporation Code and existing
laws, it issues a certificate of consolidation which makes the reorganization official. 33 The new
consolidated corporation comes into existence and the constituent corporations are dissolved
and cease to exist.34

There being no merger between FISLAI and DSLAI (now MSLAI), for third parties such as
respondents, the two corporations shall not be considered as one but two separate corporations.
A corporation is an artificial being created by operation of law. It possesses the right of
succession and such powers, attributes, and properties expressly authorized by law or incident to
its existence.35 It has a personality separate and distinct from the persons composing it, as well
as from any other legal entity to which it may be related.36 Being separate entities, the property of
one cannot be considered the property of the other.

Thus, in the instant case, as far as third parties are concerned, the assets of FISLAI remain as its
assets and cannot be considered as belonging to DSLAI and MSLAI, notwithstanding the Deed
of Assignment wherein FISLAI assigned its assets and properties to DSLAI, and the latter
assumed all the liabilities of the former. As provided in Article 1625 of the Civil Code, "an
assignment of credit, right or action shall produce no effect as against third persons, unless it
appears in a public instrument, or the instrument is recorded in the Registry of Property in case
the assignment involves real property." The certificates of title of the subject properties were
clean and contained no annotation of the fact of assignment. Respondents cannot, therefore, be
faulted for enforcing their claim against FISLAI on the properties registered under its name.
Accordingly, MSLAI, as the successor-in-interest of DSLAI, has no legal standing to annul the
execution sale over the properties of FISLAI. With more reason can it not cause the cancellation
of the title to the subject properties of Willkom and Go.

Sumifru (Phils) Corp., et. al. vs. Bernabe Baya, G.R. No. 188269. * April 17, 2017

Facts:

The instant case stemmed from a complaint for, inter alia, illegal/constructive dismissal filed by
7

Baya against AMSFC and DFC before the NLRC. Baya alleged that he had been employed by
8

AMSFC since February 5, 1985, and from then on, worked his way to a supervisory rank on
September 1, 1997. As a supervisor, Baya joined the union of supervisors, and eventually,
formed AMS Kapalong Agrarian Reform Beneficiaries Multipurpose Cooperative
(AMSKARBEMCO), the basic agrarian reform organization of the regular employees of AMSFC.
In June 1999, Ba ya was reassigned to a series of supervisory positions in AMSFC' s sister
company, DFC, where he also became a member of the latter's supervisory union while at the
same time, remaining active at AMSKARBEMCO. Later on and upon AMSKARBEMCO's petition
before the Department of Agrarian Reform (DAR), some 220 hectares of AMSFC's 513-hectare
banana plantation were covered by the Comprehensive Agrarian Reform Law. Eventually, said
portion was transferred to AMSFC's regular employees as Agrarian Reform Beneficiaries
(ARBs), including Baya.

Thereafter, the ARBs explored a possible agribusiness venture agreement with AMSFC, but the
talks broke down, prompting the Provincial Agrarian Reform Officer to terminate negotiations
and, consequently, give AMSKARBEMCO freedom to enter into similar agreement with other

53
parties. In October 2001, the ARBs held a referendum in order to choose as to which group
between AMSKARBEMCO or SAFFP AI, an association of pro-company beneficiaries, they
wanted to belong. 280 went to AMSKARBEMCO while 85 joined SAFFPAI. 9

When AMSFC learned that AMSKARBEMCO entered into an export agreement with another
company, it summoned AMSKARBEMCO officers, including Baya, to lash out at them and even
threatened them that the ARBs' takeover of the lands would not push through. Thereafter, Baya
was again summoned, this time by a DFC manager, who told the former that he would be putting
himself in a "difficult situation" if he will not shift his loyalty to SAFFP AI; this notwithstanding,
Baya politely refused to betray his cooperative. A few days later, Baya received a letter stating
that his secondment with DFC has ended, thus, ordering his return to AMSFC. However, upon
Baya's return to AMSFC on August 30, 2002, he was informed that there were no supervisory
positions available; thus, he was assigned to different rank-and-file positions instead.
On September 20, 2002, Baya' s written request to be restored to a supervisory position was
denied, prompting him to file the instant complaint. On even date, the DAR went to the farms of
AMSFC to effect the ARBs' takeover of their awarded lands. The following day, all the members
10

of AMSKARBEMCO were no longer allowed to work for AMSFC "as they have been replaced by
newly hired contract workers"; on the other hand, the SAFFP AI members were still allowed to do
so. .
11

In their defense, AMSFC and DFC maintained that they did not illegally/constructively dismiss
Baya, considering that his termination from employment was the direct result of the ARBs'
takeover of AMSFC's banana plantation through the government's agrarian reform program.
They even shifted the blame to Baya himself, arguing that he was the one who formed
AMSKARBEMCO and, eventually, caused the ARBs' aforesaid takeover.

Ruling:

Finally, Sumifru's contention that it should only be held liable for the period when Baya stayed
with DFC as it only merged with the latter and not with AMSFC is untenable. Section 80 of the
37

Corporation Code of the Philippines clearly states that one of the effects of a merger is that the
surviving company shall inherit not only the assets, but also the liabilities of the corporation it
merged with, to wit:

Section 80. Effects of merger or consolidation. - The merger or consolidation shall have the
following effects:

1. The constituent corporations shall become a single corporation which, in case of

merger, shall be the surviving corporation designated in the plan of merger; and, in case
of consolidation, shall be the consolidated corporation designated in the plan of
consolidation;

2. The separate existence of the constituent corporations shall cease, except that of the
surviving or the consolidated corporation;

3. The surviving or the consolidated corporation shall possess all the rights, privileges,
immunities and powers and shall be subject to all the duties and liabilities of a
corporation organized under this Code;

54
 4. The surviving or the consolidated corporation shall thereupon and thereafter possess
all the rights, privileges, immunities and franchises of each of the constituent
corporations; and all property, real or personal, and all receivables due on whatever
account, including subscriptions to shares and other choses in action, and all and every
other interest of, or belonging to, or due to each constituent corporation, shall be deemed
transferred to and vested in such surviving or consolidated corporation without further act
or deed; and

5. The surviving or consolidated corporation shall be responsible and liable for all the
liabilities and obligations of each of the constituent corporations in the same manner as if
such surviving or consolidated corporation had itself incurred such liabilities or
obligations; and any pending claim, action or proceeding brought by or against any of
such constituent corporations may be prosecuted by or against the surviving or
consolidated corporation. The rights of creditors or liens upon the property of any of such
constituent corporations shall not be impaired by such merger or consolidation.

In this case, it is worthy to stress that both AMSFC and DFC are guilty of acts constitutive of
constructive dismissal performed against Baya. As such, they should be deemed as solidarily
liable for the monetary awards in favor of Baya. Meanwhile, Sumifru, as the surviving entity in its
merger with DFC, must be held answerable for the latter's liabilities, including its solidary liability
with AMSFC arising herein. Verily, jurisprudence states that "in the merger of two existing
corporations, one of the corporations survives and continues the business, while the other is
dissolved and all its rights, properties and liabilities are acquired by the surviving
corporation," as in this case.
38

"Constructive dismissal exists where there is cessation of work, because 'continued employment
is rendered impossible, unreasonable or unlikely, as an offer involving a demotion in rank or a
diminution in pay' and other benefits. Aptly called a dismissal in disguise or an act amounting to
dismissal but made to appear as if it were not, constructive dismissal may, likewise, exist if an act
of clear discrimination, insensibility, or disdain by an employer becomes so unbearable on the
part of the employee that it could foreclose any choice by him except to forego his continued
employment." In Peckson v. Robinsons Supermarket Corp., the Court held that the burden is
33 34

on the employer to prove that the transfer or demotion of an employee was a valid exercise of
management prerogative and was not a mere subterfuge to get rid of an employee; failing in
which, the employer will be found liable for constructive dismissal, viz.:

In case of a constructive dismissal, the employer has the burden of proving that the transfer and
demotion of an employee are for valid and legitimate grounds such as genuine business
necessity. Particularly, for a transfer not to be considered a constructive dismissal, the employer
must be able to show that such transfer is not unreasonable, inconvenient, or prejudicial to the
employee; nor does it involve a demotion in rank or a diminution of his salaries, privileges and
other benefits. Failure of the employer to overcome this burden of proof, the employee's
demotion shall no doubt be tantamount to unlawful constructive dismissal. 35

In this case, a judicious review of the records reveals that the top management of both AMSFC
and DFC, which were sister companies at the time, were well-aware of the lack of supervisory
positions in AMSFC. This notwithstanding, they still proceeded to order Baya's return therein,
thus, forcing him to accept rank-and-file positions. Notably, AMSFC and DFC failed to refute the
allegation that Baya's "end of secondment with DFC" only occurred after: (a) he and the rest of
AMSKARBEMCO officials and members were subjected to harassment and cooperative busting
tactics employed by AMSFC and DFC; and (b) he refused to switch loyalties from
AMSKARBEMCO to SAFFP AI, the pro-company cooperative. In this relation, the Court cannot

55
lend credence to the contention that Baya's termination was due to the ARBs' takeover of the
banana plantation, because the said takeover only occurred on September 20, 2002, while the
acts constitutive of constructive dismissal were performed as early as August 30, 2002, when
Baya returned to AMSFC. Thus, AMSFC and DFC are guilty of constructively dismissing Baya. 1âwphi1

Alabang Dev. Corp. v. Alabang Hills Village Asso. et. al., G.R. No. 187456, June 2, 2014

Facts:

The case traces its roots to the Complaint for Injunction and Damages filed [with the Regional
Trial Court (RTC) of Muntinlupa City] on October 19, 2006 by [herein petitioner, Alabang
Development Corporation] ADC against [herein respondents, Alabang Hills Village Association,
Inc.] AHVAI and Rafael Tinio (Tinio), President of AHVAI. The Complaint alleged that [petitioner]
is the developer of Alabang Hills Village and still owns certain parcels of land therein that are yet
to be sold, as well as those considered open spaces that have not yet been donated to [the] local
government of Muntinlupa City or the Homeowner's Association. Sometime in September [2006],
ADC learned that AHVAI started the construction of a multi-purpose hall and a swimming pool on
one of the parcels of land still owned by ADC without the latter's consent and approval, and that
despite demand, AHVAI failed to desist from constructing the said improvements. ADC thus
prayed that an injunction be issued enjoining defendants from constructing the multi-purpose hall
and the swimming pool at the Alabang Hills Village.

In its Answer With Compulsory Counterclaim, AHVAI denied ADC's asseverations and claimed
that the latter has no legal capacity to sue since its existence as a registered corporate entity was
revoked by the Securities and Exchange Commission (SEC) on May 26, 2003; that ADC has no

56
cause of action because by law it is no longer the absolute owner but is merely holding the
property in question in trust for the benefit of AHVAI as beneficial owner thereof; and that the
subject lot is part of the open space required by law to be provided in the subdivision. As
counterclaim, it prayed that an order be issued divesting ADC of the title of the property and
declaring AHVAI as owner thereof; and that ADC be made liable for moral and exemplary
damages as well as attorney's fees.

Ruling:

Anent the first assigned error, the Court does not agree that the CA erred in relying on the case
of Columbia Pictures, Inc. v. Court of Appeals. The CA cited the case for the purpose of
5

restating and distinguishing the jurisprudential definition of the terms "lack of capacity to sue" and
"lack of personality to sue;" and of applying these definitions to the present case. Thus, the fact
that, unlike in the instant case, the corporations involved in the Columbia case were foreign
corporations is of no moment. The definition of the term "lack of capacity to sue" enunciated in
the said case still applies to the case at bar. Indeed, as held by this Court and as correctly cited
by the CA in the case of Columbia: "[l]ack of legal capacity to sue means that the plaintiff is not in
the exercise of his civil rights, or does not have the necessary qualification to appear in the case,
or does not have the character or representation he claims[;] 'lack of capacity to sue' refers to a
plaintiff's general disability to sue, such as on account of minority, insanity, incompetence, lack of
juridical personality or any other general disqualifications of a party. ..." In the instant case,
6

petitioner lacks capacity to sue because it no longer possesses juridical personality by reason of
its dissolution and lapse of the three-year grace period provided under Section 122 of the
Corporation Code, as will be discussed below.

With respect to the second assigned error, Section 122 of the Corporation Code provides as
follows:

SEC. 122. Corporate liquidation.– Every corporation whose charter expires by its own limitation
or is annulled by forfeiture or otherwise, or whose corporate existence for other purposes is
terminated in any other manner, shall nevertheless be continued as a body corporate for three
(3) years after the time when it would have been so dissolved, for the purpose of prosecuting and
defending suits by or against it and enabling it to settle and close its affairs, to dispose of and
convey its property and to distribute its assets, but not for the purpose of continuing the business
for which it was established.

At any time during said three (3) years, said corporation is authorized and empowered to convey
all of its property to trustees for the benefit of stockholders, members, creditors, and other
persons in interest. From and after any such conveyance by the corporation of its property in
trust for the benefit of its stockholders, members, creditors and others in interest, all interest
which the corporation had in the property terminates, the legal interest vests in the trustees, and
the beneficial interest in the stockholders, members, creditors or other persons in interest.

Upon winding up of the corporate affairs, any asset distributable to any creditor or stockholder or
member who is unknown or cannot be found shall be escheated to the city or municipality where
such assets are located.

Except by decrease of capital stock and as otherwise allowed by this Code, no corporation shall
distribute any of its assets or property except upon lawful dissolution and after payment of all its
debts and liabilities.

