1.

) April 29, 1987

Perez, Olan, Lazo, Trinidad,

Palabrica & Associates
11th Floor, PLDT Bldg.
Makati Ave., Metro Manila

Gentlemen:
This relates to your letter, dated April 21, 1987, requesting the opinion of this
Commission on the following queries in relation to Section 38 of the Corporation
Code, to wit:
— whether the term "bonded indebtedness" refers to secured
indebtedness only or whether it covers all forms of indebtedness
whether secured or unsecured.
— are debentures which are unsecured and merely debt instruments
covered by the term "bonded indebtedness."  llcd

Section 38 of the Corporation Code provides thus:

"No corporation shall increase or decrease its capital stock or incur,
create or increase any bonded indebtedness unless approved by a majority vote
of the board of directors and, at a stockholders' meeting duly called for the
purpose, two-thirds (2/3) of the outstanding capital stock shall favor the increase
or diminution of the capital stock, or the incurring, creating or increasing of any
bonded indebtedness. . . . ."
One way of classifying debt securities is according to whether the principal
amount loaned to the issuer is secured by a mortgage on the real or personal
property of the debtor. (6A Fletcher, Cyc. Corp., 1981 Rev. Vol., Sec. 2635). Debts
secured by real property are usually referred to as bonds, while debts secured by the
issuer's personal property are commonly referred to as collateral trust bonds.
(Fletcher, sec. 2638, 2643). "A bond is a long-term debt security supported by a mortgage
on corporate property." (Fletcher, sec., 2635). The normal distinction between
a corporate  "bond" and a corporate "debenture" or "note" is that the former is usually
secured by a mortgage, while the latter usually is not. (5A Words and Phrases, p. 128
citing Fine v. H. Klein, Inc., 77 A 2d. 295, 298. 10 N.J. Supra 295).
A comparison of Section 38 of the Corporation Code of the Philippines with
Section 359 of the Civil Code of California shows that our law on the subject of
creation and increase of "bonded indebtedness" is an adaptation of the law of
California. Unfortunately, neither the statutory law of that state nor its judicial
decisions afford any guidance as to the meaning of the term "bonded indebtedness."
 The only decision bearing upon the question which has been rendered by the
California court up to the time is one articulated in Underhill v.  Santa Barbara Land &
Building & Improvement Co., 93 Cal.  300, 307, which holds that a non-negotiable note
issued by a corporation, although secured by mortgage, does not constitute a
"bonded indebtedness" and therefore does not require the consent of shareholders.
(cited in Fischer, the Philippine Law of Stock Corporation, sec. 313, par. 180). The two
principal elements of distinction are time element and division of the whole
debt into like aliquot part units of round denominations, represented by
negotiable certificate of indebtedness, generally called "bonds", the purpose
being to enable the corporation to make use of the borrowed money for a long
period of years, to obtain it from a large number of people, and to facilitate the
transfer of the certificate of indebtedness from hand to hand during the term of
collective obligations. Such bond issues are usually secured by the transfer to a
trustee of a specific property to secure the payment of debt. The effect of the
creation and issuance of such obligation is a borrowing from the general public.
Hence, whenever the corporation adopts this method of borrowing funds, the
resulting obligations constitute "bonded indebtedness" subject to the statutory
provision of the corporation law as to increase or creation. (Fischer, Supra., par.
180).
Considering the foregoing, the Commission opines that "bonded
indebtedness" refers to negotiable corporate bonds which are secured by
mortgage on corporate property.
Anent your second query, please be advised that "debentures" are serial
obligations or "notes" representing indebtedness but not ordinarily secured by any
specific mortgage, lien or pledge of security. (Ballantine on Corporations, sec. 210, p.
496). "They are usually issued under an indenture, in which a trust company agrees to
supervise the execution of the covenants of the debtor for the benefit of all the
holders." (Kesoler v. General Cable Corp., 92 Cal. App. 3d, 531, 155 Cal. Rptr. 94, cited
in 6A Fletcher, Cyc. Corp., sec. 2649.1). Debentures are issued on the basis of the
general credit of the corporation, and since debentures are not secured by
collaterals, they are not bonded indebtedness in the true sense, and will not,
therefore, require approval of the stockholders although it is a good corporate
policy to require it. (Campos, Campos, Corporation Code,"Comments, Notes and
Selected Cases, 1981 ed., pp. 673) cdphil

Please be advised accordingly.

  (Perez, Olan, Lazo, Trinidad, Palabrica & Associates, SEC Opinion, [April 29, 1987])
|||
 2.) July 24, 2017

SEC-OGC OPINION NO. 17-06

RE: EQUITY RESTRUCTURING THROUGH THE INCREASE OF PAR VALUE

 

New Transcend Construction & Development Corporation

Unit 309 Humana Wellness Center
Tagaytay Road, Brgy. Don Jose
Sta. Rosa, Laguna 4026

Attention: Atty. Anna P. Cureg

Vice-President
Gentlemen :

This refers to your letter dated 19 September 2016 requesting for a legal
opinion regarding the intended equity restructuring of your company.
In your letter, you mentioned that you intend to amend your company's
Articles of Incorporation (Articles) to increase the par value of each share from
P10.00 to P50.00, without increasing the present number of shares. In addition,
you disclosed that your company's authorized capital stock (ACS) is fully subscribed
and fully paid up. On the basis of the foregoing, you sought clarification on the
following matters:
(a) The requirements for the above application;
(b) The processes involved in the equity restructuring that will result after the
increase in par value; and
(c) The laws and/or jurisprudence applicable to your case.
At the outset, we note that, although you mentioned that your company does
not intend to increase the present number of shares, you did not categorically state
whether, in applying for the increase in par value, you intend to maintain the current
number of shares (i.e., 2 million shares), 1 on the one hand, or to maintain the current
ACS (i.e., P20,000,000.00), 2 on the other. Increasing the par value while maintaining
the number of shares will, consequently, result in the increase of the ACS. In contrast,
increasing the par value while maintaining the ACS will necessarily result in the
decrease in the number of shares.
This opinion will, thus, provide a discussion on both scenarios.
Scenario A — Increase the par value while maintaining the number of shares
Increasing the par value from P10.00 to P50.00 while maintaining the
company's 2 million shares will increase the ACS from P20 million to P100
million. If such an increase in the ACS is intended by the company, it may
undertake the following:
(1) Reverse stock split. — In SEC Opinion No. 05-01 dated 04 January 2005, we
previously recognized a reverse stock split, i.e., the reduction of shares by
increasing the par value thereof, as a valid mode of corporate
restructuring.
In the case of your company, this will involve the amendment of the Articles by
changing the equity structure from an ACS of P20 million divided into 2
million shares with a par value of P10, to an ACS of P20 million divided
into 400,000 shares with a par value of P50. A list of the requirements for
this step is attached hereto as Annex A; 3 and
(2) Increase the ACS. — Proceeding from the reverse stock split, the company
may increase its ACS from P20 million to P100 million by amending its
Articles and submitting the requirements provided in the list attached
hereto as Annex B. 4
The requirements for the resulting increase in ACS are based on Section 38
of the Corporation Code, which provides:
"Section 38. Power to increase or decrease capital stock; incur, create or
increase bonded indebtedness. — No corporation shall increase or decrease
its capital stock or incur, create or increase any bonded indebtedness
unless approved by a majority vote of the board of directors and, at a
stockholder's meeting duly called for the purpose, two-thirds (2/3) of the
outstanding capital stock shall favor the increase or diminution of the
capital stock, or the incurring, creating or increasing of any bonded
indebtedness. Written notice of the proposed increase or diminution of the
capital stock or of the incurring, creating, or increasing of any bonded
indebtedness and of the time and place of the stockholder's meeting at which
the proposed increase or diminution of the capital stock or the incurring or
increasing of any bonded indebtedness is to be considered, must be addressed
to each stockholder at his place of residence as shown on the books of the
corporation and deposited to the addressee in the post office with postage
prepaid, or served personally.
A certificate in duplicate must be signed by a majority of the directors of
the corporation and countersigned by the chairman and the secretary of the
stockholders' meeting, setting forth:
 (1) That the requirements of this section have been complied
with;
(2) The amount of the increase or diminution of the capital
stock;
(3) If an increase of the capital stock, the amount of capital
stock or number of shares of no-par stock thereof actually
subscribed, the names, nationalities and residences of the persons
subscribing, the amount of capital stock or number of no-par stock
subscribed by each, and the amount paid by each on his
subscription in cash or property, or the amount of capital stock or
number of shares of no-par stock allotted to each stock-holder if
such increase is for the purpose of making effective stock dividend
therefor authorized;
(4) Any bonded indebtedness to be incurred, created or
increased;
(5) The actual indebtedness of the corporation on the day of
the meeting;
(6) The amount of stock represented at the meeting; and
(7) The vote authorizing the increase or diminution of the
capital stock, or the incurring, creating or increasing of any bonded
indebtedness.
Any increase or decrease in the capital stock or the incurring, creating or
increasing of any bonded indebtedness shall require prior approval of the
Securities and Exchange Commission. One of the duplicate certificates shall be
kept on file in the office of the corporation and the other shall be filed with the
Securities and Exchange Commission and attached to the original articles of
incorporation. From and after approval by the Securities and Exchange
Commission and the issuance by the Commission of its certificate of filing, the
capital stock shall stand increased or decreased and the incurring, creating or
increasing of any bonded indebtedness authorized, as the certificate of filing
may declare: Provided, That the Securities and Exchange Commission shall not
accept for filing any certificate of increase of capital stock unless accompanied
by the sworn statement of the treasurer of the corporation lawfully holding
office at the time of the filing of the certificate, showing that at least twenty-
five (25%) percent of such increased capital stock has been subscribed and
that at least twenty-five (25%) percent of the amount subscribed has been
paid either in actual cash to the corporation or that there has been
transferred to the corporation property the valuation of which is equal to
twenty-five (25%) percent of the subscription: Provided, further, That no
decrease of the capital stock shall be approved by the Commission if its effect
shall prejudice the rights of corporate creditors.
 Non-stock corporations may incur or create bonded indebtedness, or
increase the same, with the approval by a majority vote of the board of trustees
and of at least two-thirds (2/3) of the members in a meeting duly called for the
purpose.
Bonds issued by a corporation shall be registered with the Securities and
Exchange Commission, which shall have the authority to determine the
sufficiency of the terms thereof." (Emphasis supplied.)
To clarify, two (2) separate applications, with their respective
documentary requirements must be filed with the Commission for this Scenario,
however, these applications may be filed simultaneously, in which case, the
same will likewise be processed by the Commission simultaneously. Thus, the
Company need not await the approval of the reverse stock split before it can
apply for the ACS increase, provided that all requirements for both applications
are complied with.
Scenario B — Increase the par value while maintaining the amount of ACS
Increasing the par value from P10.00 to P50.00 while maintaining the company's
ACS will result in the reduction of shares (i.e., authorized, subscribed and paid up)
from 2 million to 400,000. To do this, the company may undertake a reverse stock
split by amending its Articles, as provided in number (1) of Scenario A above.
The company is advised that as a consequence of the reverse stock split,
fractional shares may arise. In this regard, the company may do well to consider the
treatment thereof prior to commencing the restructuring process, e.g., repurchase by
the company of the fractional shares (as treasury shares) at a pre-determined price.
Both restructuring scenarios will necessarily result in the cancellation of
current stock certificates and the issuance of new ones in replacement thereof,
which reflects the new number of shares and/or par value thereof, as
applicable. In this regard, the company is reminded to comply with the principle
of indivisibility of subscription, as enshrined in Article 64 of the Corporation Code,
thus:
"Section 64. Issuance of stock certificates. — No certificate of stock
shall be issued to a subscriber until the full amount of his subscription
together with interest and expenses (in case of delinquent shares), if any is
due, has been paid."
It shall be understood that the foregoing opinion is rendered based solely on
the facts and circumstances disclosed and relevant solely to the particular issue raised
therein. It shall not be used in the nature of a standing rule binding upon the
Commission in other cases or upon the courts whether of similar or dissimilar
circumstances. If, upon further inquiry or investigation it will be disclosed that the
facts relied upon are different, this opinion shall be rendered void.
Please be guided accordingly.

  (Re: Equity Restructuring through the Increase of Par Value, SEC-OGC Opinion No. 17-
|||

06, [June 24, 2017])

 3.) April 27, 2005

SEC OPINION NO. 03-05

Share issuance from original authorized capital stock; voting requirement

Atty. Zenaida O. Balmas

Rm. 303 JRM Bldg.,
No. 9 Sct. Borromeo,
South Triangle
Quezon City

Madam:

This refers to your letter dated 8 March 2005 requesting confirmation of your
opinion that the issuance of additional shares out of the unissued portion of the
authorized capital stock of the corporation requires only the board of directors
approval.

Based on the facts presented it appears that PNPI corporation is duly registered
under Philippine laws. It intends to issue shares out of the unissued portion of its
authorized capital stock to its existing stockholders to wit: Eastern Peninsula Capital
Resources, Inc., New Manila Properties Inc. and Pacific Nickel Holdings Limited.  cd1upsec05

It further appears that in its Shareholders' Agreement of 18 January 1998 the

following terms and conditions on voting requirements and pre-emptive rights are
explicitly provided:

"4.01 High Vote Requirements

"Subject to the approval of the SEC, the affirmative vote of four out of five
directors and of stockholders of the Company representing more than seventy
(70%) of the outstanding capital stock of the Company may be necessary for the
following corporate actions:

(a) creation or issue of any new shares or loan or other obligation

convertible into shares of stock of the Company.

xxx xxx xxx

"4.02. Pre-emptive right.
 "xxx xxx xxx

(b) Each holder of common stock shall be entitled to preemptive right as

to all issues of common stock, whether such issues are to be made out of
present authorized capital stock or out of a proposed increase of authorized
capital stock or from treasury. . . "

The twin issues raised in the instant query can be broken down as follows:

(a) whether or not the issuance of additional shares sourced from the

authorized capital stock partake the nature of the creation or issue of any new
shares. HTaSEA

(b) whether or not such issuance requires the high vote requirement of

the board of directors and stockholders.

The answer can be found in the following pronouncements.

Well-settled is the rule that "[I]ssuance of shares out of the unsubscribed

shares of authorized capital stock of the corporation may be exercised by the
Board of Directors thru a Board Resolution without need of stockholders'
approval." (Ltr. to Atty. Aaron B. Bautista, July 28, 1994, SQB Dec.'94 p.78).

"While under the Corporation Code the performance of the corporate functions

pertaining to the management of the corporation is vested upon the Board of
Directors, there are certain corporate transactions which the Code expressly requires
for their validity the concurrence of the votes of the stockholders by prior action or
subsequent ratification. However, in the case of issuance of additional shares out
of the unissued authorized capital stock of a corporation, the power to approve
the same is not expressly granted to the stockholders." Hence, said corporate
transaction need not be approved by the stockholders. (Ltr. to Felixberto T.
Rulona, Voice Express Corporation, dtd. January 12, 1995).  DcSACE

The aforesaid SEC rulings find support in the Supreme Court pronouncement
that there is no pre-emptive right as to additional issues of originally authorized
stocks in the following language:

The general rule is that pre-emptive right is recognized only with respect to

new issue of shares, and not with respect to additional issues of originally authorized
shares. This is on the theory that when a corporation at its first inception offers
its first shares, it is presumed to have offered all of those which it is authorized
to issue. An original subscriber is deemed to have taken his shares knowing that
they form a definite proportionate part of the whole number of authorized
 shares. When the shares left unsubscribed are later reoffered, he cannot
therefore claim dilution of interest. (Benito v. SEC, July 25, 1983, 123 SCRA 722,
726).

Thus, the high voting requirement for stockholders under Sec. 4.01 (a) of the
Shareholders Agreement aforequoted is inapplicable to the case under consideration.

  (Share issuance from original authorized capital stock; voting requirement, SEC
|||

Opinion No. 03-05, [April 27, 2005])

 4.) October 5, 2011

SEC-OGC OPINION NO. 41-11

AVAILABILITY OF PRE-EMPTIVE RIGHTS; OWNERSHIP RESTRICTIONS IN THE PSE

Joselito V. Banaag
General Counsel
The Philippine Stock Exchange, Inc.
PSE Plaza, Ayala Triangle,
Ayala Avenue, Makati City 1226

Sir :

This refers to your letter dated 12 August 2011 requesting for opinion on the
availability of pre-emptive rights of existing shareholders of the Philippine Stock
Exchange, Inc. (PSE).

As disclosed in your letter and its attached documents, the PSE's authorized
capital stock consisted of 36,800,000 common shares after the demutualization
mandate of the Securities Regulation Code (SRC). 1 On May 17, 2008, stockholders
owning at least 2/3 of the outstanding capital stock of the PSE approved the
increase in authorized capital stock from 36,800,000 to 97,800,000 common
shares, at least 25% of which would be subscribed and paid for by a 100% stock
dividend equivalent to 15,277,511 shares of stock. On May 15, 2011, stockholders
owning 2/3 of the outstanding capital stock approved 100% stock dividend, equivalent
to 30,604,363. As a result of the stock dividend, 61,208,726 PSE common shares are
presently issued and subscribed while 36,491,274 shares (or around 38% of the
authorized capital stock) are unsubscribed and unissued.

Your letter also states (1) that PSE's Articles of Incorporation do not deny pre-
emptive rights of its shareholders; (2) that the current stockholder structure of the
PSE is as follows: cADEHI

  Shareholders Category Ownership

     
Public 30% 
Brokers 32% 
Strategic investors:   
a. Premiere Capital Venture Corp. 9% 
 b. PLDT Retirement Fund 9% 
c. GSIS 9% 
d. SMC Retirement Plan 11% 

and (3) that there are two prospective investors, namely the Singapore Exchange and
the International Finance Corporation, and each has manifested its intent to subscribe
to shares representing 15% to 20% of the outstanding capital stock of PSE.

Given the foregoing, PSE seeks advice on whether:

a. Pre-emptive rights are not available under the present case, because (1)
the shares to be offered to the strategic investors are not new shares,
but are sourced from the Exchange's unsubscribed capital stock
and/or (2) the sale to the strategic investors is in furtherance of the
ownership limits prescribed by Sec. 33.2 (c) of the SRC, and thus falls
under the exceptions recognized by Sec. 39 of the Corporation
Code; 2 and
b. Even assuming that pre-emptive rights are applicable under the
circumstances, the pre-emptive right may not be exercised by those
shareholders who have already exceeded the ownership threshold
laid down by the SRC (i.e., broker-shareholders and strategic
investors).

As to your first query, you assert that pre-emptive rights are recognized only
with respect to new issues of shares and not with respect to unsubscribed authorized
capital shares, pursuant to the doctrine enunciated in Benito v. SEC  3 (Benito case)
and Dee v. SEC  4 (Dee case), as reiterated in SEC Opinion No. 05-03 5 and SEC-OGC
Opinion No. 08-08. 6 You further assert that the sale to the strategic investors is in
compliance with the legal limit provided under Section 33.2 (c) of the SRC, and
therefore, falls under the exceptions enumerated in Section 39 of the Corporation
Code. SEIDAC

At the outset, Section 39 of the Corporation Code explicitly states that unless

denied in the articles of incorporation or the issuance falls under any of the
enumerated exceptions, all existing stockholders of record are entitled to exercise
pre-emptive right to subscribe to all issues or disposition of shares of any class of a
stock corporation, to wit:

"Section 39. Power to deny pre-emptive right. — All stockholders of a stock

corporation shall enjoy pre-emptive right to subscribe to all issues or disposition
of shares of any class, in proportion to their respective shareholdings, unless
 such right is denied by the articles of incorporation or an amendment thereto:
Provided, That such pre-emptive right shall not extend to shares to be issued in
compliance with laws requiring stock offerings or minimum stock ownership by
the public; or to shares to be issued in good faith with the approval of the
stockholders representing two-thirds (2/3) of the outstanding capital stock, in
exchange for property needed for corporate purposes or in payment of a
previously contracted debt."

Since Section 39 uses the phrase "all issues or disposition of shares of any
class," pre-emptive right extends not only to issuance of new shares resulting
from an increase in capital stock, but also to issuance of previously
unsubscribed shares which form part of the existing authorized capital stock, as
well as to disposition of treasury shares. 7 Ubi lex non distinguit nec nos distinguere
debemos. 8 Where the law does not distinguish, courts should not distinguish.  EaICAD

Considering that Section 39 of the Corporation Code does not distinguish

between newly issued shares and previously unsubscribed shares, we opine that pre-
emptive right is available to existing shareholders of PSE upon its issuance of
unsubscribed authorized capital stock to potential strategic investors.

Although the Supreme Court held in the Benito case and Dee case that pre-

emptive rights are recognized only with respect to new issues of shares, it must be
emphasized that the events which gave rise to said cases (i.e., the issuance of shares)
took place under the old Corporation Law 9 wherein pre-emptive right is not expressly
provided. Thus, when the Corporation Code expressly granted and broadened the
extent of pre-emptive right, the principles stated in said two cases no longer apply.

Further, availability of pre-emptive rights in unsubscribed authorized capital

stock was not the issue addressed in SEC Opinion No. 05-03 where the query was on
the Board of Directors' approval for the unissued portion of the authorized capital
stock, and in SEC-OGC Opinion No. 08-08 where one of the issues was the effect of the
waiver of pre-emptive rights by votes representing more than 2/3 of the outstanding
capital stock over the remaining who did not wish to waive their pre-emptive rights.

More in point are SEC Opinion dated 30 September 1992 addressed to

Industrial Security Consultancy and Management, Inc. and SEC Opinion dated 10
March 2000 addressed to Radio Philippines Network, Inc. (RPN). In both opinions, the
Commission opined that the issuance of shares referred in the Benito and Dee cases
occurred under the old Corporation Law (Act No. 1459, as amended) where pre-
emptive right of existing stockholders to subscribe to new issuances is not expressly
provided. Under the present law, the Corporation Code now expressly mandates the
grant of pre-emptive right except in those situations falling under the exceptions
enumerated therein. It was further opined in SEC Opinion dated 10 March 2000 to
RPN that all issuances or disposition of shares by a corporation after the effectivity of
the Corporation Code shall be subject to Section 39 of the Corporation Code.

Neither is the issuance of shares to potential strategic investors fall under the
exceptions enumerated in Section 39 of the Corporation Code. It is apparent from
Section 39 that pre-emptive right does not extend to the issue of shares made in
compliance with laws requiring stock offerings or minimum stock ownership by the
public. However, PSE's issuance of shares to potential strategic investors to comply
with Section 33.2 (c) of the SRC cannot be considered as one in compliance with laws
requiring stock offerings or minimum stock ownership. Section 33.2 (c) of
the SRC clearly provides a maximum, not the minimum, limit on stock ownership, and
does not necessarily require the issuance of shares to comply with the legal
requirements provided therein, to wit:  cHCaIE

"Section 33.2. Registration of an Exchange shall be granted upon

compliance with the following requirements: . . . (c) Where the Exchange is
organized as a stock corporation, that no person may beneficially own or
control, directly or indirectly, more than five percent (5%) of the voting
rights of the Exchange and no industry or business group may beneficially
own or control, directly or indirectly, more than twenty percent (20%) of
the voting rights of the Exchange: Provided, however, that the Commission
may adopt rules, regulations or issue an order, upon application, exempting an
applicant from this prohibition where it finds that such ownership or control will
not negatively impact on the exchange's ability to effectively operate in the
public interest." (Underscoring and Emphasis Supplied).

Further, it must be emphasized that when the statute itself enumerates the
exceptions to the application of the general rule, the exceptions are strictly but
reasonably construed. 10 The exceptions extend only as far as their language fairly
warrants, and all doubts should be resolved in favor of the general provision rather
than the exceptions.

Accordingly, pre-emptive right is available to existing shareholders of PSE

in the instant case because (1) the law in granting pre-emptive rights to existing
shareholders makes no distinction between newly issued shares and
unsubscribed original authorized capital stock; (2) PSE's Articles of Incorporation
do not deny pre-emptive rights to its shareholders and (3) the issuance of shares
to potential strategic investors does not fall among the exceptions enumerated
in Section 39 of the Corporation Code.
 As to your second query, please be advised that pre-emptive right may be
exercised by existing PSE shareholders to the extent that individual or industry sector
or business group ownership does not exceed the threshold laid down in Section 33.2
(c) of the SRC.

While existing PSE shareholders may have pre-emptive right to subscribe to all
issues or disposition of PSE shares, Section 33.2 (c) of the SRC explicitly provides
ownership restrictions that limit the ability of an individual or industry sector or
business group to control an Exchange. It must be pointed out that such limitation has
been included in the SRC to address possible abuses which may arise in connection
with the control of the PSE so that it will develop and effectively operate in the public
interest and to achieve better corporate governance. 11

Further, it should be emphasized that Section 33.2 (c) of the SRC takes

precedence over Section 39 of the Corporation Code. The specific public policy limiting
industry ownership of an Exchange necessarily prevails over the pre-emptive right
generally granted to shareholders of private companies. In fact, Section 40.2 of
the SRC explicitly requires every self-regulatory organization including PSE to comply
with the provisions of the SRC, notwithstanding the provision of the Corporation
Code to the contrary, to wit:  IcADSE

"Section 40.2. Every self-regulatory organization shall comply with the

provisions of this Code, the rules and regulations thereunder, and its own rules,
and enforce compliance therewith, notwithstanding any provision of
the Corporation Code to the contrary, by its members, persons associated
with its members or its participants." (Underscoring and Emphasis Supplied).

Thus, pre-emptive right may not be exercised by PSE shareholders who have
already exceeded the ownership threshold laid down by the SRC.

The foregoing opinion is rendered based solely on the facts disclosed in the
query and relevant solely to the particular issues raised therein and shall not be used
in the nature of a standing rule binding upon the Commission whether of similar or
dissimilar circumstances. 12 If, upon investigation, it will be disclosed that the facts
relied upon are different, this opinion shall be rendered void.

Please be guided accordingly.

  (Availability of Pre-Emptive Rights; Ownership Restrictions in The Pse, SEC-OGC

|||

Opinion No. 41-11, [October 5, 2011])

 5.) July 8, 1987

Atty. Manuel A. Leynes

c/o 8th Flr., Philbanking Bldg.
6797 Ayala Ave., Makati, MM

Sir :
This relates to your letter, dated July 3, 1987, requesting the opinion of this
Commission on the query posed therein in behalf of your client Electro Alloys
Corporation.  cdlex

It appears therein that the board of directors of Electro Alloys Corporation

resolved to sell and dispose of all the assets of the corporation to settle the
company's obligations with its foreign creditors, manifesting that other than those
foreign creditors, the company has no other existing obligations. Said resolution was
ratified by the vote of two-thirds (2/3) of the outstanding capital stock of the
corporation. Hence, your query as to whether or not Electro Alloys Corporation
can proceed to sell all its properties and assets without necessarily dissolving
the corporation.
The pertinent provision of the Corporation Code of the Philippines reads thus:
"SECTION 40. Sale or other disposition of assets. — Subject to the provisions
of existing laws on illegal combinations and monopolies, a corporation may, by a
majority vote of its board of directors or trustees, sell, lease, exchange,
mortgage, pledge or otherwise dispose of all or substantially all of its property
and assets, including its goodwill, upon such terms and conditions and for such
consideration, which may be money, stocks, bonds or other instruments for the
payment of money or other property or consideration, as its board of directors
or trustees may deem expedient, when authorized by the vote of the
stockholders representing at least two-thirds (2/3) of the outstanding capital
stock; or in case of non-stock corporation, by the vote of at least two-thirds (2/3)
of the members, in a stockholders' or members' meeting duly called for the
purpose. Written notice of the proposed action and of the time and place of the
meeting shall be addressed to each stockholder or member at his place of
residence as shown on the books of the corporation and deposited to the
addressee in the post office with postage prepaid, or served personally:
Provided, That any dissenting stockholder may exercise his appraisal right under
the conditions provided in this Code.
A sale or other disposition shall be deemed to cover substantially all the
property and assets if thereby the corporation would be rendered incapable of
 continuing the business or accomplishing the purpose for which it was
incorporated.
xxx xxx xxx
Nothing in this section is intended to restrict the power of any
corporation, without the authorization by the stockholders or members, to sell,
lease, exchange, mortgage, pledge or otherwise dispose of any of its property
and assets if the same is necessary in the usual and regular course of business
of said corporation or if the proceeds of the sale or other disposition of such
property and assets be appropriated for the conduct of its remaining business.
xxx xxx xxx."
The sell-out statutes in literal term give the directors acting with the
requisite percentage of shareholders an absolute power to dispose of the
corporate assets in their discretion. The courts, however, have imposed certain
equitable limitations against abuse of powers. Thus, the majority cannot use a sale of
assets as a device to freeze out a minority, or to exercise their power in a way to buy
in the property for themselves and exclude the minority from a fair participation in
the fruits of the sale. (Ballantine on Corporations, sec. 285, at 672-673). Our sell-out
statute embodied in Section 40 of the Corporation Code prescribes certain restriction
when it expressly provides that the sale or other disposition of assets of a corporation
is subject to the provisions of existing laws on illegal combinations and monopolies.
Furthermore, under Act No. 3952, as amended, otherwise known as
the Bulk Sales law, the sale of all or any portion of a stock of merchandise
otherwise than in the ordinary course of trade shall be fraudulent and void
against creditors of the seller, unless the seller delivers to the purchaser a list of
his creditors and the purchaser in turn notifies such creditors of the proposed
sale a stipulated time in advance. (Agbayani, Commercial Laws of the Philippines,
Vol. 2, 1978 revision, p. 676, citing Connecticut Steam Brown Store Co. v. Lewis, 86
Cann. 386). Section 2 of the Bulk Sales law provides in part:
"SECTION 2. Any sale, transfer, mortgage or assignment of a stock of
goods, wares, merchandise, provisions, or materials otherwise than in the
ordinary course of trade and the regular prosecution of the business of the
vendor, mortgagor, transferor, or assignor, or any sale, transfer, mortgage, or
assignment of all, or substantially all, of the business or trade theretofore
conducted by the vendor, mortgagor, transferor, or assignor, or of all, or
substantially all, of the fixtures and equipment used in and about the business
of the vendor, mortgagor, transferor, or assignor, shall be deemed to be a sale
and transfer in bulk, in contemplation of this Act: Provided, however, That if
such vendor, mortgagor, transferor, or assignor, produces and delivers a written
waiver of the provisions of this Act from his creditors as shown by verified
statements, then and in that case the provisions of this Section shall not apply."
 Hence, subject to the above legal limitations, Electro Alloys Corporation
under the facts given in your letter may proceed to sell all its properties and
assets without dissolving the corporation. Some recognized authorities
in corporation law commented thus:
"A transfer of all the property and franchise of a corporation does not
necessarily dissolve the corporation or terminate the corporate existence." (6A
Fletcher Cyc. Corps., 1968 Rev. Vol., sec. 2953, Emphasis supplied).
"If one corporation sells all of its assets to another corporation and there
is no intent to combine, the considerations for the sale could be in cash or other
property, and the selling corporation may continue in a state of suspended
animation." (Campos, Campos, The Corporation Code, "Comments, Notes and
Selected Cases, 1981 ed., p. 959, citing Ballantine on Corps., 666, Emphasis
ours).
Your attention is, however, invited to the effect of non-use of corporate
charter and continued inoperation of a corporation found in Section 22 of
the Corporation Code which provides thus:
"If a corporation does not formally organize and commence the
transaction of its business or the construction of its works within two (2) years
from date of its incorporation, its corporate powers cease and the corporation
shall be deemed dissolved. However, if a corporation has commenced the
transaction of its business but subsequently becomes continuously inoperative
for a period of at least five (5) years, the same shall be a ground for the
suspension of its corporate franchise or certificate of incorporation. 
cdll

xxx xxx xxx."

Please be advised accordingly.

  (Atty. Manuel A. Leynes, SEC Opinion, [July 8, 1987])])

|||
 6.)September 22, 1987

Rizal Memorial Hospital, Inc.

Km. 16, South Super Highway
Bo. Bagumbayan, Taguig, Rizal
Attention : Mr. Juan F. Lim
President

Gentlemen :
This refers to your letter, dated September 18, 1987, requesting the opinion of
this Commission on the query posed therein.  cdtai

It appears therein that Rizal Memorial Hospital, Inc. has ceased operations
in 1975. The incumbent officers and directors of the hospital resolved to sell the
hospital building as well as the land it now occupies, and eventually search for
another location for its hospital.
Considering that the sale of said hospital building and land would be
tantamount to a disposition of all or substantially all of its property and assets, your
queries are: Is such sale possible? What are the requirements of such sale under
the law?
Your queries are directly answered by Section 40 of the Corporation Code which
reads thus:
SECTION 40. Sale or other disposition of assets. — Subject to the
provisions of existing laws on illegal combinations and monopolies, a
corporation may, by a majority vote of its board of directors or trustees, sell,
lease, exchange, mortgage, pledge or otherwise dispose of all or substantially all
of its property and assets, including its goodwill, upon such terms and
conditions and for such consideration, which may be money, stocks, bonds or
other instruments for the payment of money or other property or consideration,
as its board of directors or trustees may deem expedient, when authorized by
the vote of the stockholders representing at least two-thirds (2/3) of the
outstanding capital stock; or in case of non-stock corporation, by the vote of at
least two-thirds (2/3) of the members, in a stockholders' or members'
meeting duly called for the purpose. Written notice of the proposed action
and of the time and place of the meeting shall be addressed to each stockholder
or member at his place of residence as shown on the books of the corporation
and deposited to the addressee in the post office with postage prepaid, or
served personally: Provided, That any dissenting stockholder may exercise his
appraisal right under the conditions provided in this Code.
 A sale or other disposition shall be deemed to cover substantially all
the corporate property and assets if thereby the corporation would be
rendered incapable of continuing the business or accomplishing the
purpose for which it was incorporated.
After such authorization or approval by the stockholders or members, the
board of directors or trustees may, nevertheless, in its discretion, abandon such
sale, lease, exchange, mortgage, pledge or other disposition of property and
assets, subject to the rights of third parties under any contract relating thereto,
without further action or approval by the stockholders or members.
Nothing in this section is intended to restrict the power of any
corporation, without the authorization by the stockholders or members, to sell,
lease, exchange, mortgage, pledge or otherwise dispose of any of its property
and assets if the same is necessary in the usual and regular course of business
of said corporation or if the proceeds of the sale or other disposition of such
property and assets be appropriated for the conduct of its remaining business.
In non-stock corporations, where there are no members with voting
rights, the vote of at least a majority of the trustees in office will be sufficient
authorization for the corporation to enter into any transaction authorized by
this section. 
cdphil

Likewise, the said sale is subject to the Bulk Sales Law, which provides:
"SECTION 2. Any sale, transfer, mortgage or assignment of a stock of
goods, wares, merchandise, provisions, or materials otherwise than in the
ordinary course of trade and the regular prosecution of the business of the
vendor, mortgagor, transferor or assignor, or any sale, transfer, mortgage, or
assignment of all, or substantially all, of the business or trade theretofore
conducted by the vendor, mortgagor, transferor, or assignor, or of all, or
substantially all, of the fixtures and equipment used in and about the
business of the vendor, mortgagor, transferor, or assignor, shall be
deemed to be a sale and transfer in bulk, in contemplation of this Act:
Provided, however, That if such vendor, mortgagor, transferor, or assignor,
produces and delivers a written waiver of the provisions of this Act from his
creditors as shown by verified statements, then and in that case the provisions
of this Section shall not apply".
Please be guided accordingly.

  (Rizal Memorial Hospital, Inc., SEC Opinion, [September 22, 1987])

|||
 7.)June 27, 2016

SEC-OGC OPINION NO. 16-16

MINIMUM STOCK SUBSCRIPTION AND TREASURY SHARES

Ma. Fenora L. Pigon

Vice President for Finance
Antonino Group of Companies
17th Floor, G.E. Antonio Building,
J. Bocobo St., cor. TM Kalaw St.,
1000 Ermita, Manila

Madam :

This refers to your letter dated February 24, 2016 requesting for an opinion
regarding minimum stock subscription and treasury shares.
You stated in your letter that Company A has an authorized capital stock of Two
Million Seven Hundred Fifty Thousand Pesos (P2,750,000.00) divided into Twenty
Seven Thousand Five Hundred (27,500) shares of stock with par value of One Hundred
Pesos (P100.00) per share, of which Seven Million Eight Hundred Ten Thousand Seven
Hundred Sixty Four (7,810,764) shares or 28.4028% are subscribed.
According to you, Company A bought out three (3) of its shareholders which,
many argued, has effectively reduced the subscribed capital stock to 15.8127% or less
than the 25% minimum capital stock that is required to be subscribed, pursuant to
Section 13 of the Corporation Code. The subject treasury shares were not reported or
recorded in the balance sheet of the corporation.
Thus, your queries:
1. Under the circumstances, may Company A treat the treasury shares as
part of issued shares?
2. Because of its buy-back program, did Company A violate Section 13 of
the Corporation Code on minimum stock subscription?
3. Considering that Company A is now planning to make available for
subscription/sale said treasury shares, can it sell the same directly without
having to ask the SEC for exemption from the registration requirements of
the Revised Securities Code?
 4. Can Company A merely amend its audited financial statements (particularly
its balance sheet) and indicate therein the treasury shares?
Before we address your queries, we discuss first the nature of treasury shares.
Section 9 of the Corporation Code defines treasury shares as:
"SEC. 9. Treasury Shares. — Treasury shares are shares of stock which
have been issued and fully paid for, but subsequently reacquired by the issuing
corporation by purchase, redemption, donation, or through some other lawful
means. Such shares may again be disposed of for a reasonable price fixed by
the board of directors." 
CAIHTE

In other words, treasury shares are shares that have been earlier issued
and are regarded as property acquired and currently owned by the corporation
and not by any of its stockholders. 1 Being the owner of treasury shares, the
corporation may opt to retire, sell or distribute as property dividends said
shares. 2
Thus, we answer your first query in the affirmative. Company A may treat
the treasury shares as part of the issued shares as long as they are not
cancelled or retired. Treasury shares do not revert to the unissued shares of a
corporation but are regarded as property acquired by the corporation which may be
reissued or resold by the corporation at a price to be fixed by the Board of
Directors. 3 Since treasury shares do not revert back to unissued shares, they do not
lose their status as "issued shares." 4 When outstanding shares are acquired in
treasury, their issued status is not disturbed. These are still part of the issued
capital stock although no longer outstanding. 5 This is so because the amount
paid for the acquisition of treasury shares does not represent return of capital
to the stockholders but an investment out of retained earnings on a salable
property known as treasury shares. 6
As to your second query, we answer the same in the negative. Section 13 7 of
the Corporation Code mandates pre-incorporation subscriptions, which means that at
least 25% of the amount of authorized capital stock shall be subscribed at the time of
incorporation and at least 25% of the total subscription must be paid except where
the capital stock consists of no par value shares, in which case, the subscription must
be fully paid. 8
The above "25% and 25%" requirement are  mandatory ONLY  during (1)  pre
incorporation period  (Sec. 13); and (2) when the corporation undertakes to
increase its authorized capital stock. The acquisition of treasury shares does not
reduce the number of issued shares or the amount of stated capital and their
"sale" does not increase the number of issued shares or the amount of stated
capital. 9 Thus, the redeemed shares (treasury shares) are still part of the total
shares of stocks issued to subscribers or stockholders whether or not fully paid
or partially paid but no longer outstanding. 10
On your third query, Section 8.1 of the Securities Regulation
Code (SRC) 11 provides that "[s]ecurities shall not be sold or offered for sale or
distribution within the Philippines, without a registration statement duly filed with and
approved by the Commission. Prior to such sale, information on the securities, in such
form and with such substance as the Commission may prescribe, shall be made
available to each prospective purchaser". This is practically the same requirement
under the Revised Securities Act (RSA), which was repealed by the SRC.
In one Opinion, 12 which still holds true pursuant to the provisions of the SRC,
the Commission held that:
"[Re-issuance of treasury shares] is subject to the provisions of
the Revised Securities Act (RSA), considering that the re-issuance thereof may
constitute distribution of securities to the public, and consequently, new or
additional stockholders may come in. Under Section 4 of the RSA, 13 no
securities (which include shares of stocks), except that of a class exempt under
any of the provisions of Section 5 14 thereof or unless sold in any transaction
exempt under any of the provisions of Section 6 15 thereof, shall be sold or
offered for sale or distributed to the public unless such securities shall have
been registered and permitted to be sold or distributed.  However, while the re-
issuance of treasury shares is not exempt per se under Sections 5 and 6 of said
Act,  the same may be exempted from registration requirements considering
that said transaction is of limited character as the corporation does not normally
acquire its own shares of stocks and the number of shares to be disposed of is
usually minimal. However, exemption thereof is not automatic. The corporation
is still required to secure exemption from the Commission prior to such re-
issuance pursuant to Section 6(b) 16 of the
On your last query, we answer the same in the affirmative. Company A should
amend its audited financial statements to indicate the treasury shares with proper
disclosure as to amendment. The Commission has opined that any declaration and
issuance of treasury shares as property dividend shall be disclosed and properly
designated as property dividend in the books of the corporation and in its financial
statements. 17
This Opinion is based solely on the facts disclosed in the query and relevant to
the particular issues raised therein and shall not be used in the nature of a standing
rule binding upon the Commission whether of similar or dissimilar
circumstances. 18 If, upon investigation, it will be disclosed that the facts relied upon
are different, this opinion shall be rendered void.  aScITE

Please be guided accordingly.

   (Minimum Stock Subscription and Treasury Shares, SEC-OGC Opinion No. 16-16,
|||

[June 27, 2016])

 8.)January 27, 2010

SEC-OGC OPINION NO. 04-10

INVESTMENT OF CORPORATE FUNDS IN CORPORATE NOTES

PNOC Development and Management Corporation

5/F PNOC Bldg. VI Energy Center,
Merritt Road, Fort Bonifacio,
Makati City, Philippines
Attention:  Mr. Peter Anthony A. Abaya
President and CEO

Gentlemen :

This refers to your letter dated September 4, 2009 requesting opinion on

whether there are legal impediments or existing SEC rules and regulations applicable
to PNOC Development and Management Corporation ("PDMC," for brevity) proposed
investment of its idle corporate funds in corporate notes issued by private
corporations and/or government-owned and controlled corporations (GOCCs) with a
credit classification/rating of double 'A'.
By express provision of Section 36 of the Corporate Code, 1 every corporation
formed under the law has the implied or incidental power to purchase, receive, take
or grant, hold . . . and otherwise deal with such real and personal property, including
securities and bonds of other corporations,  as the transaction of the lawful business of
the corporation may reasonably and necessarily require.
In relation thereto, Section 42 of the Corporation Code provides:
"Sec. 42. Power to invest corporate funds in another corporation or
business or for any other purposes. Subject to the provision of this Code,  a
private corporation may invest its funds in any other corporation or business or for
any purpose other than the primary purpose for which it was organized  when
approved by a majority of the board of the directors or trustees and ratified by
the stockholders representing at least two-thirds (2/3) of the outstanding capital
stocks. . . at a stockholders' or members' meeting duly called for purpose.
Provided, that any dissenting stockholders shall have appraisal right as provided
in this Code:  Provided, however, That where the investment by the corporation is
reasonably necessary to accomplish its primary purpose as stated in the articles of
incorporation, the approval of the stockholders or members shall not be
necessary." 2 
STECDc
 It appears from your representation that the investment in high quality fixed-
income corporate notes issued by private corporation and/or GOCCs is contemplated
to avail of higher yields than the usual interest it would obtain from depositing its
funds in a bank. Moreover, you alleged that the proposed investment is in
accordance with the company's secondary purpose stated in its Articles of
Incorporation or enhance the value of, or render profitable any of its property or
rights.
We are of the opinion that PDMC may make such investment of its idle
funds in corporate note issuance. Corporations are expressly authorized to
invest their corporate funds as a means of obtaining the best return of their
investible funds. However, considering that the investment is in furtherance of
the corporation's secondary purpose, the approval of the stockholders
representing at least two-thirds (2/3) of the outstanding capital stock at a
stockholders' meeting duly called for the purpose is necessary, pursuant to
Section 42.
Likewise, the transaction is reportable under the Securities Regulation
Code. 3 SRC Rule 20 mandates the distribution of an Information Statement (SEC Form
20-IS) that is pre-approved by the Commission, to the stockholders at least fifteen (15)
business days prior to the stockholders' meeting. Form 20-IS specifies the information
that is required to be furnished by the company, including among others, a summary
of the material features and the nature and effect of the proposed transaction, any
other material contract/transaction or relationship between the parties, financial
information as to both contracting parties, relating to investment in corporate notes
of other company.
Similarly, change in material contract which may have financial, technological or
administrative impact on the company is reportable event pursuant to SRC Rule 17.1
(A) (iii). The proposed investment could have a material financial impact on the
company and hence, should be reported to the Commission on SEC Form 17-C within
five (5) days after occurrence.
This  Opinion  is rendered based solely on the facts and circumstances disclosed
and relevant solely to the particular issues raised therein and shall not be used in the
nature of a standing rule binding upon the Commission in other cases whether of
similar or dissimilar circumstances. If, upon investigation, it will be disclosed that the
facts relied upon are different, this opinion shall be rendered null and void. 
HaAISC

Please be guided accordingly.

  (Investment of Corporate Funds in Corporate Notes, SEC-OGC Opinion No. 04-10,

|||

[January 27, 2010])

 9.)March 29, 2011

SEC-OGC OPINION NO. 18-11

CORPORATE INVESTMENTS

Angara Abello Concepcion Regala & Cruz Law Offices

22/F ACCRALAW TOWER
Second Avenue corner 30th Street,
Crescent Park West
Bonifacio Global City, 0399 Taguig
Attention:  Atty. Ruby Rose J. Yusi
Atty. Christine S. Trinidad

Mesdames :

This refers to your letter dated 01 September 2008 requesting opinion on

whether BCU & Sons, Inc.'s (BCU) planned investment in another corporation requires
ratification by the stockholders representing two-thirds (2/3) of the outstanding
capital stock in accordance with Section 42 of the Corporation Code. 1
You represent that the primary purpose of BCU, as provided in its Articles of
Incorporation, is:
"To acquire, subdivide, develop, hold, manage and dispose of, by
purchase, sale, exchange, mortgage, lease, grant or otherwise, conditionally or
absolutely, real estate or any interest therein."
In response to your query, we refer you to SEC Opinion No. 54-03 2 that states:
"Section 42 of the Corporation Code of the Philippines provides:
SECTION 42. Power to invest corporate funds in another
corporation or business or for any other purpose. — Subject to the
provisions of this Code, a private corporation may invest its funds
in any other corporation or business or for any purpose other than
the primary purpose for which it was organized when approved by
a majority of the board of directors or trustees and ratified by the
stockholders representing at least two-thirds (2/3) of the
outstanding capital stock, or by at least two thirds (2/3) of the
members in the case of non-stock corporations, at a stockholders'
or members' meeting duly called for the purpose. Written notice of
the proposed investment and the time and place of the meeting
 shall be addressed to each stockholder or member at his place of
residence as shown on the books of the corporation and deposited
to the addressee in the post office with postage prepaid, or served
personally: Provided, That any dissenting stockholder shall have
appraisal right as provided in this Code: Provided, however, That
where the investment by the corporation is reasonably necessary
to accomplish its primary purpose as stated in the articles of
incorporation, the approval of the stockholders or members shall
not be necessary.  AICHaS

Based on the foregoing provision, corporations like CIGI Foundation Inc.

are expressly authorized to invest their corporate funds in another corporation
or business as a means of obtaining the best returns of their investible funds. [C.
L. Villanueva, Philippine Corporate Law (2001 ed.), p. 257]
Where the investment by the corporation is reasonably necessary to
accomplish its primary purpose as stated in its articles of incorporation, the
approval only of the board of directors or trustees is necessary. [J. Campos and
M.C. Campos, I The Corporation Code (1990 ed.), p. 493, citing De La Rama vs.
Ma-ao Sugar Central, G.R.-L-17504 & L-17506, February 26, 1969]
However, where the investment of funds is made in any other corporation
or business or for any purpose other than the primary purpose for which the
investing corporation was organized, the approval by the majority of the board
of directors or trustees need the ratification by the stockholders representing at
least two-thirds (2/3) of the outstanding capital stock or by at least two-thirds
(2/3) of the members in case on non-stock corporation.
In this case, you assert that the investment of the Foundation in shares of
stock of another corporation is in furtherance of its primary purpose, hence,
requires only authorization from the board of trustees.
In our view, it is within the authority and business discretion of the
Foundation's board of trustees to determine whether or not the investment by
the corporation is reasonably necessary to accomplish its primary purpose as
stated in its articles of incorporation. This is premised on the principle that one
who has the power to perform an act is also vested with authority to decide whether
the circumstances for the exercise of such power exists. [S. Tabios, Action Guides for
Corporate Legal Management (1991 ed.) p. 200] This Commission cannot make such
determination for this agency ought not to meddle in matters which clearly involve
the exercise of business judgment of the board of directors or trustees of a
corporation." 3
In accordance with SEC Opinion No. 54-03, we leave it to the discretion of
BCU's Board of Directors to determine whether or not the intended investment
is in line with the primary purpose of the corporation, and thus, does not
require ratification from the stockholders. We advise that any stockholder that
takes exception to the Board's determination can initiate an intra-corporate
case with the courts in order to finally settle any issues on the matter.
This Opinion is rendered based solely on the facts and circumstances disclosed
and relevant solely to the particular issues raised therein and shall not be used in the
nature of a standing rule binding upon the Commission in other cases whether of
similar or dissimilar circumstances. If, upon investigation, it will be disclosed that the
facts relied upon are different, this opinion shall be rendered null and void.
Please be guided accordingly.  A

  (Corporate Investments, SEC-OGC Opinion No. 18-11, [March 29, 2011])

|||
 10.) April 20, 2012

SEC-OGC OPINION NO. 06-12

TREASURY SHARES

Rosalino L. Marable
Unit 808 Medical Plaza Ortigas Bldg.,
San Miguel Avenue, Ortigas Center,
Pasig City

Sir :

This refers to your letter dated 10 August 2011 requesting opinion on

treasury shares of Trackworks Advertising, Promotion and Vending Corporation
(Trackworks).  aCTcDH

Your letter states that you are a stockholder of Trackworks and that sometime
in 2007, the shares of two other stockholders, namely, AAMES Group Company, Inc.
(AAMES) and the late Leo Gueco, were bought by Trackworks using company funds
and assets. It further states that Joselito P. de Joya, its incumbent President and CEO,
listed said stockholders as such in Trackworks' General Information Sheet (GIS) and
obtained their proxy votes to gain control of the Board. It also states that Mr. De
Joya informed you that the treasury shares cannot be distributed since
Trackworks has no retained earnings. Finally, it states that the shares of AAMES
were purchased by Mr. De Joya, Mr. Gil G. Chua and Mr. Rosalino Marable in their
personal capacity using company funds and assets entered as advances to officers in
the accounting books of Trackworks.

Given the foregoing, you are now asking this Office the following:

1. When records show that some stockholders sold their shares to the
corporation, is it legal to list said stockholders as such in the
corporation's GIS? Is such an act punishable as perjury? Is the act of
listing the former shareholders as such by the President and CEO of
Trackworks punishable as perjury?
2. Can a stockholder who sold his shares in a corporation be held criminally
liable for executing proxies, despite knowledge that he has been paid
the value of such shares prior to the execution of the said proxies?
 3. Is it correct that treasury shares cannot be distributed to the
remaining stockholders because the company has no retained
earnings? If it cannot be distributed, how do we compute the
percentage of ownership? If treasury shares can be distributed
despite the absence of retained earnings, how is it distributed?

After a careful evaluation of the disclosed facts, this Office deems that
answering your first and second queries require the determination of factual issues
and a review or interpretation of contract, both of which may be a proper subject of a
court case. Thus, the Commission, as a matter of policy, shall refrain from rendering
an opinion pursuant to SEC Memorandum Circular No. 15, series of 2003.  AHCaES

However, as to your last query, it is necessary for you to understand the

nature of treasury shares. Treasury shares are shares of stock which have been
issued and fully paid for, but subsequently reacquired by the issuing
corporation by purchase, redemption, donation, or through some other lawful
means. 1 In other words, treasury shares are shares that have been earlier issued
and are regarded as property acquired and currently owned by the corporation and
not by any of its stockholders.

Being the owner of treasury shares, the corporation may opt to retire, sell
or distribute as property dividends said shares. In case of retirement of treasury
shares, the corporation shall amend its Articles of Incorporation by decreasing
the capital stock of the corporation in accordance with Section 38 of
the Corporation Code of the Philippines for the purpose of eliminating the treasury
shares. 2 On the other hand, the corporation may, like any of its other properties,
sell/dispose said shares for a reasonable price fixed by the board of
directors. 3 Once sold or reissued, the treasury shares again become
outstanding stock and regain voting rights.

In case of declaration of treasury shares as property dividends, the corporation

can only do so if the amount of the retained earnings previously used to support their
acquisition has not been subsequently impaired by losses. Generally, a corporation
can reacquire its own shares for legitimate corporate purpose/s provided it has
sufficient amount of unrestricted retained earnings to support the cost of said
shares. 4 Consequently, the amount of such earnings equivalent to the cost of the
treasury shares being held cannot be declared and distributed as dividends until
said shares are reissued or retired. 5 The reason for this is that such amount of
earnings equivalent to the cost of treasury shares is not considered part of earned or
surplus profits that is distributable as dividends.
 On the other hand, if there are retained earnings arising from the business of
the corporation other than the amount equivalent to the cost of treasury shares,
treasury shares, being property of the corporation, may be distributed among the
stockholders as property dividends. 6 Any declaration and issuance of treasury shares
as property dividend shall be disclosed and properly designated as property dividend
in the books of the corporation and in its financial statements. 7

The requirement of unrestricted retained earnings is based on the trust

fund doctrine which means that capital stock, property and other assets of a
corporation are regarded as equity in trust for the payment of corporate
creditors. 8 Creditors of a corporation are preferred over the stockholders in the
distribution of corporate assets. 9 There can be no distribution of assets among
the stockholders without first paying corporate creditors . 10

In sum, treasury shares are regarded as property owned by the

corporation and cannot be distributed as property dividends among the
stockholders in the absence of unrestricted retained earnings other than the
amount equivalent to the cost of treasury shares, because to do so would
violate the trust fund doctrine.

The foregoing opinion rendered is based solely on the facts disclosed in the
query and relevant solely to the particular issues raised therein and shall not be used
in the nature of a standing rule binding upon the Commission whether of similar or
dissimilar circumstances. 11 If, upon investigation, it will be disclosed that the facts
relied upon are different, this opinion shall be rendered void.  CcAESI

  (Treasury Shares, SEC-OGC Opinion No. 06-12, [April 20, 2012])

|||
 11.) March 27, 2018

SEC-OGC OPINION NO. 18-07

RE: QUALIFICATIONS OF MEMBERS OF THE BOARD OF DIRECTORS/TRUSTEES

Adlai C. Castigador, Ph.D.

Executive Director
Philippine Association of Colleges and Universities Commission on Accreditation
Suite 7, Mezzanine Floor, Eagle Star Condominium
25 F. Dela Rosa St., Loyola Heights,
Quezon City

Sir :

This refers to your letter dated 12 January 2018, requesting our opinion
regarding qualifications of the members of the Board of Directors of your
organization, the Philippine Association of Colleges and Universities Commission on
Accreditation (PACUCOA).
You mentioned in your letter that the Board of Directors of PACUCOA issued a
Resolution dated 24 April 2017 containing the qualifications of candidates for the
Board. Specifically, the Resolution was issued to upgrade the qualifications of the
candidates for the Board to include "TEN (10) YEARS OF EXPERIENCE AS ACCREDITOR
WITH AT LEAST ONE ASSIGNMENT PER SEMESTER."
In your letter, you also cited Section 3, Article II of the PACUCOA's By-laws, which
provides that "[n]ominations and election shall be supervised by the Board of
Directors according to the approved guidelines."
Thus, you seek our opinion on whether your organization is required by law
to include the qualifications of the Board of Directors in your Constitution and
By-laws.
We answer in the affirmative.
By-laws signifies the rules and regulations or private laws enacted by the
corporation to regulate, govern and control its own actions, affairs and
concerns, and its stockholders or members and directors and officers with
relation thereto and among themselves in their relation to it. In other words, by-
laws are relatively permanent and continuing rules of action adopted by the
corporation for its own government and that of the individuals composing it and
having the direction, in whole or in part, in the management and control of its affairs
and activities. 1
Section 47 of the Corporation Code (Code) provides:
"Section 47. Contents of by-laws. — Subject to the provisions of the Constitution,
this Code, other special laws, and the articles of incorporation, a private
corporation may provide in its by-laws for:
xxx xxx xxx
5. The qualifications, duties and compensation of directors or trustees,
officers, and employees;
xxx xxx xxx." (emphasis ours)
We had long opined 2 that in the absence of a provision in the by-laws, a
corporation cannot require additional qualification for directors other than the
mandatory requirement under Sections 23 3 and 92 4 of the Code.
Mere board resolution or approval is not sufficient to legally enforce a
qualification/disqualification because it has to be clearly provided for in the
corporate by-laws. 5 Guidelines issued by the management requiring additional
qualifications for directors, president and vice-president, may only be effective if such
are stated in the by-laws. 6 Neither can a corporation's committee on election issue a
ruling requiring additional qualification for a director if the same is not stated in the
by-laws. 7
Thus, if a corporation wants to require additional qualification for a director, it
must amend its by-laws in accordance with Section 48 of the Code.
It shall be understood, however, that the foregoing opinion is rendered based
solely on the facts and circumstances disclosed and relevant solely to the particular
issue raised therein and shall not be used in the nature of a standing rule binding
upon the Commission in other cases or upon the courts whether under similar or
dissimilar circumstances. 8 If, upon further inquiry and investigation, it will be
disclosed that the facts relied upon are different, this opinion shall be rendered void.
Please be guided accordingly.

  (Re: Qualifications of Members of the Board of Directors/Trustees, SEC-OGC Opinion

|||

No. 18-07, [March 27, 2018])

 12.) January 3, 2006

SEC-OGC OPINION NO. 02-06

DELEGATION OF THE POWER TO AMEND OR REPEAL BY-LAWS OR ADOPT NEW BY-LAWS

Atty. Rodel R. Grimaldo

Libra Law
Libarios Jalandoni Dimayuga & Magtanong
10th Floor, Strata 2000 Bldg., Emerald Avenue
Ortigas Center, Pasig City

RE : Institute of Integrated Electrical Engineers of the Philippines, Inc.

Sir:

This refers to your letter dated December 9, 2005 requesting opinion relative to
delegation to the Board of Trustees of the power to amend or repeal any by-laws or
adopt new by-laws.

Your queries are:

1. Whether there is a necessity to actually hold a meeting for the

purpose of delegating to the board of trustees the power to
amend or repeal any by-laws or adopt new by-laws?
2. What are the forms and/or documents that must be accomplished
and/or executed in order to validly carry out the delegation to the
board of trustees the power to amend or repeal any by-laws or adopt
new by-laws?

To effect a change or amendment in any provision in the by-laws, the

corporation must comply with Section 48 of the Corporation Code, quoted hereunder:

"Section 48. Amendments to by-laws. — The board of directors or trustees, by a

majority vote thereof, and the owners of at least a majority of the outstanding
capital stock, or at least a majority of the members of a non-stock corporation, at
a regular or special meeting duly called for the purpose, may amend or repeal any
by-laws or adopt new by-laws. The owners of two-thirds (2/3) of the outstanding
capital stock or two-thirds (2/3) of the members in a non-stock corporation may
delegate to the board of directors or trustees the power to amend or repeal any by-
 laws or adopt new by-laws: Provided, That any power delegated to the board of
directors or trustees to amend or repeal any by-laws or adopt new by-laws shall
be considered as revoked whenever stockholders owning or representing a
majority of the outstanding capital stock or a majority of the members in non-
stock corporation, shall so vote at a regular or special meeting. . ."(Emphasis
supplied) 
HIETAc

The above-cited provision was explained by the Commission in an opinion

addressed to  Mr. Abraham F. Briones dated July 22, 1992 which states:

. . . it seems that there is no requirement of stockholders' meeting for the

"delegation" of the power to amend the by-laws and a meeting is required only
in the "revocation" of such delegated power. However, it must be borne in mind
that under the principle of statutory construction, the meaning of the law is not
only to be extracted from any single part or portion or from isolated words and
phrases, clauses or sentences, but from a general consideration or view of the
provision as a whole. Every part thereof must be interpreted with reference to
the context. This means that every part of the provision must be considered
together and kept subservient to the general intent of the whole provision, not
separately and independently. The "doctrine of last antecedent" will not be
adhered to where extension to a more remote antecedent is clearly required by
a consideration of the entire provision. Thus, where a particular word or phrase
in a statute is ambiguous in itself or is equally susceptible of various meanings,
its true meaning may be made clear and specific by considering the company in
which it is found or with which it is associated.
Furthermore, under the afore-cited provision, the vote required for the
delegation is two-thirds which is greater than the vote required for the
amendment or repeal of the by-laws by the stockholders themselves which is
only majority. The legislative intent appears to be that as the delegation of the
power is an unusual act, the law has properly made it difficult to do so. It is
noted further that the law makes it more difficult for the stockholders to
delegate their power to amend or repeal by-laws than to revoke such a
delegation which requires only a majority. The above provisions, therefore,
should be construed strictly against delegation. Thus, if the revocation of the
delegated power requires a stockholders meeting, we find no reason why a
meeting is not also required in the delegation of such power. If we rule it
otherwise, we would be making the delegation much easier than its revocation,
which is inconsistent with the intent of the provision to make the delegation
more difficult to obtain. 1

As to your last query, the delegated power of the Board of Trustees to amend or
repeal the by-laws is temporary in nature and may be revoked at anytime by a
majority of the members at a regular or special meeting. Thus, the Commission has
previously opined that a members' resolution delegating to the board of trustees the
authority to amend the by-laws be submitted to the SEC, or if there is no such
authority, the amendments must be approved by the members in accordance with
Section 48 of the Corporation Code, which is a mandatory provision. 2

Please be guided accordingly.

  (Delegation of The Power to Amend or Repeal By-Laws or Adopt New By-Laws, SEC-
|||

OGC Opinion No. 02-06, [January 3, 2006])

 13.) April 20, 2018

SEC-OGC OPINION NO. 18-08

RE: DELEGATION OF THE POWER TO AMEND OR REPEAL BY-LAWS

Unionbank

Unionbank Plaza
Meralco Avenue cor. Onyx&Sapphire Roads
Ortigas Center, Pasig City 1605

Attention: Atty. Joselito V. Banaag

Senior Vice President, Corporate Secretary &

General Counsel

Atty. Banaag,

This refers to your letter dated 17 January 2018, requesting the Commission's
legal opinion on the proposed amendment to the by-laws of Union Bank of the
Philippines, delegating to the Board of Directors (the "Board") the power to
amend or repeal said by-laws.
In your letter, you stated that the Bangko Sentral ng Pilipinas ("BSP") did not
give due course to the proposed amendment citing certain opinions 1 of the
Securities and Exchange Commission ("SEC") to the effect that the delegation
should be embodied in a Stockholders' Resolution ("Resolution") to be
submitted to SEC and not in the By-Laws.
You further stated that presently, there are some publicly-listed commercial
banks that have embodied in their respective by-laws the power to delegate to the
board the authority to amend or repeal their by-laws, similar to that of UnionBank,
that were approved by SEC. In particular, you stated that in fact, the Commission
approved the amendment of the By-laws of Prime Orion Philippines, Inc., which is
the same provision as that proposed by UnionBank, to wit:
"1. These By-Laws may be amended or repealed by the affirmative vote of at
least a majority of the Board of Directors and the stockholders representing a
majority of the outstanding capital stock at any stockholders' meeting called for
that purpose. However, the power to amend, modify, repeal or adopt new
by-laws may be delegated to the Board of Directors by the affirmative vote of
stockholders representing not less than two-thirds of the outstanding capital
stock; provided, however, that any such delegation of power to the Board of
Directors to amend, repeal or adopt new by-laws may be revoked only by the
vote of the stockholders representing a majority of the outstanding capital stock
at a regular or special meeting."
Hence, this request.  CAIHTE

Section 48 of the Corporation Code of the Philippines (the "Code"), provides:

Sec. 48. Amendment to by-laws. — The board of directors or trustees, by a
majority vote thereof, and the owners of at least a majority of the outstanding
capital stock or at least a majority of the members of a non-stock corporation, at
a regular or special meeting duly called for the purpose, may amend or repeal
any by-laws or adopt new by-laws. The owners of two-thirds (2/3) of the
outstanding capital stock or two-thirds (2/3) of the members in a non-stock
corporation may delegate to the board of directors or trustees the power
to amend or repeal any by-laws or adopt new by-laws: Provided, That any
power delegated to the board of directors or trustees to amend or repeal any
by-laws or adopt new by-laws shall be considered as revoked whenever
stockholders owning or representing a majority of the outstanding capital stock
or a majority of the members in non-stock corporation, shall so vote at a regular
or special meeting.
In a 1965 SEC Opinion, the Commission held:
"In this connection, please be advised that the delegation to the board of
directors of the power to amend, alter or repeal by-laws or adopt new by-laws
should not be embodied in the by-laws, but merely in a resolution adopted by
2/3 of the subscribed capital stock of the corporation. This is for the reason that
the delegated authority is temporary in nature and may be revoked
anytime by a majority vote of the stockholders. x x x Accordingly, if the
power is provided in the by-laws, the authority may have been revoked already,
but may still appear therein until the corresponding amendment is made and
filed with the Commission." 2
This is further reiterated in a 1994 SEC Opinion, which held that:
"While the power to amend the by-laws may be delegated to the Board of
Directors, such delegated power is temporary in nature and may be
revoked at any time by the vote of a majority of the outstanding capital
stock. Hence, it cannot be permanently embodied in the By-laws but merely in a
Stockholders' Resolution.
In the present case, there is no certainty that the alleged delegated power of
the Board still remains effective taking into consideration the length of time
since it was granted to it by the stockholders way back in 1930. The corporate
 records on file with this Office show that the latest approved amendments to
the By-laws of the corporation were approved not only by the Board but also by
the stockholders. The presumption, therefore, is that said delegated power of
the Board to amend the by-laws had already been revoked." 3
Lastly, in a 2002 SEC Opinion, the Commission, in disapproving the proposed
amendment of Composite Wings Savings and Loan Association to its By-laws, worded
as:
ARTICLE XVII. AMENDMENT OF BY-LAWS
"Sec. 1. This By-laws may be amended by the affirmative vote of at least 2/3 of
all the Directors in a general or special meeting, which may be called for the
purpose."
had enunciated, thus:
"What is not allowable under the situation is the inclusion of the very
provision on the delegated power in the by-laws . As aptly observed in the
opinion cited, the delegated authority, being transitory in nature, may be
revoked anytime by a majority vote of the members which may not be reflected
in the by-laws until the corresponding amendment of the proviso has been
effected." 4
Thus, taking into account the above-cited Opinions, it appears that what is
required to be embodied in a Resolution, and not in the by-laws, is the actual
delegation by the stockholders to the Board of the power to amend or repeal the by-
laws, and not the enabling provision that allows the delegation by the stockholders
of such power, as lifted from Section 48 of the Code.
The reason for requiring the actual delegation to be embodied in a
resolution, and not in the by-laws is that it is transitory in nature, and, as
provided in Section 48 of the Code, may be revoked at any time by a majority
vote of the stockholders or members of the corporation. In other words, if the
actual delegation is provided in the by-laws, the power delegated may have
been revoked already, but such revocation will not reflect in the by-laws until
the corresponding amendment is filed with the Commission.
In the case at hand, the UnionBank's proposed amendment to the by-laws
merely states the power of its stockholders to delegate to the Board the authority to
amend or repeal said by-laws, the language of which is lifted directly from Section 48
of the Code, and not the actual delegation itself.
To operationalize the delegation, owners of at least 2/3 of the outstanding
capital stock shall pass the appropriate Resolution in a stockholder's meeting. The
Resolution may spell out the extent or limits of the delegation, including when it is
considered 'functus officio.'
 Hence, we believe that the afore-cited Opinions do not apply in the case at bar.
It shall be understood that the foregoing opinion is rendered based solely on
the facts disclosed in the query and relevant solely to the particular issues raised
therein and shall not be used in the nature of a standing rule binding upon the courts,
or upon the Commission in other cases of similar or dissimilar circumstances. If upon
investigation, it will be disclosed that the facts relied upon are different, this opinion
shall be rendered null and void.  DETACa

Please be guided accordingly.

  (Re: Delegation of the Power to Amend or Repeal By-Laws, SEC-OGC Opinion No. 18-
|||

08, [April 20, 2018])

 14.) October 25, 2013

SEC-OGC OPINION NO. 10-13

RE: NOTICE OF STOCKHOLDERS'/DIRECTORS'/MEMBERS' MEETING THRU E-MAIL

Ms. Elizabeth S. Fructuoso

Corporate Secretary
STELSEN CORPORATION
Unit 41 Legaspi Suites, 178 Salcedo St.,
Legaspi Village, Makati City

Dear Madam;

This refers to your letter of 01 July 2011 inquiring about the practice of
sending notices of stockholders' and board of directors' meetings through
electronic mail (e-mail) and the validity of resolutions passed by the corporation
in meetings held wherein only email notices were sent, albeit acknowledged by
the recipients.

Please note that the Corporation Code of the Philippines, Batas Pambansa Blg.

68 (hereinafter, the "Corporation Code"), provides that written notice of regular
meetings of the stockholders or members of the corporation shall be sent two (2)
weeks prior to the meeting unless stated otherwise in the corporation's by-laws. On
the other hand, in the event of a special meeting of the stockholders or
members, written notice at least one (1) week prior to the schedule of the meeting is
required. 1

Further, it is specifically provided in Section 51 of the Corporation

Code that the "Notice of meetings shall be in writing, and the time and place
thereof stated therein." (emphasis ours)  HaECDI

For meetings of the board of directors or trustees, the Corporation

Code requires that regular meetings be held on a monthly basis except when the by-
laws of the corporation provides otherwise. Special meetings of the board of directors
or trustees may be held at any time upon the call of the president or as provided by
the by-laws. Whether regular of special, notice to each director or trustee must be
given at least one (1) day prior to the scheduled meeting. 2
 SEC Opinion dated 13 March 1996 3 interpreting Sections 50 and 51 of
the Corporation Code states that:

"The use of the words (sic) "shall" in the aforecited provisions

indicates (sic) that "written" notice of meeting is mandatory and therefore
an essential requisite for validity of stockholders' meeting. Accordingly, notice
in writing to each of the stockholders of records cannot be dispensed with.
In the absence of information, from the stockholders concerned of the
transfer of their post office address, the corporation is duty bound to send
them written notice of all meetings to their last known post office address as
shown in the stock and transfer book of the Corporation."

Notably, in the above preceding paragraph, "post office address" was

mentioned as the place where the written notice of meeting should be sent.

As regards the notice requirement for the meetings of the board of

directors, SEC-OGC Opinion No. 09-06 states as follows:

"With regard to your third query, Section 50 of the Corporation

Code provides that written notice of meetings must be given to all stockholders
or members of record either at least two weeks prior to the regular meeting or
one week prior to the special meeting. On the other hand, Section 53 prescribes
the giving of notice of every meeting to every director at least one day before
the scheduled meeting. Generally speaking, every member or director of a
corporation has the right to be present at every meeting thereof, and to be
notified of the meeting. However, in the case of the directors, they may waive
the required written notice either expressly or impliedly." 4 
ACTEHI

Hence, generally, and as a default rule, written notice of the meeting, sent
through regular postal mail, must be given to stockholders/directors/trustees in
relation to the holding of meetings within the periods provided in
the Corporation Code. However, Section 47 (1), (2) and (6) allows the corporation
to provide a different mode of notice in its by-laws.

In this connection, since the Corporation Code merely requires notice of

the meeting "in writing," an e-mail notice may be included as a mode of notice
in the by-laws of a corporation, since an e-mail is considered to be "in
writing." 5 In such a case, the by-laws must, likewise, provide for the mechanics of
such sending of notices through e-mail, including the indication, recording, changing
and recognition of e-mail addresses of each stockholder/director. However, it must
be stressed that absent such specific provisions on notice requirements in a
corporation's current and standing by-laws, the general/default rule — written
notice sent through regular postal mail — applies.
 Be that as it may, it should also be noted that the Corporation Code allows
the express or implied waiver of the notice requirement by stockholders,
members, directors or trustees. 6 In this wise, it may be conjectured that a
signature of a stockholder/director/trustee acknowledging receipt of a notice of
meeting sent through e-mail may be considered such a waiver.  HacADE

It shall be understood, however, that the foregoing opinion is rendered based

solely on the facts and circumstances disclosed and relevant solely to the particular
issue raised therein and shall not be used in the nature of a standing rule binding
upon the Commission in other cases or upon the courts whether of similar or
dissimilar circumstances. 7 If, upon further inquiry and investigation, it will be
disclosed that the facts relied upon are different, this opinion shall be rendered void.

Please be guided accordingly.

  (Re: Notice of Stockholders'/Directors'/Members' Meeting Thru E-Mail, SEC-OGC

|||

Opinion No. 10-13, [October 25, 2013])

 15.) October 28, 1991

Mr. Norberto R. Capistrano

Forestry Savings and Loans Asso., Inc.
Visayas Avenue, Diliman
Quezon City

Sir:

This refers to your letter dated September 17, 1991 requesting opinion on the

following queries which we answer in the order they were presented.
1. Is a proxy form duly accomplished but undated, valid?  llcd

Section 47 of the Corporation Code provides that corporations may provide in

their by-laws for "the form for proxies of stockholders and members and the manner
of voting them". The by-laws of the corporation, therefore, would be controlling
insofar as execution of proxies is concerned.
As perusal of the by-laws of Forest Savings and Loans Association, Inc.
disclosed that the same do not contain a provision requiring proxies to be
dated. It requires only that the same be designated by the members "in, writing,
which designation shall be registered with the Corporate Secretary and/or his
representative, prior to the opening of a meeting". (Article V (2)) Therefore, proxies of
the members of subject corporation should be perceived in relation to its compliance
with the above-provision of its by-laws and Section 58 of the Corporation Code quoted
hereunder:
"SECTION 58. Proxies. — Stockholders and members may vote in person
or by proxy in all meetings of stockholders or members. Proxies shall be
in writing, signed by the stockholder or member and filed before the scheduled
meeting with the corporate secretary. . . ." (Emphasis supplied)
Accordingly, for as long as the proxy is executed in accordance with the
aforementioned provisions, the corporation is duly bound to honor the same,
even if it is undated. Where a corporation receives an undated proxy, the post mark
date or actual date of presentation is considered. (SEC Opinion dated November 13,
1972 addressed to Neil Reyes and Associates)
2. Can a designated proxy further re-designate another under the
same proxy?
Section 58 of the Corporation Code requires that "proxies shall be in
writing, signed by the stockholder or member". The appointment of proxy, therefore,
is purely personal. Thus, it was held that "the right to vote is inseparable from the
right of ownership of stock without the owner's consent, and therefore a proxy to vote
stock, to be valid, must have been given by the person who is the legal owner of the stock
and entitled to vote the same at the time it is to be voted". (5 Fletcher Sec. 2053 citing
several cases) Accordingly, unless the stockholder or member who executed the
proxy consents in writing to the re-designation of proxy, your second query is
answered in the negative.
3. When two or more individuals are designated as proxies by one
and the same person, which proxy designation should prevail where:
(a) they contain different dates;
(b) they are sent through mail;
(c) they are hand-carried during election of the Board;
(d) one is dated and the other undated;
(e) both are presented at the same time.

The Commission previously opined that where a corporation receives more

than one proxy from the same stockholder and they are all undated, the postmark
dates become important. If both are mailed on the same date, the one bearing
the latest time of day of postmark is counted. If the proxies are not mailed, then
the time of their actual presentation is considered. That which is presented latest is
the one counted. (SEC Opinion dated November 13, 1972 addressed to Neil Reyes
and Associates) Consequently, when two or more proxies are submitted the proxy
that which is received latest or appears from the evidence to have been last
executed will be accepted and counted under the theory that the latter — i.e.,
more recent proxy, constitutes the revocation of the former.  cda

4. Is the proxy valid if two or more persons are designated in the
alternative as proxies in one and same authorization?
It must be noted that the power to act as proxy has its source in the principal's
consent, as borne out of the terms of the proxy. Hence, such authority will extend to
the alternate proxy designated therein. The alternate proxy however, can only act as
proxy in the event of non-attendance of the other designated person.
5. How is proxy revoked?, Can there be implied revocation of proxy?,
If so under what circumstances?
As a general rule, one who has given a proxy the right to vote the stock
owned by him may revoke the same at anytime, unless said proxy is coupled
with an interest, even though it may in terms be irrevocable. (5 Fletcher Cyc. Corp.,
1976 rev. vol., sec. 2062, at 256) Therefore, proxies constituting an agreement
between stockholders to vote their stock in a specified manner or for a specified
purpose not supported by any consideration other than a mutual agreement of the
stockholders to vote as stated in the proxy would be revocable. Revocation of a proxy
need not be made by a formal notice to the corporation unless the statute prescribes
otherwise. (Ballantine on Corp., sec. 179, p. 409) Thus, it may be revoked orally or
by conduct. Revocation may also be expressed to the proxy holder by subsequent
proxy to another. (Ballantine, Supra., p. 409) In a number of cases, the Court held that
"where the same person gives two or more proxies, the one last given is to be
deemed a revocation of all former proxies." (Standard Power & Light Corp., v.
Investment Associates, Inc., 29 De. Ch 593, 51 A2d 572, Affg. 29 Del Ch 225, 48 A2d
501, Pope v. Whitridge, 110. Md. 468, 73A 281, holding that "last proxy given revokes
all previous proxies". Bache v. Central Leather Co. 78 NJ Eq. 484, 81A 571 cited in
Fletcher, at 257 and 261, respectively).
6. Is a proxy form valid if it contains a particular circular number and date
of the issuance thereof which however, are not for the year when the election is
to be held and the period when the Trustees will serve is different?
The duration of proxy may be fixed by its own terms. (5 Fletcher, sec. 2062 at
243). However, the Corporation Code regulates the time of continuance of proxies.
The pertinent provision of the Corporation Code provides, thus:
"SECTION 58. Proxies. — . . . . Unless otherwise provided in the proxy, it shall
be valid only for the meeting for which it is intended. No proxy shall be valid and
effective for the period longer than  five (5) years at any one time." (Emphasis
supplied)
7. Can the Board of Trustees prescribe the manner/procedure of election
of the members of the Board?
The manner or procedure of election of the Board is provided for under Section
24 of the Corporation Code, quoted hereunder:
"SECTION 24. Election of directors or trustees. — At all elections of directors
or trustees, there must be present, either in person or by representative
authorized to act by written proxy, the owners of the majority of the outstanding
capital stock, or if there be no capital stock, a majority of the members entitled
to vote. The election must be by ballot if requested by any voting stockholder or
member. In stock corporations, every stockholder entitled to vote shall have the
right to vote in person or by proxy the number of shares of stock standing, at
the time fixed in the by-laws, in his own name on the stock books of the
corporation, or where the by-laws are silent, at the time of the election; and said
stockholder may vote such number of shares for as many persons as there are
directors to be elected or he may cumulate said shares and give one candidate
as many votes as the number of directors to be elected multiplied by the
number of his shares shall equal, or he may distribute them on the same
principle among as many candidates as he shall see fit: Provided, That the total
number of votes cast by him shall not exceed the number of shares owned by
 him as shown in the books of the corporation multiplied by the whole number
of directors to be elected: Provided, however, That no delinquent stock shall be
voted. Unless otherwise provided in the articles of incorporation or in the by-
laws, members of corporations which have no capital stock may cast as many
votes as there are trustees to be elected but may not cast more than one vote
for one candidate. Candidates receiving the highest number of votes shall be
declared elected. Any meeting of the stockholders or members called for an
election may adjourn from day to day or from time to time but not sine die or
indefinitely if, for any reason, no election is held, or if there are not present or
represented by proxy, at the meeting, the owners of a majority of the
outstanding capital stock, or if there be no capital stock, a majority of the
members entitled to vote.
Further, Section 47 (7) of the same Code provides:  LexLib

"SECTION 47. Content of by-laws. — Subject to the provisions of the

Constitution, this Code, other special laws, and the articles of incorporation, a
private corporation may provide in its by-laws for: . . .
7. The manner of election or appointment and the term of office of all
officers other than directors or trustees: (Emphasis supplied)
In view of the foregoing, a corporation cannot adopt any other procedure of
electing the members of the Board which is inconsistent with the manner prescribed
in the aforecited provisions of the Corporation Code.
Please be advised accordingly.  prc

  (Mr. Norberto R. Capistrano, SEC Opinion, [October 28, 1991])

|||
 16.) February 8, 2006

SEC-OGC OPINION NO. 09-06

REQUISITES FOR DIRECTORS'/STOCKHOLDERS' MEETING

Atty. Gavino R. Reyes

Gonzales Batiller Bilog Reyes & Associates
Unit B-7th Floor, ALPAP 1 Building
140 L. P. Leviste Street, Salcedo Village
Makati City

Dear Atty. Reyes :

This refers to your letter dated January 3, 2006 requesting opinion on the
following queries:

1. Was such Joint Meeting by the interlocking directors and stockholders of

the afore-said three (3) corporations and which was purportedly
conducted outside of the Philippines permissible?
2. Was there no irregularity in such joint meeting of interlocking
directors and stockholders where the concerns of all three (3)
corporations were simultaneously discussed?
3. Assuming that, despite the presence of quorum, not all interlocking
stockholders and directors were duly notified of the joint meeting,
was such joint meeting valid?
4. In the case of OMC where only two (2) of its Directors were present, could
it validly transact business by jointly meeting with VMC and GII where
its two (2) Directors are also directors?

Vibelle Manufacturing Corp. (VMC), Genato Investment, Inc. (GII) and Oriana
Manufacturing Corp. (OMC) are all domestic corporations. Their Articles of
Incorporation similarly provide that they shall have five (5) directors. 
CIETDc

Prior to February 14, 2001, the Directors of these three (3) corporations, who
were also stockholders thereof, were as follows:

  VMC   GII   OMC

           
 a. Belen K. Genato a. Belen K. Genato a. Amelita Genato
           
b. Francisco Ang b. Francisco Ang b. Eduardo Ang
           
c. Eduardo Ang c. Eduardo Ang c. Francisco Ang
           
d. Ernesto Genato d. Ernesto Genato d. Anita Ang
           
e. Anita Ang e. Anita Ang e. Manual Guese

You stated that Francisco Ang, Eduardo Ang and Anita Ang were common
Directors of the three (3) corporations, while Belen K. Genato and Ernesto Genato
were common Directors of only VMC and Gil.

Sometime on February 14, 2001, a joint meeting of the directors and

stockholders of all three corporations was purportedly held in New York, U.S.A.
The Minutes of the Joint Meeting attached thereto indicate that an election of the
members of the board of directors of the three corporations was held on that
date. Six (6) instead of only five (5) directors were elected. Among the former
members of the board, only the following were present during the said joint meeting:

  VMC   GII   OMC

           
a. Belen K. Genato a. Belen K. Genato a. Eduardo Ang
           
b. Francisco Ang b. Francisco Ang b. Francisco Ang
           
c. Eduardo Ang c. Eduardo Ang    

It was likewise noted that while quorums were obtained for both VMC and GII,
there was none for OMC. And while Eduardo Ang was allegedly present in said joint
meeting, his signature does not appear on the afore-said Minutes of the Joint Meeting.

Before answering your queries, we must first determine whether the three (3)
corporations are ordinary corporations or close corporations.

Under Section 96 1 of the Corporation Code, a close corporation is one whose: 1)

articles of incorporation provide that all of its issued stock, excluding treasury shares,
shall be held of record by not more than a specified number, not exceeding twenty
(20); 2) all issued shares shall be subject to transfer restrictions; and 3) the
corporation shall not list in any stock exchange or make any public offering any of its
stock of any class. If a corporation does not have any of these features, the
corporation will not be classified as a close corporation and will not come within the
purview of Title XII of the Code. 2

Based on the above definition, VMC, OMC and GII cannot be classified as close
corporations because their respective articles of incorporation and by-laws fail to
expressly state the three (3) distinguishing features of a close corporation.  DHcTaE

Having properly classified the involved corporations, we answer your queries as

follows:

With regard to your  first query, the pertinent provisions are Sections 50 and 51
of the Corporation Code quoted below:

Sec. 50. Regular and Special Meetings of Stockholders or Members. — Regular

meetings of stockholders or members shall be held annually on a date fixed in the
by-laws, or if not so fixed, on any date in April of every year as determined by the
board of directors or trustees: Provided, That written notice of regular meetings
shall be sent to all stockholders or members of record at least two (2) weeks prior
to the meeting, unless a different period is required by the by-laws.
Special meetings of stockholders or members shall be held at any time deemed
necessary or as provided in the by-laws: Provided, however, That at least one (1)
week written notice shall be sent to all stockholders or members, unless
otherwise provided in the by-laws.
Notice of any meeting may be waived, expressly or impliedly, by any stockholder
or member.
Whenever, for any cause, there is no person authorized to call a meeting, the
Secretaries and Exchange Commission, upon petition of a stockholder or member
on a showing of good cause therefor, may issue an order to the petitioning
stockholder or member directing him to call a meeting of the corporation by
giving proper notice required by this Code or by the by-laws. The petitioning
stockholder or member shall preside thereat until at least a majority of the
stockholders or members present have chosen one of their number as presiding
officer. (24, 26)
"Section 51. Place and time of meetings of stockholders or members.
Stockholders' or members' meetings, whether regular of special, shall be held in
the city or municipality where the principal office of the corporation is located,
and if practicable, in the principal office of the corporation: Provided, That Metro
Manila shall, for the purposes of this section, be considered a city or municipality."

The following requisites must be present for a stockholders' meeting to be

considered valid:
 1. It must be held at the stated date and the appointed time or at a
reasonable time thereafter. 3
  To determine the date of the annual stockholder's meeting, reference
must be made to the pertinent provision of the by-laws of the
corporation. SICaDA

2. There must be previous notice. 4

  The notice must be in writing, given within the period fixed in the by-laws
and sent by the proper officer authorized therein. 5
3. It must be called by the proper person. 6
  The person authorized to call the meeting is normally stated in the by-
laws. If no person is designated in the by-laws, the authority to call a
stockholders' meeting rests with the board of directors.
4. It must held at the proper place. 7
  It is mandatory that stockholders' meetings be held in the city or
municipality where the principal office of the corporation is located,
and if practicable, in the principal office of the corporation.
5. There must be a quorum. 8

The regular or special meetings of the board of directors may be held

anywhere or outside of the Philippines, unless the by-laws provide otherwise. In
addition, Section 53 of the Corporation Code prescribes that notice of every meeting,
whether regular or special, stating the date, time and place of the meeting must be
sent to every director at least one day prior to the scheduled meeting.

Anent your second query, there is no express provision of law or ruling

prohibiting the holding of a joint meeting of stockholders and directors of
different corporations. It is a sound practice, however, to prepare separate minutes
of meetings for the different corporations. Hence, it cannot be said that holding of a
joint meeting of stockholders and directors of different corporations is disallowed
especially if there are no allegations that such joint meeting adversely affected the
interests of the individual corporations and their stockholders. 
SAHIaD

With regard to your third query, Section 50 of the Corporation Code provides

that written notice of meetings must be given to all stockholders or members of
record either at least two weeks prior to the regular meeting or one week prior to the
special meeting. On the other hand, Section 53 prescribes the giving of notice of every
meeting to every director at least one day before the scheduled meeting. Generally
speaking, every member or director of a corporation has the right to be present at
every meeting thereof, and to be notified of the meeting. However, in the case of the
directors, they may waive the required written notice either expressly or impliedly.

With respect to your  fourth query, the Commission is of the opinion that any act
of the members of the Board of Directors constituting a quorum may be considered
valid and enforceable. 9 Corollary thereto, if there is no quorum, the meeting is
void. 10 The pertinent provision of the Corporation Code regarding quorum in
meetings of the members of the Board of Directors can be found in Section 25 which
provides in part as follows:

"Section 25. . . .
The directors or trustees and officers to be elected shall perform the duties
enjoined on them by law and the by-laws of the corporation. Unless the articles of
incorporation or the by-laws provide for a greater majority, a majority of the
number of directors or trustees as fixed in the articles of incorporation shall
constitute a quorum for the transaction of corporate business, and every decision
of at least a majority of the directors or trustees present at a meeting at which
there is a quorum shall be valid as a corporate act, except for the election of
officers which shall require the vote of a majority of all the members of the board.
. . ."

It must be understood, however, that the above discussion is based solely on

the facts disclosed in your letter and relevant solely to the particular issues raised
therein and shall not be used in the nature of a standing rule binding upon the
Commission.

  (Requisites for Directors'/Stockholders' Meeting, SEC-OGC Opinion No. 09-06,

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[February 8, 2006])
 17.) January 21, 1992

Mr. Elizer P. Oliveros

Insurance Sales & Services
(Brokers), Inc.
Suite 219, 2nd Floor
Bank of P. I. Office Condominium
Plaza Cervantes, Binondo
Manila

Sir:

This refers to your letter dated December 3, 1991 requesting opinion on the
following queries:
1. Can a stockholder, who is neither an officer nor a member of the
board, serve notice to the Chairman or Secretary that he intends
to observe the board meeting of the corporation, even without
an invitation?
The purpose is to observe how the directors, whom the
stockholder voted, perform their duties, and to enable also the
observing stockholder to know the workings of the board, just in case
he wants to aspire for directorship in the future.  cdlex

2. If there is no prohibition under the By-laws or in the Corporation

Code for a stockholder to invite himself to observe Board meetings
for a legitimate purpose as above mentioned, can the Board deny
him access to the meeting?
The above queries are answered by the following jurisprudence:
"The Board of Directors determines who shall or shall not attend board meetings,
other than the directors themselves and this determination is to be made by the
board as a whole and not by directors individually." (Burt v. Iruine Co., 224 Cal App
2d 50, 36 Cal Rptr 270) cited in 2 Fletcher Sec. 418)

The Corporation Code does not confer upon any stockholder the right to

attend board meetings. Accordingly, on the basis of the aforecited ruling, the
matter of allowing or refusing a stockholder's request to observe board
meetings is discretionary on the part of the board of directors. This opinion
conforms with the principle that the board of directors is entrusted by the
stockholders with the management of the corporate affairs and unless tainted with
bad faith or fraud, the stockholders cannot interfere with the exercise of business
judgment by the Board relating to the management of the corporation. The dealings
of the board of directors may be subjected to review and scrutiny only when the
corporation's or stockholders' interests are prejudiced.
Please be advised accordingly.  llcd

  (Mr. Elizer P. Oliveros, SEC Opinion, [January 21, 1992])

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 18.) August 4, 1995

Attys. Elma Christine R. Leogardo

and Cynthia D. Nuval Ambrosio
Villaraza & Cruz Law Offices
5th Flr., LTA Bldg., 118 Perea St.,
Legaspi Village 1229 City of Makati

Madam:

This refers to your letter of July 24, 1995, requesting opinion on the following
queries:  cda

1. May the stockholders and the Board of Directors of a corporation

validly approve a resolution amending the by-laws of the
corporation which would provide that the incumbent Vice-
Chairman of the Board of Directors shall automatically be the
Chairman of the succeeding Board if he is elected as a member
of the succeeding Board?

2. May the stockholders and the Board of Directors of a corporation

validly approve a resolution amending the by-laws of the
corporation which would provide that the Chairman of the Board
may exercise his voting rights in the Board only to break a tie or
to create one?

3. May a stockholder, with the consent of the corporation, transfer or

assign one (1) qualifying share of stock from his partially-paid
shares of stock to a person who will serve merely as
its/his nominee to the Board of Directors of the corporation?

The provision of the Corporation Code pertinent to your first query provides:

"SECTION 25. Corporate officers, quorum. — Immediately after their

election, the directors of a corporation must formally organized by the election
of a president, who shall be a director, a treasurer who may or may not be a
director, a secretary who shall be a resident and citizen of the Philippines, and
such other officers as may be provided for in the by-laws. . . . " (Emphasis supplied)

The above provision clearly requires an election of a new set of officers

immediately after the election of the newly elected members of the Board.
Therefore, the newly elected Board is not bound by the choice of the previous
Board. Inasmuch as the proposal would deny the newly elected Board the
prerogative to elect the new Chairman, it would be violative of the above
provision. Accordingly, your first query is answered in the negative.

Relative to your second query, the Commission had previously ruled that
any matter or transaction must necessarily fail if the votes attained are less
than what the law requires for the particular transaction." (Ltr. to Mr. Tomas F.
Cloma, Jr. dated July 21, 1994 ) Hence, if there is a tie, the issue or proposition
simply loses. Moreover, a director cannot be deprived of the right to vote as he is
elected as such purposely to participate in the management of the corporation. A
director cannot participate in major corporate decisions unless he is given the right to
vote. A by-law provision allowing the director, who happens to be elected as the
chairman of the Board or presiding officer, to vote only in case of tie or to create one
would defeat the very purpose for which a director is elected. Thus, the Commission,
in its meeting of August 4, 1995, resolved to answer your query in the negative.

Anent your third query, the Commission on several occasions has opined that if
the purpose of the transfer of stock is only to qualify the transferee for the election in
the Board of Directors, without giving him the beneficial ownership thereof, the
transfer is not violative of the transfer restriction clause in the articles of
incorporation. Said transfer would be more of a "trust" and not a transfer of
"ownership", hence, the beneficial interest in such share will remain with the assignor
while the assignee will hold only the legal title to the stock. In such case, the
transferee should be described in the Deed of Assignment, corporate books and
certificate of stock merely as a qualifying shareholder or nominee of the transferor.
The fact that the stock standing on the corporate books is in the name of the person
only as a qualifying shareholder or that the holder of the stock certificate is described
merely as a nominee serves as a notice to the corporation and third parties that the
holder thereof does not hold the share in his own right, but holds it only as a nominee
for the benefit of the real owner. (Ltr. to Mr. Carlos S. Nocon dated November 23,
1992 citing previous SEC opinions). This ruling may be applied in the case of transfer
or assignment of a qualifying share from a partially paid subscription to a nominee in
the Board of Directors, inasmuch as under the situation, the beneficial ownership of
the share to be transferred and the obligation to pay the unpaid balance of the
subscription would remain in the transferor. Your third query is therefore answered in
the affirmative.

  (Attys. Elma Christine R. Leogardo and Cynthia D. Nuval Ambrosio, SEC Opinion,
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[August 4, 1995])
 19.) April 19, 2007

SEC-OGC OPINION NO. 06-07

Transfer of Shares; Documentary Requirements

Atty. Augusto G. Panlilio

7 Lachicha Building, Marlim Avenue
Diamond Subd., Balibago
Angeles City, 2009

Sir:

We write in connection with your letter dated 31 October 2006, a copy of which
we received on 9 January 2007, wherein you posed the following queries regarding
the transfer of shares of stock not traded nor listed in the stock exchange:

1. What are the documentary requirements on the transfer of shares?

2. Is the payment of the capital gains tax on the part of the seller, assuming
there was a gain in the sale, a requirement for the validity of the sale or
assignment or transfer of the shares to the buyer?  2007sec

The documentary requirements for the transfer of shares will depend on

whether the stockholder is in possession of the stock certificates covering his
shares. If the stockholder has custody of the stock certificates, Section 63 of
the Corporation Code, partly quoted hereunder, prescribes the manner by
which shares of stock may be transferred:

Certificate of stock and transfer of shares. — . . . 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)

Accordingly, for as long as the certificate of stock is duly indorsed in

accordance with the above provision, the same may be considered a valid
transfer of the shares covered by the certificate of stock, even without
executing a "deed of assignment" of the shares.  SECHIA

A "deed of assignment" on the other hand is necessary only when no

certificate of stock has yet been issued or where the same is not in the
possession of the transferor. 1

Note that for the transfer to be valid against third parties and the
corporation, the same must be recorded in the corporate books. An unrecorded
transfer, though valid as between the parties, cannot be effective as against the
corporation. The rights of a stockholder accrues only upon entry of his name in
the books of the corporation.

Anent your second query, non-payment of capital gains tax does not affect the
validity of the transfer as between the seller and the buyer. However if the capital
gains tax is not paid, the sale or the transfer of the shares shall not be registered in
the books of the corporation by the transfer agent or secretary of the corporation
pursuant to Revenue Regulation No. 2-82 of the Bureau of Internal Revenue (BIR). We
advise you to further clarify this with the BIR which has jurisdiction on this matter.

It shall be understood that the opinion rendered is based solely on the facts
disclosed in the query and relevant solely to the particular facts raised therein and
shall not be used in the nature of a standing rule binding upon the Commission in
other case whether of similar or dissimilar circumstances

  (Transfer of Shares; Documentary Requirements, SEC-OGC Opinion No. 06-07, [April

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19, 2007])
 20.) August 27, 2010

SEC-OGC OPINION NO. 27-10

NOTICE OF MEETINGS, DELINQUENT STOCKHOLDERS

Atty. Alros B. Belloga

Counsel for Medicus Philippine Paramedical
& Technical School (Iloilo), Inc.
Mezzanine Floor, Arguelles Building I
Arguelles Street, Jaro, Iloilo City 5000

Sir :

This refers to the queries of your client, Medicus Philippine Paramedical &
Technical School (Iloilo), Inc. ("Medicus") in connection with SEC-OGC Opinion No. 10-
15 dated 23 April 2010 on Delinquent Stocks, Delinquency Sale, Effect of Delinquency.
You have narrated the facts and stated your queries as follows:
"A stockholder in a corporation subscribed to 59.99% of the total stocks of a
corporation, of which 46.12% thereof remained unpaid. A call for payment was
made by the corporation wherein the said stockholder failed to pay for his
subscription and said subscription was subsequently declared delinquent. Later
on, the same was made the subject of an auction sale, however, the same ended
in failure for lack of a bidder.
Queries:
1. Is a delinquent stockholder entitled to notices for the stockholders' meeting?
2. What is the effect if the delinquent stockholder continuously ignores the
notices for the stockholders' meeting? What is the remedy of the corporation?
3. If the subscription of a stockholder amounting to 59.99% of the stocks of the
corporation has been previously declared delinquent and the stockholder thereof
is inactive and continues to be so, will previously decided matters and/or matters
resolved upon by the remaining stockholders in a stockholders' meeting be
valid? 
cECTaD

4. In the event that a delinquent subscription, which was previously a subject of
an auction sale with no bidder, was again put up for sale in another auction sale,
can the corporation enter into an agreement with the bidder to subject the
payment for the said sale to terms of payment, i.e., to be paid in installment basis?
 5. Can the corporation be dissolved by the remaining stockholders, considering
that the subscription for the majority of the shares has been declared
delinquent?"

Query No. 1

Notice need be given only to each stockholder of record entitled to vote at the
meeting, 1 or to those entitled to be present. 2 Section 71 3 of the Corporation
Code ("Code") is explicit that the moment a stock becomes delinquent, the holder
thereof loses his right to vote, and thus his right to be represented at any
stockholders' meeting. 4

Query No. 2

If a delinquent stockholder continuously ignores the notices for the

stockholders' meeting, such may be deemed as an implied waiver of his right to
be present at the stockholders' meeting. The Code is silent on the remedy for a
situation where a delinquent stockholder continuously ignores the notices for the
stockholders' meeting.

Query No. 3

Delinquent subscription is treated in Section 67 of the Code which provides:

". . . Payment of any unpaid subscription or any percentage thereof, together with
the interest accrued, if any, shall be made on the date specified in the contract of
subscription or on the date stated in the call made by the board. Failure to pay on
such date shall render the entire balance due and payable and shall make the
stockholder liable for interest at the legal rate on such balance, unless a different
rate of interest is provided in the by-laws, computed from such date until full
payment.  If within thirty (30) days from the said date no payment is made, all stocks
covered by said subscription shall thereupon become delinquent  and shall be subject
to sale as hereinafter provided, unless the board of directors orders otherwise."
(Italics supplied)

Based on your letter dated 24 February 2010, where you wrote, "We made a Call
for Payment for unpaid subscriptions and have declared a major subscription as
delinquent . . .," it is clear that the delinquency occurred due to the call made by the
board  and not due to the contract of subscription. This appears to be an uncommon
situation wherein the majority shareholder, with a subscription amounting to 59.99%
of the stocks of the corporation, failed to control the board, and allowed himself to be
declared delinquent.  TcEaDS
 Noteworthy is the fact that out of the total amount of shares he subscribed to,
in the amount of Php5,999,000.00, Arturo Lacuesta has paid the amount of
Php2,399,000.00 as of March 2008, 5 which was increased to Php3,232,000.00 as of
General Information Sheet ("GIS") filed on 14 April 2009. Moreover, the GIS received
by the Commission's Iloilo Extension Office on March 28, 2008 shows that Arturo
Lacuesta, the majority stockholder whose stocks have been declared delinquent, was
the Chair of the Board, but as of GIS filed on 14 April 2009, he was replaced by Manuel
J. Posecion who has paid the amount of Php100,000.00 for his total subscription.
Worthy of note too are the changes in the composition of the directors of
Medicus as shown by its 2008 and 2009 GIS. In addition to the replacement of the
Chair by a minority shareholder, Oscar Lacuesta was also replaced by Vincent Joseph
C. Villareal. As a result, two Lacuestas were replaced, leaving directors representing
shares in the amount of a mere Php435,000.00. 6
Thus, the members of the board representing the minority shareholders
declared the majority shareholder delinquent. This is a peculiar situation, but we
cannot opine on the validity of the declaration of delinquency.
Since the situation is out of the ordinary, (that is, when the board declares the
shares of stock of a minority shareholder delinquent), the general rule 7 cannot apply
to Medicus.
Thus, matters decided or resolved upon by the remaining stockholders of
Medicus representing 40.01% of its stocks, after the declaration of delinquency of the
subscription of a stockholder amounting to 59.99% of the stocks of the corporation
are not valid, because of the absence of quorum. 8 This is consistent with the opinion
of this Commission addressed to Medicus dated 23 April 2010, where we stated:
"Therefore, it appears that even if 40.01 of the total stocks, fully paid and not
delinquent are entitled to vote, Medicus cannot muster a quorum unless the 59.99%
of the total stocks are sold."
This now leads to the absurd situation where Medicus is unable to muster
enough number of stockholders to constitute a quorum for purposes of holding
a stockholders' meeting.