This Court has held that:

57
It is to be noted that the time during which the corporation, through its own officers, may conduct
the liquidation of its assets and sue and be sued as a corporation is limited to three years from
the time the period of dissolution commences; but there is no time limit within which the trustees
must complete a liquidation placed in their hands. It is provided only (Corp. Law, Sec. 78 now
Sec. 122]) that the conveyance to the trustees must be made within the three-year period. It may
be found impossible to complete the work of liquidation within the three-year period or to reduce
disputed claims to judgment. The authorities are to the effect that suits by or against a
corporation abate when it ceased to be an entity capable of suing or being sued (7 R.C.L.,
Corps., par. 750); but trustees to whom the corporate assets have been conveyed pursuant to
the authority of Sec. 78 [now Sec. 122] may sue and be sued as such in all matters connected
with the liquidation... 7

In the absence of trustees, this Court ruled, thus:

… Still in the absence of a board of directors or trustees, those having any pecuniary interest in
the assets, including not only the shareholders but likewise the creditors of the corporation,
acting for and in its behalf, might make proper representations with the Securities and Exchange
Commission, which has primary and sufficiently broad jurisdiction in matters of this nature, for
working out a final settlement of the corporate concerns. 8

In the instant case, there is no dispute that petitioner's corporate registration was revoked on
May 26, 2003. Based on the above-quoted provision of law, it had three years, or until May 26,
1âwphi1

2006, to prosecute or defend any suit by or against it. The subject complaint, however, was filed
only on October 19, 2006, more than three years after such revocation. It is likewise not disputed
that the subject complaint was filed by petitioner corporation and not by its directors or trustees.
In fact, it is even averred, albeit wrongly, in the first paragraph of the Complaint that "[p]laintiff is
9

a duly organized and existing corporation under the laws of the Philippines, with capacity to sue
and be sued. x x x" 10

Petitioner, nonetheless, insists that a corporation may still sue, even after it has been dissolved
and the three-year liquidation period provided under Section 122 of the Corporation Code has
passed. Petitioner cites the cases of Gelano v. Court of Appeals, Knecht v. United Cigarette
11

Corporation, and Pepsi-Cola Products Philippines, Inc. v. Court of Appeals, as authority to

12 13

support its position. The Court, however, agrees with the CA that in the abovecited cases, the
corporations involved filed their respective complaints while they were still in existence. In other
words, they already had pending actions at the time that their corporate existence was
terminated.

The import of this Court's ruling in the cases cited by petitioner is that the trustee of a corporation
may continue to prosecute a case commenced by the corporation within three years from its
dissolution until rendition of the final judgment, even if such judgment is rendered beyond the
three-year period allowed by Section 122 of the Corporation Code. However, there is nothing in
the said cases which allows an already defunct corporation to initiate a suit after the lapse of the
said three-year period. On the contrary, the factual circumstances in the abovecited cases would
show that the corporations involved therein did not initiate any complaint after the lapse of the
three-year period. In fact, as stated above, the actions were already pending at the time that they
lost their corporate existence.

In the present case, petitioner filed its complaint not only after its corporate existence was
terminated but also beyond the three-year period allowed by Section 122 of the Corporation

58
Code. Thus, it is clear that at the time of the filing of the subject complaint petitioner lacks the
capacity to sue as a corporation. To allow petitioner to initiate the subject complaint and pursue it
until final judgment, on the ground that such complaint was filed for the sole purpose of
liquidating its assets, would be to circumvent the provisions of Section 122 of the Corporation
Code.

Rich vs. Paloma III, G.R. No. 210538, March 7, 2018

A corporation which has already been dissolved, be it voluntarily or involuntarily,

retains no juridical personality to conduct its business save for those directed
towards corporate liquidation.

Facts:

Sometime in 1997, Dr. Gil Rich (petitioner) lent P1,000,000.00 to his brother,
Estanislao Rich (Estanislao).3 The agreement was secured by a real estate mortgage
over a 1000-square-meter parcel of land with improvements

When Estanislao failed to make good on his obligations under the loan agreement,
the petitioner foreclosed on the subject property via a public auction sale conducted
on March 14, 2005 by respondent Guillermo Paloma III, Sheriff IV of the RTC. The
petitioner was declared the highest bidder, and subsequently, was issued a
Certificate of Sale as purchaser/mortgagee.5

59
Without the petitioner's knowledge, however, and prior to the foreclosure, it
appeared from the records that on January 24, 2005, 6 Estanislao entered into an
agreement with Maasin Traders Lending Corporation (MTLC), where loans and
advances amounting to P2.6 million were secured by a real estate mortgage over
the same prope1iy.7

On the strength of this document, respondent Ester L. Servacio (Servacio), as

president of MTLC, exercised equitable redemption after the foreclosure proceedings.
She tendered the amount of P2,090,000.00 as the redemption money in the extra-
judicial foreclosure sale.8 On March 15, 2006, respondent Paloma III, again as sheriff
of the RTC, issued a Deed of Redemption in favor of MTLC.

The deed then became the subject of the complaint for "Annulment of Deed of
Redemption, Damages, Attorney's Fees, Litigation Expenses, Application for
Issuance of T.R.O. &/or Writ of Preliminary Prohibitory Injunction" filed before the
RTC by the petitioner against respondent Servacio.

According to the petitioner, MTLC no longer has juridical personality to effect the
equitable redemption as it has already been dissolved by the Securities and
Exchange Commission as early as September 2003. 9 He also asserted that there was
a pending case against respondent Servacio for allegedly forging Estanislao's
signature on the same real estate mortgage that respondent Servacio used as basis
for her equitable redemption of the subject property.

Issue:

MAY A CORPORATION NOT INVESTED WITH CORPORATE PERSONALITY AT THE TIME

OF REDEMPTION REDEEM A PROPERTY?

Ruling:

According to the case of Yu vs. Yukayguan,26 once a corporation is dissolved, be it

voluntarily or involuntarily, liquidation, which is the process of settling the affairs of
the corporation, will ensue. This consists of (1) collection of all that is due the
corporation, (2) the settlement and adjustment of claims against it, and (3) the
payment of its debts.

These pronouncements draw their basis from Section 122 of the Corporation
Code,28 which empowers every corporation whose corporate existence has been
legally terminated to continue as a body corporate for three (3) years after the time
when it would have been dissolved. This continued existence would only be for the

60
purposes of "prosecuting and defending suits by or against it and enabling it to
settle and close its affairs, to dispose of and convey its property and to distribute its
assets."

In addition, and as expressly mentioned by the Corporation Code, this extended

authority necessarily excludes the purpose of continuing the business for which it
was established.33 The reason for this is simple: the dissolution of the corporation
carries with it the termination of the corporation's juridical personality. Any new
business in which the dissolved corporation would engage in, other than those for
the purpose of liquidation, "will be a void transaction because of the non-existence
of the corporate party."34

Two things must be said of the foregoing in relation to the facts of this case. First, if
MTLC entered into the real estate mortgage agreement with Estanislao after its
dissolution, then resultantly, such real estate mortgage agreement would be void ab
initio because of the non-existence of MTLC's juridical personality.

Second, if, however, MTLC entered into the real estate mortgage agreement prior to
its dissolution, then MTLC's redemption of the subject property, even if already after
its dissolution (as long as it would not exceed three years thereafter), would still be
valid because of the liquidation/winding up powers accorded by Section 122 of the
Corporation Code to MTLC.

The discourse of this case then turns to one of proven facts. The Court scoured the
records, and after a perusal of all the submissions herein and the rulings of the
lower and appellate courts, the Court finds that: (1) MTLC has already been
dissolved by the Securities and Exchange Commission as early as September
2003;35 (2) Estanislao and MTLC entered into the real estate mortgage agreement
only on January 24, 2005;36 and (3) MTLC, through respondent Servacio, redeemed
the property on December 15, 2005, for which a Deed of Redemption was issued by
respondent Paloma III on March 15, 2006.37

From the foregoing, it is clear that, by the time MTLC executed the real estate
mortgage agreement, its juridical personality has already ceased to exist. The
agreement is void as MTLC could not have been a corporate party to the same. To be
sure, a real estate mortgage is not part of the liquidation powers that could have
been extended to MTLC. It could not have been for the purposes of "prosecuting and
defending suits by or against it and enabling it to settle and close its affairs, to
dispose of and convey its property and to distribute its assets." It is, in fact, a new
business in which MTLC no longer has any business pursuing.

61
Steelcase, Inc. vs. Design International Selections, Inc., G.R. No. 171995 April 18, 2012

Facts:

Petitioner Steelcase, Inc. (Steelcase) is a foreign corporation existing under the laws of Michigan,
United States of America (U.S.A.), and engaged in the manufacture of office furniture with
dealers worldwide. Respondent Design International Selections, Inc. (DISI) is a corporation
3

existing under Philippine Laws and engaged in the furniture business, including the distribution of
furniture.
4

Sometime in 1986 or 1987, Steelcase and DISI orally entered into a dealership agreement
whereby Steelcase granted DISI the right to market, sell, distribute, install, and service its
products to end-user customers within the Philippines. The business relationship continued
smoothly until it was terminated sometime in January 1999 after the agreement was breached
with neither party admitting any fault.5

On January 18, 1999, Steelcase filed a complaint for sum of money against DISI alleging, among
6

others, that DISI had an unpaid account of US$600,000.00. Steelcase prayed that DISI be

62
ordered to pay actual or compensatory damages, exemplary damages, attorney’s fees, and costs
of suit.

In its Answer with Compulsory Counterclaims dated February 4, 1999, DISI sought the following:
7

(1) the issuance of a temporary restraining order (TRO) and a writ of preliminary injunction to
enjoin Steelcase from selling its products in the Philippines except through DISI; (2) the dismissal
of the complaint for lack of merit; and (3) the payment of actual, moral and exemplary damages
together with attorney’s fees and expenses of litigation. DISI alleged that the complaint failed to
state a cause of action and to contain the required allegations on Steelcase’s capacity to sue in
the Philippines despite the fact that it (Steelcase) was doing business in the Philippines without
the required license to do so. Consequently, it posited that the complaint should be dismissed
because of Steelcase’s lack of legal capacity to sue in Philippine courts.

Issue:

(1) Whether or not Steelcase is doing business in the Philippines without a license; and

(2) Whether or not DISI is estopped from challenging the Steelcase’s legal capacity to sue.

Ruling:

The Court rules in favor of the petitioner.

Steelcase is an unlicensed foreign corporation NOT doing business in the Philippines

The Court agrees with the petitioner.

The rule that an unlicensed foreign corporations doing business in the Philippine do not have the
capacity to sue before the local courts is well-established. Section 133 of the Corporation Code
of the Philippines explicitly states:

Sec. 133. Doing business without a license. - No foreign corporation transacting business in the
Philippines without a license, or its successors or assigns, shall be permitted to maintain or
intervene in any action, suit or proceeding in any court or administrative agency of the
Philippines; but such corporation may be sued or proceeded against before Philippine courts or
administrative tribunals on any valid cause of action recognized under Philippine laws.

The phrase "doing business" is clearly defined in Section 3(d) of R.A. No. 7042 (Foreign
Investments Act of 1991), to wit:

d) The phrase "doing business" shall include soliciting orders, service contracts, opening offices,
whether called "liaison" offices or branches; appointing representatives or distributors domiciled
in the Philippines or who in any calendar year stay in the country for a period or periods totalling
one hundred eighty (180) days or more; participating in the management, supervision or control
of any domestic business, firm, entity or corporation in the Philippines; and any other act or acts
that imply a continuity of commercial dealings or arrangements, and contemplate to that extent
the performance of acts or works, or the exercise of some of the functions normally incident to,
and in progressive prosecution of, commercial gain or of the purpose and object of the business
organization: Provided, however, That the phrase "doing business" shall not be deemed to
include mere investment as a shareholder by a foreign entity in domestic corporations duly
registered to do business, and/or the exercise of rights as such investor; nor having a nominee

63
director or officer to represent its interests in such corporation; nor appointing a representative or
distributor domiciled in the Philippines which transacts business in its own name and for its own
account; (Emphases supplied)

This definition is supplemented by its Implementing Rules and Regulations, Rule I, Section 1(f)
which elaborates on the meaning of the same phrase:

f. "Doing business" shall include soliciting orders, service contracts, opening offices, whether
liaison offices or branches; appointing representatives or distributors, operating under full control
of the foreign corporation, domiciled in the Philippines or who in any calendar year stay in the
country for a period totalling one hundred eighty [180] days or more; participating in the
management, supervision or control of any domestic business, firm, entity or corporation in the
Philippines; and any other act or acts that imply a continuity of commercial dealings or
arrangements, and contemplate to that extent the performance of acts or works, or the exercise
of some of the functions normally incident to and in progressive prosecution of commercial gain
or of the purpose and object of the business organization.

The following acts shall not be deemed "doing business" in the Philippines:

1. Mere investment as a shareholder by a foreign entity in domestic corporations duly

registered to do business, and/or the exercise of rights as such investor;

2. Having a nominee director or officer to represent its interest in such corporation;

3. Appointing a representative or distributor domiciled in the Philippines which transacts

business in the representative's or distributor's own name and account;

4. The publication of a general advertisement through any print or broadcast media;

5. Maintaining a stock of goods in the Philippines solely for the purpose of having the
same processed by another entity in the Philippines;

6. Consignment by a foreign entity of equipment with a local company to be used in the

processing of products for export;

7. Collecting information in the Philippines; and

8. Performing services auxiliary to an existing isolated contract of sale which are not on a
continuing basis, such as installing in the Philippines machinery it has manufactured or
exported to the Philippines, servicing the same, training domestic workers to operate it,
and similar incidental services. (Emphases supplied)

From the preceding citations, the appointment of a distributor in the Philippines is not sufficient to
constitute "doing business" unless it is under the full control of the foreign corporation. On the
other hand, if the distributor is an independent entity which buys and distributes products, other
than those of the foreign corporation, for its own name and its own account, the latter cannot be
considered to be doing business in the Philippines. It should be kept in mind that the
14

determination of whether a foreign corporation is doing business in the Philippines must be

judged in light of the attendant circumstances. 15

In the case at bench, it is undisputed that DISI was founded in 1979 and is independently owned
and managed by the spouses Leandro and Josephine Bantug. In addition to Steelcase products,
16

DISI also distributed products of other companies including carpet tiles, relocatable walls and
theater settings. The dealership agreement between Steelcase and DISI had been described by
17

the owner himself as:

64
xxx basically a buy and sell arrangement whereby we would inform Steelcase of the volume of
the products needed for a particular project and Steelcase would, in turn, give ‘special
quotations’ or discounts after considering the value of the entire package. In making the bid of
the project, we would then add out profit margin over Steelcase’s prices. After the approval of the
bid by the client, we would thereafter place the orders to Steelcase. The latter, upon our
payment, would then ship the goods to the Philippines, with us shouldering the freight charges
and taxes. [Emphasis supplied]
18

This clearly belies DISI’s assertion that it was a mere conduit through which Steelcase conducted
its business in the country. From the preceding facts, the only reasonable conclusion that can be
reached is that DISI was an independent contractor, distributing various products of Steelcase
and of other companies, acting in its own name and for its own account.

The CA, in finding Steelcase to be unlawfully engaged in business in the Philippines, took into
consideration the delivery by Steelcase of a letter to Phinma informing the latter that the
distribution rights for its products would be established in the near future, and also its
cancellation of orders placed by Visteon. The foregoing acts were apparently misinterpreted by
the CA. Instead of supporting the claim that Steelcase was doing business in the country, the
said acts prove otherwise. It should be pointed out that no sale was concluded as a result of
these communications. Had Steelcase indeed been doing business in the Philippines, it would
have readily accepted and serviced the orders from the abovementioned Philippine companies.
Its decision to voluntarily cease to sell its products in the absence of a local distributor indicates
its refusal to engage in activities which might be construed as "doing business."

Another point being raised by DISI is the delivery and sale of Steelcase products to a Philippine
client by Modernform allegedly an agent of Steelcase. Basic is the rule in corporation law that a
corporation has a separate and distinct personality from its stockholders and from other
corporations with which it may be connected. Thus, despite the admission by Steelcase that it
19

owns 25% of Modernform, with the remaining 75% being owned and controlled by Thai
stockholders, it is grossly insufficient to justify piercing the veil of corporate fiction and declare
20

that Modernform acted as the alter ego of Steelcase to enable it to improperly conduct business
in the Philippines. The records are bereft of any evidence which might lend even a hint of
credence to DISI’s assertions. As such, Steelcase cannot be deemed to have been doing
business in the Philippines through Modernform.

Finally, both the CA and DISI rely heavily on the Dealer Performance Expectation required by
Steelcase of its distributors to prove that DISI was not functioning independently from Steelcase
because the same imposed certain conditions pertaining to business planning, organizational
structure, operational effectiveness and efficiency, and financial stability. It is actually logical to
expect that Steelcase, being one of the major manufacturers of office systems furniture, would
require its dealers to meet several conditions for the grant and continuation of a distributorship
agreement. The imposition of minimum standards concerning sales, marketing, finance and
operations is nothing more than an exercise of sound business practice to increase sales and
maximize profits for the benefit of both Steelcase and its distributors. For as long as these
requirements do not impinge on a distributor’s independence, then there is nothing wrong with
placing reasonable expectations on them.

All things considered, it has been sufficiently demonstrated that DISI was an independent
contractor which sold Steelcase products in its own name and for its own account. As a result,
Steelcase cannot be considered to be doing business in the Philippines by its act of appointing a
distributor as it falls under one of the exceptions under R.A. No. 7042.

65
Cargill, Inc. vs. Intra Strata Assurance Corp., G.R. No. 168266 March 15, 2010

Facts:

Petitioner Cargill, Inc. (petitioner) is a corporation organized and existing under the laws of the
State of Delaware, United States of America. Petitioner and Northern Mindanao Corporation
(NMC) executed a contract dated 16 August 1989 whereby NMC agreed to sell to petitioner
20,000 to 24,000 metric tons of molasses, to be delivered from 1 January to 30 June 1990 at the
price of $44 per metric ton. The contract provides that petitioner would open a Letter of Credit
with the Bank of Philippine Islands. Under the "red clause" of the Letter of Credit, NMC was
permitted to draw up to $500,000 representing the minimum price of the contract upon
presentation of some documents.

The contract was amended three times: first, on 11 January 1990, increasing the purchase price
of the molasses to $47.50 per metric ton;3 second, on 18 June 1990, reducing the quantity of the
molasses to 10,500 metric tons and increasing the price to $55 per metric ton; 4 and third, on 22
August 1990, providing for the shipment of 5,250 metric tons of molasses on the last half of
December 1990 through the first half of January 1991, and the balance of 5,250 metric tons on
the last half of January 1991 through the first half of February 1991. 5 The third amendment also
required NMC to put up a performance bond equivalent to $451,500, which represents the value
of 10,500 metric tons of molasses computed at $43 per metric ton. The performance bond was

66
intended to guarantee NMC’s performance to deliver the molasses during the prescribed
shipment periods according to the terms of the amended contract.

In compliance with the terms of the third amendment of the contract, respondent Intra Strata
Assurance Corporation (respondent) issued on 10 October 1990 a performance bond 6 in the sum
of ₱11,287,500 to guarantee NMC’s delivery of the 10,500 tons of molasses, and a surety
bond7 in the sum of ₱9,978,125 to guarantee the repayment of downpayment as provided in the
contract.

NMC was only able to deliver 219.551 metric tons of molasses out of the agreed 10,500 metric
tons. Thus, petitioner sent demand letters to respondent claiming payment under the
performance and surety bonds. When respondent refused to pay, petitioner filed on 12 April
1991 a complaint8 for sum of money against NMC and respondent.

Petitioner, NMC, and respondent entered into a compromise agreement,9 which the trial court
approved in its Decision10 dated 13 December 1991. The compromise agreement provides that
NMC would pay petitioner ₱3,000,000 upon signing of the compromise agreement and would
deliver to petitioner 6,991 metric tons of molasses from 16-31 December 1991. However, NMC
still failed to comply with its obligation under the compromise agreement. Hence, trial proceeded
against respondent.

Issue:

1. Whether petitioner is doing or transacting business in the Philippines in contemplation of

the law and established jurisprudence;

Ruling:

Doing Business in the Philippines and Capacity to Sue

The principal issue in this case is whether petitioner, an unlicensed foreign corporation, has legal
capacity to sue before Philippine courts. Under Article 12313 of the Corporation Code, a foreign
corporation must first obtain a license and a certificate from the appropriate government agency
before it can transact business in the Philippines. Where a foreign corporation does business in
the Philippines without the proper license, it cannot maintain any action or proceeding before
Philippine courts as provided under Section 133 of the Corporation Code:

Sec. 133. Doing business without a license. – No foreign corporation transacting business in the
Philippines without a license, or its successors or assigns, shall be permitted to maintain or
intervene in any action, suit or proceeding in any court or administrative agency of the
Philippines; but such corporation may be sued or proceeded against before Philippine courts or
administrative tribunals on any valid cause of action recognized under Philippine laws.

Thus, the threshold question in this case is whether petitioner was doing business in the
Philippines. The Corporation Code provides no definition for the phrase "doing business."
Nevertheless, Section 1 of Republic Act No. 5455 (RA 5455),14 provides that:

x x x the phrase "doing business" shall include soliciting orders, purchases, service contracts,
opening offices, whether called ‘liaison’ offices or branches; appointing representatives or
distributors who are domiciled in the Philippines or who in any calendar year stay in the
Philippines for a period or periods totalling one hundred eighty days or more; participating in the

67
management, supervision or control of any domestic business firm, entity or corporation in the
Philippines; and any other act or acts that imply a continuity of commercial dealings or
arrangements, and contemplate to that extent the performance of acts or works, or the exercise
of some of the functions normally incident to, and in progressive prosecution of, commercial gain
or of the purpose and object of the business organization. (Emphasis supplied)

This is also the exact definition provided under Article 44 of the Omnibus Investments Code of
1987.

Republic Act No. 7042 (RA 7042), otherwise known as the Foreign Investments Act of 1991,
which repealed Articles 44-56 of Book II of the Omnibus Investments Code of 1987, enumerated
not only the acts or activities which constitute "doing business" but also those activities which are
not deemed "doing business." Section 3(d) of RA 7042 states:

[T]he phrase "doing business" shall include "soliciting orders, service contracts, opening offices,
whether called ‘liaison’ offices or branches; appointing representatives or distributors domiciled in
the Philippines or who in any calendar year stay in the country for a period or periods totalling
one hundred eighty (180) days or more; participating in the management, supervision or control
of any domestic business, firm, entity or corporation in the Philippines; and any other act or acts
that imply a continuity of commercial dealings or arrangements, and contemplate to that extent
the performance of acts or works, or the exercise of some of the functions normally incident to,
and in progressive prosecution of, commercial gain or of the purpose and object of the business
organization: Provided, however, That the phrase ‘doing business’ shall not be deemed to
include mere investment as a shareholder by a foreign entity in domestic corporations duly
registered to do business, and/or the exercise of rights as such investor; nor having a nominee
director or officer to represent its interests in such corporation; nor appointing a representative or
distributor domiciled in the Philippines which transacts business in its own name and for its own
account.

Since respondent is relying on Section 133 of the Corporation Code to bar petitioner from
maintaining an action in Philippine courts, respondent bears the burden of proving that
petitioner’s business activities in the Philippines were not just casual or occasional, but so
systematic and regular as to manifest continuity and permanence of activity to constitute doing
business in the Philippines. In this case, we find that respondent failed to prove that petitioner’s
activities in the Philippines constitute doing business as would prevent it from bringing an action.

The determination of whether a foreign corporation is doing business in the Philippines must be
based on the facts of each case.15 In the case of Antam Consolidated, Inc. v. CA,16 in which a
foreign corporation filed an action for collection of sum of money against petitioners therein for
damages and loss sustained for the latter’s failure to deliver coconut crude oil, the Court
emphasized the importance of the element of continuity of commercial activities to constitute
doing business in the Philippines. The Court held:

In the case at bar, the transactions entered into by the respondent with the petitioners are not a
series of commercial dealings which signify an intent on the part of the respondent to do
business in the Philippines but constitute an isolated one which does not fall under the category
of "doing business." The records show that the only reason why the respondent entered into the
second and third transactions with the petitioners was because it wanted to recover the loss it
sustained from the failure of the petitioners to deliver the crude coconut oil under the first
transaction and in order to give the latter a chance to make good on their obligation. x x x

x x x The three seemingly different transactions were entered into by the parties only in an effort
to fulfill the basic agreement and in no way indicate an intent on the part of the respondent to
engage in a continuity of transactions with petitioners which will categorize it as a foreign
corporation doing business in the Philippines.17

68
Similarly, in this case, petitioner and NMC amended their contract three times to give a chance to
NMC to deliver to petitioner the molasses, considering that NMC already received the minimum
price of the contract. There is no showing that the transactions between petitioner and NMC
signify the intent of petitioner to establish a continuous business or extend its operations in the
Philippines.

The Implementing Rules and Regulations of RA 7042 provide under Section 1(f), Rule I, that
"doing business" does not include the following acts:

1. Mere investment as a shareholder by a foreign entity in domestic corporations duly

registered to do business, and/or the exercise of rights as such investor;

2. Having a nominee director or officer to represent its interests in such corporation;

3. Appointing a representative or distributor domiciled in the Philippines which transacts

business in the representative's or distributor's own name and account;

4. The publication of a general advertisement through any print or broadcast media;

5. Maintaining a stock of goods in the Philippines solely for the purpose of having the
same processed by another entity in the Philippines;

6. Consignment by a foreign entity of equipment with a local company to be used in the

processing of products for export;

7. Collecting information in the Philippines; and

8. Performing services auxiliary to an existing isolated contract of sale which are not on a
continuing basis, such as installing in the Philippines machinery it has manufactured or
exported to the Philippines, servicing the same, training domestic workers to operate it,
and similar incidental services.

Most of these activities do not bring any direct receipts or profits to the foreign corporation,
consistent with the ruling of this Court in National Sugar Trading Corp. v. CA 18 that activities
within Philippine jurisdiction that do not create earnings or profits to the foreign corporation do not
constitute doing business in the Philippines.19 In that case, the Court held that it would be
inequitable for the National Sugar Trading Corporation, a state-owned corporation, to evade
payment of a legitimate indebtedness owing to the foreign corporation on the plea that the latter
should have obtained a license first before perfecting a contract with the Philippine government.
The Court emphasized that the foreign corporation did not sell sugar and derive income from the
Philippines, but merely purchased sugar from the Philippine government and allegedly paid for it
in full.

In this case, the contract between petitioner and NMC involved the purchase of molasses by
petitioner from NMC. It was NMC, the domestic corporation, which derived income from the
transaction and not petitioner. To constitute "doing business," the activity undertaken in the
Philippines should involve profit-making.20 Besides, under Section 3(d) of RA 7042, "soliciting
purchases" has been deleted from the enumeration of acts or activities which constitute "doing
business."

Other factors which support the finding that petitioner is not doing business in the Philippines are:
(1) petitioner does not have an office in the Philippines; (2) petitioner imports products from the
Philippines through its non-exclusive local broker, whose authority to act on behalf of petitioner is
limited to soliciting purchases of products from suppliers engaged in the sugar trade in the
Philippines; and (3) the local broker is an independent contractor and not an agent of petitioner. 21

69
To be doing or "transacting business in the Philippines" for purposes of Section 133 of the
Corporation Code, the foreign corporation must actually transact business in the Philippines, that
is, perform specific business transactions within the Philippine territory on a continuing basis in
its own name and for its own account. Actual transaction of business within the Philippine
territory is an essential requisite for the Philippines to to acquire jurisdiction over a foreign
corporation and thus require the foreign corporation to secure a Philippine business license. If a
foreign corporation does not transact such kind of business in the Philippines, even if it exports
its products to the Philippines, the Philippines has no jurisdiction to require such foreign
corporation to secure a Philippine business license.23 (Emphasis supplied)

In the present case, petitioner is a foreign company merely importing molasses from a Philipine
exporter. A foreign company that merely imports goods from a Philippine exporter, without
opening an office or appointing an agent in the Philippines, is not doing business in the
Philippines.

C.V. Gaspar Salvage Corp. vs. LG Ins. Co., Ltd., G.R. Nos. 206892 & 207035, Feb. 3, 2021

Facts:

On August 5, 1997, Sunkyong America, Inc. (Sunkyong) shipped 23,842 (1,207.50 MT) bags of
Peruvian fishmeal for delivery from Chimbote, Peru to Great Harvest, its consignee in Manila.
The shipment was insured against all risks for US$753,117.75 with LG insurance Company, Ltd.
(LG Insurance), United States (U.S.) Branch, through its American Manager, WM H. McGee &
Co., Inc. (WM H. McGee), a corporation organized and established under the laws of the United
States of America. Great Harvest engaged Fortune Brokerage as its customs broker. The
shipment was loaded and shipped on board the vessel MV Pearl Islands complete and in good
order and condition.6

On September 16, 1997, the shipment arrived at the Port of Manila and was discharged into four
barges owned by C.V. Gaspar for delivery to Great Harvest's warehouse in Valenzuela, Bulacan.
While the barges were moored at the Pasig River, the cargo loaded on barge "AYNA-1" got wet
resulting in the damage of 3,662 bags of fishmeal. Of the 3,662 bags of fishmeal, 2,085 bags
were dumped into the Pasig River as they were already emitting strong foul odor, 877 bags were
accepted by Great Harvest with 65% loss allowance, and 700 bags were disposed to salvors.7

70
Great Harvest filed separate claims against Fortune Brokerage and C.V. Gaspar for the
damaged cargo. When both Fortune Brokerage and C.V. Gaspar ignored its claims, Great
Harvest filed a claim against its insurance policy with LG Insurance. LG Insurance paid Great
Harvest's claim.