Query No. 4

The payment must be made in full at the time of the sale, and not subject to
terms, or in installment basis. In the sale of delinquent stocks, the highest bidder is
the person who offers to pay or is willing to pay the full amount of the balance on the
subscription  together with accrued interest, costs of advertisement and expenses of
sale, for the smallest number of shares or fraction of a share. 9 The stock so
purchased shall be transferred to such purchaser in the books of the corporation
and a certificate for such stock shall be issued in his favor. 11

Query No. 5

In view of the requirements 12 for dissolution of a corporation by shortening the

corporate term, we reply in the negative.
In amending the Articles of Incorporation, the same cannot be accomplished
except by "a majority vote of the board of directors or trustees and  the vote or written
assent of the stockholders representing at least two-thirds (2/3) of the outstanding capital
stock." As noted earlier, because of the act of the Board of Directors declaring 59.99%
of the total stocks delinquent, Medicus is now in a situation wherein it cannot validly
act on matters requiring the decision of the majority of the stockholders.  ICHcaD

The remedy is found in Section 67 of the Code: "Payment of balances of

subscription. — . . . If within thirty (30) days from the said date no payment is made,
all stocks covered by said subscription shall thereupon become delinquent and shall
be subject to sale as hereinafter provided, unless the board of directors orders
otherwise." (Italics supplied) Under the above provision, the board of directors may
order the removal of the delinquent status of unpaid subscription. Unless there is
such an order from the board, its delinquent status remains. 13
It shall be understood that the foregoing opinion is rendered based solely on
the facts and circumstances disclosed and relevant solely to the particular issues
raised therein and shall not be used in the nature of a standing rule binding upon the
Commission in other cases whether of similar or dissimilar circumstances. If, upon
investigation, it will be disclosed that the facts relied upon are different, this opinion
shall be rendered null and void.
Please be guided accordingly.

  (Notice of Meetings, Delinquent Stockholders, SEC-OGC Opinion No. 27-10, [August

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27, 2010])
 21.) April 26, 2016

SEC-OGC OPINION NO. 16-09

RE: ISSUANCE OF CERTIFICATES OF STOCK SOLD IN DELINQUENCY SALE

Mr. Willy Y. Tieng

President
c/o Solar Entertainment Corporation
3rd Floor, Worldwide Corporate Center
Shaw Boulevard corner EDSA
Mandaluyong City 1552 Philippines

Sir :

This refers to your letter dated December 28, 2015 requesting for an opinion
regarding the recording and issuance of certificates of stock for shares sold in a
delinquency sale.
You stated in your letter that Manila Gold Coast Development Corporation
(MGDC), a registered corporation and engaged in real estate business development
has an authorized capital stock of One Billion (1,000,000,000) shares with par value of
One peso each (P1.00).
Top Sincere Investments, Ltd. (Top Sincere), a foreign corporation, was the
registered subscriber of Fifty Million (50,000,000) shares of stock of MGDC
(Subject Shares), Twelve Million Five Hundred Thousand Pesos (P12,500,000) of which
has been paid as of July 2011.
On September 12, 2012, the board of directors of MGDC called for the
payment of all unpaid subscriptions of shares of stock until October 12, 2012.
Top Sincere was not able to pay its unpaid subscription despite notice; hence
the Subject Shares were declared delinquent on October 13, 2012 and
subsequently scheduled for sale on November 12, 2012.  ATICcS

During the delinquency sale, LST Development Corporation (LST) made a bid
for the Subject Shares and was declared as the highest bidder. MGDC sold the
Subject Shares to LST for Thirty Seven Million Five Hundred Thousand Pesos
(P37,500,000). LST has fully paid the balance of the subscription price and expenses of
the delinquency sale, which MGDC acknowledged.
From the foregoing, you ask for confirmation of your view that a
corporation may automatically register in its books and issue stock certificates
for shares sold in a delinquency sale upon full payment of the bid price. Thus,
MGDC can now register the Subject Shares in its books and issue the
corresponding certificate of stock in the name of LST.
Please be advised that the Commission does not, as a matter of settled policy,
render categorical opinions on issues, such as yours, which involve the substantive and
contractual rights of private parties who would, in all probability, contest the same in
court in an intra-corporate 1 and/or civil case if the opinion turns out to be adverse to
their interest. 2
However for purposes of information only, the following are imparted:
Section 68 of the Corporation Code, provides in part:
"Unless the delinquent stock holder pays to the corporation, on or before
the date specified for the sale of the delinquent stock, the balance due on his
subscription, plus accrued interest, co`xst of advertisement and expenses of
sale, or unless the board of directors otherwise orders, said delinquent stock
shall be sold at public auction to such bidder who shall offer to pay the full
amount of the balance on the subscription together with accrued interest, costs
of advertisement and expenses of sale, for the smallest number of shares or
fraction of a share. The stock so purchased shall be transferred to such
purchaser in the books of the corporation and a certificate for such stock
shall be issued in his favor. The remaining shares, if any, shall be credited in
favor of the delinquent stockholder who shall likewise be entitled to the
issuance of a certificate of stock covering such shares." (Emphasis supplied).
In a previous Opinion of the Commission, it was held that in a delinquency
sale, a certificate of stock shall be issued to the successful bidder if the full
amount of the bid price, together with interest and expenses, has been paid at
the time of the sale. 3 The highest bidder is the person offering at the sale to pay
the full amount of the balance on the subscription together with accrued
interest, if any, cost of advertisement and expenses of sale, for the smallest
number of shares or fraction of a share of stock so purchased. The stock so
purchased shall be transferred to such purchaser in the books of the corporation and
a certificate for such stock shall be issued in his favor. 4 A stockholder has the right to
have proper certificate issued to him as soon as he has complied with the conditions
(i.e., full payment of the bid price and expenses) which entitled him. 5
Please be guided accordingly.

  (Re: Issuance of Certificates of Stock Sold in Delinquency Sale, SEC-OGC Opinion No.
|||

16-09, [April 26, 2016])

 22.) March 31, 2016

SEC-OGC OPINION NO. 16-05

RE: INDIVISIBILITY OF SUBSCRIPTION CONTRACT; PAYMENT OF BALANCE OF UNPAID

SUBSCRIPTIONS; DELINQUENT SHARES; DELINQUENCY SALE

Estelita Y. Sy
Corporate Secretary
RURAL BANK OF MAASIN (SOUTHERN LEYTE), INC.
E. Rafols St., Tunga-tunga,
Maasin City, Southern Leyte

Madam :

This refers to your letter dated 17 August 2015 requesting for a legal opinion on
various matters, particularly on making of calls for payment of subscription on
installment basis, indivisibility of subscription contract, payment of the balance of
unpaid subscriptions, delinquent shares and delinquency sale.
You mentioned in your letter that the Board of Directors of the Rural Bank of
Maasin (Southern Leyte), Inc. (the Corporation, for brevity) is contemplating to make a
call for the payment of the subscription for all stockholders on installment basis; that
a certain percentage of the unpaid subscriptions shall be declared due and payable at
different dates. Consequently, you requested clarification and/or confirmation on the
following:
1. Whether or not calls for the balance of subscriptions may be made by
installments;
2. Whether or not stock certificates may be issued for the equivalent of
the shares partially paid in a subscription, even if the whole
subscription has yet to be fully paid or cannot be fully paid by the
subscriber;
3. Whether or not cash or stock dividends may be used to pay the balance of
unpaid subscriptions;
4. Whether or not the whole subscription becomes delinquent upon a
stockholder's failure to pay an installment pursuant to a call for
payment of the balance of subscription by installment; and
5. Whether the procedure for the delinquency sale prescribed in Sec. 68 of
the Corporation Code (the Code) is mandatory in such a manner that the
 board of directors of a corporation is precluded from adopting a different
procedure.
I. Whether or not calls for the balance of subscriptions may be made by
installment.
In your letter, you asked for confirmation whether, as provided for under
Section 67 of the Code, a call for payment for the balance of subscriptions may be
made by installments.  aDSIHc

The second paragraph of Section 67 provides:

"Payment of any unpaid subscription or any percentage thereof, together
with the interest accrued, if any, shall be made on the date specified in the
contract of subscription or on the date stated in the call made by the board.
Failure to pay on such date shall render the entire balance due and payable and
shall make the stockholder liable for interest at the legal rate on such balance,
unless a different rate of interest is provided in the by-laws, computed from
such date until full payment. If within thirty (30) days from the said date no
payment is made, all stocks covered by said subscription shall thereupon
become delinquent and shall be subject to sale as hereinafter provided, unless
the board of directors orders otherwise."
Thus, calls for the payment of the balance of the subscription may be
made on installment, because the Code itself provides that the contract of
subscription or the call by the board of directors, as the case may be, may
require the payment of the entire unpaid subscription or only a certain
percentage thereof on the date specified for payment. 1
We, therefore, answer your first query in the affirmative.
It is worth noting, however, that Section 67 does not give the Board of Directors
absolute power to make a call for the payment of the unpaid subscription. The first
paragraph of Section 67, 2 in relation to Section 13 3 of the Code, succinctly provides
that the call for the payment of the unpaid subscriptions is required only when there
is no fixed date for payment in the contract of subscription; otherwise, no amount of
calls from the board will make the subscription due and payable until the arrival of the
fixed date provided for in the subscription contract.
II. Whether or not stock certificates may be issued for the equivalent of the
shares partially paid in a subscription even if the whole subscription has yet to be
fully paid or cannot be fully paid by the subscriber.
As you mentioned, the Corporation understands that: (a) a subscription is one,
entire, and indivisible whole contract based on the import of Section 64 of
the Code which states that "no certificate of stock shall be issued to a subscriber
until the full amount of his subscription together with the interest and
expenses (in case of delinquent shares), if any is due, has been paid", and (b) the
principle of indivisibility of subscription is absolute as Section 64 of the Code speaks of
no exception. 4 You thereby request for interpretation of the foregoing principles in
relation to the following:
1. Whether stock certificates may be issued representing the amount equivalent
to subscriptions partially paid despite the balance being unpaid and/or
cannot be fully paid by a subscriber; and
2. Whether a stockholder may assign the balance of the subscription to a third
person in such a manner that the stock certificates will be issued to the
stockholder for the paid portion and the balance to the third person who
assumes the payment of the balance of the subscription.
As to your first sub-query, we answer it in the negative. To amplify, the
Commission consistently opined that a stockholder shall only be entitled to the
issuance of his certificate of stock upon payment of the full amount of his
subscription together with the interest and expenses (in case of delinquent
shares), if any is due. 5 This is pursuant to the doctrine of indivisibility of the
subscription contract implicitly set forth under Section 64 of the Code, that is, a
subscription is one, entire and indivisible contract. It cannot be divided into portions
so that the stockholder shall not be entitled to a certificate of stock until he has
remitted the full payment of his subscription together with the interest and expenses
if any is due. 6 The purpose of the prohibition is to prevent the partial disposition of a
subscription which is not fully paid, because if it is permitted, and the subscriber
subsequently becomes delinquent in the payment of his subscription, the corporation
may not be able to sell as many as his subscribed shares as would be necessary to
cover the total amount due from him, which is authorized under Section 68. 7
As to your second sub-query, we also answer in the negative. Again,
because of the principle of the indivisibility of subscription under Section 64 of
the Code, the subscription cannot be divided into portions. In one instance, the
Commission opined that:
"Accordingly, if the stockholder has not paid the full amount of his
subscription, he cannot transfer part of it in view of the indivisible nature of
subscription contract. It is only upon full payment of the whole subscription that
a stockholder can transfer the same to several transferees. 8 However, the
entire subscription, although not yet fully paid, may be transferred to a single
transferee, who as a result of the transfer, must assume the unpaid balance. It is
necessary, however, to secure the consent of the corporation since the transfer
of subscription right contemplates a novation of contract which under Article
1293 of the Civil Code of the Philippines cannot be made without the consent of
the creditor." 9
 III. Whether or not cash or stock dividends may be used to pay the balance of unpaid
subscriptions.
In your letter, you stated your position that under Section 43 of the Code, the
only time cash dividends may be applied to an unpaid subscription is when the stocks
have been declared delinquent. Hence, you raised the following sub-queries:
1. Whether cash dividends may be applied to the balance of a non-delinquent
subscription; and  ETHIDa

2. Whether stock dividends may be used to pay the balance of the unpaid
subscriptions.
We answer the first sub-query in the negative. Cash dividends cannot be
withheld from the subscribers who have not fully paid their subscriptions unless they
are delinquent on their unpaid subscriptions. 10 Basically, this is because the balance
of the unpaid subscription is not yet due and demandable. The corporation may use
the cash dividends to pay off stockholders' subscription but which have not been
declared delinquent only if the stockholders concerned give their consent thereto. 11
As to your second sub-query, we likewise answer in the negative. A
stockholder's indebtedness to a corporation under a subscription agreement cannot
be compensated with the amount of his shares in the same corporation, there being
no relation of creditor and debtor with regard to such share. Under Section 43 (par. 1),
"stock dividends shall be withheld from the delinquent stockholder until his unpaid
subscription is fully paid." In other words, under the said provision, it is not allowed to
apply stock dividend to unpaid subscription. 12
Moreover, it should be noted that the "declaration of stock dividend involves the
creation and issue of new shares of stock. The basis of the issue, insofar as payment
into the corporation is not required of the recipient, is surplus assets which thus
become converted into strict capital with all which that implies." Thus, a stock
dividend which requires a transfer of surplus to capital account cannot be made
without issuing new shares. Considering that the retained earnings/profits are already
applied as payment to the new issuance of shares, the same cannot be reapplied to
previous subscriptions which are still unpaid. Likewise, to allow the stocks issued
pursuant to the declaration of stock dividend as payment to unpaid subscription
would be, in effect, re-acquiring its own shares, the proceeds of which will be applied
to the unpaid subscription, which case is not allowed under Section 41 of
the Code which enumerates the instances and conditions wherein a corporation can
legally purchase or acquire its own shares. 13
IV. Whether or not the whole subscription becomes delinquent upon a stockholder's
failure to pay an installment pursuant to a call for payment of the balance of subscription
by installment.
 You requested that the following sub-queries be addressed:
1. Does the subscription become automatically delinquent within 30-days from
the date stated in the call should the stockholder fails to pay?
2. What is the meaning of the word "unless the board of directors orders
otherwise"? Does it authorize the board of directors of a corporation to
remove the delinquency status of a particular subscription while not lifting
the status of subscriptions similarly situated?
3. Should a stockholder fail to pay an installment within 30-days from the date
stated in the call made by the board of directors, does that render the
whole subscription delinquent or just the portion/percentage of the
subscription which becomes due and payable?
On the first sub-query, the answer is in the affirmative. There is no need of a
formal declaration of the Board for an unpaid subscription to become delinquent in
the event of failure to pay the unpaid subscription within the prescribed 30-day
period from the date specified in the subscription contract or the date stated in the
call. 14 Henceforth, the subscription becomes automatically delinquent upon the lapse
of the 30-day period stated in the call, with the stockholder failing to pay.
Relative to your second sub-query, the Code provides:
"SECTION 67. Payment of balances of subscription. — . . . If within thirty (30)
days from the said date no payment is made, all stocks covered by said
subscription shall thereupon become delinquent and shall be subject to sale as
hereinafter provided, unless the board of directors orders otherwise."
(Emphasis supplied)
Under the above provision, the phrase "unless the board orders otherwise"
means that the board of directors may order the removal of the delinquent status of
unpaid subscription. Unless, there is such an order from the board, its delinquent
status remains. 15
As to whether the removal of the delinquency status could be applied only to a
particular subscription, it has been held that a call made upon some of the
subscribers is void or which requires some to pay a higher rate than the others,
pursuant to the rule that calls must operate uniformly upon all shareholders. A call
cannot be of such a character as to permit the directors to practice favoritism or act
oppressively. 16 In like manner, if a call cannot be made discriminatorily, so should the
removal of the delinquency status.
On the last sub-query, we answer in the affirmative. Failure to pay on the date
fixed by the board on call of subscription shall render the entire balance due and
payable and make all the stocks covered by the said subscription delinquent and
subject to sale at public auction. 17
 V. Whether the procedure for the delinquency sale prescribed in Sec. 68 of
the  Code  is mandatory in such a manner that the board of directors of a corporation is
precluded from adopting a different procedure.
We answer in the affirmative.
If a stockholder fails to pay his unpaid subscription after a valid call, there are
two (2) remedies under the Code for the corporation to enforce the liability. The first
remedy consists of permitting the corporation to put up delinquent shares for sale
under Section 68 thereof and the second one is by an action in Court to recover the
unpaid subscription pursuant to Section 70 thereof. The unsuccessful attempt to
follow the remedy by sale under said Section will not bar an action in Court to recover
the unpaid subscription pursuant to Section 70. 18
Strict compliance with the formalities of sale under Section 68 is necessary, the
power to make the sale being merely granted by law and an extra ordinary
one. 19 Unless the delinquent shares are sold in accordance with the said Section, the
ownership thereof remains with the stockholder. 20
It shall be understood that the foregoing opinion is rendered based solely on
the facts disclosed in the query and relevant solely to the particular issues raised
therein and shall not be used in the nature of a standing rule binding upon the courts,
or upon the Commission in other cases of similar or dissimilar circumstances. 21 If
upon investigation, it will be disclosed that the facts relied upon are different, this
opinion shall be rendered null and avoid. cSEDTC

Please be guided accordingly.

  (Re: Indivisibility of Subscription Contract; Payment of Balance of Unpaid

|||

Subscriptions; Delinquent Shares; Delinquency Sale, SEC-OGC Opinion No. 16-05,

[March 31, 2016])
 23.) March 14, 2011

SEC-OGC OPINION NO. 16-11

STOCK AND TRANSFER BOOK; EXECUTIVE COMMITTEE

Ms. Luz I. Garcia

Chairman, Executive Committee
Mabini Colleges, Inc.
Daet, Camarines Norte

Madame :

This refers to your letter dated 20 February 2009. 1 In your letter, you posed the
following queries:

1. May the shares of known stockholders who have failed or refused to

present their stock certificates for reconstitution be recorded as
shares held in trust by Mabini Colleges without prejudice to their
being transferred to the lawful owner upon presentation of the
certificate and pertinent documents?
2. In the absence of a Board (as there is no quorum at the moment), may
the stockholders pass a resolution in lieu of a board resolution re:
signatories to bank transactions, opening and closing of bank
accounts, filing a case for the corporation and the like?
3. In reconstituting the stock and transfer book, shall recording be
that as what it was when the STB was lost? Or should it be the
current owner or last transactions affecting the shares?
4. May the third member of the Executive Committee, who has filed the
resignation from the ExeCom albeit unaccepted, be compelled to
attend the ExeCom meeting? How?  HcTIDC

Please be advised that the Commission does not, as a matter of settled policy,
render opinions on queries or transactions involving justiciable issues that may
eventually be litigated in the future or that could only be clarified and determined in a
proper proceeding, such as those presented in your letter. The opinion that may be
rendered thereon would not be binding upon private parties, who would in all
probability, if the opinion happens to be adverse to their interest, take issue therewith
and contest it before the Court. 2 For this reason, the Commission refrains from giving
opinions on these kinds of queries.

However,  for purposes of information only, based on the facts you provided, the
following may be imparted.

Anent your first query, you stated in your letter that these stockholders are
"known" but only refuse or failed to present their stock certificates for
reconstitution. It is worth reiterating that: "a stock certificate is merely
evidence of a share of stock and not the share itself." 3 Thus, the Commission has
previously opined that "a corporation cannot by itself cancel a recorded
ownership of shares of stock just because the stockholder failed to comply with
a directive to surrender the stock certificate for replacement." 4 Based on various
authorities:

"Extrinsic evidence of the acts or matters which are or should be recorded in

the corporate books and records may be admitted where the original corporate
records are lost, mislaid or destroyed or are otherwise inaccessible. Proper
foundation proof explaining the failure to produce the original books and records
must first be laid for the introduction of other evidence. Such secondary evidence
ordinarily consists of copies of the records, either certified or sworn to, or parol
testimony. (Fletcher, sec. 2197 648)

Apropos thereto, Section 4 Rule 130 of our Rules of Court reads thus:

SECTION 4.  Secondary evidence when original is lost or destroyed. — When

the original writing has been lost or destroyed, or cannot be produced in court,
upon proof of its execution and loss or destruction, or unavailability, its contents
may be proved by a copy, or by a recital of its contents in some authentic
documents, or by the recollection of witnesses.

Hence, when the original stock and transfer book of a corporation has
been lost or destroyed, secondary or extrinsic evidence may be introduced to
reconstitute its contents. In line, however, with our rules requiring the
maintenance of a stock and transfer book, said new book should be
presented to this Commission for proper registration, accompanied by a
sworn statement executed by any responsible corporate officer setting
forth the circumstances attending the loss. (SEC Opinion dated January 21,
1988)" 5 (emphasis supplied)

Anent your second query, the Corporation Code 6 provides:

"Sec. 23. The board of directors or trustees. — Unless otherwise provided in

this Code, the corporate powers of all corporations formed under
 this Code shall be exercised, all business conducted and all property of such
corporations controlled and held by the board of directors or trustees to be
elected from among the holders of stocks, or where there is no stock, from
among the members of the corporation, who shall hold office for one (1) year
until their successors are elected and qualified. 
aTEHCc

xxx xxx xxx

Sec. 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."

Under your corporation's Amended By-Laws, it is stated that:

"The business and property of the corporation shall be managed by a

Board of Five (5) Trustees who shall be elected annually by the stockholders for
a term of one (1) year and shall serve until the election and acceptance of their
duly qualified successors. . . . Any vacancies that may occur before the next
annual meeting of the stockholders may be filled by the remaining members of
the Board of Trustees if still constituting a quorum by a majority vote and the
trustee of Trustees so chosen shall serve for the unexpired term." 7

As you yourself stated in your letter, there is no quorum. We have previously

opined that:

"Failure however of the corporation to obtain a quorum for the election of

the board of directors, will simply result in the retention of the members of the
board of directors in their present respective position as hold-over until their
successors shall have been elected and qualified." 8

Thus, the lack of quorum should be addressed by conducting a meeting for the
purpose of filling up the remaining vacancies in the Board.

Regarding your third point of query, the Corporation Code 9 is clear on this

point:

"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." 10

Where the statutes require or regulate the keeping of corporate books and
record, a corporation is duty bound to comply with them. "The object of such statutes
is to protect the right of stockholders, so that the books may be open to examination
to aid the state in exercising its visitorial power over the corporation, and perhaps to
enable the creditors to examine the books also." 11 Thus, your corporation's stock and transfer book
should be accurate in all its entries, reflecting all necessary payments, alienations, sales or transfers of stock.

Anent your final question, the management of the affairs of the Executive
Committee is left to the discretion and judgment of the Board Members "subject to
specific statutory limitations which may not be delegated to committees, a properly
constituted committee composed of directors has all the authority of the board to the
extent provided in the resolution of the board or in the by-laws." 12

The foregoing opinion rendered is based solely on the facts disclosed in the
query and relevant solely to the particular issues raised therein and shall not be used
in the nature of a standing rule binding upon the Commission whether of similar or
dissimilar circumstances." 13 If, upon investigation, it will be disclosed that the facts
relied upon are different, this opinion shall be rendered void.  DaAISH

Please be guided accordingly.

  (Stock and Transfer Book; Executive Committee, SEC-OGC Opinion No. 16-11, [March
|||

14, 2011])
 24.) July 3, 2015

SEC-OGC OPINION NO. 15-03

RE: ALTERNATIVE REFERENCES OF STOCK OWNERSHIP OTHER THAN THE STB

Mr. Zandro O. Babol

Corporate Secretary
Golden Dragon International Terminals, Inc.
Osmeña St., San Nicolas
Baao, Camarines Sur

Sir :

This is in relation to your letter-request for opinion dated 25 February 2015

entitled Request for Opinion on Matters of Stockholders and Stockholdings when the Stock
and Transfer Book is Inaccessible in relation to Golden Dragon International Terminals,
Inc. (GDITI).  HTcADC

In your letter, you disclosed that upon your assumption of office as Corporate
Secretary of GDITI, you were made aware of an on-going squabble for control of
the management of the company which has lasted for six (6) years and has
resulted in the inaccessibility of some corporate records, including the stock
and transfer book (STB). Further, you stated that in calling for the annual
stockholders' meeting held on 21 March 2014, the corporation only used the 2013
General Information Sheet (GIS) as reference for the purpose of determining who
are entitled to receive the notice of meeting. You further stated that the corporation
will again call for an annual meeting this year as stipulated in its By-laws.

On your premise that the STB is inaccessible, you propound several queries,
summarized as follows:

1. What alternative record/document of stockholders and their

corresponding stockholdings could be the basis in determining
whom to send the notices of the meeting to?
2. Is personal knowledge of the Corporate Secretary sufficient basis in
determining whom to send notices?
3. Will the presentation of the certificates of stocks or duly notarized
original copies of deeds of conveyance, assignment, transfer or
 sale of such shares of stock suffice to determine a quorum and
call the meeting to order.
4. Is the recording of sales and transfer of shares of stocks in the STB
considered valid when no Certificate Authorizing Registration (CAR)
from the Bureau of Internal Revenue (BIR) is submitted?

A careful reading of your letter reveals that the queries you raised arise from an
on-going intra-corporate dispute which is covered under Section 5 (b) of Presidential
Decree No. 902-A (P.D. 902-A), as amended, which reads:

"Sec. 5. In addition to the regulatory and adjudicative functions of the

Securities and Exchange Commission over corporations, partnerships and other
forms of associations registered with it as expressly granted under existing laws
and decrees, it shall have original and exclusive jurisdiction to hear and decide
cases involving:

xxx xxx xxx

(b) Controversies arising out of intra-corporate or partnership relations,

between and among 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 franchise or right to exist as such entity. . . ."

Kindly note that pursuant to the Securities Regulation Code (SRC), the

Commission no longer has jurisdiction over intra-corporate disputes under Section 5
of P.D. 902-A, as the same has been transferred to the regular courts. 1

Further, it is the policy of the Commission to refrain from issuing opinions

involving matters which may be or are the subject of an intra-corporate dispute
pursuant to Section 5.2 of SEC Memorandum Circular No. 15 Series of 2003 (MC 15-
03) which states as follows:

"5. As a matter of policy, the Commission, shall refrain from rendering an opinion
in the following:
5.1 . . .
5.2 Matters which involve the substantive and contractual rights of private
parties who would, in all probability, contest the same in court of the
opinion turns out to be adverse to their interest. . . ."

Be that as it may, for purposes of information only, the following are imparted.
 Section 74 of B.P. 68 or the "Corporation Code of the Philippines" (Corporation
Code) provides as follows:  aScITE

"Section 74. Books to be kept; stock transfer agent. — . . .

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. . . ."

The significance of the STB in the determination of stockholder status is

apparent in the application of Section 50 of the Corporation Code which makes
it mandatory for the corporation to issue a notice of meeting to stockholders
two (2) weeks before the date of the annual stockholders' meeting. Said
provision reads:

"Section 50. Regular and special meetings of stockholders or members. —

Regular meetings of stockholders or members shall be held annually on a date
fixed in the by-laws, or if not so fixed, on any date in April of every year as
determined by the board of directors or trustees: Provided, that written notice
of regular meetings shall be sent to all stockholders or members of record at
least two (2) weeks prior to the meeting, unless a different period is required by
the by-laws." (emphasis ours.)

The right to receive notice of meeting is a right afforded only to the stockholders
of record of the corporation. The status of being a stockholder of record is
determined by the stock and transfer book (STB). "To determine who are the
present stockholders of a corporation, much would depend on the identities of
the stockholders as appearing in the STB of the corporation which is the best
evidence to show the present stock ownerships." 3

Given the significance of the STB in the determination of stockholder status, the
courts, in various cases, have discussed which sources may serve as alternative
references in determining stock ownership only in cases where the STB is lost or
destroyed. In Lanuza v. Court of Appeals, 4 the High Court held that parol evidence
may be admitted to supply omissions in the corporate records. Likewise, this
Commission previously opined that while the STB is the best evidence of stock
ownership, it is not an exclusive evidence on matters and things written
therein. Extrinsic or secondary evidence may be admitted. Proper
foundation/proof, however, explaining why the STB should not be relied on must first
be laid for the introduction of other evidence. 5 Such secondary evidence ordinarily
consists of copies of the records, either certified or sworn to, or parol testimony.
(Fletcher, sec. 2197, at 648).

Apropos thereto, Rule 130 of our Rules of Court reads:

"Section 4.  Secondary evidence when original is lost or destroyed. — When

the original writing has been lost, destroyed, or cannot be produced in court,
upon proof of its execution and loss or destruction or unavailability, its contents
may be proved by a copy, or by a recital of its contents in some authentic
documents or by the recollection of witnesses.  HEITAD

Accordingly, when the original stock and transfer books of a

corporation has been lost or destroyed, secondary or extrinsic evidence
may be introduced to reconstitute its contents." 6 (emphasis ours.)

It should be emphasized that the STB is the quintessential record of all

stockholders and their corresponding stockholdings in the corporation. Only in the
event that the said STB is lost or destroyed should the corporation resort to
gathering extrinsic evidence or parol evidence of stock ownership following the
general rules on the presentation of secondary evidence.

It is the responsibility of the Corporate Secretary to serve as the custodian of

corporate records and to keep the STB, as well as making proper and necessary
entries therein. 12 Hence, the Commission urges you as Corporate Secretary of
GDITI to take the necessary measures to make the STB accessible, including
filing a case in court to gain access to and assume custody of the STB, or have the
same reconstituted if appropriate, as in cases where the STB is lost or destroyed, so
that proper entries therein can be made.

As to the validity of the recording of sales and transfer of shares of stocks in the
STB when no CAR from the BIR is submitted, it should be noted that the Commission
is not the agency in charge of the implementation of Section 11 of Revenue
Regulations No. 06-08 as clarified by Revenue Memorandum Circular No. 37-
2012 requiring the issuance of a Certificate Authorizing Registration (CAR). However,
for purposes of discussion, said provision states that —

"Section 11. Effect of Non-Payment of Tax. — No sale, exchange, transfer

or similar transaction intended to convey ownership of, or title to any
 share of stock shall be registered in the books of the corporation unless
the receipts of payment of the tax herein imposed is filed with and
recorded by the stock transfer agent of secretary of the corporation. It shall
be the duty of the aforesaid persons to inform the Bureau of Internal Revenue
in case of non-payment of tax. Any stock transfer agent or secretary of the
corporation of the stockbroker, who caused the registration of transfer of
ownership or title on any share of stock in violation of the aforementioned
requirements shall be punished in accordance with the provisions of Title X,
Chapters I and II of the Tax Code, as amended." (emphasis ours)

Differently stated, the above-quoted provides that the recording of sales and
transfer of shares of stock in the STB without presenting or submitting the CAR from
the Bureau of Internal Revenue (BIR) to the Corporate Secretary or other transfer
agent is not valid. Hence, in the same vein, to be proof of being a stockholder of
record, the presentation of documents evidencing sales and transfer of shares of
stocks should be made together with the CAR. 

It shall be understood that the foregoing opinion is rendered based solely on

the facts disclosed in the query and relevant solely to the particular issues raised
therein and shall not be used in the nature of a standing rule binding upon the courts,
or upon the Commission in other cases of similar or dissimilar circumstances. 13 If
upon investigation, it will be disclosed that the facts relied upon are different, this
opinion shall be rendered null and void.  ATI

  (Re: Alternative References of Stock Ownership Other than the STB, SEC-OGC Opinion
|||

No. 15-03, [July 3, 2015])

 25.) January 28, 1999

Ms. Ma. Cecilia Salazar-Santos

Ishiwata Ngo & Associates
No. 12 ADB Avenue, Ortigas Center
1550 Mandaluyong City, Metro Manila

Madam:

This refers to your letter dated January 5, 1999 inquiring whether or not the

procedure for the issuance of new stock certificates laid down under Section 73 of
the Corporation Code should be followed with respect to lost/stolen/destroyed
stock certificates which must be surrendered and cancelled for purposes of
paying out liquidating dividends.  cdphil

A certificate of stock is merely an "evidence" certifying that the person

named therein is the owner of the stated number of shares of stock in a
corporation. One may own shares of stock without possessing a certificate
thereof, which after all is but an evidence of owning the shares. The "stock and
transfer book" is ordinarily admissible and generally regarded as the best
evidence of stock ownership. Therefore, a corporation cannot by itself cancel a
recorded ownership of shares of stock just because the stockholder failed to
comply with a directive to surrender the stock certificate for replacement.
Foreign jurisprudence is replete with authorities to the effect that a corporation
may voluntarily issue a new certificate of stock in place of an original certificate which
has been lost or destroyed and it can be compelled to issue a new certificate without
any indemnity where, upon the facts, it is reasonably certain that the original
certificate will not reappear. as where there is a clear proof that the original had been
destroyed, or that it had been lost or stolen, not having an assignment by the owner,
or where the certificate was lost by the corporation itself by carelessness, or if the
corporation was otherwise protected, for in such a case the corporation could not
incur any liability by reason of the original certificate. (SEC  Opinion  dated May 27,
1996  addressed to Atty.  Jose C.  Castro citing 11 Fletcher Sec.  5180) Thus, the
Commission previously opined that while Section 73 of the Corporation
Code appears to be mandatory, the same admits exceptions, such that a
corporation may voluntarily issue a new certificate in lieu of the original
certificate of stock which has been lost without complying with the
requirements under Section 73 of the Corporation Code, provided that the
corporation is certain as to the real owner of the shares to whom the new
certificate shall be issued. (Ibid.  citing  Ltr. to Josephine A Batiller dtd. June 11, 1990).
 Accordingly, under the circumstances presented in your letter, the
requirements under Section 73 of the Corporation Code may not be strictly
complied with. It would be an internal matter for the corporation to find measures in
ascertaining who are the real owners of stock for purposes of liquidation. It is well-
settled that unless proven otherwise, the "stock and transfer book" of the corporation
is the best evidence to establish stock ownership.

  (Ms. Ma. Cecilia Salazar-Santos, SEC Opinion, [January 28, 1999])

|||
 26.) July 1, 2009

SEC-OGC OPINION NO. 13-09

Effective Date of Merger

Punongbayan & Araullo
20th Floor, Tower 1
The Enterprise Center 6766
Ayala Avenue, Makati City
Attention:  Mr. Raymund S. Gallardo
Partner, Tax Advisory & Compliance

Gentlemen :

This refers to your letter dated 26 January 2009 requesting confirmation on the
issue of whether your clients, DELFINGEN PH-FILIPINAS, INC. (Delfingen PH) and
DELFINGEN WEST, INC. (Delfingen West) can include the following stipulation in their
plan of merger:  ICTDEa

"Effective Date of Merger. Upon approval of this Plan of Merger by the

stockholders of Delfingen PH and Delfingen West, the Articles of Merger shall be
filed by Delfingen PH and Delfingen West with the Securities and Exchange
Commission ("SEC"). The Merger shall be effective on January 1, 2009
(hereinafter referred to as "Effective Date of Merger"), on the condition that
this Effective Date of Merger is approved by the SEC. Accordingly, this Plan of
Merger, as well as the Articles of Merger, will have no legal effect and will not be
legally binding as between Delfingen PH and Delfingen West, nor will the rights
and obligations of third parties as regards Delfingen PH and Delfingen West be
affected, without the issuance by the SEC of the Certificate of Merger. Upon the
issuance of the Certificate of Merger by the SEC, the Effective Date of Merger
shall become operative and binding between Delfingen PH and Delfingen West."
The Commission, in a previous opinion, 1 has allowed an identical provision to
form part of the Articles of Merger of two corporations. It was provided that
notwithstanding the provisions of Section 79 2 of the Corporation Code, wherein it
was stated that the merger shall be effective upon the issuance by the Commission of
the certificate of merger, the stipulation may be allowed in view of the following:
1) Public policy considerations. "Jurisprudence dictates however that, in the
exercise of supervisory and regulatory functions over corporations and partnerships
registered with the Commission, the Corporation Code should be given a reasonable
or liberal construction which will best execute its purpose, even though such
construction is not within its strict literal interpretation. A strict construction should
not be permitted to defeat the policy and purpose of the Code. Therefore, 'a literal
interpretation is to be rejected if it would be unjust or lead to absurd results' (Soriano
v. Offshore Shipping and Manning Corp., 177 SCRA 513,519 [1989])" 3
The Supreme Court has ruled that "(t)he spirit, rather than the letter of a law
determines its construction; hence, a statute, as in this case, must be read according
to its spirit and intent." 4 In this instance, "the Corporation Code should be given a
judicious, not stern and discordant interpretation, which will promote and uplift the
development of trade relations and which will encourage friendly commercial
intercourse among corporations provided that its primordial end (protection of public
interests) is served." 5
2) No party will be prejudiced thereby. Prior to the approval of the proposed
stipulation, a confirmation was made by the applicants that the same would not
adversely affect any third party, nor would it cause a decrease in tax dues of the
corporations involved.  SHTaID

Based on your letter, the merger would be in the best interests of both
Delfingen PH and Delfingen West. Moreover, there was an assurance that "the
proposed stipulation of the parties in their Plan of Merger with regard to the
effective date of merger would not prejudice the rights of the general public or
third parties transacting with either Delfingen PH and Delfingen West nor would
it result to any decrease in the payment of tax of either of the parties." 6
From the foregoing, it is clear that there can be no objection to the
proposed stipulation in your clients' plan of merger, which is legally feasible.
It shall be understood that the opinion rendered is based solely on facts
disclosed in the query and relevant solely to the particular issues raised therein and
shall not be used in the nature of a standing rule binding upon the Commission on
other cases whether of similar or dissimilar circumstances.

  (Effective Date of Merger, SEC-OGC Opinion No. 13-09, [July 1, 2009])

|||
 27.) [G.R. No. 104102. August 7, 1996.]

CENTRAL TEXTILE MILLS, INC., Petitioner, v. NATIONAL WAGES AND PRODUCTIVITY

COMMISSION, REGIONAL TRIPARTITE WAGES AND PRODUCTIVITY BOARD — NATIONAL
CAPITAL REGION, and UNITED CMC TEXTILE WORKERS UNION, Respondents.

DECISION

ROMERO, J.:

On December 20, 1990, respondent Regional Tripartite Wages and Productivity Board — National
Capital Region (the Board) issued Wage Order No. NCR-02 (WO No. NCR-02), which took effect on
January 9, 1991. Said wage order mandated a P12.00 increase in the minimum daily wage of all
employees and workers in the private sector in the NCR, but exempted from its application
distressed employers whose capital has been impaired by at least twenty-five percent
(25%) in the preceding year.

The "Guidelines on Exemption from Compliance With the Prescribed Wage/Cost of Living Allowance
Increase Granted by the Regional Tripartite Wage and Productivity Boards," issued on February 25,
1991, defined "capital" as the "paid-up capital at the end of the last full accounting period
(in case of corporations)." Under said guidelines," (a)n applicant firm may be granted exemption
from payment of the prescribed increase in wage/cost-of-living allowance for a period not to exceed
one (1) year from effectivity of the Order . . . when accumulated losses at the end of the period
under review have impaired by at least 25 percent the paid-up capital at the end of the last full
accounting period preceding the application." cralaw virtua1aw library

By virtue of these provisions, petitioner filed on April 11, 1991 its application for exemption
from compliance with WO No. NCR-02 due to financial losses.

In an order dated October 22, 1991, the Board’s Vice-Chairman, Ernesto Gorospe, disapproved
petitioner’s application for exemption after concluding from the documents submitted that petitioner
sustained an impairment of only 22.41%.

On February 4, 1992, petitioner’s motion for reconsideration was dismissed by the Board for lack of
merit. The Board, except for Vice-Chairman Gorospe who took no part in resolving the said motion
for reconsideration, opined that according to the audited financial statements submitted by petitioner
to them, to the Securities and Exchange Commission and to the Bureau of Internal Revenue,
petitioner had a total paid-up capital of P305,767,900.00 as of December 31, 1990, which amount
should be the basis for determining the capital impairment of petitioner, instead of the authorized
capital stock of P128,000,000.00 which it insists should be the basis of computation.

The Board also noted that petitioner did not file with the SEC the August 15, 1990 resolution of its
Board of Directors, concurred in by its stockholders representing at least two-thirds of its outstanding
capital stock, approving an increase in petitioner’s authorized capital stock from P128,000,000.00 to
P640,000,000.00. Neither did it file any petition to amend its Articles of Incorporation brought about
by such increase in its capitalization.

Petitioner maintains in the instant action that its authorized capital stock, not its
unauthorized paid-up capital, should be used in arriving at its capital impairment for 1990.
Citing two SEC Opinions dated August 10, 1971, and July 28, 1978, interpreting Section 38 of the
Corporation Code, it claims that "the capital stock of a corporation stand(s) increased or decreased
only from and after approval and the issuance of the certificate of filing of increase of capital stock."
library
cralaw virtua1aw
We agree.

The guidelines on exemption specifically refer to paid-up capital, not authorized capital stock, as the
basis of capital impairment for exemption from WO. No. NCR-02. The records reveal, however, that
petitioner included in its total paid-up capital payments on advance subscriptions, although the
proposed increased in its capitalization had not yet been approved by, let alone presented for the
approval of, the SEC. As observed by the Board in its order of February 4, 1992, "the aforementioned
(r)esolution (of August 15, 1990) has not been filed by the corporation with the SEC, nor was a
petition to amend its Articles of Incorporation by reason of the increase in its capitalization filed by
the same." cralaw virtua1aw library

It is undisputed that petitioner incurred a net loss of P68,844,222.49 in 1990, and its authorized
capital stock as of that time stood at P128,000,000.00. 1 On August 15, 1990, a Board resolution
increasing the capital stock of the corporation was affirmed by the requisite number of
stockholders. Although no petition to that effect was ever submitted to the SEC for its
approval, petitioner already started receiving subscriptions and payments on the proposed increase,
which it allegedly held conditionally, that is, pending approval of the same by the SEC. In its
Memorandum, however, petitioner admitted, without giving any reason therefor, that it indeed
"received ‘subscriptions’ and ‘payments’ to the said proposed increase in capital stock,
even in the absence of SEC approval of the increase as required by the Corporation Code." 2 Thus,
by the end of 1990, the corporation had a subscribed capital stock of P482,748,900.00 and, after
deducting P176,981,000.00 in subscriptions receivables, a total paid-up capital of P305,767,900.00.
3 P177,767,900.00 of this sum constituted the unauthorized increase in its subscribed
capital stock, which are actually payments on future issues of shares.

These payments cannot as yet be deemed part of petitioner’s paid-up capital, technically
speaking, because its capital stock has not yet been legally increased. Thus, its authorized
capital stock in the year when exemption from WO No. NCR-02 was sought stood at
P128,000,000.00, which was impaired by losses of nearly 50%. Such payments constitute
deposits on future subscriptions, money which the corporation will hold in trust for the
subscribers until it files a petition to increase its capitalization and a certificate of filing of
increase of capital stock is approved and issued by the SEC. 4 As a trust fund, this money
is still withdrawable by any of the subscribers at any time before the issuance of the
corresponding shares of stock, unless there is a pre-subscription agreement to the
contrary, which apparently is not present in the instant case. Consequently, if a certificate of
increase has not yet been issued by the SEC, the subscribers to the unauthorized issuance are not to
be deemed as stockholders possessed of such legal rights as the rights to vote and dividends. 5

The Court observes that the subject wage order exempts from its coverage employers whose capital
has been impaired by at least 25% because if impairment is less than this percentage, the employer
can still absorb the wage increase. In the case at hand, petitioner’s capital held answerable for the
additional wages would include funds it only holds in trust, which to reiterate may not be deemed par
of its paid-up capital, the losses of which shall be the basis of the 25% referred to above. To include
such funds in the paid-up capital would be prejudicial to the corporation as an employer considering
that the records clearly show that it is entitled to exemption, even as the anomaly was brought about
by an auditing error.

Another issue, raised late in the proceedings by respondents, is the alleged non-exhaustion of
administrative remedies by petitioner. They claim that the questioned order of the Board should have
first been appealed to the National Wages and Productivity Commission (the Commission), as
provided for under Section 9 of the "Revised Guidelines on Exemption From Compliance With the
Prescribed Wage/Cost of Living Allowance Increases Granted by the Regional Tripartite Wages and
Productivity Boards." cralaw virtua1aw library

Petitioner explained that at the time it filed the instant petition for certiorari on March 6, 1992, the
procedure governing applications for exemption from compliance with wage orders was the original
guidelines, which took effect on February 25, 1991. Under Section 6 of said guidelines, the denial by
the Board of a request for reconsideration shall be final and immediately executory. Appeal to the
Commission as an optional remedy 6 was only made available after the issuance of the revised
guidelines on September 25, 1992. Hence, petitioner cannot be faulted for not having first appealed
the questioned orders. It must be added that since no order, resolution or decision of the
Commission is being assailed in this petition, it should be dropped as party respondent, as prayed for
in its manifestation and motion dated June 22, 1992. 7

In order to avoid any similar controversy, petitioner is reminded to adopt a more systematic and
precise accounting procedure keeping in mind the various principles and nuances surrounding
corporate practice.

WHEREFORE, the petition is hereby GRANTED. The assailed orders of the Regional Tripartite Wages
and Productivity Board — National Capital Region, dated October 22, 1991 and February 4, 1992, are
ANNULLED and SET ASIDE. Said Board is also hereby mandated to issue another order granting the
application of petitioner Central Textile Mills, Inc. for exemption from Wage Order No. NCR-02 for the
year ending December 31, 1990. No pronouncement as to cost.
28.) G.R. No. 152685             December 4, 2007

PHILIPPINE LONG DISTANCE TELEPHONE COMPANY, petitioner,

vs.
NATIONAL TELECOMMUNICATIONS COMMISSION, JOSEPH A.SANTIAGO, in his capacity as NTC
Commissioner, and EDGARDO CABARRIOS, in his capacity as Chief, CCAD, respondents.

RESOLUTION

VELASCO, JR., J.:

Before us is a Petition for Review on Certiorari1 under Rule 45 of the Rules of Court. It assails the February 12, 2001
Decision2 of the Court of Appeals (CA) in CA-G.R. SP No. 61033, which dismissed petitioner’s special civil action for
certiorari and prohibition, and the March 21, 2002 Resolution 3 of the CA denying petitioner’s motion for
reconsideration. The petition raises the sole issue on whether the appellate court erred in holding that the
assessments of the National Telecommunications Commission (NTC) were contrary to our Decision in G.R. No.
127937 entitled NTC v. Honorable Court of Appeals. 4

This case pertains to Section 40 (e)5 of the Public Service Act6 (PSA), as amended on March 15, 1984, pursuant to
Batas Pambansa Blg. 325, which authorized the NTC to collect from public telecommunications companies
Supervision and Regulation Fees (SRF) of PhP 0.50 for every PhP 100 or a fraction of the capital and stock
subscribed or paid for of a stock corporation, partnership or single proprietorship of the capital invested, or of the
property and equipment, whichever is higher.

Under Section 40 (e) of the PSA, the NTC sent SRF assessments to petitioner Philippine Long Distance Telephone
Company (PLDT) starting sometime in 1988. The SRF assessments were based on the market value of the
outstanding capital stock, including stock dividends, of PLDT. PLDT protested the assessments contending
that the SRF ought to be based on the par value of its outstanding capital stock. Its protest was denied by the NTC
and likewise, its motion for reconsideration.

PLDT appealed before the CA. The CA modified the disposition of the NTC by holding that the SRF should be
assessed at par value of the outstanding capital stock of PLDT, excluding stock dividends.

With the denial of the NTC’s partial reconsideration of the CA Decision, the issue of the basis for the assessment of
the SRF was brought before this Court under G.R. No. 127937 wherein we ruled that the SRF should be based
neither on the par value nor the market value of the outstanding capital stock but on the value of the stocks
subscribed or paid including the premiums paid therefor, that is, the amount that the corporation receives, inclusive
of the premiums if any, in consideration of the original issuance of the shares. We added that in the case of stock
dividends, it is the amount that the corporation transfers from its surplus profit account to its capital account, that is,
the amount the stock dividends represent is equivalent to the value paid for its original issuance.

PLDT wanted our July 28, 1999 Decision in G.R. No. 127937 clarified. It posited that the SRF should be based on
the par value in consonance with our holding in Philippine Long Distance Telephone Company v. Public Service
Commission,7 and that the premiums on issued shares should not be included in the valuation of the outstanding
capital stock. Through our November 15, 1999 Resolution in G.R. No. 127937, we elucidated that our July 28, 1999
decision was not in conflict with our ruling in Philippine Long Distance Telephone Company since we never
enunciated in the said case that the phrase "capital stock subscribed or paid" must be determined at par value. We
reiterated that the term "capital stock subscribed or paid" is the amount that the corporation receives, inclusive of the
premiums, if any, in consideration of the original issuance of the shares.

Thereafter, to comply with our disposition in G.R. No. 127937, for the reassessment of the SRF based on the value
of the stocks subscribed or paid including the premiums paid for the stocks, if any, the NTC sent the assailed
assessments of February 10, 20008 and September 5, 20009 to PLDT which included the value of stock dividends
issued by PLDT. The assailed assessments were based on the schedule of capital stock submitted by PLDT.
PLDT now contends that our disposition in G.R. No. 127937 excluded stock dividends from the SRF coverage, while
the NTC asserts the contrary. Also, PLDT questions the assessments for violating our disposition in G.R. No.
127937 since these assessments were identical to the previous assessments from 1988 which were questioned by
PLDT in G.R. No. 127937 for being based on the market value of its outstanding capital stock.

PLDT wrote a letter protesting the assailed February 10, 2000 assessment which was not acted upon by the NTC.
Instead, the NTC sent a second assailed assessment on September 5, 2000. Thus, in an attempt to clarify and
resolve this issue, PLDT filed a Motion for Clarification of Enforcement of the Decision dated 28 July 1999 in G.R.
No. 127937 which this Court simply noted for the case had already become final and executory.

Thus, on October 2, 2000, PLDT instituted the special civil action for certiorari and prohibition docketed as CA-G.R.
SP No. 6103310 before the CA. To maintain the status quo and to defer the enforcement of the assailed
assessments and subsequent assessments, on October 3, 2000, the CA issued a Temporary Restraining Order. On
December 4, 2000, a writ of preliminary injunction was granted.

Subsequently, on February 12, 2001, the CA rendered the assailed Decision dismissing the petition. The dispositive
portion reads:

WHEREFORE, the petition is DISMISSED for lack of merit, and the writ of preliminary injunction heretofore
issued is DISSOLVED.11

PLDT’s motion for reconsideration was denied by the CA’s Special Division of Five on March 21, 2002.

Hence, the instant petition for review, raising the core issue:

THE COURT OF APPEALS ERRED IN HOLDING THAT THE DISPUTED NTC ASSESSMENTS WERE
NOT CONTRARY TO THE PURISIMA DECISION.12

The petition is bereft of merit.

PLDT argues that in our Decision in G.R. No. 127937 we have excluded from the coverage of the SRF the capital
stocks issued as stock dividends. Petitioner argues that G.R. No. 127937 clearly delineates between capital
subscribed and stock dividends to the effect that the latter are not included in the concept of capital stock
subscribed because subscribers or shareholders do not pay for their subscriptions as no amount is received by the
corporation in consideration of such issuances since these are effected as mere book entries, that is, the transfer
from the retained earnings account to the capital or stock account. To bolster its position, PLDT repeatedly used the
phrase "actual payments" received by a corporation as a consideration for issuances of shares which do not apply
to stock dividends.

We are not persuaded.

Crucial in point is our disquisition in G.R. No. 127937 entitled National Telecommunications Commission v.
Honorable Court of Appeals, which we quote:

The term "capital" and other terms used to describe the capital structure of a corporation are of universal
acceptance and their usages have long been established in jurisprudence. Briefly, capital refers to the value
of the property or assets of a corporation. The capital subscribed is the total amount of the capital that
persons (subscribers or shareholders) have agreed to take and pay for, which need not necessarily by,
and can be more than, the par value of the shares. In fine, it is the amount that the corporation receives,
inclusive of the premiums if any, in consideration of the original issuance of the shares. In the case
of stock dividends, it is the amount that the corporation transfers from its surplus profit account to
its capital account. It is the same amount that can be loosely termed as the "trust fund" of the corporation.
The "Trust Fund" doctrine considers this subscribed capital as a trust fund for the payment of the debts of
the corporation, to which the creditors may look for satisfaction. Until the liquidation of the corporation, no
part of the subscribed capital may be returned or released to the stockholder (except in the redemption of
redeemable shares) without violating this principle. Thus, dividends must never impair the subscribed
 capital; subscription commitments cannot be condoned or remitted; nor can the corporation buy its own
shares using the subscribed capital as the considerations therefor. 13 (Emphasis supplied.)

Two concepts can be gleaned from the above. First, what constitutes capital stock that is subject to the SRF.
Second, such capital stock is equated to the "trust fund" of a corporation held in trust as security for satisfaction to
creditors in case of corporate liquidation.

The first asks if stock dividends are part of the outstanding capital stocks of a corporation insofar as it is subject to
the SRF. They are. The first issue we have to tackle is, are all the stock dividends that are part of the outstanding
capital stock of PLDT subject to the SRF? Yes, they are.

PLDT’s contention, that stock dividends are not similarly situated as the subscribed capital stock because the
subscribers or shareholders do not pay for their issuances as no amount was received by the corporation in
consideration of such issuances since these are effected as a mere book entry, is erroneous.

Dividends, regardless of the form these are declared, that is, cash, property or stocks, are valued at the
amount of the declared dividend taken from the unrestricted retained earnings of a corporation. Thus, the
value of the declaration in the case of a stock dividend is the actual value of the original issuance of said stocks. In
G.R. No. 127937 we said that "in the case of stock dividends, it is the amount that the corporation transfers from its
surplus profit account to its capital account" or "it is the amount that the corporation receives in consideration of the
original issuance of the shares." It is "the distribution of current or accumulated earnings to the shareholders of a
corporation pro rata based on the number of shares owned." 14 Such distribution in whatever form is valued at the
declared amount or monetary equivalent.

Thus, it cannot be said that no consideration is involved in the issuance of stock dividends. In fact, the
declaration of stock dividends is akin to a forced purchase of stocks. By declaring stock dividends, a
corporation ploughs back a portion or its entire unrestricted retained earnings either to its working capital
or for capital asset acquisition or investments. It is simplistic to say that the corporation did not receive any
actual payment for these. When the dividend is distributed, it ceases to be a property of the corporation as
the entire or portion of its unrestricted retained earnings is distributed pro rata to corporate shareholders.

When stock dividends are distributed, the amount declared ceases to belong to the corporation but is distributed
among the shareholders. Consequently, the unrestricted retained earnings of the corporation are diminished
by the amount of the declared dividend while the stockholders’ equity is increased. Furthermore, the actual
payment is the cash value from the unrestricted retained earnings that each shareholder foregoes for additional
stocks/shares which he would otherwise receive as required by the Corporation Code to be given to the
stockholders subject to the availability and conditioned on a certain level of retained earnings. 15 Elsewise put, where
the unrestricted retained earnings of a corporation are more than 100% of the paid-in capital stock, the corporate
Board of Directors is mandated to declare dividends which the shareholders will receive in cash unless otherwise
declared as property or stock dividends, which in the latter case the stockholders are forced to forego cash in lieu of
property or stocks.

In essence, therefore, the stockholders by receiving stock dividends are forced to exchange the monetary
value of their dividend for capital stock, and the monetary value they forego is considered the actual
payment for the original issuance of the stocks given as dividends. Therefore, stock dividends acquired by
shareholders for the monetary value they forego are under the coverage of the SRF and the basis for the
latter is such monetary value as declared by the board of directors.

On the second issue, do the assailed NTC assessments violate the ruling in G.R. No. 127937? PLDT contends that
these did since the assessments are identical to the previous assessments from 1988 which were questioned by
PLDT in the seminal G.R. No. 127937 for being based on the market value of its outstanding capital stock.

A cursory review of the assessments made by the NTC prior to our July 28, 1999 Decision in G.R. No. 127937 and
the assailed assessments of February 10, 2000 and September 5, 2000 does show that the assessments are
substantially identical. In our July 28, 1999 Decision in G.R. No. 127937, we noted, and similarly true in the petition
before us, that, "The actual capital paid or the amount of capital stock paid and for which PLDT received actual
payments were not disclosed or extant in the records before the Court." 16
Hence, as before, we cannot factually determine whether the assailed assessments substantially followed our
Decision in G.R. No. 127937. It is apparent that the assessments are identical and that the NTC in the earlier case
asserted that the SRF be based on the market value of the capital stock, yet it assessed it to PLDT. However, a
closer look at the assailed assessments of February 13, 2000 and September 5, 2000 would show that the NTC
based its assessment on the schedule of capital stock submitted by PLDT. PLDT did not dispute this; it only
disputed the level of assessment which was the same as before.

Now, where should the NTC base its assessment? It is incumbent upon PLDT to furnish the NTC the actual
payment made on the subscription of its capital stock in order for the NTC to assess the proper SRF. Logically, the
NTC would base its SRF assessment of PLDT from PLDT data.

PLDT should not bewail that the assailed assessments are substantially the same assessments it protested in G.R.
No. 127937. After all, it had not shown the actual figures of the amount of premiums and subscriptions it had
received for the original issuances of its capital stock. While indeed it submitted a table of the comparative
assessments made by the NTC to this Court, PLDT has not furnished the NTC nor this Court the correct figures of
the actual payments made for its capital stock.

We are not unaware that in accounting practice, the journal entries for transactions are recorded in historical value
or cost. Thus, the purchase of properties or assets is recorded at acquisition cost. The same is true with liabilities
and equity transactions where the actual loan and the amount paid for the subscription are recorded at the actual
payment, including the premiums paid for the subscription of capital stock.

Moreover, it is common practice that the values of the accounts recorded at historical value or cost are not
increased or decreased due to market forces. In the case of properties, the appreciation in values is generally not
recorded as income nor the increase in the corresponding asset because the increase or decrease is not yet
realized until the property is actually sold. The same is true with the capital account. The market value may be much
higher than the actual payment of the par value and premium of capital stock. Still, the books of account will not
reflect such increase; and vice-versa, any decrease of the value of stocks is likewise not reflected in the books of
account. Thus, given the general practice that book entries of the premiums and subscriptions for capital stock are
the actual value for the original issuance of stocks, then the NTC was correct to follow the schedule of capital stocks
submitted by PLDT.

Moreover, the "Trust Fund" doctrine, the second concept this Court elucidated in G.R. No. 127937 and quoted
above, bolsters the correctness of the assessments made by the NTC. As a fund in trust for creditors in case of
liquidation, the actual value of the subscriptions and the value of stock dividends distributed may not be decreased
or increased by the fluctuating market value of the stocks. Thus, absent any showing by PLDT of the actual payment
it received for the original issuance of its capital stock, the assessments made by the NTC, based on the schedule
of outstanding capital stock of PLDT recorded at historical value payments made, is deemed correct.

Anent stock dividends, the value transferred from the unrestricted retained earnings of PLDT to the capital stock
account pursuant to the issuance of stock dividends is the proper basis for the assessment of the SRF, which the
NTC correctly assessed.

WHEREFORE, we DENY the petition for lack of merit, and AFFIRM the February 12, 2001 Decision and March 21,
2002 Resolution in CA-G.R. SP No. 61033. Costs against petitioner.
29.) G.R. No. 161886             March 16, 2007

FILIPINAS PORT SERVICES, INC., represented by stockholders, ELIODORO C. CRUZ and MINDANAO
TERMINAL AND BROKERAGE SERVICES, INC., Petitioners,
vs.
VICTORIANO S. GO, ARSENIO LOPEZ CHUA, EDGAR C. TRINIDAD, HERMENEGILDO M. TRINIDAD, JESUS
SYBICO, MARY JEAN D. CO, HENRY CHUA, JOSELITO S. JAYME, ERNESTO S. JAYME, and ELIEZER B. DE
JESUS, Respondents.

DECISION

GARCIA, J.:

Assailed and sought to be set aside in this petition for review on certiorari is the Decision 1 dated 19 January 2004 of
the Court of Appeals (CA) in CA-G.R. CV No. 73827, reversing an earlier decision of the Regional Trial Court (RTC)
of Davao City and accordingly dismissing the derivative suit instituted by petitioner Eliodoro C. Cruz for and in behalf
of the stockholders of co-petitioner Filipinas Port Services, Inc. (Filport, hereafter).

The case is actually an intra-corporate dispute involving Filport, a domestic corporation engaged in stevedoring
services with principal office in Davao City. It was initially instituted with the Securities and Exchange Commission
(SEC) where the case hibernated and remained unresolved for several years until it was overtaken by the
enactment into law, on 19 July 2000, of Republic Act (R.A.) No. 8799, otherwise known as the Securities Regulation
Code. From the SEC and consistent with R.A. No. 8799, the case was transferred to the RTC of Manila, Branch 14,
sitting as a corporate court. Subsequently, upon respondents’ motion, the case eventually landed at the RTC of
Davao City where it was docketed as Civil Case No. 28,552-2001. RTC-Davao City, Branch 10, ruled in favor of the
petitioners prompting respondents to go to the CA in CA-G.R. CV No. 73827. This time, the respondents prevailed,
hence, this petition for review by the petitioners.

The relevant facts:

On 4 September 1992, petitioner Eliodoro C. Cruz, Filport’s president from 1968 until he lost his bid for reelection as
Filport’s president during the general stockholders’ meeting in 1991, wrote a letter 2 to the corporation’s Board of
Directors questioning the board’s creation of the following positions with a monthly remuneration of ₱13,050.00
each, and the election thereto of certain members of the board, to wit:

Asst. Vice-President for Corporate Planning - Edgar C. Trinidad (Director)

Asst. Vice-President for Operations - Eliezer B. de Jesus (Director)

Asst. Vice-President for Finance - Mary Jean D. Co (Director)

Asst. Vice-President for Administration - Henry Chua (Director)

Special Asst. to the Chairman - Arsenio Lopez Chua (Director)

Special Asst. to the President - Fortunato V. de Castro

In his aforesaid letter, Cruz requested the board to take necessary action/actions to recover from those elected to
the aforementioned positions the salaries they have received.

On 15 September 1992, the board met and took up Cruz’s letter. The records do not show what specific
action/actions the board had taken on the letter. Evidently, whatever action/actions the board took did not sit well
with Cruz.
On 14 June 1993, Cruz, purportedly in representation of Filport and its stockholders, among which is herein
co-petitioner Mindanao Terminal and Brokerage Services, Inc. (Minterbro), filed with the SEC a
petition3 which he describes as a derivative suit against the herein respondents who were then the
incumbent members of Filport’s Board of Directors, for alleged acts of mismanagement detrimental to the
interest of the corporation and its shareholders at large, namely:

1. creation of an executive committee in 1991 composed of seven (7) members of the board with
compensation of ₱500.00 for each member per meeting, an office which, to Cruz, is not provided for in the
by-laws of the corporation and whose function merely duplicates those of the President and General
Manager;

2. increase in the emoluments of the Chairman, Vice-President, Treasurer and Assistant General Manager
which increases are greatly disproportionate to the volume and character of the work of the directors holding
said positions;

3. re-creation of the positions of Assistant Vice-Presidents (AVPs) for Corporate Planning, Operations,
Finance and Administration, and the election thereto of board members Edgar C. Trinidad, Eliezer de Jesus,
Mary Jean D. Co and Henry Chua, respectively; and

4. creation of the additional positions of Special Assistants to the President and the Board Chairman, with
Fortunato V. de Castro and Arsenio Lopez Chua elected to the same, the directors elected/appointed
thereto not doing any work to deserve the monthly remuneration of ₱13,050.00 each.

In the same petition, docketed as SEC Case No. 06-93-4491, Cruz alleged that despite demands made upon the
respondent members of the board of directors to desist from creating the positions in question and to account for the
amounts incurred in creating the same, the demands were unheeded. Cruz thus prayed that the respondent
members of the board of directors be made to pay Filport, jointly and severally, the sums of money variedly
representing the damages incurred as a result of the creation of the offices/positions complained of and the
aggregate amount of the questioned increased salaries.

In their common Answer with Counterclaim, 4 the respondents denied the allegations of mismanagement and
materially averred as follows:

1. the creation of the executive committee and the grant of per diems for the attendance of each member
are allowed under the by-laws of the corporation;

2. the increases in the salaries/emoluments of the Chairman, Vice-President, Treasurer and Assistant
General Manager were well within the financial capacity of the corporation and well-deserved by the officers
elected thereto; and

3. the positions of AVPs for Corporate Planning, Operations, Finance and Administration were already in
existence during the tenure of Cruz as president of the corporation, and were merely recreated by the
Board, adding that all those appointed to said positions of Assistant Vice Presidents, as well as the
additional position of Special Assistants to the Chairman and the President, rendered services to deserve
their compensation.

In the same Answer, respondents further averred that Cruz and his co-petitioner Minterbro, while admittedly
stockholders of Filport, have no authority nor standing to bring the so-called "derivative suit" for and in behalf of the
corporation; that respondent Mary Jean D. Co has already ceased to be a corporate director and so with Fortunato
V. de Castro, one of those holding an assailed position; and that no demand to cease and desist from further
committing the acts complained of was made upon the board. By way of affirmative defenses, respondents asserted
that (1) the petition is not duly verified by petitioner Filport which is the real party-in-interest; (2) Filport, as
represented by Cruz and Minterbro, failed to exhaust remedies for redress within the corporation before bringing the
suit; and (3) the petition does not show that the stockholders bringing the suit are joined as nominal parties. In
support of their counterclaim, respondents averred that Cruz filed the alleged derivative suit in bad faith and purely
for harassment purposes on account of his non-reelection to the board in the 1991 general stockholders’ meeting.
As earlier narrated, the derivative suit (SEC Case No. 06-93-4491) hibernated with the SEC for a long period of
time. With the enactment of R.A. No. 8799, the case was first turned over to the RTC of Manila, Branch 14, sitting as
a corporate court. Thereafter, on respondents’ motion, it was eventually transferred to the RTC of Davao City
whereat it was docketed as Civil Case No. 28,552-2001 and raffled to Branch 10 thereof.

On 10 December 2001, RTC-Davao City rendered its decision5 in the case. Even as it found that (1) Filport’s Board
of Directors has the power to create positions not provided for in the by-laws of the corporation since the board is
the governing body; and (2) the increases in the salaries of the board chairman, vice-president, treasurer and
assistant general manager are reasonable, the trial court nonetheless rendered judgment against the respondents
by ordering the directors holding the positions of Assistant Vice President for Corporate Planning, Special Assistant
to the President and Special Assistant to the Board Chairman to refund to the corporation the salaries they have
received as such officers "considering that Filipinas Port Services is not a big corporation requiring multiple
executive positions" and that said positions "were just created for accommodation." We quote the fallo of the trial
court’s decision.

WHEREFORE, judgment is rendered ordering:

Edgar C. Trinidad under the third and fourth causes of action to restore to the corporation the total amount of
salaries he received as assistant vice president for corporate planning; and likewise ordering Fortunato V. de Castro
and Arsenio Lopez Chua under the fourth cause of action to restore to the corporation the salaries they each
received as special assistants respectively to the president and board chairman. In case of insolvency of any or all
of them, the members of the board who created their positions are subsidiarily liable.

The counter claim is dismissed.

From the adverse decision of the trial court, herein respondents went on appeal to the CA in CA-G.R. CV No.
73827.

In its decision6 of 19 January 2004, the CA, taking exceptions to the findings of the trial court that the creation of the
positions of Assistant Vice President for Corporate Planning, Special Assistant to the President and Special
Assistant to the Board Chairman was merely for accommodation purposes, granted the respondents’ appeal,
reversed and set aside the appealed decision of the trial court and accordingly dismissed the so-called derivative
suit filed by Cruz, et al., thus:

IN VIEW OF ALL THE FOREGOING, the instant appeal is GRANTED, the challenged decision
is REVERSED and SET ASIDE, and a new one entered DISMISSING Civil Case No. 28,552-2001 with no
pronouncement as to costs.

SO ORDERED.

Intrigued, and quite understandably, by the fact that, in its decision, the CA, before proceeding to address the merits
of the appeal, prefaced its disposition with the statement reading "[T]he appeal is bereft of merit," 7 thereby
contradicting the very fallo of its own decision and the discussions made in the body thereof, respondents filed with
the appellate court a Motion For Nunc Pro Tunc Order, 8 thereunder praying that the phrase "[T]he appeal is bereft of
merit," be corrected to read "[T]he appeal is impressed with merit." In its resolution 9 of 23 April 2004, the CA granted
the respondents’ motion and accordingly effected the desired correction.

Hence, petitioners’ present recourse.

Petitioners assigned four (4) errors allegedly committed by the CA. For clarity, we shall formulate the issues as
follows:

1. Whether the CA erred in holding that Filport’s Board of Directors acted within its powers in creating the
executive committee and the positions of AVPs for Corporate Planning, Operations, Finance and
Administration, and those of the Special Assistants to the President and the Board Chairman, each with
corresponding remuneration, and in increasing the salaries of the positions of Board Chairman, Vice-
President, Treasurer and Assistant General Manager; and
 2. Whether the CA erred in finding that no evidence exists to prove that (a) the positions of AVP for
Corporate Planning, Special Assistant to the President and Special Assistant to the Board Chairman were
created merely for accommodation, and (b) the salaries/emoluments corresponding to said positions were
actually paid to and received by the directors appointed thereto.

For their part, respondents, aside from questioning the propriety of the instant petition as the same allegedly raises
only questions of fact and not of law, also put in issue the purported derivative nature of the main suit initiated by
petitioner Eliodoro C. Cruz allegedly in representation of and in behalf of Filport and its stockholders.

The petition is bereft of merit.

It is axiomatic that in petitions for review on certiorari under Rule 45 of the Rules of Court, only questions of law may
be raised and passed upon by the Court. Factual findings of the CA are binding and conclusive and will not be
reviewed or disturbed on appeal.10 Of course, the rule is not cast in stone; it admits of certain exceptions, such as
when the findings of fact of the appellate court are at variance with those of the trial court, 11 as here. For this reason,
and for a proper and complete resolution of the case, we shall delve into the records and reexamine the same.

The governing body of a corporation is its board of directors. Section 23 of the Corporation Code 12 explicitly provides
that unless otherwise provided therein, the corporate powers of all corporations formed under the Code shall be
exercised, all business conducted and all property of the corporation shall be controlled and held by a board of
directors. Thus, with the exception only of some powers expressly granted by law to stockholders (or members, in
case of non-stock corporations), the board of directors (or trustees, in case of non-stock corporations) has the sole
authority to determine policies, enter into contracts, and conduct the ordinary business of the corporation within the
scope of its charter, i.e., its articles of incorporation, by-laws and relevant provisions of law. Verily, the authority of
the board of directors is restricted to the management of the regular business affairs of the corporation, unless more
extensive power is expressly conferred.

The raison d’etre behind the conferment of corporate powers on the board of directors is not lost on the Court.
Indeed, the concentration in the board of the powers of control of corporate business and of appointment of
corporate officers and managers is necessary for efficiency in any large organization. Stockholders are too
numerous, scattered and unfamiliar with the business of a corporation to conduct its business directly. And so the
plan of corporate organization is for the stockholders to choose the directors who shall control and supervise the
conduct of corporate business.13

In the present case, the board’s creation of the positions of Assistant Vice Presidents for Corporate
Planning, Operations, Finance and Administration, and those of the Special Assistants to the President and
the Board Chairman, was in accordance with the regular business operations of Filport as it is authorized to
do so by the corporation’s by-laws, pursuant to the Corporation Code.

The election of officers of a corporation is provided for under Section 25 of the Code which reads:

Sec. 25. Corporate officers, quorum. – Immediately after their election, the directors of a corporation must
formally organize by the election of a president, who shall be a director, a treasurer who may or may not be
a director, a secretary who shall be a resident and citizen of the Philippines, and such other officers as may
be provided for in the by-laws. (Emphasis supplied.)

In turn, the amended Bylaws of Filport14 provides the following:

Officers of the corporation, as provided for by the by-laws, shall be elected by the board of directors at their
first meeting after the election of Directors. xxx

The officers of the corporation shall be a Chairman of the Board, President, a Vice-President, a Secretary, a
Treasurer, a General Manager and such other officers as the Board of Directors may from time to time provide, and
these officers shall be elected to hold office until their successors are elected and qualified. (Emphasis supplied.)

Likewise, the fixing of the corresponding remuneration for the positions in question is provided for in the
same by-laws of the corporation, viz:
xxx The Board of Directors shall fix the compensation of the officers and agents of the corporation.
(Emphasis supplied.)

Unfortunately, the bylaws of the corporation are silent as to the creation by its board of directors of an
executive committee. Under Section 3515 of the Corporation Code, the creation of an executive committee
must be provided for in the bylaws of the corporation.

Notwithstanding the silence of Filport’s bylaws on the matter, we cannot rule that the creation of the executive
committee by the board of directors is illegal or unlawful. One reason is the absence of a showing as to the true
nature and functions of said executive committee considering that the "executive committee," referred to in Section
35 of the Corporation Code which is as powerful as the board of directors and in effect acting for the board itself,
should be distinguished from other committees which are within the competency of the board to create at anytime
and whose actions require ratification and confirmation by the board.16 Another reason is that, ratiocinated by both
the two (2) courts below, the Board of Directors has the power to create positions not provided for in Filport’s bylaws
since the board is the corporation’s governing body, clearly upholding the power of its board to exercise its
prerogatives in managing the business affairs of the corporation.

As well, it may not be amiss to point out that, as testified to and admitted by petitioner Cruz himself, it was during his
incumbency as Filport president that the executive committee in question was created, and that he was even the
one who moved for the creation of the positions of the AVPs for Operations, Finance and Administration. By his
acquiescence and/or ratification of the creation of the aforesaid offices, Cruz is virtually precluded from suing to
declare such acts of the board as invalid or illegal. And it makes no difference that he sues in behalf of himself and
of the other stockholders. Indeed, as his voice was not heard in protest when he was still Filport’s president, raising
a hue and cry only now leads to the inevitable conclusion that he did so out of spite and resentment for his non-
reelection as president of the corporation.

With regard to the increased emoluments of the Board Chairman, Vice-President, Treasurer and Assistant General
Manager which are supposedly disproportionate to the volume and nature of their work, the Court, after a judicious
scrutiny of the increase vis-à-vis the value of the services rendered to the corporation by the officers concerned,
agrees with the findings of both the trial and appellate courts as to the reasonableness and fairness thereof.

Continuing, petitioners contend that the CA did not appreciate their evidence as to the alleged acts of
mismanagement by the then incumbent board. A perusal of the records, however, reveals that petitioners merely
relied on the testimony of Cruz in support of their bold claim of mismanagement. To the mind of the Court, Cruz’
testimony on the matter of mismanagement is bereft of any foundation. As it were, his testimony consists merely of
insinuations of alleged wrongdoings on the part of the board. Without more, petitioners’ posture of mismanagement
must fall and with it goes their prayer to hold the respondents liable therefor.

But even assuming, in gratia argumenti, that there was mismanagement resulting to corporate damages and/or
business losses, still the respondents may not be held liable in the absence, as here, of a showing of bad faith in
doing the acts complained of.

If the cause of the losses is merely error in business judgment, not amounting to bad faith or negligence, directors
and/or officers are not liable. 17 For them to be held accountable, the mismanagement and the resulting losses on
account thereof are not the only matters to be proven; it is likewise necessary to show that the directors and/or
officers acted in bad faith and with malice in doing the assailed acts. Bad faith does not simply connote bad
judgment or negligence; it imports a dishonest purpose or some moral obliquity and conscious doing of a wrong, a
breach of a known duty through some motive or interest or ill-will partaking of the nature of fraud. 18 We have
searched the records and nowhere do we find a "dishonest purpose" or "some moral obliquity," or "conscious doing
of a wrong" on the part of the respondents that "partakes of the nature of fraud."

We thus extend concurrence to the following findings of the CA, affirmatory of those of the trial court:

xxx As a matter of fact, it was during the term of appellee Cruz, as president and director, that the executive
committee was created. What is more, it was appellee himself who moved for the creation of the positions of
assistant vice presidents for operations, for finance, and for administration. He should not be heard to complain
thereafter for similar corporate acts.
The increase in the salaries of the board chairman, president, treasurer, and assistant general manager are indeed
reasonable enough in view of the responsibilities assigned to them, and the special knowledge required, to be able
to effectively discharge their respective functions and duties.

Surely, factual findings of trial courts, especially when affirmed by the CA, are binding and conclusive on this Court.

There is, however, a factual matter over which the CA and the trial court parted ways. We refer to the
accommodation angle.

The trial court was with petitioner Cruz in saying that the creation of the positions of the three (3) AVPs for
Corporate Planning, Special Assistant to the President and Special Assistant to the Board Chairman, each with a
salary of ₱13,050.00 a month, was merely for accommodation purposes considering that Filport is not a big
corporation requiring multiple executive positions. Hence, the trial court’s order for said officers to return the
amounts they received as compensation.

On the other hand, the CA took issue with the trial court and ruled that Cruz’s accommodation theory is not based
on facts and without any evidentiary substantiation.

We concur with the line of the appellate court. For truly, aside from Cruz’s bare and self-serving testimony, no other
evidence was presented to show the fact of "accommodation." By itself, the testimony of Cruz is not enough to
support his claim that accommodation was the underlying factor behind the creation of the aforementioned three (3)
positions.

It is elementary in procedural law that bare allegations do not constitute evidence adequate to support a conclusion.
It is basic in the rule of evidence that he who alleges a fact bears the burden of proving it by the quantum of proof
required. Bare allegations, unsubstantiated by evidence, are not equivalent to proof under the Rules of Court. 19 The
party having the burden of proof must establish his case by a preponderance of evidence. 20

Besides, the determination of the necessity for additional offices and/or positions in a corporation is a management
prerogative which courts are not wont to review in the absence of any proof that such prerogative was exercised in
bad faith or with malice.
1awphi1.nét

Indeed, it would be an improper judicial intrusion into the internal affairs of Filport were the Court to determine the
propriety or impropriety of the creation of offices therein and the grant of salary increases to officers thereof. Such
are corporate and/or business decisions which only the corporation’s Board of Directors can determine.

So it is that in Philippine Stock Exchange, Inc. v. CA,21 the Court unequivocally held:

Questions of policy or of management are left solely to the honest decision of the board as the business manager of
the corporation, and the court is without authority to substitute its judgment for that of the board, and as long as it
acts in good faith and in the exercise of honest judgment in the interest of the corporation, its orders are not
reviewable by the courts.

In a last-ditch attempt to salvage their cause, petitioners assert that the CA went beyond the issues raised in the
court of origin when it ruled on the absence of receipt of actual payment of the salaries/emoluments pertaining to the
positions of Assistant Vice-President for Corporate Planning, Special Assistant to the Board Chairman and Special
Assistant to the President. Petitioners insist that the issue of nonpayment was never raised by the respondents
before the trial court, as in fact, the latter allegedly admitted the same in their Answer With Counterclaim.

We are not persuaded.

By claiming that Filport suffered damages because the directors appointed to the assailed positions are not doing
anything to deserve their compensation, petitioners are saddled with the burden of proving that salaries were
actually paid. Since the trial court, in effect, found that the petitioners successfully proved payment of the salaries
when it directed the reimbursements of the same, respondents necessarily have to raise the issue on appeal. And
the CA rightly resolved the issue when it found that no evidence of actual payment of the salaries in question was
actually adduced. Respondents’ alleged admission of the fact of payment cannot be inferred from a reading of the
pertinent portions of the parties’ respective initiatory pleadings. Respondents’ allegations in their Answer With
Counterclaim that the officers corresponding to the positions created "performed the work called for in their
positions" or "deserve their compensation," cannot be interpreted to mean that they were "actually paid" such
compensation. Directly put, the averment that "one deserves one’s compensation" does not necessarily carry the
implication that "such compensation was actually remitted or received." And because payment was not duly proven,
there is no evidentiary or factual basis for the trial court to direct respondents to make reimbursements thereof to the
corporation.

This brings us to the respondents’ claim that the case filed by the petitioners before the SEC, which eventually
landed in RTC-Davao City as Civil Case No. 28,552-2001, is not a derivative suit, as maintained by the petitioners.

We sustain the petitioners.

Under the Corporation Code, where a corporation is an injured party, its power to sue is lodged with its board of
directors or trustees. But an individual stockholder may be permitted to institute a derivative suit in behalf of the
corporation in order to protect or vindicate corporate rights whenever the officials of the corporation refuse to sue, or
when a demand upon them to file the necessary action would be futile because they are the ones to be sued, or
because they hold control of the corporation. 22 In such actions, the corporation is the real party-in-interest while the
suing stockholder, in behalf of the corporation, is only a nominal party.23

Here, the action below is principally for damages resulting from alleged mismanagement of the affairs of Filport by
its directors/officers, it being alleged that the acts of mismanagement are detrimental to the interests of Filport. Thus,
the injury complained of primarily pertains to the corporation so that the suit for relief should be by the corporation.
However, since the ones to be sued are the directors/officers of the corporation itself, a stockholder, like petitioner
Cruz, may validly institute a "derivative suit" to vindicate the alleged corporate injury, in which case Cruz is only a
nominal party while Filport is the real party-in-interest. For sure, in the prayer portion of petitioners’ petition before
the SEC, the reliefs prayed were asked to be made in favor of Filport.

Besides, the requisites before a derivative suit can be filed by a stockholder are present in this case, to wit:

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; and

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. 24

Indisputably, petitioner Cruz (1) is a stockholder of Filport; (2) he sought without success to have its board of
directors remedy what he perceived as wrong when he wrote a letter requesting the board to do the necessary
action in his complaint; and (3) the alleged wrong was in truth a wrong against the stockholders of the corporation
generally, and not against Cruz or Minterbro, in particular. In the end, it is Filport, not Cruz which directly stands to
benefit from the suit. And while it is true that the complaining stockholder must show to the satisfaction of the court
that he has exhausted all the means within his reach to attain within the corporation itself the redress for his
grievances, or actions in conformity to his wishes, nonetheless, where the corporation is under the complete control
of the principal defendants, as here, there is no necessity of making a demand upon the directors. The reason is
obvious: a demand upon the board to institute an action and prosecute the same effectively would have been
useless and an exercise in futility. In fine, we rule and so hold that the petition filed with the SEC at the instance of
Cruz, which ultimately found its way to the RTC of Davao City as Civil Case No. 28,552-2001, is a derivative suit of
which Cruz has the necessary legal standing to institute.

WHEREFORE, the petition is DENIED and the challenged decision of the CA is AFFIRMED in all respects.
 30.) A.C. No. 5804. July 1, 2003

BENEDICTO HORNILLA and ATTY. FEDERICO D. RICAFORT, complainants, v. ATTY.

ERNESTO S. SALUNAT, respondent.

RESOLUTION

YNARES-SANTIAGO, J.:

On November 21, 1997, Benedicto Hornilla and Federico D. Ricafort filed an administrative
complaint1 with the Integrated Bar of the Philippines (IBP) Commission on Bar Discipline, against
respondent Atty. Ernesto S. Salunat for illegal and unethical practice and conflict of interest. They
alleged that respondent is a member of the ASSA Law and Associates, which was the retained
counsel of the Philippine Public School Teachers Association (PPSTA). Respondents brother, Aurelio S.
Salunat, was a member of the PPSTA Board which approved respondents engagement as retained
counsel of PPSTA.

Complainants, who are members of the PPSTA, filed an intra-corporate case against its members of
the Board of Directors for the terms 1992-1995 and 1995-1997 before the Securities and Exchange
Commission, which was docketed as SEC Case No. 05-97-5657, and a complaint before the Office of
the Ombudsman, docketed as OMB Case No. 0-97-0695, for unlawful spending and the
undervalued sale of real property of the PPSTA. Respondent entered his appearance as
counsel for the PPSTA Board members in the said cases. Complainants contend that
respondent was guilty of conflict of interest because he was engaged by the PPSTA, of
which complainants were members, and was being paid out of its corporate funds where
complainants have contributed. Despite being told by PPSTA members of the said conflict of interest,
respondent refused to withdraw his appearance in the said cases.

Moreover, complainants aver that respondent violated Rule 15.06 2 of the Code of Professional
Responsibility when he appeared at the meeting of the PPSTA Board and assured its members that
he will win the PPSTA cases.

In his Answer,3 respondent stressed that he entered his appearance as counsel for the PPSTA Board
Members for and in behalf of the ASSA Law and Associates. As a partner in the said law firm, he only
filed a Manifestation of Extreme Urgency in OMB Case No. 0-97-0695.4 On the other hand, SEC Case
No. 05-97-5657 was handled by another partner of the firm, Atty. Agustin V. Agustin. Respondent
claims that it was complainant Atty. Ricafort who instigated, orchestrated and indiscriminately filed
the said cases against members of the PPSTA and its Board.

Respondent pointed out that his relationship to Aurelio S. Salunat was immaterial; and that when he
entered into the retainer contract with the PPSTA Board, he did so, not in his individual capacity, but
in representation of the ASSA Law Firm. He denied that he ensured the victory of the PPSTA Board in
the case he was handling. He merely assured the Board that the truth will come out and that the
case before the Ombudsman will be dismissed for lack of jurisdiction, considering that respondents
therein are not public officials, but private employees. Anent the SEC case, respondent alleged that
the same was being handled by the law firm of Atty. Eduardo de Mesa, and not ASSA.

By way of Special and Affirmative Defenses, respondent averred that complainant Atty. Ricafort was
himself guilty of gross violation of his oath of office amounting to gross misconduct, malpractice and
unethical conduct for filing trumped-up charges against him and Atty. De Mesa. Thus, he prayed that
the complaint against him be dismissed and, instead, complainant Ricafort be disciplined or
disbarred.
The complainant was docketed as CBD Case No. 97-531 and referred to the IBP Commission on Bar
Discipline. After investigation, Commissioner Lydia A. Navarro recommended that respondent be
suspended from the practice of law for six (6) months. The Board of Governors thereafter adopted
Resolution No. XV-3003-230 dated June 29, 2002, approving the report and recommendation of the
Investigating Commissioner.

Respondent filed with this Court a Motion for Reconsideration of the above Resolution of the IBP
Board of Governors.

The pertinent rule of the Code of Professional Responsibility provides:

RULE 15.03. A lawyer shall not represent conflicting interests except by written consent of
all concerned given after a full disclosure of the facts.

There is conflict of interest when a lawyer represents inconsistent interests of two or more opposing
parties. The test is whether or not in behalf of one client, it is the lawyers duty to fight for
an issue or claim, but it is his duty to oppose it for the other client. In brief, if he argues
for one client, this argument will be opposed by him when he argues for the other
client.5 This rule covers not only cases in which confidential communications have been confided, but
also those in which no confidence has been bestowed or will be used. 6 Also, there is conflict of
interests if the acceptance of the new retainer will require the attorney to perform an act which will
injuriously affect his first client in any matter in which he represents him and also whether he will be
called upon in his new relation to use against his first client any knowledge acquired through their
connection.7 Another test of the inconsistency of interests is whether the acceptance of a new
relation will prevent an attorney from the full discharge of his duty of undivided fidelity and loyalty to
his client or invite suspicion of unfaithfulness or double dealing in the performance thereof. 8
cräläwvirtualibräry

In this jurisdiction, a corporations board of directors is understood to be that body which

(1) exercises all powers provided for under the Corporation Code; (2) conducts all
business of the corporation; and (3) controls and holds all property of the corporation. 9 Its
members have been characterized as trustees or directors clothed with a fiduciary
character.10 It is clearly separate and distinct from the corporate entity itself.

Where corporate directors have committed a breach of trust either by their frauds, ultra
vires acts, or negligence, and the corporation is unable or unwilling to institute suit to
remedy the wrong, a stockholder may sue on behalf of himself and other stockholders and
for the benefit of the corporation, to bring about a redress of the wrong done directly to
the corporation and indirectly to the stockholders. 11 This is what is known as a derivative
suit, and settled is the doctrine that in a derivative suit, the corporation is the real party in
interest while the stockholder filing suit for the corporations behalf is only nominal party.
The corporation should be included as a party in the suit. 12 cräläwvirtualibräry

Having thus laid a suitable foundation of the basic legal principles pertaining to derivative suits, we
come now to the threshold question: can a lawyer engaged by a corporation defend members of the
board of the same corporation in a derivative suit? On this issue, the following disquisition is
enlightening:

The possibility for conflict of interest here is universally recognized. Although early cases found joint
representation permissible where no conflict of interest was obvious, the emerging rule is against
dual representation in all derivative actions. Outside counsel must thus be retained to represent one
of the defendants. The cases and ethics opinions differ on whether there must be separate
representation from the outset or merely from the time the corporation seeks to take an active role.
Furthermore, this restriction on dual representation should not be waivable by consent in the usual
way; the corporation should be presumptively incapable of giving valid consent.13 (underscoring ours)
In other jurisdictions, the prevailing rule is that a situation wherein a lawyer represents both the
corporation and its assailed directors unavoidably gives rise to a conflict of interest. The interest of
the corporate client is paramount and should not be influenced by any interest of the individual
corporate officials.14 The rulings in these cases have persuasive effect upon us. After due deliberation
on the wisdom of this doctrine, we are sufficiently convinced that a lawyer engaged as counsel for
a corporation cannot represent members of the same corporations board of directors in a
derivative suit brought against them. To do so would be tantamount to representing
conflicting interests, which is prohibited by the Code of Professional Responsibility.

In the case at bar, the records show that SEC Case No. 05-97-5657, entitled Philippine Public School
Teachers Assn., Inc., et al. v. 1992-1995 Board of Directors of the Philippine Public School Teachers
Assn. (PPSTA), et al., was filed by the PPSTA against its own Board of Directors. Respondent admits
that the ASSA Law Firm, of which he is the Managing Partner, was the retained counsel of PPSTA.
Yet, he appeared as counsel of record for the respondent Board of Directors in the said case. Clearly,
respondent was guilty of conflict of interest when he represented the parties against whom his other
client, the PPSTA, filed suit.

In his Answer, respondent argues that he only represented the Board of Directors in OMB Case No.
0-97-0695. In the said case, he filed a Manifestation of Extreme Urgency wherein he prayed for the
dismissal of the complaint against his clients, the individual Board Members. By filing the said
pleading, he necessarily entered his appearance therein.15 Again, this constituted conflict of interests,
considering that the complaint in the Ombudsman, albeit in the name of the individual members of
the PPSTA, was brought in behalf of and to protect the interest of the corporation.

Therefore, respondent is guilty of representing conflicting interests. Considering however, that this is
his first offense, we find the penalty of suspension, recommended in IBP Resolution No. XV-2002-230
dated June 29, 2002, to be too harsh. Instead, we resolve to admonish respondent to observe a
higher degree of fidelity in the practice of his profession.

ACCORDINGLY, respondent Atty. Ernesto Salunat is found GUILTY of representing conflicting

interests and is ADMONISHED to observe a higher degree of fidelity in the practice of his profession.
He is further WARNED that a repetition of the same or similar acts will be dealt with more severely
 31.) [ G.R. No. 201306. August 09, 2017 ]
LYDIA LAO, JEFFREY ONG, HENRY SY, SY TIAN TIN, SY TIAN TIN, JR., AND PAUL CHUA,
PETITIONERS, V. YAO BIO LIM AND PHILIP KING, RESPONDENTS.

DECISION
LEONEN, J.:
This resolves a Petition for Review on Certiorari[1] seeking to annul and set aside the Decision[2] dated August 3, 2011 and
Resolution[3] dated March 21, 2012 of the Court of Appeals in CA-G.R. CV. No. 90314. The Court of Appeals affirmed the March 20,
2007 Decision of Branch 90, Regional Trial Court, Quezon City.[4] This trial court Decision annulled the elections of the board of
directors of Philadelphia School, Inc. (PSI) held on March 15, 2002 and the issuance of stock dividends and transfer of shares of stock,
and awarded damages to Yao Bio Lim and Philip King (respondents).[5]

This case is a continuation of a dispute between two (2) groups of stockholders for the control and management of PSI. One group was
headed by Lydia Lao (Lao) and the other was led by Philip King (King). Their dispute eventually reached this Court in G.R. No. 160358,
entitled Lydia Lao, William Chua Lian, Jeffrey Ong and Henry Sy v. Philip King.[6] The relevant facts in that case were as follows:

PSI was organized in 1970 with an authorized capital stock of P2,000,000.00, divided into 20,000 shares with a par value of P100 per
share. Out of this authorized capital stock, 4,600 shares were subscribed and paid up.[7]

Ong Y. Seng, King's father, had the most number of subscribed shares, holding 1,200 shares. Before his death in 1994, he sought, and
was granted, the approval of the PSI board of directors to transfer his shares to King. Since then, King had been consistently elected as
a member of the PSI board of directors.[8]

During the special stockholders' meeting on May 23, 1998, a new set of directors and officers was elected. Yao Bio Lim was elected
President and King was Vice President.[9]

Lao, the former president, refused to acknowledge the newly elected directors and officers as well as King's ownership of 1,200 PSI
shares. On August 15, 1998, Lao issued a Secretary's Certificate stating that a board meeting was held on the same date wherein the
board of directors resolved to nullify the transfer to King of the shares owned by his father.[10]

In April 1999, King discovered that a stockholders' meeting was conducted on March 19, 1999, wherein Lao, William Chua Lian (Chua
Lian), Jeffrey Ong (Ong), and Henry Sy were elected as new members of the board of directors.[11]

King filed a petition before the Securities and Exchange Commission "to enjoin [Lao, Chua Lian, Ong, and Henry Sy] from representing
themselves as officers and members of the board of directors of the Philadelphia School, Inc. and to nullify all acts done and resolutions
passed by them. The petition was docketed as SEC Case No. 05-99-6297."[12]

When Republic Act No. 8799[13] took effect, the case was transferred to Branch 93, Regional Trial Court, Quezon City and was
docketed as Civil CaseNo.Q-01-42972.[14]

On September 25, 2002, Judge Apolinario D. Bruselas, Jr. rendered a decision granting King's petition. It disposed as follows:

WHEREFORE, the foregoing premises considered, the court finds for [King] and as prayed for, hereby orders as follows:

1) The meetings held by the [petitioners] on 15 August 1998 and all acts performed by them as the alleged officers and Board of
Directors of the corporation are declared null and void;

2) The alleged election of [petitioner] Lydia Lao as president and other [petitioners] as members of the Board of Directors of the
corporation during the aforementioned meeting, declared null and void;

3) The reduction in the shareholdings of [King] from 1,200 shares to only 500 shares, declared null and void; the shares of [King] should
be restored to 1,200 and which number he is entitled to vote;

4) The increase in the number of the shares of Mr. Sy Tian Ting and Dy Siok Bee, declared null and void;

5) The [petitioners] to account for the funds of the corporation disbursed by them during the period they took control;

6) The new elections of the corporate directors and officers should be based on the shareholdings reflected in the Articles of
Incorporation modified only by such transfers as may be shown to be valid and legitimate.

SO ORDERED.[15]
King filed a motion for execution, which was granted by the Regional Trial Court.[16] Lao's group questioned the order of the trial court
granting execution through a petition for certiorari filed before the Court of Appeals.[17] The Court of Appeals upheld the validity of the
order,[18] which this Court eventually sustained on August 31, 2006 in G.R. No. 160358.[19]

Meanwhile, on March 15, 2002, a general stockholders' meeting was held wherein Lao, Ong, Henry- Sy, Sy Tian Tin, Sy Tian Tin,
Jr. and Paul Chua (petitioners) were elected as members of the board of directors, with Chua Lian as chairman of the board.[20]

On March 26, 2002, Yao Bio Lim and King filed a Petition[21] before Branch 90, Regional Trial Court, Quezon City against petitioners,
the newly elected board of directors. They sought, among others, to annul: (1) "the elections held on March 15, 2002 and all corporate
acts of the supposedly new board of directors and officers of [PSI]," (2) the "issuance of stock dividends," and (3) the "illegal transfer of
shares of stock."[22] They also prayed that petitioners, together with Chua Lian, be ordered to account for damages and for the funds
and assets of the corporation since August 1998.[23]

Yao Bio Lim and King averred that on March 10, 2002, they received the Notice of meeting informing them about the general
stockholders' meeting to be held on March 15, 2002 at 9:00 a.m. at the PSI's board room. "The notice, however, did not state the
agenda or the purpose of the meeting."[24] Moreover, they alleged that the Notice sent to King was still in the name of his father, Ong Y.
Seng, while that sent to Yao Bio Lim included the name of his deceased father, Yao Chek.[25]

Yao Bio Lim claimed that he acquired his PSI shares from his father, who owned 300 PSI shares during his lifetime. Specifically, in
1995, Yao Chek transferred one (1) share to him and 100 shares to his brother, Yao Tok Lim. After Yao Chek's death in 1999, his
remaining shares were divided among his five (5) children. Yao Bio Lim's brothers, in turn, agreed to assign their corresponding shares
to Yao Bio Lim and Yao Juan Lim.[26]

During the meeting, "Philip King and a certain Atty. Garaygay were asked to leave the board room because they were allegedly not
stockholders."[27] On the other hand, Yao Bio Lim was allowed to vote for only one (1) share during the elections despite the proxies he
held for his brothers, Yao Tok Lim and Yao Juan Lim.[28
]

Yao Bio Lim and King further attested that the Securities and Exchange Commission and the Regional Trial Court had previously
ordered that the stockholders listed in the 1997 General Information Sheet be used as basis for the 2000 and 2001 elections of PSI
board of directors. Lao, Chua Lian, Ong, and Henry Sy allegedly violated these orders when they used a different list of stockholders
during the elections held on March 15, 2002. Moreover, they had purportedly previously issued 300% stock dividends to some
stockholders without the required approval of stockholders representing two-thirds (2/3) of the outstanding capital stock of PSI.[29]
Finally, Yao Bio Lim and King assailed the transfer of the following shares of stocks without the required prior notice to all stockholders,
which allegedly deprived them of "the opportunity to exercise their option to buy the shares"[30]:
SELLER TRANSFEREE NUMBER OF
SHARES
     
David Lio Betty Lao/Lydia Lao 200 shares
Ong Giok King Lydia Lao/Sy Tian 99 shares
Tin
William Chua Paul Chua 1 shares [sic][31]
Lian
On the other hand, petitioners claimed that the stockholders' meeting and the elections held on March 15, 2002 were conducted in
accordance with the PSI's by-laws and the Corporation Code.[32]

On March 20, 2007, the trial court rendered its decision in favor of Yao Bio Lim and King. The dispositive portion of this decision read:

IN VIEW OF THE FOREGOING, judgment is rendered in favor of [respondents] and against [petitioners] as follows:

(a) Declaring the March 15, 2002 general stockholders' meeting and elections null and void and the results thereof invalid;

(b) Declaring the issuance of 300% stock dividend[s] by [petitioners]/Philadelphia School, Inc. in 199[7][33] null and void;
(c) Declaring the sale/transfer of shares of stocks of David Lao, Ong Giok King and William Chua Lian illegal and void;

(d) Ordering [petitioners] to pay [respondents]: (i) PhP100,000.00 as temperate damages, (ii) PhP50,000.00 as moral damages, (iii)
PhP100,000 as reasonable attorney's fees and expenses of litigation plus costs of suit.

All other claims are dismissed fort (sic) lack of factual/legal basis.[34]

The Court of Appeals affirmed the Regional Trial Court Decision. It held that there were valid grounds to nullify the March 15, 2002
stockholders' meeting. First, the Notice of meeting did not state the purpose of the stockholders' meeting as required by Article VIII (5)
of PSI's by-laws.[35] Additionally, it was not sent to the stockholders at least two (2) weeks prior to the meeting as required under Section
50 of the Corporation Code.[36] Finally, petitioners used a schedule of stockholders different from the list contained in the 1997 General
Information Sheet, contrary to previous orders of the Securities and Exchange Commission and of the Regional Trial Court.[37]

The Court of Appeals further found that the issuance of 300% stock dividends was not approved by stockholders representing two-
thirds (2/3) of the outstanding capital stock in violation of Section 43 of the Corporation Code.[38]

Petitioners filed a motion for reconsideration, which was likewise denied by the Court of Appeals in its March 21, 2012 Resolution.[39]

Hence, this Petition was filed[40] anchored on the following grounds:

I. [The Court of Appeals] seriously erred in concluding that the March 15, 2002 General Stockholders[‘] Meeting was a special
meeting, despite th[e] fact that it was a regular meeting which does not require that the notice of the meeting shall state its
object and purpose;

II. [The Court of Appeals] seriously erred in ruling that [the] notice of regular meetings should be sent to all stockholders at least
two (2) weeks prior to the meeting, despite th[e] fact that the by-laws of [PSI] specifically provide that the notice should be
sent not less than five (5) days prior to the meeting;

III. [The Court of Appeals] seriously erred in ruling that. . . Yao Bio Lim was not properly notified of the March 15, 2002 General
Stockholders[‘] [Meeting] . . . because the notice sent to him also included the name of his rather, Yao Check, despite the
fact that he actually received the notice and personally attended the meeting;

IV. [The Court of Appeals] seriously erred in concluding that Philip King was a stockholder of PSI in the year 2002 as the
determination of the true ownership of shares of stock left by the late Ong Y. Seng was then still pending before the
Regional Trial Court of Quezon City, Branch 93 (SEC Case No. 05-099-6297, Civil Case No. Q-01-42972) V. [The Court of
Appeals] seriously erred in ruling that the distribution in the year 2002 of the previously approved and declared 300% stock
dividends in the year 1997 is invalid ...