Great Harvest executed a subrogation receipt in LG Insurance's favor. LG Insurance and WM H.

McGee then demanded from Fortune Brokerage and C.V. Gaspar the amount paid to Great
Harvest. Both Fortune Brokerage and C.V. Gaspar refused to pay LG Insurance and WM H.
McGee prompting the filing by the latter of an action for damages against the former. The case
was docketed as Civil Case No. 99-1864. Venancio Mesina (Mesina) was impleaded as Fortune
Brokerage's authorized representative who signed the service contract, although he already
retired from the service effective September 15, 1999.8

LG Insurance alleged that the damage/loss suffered by the shipment from wettage was
attributable to the negligence of Fortune Brokerage in utilizing an unseaworthy barge, AYNA-1
and the negligence of C.V. Gaspar in supplying the unseaworthy barge that suffered a hole at
the bottom of its plating in Hatch 1, through which the water gained entry and damaged the
cargo.

Issue:

Whether Fajardo Law Office, through Atty. Fajardo, is authorized to file the Complaint and
Amended Complaint and to sign the Verification and Certification on Non-Forum Shopping in
behalf of LG Insurance and WM H. McGee;

Ruling:

The petitions have no merit.

Verification and Certification of Non-Forum Shopping.

Both C.V. Gaspar and Fortune Brokerage assail the authority of Fajardo Law Office and/or Atty.
Fajardo to file the Complaint and Amended Complaint and sign the Verification and Certification
on NonForum Shopping. C.V. Gaspar alleges that a foreign corporation has no personality to sue
in the Philippines; and that Fajardo Law Office is not authorized to initiate, file, and prosecute the
case for and in behalf of LG Insurance and WM H. McGee.

It is undisputed that LG Insurance is a corporation organized and established under U.S. Laws. It
is a foreign corporation that is not doing business in the Philippines. However, it is a settled rule
that a foreign corporation not doing business in the Philippines does not entirely lack capacity to
sue in this jurisdiction. Thus, the Court ruled:

71
A foreign corporation not licensed to do business in the Philippines is not absolutely
incapacitated from filing a suit in local courts. Only when that foreign corporation is "transacting"
or "doing business" in the country will a license be necessary before it can institute suits. It may,
however, bring suits on isolated business transactions, which is not prohibited under Philippine
law. Thus, this Court has held that a foreign insurance company may sue in Philippine courts
upon the marine insurance policies issued by it abroad to cover international-bound cargoes
shipped by a Philippine carrier, even if it has no license to do business in this country. It is the act
of engaging in business without the prescribed license, and not the lack of license per se, which
bars a foreign corporation from access to our courts.20

In its transactions with Great Harvest and in filing the cases against C.V. Gaspar and Fortune
Brokerage, LG Insurance acted through WM H. McGee, its American Manager. The authority of
ℒαwρhi ৷

Fajardo Law Office and Atty. Fajardo to act for and in behalf of LG Insurance and WM H. McGee
is established by the Special Power of Attorney designating Fajardo Law Office to act as WM H.
McGee's resident agent and to represent it in a suit against Fortune Brokerage and C.V. Gaspar.
WM H. McGee also designated Atty. Fajardo as its resident agent. The Court agrees with the CA
that the designation necessarily includes signing the requisite Verification and Certification of
Non-Forum Shopping.

Magna Ready Mix vs. Andersen Bjornstad Kane Jacobs, Inc., G.R. No. 196158, Jan. 20, 2021

Facts:

This case stemmed from a complaint for collection of a sum of money and damages filed on April
20, 2004 by ANDERSEN against MAGNA.

MAGNA is a corporation organized and existing under the laws of the Philippines.7 ANDERSEN
is a corporation organized and existing under the laws of the State of Washington, United States
of America.8 In its Complaint, ANDERSEN alleged that it was neither doing business in the
Philippines nor licensed to do business herein; it is suing on an isolated transaction that it
entered into with MAGNA.9

In 1996, MAGNA ordered from ANDERSEN the form design and drawing development for its
project on the development of a precast plant and PIC double tee design.10 In this connection,
MAGNA issued a purchase order dated October 21, 1996; the parties also allegedly executed an

72
Agreement for Professional Services11 dated November 29, 199612 which provided that
MAGNA would compensate ANDERSEN for the performance of services described therein.13 In
February 1997, MAGNA asked ANDERSEN to prepare a preliminary design for its Ecocentrum
Garage Project.14 Pursuant to the contract, ANDERSEN delivered the designs.15

MAGNA made partial payments, but left an unpaid balance in the amount of US$60,786.59
pertaining to: (a) precast plant inspection and consultation; (b) PIC double tee form design and
plant development design; and, (c) Ecocentrum Garage preliminary design for bidding.16

ANDERSEN made repeated demands for MAGNA to pay, but to no avail; hence the filing of the
complaint.17 ANDERSEN claimed that MAGNA acted "maliciously, fraudulently, and in gross
and evident bad faith" in refusing to pay the balance.18 ANDERSEN also sought payment of
interest, exemplary damages, and attorney's fees.19

In its defense, MAGNA claimed that ANDERSEN did not render any inspection or consultation
services for it.20 It averred that ANDERSEN's claims had no basis because the contract upon
which they were based was executed after the services had been performed.21 MAGNA further
stated that it could not be liable for the PIC double tee design and plant development design
because these were not delivered.22 The Ecocentrum Garage preliminary design was also not
delivered.23 MAGNA sought moral and exemplary damages, and attorney's fees in its
compulsory counterclaim.24

Gene Lim (Lim), MAGNA's general manager, testified that the services ANDERSEN allegedly
rendered were not for MAGNA's benefit, but were for business development, due diligence, and
feasibility studies undertaken for the creation of Structural Pre-cast Inc. (SPI).25 SPI was
allegedly a corporation that Bharat Soli (Soli), ANDERSEN's principal owner, and Lim had
planned to incorporate for their business venture.26 However, SPI was not formally incorporated
due to the Asian Financial Crisis.27

During the trial, MAGNA filed a Motion to Dismiss with Motion to Cancel Hearing28 claiming that
it later discovered (after filing its answer) that ANDERSEN previously filed a case against another
Philippine corporation.29 In that earlier case, ANDERSEN sought to collect a sum of money from
the defendant for the design and development of the latter's projects.30 MAGNA claimed that the
earlier case covered several transactions different from the subject of the instant case but
involved the same Ecocentrum design drawing.31 Due to this discovery, MAGNA asserted that
ANDERSEN was indeed doing business in the Philippines but without the necessary license.
Hence, it filed the motion to dismiss alleging that ANDERSEN has no legal capacity to sue.

Issue:

whether ANDERSEN has legal capacity to sue in the Philippines.

Ruling:

The Court resolves that ANDERSEN has no legal capacity to sue for doing business in the
Philippines without procuring the necessary license. It is not suing on an isolated transaction on
ᇈ WᑭHIL

the basis of the contract it entered into with MAGNA. However, MAGNA is already estopped from
challenging ANDERSEN's legal capacity when it entered into a contract with it.

Section 133 of the Corporation Code of the Philippines (1980)62 provides:

73
Section 133. Doing Business Without License. -No foreign corporation transacting business in
the Philippines without a license, or its successors or assigns, shall be permitted to maintain or
intervene in any action, suit or proceeding in any court or administrative agency of the
Philippines; but such corporation may be sued or proceeded against before Philippine courts or
administrative tribunals on any valid cause of action recognized under Philippine laws.

Thus, a foreign corporation that conducts business in the Philippines must first secure a license
for it to be allowed to initiate or intervene in any action in any court or administrative agency in
the Philippines. A corporation has legal status only in the state that granted it
personality.63 Hence, a foreign corporation has no personality in the Philippines, much less legal
capacity to file a case, unless it procures a license as provided by law.64

The case of Agilent Technologies v. Integrated Silicon,65 citing Mentholatum v.

Mangaliman,66 discusses the two tests to determine whether a foreign corporation is doing
business in the Philippines:

In Mentholatum, this Court discoursed on the two general tests to determine whether or not a
foreign corporation can be considered as "doing business" in the Philippines. The first of these is
the substance test, thus:

The true test [for doing business], however, seems to be whether the foreign corporation is
continuing the body of the business or enterprise for which it was organized or whether it has
substantially retired from it and turned it over to another.

The second test is the continuity test, expressed thus:

The term [doing business] implies a continuity of commercial dealings and arrangements, and
contemplates, to that extent, the performance of acts or works or the exercise of some of the
functions normally incident to, and in the progressive prosecution of, the purpose and object of its
organization.67

The number of the transactions entered into is not determinative whether a foreign corporation is
doing business in the Philippines; the intention to continue the body of its business
prevails.68 The number or quantity is merely an evidence of such intention.69 A single act or
transaction may then be considered as doing business when a corporation performs acts for
which it was created or exercises some of the functions for which it was organized.70

As an exception, a foreign corporation may sue without a license on the basis of an isolated
transaction. Eriks Pte. Ltd. v. Court of Appeals71 describes the concept of isolated transaction, to
wit:

The phrase "isolated transaction" has a definite and fixed meaning, i.e. a transaction or series of
transactions set apart from the common business of a foreign enterprise in the sense that there
is no intention to engage in a progressive pursuit of the purpose and object of the business
organization. Whether a foreign corporation is "doing business" does not necessarily depend
upon the frequency of its transactions, but more upon the nature and character of the
transactions.72

Based on the foregoing, a single act may be considered as either doing business or an isolated
transaction depending on its nature. It may be considered as doing business if it implies a
continuity of commercial dealings and contemplates the performance of acts or the exercise of
functions normally incidental to and in the progressive pursuit of its purpose. Contrarily, it may be
considered as an isolated transaction if it is different from or not related to the common business
of the foreign corporation in the sense that there is no objective to increasingly pursue its
purpose or object. And as stated, a license is not required if the foreign corporation is suing on
an isolated transaction.

74
Here, ANDERSEN alleged in its Complaint that it was suing on an isolated transaction based on
its contract with MAGNA but admitting at the same time that it did not have a license to do
business in the Philippines. The CA ruled that ANDERSEN was indeed suing on an isolated
transaction.

This Court does not agree with theCA's finding in this regard.

ANDERSEN's act of entering into a contract with MAGNA does not fall into the category of
isolated transactions. The contract clearly shows that ANDERSEN was to render professional
services to MAGNA for a fee. These professional services included the following: (1) providing
master plant site layout and plant design; (2) providing plant operation procedures and
organization matrix; (3) providing plant management and production staff training; (4) providing
plant construction and operation start-up services; and (5) providing consultation services for
developing a precast plant program.73 It is clear then that ANDERSEN, in entering into that
contract with MAGNA, was performing acts that were in progressive pursuit of its business
purpose, which, as found by the RTC, involved consultation and design services.74

Though it was a single transaction, ANDERSEN's act of entering into a contract with MAGNA
constitutes doing business in the Philippines. It cannot be considered as an isolated transaction
because the act is related to ANDERSEN's specific business purpose. Thus, in doing business
without a license, ANDERSEN had no legal capacity to sue in the Philippines.

However, the Court agrees that MAGNA is already estopped from challenging ANDERSEN's
legal capacity to sue. The doctrine of estoppel states that the other contracting party may no
ℒαwρhi ৷

longer challenge the foreign corporation's personality after acknowledging the same by entering
into a contract with it.75 This principle is applied in order to "prevent a person (or another
corporation) contracting with a foreign corporation from later taking advantage of its
noncompliance with the statutes, chiefly in cases where such person has received the benefits of
the contract."76 The case of Communications Materials and Design, Inc. v. Court of
Appeals77 elaborates on the doctrine:

A foreign corporation doing business in the Philippines may sue in Philippine Courts although not
authorized to do business here against a Philippine citizen or entity who had contracted with and
benefited by said corporation. To put it in another way, a party is estopped to challenge the
personality of a corporation after having acknowledged the same by entering into a contract with
it. And the doctrine of estoppel to deny corporate existence applies to a foreign as well as to
domestic corporations. One who has dealt with a corporation of foreign origin as a corporate
entity is estopped to deny its corporate existence and capacity. The principle will be applied to
prevent a person contracting with a foreign corporation from later taking advantage of its
noncompliance with the statutes chiefly in cases where such person has received the benefits of
the contract.

By virtue of the doctrine of estoppel, a party cannot take undue advantage by challenging the
foreign corporation's personality or legal capacity to sue when the former already acknowledged
the same by entering into a contract with the latter and derived benefits therefrom.

75
In this case, MAGNA is already estopped from challenging ANDERSEN's legal capacity to sue
due to its prior dealing with the latter, that is, entering into a contract with it. As ruled by the
courts below, there was a perfected and binding contract between the parties. By such contract,
MAGNA effectively acknowledged ANDERSEN's personality. MAGNA's allegation that it only
discovered during the trial that ANDERSEN was doing business in the Philippines without a
license, is therefore irrelevant. Moreover, MAGNA had already benefited from the contract
because as found by the lower and appellate courts, ANDERSEN indeed rendered services to
MAGNA pursuant to their contract and even prior thereto.