V. [The Court of Appeals] erred in ruling that petitioners defied a purported order of the Securities and Exchange Commission ...

VI. [The Court of Appeals] erred in ruling that petitioners should be ordered to pay moral and temporary damages, attorney's fees,
and litigation expenses in favor of [respondents] ...[41]
The petition is denied.

I
On the first and second assigned errors, petitioners contend that the Court of Appeals erred in considering the March 15, 2002
stockholders' meeting as a special meeting. They aver that the Court of Appeals erred in ruling that the meeting was not
properly called due to the Notice's failure to state the meeting's purpose and to meet the two (2)-week notice requirement
under Section 50 of the Corporation Code, They maintain that the Notice of the March 15, 2002 stockholders' meeting was
sent to the stockholders at least five (5) days before the meeting in compliance with the PSI's by-laws.

Respondents counter that the issue of whether or not the March 15, 2002 meeting was a special meeting is a factual issue that is not
proper in a Rule 45 petition. Furthermore, they argue that petitioners are estopped from raising this issue for the first time on their
appeal.

This Court finds for petitioners on this issue.

The rule that factual findings of the Court of Appeals are not reviewable by this Court is subject to certain exceptions, such as when the
inference made is manifestly mistaken[42] and when the "findings of fact are conclusions without citation of specific evidence on which
they are based."[43]

Here, the Court of Appeals, in ruling that the Notice of the March 15, 2002 meeting sent to the stockholders did not comply with the
requirement set forth in Article VIII (5) of the PSI's by-laws,[44] explained:

[T]he notice of meeting sent to the stockholders did not comply with the requirement set forth in Article VIII (5) of the [By-Laws] of
Philadephia School, Inc., which expressly provides that:

[5]. - NOTICE OF MEETINGS: Notice of the meetings, which shall be written or printed, for every regular or special meeting of the
stockholders, shall be mailed or personally delivered to each stockholder, at their respective addresses as they appear in the book of
the corporation, not less than five (5) days prior to the date set for such meeting; and in case of special meeting the notice
shall state the object and purpose of the same . . .
Clearly, in case of a special meeting, the corporate by-laws require that the notice shall state the object and purpose for
which the meeting is called. This, however, was transgressed as there was no mention in the notice as to the purpose for
calling the March 15, 2002 stockholders' meeting.[45] (Emphasis supplied)

The Court of Appeals sweepingly considered the March 15, 2002 stockholders' meeting as a special meeting without discussing the
factual bases for its conclusion.

Furthermore, although raised for the first time on appeal as respondents argued, this Court resolves to pass on these issues as their
resolution would not require presentation of further evidence by the adverse party. An exception to the rule that a party may not change
his or her theory on appeal was recognized in Lianga Lumber Co. v. Lianga Timber Co., Inc.,[46] wherein this Court said:

[I]n the interest of justice arid within the sound discretion of the appellate court, a party may change his legal theory on appeal only
when the factual bases thereof would not require presentation of any further evidence by the adverse party in order to enable it to
properly meet the issue raised in the new theory.[47]

In this case, the issues raised do not involve any disputed evidentiary matter.

A copy of the Notice dated March 4, 2002 for the March 15, 2002 stockholders' meeting that was sent to respondents
specifically stated:

March 4, 2002

NOTICE

TO: ALL STOCKHOLDERS:

This is to inform you that the annual Meeting of the Stockholders of Philadelphia School, Inc. is scheduled on March 15, 2002 at 9:00
a.m. to be held at the school board room.

Any proxy should be presented to the Corporation at least three (3) days before the meeting or on or before March 12, 2002.

[sgd.]
JEFFREY ONG
 
Corporate Secretary[48]
(Emphasis supplied)
Section 50 of Batas Pambansa Blg. 68 or the Corporation Code prescribes that "regular meetings of stockholders or members shall be
held annually on a date fixed in the by-laws." Respondents do not dispute that Article VIII (3) of the PSI's by-laws fixed the annual
meeting of stockholders on the third Friday of March of every year.[49] This Court takes judicial notice that March 15, 2002 was
the third Friday of March 2002.

Furthermore, the agenda[50] for the meeting, which includes the elections of the new board of directors and ratification of acts of the
incumbent board of directors and management, was the standard order of business in a regular annual meeting of stockholders of a
corporation.

Thus, this Court holds that the March 15, 2002 annual stockholders' meeting was a regular meeting. Hence, the requirement to
state the object and purpose in case of a special meeting as provided for in Article VIII (5) of the PSI’s by-laws does not apply
to the Notice for the March 15, 2002 annual stockholders' meeting.

Regarding the time for serving notice of the meeting to all the stockholders, Section 50 of Batas Pambansa Blg. 68 reads in part:

Section 50. Regular and Special Meetings of Stockholders or Members. — Regular meetings of stockholders or members shall be held
annually on a date fixed in the by-laws, or if not so fixed, on any date in April of every year as determined by the board of directors or
trustees: Provided, That written notice of regular meetings shall be sent to all stockholders or members of record at least two (2) weeks
prior to the meeting, unless a different period is required by the by-laws. (Emphasis supplied)
Under PSI's by-laws, notice of every regular or special meeting must be mailed or personally delivered to each stockholder not less
than five (5) days prior to the date set for the meeting. Article VIII (5) of PSI's by-laws expressly provides:

5. - NOTICE OF MEETINGS: Notice of the meetings, which shall be written or printed, for every regular or special meeting of the
stockholders, shall be mailed or personally delivered to each stockholder, at their respective addresses as they appear in the book of
the corporation, not less than five (5) days prior to the date set for such meeting; and in case of special meeting the notice shall state
the object and purpose of the same. Provided, however, that any irregularity either in calling the meeting or in serving notice shall not
invalidate any act duly voted upon in such meeting or any proceeding held thereafter, provided that all stockholders are present at the
meeting.[51] (Emphasis supplied)

In this case, the PSI's by-laws providing only for a five (5)-day prior notice must prevail over the two (2)-week notice under the
Corporation Code. By its express terms, the Corporation Code allows "the shortening (or lengthening) of the period within
which to send the notice to call a special (or regular) meeting."[52] Thus, the mailing of the Notice to respondents on March 5,
2002[53] calling for the annual stockholders' meeting to be held on March 15, 2002 is not irregular, since it complies with what was stated
in PSI's by-laws.
II
Despite the foregoing circumstances, there were other grounds to nullify the March 15, 2002 annual stockholders' meeting. As found by
the Court of Appeals, petitioners did not recognize respondents' rights as stockholders, making the proceedings and elections during
the March 15, 2002 meeting void. The Court of Appeals discussed:

[D]uring the same meeting, [petitioners] made use of a schedule of stockholders which was different from the list contained in the 1997
[General Information Sheet]. Obviously, [petitioners] defied the previously issued Order of both the SEC and the RTC requiring the use
of the 1997 [General Information Sheet], it being the last, official and recorded submission by the Philadelphia School in keeping with its
reportorial requirement with the SEC. As disclosed in the records, the 1997 [General Information Sheet] specified the stockholders of
Philadelphia School and their respective shareholdings. Since the composition in 1997 [General Information Sheet] was not changed
up to the time the March 15, 2002 meeting was called, the same should have been used as the basis for the schedule of stockholders
and their respective shareholdings relative to the election of its board of directors. By so defying the Order of both the SEC and the
RTC as regards the use of the 1997 [General Information Sheet], [petitioners], in effect, refused to recognize [respondents']
shareholdings and their right to vote, thus, rendering void all the acts done during the meeting, particularly the holding of the election of
the officers and the declaration and issuance of the 300% stock dividend.[54]

The foregoing disquisitions of the Court of Appeals render untenable and irrelevant petitioners' contention that King could not be
considered a legitimate stockholder of PSI during the stockholders' meeting in 2002. This is because the validity of Ong Y. Seng's
transfer of shares to his son was still at issue and King's ownership of PSI stocks was finally resolved by this Court only on April 28,
2011.[55]

Petitioners also fault the Court of Appeals for not specifying which orders of the Securities and Exchange Commission and of the
Regional Trial Court they allegedly violated. Respondents counter that had petitioners been mindful to search the records of the case,
they would have easily known that the Court of Appeals was referring to the following Orders:

(1) the March 13, 2000 Order of the Securities and Exchange Commission issued relative to SEC Case No. 05-99-6297, which
recognized the 1997 General Information Sheet as reference of stockholders' names to be used in any stockholders' meeting and
elections for the members of the board of directors of PSI; and

(2) the March 23, 2001 Order issued by Judge Apolinario Bruselas of Branch 93, Regional Trial Court, Quezon City in Civil Case No.
Q-01-42972, where he instructed that the 1997 General Information Sheet be the basis for the schedule of stockholders and their
respective shareholdings.[56]

Nonetheless, petitioners harp on the self-serving nature of the 1997 General Information Sheet, which they assert was prepared by Yao
Bio Lim. Furthermore, they insist that the issue of King's rightful ownership of the stocks was resolved with finality only on April 28,
2011.

This Court is not persuaded.

Petitioners cannot unilaterally disobey or disregard the Orders of the Securities and Exchange Commission and of the Regional Trial
Court despite their own views of the correctness or propriety thereof. In Republic Commodities Corporation v. Oca,[57] the president and
general manager of Republic Commodities Corporation were held in contempt for their refusal to comply with the order of the trial court,
then Court of First Instance, to redeliver the seized air-conditioning units to Salustiano Oca. This Court, in affirming the lower court,
said:
The theory espoused by appellants that a party may, at his own choice, directly disobey a court order which said party believes to be
erroneous or beyond the court's authority is fraught with serious consequences. This Court, speaking through Mr. Justice Enrique
Fernando, has had occasion to condemn a similar attitude in another case:

. . . The failure to abide by the orders and processes of judicial . . . agencies . . . gives, rise to a serious concern. It engenders at the
very least the well-founded suspicion that such an attitude betrays an absence of good faith. It is indicative of a belief at war with all that
adjudication stands for.

No one may be permitted to take the law into his own hands. No one, much less the party immediately concerned, should have the final
say on the validity or lack of it of one's course of conduct. Centuries of reliance on the judicial process repel such a notion ...

. . . Such refusal to accord due respect and yield obedience to what a court or administrative tribunal ordains is fraught with much
gravel [sic] consequences ... If such a conduct were not condemned, some other group or groups emboldened by the absence of any
reproof or disapproval may conduct themselves similarly. The injury to the rule of law may well-nigh be irreparable.

Law stands for order, for the peaceful and systematic adjustment of frictions and conflicts unavoidable in a modern society with his
complexities and clashing interests, The instrumentality for such balancing or harmonization is the judiciary and other agencies
exercising quasi-judicial powers. When judicial or quasi-judicial tribunals speak, what they decree must be obeyed; what they ordain
must be followed. A party dissatisfied may ask for reconsideration and, if denied, may go on to higher tribunal. As long as the orders
stand unmodified, however, they must, even if susceptible to well-founded doubts on jurisdictional grounds, be faithfully complied with.
[58]

While it may be true that SEC Case No. 05-99-6297 and Civil Case No. Q-01-42972 were finally resolved only on April 28, 2011, the
Orders mentioned in the Court of Appeals Decision were issued before the March 15, 2002 annual stockholders' meeting. Hence,
petitioners were obliged to use the list of stockholders indicated in the 1997 General Information Sheet in compliance with the Orders
dated March 13, 2000 and March 23, 2001 issued by the Securities and Exchange Commission and by the Regional Trial Court,
respectively.

III
On the issue of the validity of the 300% stock dividends declaration, petitioners insist that the 300% stock dividends were validly
declared by the PSI board of directors. They claim that these were ratified by the stockholders owning two-thirds (2/3) of the
outstanding capital stock in the meeting held on March 22, 1997, although its distribution was implemented only on February 28, 2002.
[59]

The Court of Appeals rejected this stance. It held that the handwritten minutes of the March 22, 1997 meeting offered by petitioners as
proof that the declaration and issuance of stock dividends were valid was questionable because "it [did] not even indicate the number of
stock dividends to be declared."[60]

This Court agrees with the Court of Appeals.

The handwritten minutes of the March 22, 1997 stockholders' meeting recorded the following:

Quorum established.
Ratified all acts and proceedings of the Board of Directors and Management
Declaration of stock dividends
Nomination and the election of same Board and Officers in the preceding years as new Board
Meeting adjourned. 1:05 P.M.[61] (Emphasis supplied)

Clearly, the foregoing minutes alone would be insufficient to prove petitioners' claim that the 300% stock dividends were approved by
the board of directors and ratified by the stockholders in the March 22, 1997 meeting. The minutes did not provide any other detail that
would convincingly show that the 300% stock, dividends distributed in 2002 were the same stock dividends that were ratified by the
stockholders in 1997.

Furthermore, while the minutes contain the names and signatures of stockholders who were present at the meeting, the shares held by
each were not indicated. On its face, the minutes did not readily confirm how many shares were represented and voted at the meeting,
particularly on the stock dividends declaration.

This Court finds no reversible error on the part of the Court of Appeals in nullifying the 300% stock dividends, a declaration on the basis
of the following findings of the Regional Trial Court:

[O]n the declaration, issuance and distribution of a three hundred percent (300%) stock dividend by [petitioners] in favor of certain
stockholders, the evidence shows that the action or actions of the [petitioners] with respect to the 300% stock dividends was or were
done without the approval of. . . Yao Bio Lim, . . . Philip King and Lucia Cheng who own and/or are entitled to vote one thousand nine
hundred fifty (1,950) shares of stocks of the outstanding capital stock of the School of 4,600 shares, or approximately forty-two percent
(42%) of the outstanding capital stock of the School. The act/s of the [petitioners] violated Section 43 of the Corporation Code which
provides that ". . . no stock dividend shall be issued without the approval of stockholders representing not less than two-thirds (2/3) of
the capital stock[.]"[62]
Petitioners have not presented any cogent reason for this Court to set aside these findings. Without respondents' and Lucia Cheng's
approval, who held 42% of the outstanding capital stock of PSI collectively, the required two-thirds (2/3) or 67% vote for stock dividends
declaration prescribed under Section 43[63] of the Corporation Code clearly could not have been met.
IV
Finally, this Court finds no reason to reverse the award of damages. The award of moral damages finds legal basis in Articles
2217[64] and 2220[65] of the New Civil Code, which allow recovery of moral damages in case of willful injury to property. A stockholder's
right to vote is inherent in and incidental to the ownership of a capital stock.[66] Here, petitioners unjustifiably and obstinately refused to
recognize respondents' shareholdings in PSI and to allow them to participate in the 2002 stockholders' meeting and elections of the
corporation's directors. They did this despite the previous Orders of the Securities and Exchange Commission and of the Regional Trial
Court; thus, depriving respondents of their property rights. The Court of Appeals found that "the acts of the [petitioners] have caused
mental anguish, serious anxiety and social humiliation to [respondents]."[67]
Similarly, the award of attorney's fees and litigation expenses is proper because respondents were compelled to litigate to protect or
vindicate their stockholders' rights[68] against the unlawful acts of the petitioners.
The Court of Appeals likewise correctly sustained the award of temperate damages. Petitioners contest the award on the ground that
respondents have not prayed for it.[69] While this may be true, it is also true that respondents have prayed for actual damages in their
complaint.[70] Under the law, courts may award other kinds of damages in lieu of actual damages:
Article 2224, Temperate or moderate damages, which are more than nominal but less than compensatory damages, may be
recovered when the court finds that some pecuniary loss has been suffered but its amount cannot, from the nature of the case, be
provided with certainty. (Emphasis supplied)
In several cases,[71] this Court has sustained the award of temperate damages where the amount of actual damages was not sufficiently
proven.
Here, in sustaining the Regional Trial Court Decision, the Court of Appeals found that respondents have suffered some pecuniary loss.
[72]
 Petitioners' wrongful acts have prevented respondents from exercising their rights as legitimate stockholders of the corporation.
Under the circumstances of this case, this Court, finds the amount of P100,000.00 awarded by the lower court to be fair and
reasonable.
WHEREFORE, the petition is DENIED.
 32.) G.R. No. 225022, February 05, 2018

CAROLINA QUE VILLONGCO, ANA MARIA QUE TAN, ANGELICA QUE GONZALES, ELAINE
VICTORIA QUE TAN AND EDISON WILLIAMS QUE TAN, Petitioners, v. CECILIA QUE YABUT,
EUMIR CARLO QUE CAMARA AND MA. CORAZON QUE GARCIA, Respondents.

G.R. No. 225024, February 5, 2018

CECILIA QUE YABUT, EUMIR CARLO QUE CAMARA AND MA. CORAZON QUE
GARCIA, Petitioners, v. CAROLINA QUE VILLONGCO, ANA MARIA QUE TAN, ANGELICA QUE
GONZALES, ELAINE VICTORIA QUE TAN AND EDISON WILLIAMS QUE TAN, Respondents.

DECISION

TIJAM, J.:

Before Us are separate Petitions for Review on Certiorari1 assailing the Decision2 dated September 4,
2015 and Amended Decision3 dated June 8, 2016 of the Court of Appeals (CA) in CA-G.R. SP No.
134666 declaring the annual stockholder's meeting held by Cecilia Que Yabut, Eumir Carlo Que and
Ma. Corazon Que Garcia (Cecilia Que, et al.) on January 25, 2014 void for lack of quorum and
declared all acts performed by Cecilia Que, et al. as ultra vires acts as they were not legally clothed
with corporate authority to do so.

The pertinent facts of the case as found by the CA are as follows:

Phil-Ville Development and Housing Corporation (Phil-Ville) is a family corporation founded by

Geronima Gallego Que (Geronima) that is engaged in the real estate business. The authorized
capital stock of Phil-Ville is Twenty Million Pesos (P20,000,000) divided into Two Hundred
Thousand (200,000) shares with a par value of One Hundred Pesos (P100.00) per share. During
her lifetime, Geronima owned 3,140 shares of stock while the remaining 196,860 shares were equally
distributed among Geronima's six children, namely: Carolina Que Villongco, Ana Maria Que Tan,
Angelica Que Gonzales, Cecilia Que Yabut, Ma. Corazon Que Garcia, and Maria Luisa Que Camara, as
follows:

(a) Carolina Que Villongco- 32,810 shares;

(b) Ana Maria Que Tan- out of her 32,810 shares, she retained 17,710 shares and transferred the
rest to her six children, thus: Edmund Williams Que Tan- 2,600 shares; Edward Williams Que Tan-
2,500 [shares]; Edison Williams Que Tan- 2,500 shares; Elaine Victoria Que Tan[-] 2,500 shares;
Eloisa Victoria- 2,500 shares; and Elinor Victoria- 2,500 shares;
(c) Angelica Que Gonzales- 32,810;
(d) Cecilia Que Yabut- out of her 32,810 shares, she retained 22,810 shares and transferred the rest
to her four children, thus: Geminiano Que Yabut III- 2,500 shares; Carlos Que Yabut- 2,500 shares;
Geronimo Que Yabut- 2,500 shares; and Jose Elston Que Yabut- 2,500 shares;
(e) Ma. Corazon Que Garcia- out of her 32,810 shares, she retained 21,460 shares and transferred
the rest to her four children, thus: Anthony Que Garcia- 2,500 shares; Geronima Que Garcia- 2,950
shares; Michelle Que Garcia- 2,950 shares; and Ma. Christina Que Garcia- 2,950 shares;
(f) Maria Luisa Que Camara- upon her death, her shares were divided among her children: Eumir Que
Camara- 10,936.67 shares; Pablo Que Camara- 10,936.67 shares; and Abimar Que Camara-
10,936.66 shares.

Geronima died on August 31, 2007. By virtue of the Sale of Shares of Stocks dated June 11, 2005
purportedly executed by Cecilia as the attorney-in-fact of Geronima, Cecilia allegedly effected an
inequitable distribution of the 3,140 shares that belonged to Geronima, to wit:
(a) Carolina's children were given a total of 523 shares distributed as follows: Francis Villongco- 131
shares; Carlo Villongco- 131 shares; Michael Villongco- 131 shares; and Marcelia Villongco- 130
shares;
(b) Ana Maria's daughter Elaine Victoria Que Tan was given 523 shares;
(c) Angelica- 523 shares;
(d) Cecilia's children were given a total of 524 shares distributed as follows: Geminiano Yabut- 131
shares; Carlos Yabut- 131 shares; Geronimo Yabut- 131 shares; and John Elston Yabut- 131 shares;
(e) Ma. Corazon's son Anthony Garcia was given 523 shares;
(f) Maria Luisa's children were given a total of 524 shares distributed as follows: Eumir Carlo
Camara- 174 shares; Paolo Camara- 175 shares; Abimar Camara-175 shares[.]

Accordingly, the distribution of Geronima's shares in accordance with the Sale of Shares of

Stocks was reflected in the General Information Sheets filed by Phil-Ville in 2010 and 2011, x x x

On January 18, 2013, Cecilia, Eumir Carlo Que Camara and Ma. Corazon [Cecilia Que, et. al.] wrote a
letter to Ana Maria, Corporate Secretary of Phil-Ville, to send out notices for the holding of the annual
stockholders' meeting. However, before Ana Maria could reply thereto, on January 21, 2013, several
letters were sent to Phil-Ville's stockholders containing a document captioned "Notice of Annual
Stockholders' Meeting" signed by Cecilia and Ma. Corazon as directors, x x x

xxxx

Thereafter, Carolina, Ana Maria, and Angelica, comprising the majority of the Board of Directors of
Phil-Ville held an emergency meeting and made a decision, by concensus, to postpone the annual
stockholders' meeting of Phil-Ville until the issue of the distribution of the 3,140 shares of stocks in
the name of certain stockholders is settled. All the stockholders were apprised of the decision to
postpone the meeting in a letter dated January 21, 2013. Ana Maria, in her capacity as Corporate
Secretary and Director of Phil-Ville likewise gave notice to the Securities and Exchange Commission
(SEC) with regard to the postponement of the meeting.

xxxx

Despite the postponement, however, [Cecilia Que, et al.] proceeded with the scheduled annual
stockholder's meeting participated only by a few stockholders. In the said meeting, they elected the
new members of the Board of Directors and officers of Phil-Ville namely: Cecilia, Ma. Corazon and
Eumir, Chairman/Vice President/Treasurer, President/General Manager, and Secretary, respectively.

Meantime, two days prior to the stockholders' meeting, Carolina, Ana Maria, and Angelica, together
with several others, had already filed a Complaint for Annulment of Sale/Distribution or Settlement of
Shares of Stock/Injunction against Cecilia, Eumir Carlo and Ma. Corazon. They subsequently filed
an Amended and Supplemental Complaint for Annulment of Sale/Distribution or Settlement of Shares
of Stock/Annulment of Meeting/Injunction (with Prayer for the Issuance of Temporary Restraining
Order and Writ of Preliminary Prohibitory and Mandatory Injunction). x x x

xxxx

While Civil Case No. CV-940-MN was still pending, on January 15, 2014, Eumir Carlo sent a Notice of
Annual Stockholders' Meeting to all the stockholders of Phil-Ville, notifying them of the setting of the
annual stockholders' meeting on January 25, 2014 at 5:00 P.M. at Max's Restaurant, Gov. Pascual
comer M.H. Del Pilar Streets, Tugatog, Malabon City. During the meeting, Cecilia, Ma. Corazon and
Eumir Carlo were elected as directors and later elected themselves to the following positions: Cecilia
as Chairperson/Vice President/Treasurer; Ma. Corazon as Vice Chairperson/President/General
Manager; and Eumir Carlo as Corporate Secretary/Secretary.

xxxx
Consequently, on February 10, 2014, Carolina, Ana Maria, Angelica, Elaine and Edison Williams
[Carolina, et al.] filed the instant election case against [Cecilia Que, et al.] before the RTC
of Malabon City docketed as SEC Case No. 14-001-MN. The Complaint prayed that the
election of Cecilia, Ma. Corazon and Eumir Carlo as directors be declared void considering
the invalidity of the holding of the meeting at Max's Restaurant for lack of quorum therein,
the questionable manner by which it was conducted, including the invalid inclusion in the voting of
the shares of the late Geronima, the questionable validation of proxies, the representation and
exercise of voting rights by the alleged proxies representing those who were not personally present
at the said meeting, and the invalidity of the proclamation of the winners. [Carolina, et al.] also
questioned the election of Cecilia, Ma. Corazon and Eumir Carlo as officers of the corporation. They
likewise prayed that all the actions taken by the petitioners in relation to their election as directors
and officers of the corporation be declared void, including but not limited to the filing of the General
Information Sheet with the Securities and Exchange Commission on January 27, 2014. 4

Cecilia Que, et al., filed a Motion for Additional Time to file Answer on March 7, 2014 arguing that the
summons was not properly served on them. The RTC however denied said motion since it should
have been filed within ten (10) days or on March 2, 2014, in accordance with Section 5; Rule 6 5 of
the Interim Rules of Procedure for Intra-Corporate Controversies. 6

Thus, On March 14, 2014, the RTC rendered a Decision7 declaring the election of Cecilia Que, et al. as
void and of no effect considering the lack of quorum during the annual stockholders' meeting
conducted by the latter, thus:

WHEREFORE, judgment is hereby rendered:

a. On the First Cause of Action, declaring as null and void and of no effect whatsoever the election of
defendants Cecilia Que Yabut, Ma. Corazon Que Garcia and Eumir Que Camara as Directors of Phil-
Ville considering the lack of quorum during the alleged annual meeting of the stockholders on 25
January 2014 at Max's Restaurant, Gov. Pascual cor. M.H. Del Pilar, Tugatog, Malabon City at 5:00
o'clock in the afternoon;

b. On the Second Cause of Action, declaring as null and void and of no effect whatsoever the election
of defendants Cecilia Que Yabut, Ma. Corazon Que Garcia and Eumir Que Camara to the positions of
Chairperson, Vice Chairperson and Corporate Secretary, respectively in the Board of Directors of Phil-
Ville, as well as their election as Vice-President/Treasurer, President/General Manager and Secretary,
respective[ly], of PhilVille, considering the invalidity of the proclamation of the winners in the election
supposedly conducted on that date, the alleged "Annual Meeting of the Board of Directors of Phil-Ville
held at Max's Restaurant, Gov. Pascual cor. M.H. Del Pilar, Tugatog, Malabon City on 25 January
2014 at 6:30 o'clock in the evening being null and void; and

c. On the Third Cause of Action, declaring as null and void and of no effect whatsoever any and all
actions taken by defendants Cecilia Que Yabut, Ma. Corazon Que Garcia and Eumir Que Camara in
relation to their alleged election as Directors, their alleged elecion to certain positions in the Board of
Directors, and their alleged election as officers of Phil-Ville including but not limited to the filing of the
General Information Sheet with the Securities and Exchange Commission on 27 January 2014.

SO ORDERED.8

On appeal to the CA, the latter in its Decision dated September 4, 2015, while it declared the RTC
decision void for violating Section 14, Article VIII of the Constitution 9, the CA however declared
the annual stockholders meeting conducted by Cecilia Que, et al. void for lack of quorum.
The dispositive portion reads:

WHEREFORE, the instant Petition for Review is DENIED for lack of merit. The Decision dated March
14, 2014 Decision[sic] of the Regional Trial Court of the City of Malabon, Branch 74, in SEC Case No.
SEC14-00l-MN is declared VOID for failure to comply with the constitutional requirement of a valid
judgment and a new one is ENTERED declaring as invalid for lack of quorum the Phil-Ville
Development and Housing Corporation's stockholders annual meeting conducted by petitioners
Cecilia Que Yabut, Eumir Carlo Que Camara and Ma. Corazon Que Garcia on January 14, 2014. The
election of the members of the board of directors and officers of Phil-Ville that emanated from the
said invalid meetings is likewise struck as void.

SO ORDERED.10

On the parties' separate Motions for Partial Reconsideration, the CA issued an Amended Decision
dated June 8, 2016 ruling as follows:

WHEREFORE, petitioner's Motion for Partial Reconsideration is DENIED for lack of merit while that of
respondents' is PARTLY GRANTED with respect to the ultra vires acts committed by petitioners after
the invalidation of the election conducted on January 25, 2014. The dispositive portion of the assailed
Decision dated September 4, 2015 is hereby amended to reflect the following modifications and shall
read as follows:

WHEREFORE, the instant Petition for Review is DENIED for lack of merit The Decision dated March
14, 2014 Decision[sic] of the Regional Trial Court of the City of Malabon, Branch 74, in SEC Case No.
SEC14-001-MN is declared VOID for failure to comply with the constitutional requirement of a valid
judgment and a new one is ENTERED declaring as invalid for lack of quorum the Phil-Ville
Development and Housing Corporation's stockholders annual meeting conducted by
petitioners Cecilia Que Yabut, Eumir Carlo Que Camara and Ma. Corazon Que Garcia
on January 25, 2014. The election of the members of the board of directors and officers of Phil-Ville
that emanated from the said invalid meetings is likewise struck as void. All acts performed by
petitioners by reason of said election, including but not limited to the filing of the General
Information Sheet with the SEC on January 27, 2014, were   ultra vires  as they were not legally
clothed with corporate authority to do so.

SO ORDERED.

SO ORDERED.11

Both parties filed before Us their separate Petitions for Review on Certiorari.

Carolina, et al., raised in their petition the following assignment of errors:

I. The Honorable Court of Appeals committed manifest error in not upholding that the applicability of
Section 14, Article VIII of the Constitution ensconed in Section 1, Rule 36 of the Revised Rules of
Court was adhered to by the RTC-Malabon City, Branch 74 in the rendition of its decision as
warranted by the facts alleged in the complaint.
II. The Honorable Court of Appeals committed manifest error in not upholding the applicability of the
exception to the general rule in the determination of a quorum. 12

While Cecilia Que, et al., raised the following in their petition, to wit:

I. The Court of Appeals gravely erred when it ruled that petitioners were barred from filing an
answer.
II. The Court of Appeals gravely erred in ruling on the merits, despite the finding that there was a
need to remand the case.
III. At any rate, the issues raised in the case are being litigated in another case, barring its resolution
on the merits here.13
Ultimately, the issues to be resolved are: 1) whether the CA was correct in holding that the RTC
decision violated Section 14, Article VIII of the Constitution; 2) whether the total undisputed
shares of stocks in Phil-Ville should be the basis in determining the presence of a quorum;
and 3) whether Cecilia et al., were barred from filing an answer.

Both petitions are unmeritorious.

The Procedural Aspect

The Motion for Extension of Time to file Answer is a voluntary appearance on the part of Cecilia, et al.

Cecilia Que, et al., alleged the CA erred in holding that the Motion for Extension of Time to File
Answer filed by them was a voluntary appearance on their part. 14 We do not agree.

It is well-settled that jurisdiction over the person of the defendant in a civil case is obtained through
a valid service of summons. When there is no service of summons upon the defendant, the court
acquires no jurisdiction over his person, and a judgment rendered against him is null and void. 15

However, the invalidity of the service of summons is cured by the voluntary appearance of the
defendant in court and their submission to the court's authority. As held in the case of Carson Realty
& Management Corporation v. Red Robin Security Agency, et al.,16 this Court has repeatedly held that
the filing of a motion of time to file answer is considered voluntary appearance on the part of the
defendant, such that the trial court nevertheless acquired jurisdiction over his person despite the
defectiveness of the service of summons, to wit:

We have, time and again, held that the filing of a motion for additional time to file answer is
considered voluntary submission to the jurisdiction of the court. If the defendant knowingly does an
act inconsistent with the right to object to the lack of personal jurisdiction as to him, like voluntarily
appearing in the action, he is deemed to have submitted himself to the jurisdiction of the court.
Seeking an affirmative relief is inconsistent with the position that no voluntary appearance had been
made, and to ask for such relief, without the proper objection, necessitates submission to the Court's
jurisdiction.17 In the instant case, Cecilia Que, et al., filed a motion for extension to file an answer.
Thus, is deemed to be a voluntary submission to the authority of the trial court over their persons.

The Substantive Aspect

The RTC Decision dated March 14, 2014 is void for violating Section 14, Article VIII of the Constitution.

Carolina, et al., alleged in their petition that the RTC Decision did not violate Section 14, Article VIII
of the Constitution since the decision clearly stated the facts and the law on which it was based. They
alleged that "the decision thoroughly passed upon all the allegations in the complaint, vis-a-vis the
Judicial affidavit of x x x Carolina x x x, which remams unrebutted." 18 We are not persuaded.

The RTC decision is hereby quoted in toto:

Before the Court is the Election Contest filed by plaintiffs stockholders/board members/officers of
Phil-Ville Housing and Development Corporation questioning the validity of the election held by
defendants on January 25, 2014 at Max's Restaurant, Malabon City.

Having been served with Summons on February 20, 2014, and not having filed an Answer but
instead filed a Motion for Extension of Time to the Answer on March 7, 2014 by registered mail,
which was received by this Court only on March 13, 2014, the Court is duty bound to render
judgment  motu proprio within ten (10) days from the lapse of the period to file an Answer, as may
be warranted by the allegations of the Complaint, as well as the affidavits, documentary and other
evidence on record, awarding relief, if any, only as prayed for.

After thoroughly passing upon all and[sic] the allegations in the Complaint, vis-a-vis the Judicial
Affidavit of plaintiff Carolina Que Villongco, which remains unrebutted, the Court finds that plaintiffs
have fully established that there was no quorum during the annual stockholder's meeting held on 25
January 2014 at Max's Restaurant, Malabon City. Only 98,428 voting shares out of the 200,000
outstanding shares were represented. Therefore, no valid election of board members/officers of Phil-
Ville could have taken place.

Necessarily, the organizational meeting supposedly conducted thereafter is likewise null and void and
could not possibly binding[sic] to the said corporation.

WHEREFORE, judgment is hereby rendered:

a. On the First Cause of Action, declaring as null and void and of no effect whatsoever the election of
defendants Cecilia Que Yabut, Ma. Corazon Que Garcia and Eumir Que Camara as Directors of Phil-
Ville considering the lack of quorum during the alleged annual meeting of the stockholders on 25
January 2014 at Max's Restaurant, Gov. Pascual cor. M.H. Del Pilar, Tugatog, Malabon City at 5:00
o'clock in the afternoon;

b. On the Second Cause of Action, declaring as null and void and of no effect whatsoever the election
of defendants Cecilia Que Yabut, Ma. Corazon Que Garcia and Eumir Que Camara to the positions of
Chairperson, Vice-Chairperson and Corporate Secretary, respectively in the Board of Directors of Phil-
Ville, as well as their election as Vice President/Treasurer, President/General Manager and Secretary,
respectively, of Phil-Ville, considering the invalidity of the proclamation of the winners in the election
supposedly conducted on that date, the alleged "Annual Meeting of the Board of Directors of Phil-Ville
held at Max's Restaurant, Gov. Pascual cor. M.H. Del Pilar, Tugatog, Malabon City on 25 January
2014 at 6:30 o'clock in the evening being null and void; and

c. On the Third Cause of Action, declaring as null and void and of no effect whatsoever any and all
actions taken by defendants Cecilia Que Yabut, Ma. Corazon Que Garcia and Eumir Que Camara in
relation to their alleged election as Directors, their alleged elecion to certain positions in the Board of
Directors, and their alleged election as officers of Phil-Ville including but not limited to the filing of the
General Information Sheet with the Securities and Exchange Commission on 27 January 2014.

SO ORDERED.19

In the case of De Leon v. People20 this Court held that:

Under Section 14, Article VIII of the Constitution, no decision shall be rendered by any court without
expressing therein clearly and distinctly the facts and the law on which it is based. Section 1 of Rule
36 of the Rules of Court provides that a judgment or final order determining the merits of the case
shall be in writing personally and directly prepared by the judge, stating clearly and distinctly the
facts and the law on which it is based, signed by him and filed with the clerk of the court.

Faithful adherence to the requirements of Section 14, Article VIII of the Constitution is indisputably a
paramount component of due process and fair play. A decision that does not clearly and distinctly
state the facts and the law on which it is based leaves the parties in the dark as to how it was
reached and is precisely prejudicial to the losing party, who is unable to pinpoint the possible errors
of the court for review by a higher tribunal. More than that, the requirement is an assurance to the
parties that, in arriving at a judgment, the judge did so through the processes of legal reasoning. It
is, thus, a safeguard against the impetuosity of the judge, preventing him from deciding ipse dixit.
The standard "expected of the judiciary" is that the decision rendered makes clear why either party
prevailed under the applicable law to the facts as established. Nor is there any rigid formula as to the
language to be employed to satisfy the requirement of clarity and distinctness. The discretion of the
particular judge in this respect, while not unlimited, is necessarily broad. There is no sacramental
form of words which he must use upon pain of being considered as having failed to abide by what the
Constitution directs.21

Thus, Section 14, Article VIII of the Constitution mandates Us to craft Our decisions stating clearly
and distinctly the facts and the law on which We based Our decisions. It should be emphasized that
the mere fact that the defendant was not able to file an answer does not automatically mean that the
trial court will render a judgment in favor of the plaintiff. The trial court must still determine whether
the plaintiff is entitled to the reliefs prayed for. Thus, it is incumbent upon the RTC to clearly and
distinctly state the facts and the legal basis on which it based its decision. This is sadly not followed
by the RTC in its Decision dated March 14, 2014. The RTC merely adopted the allegations of Carolina
et al. without any rhyme or reason. The decision merely stated that quorum was not established
during the annual stockholders meeting conducted by Cecilia Que, et al. and that only 98,428 shares
were present during the said meeting without any explanation or justification as to why the trial court
ruled that way. Therefore, We agree with the CA that the RTC decision is null and void for violating
the constitutional provision.

Total outstanding capital stocks, without distinction as to disputed or undisputed shares of stock, is the
basis in determining the presence of quorum.

Carolina et. al., claimed that the basis for determining quorum should have been the total number
of undisputed shares of stocks of Phil-Ville due to the exceptional nature of the case since the 3,140
shares of the late Geronima and the fractional .67, .67, and .66 shares of Eumir Que Camara, Paolo
Que Camara and Abimar Que Camara are the subject of another dispute filed before the RTC. Thus,
excluding the 3,142 shares from the 200,000 outstanding capital stock, the proper basis of
determining the presence of quorum should be 196,858 shares of stocks.22 We do not agree.

Section 52 of the Corporation Code states that:

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.

While Section 137 of the same Code defines "outstanding capital stock", 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.

The right to vote is inherent in and incidental to the ownership of corporate stocks. It is settled that
unissued stocks may not be voted or considered in determining whether a quorum is
present in a stockholders' meeting. Only stocks actually issued and outstanding may be
voted.23 Thus, for stock corporations, the quorum is based on the number of outstanding
voting stocks.24 The distinction of undisputed or disputed shares of stocks is not provided
for in the law or the jurisprudence. Ubi lex non distinguit nec nos distinguere debemus — when
the law does not distinguish we should not distinguish. Thus, the 200,000 outstanding capital
stocks of Phil-Ville should be the basis for determining the presence of a quorum, without
any distinction.

Therefore, to constitute a quorum, the presence of 100,001 shares of stocks in Phil-Ville is necessary.
We agree with the CA when it held that only 98,430 shares of stocks. were present during
the January 25, 2014 stockholders meeting at Max's Restaurant, therefore, no quorum had
been established.

There is no evidence that the 3,140 shares which allegedly had been transferred to 1) Carolina's
children, namely: Francis Villongco, Carlo Villongco, Michael Villongco and Marcelia Villongco; 2) Ana
Maria's daughter, namely: Elaine Victoria Que Tan; 3) Angelica Que; 4) Cecilia's children, namely:
Geminiano, Carlos, Geronimo and John Elston; 5) Ma. Corazon's son, Anthony; and, 6) Maria Luisa's
children, namely: Eumir Carlo Camara, Paolo Camara, and Abimar Camara; where transferred and
recorded in the stocks and transfer book of Phil-Ville.

Section 6325 of the Corporation Code states that "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. "

As held in the case of Interport Resources Corporation v. Securities Specialist, Inc.,26 held that:

A transfer of shares of stock not recorded in the stock and transfer book of the corporation
is non-existent as far as the corporation is concerned. As between the corporation on the one
hand, and its shareholders and third persons on the other, the corporation looks only to its books for
the purpose of determining who its shareholders are. It is only when the transfer has been recorded
in the stock and transfer book that a corporation may rightfully regard the transferee as one of its
stockholders. From this time, the consequent obligation on the part of the corporation to recognize
such rights as it is mandated by law to recognize arises. 27

The contention of Cecilia Que, et al., that they should not be faulted for their failure to present the
stock and transfer book because the same is in the possession of the corporate secretary, Ana Maria
Que Tan, who has an interest adverse from them, is devoid of merit. It is basic that a stockholder
has the right to inspect the books of the corporation, 28 and if the stockholder is refused by an officer
of the corporation to inspect or examine the books of the corporation, the stockholder is not without
any remedy. The Corporation Code grants the stockholder a remedy—to file a case in accordance
with Section 144.29

In this case, there is no evidence that the 3,140 shares of the late Geronima were recorded in the
stocks and transfer book of Phil-Ville. Thus, insofar as Phil-Ville is concerned, the 3,140 shares of the
late Geronima allegedly transferred to several persons is non-existent. Therefore, the transferees of
the said shares cannot exercise the rights granted unto stockholders of a corporation, including the
right to vote and to be voted upon.

WHEREFORE, premises considered, the instant Petitions for Review on Certiorari are DENIED. The
Decision dated September 4, 2015 and Amended Decision dated June 8, 2016 of the Court of Appeals
in CA-G.R. SP No. 134666 are hereby AFFIRMED in toto.
 33.) [G.R. No. 45493. April 21, 1939.]

GERARDO GARCIA, Plaintiff-Appellee, v. ANGEL SUAREZ, Defendant-Appellant.

Sotto & Sotto for Appellant.

Ramirez & Ortigas for Appellee.

SYLLABUS

1. CORPORATIONS; SUBSCRIPTION TO SHARES OF CAPITAL STOCK; PAYMENT OF SUBSCRIPTION.

— Section 37 of the Corporation Law, amended by Act No. 3518, provides when the obligation to pay
interest arises and when payment should be made, but it is absolutely silent as to when the
subscription to a stock should be paid. Of course, the obligation to pay arises from the date of the
subscription, but the coming into being of an obligation should not be confused with the time when it
becomes demandable. In a loan, for example, the obligation to pay arises from the time the loan is
taken; but the maturity of that obligation, the date when the debtor can be compelled to pay, is not
the date itself of the loan, because this would be absurd. The date when payment can be demanded
is necessarily distinct from and subsequent to that when the obligation is contracted.

2. ID.; ID.; ID. — The subscription to the capital stock of a corporation, unless otherwise stipulated,
is not payable at the moment of the subscription but on a subsequent date which may be fixed by
the corporation. Hence, section 38 of the Corporation Law, amended by Act No. 3518, provides that:
"The board of directors or trustees of any stock corporation formed, organized, or existing under this
Act may at any time declare due and payable to the corporation unpaid subscriptions to the capital
stock . . .

3. ID.; ID.; ID.; PRESCRIPTION OF ACTION FOR RECOVERY OF SHARES OF A CORPORATION. — The
board of directors of the Compañia Hispano-Filipina, Inc., not having declared due and payable the
stock subscribed by the appellant, the prescriptive period of the action nor the collection thereof only
commenced to run from June 18, 1931 when the plaintiff, in his capacity as receiver and in the
exercise of the power conferred upon him by the said section 38 of the Corporation Law, demanded
of the appellant to pay the balance of his subscription. The present action having been filed on
October 10, 1936, the defense of prescription is entirely without basis.

4. ID.; ID.; ID.; RELEASE FROM OBLIGATION TO PAY SUBSCRIPTION. — Not having established that
the stockholders of the Compañia Hispano-Filipina, Inc., have in any wise consented to release the
appellant from his obligation, or that the acting president, R. P., was expressly authorized by the
stockholders, or was authorized by the by-laws of the corporation, to release the appellant from his
obligation, the appealed decision is affirmed.

DECISION

CONCEPCION, J.:

On October 4, 1924, the appellant subscribed to sixteen shares of the capital stock of the
Compañia Hispano-Filipina, Inc., a corporation which is duly formed and organized. Of the
sixteen subscribed shares, at the par value of P100 each, the appellant only paid P400, the
value of four shares. On June 6, 1931, the plaintiff-appellee was appointed by the court receiver of
the Compañia Hispano-Filipina, Inc., to collect all the credits of said corporation, pay its debts and
dispose of the remainder of its assets and of its properties. On June 18, 1931, the plaintiff-
appellee in vain made demand upon the defendant-appellant to pay the balance of his
subscription. On July 10, 1933, the plaintiff, as receiver, brought an action in the Court of First
Instance of Manila to recover from the defendant-appellant and other shareholders the balance of
their subscriptions, but the complaint was dismissed for lack of prosecution. On October 10, 1935, a
similar complaint was filed against the appellant, and after trial, judgment was rendered therein
ordering the said defendant to pay to the plaintiff, as receiver of Compañia Hispano-Filipina, Inc., the
sum of P1,200, with legal interest thereon from October 4, 1924, and the costs. The defendant
appealed and in this instance contends that the trial court erred in holding that the action
of the plaintiff-appellee has not prescribed, and that the appellant has not been released
from his obligation to pay the balance of his subscription.

The first alleged error is based on the ground that the obligation contracted by the
appellant to pay the value of his subscription was demandable, according to him, from the
date of subscription in the absence of any stipulation to the contrary, and he says that
from the date of his subscription, October 4, 1924, until the filing of the complaint on
October 10, 1936, more than ten years have elapsed, a period which is more than
sufficient for the prescription of the action brought against the Appellant.

In support of his contention, the appellant cites section 37 of the Corporation Law, amended by Act
No. 8618, according to which, subscribers for stock shall pay to the corporation quarterly on all
unpaid subscription interest, from the date of subscription, at the rate of six per centum per annum
unless otherwise provided in the by. laws. From this legal provision the appellant infers that the
subscriber is bound to pay the total amount of the subscription from the perfection of the
contract, there being, as there is none in this case, any stipulation to the contrary in the
bylaws of the corporation or in the contract of subscription.

The premise of the argument is wrong because it confuses two distinct obligations: the obligation to
pay interest and that to pay the amount of the subscription. The said section 37 of the
Corporation Law provides when the obligation to pay interest arises and when payment
should be made, but it is absolutely silent as to when the subscription to a stock should be
paid. Of course, the obligation to pay arises from the date of the subscription, but the
coming into being of an obligation should not be confused with the time when it becomes
demandable. In a loan, for example, the obligation to pay arises from the time the loan is taken;
but the maturity of that obligation, the date where the debtor can be compelled to pay is not the
date itself of the loan because this would be absurd The date when payment can be demanded is
necessarily distinct from and subsequent to that when the obligation is contracted.

By the same token, the subscription to the capital stock of a corporation, unless otherwise
stipulated, is not payable at the moment of the subscription but on a subsequent date
which may be fixed by the corporation. Hence, section 38 of the Corporation Law, amended by
Act No. 3518, provides that: jgc:chanrobles.com.ph

"The board of directors or trustees of any stock corporation formed, organized, or existing under this
Act may at any time declare due and payable to the corporation unpaid subscriptions to the capital
stock . . .

The board of directors of the Compañia Hispano-Filipina, Inc., not having declared due and
payable the stock subscribed by the appellant, the prescriptive period of the action for the
collection thereof only commenced to run from June 18, 1931 when the plaintiff, in his
capacity as receiver and in the exercise of the power conferred upon him by the said
section 38 of the Corporation Law, demanded of the appellant to pay the balance of his
subscription. The present action having been field on October 10, 1935, the defense of prescription
is entirely without basis.

The second alleged error of the court assigned by the appellant consists in not holding that he was
released from the obligation to pay the balance of his subscription. In support of his contention, the
appellant adduced as evidence a letter., allegedly signed by R. Pando, acting president of
the corporation Compañia Hispano-Filipina, Inc., wherein the appellant was released by
Pando from an obligation with respect to the payment of his subscription in consideration
of his transfer of his shares to the corporation.

The very citation of authorities made by the appellant in his brief destroys his contention. It says: jgc:chanrobles.com.ph

"Release of subscribers by the corporation. — There can be no doubt that a corporation may
effectually release a subscriber from liability on his subscription, in whole or in art, or allow him to
modify his contract, if all the stockholders expressly or impliedly consent . . .

"The agents or officers of the corporation have no such power, however, unless it is
expressly conferred upon them by the charter or statute, or by the stockholders by a by-law
or otherwise. . . (Thomas v. Wentworth Hotel Co., 117 Pac., 1041; Fletcher, Encyc. of Private
Corporations, sec. 638)." (Emphasis ours.)

It has not been established that the stockholders of the Compañia Hispano-Filipina, Inc.,
have in any wise consented to release the appellant from his obligation, or that the acting
president, R. Pando, was expressly authorized by the stockholders, or was authorized by
the by-laws of the corporation, to release the appellant from his obligation.

Against the contention of the appellant, this court he held that: jgc:chanrobles.com.ph

"A corporation has no legal capacity to release a subscriber to its capital stock from the
obligation to pay for his shares; and any agreement to this effect is invalid." (Velas o v.
Poizat, 37 Phil., 802.)

"A corporation has no power to release an original subscriber to its capital stock from the
obligation of paying for his shares, without a valuable consideration for such release; . . ."
(Philippine Trust Co. v. Rivera, 4 Phil., 469.)

"A stock subscription is a contract between the corporation and the subscriber, and courts
will enforce it for or against either. A corporation has no legal capacity to release a
subscriber to its capital stock from the obligation to pay for his shares, and any agreement
to this effect is invalid. (Velasco v. Poizat, 37 Phil., 802.)" (Miranda v. Tarlac Rice Mill Co, 57 Phil.,
619.)