Development Bank of the Philippines vs. Monsanto Co., G.R. No. 207153, January 25, 2023

Facts:
Monsanto International Sales Company (MISCO), a foreign corporation organized and existing
under the laws of Delaware, sold acrylic fibers to Continental Manufacturing Corporation (CMC)
from 1978 to 1983. The sale was made through a local indentor, Robert Lipton and Co., Inc.
(Lipton).5

The transactions were made in this wise: as an indentor, Lipton would inquire from CMC if it
wanted to buy acrylic fiber. CMC would then give the specifications, which Lipton would relay to
MISCO. If the product was available, MISCO would give Lipton the price inclusive of the delivery
charge and terms of payment, which the latter would relay to CMC. The transaction for the

76
purchase of products was documented through an indent order prepared and signed in five
copies: three copies would be given to CMC, while Lipton and MISCO each kept a copy. The
mode of payment was draft against acceptance, prepared by the supplier and sent to the buyer
who in tum would indorse it to the bank. The drafts were paid on its maturity date.6

Issue arose when CMC failed to settle its obligations with MISCO prompting the latter to file a
complaint7 for sum of money on 31 July 1986. MISCO alleged that CMC purchased acrylic fibers
for an aggregate amount of US$1,417,980.89 covered by five drafts co-accepted by CMC and
petitioner Development Bank of the Philippines (DBP). MISCO sought payment for the unpaid
outstanding balance amounting to US$938,267.58 covered by the drafts but no payments were
made.8

In response, CMC admitted the obligation but argued that MISCO, being a foreign
corporation "doing business" without the necessary license, had no capacity to sue in the
Philippines.9 It alleged that MISCO appointed Lipton as its representative in the Philippines,
which appointment was considered as "doing business" under Republic Act No. (RA) 5455.10

Assuming that MISCO can sue, CMC claimed that the manner of payment had been novated
by a revised draft agreement. CMC averred that pursuant to such revised draft agreement, it
£A⩊phi£

made payments in the total amount of US$184,000.00, which MISCO accepted.

Issue:

The CA ruled that Monsanto is not deemed "doing business" in the Philippines as defined
under Sec. 3(d) of RA 7042 or the Foreign Investments Act of 1991. It stated that if the distributor
is an independent entity which buys and distributes products, other than those of the foreign
corporation, for its own name and for its own account, the foreign corporation cannot be
considered to be doing business in the Philippines. Giving credence to the testimony of Lipton's
Vice President, Desiderio F. Torres, the CA held that the subject transactions were made through
a bona fide local indentor.20

It further held that even assuming that MISCO lacked the capacity to sue, the parties were
estopped from raising said ground since CMC admitted its obligation to MISCO subject only to
the defense of novation

In essence, the sole issue for resolution of this Court is whether the CA erred in finding that
MISCO, or its assign Monsanto, a foreign corporation without license to transact business in the
Philippines, has the capacity to sue.

Ruling:

The rule that an unlicensed foreign corporation doing business in the Philippine does not
have the capacity to sue before the local courts is well-established.26 Foreign corporations are
required to obtain a license to do business in the Philippines to be clothed with the capacity to
sue as provided under Sec. 13327 of Batasang Pambansa Big. 6828 or the Corporation Code of
the Philippines (Corporation Code):

77
 SECTION 133. Doing Business Without License. - No foreign corporation
transacting business in the Philippines without a license, or its successors or
assigns, shall be permitted to maintain or intervene in any action, suit or
proceeding in any court or administrative agency of the Philippines; but such
corporation may be sued or proceeded against before Philippine courts or
administrative tribunals on any valid cause of action recognized under Philippine
laws.

The Corporation Code, however, is silent as to the definition of the phrase "doing business."
It has been held that there is no general rule or governing principle as to what constitutes "doing"
or "engaging in" or "transacting" business in the Philippines. As such, each case must be judged
in the light of its peculiar circumstances.

Sec. 1(g) of the IRR of PD 1789 clarifies said definition by providing that "doing business"
includes:

(1) Soliciting orders, purchases (sales) or service contracts. Concrete and specific
solicitations by a foreign firm or by an agent of such foreign firm, not acting
independently of the foreign firm, amounting to negotiations or fixing of the terms and
conditions of sales or service contracts, regardless of where the contracts are actually
reduced to writing, shall constitute doing business even if the enterprise has no office or
fixed place of business in the Philippines. The arrangements agreed upon as to manner, time
and tem1s of delivery of the goods or the transfer of title thereto is immaterial. A foreign firm
which does business through the middlemen acting in their own names, such as
indentors, commercial brokers or commission merchants, shall not be deemed doing
business in the Philippines. But such indentors, commercial brokers or commission merchants
shall be the ones deemed to be doing business in the Philippines.

(2) Appointing a representative or distributor who is domiciled in the Philippines, unless

said representative or distributor has an independent status, i.e., it transacts business in
its name and for its own account, and not in the name or for the account of a
principal. Thus, where a foreign firm is represented in the Philippines by a person or local
company which does not act in its name but in the name of the foreign firm, the latter is doing
business in the Philippines. (Emphases and underscoring supplied.)

The foregoing laws and rules consistently provide that the appointment of representatives
which transact business in its own name and for its own account shall not be deemed as "doing
business." Markedly, the IRR of PD 1789 specifically mentions transactions done through
middlepersons acting in their own names, such as indentors, as excluded from the phrase "doing
business."

Verily, as a foreign corporation without license to do business in the Philippines, the capacity
to sue of MISCO, or its assignee Monsanto, hinges on whether Lipton transacts business in its
own name and for its own account. In order to determine compliance with such requirement, We
need to understand how an indentor operates.

From the language of Section 1(g) of the IRR of PD 1789 and the nature of the business of
an indentor as described in Schmid, it can be concluded that when an indentor brings about a
purchase and sale of goods between a foreign supplier and a local purchaser, as an agent of
both parties, it is in contemplation of law transacting for its own account. Precisely because such
is the business of an indentor as a middleman.

In this case, both the RTC and the CA found that the sale between CMC and MISCO was
made through Lipton acting as an indentor. The records of this case likewise show that Lipton is
a registered domestic corporation whose purpose is, among others, "[t]o engage and carry on a
general brokerage business; to act as agents or brokers in effecting sales of merchandise and

78
other commodities."32 In the pursuit of its business, Lipton represents a number of
manufacturers.

DBP does not deny nor offer controverting evidence against the foregoing. It contends,
however, that Lipton is not transacting business in its own name and account, as its function was
merely to act as go-between to the transactions of CMC and MISCO. It stressed that Lipton had
no authority to agree and enter into agreement for the supply of raw materials for MISCO and
that MISCO acted and transacted in its own behalf. 1âшphi1

The argument must be rejected. To be clear, acting as a "go-between" is exactly the

business of an indentor, and Lipton's lack of authority to enter into an agreement with CMC is
consistent with its role as a middleperson. DBP's assertions do not negate the independence of
Lipton. As discussed above, the IRR of PD 1789 saw it proper to expressly exclude transactions
of foreign corporations done through indentors from the contemplation of the phrase "doing
business.

Saint Wealth Ltd. vs. BIR, G.R. Nos. 252965 & 254102, December 7, 2021

Facts:

In 1983, Presidential Decree No. 1869 (PAGCOR Charter) was enacted, consolidating all
laws relative to the franchise and powers of the Philippine Amusement and Gaming Corporation
(PAGCOR).2 Under Section 10 of the PAGCOR Charter, PAGCOR is granted rights, privileges,
and authority to operate and license gambling casinos, gaming clubs, and other similar
recreation or amusement places within the territorial jurisdiction of the Philippines.3

From 2016, the Philippines began regulating online gaming hubs, specifically the Philippine
Offshore Gaming Operators (POGOs). Thus, on September 1, 2016, the PAGCOR issued the

79
Rules and Regulations for Philippine Offshore Gaming Operations (POGO Rules and
Regulations).4

The POGO Rules and Regulations defines offshore gaming as "the offering by a licensee of
PAGCOR authorized online games of chance via the internet using a network and software or
program, exclusively to offshore authorized players excluding Filipinos abroad, who have
registered and established an online gaming account with the licensee."

The POGO Rules and Regulations further provides that POGOs must register with
PAGCOR. Upon registration, the POGO is given an Offshore Gaming License (OGL). Entities
who may be given an OGL are either: (1) Philippine-based operators; or (2) offshore-based
operators. Philippine-based operators are corporations organized in the Philippines which will
either conduct offshore gaming operations themselves or engage the services of PAGCOR-
accredited service providers. Meanwhile, offshore-based operators are corporations organized in
any foreign country which will engage the services of PAGCOR-accredited local gaming agents
and/or service providers for its offshore gaming operations.7

POGO licensees are likewise required to pay several monthly regulatory fees. Thus, from
these regulatory fees alone, PAGCOR is able to generate billions of pesos in revenues.

On December 27, 2017, the BIR issued RMC No. 102-2017, entitled "Taxation of Taxpayers
Engaged in Philippine Offshore Gaming Operations," which recognized that online activity is
sufficient to constitute doing business in the Philippines, and clarified the taxability of POGOs.
Under RMC No. 102-2017, POGOs may either be classified as Licensees (Philippine-based or
offshore-based) or Other Entities (such as local gaming agents and other service providers).

Thus, under RMC No. 102-2017, Licensees must pay a five percent (5%) franchise tax, in
lieu of all other taxes, for their income arising from their gaming operations. Such franchise tax
is based on their entire gross gaming revenues. Meanwhile, for income arising from non-
gaming operations, Licensees must pay normal income tax, value-added tax (VAT), and other
applicable taxes.8

On the other hand, Other Entities, who must also be registered with PAGCOR, are subject to
five percent (5%) franchise tax for income arising from gaming operations, and normal income
tax, VAT, and other applicable taxes for income arising from non-gaming operations. Other
Entities deriving income solely from non-gaming operations shall be liable to pay normal income
tax, VAT, and other applicable taxes.9

Thereafter, to implement RMC No. 102-2017, the BIR issued RMC No. 78-2018 dated
September 7, 2018, entitled "Registration Requirements of Philippine Offshore Gaming
Operators and Its Accredited Service Providers," which reiterated that online activity is sufficient
to do business in the Philippines and considered POGOs as "Resident Foreign Corporation
Engaged in Business in the Philippines." As such, RMC No. 78-2018, requires all offshore-based
and Philippine-based POGO licensees to register with the BIR.10

The COVID-19 Pandemic

At the start of 2020, the COVID-19 pandemic hit the Philippines, which brought about the
closure of several business establishments and industries. Sometime in mid-2020, the
Philippines began relaxing community quarantine restrictions, and the government started
allowing some industries to operate, including POGOs. Thus, on May 7, 2020, the BIR
issued RMC No. 46-2020, entitled "Guidelines & Requirements for POGO Licensees and Service
Providers in the Application of a BIR Clearance for the Resumption of Operations." Under RMC
No. 46-2020, POGOs must comply with the following conditions and submit the following
documents before they can resume their operations:

80
On August 24, 2020, Saint Wealth Ltd. (Saint Wealth), an offshore-based POGO licensee, filed
a Petition for Certiorari and Prohibition [With Application for a Temporary Restraining Order
and/or Writ of Preliminary Injunction] (the Saint Wealth Petition), assailing the constitutionality
of RMC No. 64-2020, and praying for the issuance of a TRO and/or writ of preliminary injunction
to enjoin the enforcement of the same

Issue:

(1) whether offshore-based POGO licensees are liable to pay a five percent (5%) franchise
tax for income derived from their gaming operations; and (2) whether offshore-based
POGO licensees are liable to pay income tax, VAT, and other applicable taxes for income
derived from their non-gaming operations.

Ruling:
The BIR can only Impose Income Tax Upon Income Derived from the Philippines; VAT can
only be Imposed for Services and Goods Consumed in the Philippines.

Under the POGO Rules and Regulations, POGOs are entities which provide and participate in
offshore gaming services. As stated above, offshore gaming refers to "the offering by a licensee
of PAGCOR authorized online games of chance via the Internet using a network and software or
program, exclusively to offshore authorized players excluding Filipinos abroad, who have
registered and established an online gaming account with the licensee."

these three components do not involve and are not performed within the Philippine territory.
None of these components likewise deals with Filipino citizens. To reiterate, the placing of bets
occurs outside the Philippines; the players must not be Filipino citizens, or within the Philippines;
and the payment of the prize also occurs outside of the Philippines.

Given the above, the only point of contact of an offshore-based POGO licensee to the
Philippines is that it is required, pursuant to its OGL, to engage the services of PAGCOR-
accredited local gaming agents and service providers for its offshore gaming
operations.93 These service providers are separate and distinct entities from the offshore-
based POGO licensees. Simply put, the only transaction entered into by these offshore-based
POGO licensees are the service contracts with these service providers located in the Philippines.

Because of the supposed continuing presence (through transacting with service providers) of
offshore-based POGO licensees in the Philippines, the BIR has categorized offshore-based
POGO licensees as resident foreign corporations. Notably, R.A. No. 11590 likewise classifies
all POGO licensees, including offshore-based POGO licensees as corporations "engaged in
doing business in the Philippines." Nevertheless, the NIRC provides that foreign corporations are
only taxed for income derived in the Philippines:

fact, R.A. No. 11590 likewise categorically provides that offshore-based POGO licensees
are only liable to pay income tax for income derived within the Philippines.

As mentioned by Justice Perlas-Bernabe, Section 42(A)94 of the NIRC provides the

guidelines in determining what income is derived from sources within the Philippines, while
Section 42(C)95 thereof identifies what income is sourced without. In explaining the concept of
"source" vis-à-vis taxation, this Court stated in Manila Gas Corporation v. Collector of Internal
Revenue:96 "[t]he word 'source' conveys only one idea, that of origin, and the origin of the
income was the Philippines." Thus, the test is to determine if the income originated from the
Philippines.97

81
 A reading of Section 42(A) and (C) of the NIRC makes it clear that for income derived from
the sale of services, the focal point is where the actual performance of the service occurs.