The appealed judgment is affirmed, with the costs to the appellant. So ordered
34.) G.R. No. L-19893             March 31, 1923

ARNALDO F. DE SILVA, plaintiff-appellant,
vs.
ABOITIZ & COMPANY, INC., defendant-appellee.

Del Rosario and Del Rosario and Andres Jayme for appellant.
Rodriguez and Zacarias for appellee.

ARAULLO, C. J.:

The plaintiff subscribed for 650 shares of stock of the defendant corporation of the value of P500 each, of which he
has paid only the total value of 200 shares, there remaining 450 shares unpaid, for which he was indebted to the
corporation in the sum of P225,000, the value thereof. On April 22, 1922, he was notified by the secretary of the
corporation of a resolution adopted by the board of directors of the corporation on the preceding day, declaring the
unpaid subscriptions to the capital stock of the corporation to have become due and payable on the
following May 31st at the office thereof, the payment to be made to the treasurer, and stating that all such shares
as may have not been paid then, with the accrued interest up to that date, will be declared delinquent, advertised
for sale at public auction, and sold on the following June 16th, for the purpose of paying up the amount of the
subscription and accrued interest, with the expenses of the advertisement and sale, unless said payment was made
before. The proper advertisement having been published, as announced in the aforesaid notice, the plaintiff filed a
complaint in the Court of First Instance of Cebu on May 5th of the same year against the said corporation, wherein,
after relating the above-mentioned facts, he prayed for a judgment in his favor, decreeing that, in prescribing
another method of paying the subscription to the capital stock different from that provided in article 46 of its by-laws,
in declaring the aforesaid 450 shares delinquent, and in directing the sale thereof, as advertised, the corporation
had exceeded its executive authority, and as a consequence thereof he asked that a writ of injunction be issued
against the said defendant, enjoining it from taking any further action of whatever nature in connection with the acts
complained of and that it pay the costs of this suit.

The plaintiff alleged as the grounds of his petition: (1) That, according to aforesaid article 46 of the by-law of
the corporation, which was inserted in the complaint, all the shares subscribed to by the incorporation that
were not paid for at the time of the incorporation, shall be paid out of the 70 per cent of the profit obtained,
the same to be distributed among the subscribers, who shall not receive any dividend until said shares were paid in
full; (2) that in declaring the plaintiff's unpaid subscription to the capital stock to have become due and payable on
May 31st, and in publishing the aforesaid notice declaring his unpaid shares delinquent, the defendant corporation
has violated the aforesaid article, which prescribes an operative method of paying for the shares continuously until
their full amortization, thus violating and disregarding a right of the plaintiff vested under the said by-laws; (3) that
the aforesaid acts of the defendant corporation were in excess of its powers and executive authority and the plaintiff
had no other plain, speedy and adequate remedy in the ordinary course of law than that prayed for in the said
complaint, to prevent the defendant from taking any further action in connection with the sale and alienation of the
said shares.

A preliminary injunction having been issued against the defendant, as prayed for by the plaintiff, upon the giving of
the proper bond, and the defendant having been summoned, the latter filed a demurrer to the complaint on the
ground that the facts alleged therein did not constitute a cause of action, and that even supposing the plaintiff to
have any lawful claim against the defendant corporation, the special remedy applied for by the plaintiff was not the
most adequate and speedy.

Hearing having been had the court below by an order dated September 21, 1922, sustained the aforesaid demurrer
on the first ground, giving the plaintiff five days within which to amend his complaint, but the said period having
elapsed without the plaintiff having amended his complaint, upon motion of the defendant, that court, by an order
dated the 2d of the following month of October, dismissed the complaint and ordered the dissolution of the
preliminary injunction previously issued, with costs, to which orders the plaintiff excepted, asking at the same time
for the annulment thereof and a new hearing, which motion was denied by the lower court. To that ruling the plaintiff
also excepted, and brought the case to this court by the proper bill of exceptions.
Assuming the truth of the facts alleged in the complaint filed against the herein defendant, as the filling of a
demurrer to a complaint is made on that assumption, the question to be decided reduces itself to determining
whether or not, under the provision of article 46 of the by-laws of the defendant corporation, the latter may
declare the unpaid shares delinquent, or collect their value by another method different from that
prescribed in the aforecited article.

Said article reads thus:

ART. 46. The net profit resulting from the annual liquidation shall be distributed as follows: Ten per cent
(10%) for the Board of Directors and in the manner prescribed in article twenty-six (26) of these by-laws; ten
per cent (10%) for the general manager; ten per cent (10%) for the reserve fund, and seventy per cent
(70%) for the shareholders in equal parts; Provided, however, That from this seventy per cent dividend
the Board of Directors may deduct such amount as it may deem fit for the payment of the unpaid
subscription to the capital stock and not pay any dividend to the holders of the said unpaid shares until
they are fully paid; Provided, further, That when all the shares have been paid in full as provided in the
preceding paragraph, the Board of Directors may also deduct such amount as it may deem fit for the
creation of an emergency special fund, or extraordinary reserve fund when in its judgment the same may
convenient for the development of the business of the corporation or for meeting any such contingencies as
may arise from its operation, whenever the distributable dividend is found, after the foregoing deduction, to
be not less than ten per cent (10%) of the paid up capital stock.

No dividend shall be declared or paid, except when there remains a net profit after the payment of all the
expenses incurred, or allowances made, by the corporation to carry out the operation of its business; so that
no such dividend may be declared as may affect the capital of the corporation.

As will be seen from the context of the said article, its first part specifies the manner in which the net profit from the
annual liquidation should be distributed, fixing a certain per cent for the board of directors; another for the general
manager; another for the reserve fund, and the remaining 70 per cent to be distributed in equal parts among the
shareholders. But it authorizes or empowers the board of directors to collect the value of the shares subscribed to
and not fully paid by deducting from the 70 per cent, distributable in equal parts among the shareholders, such
amount as may be deemed convenient, to be applied on the payment of the said shares, and not to pay the
subscriber until the same are fully paid up. In no other way can the words "Provided, however, that from this seventy
per cent dividend the board of directors may deduct such amount as it may deem fit for the payment, etc." And this
is so clear that in that same article the board of directors is also authorized to create a special emergency fund or
extraordinary reserve fund, when, in its judgment, and in case all the shares subscribed to have been fully paid, the
same is convenient for the development of the business of the corporation or for meeting any such contingencies as
my arise from its operation, applying said 70 per cent of the profit on the payment of the shares that may have not
been fully paid, provided that the distributable dividend remaining after the deduction to be made for the creation of
the said special emergency fund or extraordinary reserve fund is not less than 10 per cent of the capital actually
paid. So that it is discretionary on the part of the board of directors to do whatever is provided in the said
article relative to the application of a part of the 70 per cent of the profit distributable in equal parts on the
payment of the shares subscribed to and not fully paid, and to the creation of a special emergency fund or
extraordinary reserve fund; and the fact itself that said special fund may not be created when the dividend
appearing to be distributable, after deducting from the said 70 per cent the amount to be applied on the payment of
the unpaid subscription, is less than 10 per cent of the capital actually paid, shows that it is the board of directors
and not the delinquent subscriber that may and must judge and decide whether or not such value must be
paid out of a part of the 70 per cent of the profit distributable in equal parts among the shareholders, as
provided in the first part of the said article. It lies therefore, within the discretion of the board of directors to
make use of such authority.

If the board of directors does not wish to make, or does not make, use of said authority it has two other
remedies for accomplishing the same purpose. As was said by this court in the case of Velasco vs. Poizat (37
Phil., 802):

The first and most special remedy given by the statute consists in permitting the corporation to put
the unpaid stock for sale and dispose of it for the account of the delinquent subscriber. In this case
the provisions of sections 38 to 48, inclusive, of the Corporation Law are applicable and must be followed.
 The other remedy is by action in court concerning which we find in section 49 the following
provision:

"Nothing in this Act prevent the directors from collecting, by action in any court of proper
jurisdiction, the amount due on any unpaid subscription, together with accrued interest and costs
and expenses incurred."

In the instant case the board of directors of the defendant corporation elected to avail itself of the first of said two
remedies, and, complying strictly with the provisions of sections 37 to 49, inclusive, of the aforesaid Corporation
Law, which is binding upon it and its stockholders. it being an artificial entity created by virtue of that same law (sec.
2), the board of directors made use of the discretionary power granted to it by that law and declared that payment of
plaintiff's subscription to 450 shares which had not been paid by him was due, and that said shares were delinquent,
and performed all the other acts subsequent to said declaration that are mentioned in the complaint, as it did not
deem it advantageous to the corporation to apply on the payment of said shares, as was authorized by the by-law, a
part of the profit that was, or might have been realized, and was distributable among the stockholders in equal parts,
as to the existence of which profit no allegation is made in the complaint, or to enforce payment of such shares by
bringing in court the proper action against the debtor or delinquent stockholders. It is, however, alleged by the
appellant that the by-law of the corporation being of the nature of a contract between it and its stockholders or
members, and article 46 of the by-laws of the said corporation providing an operative method for the payment of
stock subscriptions continuously until the full amortization thereof, application cannot be made in the present case of
the provisions above cited of the Corporation Law for the purpose contemplated by the defendant, as the provision
of said article must prevail against that law.

Admitting that the provision of article 46 of the said by-laws maybe regarded as a contract between the defendant
corporation and its stockholders , yet as it is only to the board of directors of the corporation that said articles gives
the authority or right to apply on the payment of unpaid subscriptions such amount of the 70 per cent of the profit
distributable among the shareholders in equal parts as may be deemed fit, it cannot be maintained that the said
article has prescribe an operative method for the payment of said subscription continuously until their full
amortization, or, what would be the same thing, that said article has prescribe that sole and exclusive method for
that purpose, for, in the first place, the adoption of that method for the purpose of collecting the value of
subscriptions due and unpaid lies, according to said article, within the discretion of the board of directions, that is, it
is subject to this condition, and this can in no way be reconciled with the idea of method, which implies something
fixed as a rule or permanent standard, and not variable at the will of somebody and according to the circumstances;
and, in the second place, in connection with the provision of the said article relative to the aforesaid
discretionary power of the board of directors to adopt that method, there is also the discretionary power
granted the same board of directors to avail itself, for the same purpose, to either of the two remedies
prescribed in sections 38 to 49, inclusive, of the aforecited Corporation Law.

In the instant case, the defendant corporation, through its board of directors, made use of its discretionary power,
taking advantage of the first of the two remedies provided by the aforesaid law. On the other hand, the plaintiff has
no right whatsoever under the provision of the above cited article 46 of the said by-laws to prevent the board of
directors from following, for that purpose, any other method than that mentioned in the said article, for the very
reason that the same does not give the stockholders any right in connection with the determination of the question
whether or not there should be deducted from the 70 per cent of the profit distributable among the stockholders
such amount as may be deemed fit for the payment of subscriptions due and unpaid. Therefore, it is evident that the
defendant corporation has not violated, nor disregarded any right of the plaintiff recognized by the said by-laws, nor
exceeded its authority in the discharge of its executive functions, nor abused its discretion when it performed the
acts mentioned in the complaint as grounds thereof, and, consequently, the facts therein alleged do not constitute a
cause of action.

For the foregoing, the orders appealed from are affirmed, with the costs of both instances against the appellant. So
ordered.
35.) G.R. No. 96674 June 26, 1992

RURAL BANK OF SALINAS, INC., MANUEL SALUD, LUZVIMINDA TRIAS and FRANCISCO TRIAS, petitioners,

vs.

COURT OF APPEALS*, SECURITIES AND EXCHANGE COMMISSION, MELANIA A. GUERRERO, LUZ

ANDICO, WILHEMINA G. ROSALES, FRANCISCO M. GUERRERO, JR., and FRANCISCO GUERRERO ,
SR., respondents.

PARAS, J.:

The basic controversy in this case is whether or not the respondent court erred in sustaining the Securities and
Exchange Commission when it compelled by Mandamus the Rural Bank of Salinas to register in its stock and
transfer book the transfer of 473 shares of stock to private respondents. Petitioners maintain that the Petition
for Mandamus should have been denied upon the following grounds.

(1) Mandamus cannot be a remedy cognizable by the Securities and Exchange Commission when the purpose is to
register certificates of stock in the names of claimants who are not yet stockholders of a corporation:

(2) There exist valid reasons for refusing to register the transfer of the subject of stock, namely:

(a) a pending controversy over the ownership of the certificates of stock with the Regional Trial
Court;

(b) claims that the Deeds of Assignment covering the subject certificates of stock were fictitious and
antedated; and

(c) claims on a resultant possible deprivation of inheritance share in relation with a conflicting claim
over the subject certificates of stock.

The facts are not disputed.

On June 10, 1979, Clemente G. Guerrero, President of the Rural Bank of Salinas, Inc., executed a Special Power of
Attorney in favor of his wife, private respondent Melania Guerrero, giving and granting the latter full power and
authority to sell or otherwise dispose of and/or mortgage 473 shares of stock of the Bank registered in his name
(represented by the Bank's stock certificates nos. 26, 49 and 65), to execute the proper documents therefor, and to
receive and sign receipts for the dispositions.

On February 27, 1980, and pursuant to said Special Power of Attorney, private respondent Melania Guerrero, as
Attorney-in-Fact, executed a Deed of Assignment for 472 shares out of the 473 shares, in favor of private
respondents Luz Andico (457 shares), Wilhelmina Rosales (10 shares) and Francisco Guerrero, Jr. (5
shares).

Almost four months later, or two (2) days before the death of Clemente Guerrero on June 24, 1980, private
respondent Melania Guerrero, pursuant to the same Special Power of Attorney, executed a Deed of
Assignment for the remaining one (1) share of stock in favor of private respondent Francisco Guerrero, Sr.

Subsequently, private respondent Melania Guerrero presented to petitioner Rural Bank of Salinas the two (2)
Deeds of Assignment for registration with a request for the transfer in the Bank's stock and transfer book of
the 473 shares of stock so assigned, the cancellation of stock certificates in the name of Clemente G. Guerrero,
and the issuance of new stock certificates covering the transferred shares of stocks in the name of the new owners
thereof. However, petitioner Bank denied the request of respondent Melania Guerrero.
On December 5, 1980, private respondent Melania Guerrero filed with the Securities and Exchange
Commission" (SEC) an action for mandamus against petitioners Rural Bank of Salinas, its President and
Corporate Secretary. The case was docketed as SEC Case No. 1979.

Petitioners filed their Answer with counterclaim on December 19, 1980 alleging the upon the death of Clemente G.
Guerrero, his 473 shares of stock became the property of his estate, and his property and that of his widow should
first be settled and liquidated in accordance with law before any distribution can be effected so that petitioners may
not be a party to any scheme to evade payment of estate or inheritance tax and in order to avoid liability to any third
persons or creditors of the late Clemente G. Guerrero.

On January 29, 1981, a motion for intervention was filed by Maripol Guerrero, a legally adopted daughter of the late
Clemente G. Guerrero and private respondent Melania Guerrero, who stated therein that on November 26, 1980
(almost two weeks before the filing of the petition for Mandamus) a Petition for the administration of the estate of the
late Clemente G. Guerrero had been filed with the Regional Trial Court, Pasig, Branch XI, docketed as Special
Proceedings No. 9400. Maripol Guerrero further claimed that the Deeds of Assignment for the subject shares of
stock are fictitious and antedated; that said conveyances are donations since the considerations therefor are below
the book value of the shares, the assignees/private respondents being close relatives of private respondent Melania
Guerrero; and that the transfer of the shares in question to assignees/private respondents, other than private
respondent Melania Guerrero, would deprive her (Maripol Guerrero) of her rightful share in the inheritance. The
SEC hearing officer denied the Motion for Intervention for lack of merit. On appeal, the SEC En Banc affirmed the
decision of the hearing officer.

Intervenor Guerrero filed a complaint before the then Court of First Instance of Rizal, Quezon City Branch, against
private respondents for the annulment of the Deeds of Assignment, docketed as Civil Case No. Q-32050.
Petitioners, on the other hand, filed a Motion to Dismiss and/or to Suspend Hearing of SEC Case No. 1979 until
after the question of whether the subject Deeds of Assignment are fictitious, void or simulated is resolved in Civil
Case No. Q-32050. The SEC Hearing Officer denied said motion.

On December 10, 1984, the SEC Hearing Officer rendered a Decision granting the writ of Mandamus prayed for by
the private respondents and directing petitioners to cancel stock certificates nos. 26, 49 and 65 of the Bank, all in
the name of Clemente G. Guerrero, and to issue new certificates in the names of private respondents, except
Melania Guerrero. The dispositive, portion of the decision reads:

WHEREFORE, judgment is hereby rendered in favor of the petitioners and against the respondents,
directing the latter, particularly the corporate secretary of respondent Rural Bank of Salinas, Inc., to
register in the latter's Stock and Transfer Book the transfer of 473 shares of stock of respondent
Bank and to cancel Stock Certificates Nos. 26, 45 and 65 and issue new Stock Certificates covering
the transferred shares in favor of petitioners, as follows:

1. Luz Andico 457 shares

2. Wilhelmina Rosales 10 shares

3. Francisco Guerrero, Jr. 5 shares

4. Francisco Guerrero, Sr. 1 share

and to pay to the above-named petitioners, the dividends for said shares corresponding to the years
1981, 1982, 1983 and 1984 without interest.

No pronouncement as to costs.

SO ORDERED. (p. 88, Rollo)

On appeal, the SEC En Banc affirmed the decision of the Hearing Officer. Petitioner filed a petition for review with
the Court of Appeals but said Court likewise affirmed the decision of the SEC.
We rule in favor of the respondents.

Section 5 (b) of P.D. No. 902-A grants to the SEC the original and exclusive jurisdiction to hear and decide cases
involving intracorporate controversies. An intracorporate controversy has been defined as one which arises between
a stockholder and the corporation. There is no distinction, qualification, nor any exception whatsoever (Rivera vs.
Florendo, 144 SCRA 643 [1986]). The case at bar involves shares of stock, their registration, cancellation and
issuances thereof by petitioner Rural Bank of Salinas. It is therefore within the power of respondent SEC to
adjudicate.

Respondent SEC correctly ruled in favor of the registering of the shares of stock in question in private respondent's
names. Such ruling finds support under Section 63 of the Corporation Code, to wit:

Sec. 63. . . . 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 . . .

In the case of Fleisher vs. Botica Nolasco, 47 Phil. 583, the Court interpreted Sec. 63 in his wise:

Said Section (Sec. 35 of Act 1459 [now Sec. 63 of the Corporation Code]) contemplates no
restriction as to whom the stocks may be transferred. It does not suggest that any
discrimination may be created by the corporation in favor of, or against a certain purchaser.
The owner of shares, as owner of personal property, is at liberty, under said section to
dispose them in favor of whomever he pleases, without limitation in this respect, than the
general provisions of law. . . .

The only limitation imposed by Section 63 of the Corporation Code is when the corporation holds any unpaid
claim against the shares intended to be transferred, which is absent here.

A corporation, either by its board, its by-laws, or the act of its officers, cannot create restrictions in stock
transfers, because:

. . . Restrictions in the traffic of stock must have their source in legislative enactment, as the
corporation itself cannot create such impediment. By-laws are intended merely for the protection of
the corporation, and prescribe regulation, not restriction; they are always subject to the charter of the
corporation. The corporation, in the absence of such power, cannot ordinarily inquire into or pass
upon the legality of the transactions by which its stock passes from one person to another, nor can it
question the consideration upon which a sale is based. . . . (Tomson on Corporation Sec.
4137, cited in Fleisher vs. Nolasco, Supra).

The right of a transferee/assignee to have stocks transferred to his name is an inherent right flowing from his
ownership of the stocks. Thus:

Whenever a corporation refuses to transfer and register stock in cases like the
present, mandamus will lie to compel the officers of the corporation to transfer said stock in
the books of the corporation" (26, Cyc. 347, Hyer vs. Bryan, 19 Phil. 138; Fleisher vs. Botica
Nolasco, 47 Phil. 583, 594).

The corporation's obligation to register is ministerial.

In transferring stock, the secretary of a corporation acts in purely ministerial capacity, and does not
try to decide the question of ownership. (Fletcher, Sec. 5528, page 434).

The duty of the corporation to transfer is a ministerial one and if it refuses to make such
transaction without good cause, it may be compelled to do so by mandamus. (See. 5518, 12
Fletcher 394)
For the petitioner Rural Bank of Salinas to refuse registration of the transferred shares in its stock and transfer book,
which duty is ministerial on its part, is to render nugatory and ineffectual the spirit and intent of Section 63 of the
Corporation Code. Thus, respondent Court of Appeals did not err in upholding the Decision of respondent SEC
affirming the Decision of its Hearing Officer directing the registration of the 473 shares in the stock and transfer book
in the names of private respondents. At all events, the registration is without prejudice to the proceedings in court to
determine the validity of the Deeds of Assignment of the shares of stock in question.

WHEREFORE, the petition is DISMISSED for lack of merit.

 36.) G. R. NO. 139802 - December 10, 2002

VICENTE C. PONCE, Petitioner, vs. ALSONS CEMENT CORPORATION, and FRANCISCO M.

GIRON, JR., Respondents.

DECISION

QUISUMBING, J.:

This petition for review seeks to annul the decision 1 of the Court of Appeals, in CA-G.R. SP No.
46692, which set aside the decision2 of the Securities and Exchange Commission (SEC) En Banc in
SEC-AC No. 545 and reinstated the order3 of the Hearing Officer dismissing herein petitioners
complaint. Also assailed is the CAs resolution 4 of August 10, 1999, denying petitioners motion for
reconsideration.

On January 25, 1996, plaintiff (now petitioner) Vicente C. Ponce, filed a complaint 5 with the SEC for
mandamus and damages against defendants (now respondents) Alsons Cement Corporation and its
corporate secretary Francisco M. Giron, Jr. In his complaint, petitioner alleged, among others, that:

xxx

5. The late Fausto G. Gaid was an incorporator of Victory Cement Corporation (VCC), having
subscribed to and fully paid 239,500 shares of said corporation.

6. On February 8, 1968, plaintiff and Fausto Gaid executed a "Deed of Undertaking" and
"Indorsement" whereby the latter [Gaid] acknowledges that the former [Ponce] is the
owner of said shares and he was therefore assigning/endorsing the same to the plaintiff. A
copy of the said deed/indorsement is attached as Annex "A".

7. On April 10, 1968, VCC was renamed Floro Cement Corporation (FCC for brevity).

8. On October 22, 1990, FCC was renamed Alsons Cement Corporation (ACC for brevity) as shown by
the Amended Articles of Incorporation of ACC, a copy of which is attached as Annex "B".

9. From the time of incorporation of VCC up to the present, no certificates of stock corresponding to
the 239,500 subscribed and fully paid shares of Gaid were issued in the name of Fausto G. Gaid
and/or the plaintiff.

10. Despite repeated demands, the defendants [Alsons] refused and continue to refuse
without any justifiable reason to issue to plaintiff [Ponce] the certificates of stocks
corresponding to the 239,500 shares of Gaid, in violation of plaintiffs [Ponce] right to
secure the corresponding certificate of stock in his name.6

Attached to the complaint was the Deed of Undertaking and Indorsement 7 upon which petitioner
based his petition for mandamus. Said deed and indorsement read as follows:

DEED OF UNDERTAKING

KNOW ALL MEN BY THESE PRESENTS:

I, VICENTE C. PONCE, is the owner of the total subscription of Fausto Gaid with Victory Cement
Corporation in the total amount of TWO HUNDRED THIRTY NINE THOUSAND FIVE HUNDRED
(P239,500.00) PESOS and that Fausto Gaid does not have any liability whatsoever on the
subscription agreement in favor of Victory Cement Corporation.

(SGD.) VICENTE C. PONCE

February 8, 1968

CONFORME:

(SGD.) FAUSTO GAID

INDORSEMENT

I, FAUSTO GAID is indorsing the total amount of TWO HUNDRED THIRTY NINE THOUSAND FIVE
HUNDRED (239,500.00) stocks of Victory Cement Corporation to VICENTE C. PONCE.

(SGD.) FAUSTO GAID

With these allegations, petitioner prayed that judgment be rendered ordering respondents (a) to
issue in his name certificates of stocks covering the 239,500 shares of stocks and its legal increments
and (b) to pay him damages.8

Instead of filing an answer, respondents moved to dismiss the complaint on the grounds that:
(a) the complaint states no cause of action; mandamus is improper and not available to
petitioner; (b) the petitioner is not the real party in interest; (c) the cause of action is barred
by the statute of limitations; and (d) in any case, the petitioners cause of action is barred by
laches.9 They argued, inter alia, that there being no allegation that the alleged
"INDORSEMENT" was recorded in the books of the corporation, said indorsement by Gaid
to the plaintiff of the shares of stock in question assuming that the indorsement was in
fact a transfer of stocks was not valid against third persons such as ALSONS under Section
63 of the Corporation Code.10 There was, therefore, no specific legal duty on the part of the
respondents to issue the corresponding certificates of stock, and mandamus will not lie. 11

Petitioner filed his opposition to the motion to dismiss on February 19, 1996 contending that: (1)
mandamus is the proper remedy when a corporation and its corporate secretary wrongfully refuse to
record a transfer of shares and issue the corresponding certificates of stocks; (2) he is the proper
party in interest since he stands to be benefited or injured by a judgment in the case; (3) the statute
of limitations did not begin to run until defendant refused to issue the certificates of stock in favor of
the plaintiff on April 13, 1992.

After respondents filed their reply, SEC Hearing Officer Enrique L. Flores, Jr. granted the motion to
dismiss in an Order dated February 29, 1996, which held that:

xxx

Insofar as the issuance of certificates of stock is concerned, the real party in interest is Fausto G.
Gaid, or his estate or his heirs. Gaid was an incorporator and an original stockholder of the defendant
corporation who subscribed and fully paid for 239,500 shares of stock (Annex "B"). In accordance
with Section 37 of the old Corporation Law (Act No. 1459) obtaining in 1968 when the defendant
corporation was incorporated, as well as Section 64 of the present Corporation Code (Batas
Pambansa Blg. 68), a stockholder who has fully paid for his subscription together with interest and
expenses in case of delinquent shares, is entitled to the issuance of a certificate of stock for his
shares. According to paragraph 9 of the Complaint, no stock certificate was issued to Gaid.
Comes now the plaintiff who seeks to step into the shoes of Gaid and thereby become a stockholder
of the defendant corporation by demanding issuance of the certificates of stock in his name. This he
cannot do, for two reasons: there is no record of any assignment or transfer in the books of the
defendant corporation, and there is no instruction or authority from the transferor (Gaid) for such
assignment or transfer. Indeed, nothing is alleged in the complaint on these two points.

xxx

In the present case, there is not even any indorsement of any stock certificate to speak of. What the
plaintiff possesses is a document by which Gaid supposedly transferred the shares to him. Assuming
the document has this effect, nevertheless there is neither any allegation nor any showing that it is
recorded in the books of the defendant corporation, such recording being a prerequisite to the
issuance of a stock certificate in favor of the transferee. 12

Petitioner appealed the Order of dismissal. On January 6, 1997, the Commission En Banc reversed
the appealed Order and directed the Hearing Officer to proceed with the case. In ruling that a
transfer or assignment of stocks need not be registered first before it can take cognizance of the case
to enforce the petitioners rights as a stockholder, the Commission En Banc cited our ruling in Abejo
vs. De la Cruz, 149 SCRA 654 (1987) to the effect that:

xxx As the SEC maintains, "There is no requirement that a stockholder of a corporation must be a
registered one in order that the Securities and Exchange Commission may take cognizance of a suit
seeking to enforce his rights as such stockholder". This is because the SEC by express mandate has
"absolute jurisdiction, supervision and control over all corporations" and is called upon to enforce the
provisions of the Corporation Code, among which is the stock purchasers right to secure the
corresponding certificate in his name under the provisions of Section 63 of the Code. Needless to say,
any problem encountered in securing the certificates of stock representing the investment made by
the buyer must be expeditiously dealt with through administrative mandamus proceedings with the
SEC, rather than through the usual tedious regular court procedure. xxx

Applying this principle in the case on hand, a transfer or assignment of stocks need not be registered
first before the Commission can take cognizance of the case to enforce his rights as a stockholder.
Also, the problem encountered in securing the certificates of stock made by the buyer must be
expeditiously taken up through the so-called administrative mandamus proceedings with the SEC
than in the regular courts.13

The Commission En Banc also found that the Hearing Officer erred in holding that petitioner is not
the real party in interest.

xxx

As appearing in the allegations of the complaint, plaintiff-appellant is the transferee of the shares of
stock of Gaid and is therefore entitled to avail of the suit to obtain the proper remedy to make him
the rightful owner and holder of a stock certificate to be issued in his name. Moreover, defendant-
appellees failed to show that the transferor nor his heirs have refuted the ownership of the
transferee. Assuming these allegations to be true, the corporation has a mere ministerial duty to
register in its stock and transfer book the shares of stock in the name of the plaintiff-appellant
subject to the determination of the validity of the deed of assignment in the proper tribunal. 14

Their motion for reconsideration having been denied, herein respondents appealed the decision 15 of
the SEC En Banc and the resolution16 denying their motion for reconsideration to the Court of
Appeals.

In its decision, the Court of Appeals held that in the absence of any allegation that the transfer of the
shares between Fausto Gaid and Vicente C. Ponce was registered in the stock and transfer book of
ALSONS, Ponce failed to state a cause of action. Thus, said the CA, "the complaint for mandamus
should be dismissed for failure to state a cause of action." 17 petitioners motion for reconsideration
was likewise denied in a resolution 18 dated August 10, 1999.

Hence, the instant petition for review on certiorari alleging that:

I. THE HONORABLE COURT OF APPEALS ERRED IN HOLDING THAT THE COMPLAINT FOR ISSUANCE
OF A CERTIFICATE OF STOCK FILED BY PETITIONER FAILED TO STATE A CAUSE OF ACTION
BECAUSE IT DID NOT ALLEGE THAT THE TRANSFER OF THE SHARES (SUBJECT MATTER OF THE
COMPLAINT) WAS REGISTERED IN THE STOCK AND TRANSFER BOOK OF THE CORPORATION,
CITING SECTION 63 OF THE CORPORATION CODE.

II. THE HONORABLE COURT OF APPEALS ERRED IN NOT APPLYING THE CASES OF "ABEJO VS. DE LA
CRUZ", 149 SCRA 654 AND "RURAL BANK OF SALINAS, INC., ET AL VS. COURT OF APPEALS, ET AL.",
G.R. NO. 96674, JUNE 26, 1992.

III. THE HONORABLE COURT OF APPEALS ERRED IN APPLYING A 1911 CASE, "HAGER VS. BRYAN",
19 PHIL. 138, TO DISMISS THE COMPLAINT FOR ISSUANCE OF A CERTIFICATE OF STOCK. 19

At issue is whether the Court of Appeals erred in holding that herein petitioner has no
cause of action for a writ of mandamus.

Petitioner first contends that the act of recording the transfer of shares in the stock and
transfer book and that of issuing a certificate of stock for the transferred shares involves
only one continuous process. Thus, when a corporate secretary is presented with a
document of transfer of fully paid shares, it is his duty to record the transfer in the stock
and transfer book of the corporation, issue a new stock certificate in the name of the
transferee, and cancel the old one. A transferee who requests for the issuance of a stock
certificate need not spell out each and every act that needs to be done by the corporate
secretary, as a request for issuance of stock certificates necessarily includes a request for
the recording of the transfer. Ergo, the failure to record the transfer does not mean that
the transferee cannot ask for the issuance of stock certificates.

Secondly, according to petitioner, there is no law, rule or regulation requiring a transferor of

shares of stock to first issue express instructions or execute a power of attorney for the
transfer of said shares before a certificate of stock is issued in the name of the transferee
and the transfer registered in the books of the corporation. He contends that Hager vs. Bryan,
19 Phil. 138 (1911), and Rivera vs. Florendo, 144 SCRA 643 (1986), cited by respondents, do not
apply to this case. These cases contemplate a situation where a certificate of stock has been issued
by the company whereas in this case at bar, no stock certificates have been issued even in the name
of the original stockholder, Fausto Gaid.

Finally, petitioner maintains that since he is under no compulsion to register the transfer or to secure
stock certificates in his name, his cause of action is deemed not to have accrued until respondent
ALSONS denied his request.

Respondents, in their comment, maintain that the transfer of shares of stock not recorded
in the stock and transfer book of the corporation is non-existent insofar as the corporation
is concerned and no certificate of stock can be issued in the name of the transferee. Until
the recording is made, the transfer cannot be the basis of issuance of a certificate of stock. They add
that petitioner is not the real party in interest, the real party in interest being Fausto Gaid since it is
his name that appears in the records of the corporation. They conclude that petitioners cause of
action is barred by prescription and laches since 24 years elapsed before he made any demand upon
ALSONS.
We find the instant petition without merit. The Court of Appeals did not err in ruling that petitioner
had no cause of action, and that his petition for mandamus was properly dismissed.

There is no question that Fausto Gaid was an original subscriber of respondent corporations 239,500
shares. This is clear from the numerous pleadings filed by either party. It is also clear from the
Amended Articles of Incorporation20 approved on August 9, 199521 that each share had a par value
of P1.00 per share. And, it is undisputed that petitioner had not made a previous request upon the
corporate secretary of ALSONS, respondent Francisco M. Giron Jr., to record the alleged transfer of
stocks.

The Corporation Code states that:

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.

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

Pursuant to the foregoing provision, a transfer of shares of stock not recorded in the stock and
transfer book of the corporation is non-existent as far as the corporation is concerned. 22 As between
the corporation on the one hand, and its shareholders and third persons on the other, the corporation
looks only to its books for the purpose of determining who its shareholders are. 23 It is only when the
transfer has been recorded in the stock and transfer book that a corporation may rightfully regard
the transferee as one of its stockholders. From this time, the consequent obligation on the part of the
corporation to recognize such rights as it is mandated by law to recognize arises.

Hence, without such recording, the transferee may not be regarded by the corporation as one among
its stockholders and the corporation may legally refuse the issuance of stock certificates in the name
of the transferee even when there has been compliance with the requirements of Section 64 24 of the
Corporation Code. This is the import of Section 63 which states that "No transfer, however,
shall be valid, except 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." The
situation would be different if the petitioner was himself the registered owner of the stock
which he sought to transfer to a third party, for then he would be entitled to the remedy of
mandamus.25

From the corporations 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. As between the corporation on the one hand, and its
shareholders and third persons on the other, the corporation looks only to its books for the purpose
of determining who its shareholders are.26 In other words, the 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 transferees name.

It follows that, as held by the Court of Appeals:

 x x x until registration is accomplished, the transfer, though valid between the parties, cannot be
effective as against the corporation. Thus, in the absence of any allegation that the transfer of the
shares between Gaid and the private respondent [herein petitioner] was registered in the stock and
transfer book of the petitioner corporation, the private respondent has failed to state a cause of
action.27

Petitioner insists that it is precisely the duty of the corporate secretary, when presented
with the document of fully paid shares, to effect the transfer by recording the transfer in
the stock and transfer book of the corporation and to issue stock certificates in the name
of the transferee. On this point, the SEC En Banc cited Rural Bank of Salinas, Inc. vs. Court of
Appeals, 28 where we held that:

For the petitioner Rural Bank of Salinas to refuse registration of the transferred shares in its stock
and transfer book, which duty is ministerial on its part, is to render nugatory and ineffectual the spirit
and intent of Section 63 of the Corporation Code. Thus, respondent Court of Appeals did not err in
upholding the decision of respondent SEC affirming the Decision of its Hearing Officer directing the
registration of the 473 shares in the stock and transfer book in the names of private respondents. At
all events, the registration is without prejudice to the proceedings in court to determine the validity
of the Deeds of Assignment of the shares of stock in question.

In Rural Bank of Salinas, Inc., however, private respondent Melania Guerrero had a Special
Power of Attorney executed in her favor by Clemente Guerrero, the registered stockholder.
It gave Guerrero full authority to sell or otherwise dispose of the 473 shares of stock registered in
Clementes name and to execute the proper documents therefor. Pursuant to the authority so given,
Melania assigned the 473 shares of stock owned by Guerrero and presented to the Rural Bank of
Salinas the deeds of assignment covering the assigned shares. Melania Guerrero prayed for the
transfer of the stocks in the stock and transfer book and the issuance of stock certificates in the
name of the new owners thereof. Based on those circumstances, there was a clear duty on the part
of the corporate secretary to register the 473 shares in favor of the new owners, since the person
who sought the transfer of shares had express instructions from and specific authority given by the
registered stockholder to cause the disposition of stocks registered in his name.

That cannot be said of this case. The deed of undertaking with indorsement presented by
petitioner does not establish, on its face, his right to demand for the registration of the
transfer and the issuance of certificates of stocks. In Hager vs. Bryan, 19 Phil. 138 (1911), this
Court held that a petition for mandamus fails to state a cause of action where it appears that the
petitioner is not the registered stockholder and there is no allegation that he holds any power of
attorney from the registered stockholder, from whom he obtained the stocks, to make the transfer,
thus:

It appears, however, from the original as well as the amended petition, that this petitioner is not the
registered owner of the stock which he seeks to have transferred, and except in so far as he alleges
that he is the owner of the stock and that it was "indorsed" to him on February 5 by the Bryan-
Landon Company, in whose name it is registered on the books of the Visayan Electric Company,
there is no allegation that the petitioner holds any power of attorney from the Bryan-Landon
Company authorizing him to make demand on the secretary of the Visayan Electric Company to
make the transfer which petitioner seeks to have made through the medium of the mandamus of this
court.

Without discussing or deciding the respective rights of the parties which might be properly asserted
in an ordinary action or an action in the nature of an equitable suit, we are all agreed that in a case
such as that at bar, a mandamus should not issue to compel the secretary of a corporation to
make a transfer of the stock on the books of the company, unless it affirmatively appears
that he has failed or refused so to do, upon the demand either of the person in whose
name the stock is registered, or of some person holding a power of attorney for that
purpose from the registered owner of the stock. There is no allegation in the petition that the
petitioner or anyone else holds a power of attorney from the Bryan-Landon Company authorizing a
demand for the transfer of the stock, or that the Bryan-Landon Company has ever itself made such
demand upon the Visayan Electric Company, and in the absence of such allegation we are not able to
say that there was such a clear indisputable duty, such a clear legal obligation upon the respondent,
as to justify the issuance of the writ to compel him to perform it.

Under the provisions of our statute touching the transfer of stock (secs. 35 and 36 of Act No.
1459),29 the mere indorsement of stock certificates does not in itself give to the indorsee such a right
to have a transfer of the shares of stock on the books of the company as will entitle him to the writ of
mandamus to compel the company and its officers to make such transfer at his demand, because,
under such circumstances the duty, the legal obligation, is not so clear and indisputable as to justify
the issuance of the writ. As a general rule and especially under the above-cited statute, as between
the corporation on the one hand, and its shareholders and third persons on the other, the
corporation looks only to its books for the purpose of determining who its shareholders
are, so that a mere indorsee of a stock certificate, claiming to be the owner, will not
necessarily be recognized as such by the corporation and its officers, in the absence of
express instructions of the registered owner to make such transfer to the indorsee, or a
power of attorney authorizing such transfer.30

In Rivera vs. Florendo, 144 SCRA 643, 657 (1986), we reiterated that a mere indorsement by the
supposed owners of the stock, in the absence of express instructions from them, cannot be the basis
of an action for mandamus and that the rights of the parties have to be threshed out in an ordinary
action. That Hager and Rivera involved petitions for mandamus to compel the registration of the
transfer, while this case is one for issuance of stock, is of no moment. It has been made clear, thus
far, that before a transferee may ask for the issuance of stock certificates, he must first cause the
registration of the transfer and thereby enjoy the status of a stockholder insofar as the corporation is
concerned. A corporate secretary may not be compelled to register transfers of shares on
the basis merely of an indorsement of stock certificates. With more reason, in our view, a
corporate secretary may not be compelled to issue stock certificates without such
registration.31

Petitioners reliance on our ruling in Abejo vs. De la Cruz, 149 SCRA 654 (1987), that notice given to
the corporation of the sale of the shares and presentation of the certificates for transfer is equivalent
to registration is misplaced. In this case there is no allegation in the complaint that petitioner ever
gave notice to respondents of the alleged transfer in his favor. Moreover, that case arose between
and among the principal stockholders of the corporation, Pocket Bell, due to the refusal of the
corporate secretary to record the transfers in favor of Telectronics of the corporations controlling
56% shares of stock which were covered by duly endorsed stock certificates. As aforesaid, the
request for the recording of a transfer is different from the request for the issuance of stock
certificates in the transferees name. Finally, in Abejo we did not say that transfer of shares need not
be recorded in the books of the corporation before the transferee may ask for the issuance of stock
certificates. The Courts statement, that "there is no requirement that a stockholder of a corporation
must be a registered one in order that the Securities and Exchange Commission may take cognizance
of a suit seeking to enforce his rights as such stockholder among which is the stock purchasers right
to secure the corresponding certificate in his name," 32 was addressed to the issue of jurisdiction,
which is not pertinent to the issue at hand.

Absent an allegation that the transfer of shares is recorded in the stock and transfer book of
respondent ALSONS, there appears no basis for a clear and indisputable duty or clear legal obligation
that can be imposed upon the respondent corporate secretary, so as to justify the issuance of the
writ of mandamus to compel him to perform the transfer of the shares to petitioner. The test of
sufficiency of the facts alleged in a petition is whether or not, admitting the facts alleged, the court
could render a valid judgment thereon in accordance with the prayer of the petition. 33 This test would
not be satisfied if, as in this case, not all the elements of a cause of action are alleged in the
complaint.34 Where the corporate secretary is under no clear legal duty to issue stock certificates
because of the petitioners failure to record earlier the transfer of shares, one of the elements of the
cause of action for mandamus is clearly missing.

That petitioner was under no obligation to request for the registration of the transfer is not in issue.
It has no pertinence in this controversy. One may own shares of corporate stock without possessing
a stock certificate. In Tan vs. SEC, 206 SCRA 740 (1992), we had occasion to declare that a
certificate of stock is not necessary to render one a stockholder in a corporation. But a
certificate of stock is the tangible evidence of the stock itself and of the various interests
therein. The certificate is the evidence of the holders interest and status in the
corporation, his ownership of the share represented thereby. The certificate is in law, so to
speak, an 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.35 In fact, it rests on the will of the
stockholder whether he wants to be issued stock certificates, and a stockholder may opt not to be
issued a certificate. In Won vs. Wack Wack Golf and Country Club, Inc., 104 Phil. 466 (1958), we
held that considering that the law does not prescribe a period within which the
registration should be effected, the action to enforce the right does not accrue until there
has been a demand and a refusal concerning the transfer. In the present case, petitioners
complaint for mandamus must fail, not because of laches or estoppel, but because he had alleged no
cause of action sufficient for the issuance of the writ.

WHEREFORE, the petition is DENIED for lack of merit. The decision of the Court of Appeals, in CA-
G.R. SP No. 46692, which set aside that of the Securities and Exchange Commission En Banc in SEC-
AC No. 545 and reinstated the order of the Hearing Officer, is hereby AFFIRMED.
37.) G.R. No. 124535            September 28, 2001

THE RURAL BANK OF LIPA CITY, INC., THE OFFICERS AND DIRECTORS, BERNARDO BAUTISTA, JAIME
CUSTODIO, OCTAVIO KATIGBAK, FRANCISCO CUSTODIO, and JUANITA BAUTISTA OF THE RURAL BANK
OF LIPA CITY, INC., petitioners,
vs.
HONORABLE COURT OF APPEALS, HONORABLE COMMISSION EN BANC, SECURITIES AND EXCHANGE
COMMISSION, HONORABLE ENRIQUE L. FLORES, JR., in his capacity as Hearing Officer, REYNALDO
VILLANUEVA, SR, AVELINA M. VILLANUEVA, CATALINO VILLANUEVA, ANDRES GONZALES, AURORA
LACERNA, CELSO LAYGO, EDGARDO REYES, ALEJANDRA TONOGAN and ELENA USI, respondents.

YNARES-SANTIAGO, J.:

Before us is a petition for review on certiorari assailing the Decision of the Court of Appeals dated February 27,
1996, as well as the Resolution dated March 29, 1996, in CA-G.R. SP No. 38861.

The instant controversy arose from a dispute between the Rural Bank of Lipa City, Incorporated (hereinafter referred
to as the Bank), represented by its officers and members of its Board of Directors, and certain stockholders of the
said bank. The records reveal the following antecedent facts:

Private respondent Reynaldo Villanueva, Sr., a stockholder of the Rural Bank of Lipa City, executed a Deed
of Assignment,1 wherein he assigned his shares, as well as those of eight (8) other shareholders under his
control with a total of 10,467 shares, in favor of the stockholders of the Bank represented by its directors
Bernardo Bautista, Jaime Custodio and Octavio Katigbak. Sometime thereafter, Reynaldo Villanueva, Sr. and his
wife, Avelina, executed an Agreement 2 wherein they acknowledged their indebtedness to the Bank in the
amount of Four Million Pesos (P4,000,000.00), and stipulated that said debt will be paid out of the proceeds of the
sale of their real property described in the Agreement.

At a meeting of the Board of Directors of the Bank on November 15, 1993, the Villanueva spouses assured the
Board that their debt would be paid on or before December 31 of that same year; otherwise, the Bank would
be entitled to liquidate their shareholdings, including those under their control. In such an event, should the
proceeds of the sale of said shares fail to satisfy in full the obligation, the unpaid balance shall be secured by other
collateral sufficient therefor.

When the Villanueva spouses failed to settle their obligation to the Bank on the due date, the Board sent them
a letter3 demanding: (1) the surrender of all the stock certificates issued to them; and (2) the delivery of sufficient
collateral to secure the balance of their debt amounting to P3,346,898.54. The Villanuevas ignored the bank's
demands, whereupon their shares of stock were converted into Treasury Stocks. Later, the Villanuevas,
through their counsel, questioned the legality of the conversion of their shares.4

On January 15, 1994, the stockholders of the Bank met to elect the new directors and set of officers for the
year 1994. The Villanuevas were not notified of said meeting. In a letter dated January 19, 1994, Atty. Amado
Ignacio, counsel for the Villanueva spouses, questioned the legality of the said stockholders' meeting and the
validity of all the proceedings therein. In reply, the new set of officers of the Bank informed Atty. Ignacio that
the Villanuevas were no longer entitled to notice of the said meeting since they had relinquished their rights
as stockholders in favor of the Bank.

Consequently, the Villanueva spouses filed with the Securities and Exchange Commission (SEC), a petition
for annulment of the stockholders' meeting and election of directors and officers on January 15, 1994, with
damages and prayer for preliminary injunction5 , docketed as SEC Case No. 02-94-4683. Joining them as co-
petitioners were Catalino Villanueva, Andres Gonzales, Aurora Lacerna, Celso Laygo, Edgardo Reyes, Alejandro
Tonogan, and Elena Usi. Named respondents were the newly-elected officers and directors of the Rural Bank,
namely: Bernardo Bautista, Jaime Custodio, Octavio Katigbak, Francisco Custodio and Juanita Bautista.

The Villanuevas' main contention was that the stockholders' meeting and election of officers and directors held on
January 15, 1994 were invalid because: (1) they were conducted in violation of the by-laws of the Rural Bank; (2)
they were not given due notice of said meeting and election notwithstanding the fact that they had not waived
their right to notice; (3) they were deprived of their right to vote despite their being holders of common stock
with corresponding voting rights; (4) their names were irregularly excluded from the list of stockholders; and (5)
the candidacy of petitioner Avelina Villanueva for directorship was arbitrarily disregarded by respondent Bernardo
Bautista and company during the said meeting

On February 16, 1994, the SEC issued a temporary restraining order enjoining the respondents, petitioners herein,
from acting as directors and officers of the Bank, and from performing their duties and functions as such.6

In their joint Answer,7 the respondents therein raised the following defenses:

1) The petitioners have no legal capacity to sue;

2) The petition states no cause of action;

3) The complaint is insufficient;

4) The petitioners' claims had already been paid, waived, abandoned, or otherwise extinguished;

5) The petitioners are estopped from challenging the conversion of their shares.

Petitioners, respondents therein, thus moved for the lifting of the temporary restraining order and the dismissal of
the petition for lack of merit, and for the upholding of the validity of the stockholders' meeting and election of
directors and officers held on January 15, 1994. By way of counterclaim, petitioners prayed for actual, moral and
exemplary damages.

On April 6, 1994, the Villanuevas' application for the issuance of a writ of preliminary injunction was denied by the
SEC Hearing Officer on the ground of lack of sufficient basis for the issuance thereof. However, a motion for
reconsideration8 was granted on December 16, 1994, upon finding that since the Villanuevas' have not disposed of
their shares, whether voluntarily or involuntarily, they were still stockholders entitled to notice of the annual
stockholders' meeting was sustained by the SEC. Accordingly, a writ of preliminary injunction was issued enjoining
the petitioners from acting as directors and officers of the bank.9

Thereafter, petitioners filed an urgent motion to quash the writ of preliminary injunction, 10 challenging the propriety of
the said writ considering that they had not yet received a copy of the order granting the application for the writ of
preliminary injunction.

With the impending 1995 annual stockholders' meeting only nine (9) days away, the Villanuevas filed an Omnibus
Motion11 praying that the said meeting and election of officers scheduled on January 14, 1995 be suspended or held
in abeyance, and that the 1993 Board of Directors be allowed, in the meantime, to act as such. One (1) day before
the scheduled stockholders meeting, the SEC Hearing Officer granted the Omnibus Motion by issuing a temporary
restraining order preventing petitioners from holding the stockholders meeting and electing the board of directors
and officers of the Bank.12

A petition for Certiorari and Annulment with Damages was filed by the Rural Bank, its directors and officers before
the SEC en banc,13 naming as respondents therein SEC Hearing Officer Enrique L. Flores, Jr., and the Villanuevas,
erstwhile petitioners in SEC Case No. 02-94-4683. The said petition alleged that the orders dated December 16,
1994 and January 13, 1995, which allowed the issuance of the writ of preliminary injunction and prevented the bank
from holding its 1995 annual stockholders' meeting, respectively, were issued by the SEC Hearing Officer with grave
abuse of discretion amounting to lack or excess of jurisdiction. Corollarily, the Bank, its directors and its officers
questioned the SEC Hearing Officer's right to restrain the stockholders' meeting and election of officers and
directors considering that the Villanueva spouses and the other petitioners in SEC Case No. 02-94-4683 were no
longer stockholders with voting rights, having already assigned all their shares to the Bank.