Pertinently, apart from the disquisitions found in BOAC and Baier-Nickel, Justice Dimaampao
also observed the necessity to discuss the other jurisprudential tests to ascertain whether a
resident foreign corporation is "doing" or "engaging in" or "transacting" business in the
Philippines, to determine the taxability of POGOs, particularly offshore-based POGO licensees,
within the jurisdiction of the Philippines.103 These jurisprudential tests are as follows:

1. Substance Test;104

2. Contract Test;105

3. Intention Test;106 and

4. Actual Performance Test.107

Substance Test – the true test in determining whether a foreign corporation is transacting
business "seems to be whether [it] is continuing the body or substance of the business or
enterprise for which it was organized or whether it has substantially retired from it and turned it
over to another."108 As noted by Justice Dimaampao, the Substance Test implies a continuity
of commercial dealings and arrangements, and contemplates, to the extent, the performance
of acts or works or the exercise of some of the functions normally incident to, and in progressive
prosecution of, the purpose of its organization.109

Contract Test – transactions entered into by a foreign corporation which constitute

an isolated transaction and are not a series of commercial dealings which signify an intent on
the part of such corporation to do business in the Philippines, does not fall under the category of
"doing business." Thus, as stressed by Justice Dimaampao, isolated transactions by a foreign
corporation do not constitute engaging in business in the Philippines.110

Intention Test – what is determinative of "doing business" is not really the number or the
quantity of the transactions, but the intention of the entity to continue the body of its business in
the country. The number and quantity are merely evidence of such intention. The
phrase "isolated transaction" has a definite and fixed meaning, i.e., a transaction or series of
transactions set apart from the common business of a foreign enterprise in the sense that no
intention to engage in a progressive pursuit of the purpose and object of the business
organization. As such, Justice Dimaampao noted in his Reflections that under the Intention
Test, the question of whether a foreign corporation is "doing business" does not necessarily
depend upon the frequency of its transactions, but more upon the nature and character of the
transactions.

Actual Performance Test – an essential condition to be considered as "doing business" in

the Philippines is the actual performance of specific commercial acts within the territory of
the Philippines, because, as aptly pointed out by Justice Dimaampao in his Reflections, the
Philippines has no jurisdiction over commercial acts performed in foreign territories.

Applying these jurisprudential tests, as well as the discussion of what constitutes doing
business under Section 3(d) of the Foreign Investments Act of 1991 (FIA),111 it is abundantly
clear that the POGOs, particularly offshore-based POGO licensees, are not doing, engaging in,
nor transacting business in the Philippines. As emphasized by Justice Dimaampao: first, the
activities of offshore-based POGO licensees do not fall under Section 3(d) of the
FIA; second, offshore-based POGO licensees only have a limited presence in the Philippines;
and third, the transactions of offshore-based POGO licensees not performed in the Philippines
are beyond our jurisdiction.112

82
 In view of all the foregoing, and to answer the query above, it is apparent that POGOs,
particularly offshore-based POGO licensees, do not enjoy any protection from the State. To be
clear, the very nature of their operations and the limited presence of offshore-based POGO
licensees in the Philippines negate the concept of "doing business" in the Philippines; and
therefore, POGOs, particularly offshore-based POGO licensees cannot be taxed here.

Relevantly, while the application of the aforementioned jurisprudential tests, including the
rulings in BOAC and Baier-Nickel, and the provisions of the FIA, lead to the inescapable
conclusion that POGOs, particularly offshore-based POGO licensees, cannot be subjected to tax
in the Philippine jurisdiction, it must be borne in mind that the foregoing were promulgated and
enacted during a time when businesses require physical presence within a State to provide
certain services. As observed by both Justice Perlas-Bernabe and Justice Dimaampao, with the
proliferation of digital and online commerce, it becomes more complicated and less
straightforward to determine where the activity which produces income occurs, as when the
transaction is conducted over the internet.

Llorente vs. Star City Pty Limited, G.R. Nos. 212050 & 212216, January 15, 2020

Facts:

x x x [SCPL] is an Australian corporation which operates the Star City Casino in Sydney,
New South Wales, Australia. Claiming that it is not doing business in the Philippines and
is suing for an isolated transaction, it filed on 25 November 2002 through its attorney-in-
fact, Jimeno Jalandoni and Cope Law Offices, a complaint for collection of sum of money
with prayer for preliminary attachment against x x x Llorente, who was a patron of its Star

83
City casino and Equitable PCI Bank (EPCIB, for brevity). This case was docketed as Civil
Case No. 02-1423 and raffled to Branch 134 of the Regional Trial Court (RTC) in the City of
Makati.

[SCPL] alleged that Llorente is one of the numerous patrons of its casino in Sydney,
Australia. As such, he maintained therein Patron Account Number 471741. On 12 July
2000, he negotiated two (2) Equitable PCI bank drafts with check numbers 034967 and
034968 worth US $150,000.00 each or for the total amount of US $300,000.00 ("subject
[demand/bank]6 drafts" [or simply "subject drafts"]) in order to play in the Premium
Programme of the casino. This Premium Programme offers the patron a 1% commission
rebate on his turnover at the gambling table and a .10% rebate for complimentary
expenses. Before upgrading x x x Llorente to this programme, [SCPL] contacted first
EPCIB to check the status of the subject drafts. The latter confirmed that the same were
issued on clear funds without any stop payment orders. Thus, Llorente was allowed to
buy in on a Premium Programme and his front money account in the casino was credited
with US $300,000.00.

On 18 July 2000, [SCPL] deposited the subject drafts with Thomas Cook Ltd. On 1 August
2000, it received the advice of Bank of New York about the "Stop Payment Order"
prompting it to make several demands, the final being on 22 August 2002, upon Llorente
to make good his obligation. However, the latter refused to pay. It likewise asked EPCIB
on 30 August 2002 for a settlement which the latter denied on the ground that it was
Llorente who requested the Stop Payment Order and no notice of dishonor was given.

Ruling:
For his part, Llorente alleged that he caused the stoppage of the subject drafts' payment
because (SCPL's] personnel and representatives committed fraud and unfair gaming
practices during his stay in the casino on 12 July up to 17 July 2000. He also countered
that the case should be dismissed on the ground that [SCPL] lacks the legal capacity to
sue since the "isolated tr1nsaction rule" for which it anchored its right to bring action in
our courts presupposes that the transaction subject matter of the complaint must have
occurred in the Philippines, which however, is not the situation at bar since it is clear from
the narration that the same occurred in Australia.

Issue:

whether the CA erred in finding that SCPL has legal capacity to sue under the
isolated transaction rule.

Ruling:

On the capacity of a foreign corporation to sue before Philippine courts, the

applicable law is clear.

Under Republic Act No. (RA) 11232 36 or the Revised Corporation Code of the
Philippines (Revised Corporation Code), which became effective on February 23,
2019,37 the pertinent provision is Section 150, which states:

84
SEC. 150. Doing Business Without a License. - No foreign corporation transacting
business in the Philippines without a license, or its successors or assigns, shall be
permitted to maintain or intervene in any action, suit or proceeding in any court or
administrative agency of the Philippines; but such corporation may be sued or
proceeded against before Philippine courts or administrative tribunals on any valid
cause of action recognized under Philippine laws.

Section 150 of the Revised Corporation Code is a verbatim reproduction of Section

133 of Batas Pambansa Blg. (BP) 68 or the Corporation Code of the Philippines
(Corporation Code), which provided:

Sec. 133. Doing business without a license. - No foreign corporation transacting

business in the Philippines without a license, or its successors or assigns, shall be
permitted to maintain or intervene in any action, suit or proceeding in any court or
administrative agency of the Philippines; but such corporation may be sued or
proceeded against before Philippine courts or administrative tribunals on any valid
cause of action recognized under Philippine laws. (69a)

It must be noted that the Revised Corporation Code repealed the Corporation Code
and any law, presidential decree or issuance, executive order, letter of instruction,
administrative order, rule or regulation contrary or inconsistent with any provision of
the Revised Corporation Code is modified or repealed accordingly. 38

While the law (presently the Revised Corporation Code or its predecessor, the
Corporation Code) grants to foreign corporations with Philippine license the right to
sue in the Philippines, the Court, however, in a long line of cases under the regime
of the Corporation Code has held that a foreign corporation not engaged in business
in the Philippines may not be denied the right to file an action in the Philippine
courts for an isolated transaction.39 The issue on whether a foreign corporation which
does not have license to engage in business in the Philippines can seek redress in
Philippine courts depends on whether it is doing business or it merely entered into
an isolated transaction.40 A foreign corporation that is not doing business in the
Philippines must disclose such fact if it desires to sue in Philippine courts under the
"isolated transaction rule" because without such disclosure, the court may choose to
deny it the right to sue.41

The right and capacity to sue, being, to a great extent, matters of pleading and
procedure, depend upon the sufficiency of the allegations in the complaint. Thus, as
to a foreign corporation, the qualifying circumstance that if it is doing business in the
Philippines, it is duly licensed or if it is not, it is suing upon a singular and isolated
transaction, is an essential part of the element of the plaintiffs capacity to sue and
must be affirmatively pleaded.42

These pronouncements equally obtain under the Revised Corporation Code given the
reproduction of the exact wording of Section 133, Corporation Code in Section 150
of the Revised Corporation Code.

Based on the parameters discussed above, the CA has correctly ruled that SCPL has
personality to sue before Philippine courts under the isolated transaction rule, to wit:

x x x [A] foreign corporation needs no license to sue before Philippine courts on an

isolated transaction.43 However, to say merely that a foreign corporation not doing
business in the Philippines does not need a license in order to sue in our courts does

85
not completely resolve the issue. When the allegations in the complaint have a
bearing on the plaintiff�s capacity to sue and merely state that the plaintiff is a
foreign corporation existing under the laws of a country, such averment conjures
two alternative possibilities: either the corporation is engaged in business in the
Philippines, or it is not so engaged. In the first, the corporation must have been duly
licensed in order to maintain the suit; in the second, and the transaction sued upon
is singular and isolated, no such license is required. In either case, compliance with
the requirement of license, or the fact that the suing corporation is exempt
therefrom, as the case may be, cannot be inferred from the mere fact that the party
suing is a foreign corporation. The qualifying circumstance being an essential part of
the plaintiff�s capacity to sue must be affirmatively pleaded. Hence, the ultimate
fact that a foreign corporation is not doing business in the Philippines must first be
disclosed for it to be allowed to sue in Philippine courts under the isolated
transaction rule. Failing in his requirement, the complaint filed by plaintiff with the
trial court, it must be said, fails to show its legal capacity to sue. 44 x x x

In the case at bar, [SCPL] alleged in its complaint that "it is a foreign corporation
which operates its business at the Star City Casino in Sydney, New South Wales,
Australia; that it is not doing business in the Philippines; and that it is suing upon a
singular and isolated transaction". It also appointed Jimeno, Jalandoni and Cope Law
Offices as its attorney-in-fact. Following the pronouncement mentioned above and
having pleaded these averments in the complaint sufficiently clothed [SCPL] the
necessary legal capacity to sue before Philippine courts.

Bustos vs. Millians Shoe, Inc., G.R. No. 185024, April 24, 2017

Facts:

Spouses Fernando and Amelia Cruz owned a 464-square-meter lot covered by Transfer
Certificate of Title (TCT) No. N-126668. On 6 January 2004, the City Government of Marikina
4

levied the prope1iy for nonpayment of real estate taxes. The Notice of Levy was annotated on
the title on 8 January 2004. On 14 October 2004, the City Treasurer of Marikina auctioned off the
property, with petitioner Joselito Hernand M. Bustos emerging 'as the winning bidder.

86
Petitioner then applied for the cancellation of TCT No. N-126668. On 13 July 2006, the Regional
Trial Court, Marikina City, Branch 273, rendered a final and executory Decision ordering the
cancellation of the previous title and the issuance of a new one under the name of petitioner. 5

Meanwhile, notices of lis pendens were annotated on TCT No. N-126668 on 9 February
2005. These markings indicated that SEC Corp. Case No. 036-04, which was filed before the
6

RTC and involved the rehabilitation proceedings for MSI, covered the subject property and
included it in the Stay Order issued by the RTC dated 25 October 2004. 7

On 26 September 2006, petitioner moved for the exclusion of the subject property from the Stay
Order.8 He claimed that the lot belonged to Spouses Cruz who were mere stockholders and
officers of MSL He further argued that since he had won the bidding of the property on 14
October 2004, or before the annotation of the title on 9 February 2005, the auctioned property
could no longer be part of the Stay Order.

The RTC denied the entreaty of petitioner. It ruled that because the period of redemption up to
15 October 2005 had not yet lapsed at the time of the issuance of the Stay Order on 25 October
2004, the ownership thereof had not yet been transferred to petitioner. 9

Petitioner moved for reconsideration, but to no avail. He then filed an action

10 11

for certiorari before the CA. He asserted that the Stay Order undermined the taxing powers of the
local government unit. He also reiterated his arguments that Spouses Cruz owned the property,
and that the lot had already been auctioned to him.

In the assailed Decision dated 12 June 2008, the CA brushed aside the claim that the
suspension orders undermined the power to tax.

Issue:

whether the CA correctly considered the properties of Spouses Cruz answerable for the
obligations of MSI.

Ruling:

We set aside rulings of the CA for lack of basis.

In finding the subject property answerable for the obligations of MSI, the CA characterized
respondent spouses as stockholders of a close corporation who, as such, are liable for its debts.
This conclusion is baseless.

To be considered a close corporation, an entity must abide by the requirements laid out in
Section 96 of the Corporation Code, which reads:

Sec. 96. Definition and applicability of Title. - A close corporation, within the meaning of this
Code, is one whose articles of incorporation provide that: (1) All the corporation's issued stock
of all classes, exclusive of treasury shares, shall be held of record by not more than a specified
number of persons, not exceeding twenty (20); (2) all the issued stock of all classes shall be
subject to one or more specified restrictions on transfer permitted by this Title; and (3) The
corporation shall not list in any stock exchange or make any public offering of any of its stock of
any class. Notwithstanding the foregoing, a corporation shall not be deemed a close corporation
when at least two-thirds (2/3) of its voting stock or voting rights is owned or controlled by another

87
corporation which is not a close corporation within the meaning of this Code.x x x. (Emphasis
supplied)

In San Juan Structural and Steel Fabricators. Inc. v. Court ol Appeals, this Court held that a
14

narrow distribution of ownership does not, by itself, make a close corporation. Courts must look
into the articles of incorporation to find provisions expressly stating that (l) the number of
stockholders shall not exceed 20; or (2) a preemption of shares is restricted in favor of any
stockholder or of the corporation; or (3) the listing of the corporate stocks in any stock exchange
or making a public offering of those stocks is prohibited.