In their Comment/Opposition, the Villanuevas and other private respondents argued that the filing of the petition for
certiorari was premature and there was no grave abuse of discretion on the part of the SEC Hearing Officer, nor did
he act without or in excess of his jurisdiction.
On June 7, 1995, the SEC en banc denied the petition for certiorari in an Order,14 which stated:

In the case now before us, petitioners could not show any proof of despotic or arbitrary exercise of discretion
committed by the hearing officer in issuing the assailed orders save and except the allegation that the
private respondents have already transferred their stockholdings in favor of the stockholders of the Bank.
This, however, is the very issue of the controversy in the case a quo and which, to our mind, should rightfully
be litigated and proven before the hearing officer. This is so because of the undisputed fact the (sic) private
respondents are still in possession of the stock certificates evidencing their stockholdings and as held by the
Supreme Court in Embassy Farms, Inc. v. Court of Appeals, et al., 188 SCRA 492, citing Nava v. Peers
Marketing Corp., the non-delivery of the stock certificate does not make the transfer of the shares of stock
effective. For an effective transfer of stock, the mode of transfer as prescribed by law must be followed.

We likewise find that the provision of the Corporation Code cited by the herein petitioner, particularly Section
83 thereof, to support the claim that the private respondents are no longer stockholders of the Bank is
misplaced. The said law applies to acquisition of shares of stock by the corporation in the exercise of a
stockholder's right of appraisal or when the said stockholder opts to dissent on a specific corporate act in
those instances provided by law and demands the payment of the fair value of his shares. It does not
contemplate a "transfer" whereby the stockholder, in the exercise of his right to dispose of his shares (jus
disponendi) sells or assigns his stockholdings in favor of another person where the provisions of Section 63
of the same Code should be complied with.

The hearing officer, therefore, had a basis in issuing the questioned orders since the private respondents'
rights as stockholders may be prejudiced should the writ of injunction not be issued. The private
respondents are presumably stockholders of the Bank in view of the fact that they have in their possession
the stock certificates evidencing their stockholdings. Until proven otherwise, they remain to be such and the
hearing officer, being the one directly confronted with the facts and pieces of evidence in the case, may
issue such orders and resolutions which may be necessary or reasonable relative thereto to protect their
rights and interest in the meantime that the said case is still pending trial on the merits.

A subsequent motion for reconsideration15 was likewise denied by the SEC en banc in a Resolution16 dated
September 29, 1995.

A petition for review was thus filed before the Court of Appeals, which was docketed as CA-G.R. SP No. 38861,
assailing the Order dated June 7, 1995 and the Resolution dated September 29, 1995 of the SEC en banc in SEC
EB No. 440. The ultimate issue raised before the Court of Appeals was whether or not the SEC en banc erred in
finding:

1. That the Hon. Hearing Officer in SEC Case No. 02-94-4683 did not commit any grave abuse of discretion
that would warrant the filing of a petition for certiorari;

2. That the private respondents are still stockholders of the subject bank and further stated that "it does not
contemplate a transfer" whereby the stockholders, in the exercise of his right to dispose of his shares (Jus
Disponendi) sells or assigns his stockholdings in favor of another person where the provisions of Sec. 63 of
the same Code should be complied with; and

3. That the private respondents are presumably stockholders of the bank in view of the fact that they have in
their possession the stock certificates evidencing their stockholdings.

On February 27, 1996, the Court of Appeals rendered the assailed Decision17 dismissing the petition for review for
lack of merit. The appellate court found that:

The public respondent is correct in holding that the Hearing Officer did not commit grave abuse of discretion.
The officer, in exercising his judicial functions, did not exercise his judgment in a capricious, whimsical,
arbitrary or despotic manner. The questioned Orders issued by the Hearing Officer were based on pertinent
law and the facts of the case.
 Section 63 of the Corporation Code states: "x x x Shares of stock so issued are personal property and may
be transferred by delivery of the certificate or certificates indorsed by the owner x x x. 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 the case at bench, when private respondents executed a deed of assignment of their shares of stocks in
favor of the Stockholders of the Rural Bank of Lipa City, represented by Bernardo Bautista, Jaime Custodio
and Octavio Katigbak, title to such shares will not be effective unless the duly indorsed certificate of stock is
delivered to them. For an effective transfer of shares of stock, the mode and manner of transfer as
prescribed by law should be followed. Private respondents are still presumed to be the owners of the shares
and to be stockholders of the Rural Bank.

We find no reversible error in the questioned orders.

Petitioners' motion for reconsideration was likewise denied by the Court of Appeals in an Order 18 dated March 29,
1996.

Hence, the instant petition for review seeking to annul the Court of Appeals' decision dated February 27, 1996 and
the resolution dated March 29, 1996. In particular, the decision is challenged for its ruling that notwithstanding
the execution of the deed of assignment in favor of the petitioners, transfer of title to such shares is
ineffective until and unless the duly indorsed certificate of stock is delivered to them. Moreover, petitioners
faulted the Court of Appeals for not taking into consideration the acts of disloyalty committed by the
Villanueva spouses against the Bank.

We find no merit in the instant petition.

The Court of Appeals did not err or abuse its discretion in affirming the order of the SEC en banc, which in turn
upheld the order of the SEC Hearing Officer, for the said rulings were in accordance with law and jurisprudence.

The Corporation Code specifically 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 stocks 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.

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

Petitioners argue that by virtue of the Deed of Assignment, 19 private respondents had relinquished to them
any and all rights they may have had as stockholders of the Bank. While it may be true that there was an
assignment of private respondents' shares to the petitioners, said assignment was not sufficient to effect
the transfer of shares since there was no endorsement of the certificates of stock by the owners, their
attorneys-in-fact or any other person legally authorized to make the transfer. Moreover, petitioners admit
that the assignment of shares was not coupled with delivery, the absence of which is a fatal defect. The rule
is that the delivery of the stock certificate duly endorsed by the owner is the operative act of transfer of
shares from the lawful owner to the transferee. 20 Thus, title may be vested in the transferee only by delivery
of the duly indorsed certificate of stock.21

We have uniformly held that for a valid transfer of stocks, there must be strict compliance with the mode of
transfer prescribed by law.22 The requirements are: (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. As it is, compliance with any of these requisites has not been clearly and sufficiently
shown.

It may be argued that despite non-compliance with the requisite endorsement and delivery, the assignment was
valid between the parties, meaning the private respondents as assignors and the petitioners as assignees. While
the assignment may be valid and binding on the petitioners and private respondents, it does not necessarily make
the transfer effective. Consequently, the petitioners, as mere assignees, cannot enjoy the status of a stockholder,
cannot vote nor be voted for, and will not be entitled to dividends, insofar as the assigned shares are concerned
Parenthetically, the private respondents cannot, as yet, be deprived of their rights as stockholders, until and
unless the issue of ownership and transfer of the shares in question is resolved with finality.

There being no showing that any of the requisites mandated by law 23 was complied with, the SEC Hearing Officer
did not abuse his discretion in granting the issuance of the preliminary injunction prayed for by petitioners in SEC
Case No. 02-94-4683 (herein private respondents). Accordingly, the order of the SEC en banc affirming the ruling of
the SEC Hearing Officer, and the Court of Appeals decision upholding the SEC en banc order, are valid and in
accordance with law and jurisprudence, thus warranting the denial of the instant petition for review.

To enable the shareholders of the Rural Bank of Lipa City, Inc. to meet and elect their directors, the temporary
restraining order issued by the SEC Hearing Officer on January 13, 1995 must be lifted. However, private
respondents shall be notified of the meeting and be allowed to exercise their rights as stockholders thereat.

While this case was pending, Republic Act No. 8799 24 was enacted, transferring to the courts of general jurisdiction
or the appropriate Regional Trial Court the SEC's jurisdiction over all cases enumerated under Section 5 of
Presidential Decree No. 902-A.25 One of those cases enumerated is any controversy "arising out of intra-corporate
or partnership relations, between and among stockholders, members, or associates, between any and/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
franchise or right to exist as such entity." The instant controversy clearly falls under this category of cases which are
now cognizable by the Regional Trial Court.

Pursuant to Section 5.2 of R.A. No. 8799, this Court designated specific branches of the Regional Trial Courts to try
and decide cases formerly cognizable by the SEC. For the Fourth Judicial Region, specifically in the Province of
Batangas, the RTC of Batangas City, Branch 32 is the designated court. 26

WHEREFORE, in view of all the foregoing, the instant petition for review on certiorari is DENIED. The Decision and
Resolution of the Court of Appeals in CA-G.R. SP No. 38861 are hereby AFFIRMED. The case is ordered
REMANDED to the Regional Trial Court of Batangas City, Branch 32, for proper disposition. The temporary
restraining order issued by the SEC Hearing Officer dated January 13, 1995 is ordered LIFTED.
38.) G.R. No. 184332

ANNA TENG, Petitioner,
vs.
SECURITIES AND EXCHANGE COMMISSION (SEC) and TING PING LAY, Respondents.

DECISION

REYES, J.:

This petition for review on certiorari  under Rule 45 of the Rules of Court seeks the reversal of the Decision  dated
1 2

April 29, 2008 and the Resolution  dated August 28, 2008 rendered by the Court of Appeals (CA) in CA-G.R. SP No.
3

99836. The CA affirmed the orders of the Securities and Exchange Commission (SEC) granting the issuance of
an alias writ of execution, compelling petitioner Anna Teng (Teng) to register and issue new certificates of stock in
favor of respondent Ting Ping Lay (Ting Ping).

The Facts

This case has its origin in G.R. No. 129777  entitled TCL Sales Corporation and Anna Teng v. Hon. Court of
4

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.
He 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. 6

In its Decision  dated July 20, 1994, the SEC granted Ting Ping's petition, ordering as follows:
7

WHEREFORE, in view of all the foregoing facts and circumstances, judgment is hereby rendered.

A. Ordering [TCL and Teng] to record in the Books of the Corporation the following shares:

1. 480 shares acquired by [Ting Ping] from [Chiu] per Deed of Sales [sic] dated February 20, 1979;

2. 1,400 shares acquired by [Ting Ping] from [Teng Ching] per Deed of Sale dated September 22, 1985; and

3. 1,440 shares acquired by [Ting Ping] from [Maluto] per Deed of Assignment dated Sept 2, 1989 [sic].

B. Ordering [TCL and Teng] to issue corresponding new certificates of stocks (sic) in the name of [Ting Ping].

C. Ordering [TCL and Teng] to pay [Ting Ping] moral damages in the amount of One Hundred Thousand (P
100,000.00) Pesos and Fifty Thousand (P 50,000.00) Pesos for attorney's fees.

SO ORDERED.  8

TCL and Teng appealed to the SEC en banc, which, in its Order  dated June 11, 1996, affirmed the SEC decision
9

with modification, in that Teng was held solely liable for the payment of moral damages and attorney's fees.

Not contented, TCL and Teng filed a petition for review with the CA, docketed as CA-G.R. SP. No. 42035. On
January 31, 1997, the CA, however, dismissed the petition for having been filed out of time and for finding no cogent
and justifiable grounds to disturb the findings of the SEC en banc.   This prompted TCL and Teng to come to the
10

Court via a petition for review on certiorari under Rule 45.

On January 5, 2001, the Court promulgated its Decision in G.R. No. 129777, the dispositive portion of which states:

WHEREFORE, the petition is DENIED, and the Decision dated January 31, 1997, as well as the Resolution dated
July 3, 1997 of [the CA] are hereby AFFIRMED. Costs against [TCL and Teng].

SO ORDERED. 11

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.  12

On March 13, 2003, the RTC of Manila, Branch 46, rendered its Decision  in Civil Case No. 02-102776, finding
13

Henry to have a better right to the shares of stock formerly owned by Teng Ching, except as to those covered by
Stock Certificate No. 011 covering 262.5 shares, among others.  14

Thereafter, an Ex Parte Motion for the Issuance of Alias Writ of Execution  was filed by Ting Ping where he sought
15

the partial satisfaction of SEC en banc Order dated June 11, 1996 ordering TCL and Teng to record the 480 shares
he acquired from Chiu and the 1,440 shares he acquired from Maluto, and for Teng's payment of the damages
awarded in his favor.

Acting upon the motion, the SEC issued an Order  dated August 9, 2006 granting partial enforcement and
16

satisfaction of the Decision dated July 20, 1994, as modified by the SEC en banc's Order dated June 11, 1996.  On 17

the same date, the SEC issued an alias writ of execution.  18

Teng and TCL filed their respective motions to quash the alias writ of execution,   which was opposed by Ting
19

Ping,  who also expressed his willingness to surrender the original stock certificates of Chiu and Maluto to facilitate
20

and expedite the transfer of the shares in his favor. Teng pointed out, however, that the annexes in Ting Ping's
opposition did not include the subject certificates of stock, surmising that they could have been lost or
destroyed.  Ting Ping belied this, claiming that his counsel Atty. Simon V. Lao already communicated with TCL's
21

counsel regarding the surrender of the said certificates of stock.   Teng then filed a counter manifestation where she
22

pointed out a discrepancy between the total shares of Maluto based on the annexes, which is only 1305 shares, as
against the 1440 shares acquired by Ting Ping based on the SEC Order dated August 9, 2006. 23

On May 25, 2007, the SEC denied the motions to quash filed by Teng and TCL, and affinned its Order dated August
9, 2006. 24

Unperturbed, Teng filed a petition for certiorari and prohibition under Rule 65 of the Rules of Court, docketed as CA-
G.R. SP No. 99836.  The SEC, through the Office of the Solicitor General (OSG), filed a Comment dated June 30,
25

2008,  which, subsequently, Teng moved to expunge.

26 27

On April 29, 2008, the CA promulgated the assailed decision dismissing the petition and denying the motion to
expunge the SEC's comment. 28

Hence, Teng filed the present petition, raising the following grounds:

I. THE RESPONDENT [CA] GRAVELY ERRED IN DECLARING THAT THERE WAS NO NEED TO
SURRENDER THE STOCK CERTIFICATES (REPRESENTING THE SHARES CONVEYED BY [MALUTO]
TO [TING PING] TO RECORD THE TRANSFER THEREOF IN THE CORPORATE BOOKS AND ISSUE
NEW STOCK CERTIFICATES[;]
 II. THE RESPONDENT [CA] GRAVELY ERRED IN UPHOLDING THE POSE THAT THERE WAS NEITHER
AMENDMENT NOR ALTERATION OF THE FINAL DECISION OF THE SUPREME COURT IN "TCL
SALE[S] CORP., ET AL. VS. CA, ET AL.", G.R. NO. 129777, DESPITE THE CONTRARY RECORD
THERETO[;]

III. THE RESPONDENT [CA] GRAVELY ERRED IN DECLARING THAT THE [OSG] WAS ALREADY
REQUIRED TO COMMENT ON [TENG'S] MOTION FOR RECONSIDERATION. 29

The core question before the Court is 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. Note at this juncture that the present dispute involves the execution of the Court's decision in G.R. No.
129777 but only with regard to Chiu's and Maluto's respective shares. The subject of the orders of execution issued
by the SEC pertained only to these shares and the Court's decision will revolve only on these shares.

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. She also claims that the CA's reliance
on Tan v. SEC  is misplaced since therein subject stock certificate was allegedly surrendered.
30 31

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,  he
32

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.
33

Ruling of the Court

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.   A certificate, however, is merely a tangible
34

evidence of ownership of shares of stock.   It is not a stock in the corporation and merely expresses the contract
35

between the corporation and the stockholder.   The shares of stock evidenced by said certificates, meanwhile, are
36

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.,  defines the nature, character and transferability of shares of stock. Fleisher also stated that the
38

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)

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. 40

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.  The 41

Court even emphatically declared. in Fil-Estate Golf and Development, Inc., et al. v. Vertex Sales and Trading,
Inc.   that in "a sale of shares of stock, physical delivery of a stock certificate is one of the essential requisites for
42

the transfer of ownership of the stocks purchased."  The delivery contemplated in Section 63, however, pertains
43

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.  "[S]hares of stock may be
44

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 Rural Bank of Salinas,  the Court ruled that the right of a transferee/assignee to have stocks transferred to his
46

name is an inherent right flowing from his ownership of the stocks.  In said case, the private respondent presented
47

to the bank the deeds of assignment for registration, transfer of the shares assigned in the bank's books,
cancellation of the stock certificates, and issuance of new stock certificates, which the bank refused. In ruling
favorably for the private respondent, the Court stressed that a corporation, either by its board, its by-laws, or the
act of its officers, cannot create restrictions in stock transfers. In transferring stock, the secretary of a
corporation acts in purely ministerial capacity, and does not try to decide the question of ownership.   If a
48

corporation refuses to make such transfer without good cause, it may, in fact, even be compelled to do so
by mandamus.  With more reason in this case where the Court, in G.R. No. 129777, already upheld Ting Ping's
49

definite and uncontested titles to the subject shares, viz:

Respondent Ting Ping Lay was able to establish prima facie ownership over the shares of stocks in question,
through deeds of transfer of shares of stock of TCL Corporation. Petitioners could not repudiate these
documents. Hence, the transfer of shares to him must be recorded on the corporation's stock and transfer
book.  (Emphasis and underscoring ours)
50

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.  Aside from this, Teng's
51

argument on this point was adequately explained by both the SEC and CA in this wise:

In explaining the alleged discrepancy, the public respondent, in its 25 May 2007 order, cited the order of the
Commission En Banc, thus:
"An examination of this decision, however, reveals, no categorical pronouncements of fraud. The refusal to credit in
[Ting Ping's] favor five hundred eighty-five (585) shares in excess of what [Maluto] owned and the two hundred forty
(240) shares that [Ting Ping] bought from the corporation, is a mere product of the failure of the corporation to
register with the [SEC] the increase in the subscribed capital stock by 4000 shares last 1981. Surely, [Ting Ping]
cannot be faulted for this."  52

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;  two, to inform the corporation of any change in share
53

ownership so that it can ascertain the persons entitled to the rights and subject to the liabilities of a
stockholder;  and three, to avoid fictitious or fraudulent transfers,   among others. Thus, in Chua Guan v.
54 55

Samahang Mags as aka, Inc.,   the Court stated that the only safe way to accomplish the hypothecation of share of
56

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.  In this case, given the Court's decision in GR. No. 129777, registration of the
57

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.  58

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.   In Ponce v. Alsons Cement
59

Corporation,  the Court stated that "[f]rom the corporation's point of view, the transfer is not effective until it is
60

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,  the Court outlined the procedure for the issuance of new certificates of stock in the name of
62

a transferee:

First, the certificates must be signed by the president or vice-president, countersigned by the secretary or
assistant secretary, and sealed with the seal of the corporation. x x x Second, delivery of the certificate is
an essential element of its issuance. x x x Third, the par value, as to par value shares, or the full
subscription as to no par value shares, must first be fully paid. Fourth, the original certificate must be
surrendered where the person requesting the issuance of a certificate is a transferee from a
stockholder.   (Emphasis ours and citations omitted)
63

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.  Surrender and cancellation of the old certificates serve
64

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, tμe 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.

WHEREFORE, the petition is DENIED. The Decision dated April 29, 2008 and Resolution dated August 28, 2008 of
the Court of Appeals in CA-G.R. SP No. 99836 are AFFIRMED.

Respondent Ting Ping Lay is hereby ordered to surrender the certificates of stock covering the shares respectively
transferred by Ismaelita Maluto and Peter Chiu. Petitioner Anna Teng or the incumbent corporate secretary of TCL
Sales Corporation, on the other hand, is hereby ordered, under pain of contempt, to immediately cancel Ismaelita
Maluto's and Peter Chiu's certificates of stock and to issue new ones in the name of Ting Ping Lay, which shall
include Ismaelita Maluto's shares not covered by any existing certificate of stock but otherwise validly transferred to
Ting Ping Lay.

Costs against petitioner Anna Teng.

39.) G.R. No. 131394             March 28, 2005

JESUS V. LANUZA, MAGADYA REYES, BAYANI REYES and ARIEL REYES, Petitioner,

vs.
COURT OF APPEALS, SECURITIES AND EXCHANGE COMMISSION, DOLORES ONRUBIA, ELENITA
NOLASCO, JUAN O. NOLASCO III, ESTATE OF FAUSTINA M. ONRUBIA, PHILIPPINE MERCHANT MARINE
SCHOOL, INC., Respondents.

DECISION

TINGA, J.:

Presented in the case at bar is the apparently straight-forward but complicated question: What should be the basis
of quorum for a stockholders’ meeting—the outstanding capital stock as indicated in the articles of
incorporation or that contained in the company’s stock and transfer book?

Petitioners seek to nullify the Court of Appeals’ Decision in CA–G.R. SP No. 414731 promulgated on 18 August
1997, affirming the SEC Order dated 20 June 1996, and the Resolution2 of the Court of Appeals dated 31 October
1997 which denied petitioners’ motion for reconsideration.

The antecedents are not disputed.

In 1952, the Philippine Merchant Marine School, Inc. (PMMSI) was incorporated, with seven hundred (700)
founders’ shares and seventy-six (76) common shares as its initial capital stock subscription reflected in
the articles of incorporation. However, private respondents and their predecessors who were in control of
PMMSI registered the company’s stock and transfer book for the first time in 1978, recording thirty-three
(33) common shares as the only issued and outstanding shares of PMMSI. Sometime in 1979, a special
stockholders’ meeting was called and held on the basis of what was considered as a quorum of twenty-seven (27)
common shares, representing more than two-thirds (2/3) of the common shares issued and outstanding.

In 1982, the heirs of one of the original incorporators, Juan Acayan, filed a petition with the Securities and
Exchange Commission (SEC) for the registration of their property rights over one hundred (120) founders’
shares and twelve (12) common shares owned by their father. The SEC hearing officer held that the heirs of
Acayan were entitled to the claimed shares and called for a special stockholders’ meeting to elect a new set of
officers.3 The SEC En Banc affirmed the decision. As a result, the shares of Acayan were recorded in the stock and
transfer book.

On 06 May 1992, a special stockholders’ meeting was held to elect a new set of directors. Private respondents
thereafter filed a petition with the SEC questioning the validity of the 06 May 1992 stockholders’ meeting,
alleging that the quorum for the said meeting should not be based on the 165 issued and outstanding
shares as per the stock and transfer book, but on the initial subscribed capital stock of seven hundred
seventy-six (776) shares, as reflected in the 1952 Articles of Incorporation. The petition was
dismissed.4 Appeal was made to the SEC En Banc, which granted said appeal, holding that the shares of the
deceased incorporators should be duly represented by their respective administrators or heirs concerned. The SEC
directed the parties to call for a stockholders meeting on the basis of the stockholdings reflected in the
articles of incorporation for the purpose of electing a new set of officers for the corporation.5

Petitioners, who are PMMSI stockholders, filed a petition for review with the Court of Appeals.6 Rebecca Acayan,
Jayne O. Abuid, Willie O. Abuid and Renato Cervantes, stockholders and directors of PMMSI, earlier filed another
petition for review of the same SEC En Banc’s orders. The petitions were thereafter consolidated. 7 The consolidated
petitions essentially raised the following issues, viz: (a) whether the basis the outstanding capital stock and
accordingly also for determining the quorum at stockholders’ meetings it should be the 1978 stock and
transfer book or if it should be the 1952 articles of incorporation; and (b) whether the Court of Appeals "gravely
erred in applying the Espejo Decision to the benefit of respondents." 8 The "Espejo Decision" is the decision of the
SEC en banc in SEC Case No. 2289 which ordered the recording of the shares of Jose Acayan in the stock and
transfer book.
The Court of Appeals held that for purposes of transacting business, the quorum should be based on the
outstanding capital stock as found in the articles of incorporation. 9 As to the second issue, the Court of Appeals held
that the ruling in the Acayan case would ipso facto benefit the private respondents, since to require a separate
judicial declaration to recognize the shares of the original incorporators would entail unnecessary delay and
expense. Besides, the Court of Appeals added, the incorporators have already proved their stockholdings through
the provisions of the articles of incorporation.10

In the instant petition, petitioners claim that the 1992 stockholders’ meeting was valid and legal. They
submit that reliance on the 1952 articles of incorporation for determining the quorum negates the existence
and validity of the stock and transfer book which private respondents themselves prepared. In addition, they
posit that private respondents cannot avail of the benefits secured by the heirs of Acayan, as private respondents
must show and prove entitlement to the founders and common shares in a separate and independent
action/proceeding.

In private respondents’ Memorandum11 dated 08 March 2000, they point out that the instant petition raises the same
facts and issues as those raised in G.R. No. 131315 12, which was denied by the First Division of this Court on 18
January 1999 for failure to show that the Court of Appeals committed any reversible error. They add that as a logical
consequence, the instant petition should be dismissed on the ground of res judicata. Furthermore, private
respondents claim that in view of the applicability of the rule on res judicata, petitioners’ counsel should be cited for
contempt for violating the rule against forum-shopping. 13

For their part, petitioners claim that the principle of res judicata does not apply to the instant case. They argue that
the instant petition is separate and distinct from G.R. No. 131315, there being no identity of parties, and more
importantly, the parties in the two petitions have their own distinct rights and interests in relation to the subject
matter in litigation. For the same reasons, they claim that counsel for petitioners cannot be found guilty of forum-
shopping.14

In their Manifestation and Motion15 dated 22 September 2004, private respondents moved for the dismissal of the
instant petition in view of the dismissal of G.R. No. 131315. Attached to the said manifestation is a copy of the Entry
of Judgment16 issued by the First Division dated 01 December 1999.

The petition must be denied, not on res judicata, but on the ground that like the petition in G.R. No. 131315 it fails to
impute reversible error to the challenged Court of Appeals’ Decision.

Res judicata does not apply in

the case at bar.

Res judicata means a matter adjudged, a thing judicially acted upon or decided; a thing or matter settled by
judgment.17 The doctrine of res judicata provides that a final judgment, on the merits rendered by a court of
competent jurisdiction is conclusive as to the rights of the parties and their privies and constitutes an absolute bar to
subsequent actions involving the same claim, demand, or cause of action. 18 The elements of res judicata are (a)
identity of parties or at least such as representing the same interest in both actions; (b) identity of rights asserted
and relief prayed for, the relief being founded on the same facts; and (c) the identity in the two (2) particulars is such
that any judgment which may be rendered in the other action will, regardless of which party is successful, amount
to res judicata in the action under consideration.19

There is no dispute as to the identity of subject matter since the crucial point in both cases is the propriety of
including the still unproven shares of respondents for purposes of determining the quorum. Petitioners, however,
deny that there is identity of parties and causes of actions between the two petitions.

The test often used in determining whether causes of action are identical is to ascertain whether the same facts or
evidence would support and establish the former and present causes of action. 20 More significantly, there is identity
of causes of action when the judgment sought will be inconsistent with the prior judgment. 21 In both petitions,
petitioners assert that the Court of Appeals’ Decision effectively negates the existence and validity of the stock and
transfer book, as well as automatically grants private respondents’ shares of stocks which they do not own, or the
ownership of which remains to be unproved. Petitioners in the two petitions rely on the entries in the stock and
transfer book as the proper basis for computing the quorum, and consequently determine the degree of control one
has over the company. Essentially, the affirmance of the SEC Order had the effect of diminishing their control and
interests in the company, as it allowed the participation of the individual private respondents in the election of
officers of the corporation.

Absolute identity of parties is not a condition sine qua non for res judicata to apply—a shared identity of interest is

sufficient to invoke the coverage of the principle. 22 However, there is no identity of parties between the two cases.
The parties in the two petitions have their own rights and interests in relation to the subject matter in litigation. As
stated by petitioners in their Reply to Respondents’ Memorandum,23 there are no two separate actions filed, but
rather, two separate petitions for review on certiorari filed by two distinct parties with the Court and represented by
their own counsels, arising from an adverse consolidated decision promulgated by the Court of Appeals in one
action or proceeding.24 As such, res judicata is not present in the instant case.

Likewise, there is no basis for declaring petitioners or their counsel guilty of violating the rules against forum-
shopping. In the Verification/Certification25 portion of the petition, petitioners clearly stated that there was then a
pending motion for reconsideration of the 18 August 1997 Decision of the Court of Appeals in the consolidated
cases (CA-G.R. SP No. 41473 and CA-G.R. SP No. 41403) filed by the Abuids, as well as a motion for clarification.
Moreover, the records indicate that petitioners filed their Manifestation26 dated 20 January 1998, informing the Court
of their receipt of the petition in G.R. No. 131315 in compliance with their duty to inform the Court of the pendency of
another similar petition. The Court finds that petitioners substantially complied with the rules against forum-
shopping.

The Decision of the Court of

Appeals must be upheld.

The petition in this case involves the same facts and substantially the same issues and arguments as those in G.R.
No. 131315 which the First Division has long denied with finality. The First Division found the petition before it
inadequate in failing to raise any reversible error on the part of the Court of Appeals. We reach a similar conclusion
as regards the present petition.

The crucial issue in this case is whether it is the company’s stock and transfer book, or its 1952 Articles of
Incorporation, which determines stockholders’ shareholdings, and provides the basis for computing the
quorum.

We agree with the Court of Appeals.

The articles of incorporation has been described as one that defines the charter of the corporation and the
contractual relationships between the State and the corporation, the stockholders and the State, and between the
corporation and its stockholders.27 When PMMSI was incorporated, the prevailing law was Act No. 1459, otherwise
known as "The Corporation Law." Section 6 thereof states:

Sec. 6. Five or more persons, not exceeding fifteen, a majority of whom are residents of the Philippines, may
form a private corporation for any lawful purpose or purposes by filing with the Securities and Exchange
Commission articles of incorporation duly executed and acknowledged before a notary public, setting forth:

....

(7) If it be a stock corporation, the amount of its capital stock, in lawful money of the Philippines, and the
number of shares into which it is divided, and if such stock be in whole or in part without par value then such
fact shall be stated; Provided, however, That as to stock without par value the articles of incorporation need
only state the number of shares into which said capital stock is divided.

(8) If it be a stock corporation, the amount of capital stock or number of shares of no-par stock actually
subscribed, the amount or number of shares of no-par stock subscribed by each and the sum paid by each
on his subscription. . . .28

A review of PMMSI’s articles of incorporation 29 shows that the corporation complied with the requirements laid down
by Act No. 1459. It provides in part:
7. That the capital stock of the said corporation is NINETY THOUSAND PESOS (P90,000.00) divided into
two classes, namely:

FOUNDERS’ STOCK - 1,000 shares at P20 par value- P 20,000.00

COMMON STOCK- 700 shares at P 100 par value – P 70,000.00

TOTAL ---------------------1,700 shares----------------------------P 90,000.00

....

8. That the amount of the entire capital stock which has been actually subscribed is TWENTY ONE
THOUSAND SIX HUNDRED PESOS (P21,600.00) and the following persons have subscribed for the
number of shares and amount of capital stock set out after their respective names:

SUBSCRIBER SUBSCRIBED AMOUNT

SUBSCRIBED

  No. of Shares Par Value

Crispulo J. Onrubia 120 Founders P 2,400.00

Juan H. Acayan 120 " 2, 400.00

Martin P. Sagarbarria 100 " 2, 000.00

Mauricio G. Gallaga 50 " 1, 000.00

Luis Renteria 50 " 1, 000.00

Faustina M. de Onrubia 140 " 2, 800.00

Mrs. Ramon Araneta 40 " 800.00

Carlos M. Onrubia 80 " 1,600.00

  700 P 14,000.00

SUBSCRIBER SUBSCRIBED AMOUNT

SUBSCRIBED
No. of Shares
Par Value

Crispulo J. Onrubia 12 Common P 1,200.00

Juan H. Acayan 12 " 1,200.00

Martin P. Sagarbarria 8" 800.00

 Mauricio G. Gallaga 8" 800.00

Luis Renteria 8" 800.00

Faustina M. de Onrubia 12 " 1,200.00

Mrs. Ramon Araneta 8" 800.00

Carlos M. Onrubia   8"         800.00

  76 P7,600.0030

There is no gainsaying that the contents of the articles of incorporation are binding, not only on the corporation, but
also on its shareholders. In the instant case, the articles of incorporation indicate that at the time of
incorporation, the incorporators were bona fide stockholders of seven hundred (700) founders’ shares and
seventy-six (76) common shares. Hence, at that time, the corporation had 776 issued and outstanding
shares.

On the other hand, a stock and transfer book is the book which records the names and addresses of all
stockholders arranged alphabetically, the installments paid and unpaid on all stock for which subscription has been
made, and the date of payment thereof; 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 may be prescribed by law. 31 A stock and transfer
book is necessary as a measure of precaution, expediency and convenience since it provides the only certain
and accurate method of establishing the various corporate acts and transactions and of showing the ownership of
stock and like matters.32 However, a stock and transfer book, like other corporate books and records, is not in
any sense a public record, and thus is not exclusive evidence of the matters and things which ordinarily are
or should be written therein.33 In fact, it is generally held that the records and minutes of a corporation are
not conclusive even against the corporation but are prima facie evidence only,34 and may be impeached or
even contradicted by other competent evidence.35 Thus, parol evidence may be admitted to supply omissions in
the records or explain ambiguities, or to contradict such records.36

In 1980, Batas Pambansa Blg. 68, otherwise known as "The Corporation Code of the Philippines" supplanted Act
No. 1459. BP Blg. 68 provides:

Sec. 24. Election of directors or trustees.—At all elections of directors or trustees, there must be present,
either in person or by representative authorized to act by written proxy, the owners of a majority of the
outstanding capital stock, or if there be no capital stock, a majority of the members entitled to vote. . . .

Sec. 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 majority of the
members in the case of non-stock corporation.

Outstanding capital stock, on the other hand, is defined by the Code as:

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

Thus, quorum is based on the totality of the shares which have been subscribed and issued, whether it be founders’
shares or common shares.37 In the instant case, two figures are being pitted against each other— those contained in
the articles of incorporation, and those listed in the stock and transfer book.

To base the computation of quorum solely on the obviously deficient, if not inaccurate stock and transfer
book, and completely disregarding the issued and outstanding shares as indicated in the articles of
incorporation would work injustice to the owners and/or successors in interest of the said shares. This case
is one instance where resort to documents other than the stock and transfer books is necessary. The stock
and transfer book of PMMSI cannot be used as the sole basis for determining the quorum as it does not
reflect the totality of shares which have been subscribed, more so when the articles of incorporation show a
significantly larger amount of shares issued and outstanding as compared to that listed in the stock and
transfer book. As aptly stated by the SEC in its Order dated 15 July 1996:38

It is to be explained, that if at the onset of incorporation a corporation has 771 shares subscribed, the Stock
and Transfer Book should likewise reflect 771 shares. Any sale, disposition or even reacquisition of the
company of its own shares, in which it becomes treasury shares, would not affect the total number of shares
in the Stock and Transfer Book. All that will change are the entries as to the owners of the shares but not as
to the amount of shares already subscribed.

This is precisely the reason why the Stock and Transfer Book was not given probative value. Did the shares,
which were not recorded in the Stock and Transfer Book, but were recorded in the Articles of Iincorporation
just vanish into thin air? . . . .39

As shown above, at the time the corporation was set-up, there were already seven hundred seventy-six
(776) issued and outstanding shares as reflected in the articles of incorporation. No proof was adduced as
to any transaction effected on these shares from the time PMMSI was incorporated up to the time the
instant petition was filed, except for the thirty-three (33) shares which were recorded in the stock and
transfer book in 1978, and the additional one hundred thirty-two (132) in 1982. But obviously, the shares so
ordered recorded in the stock and transfer book are among the shares reflected in the articles of
incorporation as the shares subscribed to by the incorporators named therein.

One who is actually a stockholder cannot be denied his right to vote by the corporation merely because the
corporate officers failed to keep its records accurately. 40 A corporation’s records are not the only evidence of the
ownership of stock in a corporation.41 In an American case,42 persons claiming shareholders status in a professional
corporation were listed as stockholders in the amendment to the articles of incorporation. On that basis, they were in
all respects treated as shareholders. In fact, the acts and conduct of the parties may even constitute sufficient
evidence of one’s status as a shareholder or member. 43 In the instant case, no less than the articles of incorporation
declare the incorporators to have in their name the founders and several common shares. Thus, to disregard the
contents of the articles of incorporation would be to pretend that the basic document which legally triggered the
creation of the corporation does not exist and accordingly to allow great injustice to be caused to the incorporators
and their heirs.

Petitioners argue that the Court of Appeals "gravely erred in applying the Espejo decision to the benefit of
respondents." The Court believes that the more precise statement of the issue is whether in its assailed Decision,
the Court of Appeals can declare private respondents as the heirs of the incorporators, and consequently register
the founders shares in their name. However, this issue as recast is not actually determinative of the present
controversy as explained below.

Petitioners claim that the Decision of the Court of Appeals unilaterally divested them of their shares in PMMSI as
recorded in the stock and transfer book and instantly created inexistent shares in favor of private respondents. We
do not agree.

The assailed Decision merely declared that a separate judicial declaration to recognize the shares of the original
incorporators would entail unnecessary delay and expense on the part of the litigants, considering that the
incorporators had already proved ownership of such shares as shown in the articles of incorporation. 44 There was no
declaration of who the individual owners of these shares were on the date of the promulgation of the Decision. As
properly stated by the SEC in its Order dated 20 June 1996, to which the appellate court’s Decision should be
related, "if at all, the ownership of these shares should only be subjected to the proper judicial (probate) or
extrajudicial proceedings in order to determine the respective shares of the legal heirs of the deceased
incorporators."45

WHEREFORE, the petition is DENIED and the assailed Decision is AFFIRMED. Costs against petitioners
40.) G.R. No. 170585             October 6, 2008

DAVID C. LAO and JOSE C. LAO, petitioners,

vs.
DIONISIO C. LAO, respondents.

DECISION

REYES, R.T., J.:

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

This is the main question for resolution in this petition for review on certiorari of the Amended Decision1 of the Court
of Appeals (CA) affirming the Decision 2 of the Regional Trial Court (RTC), Branch 11, Cebu City in CEB-25916-
SRC.

The Facts

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.6

During pre-trial, the parties agreed to submit the case for resolution based on the evidence on record. 7

RTC Disposition

On December 19, 2001, the RTC rendered a Joint Decision8 with the following pertinent disposition, thus:

WHEREFORE, in view of the foregoing premises, judgment is hereby rendered by the Court in these cases:

(a) Denying the petition of David C. Lao and Jose C. Lao to be recognized as stockholders and directors of
Pacific Foundry Shop Corporation, to be issued certificates of stock of said corporation and to be allowed to
exercise rights of stockholders of the same corporation. 9

In denying the petition, the RTC ratiocinated:

 x x x Thus, the petitioners David C. Lao and Jose C Lao do not appear to have become registered
stockholders of Pacific Foundry Shop corporation, as they do not appear to have acquired shares of stock of
the corporation either as subscribers or by purchase from a holder of outstanding shares or by purchase
from the corporation of additionally issued shares.

xxxx

Secondly, the claim or contention of the petitioners David C. Lao and Jose C. Lao is wanting in merit
because they have no stock certificates in their names. A stock certificate, as we very well know, is the
evidence of ownership of corporate stock. If ever the said petitioners acquired shares of stock of the
corporation, there is a need for their acquisition of said shares to be registered in the Stock and Transfer
Book of the corporation. Registration is necessary to entitle a person to exercise the rights of a stockholder
and to hold office as director or other offices (12 Fletcher 343). That is why it is explicitly provided in Section
63 of the Corporation Code of the Philippines that no transfer of shares of stock shall be valid until the
transfer is recorded in the books of the corporation. An unregistered transfer is not valid as against the
corporation (Uson vs. Diosomito, 61 Phil. 535). A transfer must be registered, or at least notice thereof given
to the corporation for the purpose of registration, before the transferee can acquire any right as against the
corporation other than the right to have the transfer registered (12 Fletcher 339). An unrecorded transferee
can not enjoy the status of a stockholder, he can not vote nor he voted for (Price & Sulu Development Corp.
vs. Martin, 58 Phil. 707). Until the transfer is registered, the transferee is not a stockholder but an outsider
(Rivera vs. Florendo, G.R. No. L-57586, October 8, 1986). So, a person who has acquired or purchased
shares of stock of a corporation, and who desires to be recognized as stockholder for the purpose of voting
and exercising other rights of a stockholder, must secure such a standing by having the acquisition or
transfer recorded in the corporate books (Price & Sulu development Corp. vs. Martin, supra). Unfortunately,
in the cases at bench, the petitioners David C. Lao and Jose C. Lao did not secure such a standing.
Consequently, their petition to be recognized as stockholders of Pacific Foundry Shop Corporation must
fail.10

Petitioners appealed to the CA.

CA Disposition

On May 27, 2005, the CA rendered a Decision11 modifying that of the RTC, disposing as follows:

WHEREFORE, premises considered, judgment is hereby rendered modifying the Joint Decision dated
December 19, 2001 of the trial court in so far as it relates to Civil Case No. CEB-25916-SRC by:

(a) Declaring that petitioners have owned since 1987 shares of stock in Pacific Foundry Shop Corporation,
numbering 446 for petitioner-appellant David C. Lao and 333 for petitioner-appellant Jose C. Lao;

(b) Ordering respondent-appellee through the corporate secretary to issue to petitioners-appellants the
certificates of stock for the aforementioned number of shares;

(c) Ordering respondent-appellee, as President of Pacific Foundry Shop Corporation, to allow petitioners-
appellants to exercise their rights as stock holders;

(d) Ordering respondent-appellee to call a stockholders meeting every fourth Saturday of January in
accordance with the By-Laws of Pacific Foundry shop Corporation. 12

The CA decision was penned by Justice Arsenio Magpale and concurred in by Justices Sesinando Villon and Enrico
Lanzanas.

In modifying the RTC decision, the appellate court gave credence to the General Information Sheet submitted by
petitioners that names them as stockholders of PFSC, thus:

The General Information Sheet of PFSC for the years 1987-1998 state that petitioners-appellants David C.
Lao and Jose C. Lao own 446 and 333 shares, respectively, in PFSC. It is also indicated therein that David
 C. Lao occupied various key positions in PFSC from 1987-1998 and Jose C. Lao served as Director in
PFSC from 1990-1998. The Sworn Statements of Uy Lam Tiong, former corporate secretary of the PFSC,
also state that petitioners-appellants David C. Lao and Jose C. Lao, per corporate records of PFSC, own
shares of stock numbering 446 and 333, respectively. The minutes of the Annual Stockholders Meeting of
PFSC on January 28, 1988 at 3:00 o'clock p.m. shows that among those present were petitioners-appellants
David C. Lao and Jose C. Lao. During the said meeting, petitioner-appellant David C. Lao was nominated
and elected Director of PFSC. Withal, the Minutes of the Meeting of the Board of Directors of PFSC at its
Office at Hipodromo, Cebu City, on January 28, 1988 at 4:00 p.m. disclose that petitioner-appellant David C.
Lao was elected vice-president of PFSC. Both minutes were signed by the officers of PFSC including
respondent-appellee.13

Respondent filed a motion for reconsideration 14 of the CA decision.

On July 11, 2005, respondent moved to inhibit 15 the ponente of the CA decision, Justice Magpale, from resolving his
pending motion for reconsideration.

On July 22, 2005, Justice Magpale issued a Resolution16 voluntarily inhibiting himself from further participating in the
resolution of the pending motion for reconsideration. Justice Magpale stated:

Although the undersigned ponente does not agree with the imputations of respondent-appellee and that the
same are not any of those grounds mentioned in Rule 137 of the Revised Rules of Court, nonetheless the
ponente voluntarily inhibits himself from further handling this case in order to free the entire court of the
slightest suspicion of bias and prejudice against the respondent-appellee. 17

Amended Decision

On August 31, 2005, the CA rendered an Amended Decision18 affirming that of the RTC, with a fallo reading:

IN VIEW OF THE FOREGOING, the May 27, 2005 Decision of this Court is hereby SET ASIDE and the
Decision of the Regional Trial Court, Branch 11, Cebu City with respect to Civil Case No. 25916-SRC is
hereby AFIRMED in toto.19

The Amended Decision was penned by Justice Enrico Lanzanas and concurred in by Justices Sesinando Villon and
Vicente Yap. The CA stated:

Petitioners-appellants maintain that they acquired their shares of stocks through transfer - the third mode
mentioned by the trial court. David C. Lao claims that he acquired his 446 shares through his father, Lao
Pong Bao, when the latter purchased said shares from Hipolito Lao. On the other hand, Jose C. Lao asserts
that he acquired his 333 shares through Dionisio C. Lao himself from the original 1,333 shares of stocks of
the latter.

Petitioner-appellants asseverations are unavailing. To substantiate their statements, they merely relied on
the General Information Sheets submitted to the Securities and Exchange Commission for the year 1987 to
1998, as well as on the Minutes of the Stockholders Meeting and Board of Directors Meeting held on
January 28, 1988. They did not adduce evidence that would indubitably show that there was indeed a valid
transfer of stocks, i.e. endorsement and delivery, from the transferors, Hipolito Lao and Dionisio Lao, to
them as transferees.

xxxx

To our mind, David C. Lao utterly failed to confute the argument posited by respondent-appellee or
demonstrate compliance with any of the statutory requirements as to warrant a favorable ruling on his part.
No proof was ever shown that there was endorsement and delivery to him of the stock certificates
representing the 446 shares of Hipolito Lao. Neither was the transfer registered in PFSC's Stock and
Transfer Book. Conversely, Dionisio C. Lao was able to show conformity with the aforementioned
requirements. Accordingly, it is but logical to conclude that the certificate of stock covering 446 shares of
 Hipolito Lao was in fact endorsed and delivered to Dionisio C. Lao and as such is reflected in PFSC's Stock
and Transfer Book x x x.

In fact, it is a rule that private transactions are presumed to have been faire and regular and that the regular
course of business is presumed to have been followed. Thus, the transfer made by Hipolito Lao of the 446
shares of stocks to Dionisio C. Lao is deemed to have been valid and well-founded unless proven otherwise.
David C. Lao's mere allegation that Dionisio Lao illegally appropriated upon himself the 446 shares failed to
hurdle such presumption. In this jurisdiction, neither fraud nor evil is presumed and the record does not
show either as to establish by clear and sufficient evidence that may lead Us to believe such allegation. The
party alleging the same has the burden of proof to present evidence necessary to establish his claim,
unfortunately however petitioners failed to do so. The General Information Sheets and the Minutes of the
Meetings adduced by petitioners-appellants do not prove such allegation of fraud or deceit. In the absence
thereof, the presumption remains that private transactions have been fair and regular.

As for the alleged shares of Jose C. Lao, We find his position identically situated with David C. Lao. There is
also no evidence on record that would clearly establish how he acquired said shares of PFSC. Jose C. Lao
failed to show that there was endorsement and delivery to him of the stock certificates or any documents
showing such transfer or assignment. In fact, the 333 shares being claimed by him is still under the name of
Dionisio C. Lao was reflected by the Certificate of Stock as well as in PFSC's Stock and Transfer Book.
Corollary, Jose C. Lao could not be considered a stockholder of PFSC in the absence of support reflecting
his right to the 333 shares other than the inclusion of his name in the General Information Sheets from 1987
to 1998 and the Minutes of the Stockholder's Meeting and Board of Director's Meeting. 20

Petitioners moved for reconsideration but their motion was denied. 21 Hence, the present petition for review on
certiorari under Rule 45 of the 1997 Rules of Civil Procedure.

Issues

Petitioners raise five (5) issues for Our consideration, thus:

1. Whether or not the inhibition of Justice Arsenio J. Magpale is proper when there is no "extrinsic evidence
of bias, bad faith, malice, or corrupt purpose" on the part of Justice Magpale, which is required by this
Honorable Court in its decision in Webb, et al. v. People of the Philippines, 276 SCRA 243 [1997], as basis
for disqualification.

2. Whether or not the inhibition of Justice Magpale constitutes, in effect, forum shopping, which is proscribed
under Section 5, Rule 7 of the Rules of Court, as amended, and decisions of this Honorable Court.

3. Whether or not determination of ownership of shares of stock in a corporation shall be based on

the Stock and Transfer Book alone, or other evidence can be considered pursuant to the decision of
this Honorable Court in Tan v. Securities and Exchange Commission, 206 SCRA 740.

4. Whether or not the admissions and representations of respondent in the General Information Sheets
submitted by him to the Securities and Exchange Commission during the years 1987 to 1998 that (a)
petitioners were stockholders of Pacific Foundry Shop Corporation; that (b) petitioner David C. Lao and Jose
C. Lao owned 446 and 333 shares in the corporation, respectively; and that (c) petitioners had been
directors and officers of the corporation, as well as the Sworn Statement of Uy Lam Tiong, former Corporate
Secretary, the Minutes of the Annual Stockholders Meeting of PFSC on January 28, 1988, and the Minutes
of Meeting of the Board of Directors on January 28, 1988, mentioned by Justice Magpale in his ponencia,
are sufficient proof of petitioners ownership of stocks in the corporation.

5. Whether or not respondent is stopped from questioning petitioners' ownership of stocks in the corporation
in view of his admissions and representations in the General Information Sheets he submitted to the
Securities and Exchange Commission from 1987 to 1998 that petitioners were stockholders and officers of
the corporation.22
Essentially, only two (2) issues are raised in this petition. The first concerns the voluntary inhibition of Justice
Magpale, while the second involves the substantive issue of whether or not petitioners are indeed
stockholders of PFSC.

Our Ruling

We deny the petition.

Voluntary inhibition is within the sound discretion of a judge.

Petitioners claim that the motion to inhibit Justice Magpale from resolving the pending motion for reconsideration
was improper and unethical. They assert that the "bias and prejudice" grounds alleged by private respondent were
unsubstantiated and, worse, constituted proscribed forum shopping. They argue that Justice Magpale should have
resolved the pending motion, instead of voluntarily inhibiting himself from the case.

In cases of voluntary inhibition, the law leaves to the sound discretion of the judge the decision to decide for himself
the question of whether or not he will inhibit himself from the case. Section 1, Rule 137 of the Rules of Court
provides:

Section 1. Disqualification of judges. - No judge or judicial officer shall sit in any case in which he, or his wife
or child, is pecuniarily interested as heir, legatee, creditor, or otherwise, or in which he is related to either
party within the sixth degree of consanguinity or affinity, or to counsel within the fourth degree, computed
according to the rules of the civil law, or in which he has been executor, administrator, guardian, trustee, or
counsel, or in which he has presided in any inferior court when his ruling or decision is the subject of review,
without the written consent of all parties in interest, signed by them and entered upon the record.

A judge may, in the exercise of his sound discretion, disqualify himself from sitting in a case, for just or valid
reasons other than those mentioned above.

Here, Justice Magpale voluntarily inhibited himself "in order to free the entire court [CA] of the slightest suspicion of
bias and prejudice x x x."23 We certainly cannot nullify the decision of Justice Magpale recusing himself from the
case because that is a matter left entirely to his discretion. Nor can We fault him for doing so. No judge should
preside in a case in which he feels that he is not wholly free, disinterested, impartial, and independent.

We agree with petitioners that it may seem unpalatable and even revolting when a losing party seeks the
disqualification of a judge who had previously ruled against him in the hope that a new judge might be more
favorable to him. But We cannot take that basic proposition too far. That Justice Magpale opted to voluntarily recuse
himself from the appealed case is already fait accompli. It is, in popular idiom, water under the bridge.