Here, neither the CA nor the R TC showed its basis for finding that MSI is a close corporation.
The courts a quo did not at all refer to the Articles of Incorporation of MSI. The Petition submitted
by respondent in the rehabilitation proceedings before the RTC did not even include those
Articles of Incorporation among its attachments. 15

In effect, the CA and the RTC deemed MSI a close corporation based on the allegation of
Spouses Cruz that it was so. However, mere allegation is not evidence and is not equivalent to
proof. For this reason alone, the CA rulings should be set aside.
16

Furthermore, we find that the CA seriously erred in portraying the import of Section 97 of the
Corporation Code. Citing that provision, the CA concluded that "in a close corporation, the
stockholders and/or officers usually manage the business of the corporation and are subject to all
liabilities of directors, i.e. personally liable for corporate debts and obligations."
17

However, Section 97 of the Corporation Code only specifies that "the stockholders of the
corporation shall be subject to all liabilities of directors." Nowhere in that provision do we find any
inference that stockholders of a close corporation are automatically liable for corporate debts and
obligations.

Parenthetically, only Section 100, paragraph 5, of the Corporation Code explicitly provides for
personal liability of stockholders of close corporation, viz:

As can be read in that provision, several requisites must be present for its applicability. None of
these were alleged in the case of Spouses Cruz. Neither did the RTC or the CA explain the
factual circumstances for this Court to discuss the personally liability of respondents to their
creditors because of corporate torts." 18

We thus apply the general doctrine of separate juridical personality, which provides that a
corporation has a legal personality separate and distinct from that of people comprising it. By19

virtue of that doctrine, stockholders of a corporation enjoy the principle of limited liability: the
corporate debt is not the debt of the stockholder. Thus, being an officer or a stockholder of a
20

corporation does not make one's property the property also of the corporation.

Oscar Reyes vs. Hon. Regional Trial Court of Makati, G.R. No. 165744, August 11, 2008

Facts:

Oscar and private respondent Rodrigo C. Reyes (Rodrigo) are two of the four children of the spouses
Pedro and Anastacia Reyes. Pedro, Anastacia, Oscar, and Rodrigo each owned shares of stock of
Zenith Insurance Corporation (Zenith), a domestic corporation established by their family. Pedro died

88
in 1964, while Anastacia died in 1993. Although Pedro’s estate was judicially partitioned among his
heirs sometime in the 1970s, no similar settlement and partition appear to have been made with
Anastacia’s estate, which included her shareholdings in Zenith. As of June 30, 1990, Anastacia
owned 136,598 shares of Zenith; Oscar and Rodrigo owned 8,715,637 and 4,250 shares,
respectively.3

On May 9, 2000, Zenith and Rodrigo filed a complaint4 with the Securities and Exchange Commission
(SEC) against Oscar, docketed as SEC Case No. 05-00-6615. The complaint stated that it is "a
derivative suit initiated and filed by the complainant Rodrigo C. Reyes to obtain an accounting of
the funds and assets of ZENITH INSURANCE CORPORATION which are now or formerly in the
control, custody, and/or possession of respondent [herein petitioner Oscar] and to determine the
shares of stock of deceased spouses Pedro and Anastacia Reyes that were arbitrarily and
fraudulently appropriated [by Oscar] for himself [and] which were not collated and taken into account
in the partition, distribution, and/or settlement of the estate of the deceased spouses, for which he
should be ordered to account for all the income from the time he took these shares of stock, and
should now deliver to his brothers and sisters their just and respective shares."5 [Emphasis supplied.]

In his Answer with Counterclaim,6 Oscar denied the charge that he illegally acquired the shares of
Anastacia Reyes. He asserted, as a defense, that he purchased the subject shares with his own funds
from the unissued stocks of Zenith, and that the suit is not a bona fide derivative suit because the
requisites therefor have not been complied with. He thus questioned the SEC’s jurisdiction to entertain
the complaint because it pertains to the settlement of the estate of Anastacia Reyes.

On October 22, 2002, Oscar filed a Motion to Declare Complaint as Nuisance or Harassment
Suit.9 He claimed that the complaint is a mere nuisance or harassment suit and should, according to
the Interim Rules of Procedure for Intra-Corporate Controversies, be dismissed; and that it is not
a bona fide derivative suit as it partakes of the nature of a petition for the settlement of estate of the
deceased Anastacia that is outside the jurisdiction of a special commercial court.

Issue:

The core question for our determination is whether the trial court, sitting as a special commercial
court, has jurisdiction over the subject matter of Rodrigo’s complaint.

Ruling:

Intra-Corporate Controversy

A review of relevant jurisprudence shows a development in the Court’s approach in classifying what
constitutes an intra-corporate controversy. Initially, the main consideration in determining whether a
dispute constitutes an intra-corporate controversy was limited to a consideration of the intra-corporate
relationship existing between or among the parties.19 The types of relationships embraced under
Section 5(b), as declared in the case of Union Glass & Container Corp. v. SEC,20 were as follows:

a) between the corporation, partnership, or association and the public;

b) between the corporation, partnership, or association and its stockholders, partners,

members, or officers;

c) between the corporation, partnership, or association and the State as far as its franchise,
permit or license to operate is concerned; and

d) among the stockholders, partners, or associates themselves. [Emphasis supplied.]

89
The existence of any of the above intra-corporate relations was sufficient to confer jurisdiction to the
SEC, regardless of the subject matter of the dispute. This came to be known as the relationship test.

However, in the 1984 case of DMRC Enterprises v. Esta del Sol Mountain Reserve, Inc.,21 the Court
introduced the nature of the controversy test. We declared in this case that it is not the mere
existence of an intra-corporate relationship that gives rise to an intra-corporate controversy; to rely on
the relationship test alone will divest the regular courts of their jurisdiction for the sole reason that the
dispute involves a corporation, its directors, officers, or stockholders. We saw that there is no legal
sense in disregarding or minimizing the value of the nature of the transactions which gives rise to the
dispute.

Under the nature of the controversy test, the incidents of that relationship must also be considered for
the purpose of ascertaining whether the controversy itself is intra-corporate.22 The controversy must
not only be rooted in the existence of an intra-corporate relationship, but must as well pertain to the
enforcement of the parties’ correlative rights and obligations under the Corporation Code and the
internal and intra-corporate regulatory rules of the corporation. If the relationship and its incidents are
merely incidental to the controversy or if there will still be conflict even if the relationship does not
exist, then no intra-corporate controversy exists.

The Court then combined the two tests and declared that jurisdiction should be determined by
considering not only the status or relationship of the parties, but also the nature of the question under
controversy.23 This two-tier test was adopted in the recent case of Speed Distribution, Inc. v. Court of
Appeals:24

To determine whether a case involves an intra-corporate controversy, and is to be heard and

decided by the branches of the RTC specifically designated by the Court to try and decide
such cases, two elements must concur: (a) the status or relationship of the parties; and (2)
the nature of the question that is the subject of their controversy.

The first element requires that the controversy must arise out of intra-corporate or partnership
relations between any or all of the parties and the corporation, partnership, or association of
which they are stockholders, members or associates; between any or all of them and the
corporation, partnership, or association of which they are stockholders, members, or
associates, respectively; and between such corporation, partnership, or association and the
State insofar as it concerns their individual franchises. The second element requires that the
dispute among the parties be intrinsically connected with the regulation of the corporation. If
the nature of the controversy involves matters that are purely civil in character, necessarily,
the case does not involve an intra-corporate controversy.

Given these standards, we now tackle the question posed for our determination under the specific
circumstances of this case:

Application of the Relationship Test

Is there an intra-corporate relationship between the parties that would characterize the case as an
intra-corporate dispute?

We point out at the outset that while Rodrigo holds shares of stock in Zenith, he holds them in two
capacities: in his own right with respect to the 4,250 shares registered in his name, and as one of the
heirs of Anastacia Reyes with respect to the 136,598 shares registered in her name. What is material
in resolving the issues of this case under the allegations of the complaint is Rodrigo’s interest as an
heir since the subject matter of the present controversy centers on the shares of stocks belonging to
Anastacia, not on Rodrigo’s personally-owned shares nor on his personality as shareholder owning
these shares. In this light, all reference to shares of stocks in this case shall pertain to the
shareholdings of the deceased Anastacia and the parties’ interest therein as her heirs.

Article 777 of the Civil Code declares that the successional rights are transmitted from the moment of
death of the decedent. Accordingly, upon Anastacia’s death, her children acquired legal title to her

90
estate (which title includes her shareholdings in Zenith), and they are, prior to the estate’s partition,
deemed co-owners thereof.25 This status as co-owners, however, does not immediately and
necessarily make them stockholders of the corporation. Unless and until there is compliance with
Section 63 of the Corporation Code on the manner of transferring shares, the heirs do not become
registered stockholders of the corporation. Section 63 provides:

Section 63. Certificate of stock and transfer of shares. – The capital stock of stock
corporations shall be divided into shares for which certificates signed by the president or vice-
president, countersigned by the secretary or assistant secretary, and sealed with the seal of
the corporation shall be issued in accordance with the by-laws. Shares of stock so issued are
personal property and may be transferred by delivery of the certificate or certificates indorsed
by the owner or his attorney-in-fact or other person legally authorized to make the
transfer. No transfer, however, shall be valid, except as between the parties, until the
transfer is recorded in the books of the corporation so as to show the names of the
parties to the transaction, the date of the transfer, the number of the certificate or
certificates, and the number of shares transferred. [Emphasis supplied.]

No shares of stock against which the corporation holds any unpaid claim shall be transferable
in the books of the corporation.

Simply stated, the transfer of title by means of succession, though effective and valid between the
parties involved (i.e., between the decedent’s estate and her heirs), does not bind the corporation and
third parties. The transfer must be registered in the books of the corporation to make the transferee-
heir a stockholder entitled to recognition as such both by the corporation and by third parties.26

We note, in relation with the above statement, that in Abejo v. Dela Cruz27 and TCL Sales Corporation
v. Court of Appeals28 we did not require the registration of the transfer before considering the
transferee a stockholder of the corporation (in effect upholding the existence of an intra-corporate
relation between the parties and bringing the case within the jurisdiction of the SEC as an intra-
corporate controversy). A marked difference, however, exists between these cases and the present
one.

Rodrigo must, therefore, hurdle two obstacles before he can be considered a stockholder of Zenith
with respect to the shareholdings originally belonging to Anastacia. First, he must prove that there are
shareholdings that will be left to him and his co-heirs, and this can be determined only in a settlement
of the decedent’s estate. No such proceeding has been commenced to date. Second, he must
register the transfer of the shares allotted to him to make it binding against the corporation. He cannot
demand that this be done unless and until he has established his specific allotment (and prima
facie ownership) of the shares. Without the settlement of Anastacia’s estate, there can be no definite
partition and distribution of the estate to the heirs. Without the partition and distribution, there can be
no registration of the transfer. And without the registration, we cannot consider the transferee-heir a
stockholder who may invoke the existence of an intra-corporate relationship as premise for an intra-
corporate controversy within the jurisdiction of a special commercial court.

In sum, we find that – insofar as the subject shares of stock (i.e., Anastacia’s shares) are concerned –
Rodrigo cannot be considered a stockholder of Zenith. Consequently, we cannot declare that an intra-
corporate relationship exists that would serve as basis to bring this case within the special commercial
court’s jurisdiction under Section 5(b) of PD 902-A, as amended. Rodrigo’s complaint, therefore, fails
the relationship test.

Application of the Nature of Controversy Test

The body rather than the title of the complaint determines the nature of an action.31 Our examination
of the complaint yields the conclusion that, more than anything else, the complaint is about the
protection and enforcement of successional rights. The controversy it presents is purely civil rather
than corporate, although it is denominated as a "complaint for accounting of all corporate funds and
assets."

91
Contrary to the findings of both the trial and appellate courts, we read only one cause of action
alleged in the complaint. The "derivative suit for accounting of the funds and assets of the corporation
which are in the control, custody, and/or possession of the respondent [herein petitioner Oscar]" does
not constitute a separate cause of action but is, as correctly claimed by Oscar, only an incident to the
"action for determination of the shares of stock of deceased spouses Pedro and Anastacia Reyes
allegedly taken by respondent, its accounting and the corresponding delivery of these shares to the
parties’ brothers and sisters." There can be no mistake of the relationship between the "accounting"
mentioned in the complaint and the objective of partition and distribution when Rodrigo claimed in
paragraph 10.1 of the complaint that:

10.1 By refusal of the respondent to account of [sic] his shareholdings in the company, he
illegally and fraudulently transferred solely in his name wherein [sic] the shares of stock of the
deceased Anastacia C. Reyes [which] must be properly collated and/or distributed equally
amongst the children including the complainant Rodrigo C. Reyes herein to their damage and
prejudice.

We particularly note that the complaint contained no sufficient allegation that justified the need for an
accounting other than to determine the extent of Anastacia’s shareholdings for purposes of
distribution.

Another significant indicator that points us to the real nature of the complaint are Rodrigo’s repeated
claims of illegal and fraudulent transfers of Anastacia’s shares by Oscar to the prejudice of the other
heirs of the decedent; he cited these allegedly fraudulent acts as basis for his demand for the collation
and distribution of Anastacia’s shares to the heirs. These claims tell us unequivocally that the present
controversy arose from the parties’ relationship as heirs of Anastacia and not as shareholders of
Zenith. Rodrigo, in filing the complaint, is enforcing his rights as a co-heir and not as a stockholder of
Zenith. The injury he seeks to remedy is one suffered by an heir (for the impairment of his
successional rights) and not by the corporation nor by Rodrigo as a shareholder on record.

More than the matters of injury and redress, what Rodrigo clearly aims to accomplish through his
allegations of illegal acquisition by Oscar is the distribution of Anastacia’s shareholdings without a
prior settlement of her estate – an objective that, by law and established jurisprudence, cannot be
done. The RTC of Makati, acting as a special commercial court, has no jurisdiction to settle, partition,
and distribute the estate of a deceased.

That an accounting of the funds and assets of Zenith to determine the extent and value of Anastacia’s
shareholdings will be undertaken by a probate court and not by a special commercial court is
completely consistent with the probate court’s limited jurisdiction. It has the power to enforce an
accounting as a necessary means to its authority to determine the properties included in the inventory
of the estate to be administered, divided up, and distributed. Beyond this, the determination of title or
ownership over the subject shares (whether belonging to Anastacia or Oscar) may be conclusively
settled by the probate court as a question of collation or advancement.

1) In sum, we hold that the nature of the present controversy is not one which may be classified
as an intra-corporate dispute and is beyond the jurisdiction of the special commercial court to
resolve. In short, Rodrigo’s complaint also fails the nature of the controversy test.

Belo Medical Group, Inc. vs. Jose Santos, et. al., G.R. No. 185894. August 30, 2017

Facts:

92
 [5]
The controversy began on May 5, 2008 when Belo Medical Group received a request from
[6]
Santos for the inspection of corporate records. Santos claimed that he was a registered
shareholder and a co-owner of Belo's shares, as these were acquired while they cohabited
[7]
as husband and wife. Santos sought advice on his probable removal as director of the
corporation considering that he was not notified of meetings where he could have been
removed. He also inquired on the election of Alfredo Henares (Henares) as Corporate
Secretary in 2007 when Santos had not been notified of a meeting for Henares' possible
election. Finally, he sought explanation on the corporation's failure to inform him of the
[8]
2007 annual meeting and the holding of an annual meeting in 2008. Santos' concern over
the corporate operations arose from the alleged death of a patient in one (1) of its clinics.
[9]

Santos was unsuccessful in inspecting the corporate books as Henares, the officer-in-
charge of corporate records, was travelling. Belo Medical Group asked for time in order for
[10]
Henares to accommodate Santos' request.

After the first attempt to inspect, Belo wrote Belo Medical Group on May 14, 2007 to
repudiate Santos' co-ownership of her shares and his interest in the corporation. She
claimed that Santos held the 25 shares in his name merely in trust for her, as she, and not
Santos, paid for these shares. She informed Belo Medical Group that Santos already had a
pending petition with the Regional Trial Court to be declared as co-owner of her properties.
She asserted that unless a decision was rendered in Santos' favor, he could not exercise
[11]
ownership rights over her properties.

Belo also informed Belo Medical Group that Santos had a business in direct competition
with it. She suspected that Santos' request to inspect the records of Belo Medical Group
was a means to obtain a competitor's business information, and was, therefore, in bad
[12]
faith.

A second inspection was attempted through a written demand by Santos on May 15, 2008.
[13]
Again, he was unsuccessful.

Belo wrote to Belo Medical Group on May 20, 2008 to reiterate her objections to Santos'
attempts at inspecting corporate books and his inquiry regarding a patient. Belo further
manifested that she was exercising her right as a shareholder to inspect the books herself
to establish that the 25 shares were not owned by Santos, and that he did not pay for these
[14]
shares.

[15]
Thus, Belo Medical Group filed a Complaint for Interpleader with Branch 149, Regional
Trial Court, Makati City on May 21, 2008. Belo Medical Group alleged that while Santos
appeared to be a registered stockholder, there was nothing on the record to show that he
had paid for the shares under his name. The Complaint was filed "to protect its interest and
compel [Belo and Santos] to interplead and litigate their conflicting claims of ownership of,
as well as the corresponding right of inspection arising from, the twenty-five (25) [Belo
Medical Group] shares between themselves

Santos, for the third time, sent a letter on May 22, 2008 to schedule an inspection of the
corporate books and warned that continued rejection of his request exposed the
[20]
corporation to criminal liability. Nothing came out of this last attempt as well.

93
Bela and Bela Medical Group wrote to Santos on May 27, 2008 to inform him that he was
barred from accessing corporate records because doing so would be inimical to Belo
[21]
Medical Group's interests. Through another letter on May 28, 2008, Santos was
reminded of his majority share in The Obagi Skin Health, Inc. the owner and operator of the
House of Obagi (House of Obagi) clinics. He was likewise reminded of the service of a
notice of the 2007 special meeting of stockholders to his address at Valero Street, Makati
[22]
City, contrary to his claim.

[23]
On May 29, 2008, Belo Medical Group filed a Supplemental Complaint for declaratory
relief under Rule 63 of the Rules of Court. In its Supplemental Complaint, Belo Medical
[24]
Group relied on Section 74 of the Corporation Code to deny Santos' request for
inspection. It prayed that Santos be perpetually barred from inspecting its books due to his
[25]
business interest in a competitor. Should the ruling for interpleader be in favor of
Santos, Belo Medical Group prayed that the trial court:

Belo filed her Answer Ad Cautelam with Cross-Claim to put on record her defenses that
Santos had no right to inspect the books as he was not the owner of the 25 shares of stock
in his name and that he was acting in bad faith because he was a majority owner of House
[29]
of Obagi.

Belo further argued that the proceedings should not have been classified as intra-corporate
because while their right of inspection as shareholders may be considered intra-corporate,
"it ceases to be that and becomes a full-blown civil law question if competing rights of
ownership are asserted as the basis for the right of inspection."

On July 4, 2008, Belo Medical Group filed an Omnibus Motion for Clarificatory Hearing and
[34]
for Leave to File Consolidated Reply, praying that the case be tried as a civil case and
not as an intra-corporate controversy. It argued that the Interim Rules of Procedure
[35]
Governing Intra-Corporate Controversies did not include special civil actions for
interpleader and declaratory relief found under the Rules of Court. Belo Medical Group
clarified that the issue on ownership of the shares of stock must first be resolved before
the issue on inspection could even be considered ripe for determination.

Issue:

Second, whether or not the present controversy is intra-corporate

Ruling:

Belo Medical Group filed a case for interpleader, the proceedings of which are covered by
the Rules of Court. At its core, however, it is an intra-corporate controversy.

A.M. No. 01-2-04-SC, or the Interim Rules of Procedure Governing Intra-Corporate

94
Controversies, enumerates the cases where the rules will apply:

Section 1. (a) Cases Covered - These Rules shall govern the procedure to be observed in
civil cases involving the following:

1. Devices or schemes employed by, or any act of, the board of directors, business
associates, officers or partners, amounting to fraud or misrepresentation which
may be detrimental to the interest of the public and/or of the stockholders,
partners, or members of any corporation, partnership, or association;

2. Controversies arising out of intra-corporate, partnership, or association

relations, between and among stockholders, members, or associates; and
between, any or all of them and the corporation, partnership, or association of
which they are stockholders, members, or associates, respectively;

3. Controversies in the election or appointment of directors, trustees, officers, or

managers of corporations, partnerships, or associations;

4. Derivative suits; and

5. Inspection of corporate books.[87]

The same rules prohibit the filing of a motion to dismiss:

Section 8. Prohibited Pleadings. -The following pleadings are prohibited: (1) Motion to
dismiss;

(2) Motion for a bill of particulars;

(3) Motion for new trial or for reconsideration of judgment or order, or for re opening of trial;

(4) Motion for extension of time to file pleadings, affidavits or any other paper, except
those filed due to clearly compelling reasons. Such motion must be verified and under
oath; and

(5) Motion for postponement and other motions of similar intent, except those filed due to
clearly compelling reasons. Such motion must be verified and under oath.

To determine whether an intra-corporate dispute exists and whether this case requires the
application of these rules of procedure, this Court evaluated the relationship of the parties.
The types of intra-corporate relationships were reviewed in Union Glass & Container
[88]
Corporation v. Securities and Exchange Commission:

[a] between the corporation, partnership or association and the public; [b] between the
corporation, partnership or association and its stockholders, partners, members, or
officers; [c] between the corporation, partnership or association and the state in so far as
its franchise, permit or license to operate is concerned; and [d] among the stockholders,
partners or associates themselves.[89]

For as long as any of these intra-corporate relationships exist between the parties, the
[90]
controversy would be characterized as intra-corporate. This is known as the
"relationship test."

95
 [91]
DMRC Enterprises v. Este del Sol Mountain Reserve, Inc. employed what would later be
called as the "nature of controversy test." It became another means to determine if the
dispute should be considered as intra-corporate.

In DMRC Enterprises, Este del Sol leased equipment from DMRC Enterprises. Part of Este
del Sol's payment was shares of stock in the company. When Este del Sol defaulted, DMRC
Enterprises filed a collection case before the Regional Trial Court. Este del Sol argued that
it should have been filed before the Securities and Exchange Commission as it involved an
intra-corporate dispute where a corporation was being compelled to issue its shares of
stock to subscribers. This Court held that it was not just the relationship of the parties that
mattered but also the conflict between them:

The purpose and the wording of the law escapes the respondent. Nowhere in said decree
do we find even so much as an intimidation that absolute jurisdiction and control is vested
in the Securities and Exchange Commission in all matters affecting corporations. To
uphold the respondent's argument would remove without legal imprimatur from the regular
courts all conflicts over matters involving or affecting corporations, regardless of the
nature of the transactions which give rise to such disputes. The courts would then be
divested of jurisdiction not by reason of the nature of the dispute submitted to them for
adjudication, but solely for the reason that the dispute involves a corporation. This cannot
be done. To do so would not only be to encroach on the legislative prerogative to grant and
revoke jurisdiction of the courts but such a sweeping interpretation may suffer
constitutional infirmity. Neither can we reduce jurisdiction of the courts by judicial fiat
(Article X, Section 1, The Constitution).[92]

This Court now uses both the relationship test and the nature of the controversy test to
[93]
determine if an intra-corporate controversy is present.

Applying the relationship test, this Court notes that both Belo and Santos are named
[94]
shareholders in Belo Medical Group's Articles of Incorporation and General Information
[95]
Sheet for 2007. The conflict is clearly intra-corporate as it involves two (2) shareholders
although the ownership of stocks of one stockholder is questioned. Unless Santos is
adjudged as a stranger to the corporation because he holds his shares only in trust for
Belo, then both he and Belo, based on official records, are stockholders of the corporation.
Belo Medical Group argues that the case should not have been characterized as intra-
corporate because it is not between two shareholders as only Santos or Belo can be the
rightful stockholder of the 25 shares of stock. This may be true. But this finding can only
be made after trial where ownership of the shares of stock is decided.

The trial court cannot classify the case based on potentialities. The two defendants in that
case are both stockholders on record. They continue to be stockholders until a decision is
rendered on the true ownership of the 25 shares of stock in Santos' name. If Santos'
subscription is declared fictitious and he still insists on inspecting corporate books and
exercising rights incidental to being a stockholder, then, and only then, shall the case
cease to be intra-corporate.

Applying the nature of the controversy test, this is still an intra-corporate dispute. The
Complaint for interpleader seeks a determination of the true owner of the shares of stock
registered in Santos' name. Ultimately, however, the goal is to stop Santos from inspecting
corporate books. This goal is so apparent that, even if Santos is declared the true owner of
the shares of stock upon completion of the interpleader case, Belo Medical Group still
seeks his disqualification from inspecting the corporate books based on bad faith.
Therefore, the controversy shifts from a mere question of ownership over movable property

96
to the exercise of a registered stockholder's proprietary right to inspect corporate books.

Belo Medical Group argues that to include inspection of corporate books to the
controversy is premature considering that there is still no determination as to who,
between Belo and Santos, is the rightful owner of the 25 shares of stock. Its actions belie
its arguments. Belo Medical Group wants the trial court not to prematurely characterize
the dispute as intra-corporate when, in the same breath, it prospectively seeks Santos'
perpetual disqualification from inspecting its books. This case was never about putting
into light the ownership of the shares of stock in Santos' name. If that was a concern at all,
it was merely secondary. The primary aim of Belo and Belo Medical Group was to defeat
his right to inspect the corporate books, as can be seen by the filing of a Supplemental
Complaint for declaratory relief.

The circumstances of the case and the aims of the parties must not be taken in isolation
from one another. The totality of the controversy must be taken into account to improve
upon the existing tests. This Court notes that Belo Medical Group used its Complaint for
interpleader as a subterfuge in order to stop Santos, a registered stockholder, from
exercising his right to inspect corporate books.

Belo made no claims to Santos' shares before he attempted to inspect corporate books,
and inquired about the Henares' election as corporate secretary and the conduct of
stockholders' meetings. Even as she claimed Santos' shares as hers, Belo proffered no
initial proof that she had paid for these shares. She failed to produce any document except
her bare allegation that she had done so. Even her Answer Ad Cautelam with Cross-
[96]
Claim contained bare allegations of ownership.

According to its Complaint, although Belo Medical Group's records reflect Santos as the
registered stockholder of the 25 shares, they did not show that Santos had made payments
to Belo Medical Group for these shares, "consistent with Bela's claim of ownership over
[97]
them." The absence of any document to establish that Santos had paid for his shares
does not bolster Belo's claim of ownership of the same shares. Santos remains a
stockholder on record until the contrary is shown.

[98]
Belo Medical Group cites Lim v. Continental Development Corporation as its basis for
filing its Complaint for interpleader. In Lim, Benito Gervasio Tan (Tan) appeared as a
stockholder of Continental Development Corporation. He repeatedly requested the
corporation to issue certificates of shares of stock in his name but Continental
Development Corporation could not do this due to the claims of Zoila Co Lim (Lim). Lim
alleged that her mother, So Bi, was the actual owner of the shares that were already
registered in the corporate books as Lim's, and she delivered these in trust to Lim before
she died. Lim wanted to have the certificates of shares cancelled and new ones re-issued
in his name. This Court ruled that Continental Development Corporation was correct in
filing a case for interpleader:

Since there is an active conflict of interests between the two defendants, now herein
respondent Benito Gervasio Tan and petitioner Zoila Co Lim, over the disputed shares of
stock, the trial court gravely abused its discretion in dismissing the complaint for
interpleader, which practically decided ownership of the shares of stock in favor of
defendant Benito Gervasio Tan. The two defendants, now respondents in G.R. No. L-41831,
should be given full opportunity to litigate their respective claims.

97
On the other hand, based on the facts of this case and applying the relationship and nature
of the controversy tests, it was understandable how the trial court could classify the
interpleader case as intra-corporate and dismiss it. There was no ostensible debate on the
ownership of the shares that called for an interpleader case. The issues and remedies
sought have been muddled when, ultimately, at the front and center of the controversy is a
registered stockholder's right to inspect corporate books.

As an intra-corporate dispute, Santos should not have been allowed to file a Motion to
[100]
Dismiss. The trial court should have continued on with the case as an intra-corporate
dispute considering that it called for the judgments on the relationship between a
corporation and its two warring stockholders and the relationship of these two
stockholders with each other.

98