Petitioners cannot bank on his voluntary inhibition to nullify the Amended Decision later issued by the appellate
court. It is highly specious to assume that Justice Magpale would have ruled in favor of petitioners on the pending
motion for reconsideration if he took a different course and opted to stay on with the case. It is also illogical to
presume that the Amended Decision would not have been issued with or without the participation of Justice
Magpale. The Amended Decision is too far removed from the issue of voluntary inhibition. It does not follow that
petitioners would be better off were it not for the voluntary inhibition.

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.

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."

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.

All told, We agree with the RTC and CA decision that petitioners are not shareholders of PFSC.

WHEREFORE, the petition is DENIED and the appealed Amended Decision AFFIRMED IN FULL

41.) G.R. No. 164588 October 19, 2005

NAUTICA CANNING CORPORATION, FIRST DOMINION PRIME HOLDINGS, INC. and FERNANDO R.
ARGUELLES, JR., Petitioners
vs.
ROBERTO C. YUMUL, Respondent.

DECISION

YNARES-SANTIAGO, J.:

Petitioners assail the September 26, 2001 Decision1 of the Court of Appeals in CA-G.R. SP No. 61919, affirming in
toto the Decision of the Securities and Exchange Commission (SEC) En Banc in SEC Case No. 10-96-5455, as well
as the July 16, 2004 Resolution2 denying the motion for reconsideration.

The facts of the case show that Nautica Canning Corporation (Nautica) was organized and incorporated on May 11,
1994 with an authorized capital stock of P40,000,000 divided into 400,000 shares with a par value of P100.00 per
share. It had a subscribed capital stock of P10,000,000 with paid-in subscriptions from its incorporators as follows: 3

Name No. of Shares Amount Subscribed Amount Paid

ALVIN Y. DEE 89,991 P8,999,100 P4,499,100

JONATHAN Y. DEE 2 200 200

JOANNA D. LAUREL 2 200 200

DARLENE EDSA MARIE

GONZALES 2 200 200

JENNIFER Y. DEE 2 200 200

ROBERTO C. YUMUL 1 100 100

JERRY ANGPING 10,000 1,000,000 500,000

-------------- -------------------- -------------------

100,000 P10,000,000 P5,000,000

On December 19, 1994, respondent Roberto C. Yumul was appointed Chief Operating Officer/General Manager of
Nautica with a monthly compensation of P85,000 and an additional compensation equal to 5% of the company’s
operating profit for the calendar year.4 On the same date, First Dominion Prime Holdings, Inc., Nautica’s parent
company, through its Chairman Alvin Y. Dee, granted Yumul an Option to Purchase5 up to 15% of the total stocks it
subscribed from Nautica.

On June 22, 1995, a Deed of Trust and Assignment6 was executed between First Dominion Prime Holdings,
Inc. and Yumul whereby the former assigned 14,999 of its subscribed shares in Nautica to the latter. The
deed stated that the 14,999 "shares were acquired and paid for in the name of the ASSIGNOR only for
convenience, but actually executed in behalf of and in trust for the ASSIGNEE."

In March 1996, Nautica declared a P35,000,000 cash dividend, P8,250,000 of which was paid to Yumul
representing his 15% share.
After Yumul’s resignation from Nautica on August 5, 1996, he wrote a letter 7 to Dee requesting the latter to
formalize his offer to buy Yumul’s 15% share in Nautica on or before August 20, 1996; and demanding the
issuance of the corresponding certificate of shares in his name should Dee refuse to buy the same. Dee,
through Atty. Fernando R. Arguelles, Jr., Nautica’s corporate secretary, denied the request claiming that
Yumul was not a stockholder of Nautica.

On September 6, 19968 and September 9, 1996,9 Yumul requested that the Deed of Trust and Assignment be
recorded in the Stock and Transfer Book of Nautica, and that he, as a stockholder, be allowed to inspect its
books and records.

Yumul’s requests were denied allegedly because he neither exercised the option to purchase the shares nor
paid for the acquisition price of the 14,999 shares. Atty. Arguelles maintained that the cash dividend received by
Yumul is held by him only in trust for First Dominion Prime Holdings, Inc.

Thus, Yumul filed on October 3, 1996, before the SEC a petition for mandamus with damages, with prayer that
the Deed of Trust and Assignment be recorded in the Stock and Transfer Book of Nautica and that the certificate of
stocks corresponding thereto be issued in his name.10

On October 12, 2000, the SEC En Banc rendered the Decision,11 the dispositive portion of which reads:

WHEREFORE, judgment is hereby rendered in favor of the petitioner and against the respondents, as follows:

1. Declaring petitioner as a stockholder of respondent Nautica;

2. Declaring petitioner as beneficial owner of 14,999 shares of Nautica under the Deed of Trust and Assignment
dated June 22, 1995

3. Declaring petitioner to be entitled to the right of inspection of the books of the corporation pursuant to the
pertinent provisions of the Corporation Code; and

4. Directing the Corporate Secretary of Nautica to recognize and register the Deed of Trust and Assignment dated
June 22, 1995.

SO ORDERED.12

On appeal, the Court of Appeals affirmed the decision of the SEC En Banc. Petitioners’ motion for reconsideration
was denied in a Resolution dated July 16, 2004.

Hence, this petition.

At the outset, we note that petitioners’ recourse to this Court via a "combined" petition under Rule 65 and an appeal
under Rule 45 of the Rules of Court is irregular. A petition for review under Rule 45 is the proper remedy of a party
aggrieved by a decision of the Court of Appeals, which is not identical to a petition for certiorari under Rule 65.
Under Rule 45, decisions, final orders or resolutions of the Court of Appeals is appealed by filing a petition for
review, which is a continuation of the appellate process over the original case. 13 On the other hand, the writ
of certiorari under Rule 65 is filed when petitioner has no plain, speedy and adequate remedy in the ordinary course
of law against its perceived grievance. A remedy is considered "plain, speedy and adequate" if it will promptly
relieve the petitioner from the injurious effects of the judgment and the acts of the lower court or agency.

In this case, petitioners’ speedy, available and adequate remedy is appeal via Rule 45, and not certiorari under Rule
65. Notwithstanding petitioners’ procedural lapse, we shall treat the petition as one filed under Rule 45.

The petition is partly meritorious.

Petitioners contend that Yumul was not a stockholder of Nautica; that he was just a nominal owner of one
share as the beneficial ownership belonged to Dee who paid for said share when Nautica was incorporated.
They presented China Banking Corporation Check No. A2620636 and Citibank Check No. B82642 as proof of
payment by Dee; a letter by Dee dated July 15, 1994 requesting the corporate secretary of Nautica to issue a
certificate of stock in Yumul’s name but in trust for Dee; and Stock Certificate No. 6 with annotation "ITF Alvin
Y. Dee" which means that respondent held said stock "In Trust For Alvin Y. Dee".

We are not persuaded.

Indeed, it is possible for a business to be wholly owned by one individual. The validity of its incorporation is not
affected when such individual gives nominal ownership of only one share of stock to each of the other four
incorporators. This is not necessarily illegal. 14 But, this is valid only between or among the incorporators privy to the
agreement. It does bind the corporation which, at the time the agreement is made, was non-existent. Thus,
incorporators continue to be stockholders of a corporation unless, subsequent to the incorporation, they
have validly transferred their subscriptions to the real parties in interest. As between the corporation on the
one hand, and its shareholders and third persons on the other, the corporation looks only to its books for
the purpose of determining who its shareholders are.15

In the case at bar, the SEC and the Court of Appeals correctly found Yumul to be a stockholder of Nautica,
of one share of stock recorded in Yumul’s name, although allegedly held in trust for Dee. Nautica’s Articles
of Incorporation and By-laws, as well as the General Information Sheet filed with the SEC indicated that
Yumul was an incorporator and subscriber of one share.16 Even granting that there was an agreement
between Yumul and Dee whereby the former is holding the share in trust for Dee, the same is binding only
as between them. From the corporation’s vantage point, Yumul is its stockholder with one share,
considering that there is no showing that Yumul transferred his subscription to Dee, the alleged real owner
of the share, after Nautica’s incorporation.

We held in Ponce v. Alsons Cement Corp.17 that:

... [A] transfer of shares of stock not recorded in the stock and transfer book of the corporation is non-existent as far
as the corporation is concerned. As between the corporation on one hand, and its shareholders and third persons
on the other, the corporation looks only to its books for the purpose of determining who its shareholders are. It is
only when the transfer has been recorded in the stock and transfer book that a corporation may rightfully regard the
transferee as one of its stockholders. From this time, the consequent obligation on the part of the corporation to
recognize such rights as it is mandated by law to recognize arises.

Hence, without such recording, the transferee may not be regarded by the corporation as one among its
stockholders and the corporation may legally refuse the issuance of stock certificates[.]

Moreover, the contents of the articles of incorporation bind the corporation and its stockholders. Its contents cannot
be disregarded considering that it was the basic document which legally triggered the creation of the corporation. 18

The Court of Appeals, in affirming the factual findings of SEC, held that:

The evidence submitted by petitioners to establish trust is palpably incompetent, consisting mainly of the self-
serving allegations by the petitioners and the China Banking Corporation checks issued as payment for the shares
of stock of Nautica. Dee did not testify on the supposed trust relationship between him and Yumul. While Atty.
Arguelles testified, his testimony is barren of probative value since he had no first-hand knowledge of the
relationship in question. The isolated fact that Dee might have paid for the share in the name of Yumul did not by
itself make the latter a man of straw. Such act of payment is so nebulous and equivocal that it can not yield the
meaning which the petitioners would want to squeeze from it without the clarificatory testimony of Dee. 19

We see no cogent reason to set aside the factual findings of the SEC, as upheld by the Court of Appeals. Findings
of fact of quasi-judicial agencies, like the SEC, are generally accorded respect and even finality by the Supreme
Court, if supported by substantial evidence, in recognition of their expertise on the specific matters under their
consideration,20 moreso if the same has been upheld by the appellate court, as in this case.

Besides, other than petitioners’ self-serving assertion that the beneficial ownership belongs to Dee, they failed to
show that the subscription was transferred to Dee after Nautica’s incorporation. The conduct of the parties also
constitute sufficient proof of Yumul’s status as a stockholder. On April 4, 1995, Yumul was elected during the
regular annual stockholders’ meeting as a Director of Nautica’s Board of Directors.21 Thereafter, he was elected as
president of Nautica.22 Thus, Nautica and its stockholders knowingly held respondent out to the public as an officer
and a stockholder of the corporation.

Section 23 of Batas Pambansa (BP) Blg. 68 or The Corporation Code of the Philippines requires that every director
must own at least one share of the capital stock of the corporation of which he is a director. Before one may be
elected president of the corporation, he must be a director. 23 Since Yumul was elected as Nautica’s Director and as
President thereof, it follows that he must have owned at least one share of the corporation’s capital stock.

Thus, from the point of view of the corporation, Yumul was the owner of one share of stock. As such, the SEC
correctly ruled that he has the right to inspect the books and records of Nautica, 24 pursuant to Section 74 of BP Blg.
68 which states that 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.

As to whether or not Yumul is the beneficial owner of the 14,999 shares of stocks of Nautica, petitioners allege that
Yumul was given the option to purchase shares of stocks in Nautica under the Option to Purchase dated December
19, 1994. However, he failed to exercise the option, thus there was no cause or consideration for the Deed of Trust
and Assignment, which makes it void for being simulated or fictitious. 25

Anent this issue, the SEC did not make a categorical finding on whether Yumul exercised his option and also on the
validity of the Deed of Trust and Assignment. Instead, it held that:

... Although unsubstantiated, the apparent objective of the respondents’ allegation was to refute petitioners claim
over the shares covered by the Deed of Trust and Assignment. This must therefore be deemed as nothing but a
ploy to deprive petitioner of his right over the shares in question, which to us should not be countenanced. 26

Neither did the Court of Appeals rule on the issue as it only held that:

Petitioners also contend that the Deed is a simulated contract.

Simulation is "the declaration of a fictitious will, deliberately made by agreement of the parties, in order to produce,
for the purposes of deception, the appearances of a judicial act which does not exist or is different with that which
was really executed." The characteristic of simulation is that the apparent contract is not really desired or intended
to produce legal effect or in any way alter the juridical situation of the parties.

The requisites for simulation are: (a) an outward declaration of will different from the will of the parties; (b) the false
appearance must have been intended by mutual agreement; and (c) the purpose is to deceive third persons. These
requisites have not been proven in this case.27

Thus, other than defining and enumerating the requisites of a simulated contract or deed, the Court of Appeals did
not make a determination whether the SEC has the jurisdiction to resolve the issue and whether the questioned
deed was fictitious or simulated.

In Intestate Estate of Alexander T. Ty v. Court of Appeals,28 we held that:

… The question raised in the complaints is whether or not there was indeed a sale in the absence of cause or
consideration. The proper forum for such a dispute is a regular trial court. The Court agrees with the ruling of the
Court of Appeals that no special corporate skill is necessary in resolving the issue of the validity of the transfer of
shares from one stockholder to another of the same corporation. Both actions, although involving different property,
sought to declare the nullity of the transfers of said property to the decedent on the ground that they were not
supported by any cause or consideration, and thus, are considered void ab initio for being absolutely simulated or
fictitious. The determination whether a contract is simulated or not is an issue that could be resolved by
applying pertinent provisions of the Civil Code, particularly those relative to obligations and contracts.
Disputes concerning the application of the Civil Code are properly cognizable by courts of general
jurisdiction. No special skill is necessary that would require the technical expertise of the SEC. (Emphasis
supplied)

Thus, when the controversy involves matters purely civil in character, it is beyond the ambit of the limited jurisdiction
of the SEC. As held in Viray v. Court of Appeals,29 the better policy in determining which body has jurisdiction over a
case would be to consider not only the status or relationship of the parties, but also the nature of the question that is
the subject of their controversy. This, however, is now moot and academic due to the passage of Republic Act No.
8799 or The Securities Regulation Code which took effect on August 8, 2000. The Act transferred from the SEC to
the regional trial court jurisdiction over cases involving intra-corporate disputes. Thus, whether or not the issue is
intra-corporate, it is now the regional trial court and no longer the SEC that takes cognizance of the controversy.

Considering that the issue of the validity of the Deed of Trust and Assignment is civil in nature, thus, under the
competence of the regular courts, and the failure of the SEC and the Court of Appeals to make a determinative
finding as to its validity, we are constrained to refrain from ruling on whether or not Yumul can compel the corporate
secretary to register said deed. It is only after an appropriate case is filed and decision rendered thereon by the
proper forum can the issue be resolved.

WHEREFORE, the petition is PARTIALLY GRANTED. The September 26, 2001 Decision of the Court of Appeals in
CA-G.R. SP No. 61919, is AFFIRMED insofar as it declares respondent Roberto C. Yumul as a subscriber and
stockholder of one share of stock of Nautica Canning Corporation. The Decision is REVERSED and SET
ASIDE insofar as it affirms the validity of the Deed of Trust and Assignment and orders its registration in the Stock
and Transfer Book of Nautica Canning Corporation.
 42.) G.R. No. 160924, August 05, 2015

TERELAY INVESTMENT AND DEVELOPMENT CORPORATION, Petitioner, v. CECILIA TERESITA

J. YULO, Respondent.

DECISION

BERSAMIN, J.:

In its desire to block the inspection of its corporate books by a stockholder holding a very
insignificant shareholding, the petitioner now seeks to set aside the judgment promulgated on
September 12, 2003,1 whereby the Court of Appeals (CA) affirmed the decision rendered on March
22, 2002 by the Regional Trial Court, Branch 142, in Makati City (RTC) allowing the inspection, and
ordering it to pay attorney's fees of P50,000.00 to the stockholder. 2 cralawrednad

With the CA having denied the petitioner's motion for reconsideration and motion for oral argument
through the resolution promulgated on November 28, 2003,3 such denial is also the subject of this
appeal.

Antecedents

The CA recited the following antecedents: cralawlawlibrary

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:cralawlawlibrary

1. Petitioner Cecilia Teresita Yulo is registered as a stockholder in the corporation's stock and transfer
book subject to the qualification in the Answer, and

2. Petitioner had informed the respondent, through demand letter, of her desire to inspect the
records of the corporation, but the same was denied by the respondent.

Thereafter, the parties stipulated that the ISSUES to be resolved are the following: cralawlawlibrary

1. Whether or not petitioner has the right to inspect and examine TERELAY's corporate records,
books of account and other financial records pursuant to Section 74 of the Corporation Code of the
Philippines;

2. Whether or not petitioner as stockholder and director of TERELAY has been unduly deprived of her
right to inspect and examine TERELAY's corporate records, books of accounts and other financial
records in clear contravention of law, which warrants her claim for damages;

3. Whether or not Atty. Reynaldo G. Geronimo and/or the principal officers, Ma. Antonia Yulo Loyzaga
and Teresa J. Yulo of respondent corporation are indispensable parties and hence, should be
impleaded as respondents;

4. As a prejudicial question, whether or not petitioner is a stockholder of respondent corporation and

such being the issue, whether this issue should be threshed out in the probate of the will of the late
Luis A. Yulo and settlement of estate now pending with the Regional Trial Court of Manila;

5. Assuming petitioner is a stockholder, whether or not petitioner's mere desire to inquire into the
financial condition of respondent corporation and conduct of the affairs of the corporation is a just
and sufficient ground for inspection of the corporate records. 4

Following the enactment of Republic Act No. 8799 (The Securities Regulation Code), the case was
transferred from the Securities and Exchange Commission to the RTC.

On March 22, 2002, the RTC rendered its judgment,5 ruling thusly: cralawlawlibrary

Accordingly, petitioner's application for inspection of corporate records is granted pursuant to Rule 7
of the Interim Rules in relation to Section 74 and 75 of the Corporation Code. Defendant, through its
officers, is ordered to allow inspection of corporate books and records at reasonable hours on
business days and/or furnish petitioner copies thereof all at her expense. In this connection, plaintiff
is ordered to deposit to the Court the amount of P1,000.00 to cover the estimated cost of the
manpower necessary to produce the books and records and the cost of copying.

Respondent is further ordered to pay petitioner attorney's fees in the amount of P50,000.00

SO ORDERED.6
On September 12, 2003, the CA affirmed the RTC.7 cralawrednad

The petitioner sought reconsideration, and moved for the holding of oral arguments thereon, but the
CA denied the motion on November 28, 2003.8 cralawrednad

Issues

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; (b) in
declaring that the RTC had the jurisdiction to determine whether or not she was a stockholder; (c) in
ruling that it did not adduce sufficient proof showing that she was in bad faith or had an ulterior
motive in demanding inspection of the records; (d) in finding that her purpose for the inspection,
which was to inquire into its financial condition and into the conduct of its affairs by its principal
officers, was a valid ground to examine the corporate records; (e) in holding that her petition
for mandamus was not premature; (f) in not resolving whether or not its principal officers should be
impleaded as indispensable parties; and (g) in not setting aside the award of attorney's fees in the
amount of P50,000.00.9 cralawrednad

In her comment,10 the respondent counters that the law does not require substantial
shareholding before she can exercise her right of inspection as a stockholder; that the issue
of the nullity of the donation in her favor of the shareholding was irrelevant because it was the
subscription to the shares that granted the statutory and common rights to stockholders; that the
RTC, sitting as a corporate court, was the proper court to declare that she was a stockholder; that
she has just and sufficient grounds to inspect its corporate records; that its officers are not
indispensable parties; that her petition for mandamus was not premature; and that the CA correctly
upheld the RTC's order to pay attorney's fees to her.
 Ruling of the Court

We deny the petition for review on certiorari.

To start with, it is fundamental that a petition for review on certiorari should raise only questions of
law.11 In that regard, the findings of fact of the trial court, as affirmed by the appellate court, are
final and conclusive, and cannot be reviewed on appeal by the Court as long as such findings are
supported by the records, or are based on substantial evidence. In other words, it is not the function
of the Court to analyze or weigh all over again the evidence or the factual premises supportive of the
lower courts' determinations.

Even when the Court has to review the factual premises, it has consistently held that the findings of
the appellate and the trial courts are accorded great weight, if not binding effect, unless the most
compelling and cogent reasons exist to revisit such findings. 12 Among the compelling and cogent
reasons are the following,13 namely: (a) when the findings are grounded entirely on speculation,
surmises, or conjectures; (b) when the inference made is manifestly mistaken, absurd, or
impossible; (c) when there is grave abuse of discretion; (d) when the judgment is based on a
misapprehension of facts; (e) when the findings of facts are conflicting; (f) when the CA, in making
its findings, went beyond the issues of the case, or its findings are contrary to the admissions of both
the appellant and the appellee; (g) when the CA's findings are contrary to those by the trial court;
(h) when the findings are conclusions without citation of specific evidence on which they are based;
(i) when the facts set forth in the petition as well as in the petitioner's main and reply briefs are not
disputed by the respondent; (j) when the findings of fact are premised on the supposed absence of
evidence and contradicted by the evidence on record; or (k) when the CA manifestly overlooked
certain relevant facts not disputed by the parties, which, if properly considered, would justify a
different conclusion.

However, the Court has determined from its review in this appeal that the CA correctly disposed of
the legal and factual matters and issues presented by the parties. This appeal is not, therefore, under
any of the aforecited exceptions.

The Court now adopts with approval the cogent observations of the CA on the matters and issues
raised by the petitioner, as follows:
lawlibrary
cralaw

Regarding the issue of jurisdiction, TERELAY avers that it is not within the jurisdiction of the trial
court to determine whether or not petitioner-appellee is its stockholder. It contends that a petition
for the probate of the will of Cecilia's father, the late Luis A. Yulo, and the settlement of his estate
was filed with the Regional Trial Court of Manila. The inventory of the estate includes the five (5)
shares which Cecilia is claiming. Being a court of limited jurisdiction, the court a quo could not decide
whether or not Luis A. Yulo donated five (5) shares to Cecilia during his lifetime. The position of
TERELAY is untenable. As correctly pointed out by Cecilia Yulo, the main issue in this case is the
question of whether or not she is a stockholder and therefore, has the right to inspect the corporate
books and records. We agree with the ruling of the trial court that the determination of this issue is
within the competence of the Regional Trial Court, acting as a special court for intra-corporate
controversies, and not in the proceeding for the settlement of the estate of the late Luis Yulo.

On the matter of exhaustion of administrative remedies, TERELAY asserts that the petition for
mandamus filed by Cecilia Yulo was premature because she failed to exhaust all available remedies
before filing the instant petition. The Court disagrees. A writ of mandamus is a remedy provided by
law where despite the stockholder's request for record inspection, the corporation still refuses to
allow the stockholder the right to inspect. In the instant case, Cecilia Yulo, through counsel, sent a
letter request, dated September 14, 1999, for inspection of corporate records, books of accounts and
other financial records, but the same was denied by TERELAY through counsel, in its reply-letter,
dated September 15, 1999. Appellee Yulo sent another letter, dated September 16, 1999, reiterating
the same request but the same was again denied by TERELAY in a reply-letter dated September 17,
1999. Clearly then, appellee Yulo's right is not pre-mature and may be enforced by a writ of
mandamus.
On the contention that there was no stipulation that Cecilia Yulo was registered as a stockholder,
TERELAY asserts that the trial court was misled into believing that there was a stipulation or
admission that Cecilia Yulo is a registered stockholder in its stock and transfer book. According to
TERELAY, the admission or stipulation was that she was registered in the Articles of Incorporation is
separate and distinct from being so in the stock and transfer book. TERELAY's argument cannot be
sustained. A careful review of the records would show that in the Preliminary Conference Order,
dated May 16, 2000, of the SEC Hearing Officer, both parties represented by their respective
counsels, agreed on the fact that petitioner-appellee was "registered as a stockholder in respondent-
appellant's stock and transfer book subject to the qualifications in the Answer." The records failed to
disclose any objection by TERELAY. Neither did TERELAY raise this matter in the SEC hearing held on
August 7, 2000 as one of the issues to be determined and resolved.

TERELAY further points out that her name as incorporator, stockholder and director in the Articles of
Incorporation and Amendments were unsigned; that she did not pay for the five (5) shares appearing
in the Amended Articles of Incorporation and General Information Sheet of TERELAY; that she did not
subscribe to the shares; that she has neither been in possession of nor seen the certificate of stock
covering the five (5) shares of stock; that the donation of the five (5) shares claimed by her was null
and void for failure to comply with the requisites of a donation under Art. 748 of the Civil Code; and
that there was no acceptance of the donation by her as donee. TERELAY further contends that Cecilia
Yulo's purpose in inspecting the books was to inquire into its financial condition and the conduct of its
affairs by the principal officers which are not sufficient and valid reasons. Therefore, the presumption
of good faith cannot be accorded her.

TERELAY's position has no merit. The records disclose that the corporate documents submitted,
which include the Articles of Incorporation and the Amended Articles of Incorporation, as well as the
General Information Sheets and the Quarterly Reports all bear the signatures of the proper parties
and their authorized custodians. The signature of appellee under the name Cecilia J. Yulo appears in
the Articles of Incorporation of TERELAY. Likewise, her signatures under the name Cecilia Y.
Blancaflor appear in the Amended Articles of Incorporation where she signed as Director and
Corporate Secretary of TERELAY. The General Information Sheets from December 31, 1977 up to
February 20, 2002 all exhibited that she was recognized as director and corporate secretary, and that
she had subscribed to five (5) shares of stock. The quarterly reports do not show otherwise.

Verily, petitioner-appellee has presented enough evidence that she is a stockholder of TERELAY. The
corporate documents presented support her claim that she is a registered stockholder in TERELAY's
stock and transfer book thus giving her the right, under Section 74 par. 2 and Section 75 of the
Philippine Corporation Law, to inspect TERELAY's books, records, and financial statements. Section
74, par. 2 and Section 75 of our Corporation Code reads as follows: x x x

Accordingly, Cecilia Yulo as the right to be fully informed of TERELAY's corporate condition and the
manner its affairs are being managed. It is well-settled that the ownership of shares of stock gives
stockholders the right under the law to be protected from possible mismanagement by its officers.
This right is predicated upon self-preservation. In any case, TERELAY did not adduce sufficient proof
that Cecilia Yulo was in bad faith or had an ulterior motive in demanding her right under the law.

In view of the foregoing, the Court finds it unnecessary to discuss the other issues raised by TERELAY
as they are incapable of defeating the established fact that Cecilia Yulo is a registered stockholder of
respondent-applicant.

Finally, the Court agrees with the ruling of the court a quo that the petitioner is entitled to the
reasonable amount of P50,000.00 representing attorney's fees for having been compelled to litigate
in order to exercise her right of inspection. 14

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.

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. According to a recognized commentator: 16
By early English decisions it was formerly held that there must be something more than bare
suspicion of mismanagement or fraud. There must be some particular controversy or question in
which the party applying was interested, and inspection would be granted only so far as necessary
for that particular occasion. By the general rule in the United States, however, shareholders have a
right to inspect the books and papers of the corporation without first showing any particular dispute
or proving any mismanagement or other occasion rendering an examination proper. The privilege,
however, is not absolute and the corporation may show in defense that the applicant is acting from
wrongful motives.

In Guthrie v. Harkness, there was involved the right of a shareholder in a national bank to inspect its
books for the purpose of ascertaining whether the business affairs of the bank had been conducted
according to law, and whether, as suspected, the bank was guilty of irregularities. The court said:
"The decisive weight of American authority recognizes the right of the shareholder, for proper
purposes and under reasonable regulations as to place and time, to inspect the books of the
corporation of which he is a member . . . In issuing the writ of mandamus the court will exercise a
sound discretion and grant the right under proper safeguards to protect the interest of all concerned.
The writ should not be granted for speculative purposes or to gratify idle curiosity or to aid a
blackmailer, but it may not be denied to the stockholder who seeks the information for legitimate
purposes."

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.
WHEREFORE, the Court AFFIRMS the judgment promulgated on September 12, 2003;
and ORDERS the petitioner to pay the costs of suit.
43.) G.R. No. 178618               October 11, 2010

MINDANAO SAVINGS AND LOAN ASSOCIATION, INC., represented by its Liquidator, THE PHILIPPINE
DEPOSIT INSURANCE CORPORATION, Petitioner,
vs.
EDWARD WILLKOM; GILDA GO; REMEDIOS UY; MALAYO BANTUAS, in his capacity as the Deputy Sheriff
of Regional Trial Court, Branch 3, Iligan City; and the REGISTER OF DEEDS of Cagayan de Oro
City, Respondent.

DECISION

NACHURA, J.:

This is a petition for review on certiorari under Rule 45 of the Rules of Court filed by Mindanao Savings and Loan
Association, Inc. (MSLAI), represented by its liquidator, Philippine Deposit Insurance Corporation (PDIC), against
respondents Edward R. Willkom (Willkom); Gilda Go (Go); Remedios Uy (Uy); Malayo Bantuas (sheriff Bantuas), in
his capacity as sheriff of the Regional Trial Court (RTC), Branch 3 of Iligan City; and the Register of Deeds of
Cagayan de Oro City. MSLAI seeks the reversal and setting aside of the Court of Appeals 1 (CA) Decision2 dated
March 21, 2007 and Resolution3 dated June 1, 2007 in CA-G.R. CV No. 58337.

The controversy stemmed from the following 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 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. 14

On March 13, 1997, the RTC issued a resolution dismissing the case for lack of jurisdiction. The RTC declared that
it could not annul the decision in Civil Case No. 111-697, having been rendered by a court of coordinate
jurisdiction.15

On appeal, MSLAI failed to obtain a favorable decision when the CA affirmed the RTC resolution. The dispositive
portion of the assailed CA Decision reads:

WHEREFORE, premises considered, the instant appeal is DENIED. The decision assailed is AFFIRMED.

We REFER Sheriff Malayo B. Bantuas’ violation of the Supreme Court Administrative Circular No. 12 to the Office of
the Court Administrator for appropriate action. The Division Clerk of Court is hereby DIRECTED to furnish the Office
of the Court Administrator a copy of this decision.

SO ORDERED.16

The appellate court sustained the dismissal of petitioner’s complaint not because it had no jurisdiction over the case,
as held by the RTC, but on a different ground. Citing Associated Bank v. CA,17 the CA ruled that there was no
merger between FISLAI and MSLAI (formerly DSLAI) for their failure to follow the procedure laid down by
the Corporation Code for a valid merger or consolidation. The CA then concluded that the two corporations
retained their separate personalities; consequently, the claim against FISLAI is warranted, and the
subsequent sale of the levied properties at public auction is valid. The CA went on to say that even if there had
been a de facto merger between FISLAI and MSLAI (formerly DSLAI), Willkom, having relied on the clean
certificates of title, was an innocent purchaser for value, whose right is superior to that of MSLAI. Furthermore, the
alleged assignment of assets and liabilities executed by FISLAI in favor of MSLAI was not binding on third parties
because it was not registered. Finally, the CA said that the validity of the auction sale could not be invalidated by the
fact that the sheriff had no authority to conduct the execution sale. 18

Petitioner’s motion for reconsideration was denied in a Resolution dated June 1, 2007. Hence, the instant petition
anchored on the following grounds:

THE HONORABLE COURT OF APPEALS, CAGAYAN DE ORO COMMITTED GRAVE AND REVERSIBLE
ERROR WHEN:

(1)

IT PASSED UPON THE EXISTENCE AND STATUS OF DSLAI (now MSLAI) AS THE SURVIVING ENTITY
IN THE MERGER BETWEEN DSLAI AND FISLAI AS A DEFENSE IN AN ACTION OTHER THAN IN A
QUO WARRANTO PROCEEDING UPON THE INSTITUTION OF THE SOLICITOR GENERAL AS
MANDATED UNDER SECTION 20 OF BATAS PAMBANSA BLG. 68.

(2)
 IT REFUSED TO RECOGNIZE THE MERGER BETWEEN F[I]SLAI AND DSLAI WITH DSLAI AS THE
SURVIVING CORPORATION.

(3)

IT HELD THAT THE PROPERTIES SUBJECT OF THE CASE ARE NOT IN CUSTODIA LEGIS AND
THEREFORE, EXEMPT FROM GARNISHMENT, LEVY, ATTACHMENT OR EXECUTION.19

To resolve this petition, we must address two basic questions: (1) Was the merger between FISLAI and DSLAI
(now MSLAI) valid and effective; and (2) Was there novation of the obligation by substituting the person of the
debtor?

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, 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

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.

Petitioner cannot also anchor its right to annul the execution sale on the principle of novation.  While it is true that
1avvphi1

DSLAI (now MSLAI) assumed all the liabilities of FISLAI, such assumption did not result in novation as would
release the latter from liability, thereby exempting its properties from execution. Novation is the extinguishment of an
obligation by the substitution or change of the obligation by a subsequent one which extinguishes or modifies the
first, either by changing the object or principal conditions, by substituting another in place of the debtor, or by
subrogating a third person in the rights of the creditor. 37

It is a rule that novation by substitution of debtor must always be made with the consent of the creditor. 38 Article
1293 of the Civil Code is explicit, thus:

Art. 1293. Novation which consists in substituting a new debtor in the place of the original one, may be made even
without the knowledge or against the will of the latter, but not without the consent of the creditor. Payment by the
new debtor gives him the rights mentioned in Articles 1236 and 1237.

In this case, there was no showing that Uy, the creditor, gave her consent to the agreement that DSLAI (now
MSLAI) would assume the liabilities of FISLAI. Such agreement cannot prejudice Uy. Thus, the assets that FISLAI
transferred to DSLAI remained subject to execution to satisfy the judgment claim of Uy against FISLAI. The
subsequent sale of the properties by Uy to Willkom, and of one of the properties by Willkom to Go, cannot,
therefore, be questioned by MSLAI.

The consent of the creditor to a novation by change of debtor is as indispensable as the creditor’s consent in
conventional subrogation in order that a novation shall legally take place. 39 Since novation implies a waiver of the
right which the creditor had before the novation, such waiver must be express. 40

WHEREFORE, premises considered, the petition is DENIED. The Court of Appeals Decision dated March 21, 2007
and Resolution dated June 1, 2007 in CA-G.R. CV No. 58337 are AFFIRMED.
44.) G.R. No. 208638

SPOUSES FRANCISCO ONG and BETTY LIM ONG, and SPOUSES JOSEPH ONG CHUAN and ESPERANZA
ONG CHUAN, Petitioners
vs.
BPI FAMILY SAVINGS BANK, INC.,, Respondent

DECISION

REYES, JR., J.:

This is a Petition for Review under Rule 45 of the Rules of Court, as amended, seeking to reverse and set aside the
Decision   dated January 3 1, 2013 and Resolution  dated August 16, 2013 of the Court of Appeals (CA) in CA-G.R.
1 2

CV No. 92348

The Facts

Spouses Francisco Ong and Betty Lim Ong and Spouses Joseph Ong Chuan and Esperanza Ong Chuan
(collectively referred to as the petitioners) are engaged in the business of printing under the name and style
"MELBROS PRINTING CENTER". 3

Sometime in December 1996, Bank of Southeast Asia's (BSA) managers, Ronnie Denila and Rommel Nayve,
visited petitioners' office and discussed the various loan and credit facilities offered by their bank. In view of
petitioners' business expansion plans and the assurances made by BSA's managers, they applied for the credit
facilities offered by the latter.

Sometime in April 1997, they executed a real estate mortgage (REM) over their property situated in Paco, Manila,
covered by Transfer Certificate of Title No. 143457, in favor of BSA as security for a ₱15,000,000.00 term loan and
₱5,000,000.00 credit line or a total of ₱20,000,000.00.

With regard to the term loan, only ₱10,444,271.49 was released by BSA (the amount needed by the petitioners to
pay out their loan with Ayala life assurance, the balance was credited to their account with BSA).

With regard to the ₱5,000,000.00 credit line, only ₱3,000,000.00 was released. BSA promised to release the
remaining ₱2,000,000.00 conditioned upon the payment of the ₱3,000,000.00 initially released to petitioners.

Petitioners acceded to the condition and paid the ₱3,000,000.00 in full. However, BSA still refused to release the
₱2,000,000.00. Petitioners then refused to pay the amortizations due on their term loan.

Later on, BPI Family Savings Bank (BPI) merged with BSA, thus, acquired all the latter's rights and assumed
its obligations. BPI filed a petition for extrajudicial foreclosure of the REM for petitioners' default in the
payment of their term loan.

In order to enjoin the foreclosure, petitioners instituted an action for damages with Temporary Restraining Order and
Preliminary Injunction against BPI praying for ₱23,570,881.32 as actual damages; ₱1,000,000.00 as moral
damages; ₱500,000.00 as attorney's fees, litigation expenses and costs of suit.

On November 10, 2008, the trial court rendered its Decision,  disposing, thus:
4

WHEREFORE, in view of all the foregoing, the Court hereby resolves in favor of the plaintiffs and against the
defendant bank for the latter to pay the former the above-cited sum of Php20,469,498.00 by way of actual damages
and Php500,000.00 by way of attorney's fees.

No pronouncement as to costs.
SO ORDERED. 5

BPI thereafter appealed to the CA averring that the court a quo erred when it ruled that petitioners were entitled to
damages. BPI posited that petitioners are liable to them on the principal balance of the mortgage loan agreement.

The CA reversed the decision of the lower court and ruled in favor of BPI, the dispositive portion of which states:

WHEREFORE, in the light of the foregoing, the assailed Decision dated 10 November 2008 of the Regional Trial
Court, Branch 49, Manila, in Civil Case No. 02-105189 is hereby REVERSED and SET ASIDE. The Complaint for
Damages below is DISMISSED for lack of merit.

SO ORDERED.

Petitioners filed a Motion for Reconsideration but the same was denied by the CA in a Resolution dated August 16,
2013, viz.:

Finding no new matter of substance which would warrant the modification much less the reversal of the assailed
decision, plaintiffs-appellees' motion for reconsideration is hereby DENIED for lack of merit.

SO ORDERED. 6

Aggrieved, petitioners filed the present petition.

The Issues

I. WHETHER OR NOT THERE WAS ALREADY AN EXISTING AND BINDING CONTRACT BETWEEN
PETITIONERS AND BSA WITH REGARD TO THE OMNIBUS CREDIT LINE;

II. WHETHER OR NOT BSA INCURRED DELAY IN THE PERFORMANCE OF ITS OBLIGATIONS; Ill. WHETHER
OR NOT PETITIONERS ARE ENTITLED TO DAMAGES; and

IV. WHETHER OR NOT BPI CAN FORECLOSE THE MORTGAGE ON THE LAND OF HEREIN PETITIONERS. 7

Ruling of the Court

The Court finds merit in the petition.

In fine, petitioners contend that the CA in its assailed decision erred in ruling that that there was no perfected
contract between the pai1ies with respect to the omnibus credit line and that being so, no delay could be 8:ttributed
to BPI, the successor-in-interest of BSA. Petitioners likewise pointed out that it was error for the CA to delve into the
matter regarding existence or perfection of a contract, especially when such issue was never raised by BPI in any of
its pleadings or proceedings in the lower court.

As a rule, a contract is perfected upon the meeting of the minds of the two parties. It is perfected by mere consent,
that is, from the moment that there is a meeting of the offer and acceptance upon the thing and the cause that
constitute the contract.8

In the case of Spouses Palada v. Solidbank Corporation, et al.,  this Court held that under Article 1934 of the Civil
9

Code, a loan contract is perfected only upon the delivery of the object of the contract. In that case, although therein
petitioners applied for a ₱3,000,000.00 loan, only the amount of ₱1,000,000.00 was approved by therein respondent
bank because petitioners became collaterally deficient. Nonetheless, the loan contract was deemed perfected on
March 17, 1997, the date when petitioners received the ₱1,000,000.00 loan, which was the object of the contract
and the date when the REM was constituted over the property.  10

Applying this to the case at bench, there is no iota of doubt that when BSA approved and released the
₱3,000,000.00 out of the original ₱5,000,000.00 credit facility, the contract was perfected.
The conclusion reached by the appellate court that only the term loan of ₱15,000,000.00 was proved to have
materialized into an actual contract while the ₱5,000,000.00 omnibus line credit remained non-existent is ludicrous.
A careful perusal of the records reveal that the credit facility that BSA extended to petitioners was a credit line of
₱20,000,000.00 consisting of a term loan in the sum of ₱15,000,000.00 and a revolving omnibus line of
₱3,000,000.00 to be used in the petitioner's printing business. In separate Letters both dated January 31, 1997,
BSA approved the term loan and the credit line. Such approval and subsequent release of the amounts, albeit
delayed, perfected the contract between the parties.

Loan is a reciprocal obligation, as it arises from the same cause where one party is the creditor and the other the
debtor.   The obligation of one party in a reciprocal obligation is dependent upon the obligation of the other, and the
11

performance should ideally be simultaneous. This means that in a loan, the creditor should release the full loan
amount and the debtor repays it when it becomes due and demandable.  12

In this case, BSA did not only incur delay in releasing the pre-agreed credit line of ₱5,000,000.00 but likewise
violated the terms of its agreement with petitioners when it deliberately failed to release the amount of
₱2,000,000.00 after petitioners complied with their terms and paid the first ₱3,000,000.00 in full. The default
attributed to petitioners when they stopped paying their amortizations on the term loan cannot be sustained by this
Court because long before they sent a Letter to BSA informing the latter of their refusal to continue paying
amortizations, BSA had already reneged on its obligation to release the amount previously agreed upon, i.e., the
₱5,000,000.00 covered by the credit line.

Article 1170 of the Civil Code enumerates the instances when parties to a contract may be held liable for
damages, viz.:

Article 1170. Those who in the performance of their obligations are guilty of fraud, negligence, or delay, and those
who in any manner contravene the tenor thereof, are liable for damages.

It bears stressing that petitioners entered into a credit agreement with BSA to enable them to buy machineries and
equipment for their printing business. On its face, it can be gleaned that the purpose of the credit agreement with
BSA was indeed to assist and finance petitioner's business by way of providing additional funds as working capital
or revolving fund. 
13

The direct consequences therefore of the acts of BSA are: the machinery and equipment that were essential to
petitioners' business and requisite for its operations had to be procured so late in time and had crippled the printing
of school supplies, hence, petitioners were constrained to cancel purchase orders of their clients to petitioners'
damage.  14

BSA claims that the release of the amount covered by the credit line was subject to the "availability of funds" thus
only a part of the proceeds of the entire omnibus line was released.

Assuming for the sake of discussion that the funds at the time were insufficient to cover the entire ₱5,000,000.00,
BSA should have at least informed petitioners in advance so that the latter could have resorted to other means to
secure the amount needed for their printing business. The omnibus line was approved and became effective on
January 1997 yet BSA did not allow petitioners to draw from the line until November 1997. Moreover, BSA
downgraded petitioners' drawdown to only ₱3,000,000.00 despite the clear wordings of their credit agreement
whereby petitioners were allowed to draw any portion or all of the omnibus line not to exceed ₱5,000,000.00. The
almost 10 months delay in releasing the amount applied for by petitioners negates good faith on the part of BSA.

BPI insists that it acted in good faith when it sought extrajudicial foreclosure of the mortgage and that it
was not responsible for acts committed by its predecessor, BSA. Good faith, however, is not an excuse to
exempt BPI from the effects of a merger or consolidation, viz.:

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 merge; and, in case of consolidation, shall be the consolidated corporation
designated in the plan of consolidation;
xxxx

4. The surviving or the consolidated corporation shall thereupon and thereafter possess all the right, privileges,
immunities and franchises of each of the constituent corporations; and all property, real or personal, and all
receivable 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.

Applying the pertinent provisions of the Corporation Code, BPI did not only acquire all the rights, privileges and
assets of BSA but likewise acquired the liabilities and obligations of the latter as if BPI itself incurred it.

Moreover, Section 1(e) of the Articles of Merger dated November 21, 2001 provides that all liabilities and obligations
of BSA shall be transferred to and become the liabilities and obligations of BPI in the same manner as if it had itself
incurred such liabilities or obligations. 
15

Pursuant to such merger and consolidation, BPI's right to foreclose the mortgage on petitioner's property depends
on the status of the contract and the corresponding obligations of the parties originally involved, that is, the
agreement between its predecessor BSA and petitioner.

Since BSA incurred delay in the performance of its obligations and subsequently cancelled the omnibus
line without petitioners' consent, its successor BPI cannot be permitted to foreclose the loan for the reason
that its successor BSA violated the terms of the contract even prior to petitioners' justified refusal to
continue paying the amortizations.

The trial court pointed out that based on the evidence presented by petitioners, the latter conformed to the
acquisition of the loan precisely because BSA promised them working capital for the expansion of their business,
viz.:

Clear from the plaintiffs' evidence actually presented and marked is the fact that plaintiffs conformed to the
acquisition of the loan principally upon the promise by BSA that the working capital would be made available to
plaintiffs on time for the opening of classes, for plaintiffs to be able to secure their machineries and meet the orders
of their clients. 
16

The subsequent refusal of BSA in releasing the maximum amount agreed upon, transgressed the very purpose of
petitioners in availing the credit facility. Clearly, given the nature of petitioners' business, time is of the essence as
they needed to have the orders ready before opening of classes.

To emphasize the injury caused to the petitioners due to the bank's delay and subsequent refusal to release the
omnibus loan, the petitioners testified as follows:

Q The fact that the bank did not allow you to avail of the omnibus line, what is the effect to your business?

A Because I have already manufactured the notebooks/or St. Michael and I already sent them to supermarkets and
family stores like SM and Gaisano and they have PO coming, I cannot deliver the goods because of lack of funds.
They kept calling and confirming about their PO. Because of this my reputation is going down.

(TSN dated November 28, 2002 pp. 28-29)

Witness: And the 4.2 was released ... When we originally received the Php 4.2 Million, we could not push through
with our plan in our business, sir.
Court: Why?

Witness: Because it was not sufficient and money came to us very late with the lines of our plans, because we are
supposed to manufacture notebooks, school items in time for the school opening in June, and it was delayed, your
Honor. We continued paying our amortization for two years. We paid almost 7 million.

(TSN dated September 24, 2007 pp. 13 and 14)

Q How important is your working capital to your business?

A: The omnibus line is the most important in the business.

Court: The question is, why is it important?

A: Because I need capital for my business to replenish my supply and to pay the labor and materials

Atty. Cinco: and when you said the proceeds of the omnibus line was released only on November 10, 1997, how did
this affect your business?

A: My business suffered badly because I already got the orders from the department stores and book stores.

(TSN dated September 17, 2004 pp. 43-44)  17

The CA, on the other hand, is of the opinion that the delay and damages claimed by the petitioners are mere cloaks
to hide their obligations in the mortgage loan agreement.

The Court disagrees.

No evidence was ever presented in the lower courts showing that the petitioners defaulted in paying their
amortizations on the term loan prior to their refusal which was mainly grounded on BSA's failure to release the
amount covered by the omnibus line. Petitioners' continuous payment of amortizations even during the period
between January 1997 and November 1997 (when BSA incurred delay in releasing the omnibus line credit) is
inconsistent with the appellate court's finding that petitioners intended to hide their obligations in the mortgage loan
agreement. Petitioners' refusal to continue paying was only prompted by BSA's refusal to abide by the terms of the
contract. Thus, it would be the height of injustice to allow BPI to foreclose on the mortgage despite violation of its
predecessor BSA of its principal obligation.

In the case of Development Bank of the Philippines v. Guariña Agricultural and Realty Development Corp.,   the 18

Court ruled that a debtor cannot incur delay unless the creditor has fully performed its reciprocal obligation, viz.:

It is true that loans are often secured by a mortgage constituted on real or personal property to protect the creditor's
interest in case of the default of the debtor.  By its nature, however, a mortgage remains an accessory contract
1âwphi1

dependent on the principal obligation, such that enforcement of the mortgage contract will depend on whether or not
there has been a violation of the principal obligation. While a creditor and a debtor could regulate the order in which
they should comply with their reciprocal obligations, it is presupposed that in a loan the lender should perform its
obligation - the release of the full loan amount - before it could demand that the borrower repay the loaned amount.
In other words, Guariña Corporation would not incur in delay before DBP fully performed its reciprocal obligation.  19

Since the credit facility that BSA extended to petitioners was a credit line total of ₱20,000,000.00, its refusal to
release the balance on the omnibus line prevented full performance of its obligation to petitioners. There being no
release of the full loan amount, no default could be attributed to petitioners. In other words, foreclosure was
premature.

In Metropolitan Bank v. Wong,  the Court declared:

20
While the law recognizes the right of a bank to foreclose a mortgage upon the mortgagor's failure to pay his
obligation, it is imperative that such right be exercised according to its clear mandate. Each and every requirement
of the law must be complied with, lest, the valid exercise of the right would end. It must be remembered that the
exercise of a right ends when the right disappears, and it disappears when it is abused especially to the prejudice of
others.21

BPI was remiss in its duty of looking into the transaction involving the mortgage it sought to foreclose. As BSA's
successor-in-interest, it cannot feign ignorance of transactions entered into by the former especially when it seeks to
benefit from the same by foreclosing the mortgage thereon.

Anent the propriety of awarding damages, the Court upholds the ruling of the trial court that actual damages in the
amount of ₱2,772,000.00 is proper. Said amount is the computed total difference in interest paid to other sources
and that which should have only been paid to BSA had the latter complied with the terms of the agreement.
However, with regard to the claim of damages representing petitioners' unrealized profits of ₱23,570,881.32, the
Court agrees with the CA that petitioners failed to prove with a reasonable degree of certainty, premised upon
competent proof and on the best evidence obtainable, the actual amount of loss. Although petitioners were able to
present in evidence purchase orders, company records and checks, the Court agrees with the appellate court that
these are insufficient as they are self-serving. Although petitioners claimed that these orders were cancelled, no
other evidence was adduced to prove such fact of cancellation.

The law allows the grant of exemplary damages to set an example for the public good. The banking system has
become an indispensable institution in the modem world and plays a vital role in the economic life of every civilized
society. Whether as mere passive entities for .the safe-keeping and saving of money or as active instruments of
business and commerce, banks have attained an ubiquitous presence among the people, who have come to regard
them with respect and even gratitude and most of all, confidence. For this reason, banks should guard against injury
attributable to negligence or bad faith on its part.  Thus, the Court finds it proper to likewise award exemplary
22

damages in the amount of ₱100,000.00.

Finally, as to the matter concerning attorney's fees, the Court finds the ₱500,000.00 awarded by the trial court to be
excessive and should accordingly be reduced to ₱300,000.00.

WHEREFORE, in light of the foregoing, the petition is hereby GRANTED. The Decision dated January 31, 2013 of
the Court of Appeals in CA-G.R. CV No. 92348 is hereby REVERSED and SET ASIDE. The questioned extrajudicial
foreclosure of real estate mortgage is likewise declared VOID. Respondent BPI Family Savings Bank, Inc. is
hereby ORDERED to pay petitioners Spouses Francisco Ong and Betty Lim Ong and spouses Joseph Ong Chuan
and Esperanza Ong Chuan the amount of ₱2,772,000.00 as actual or compensatory damages; ₱100,000.00 as
exemplary damages; ₱300,000.00 as attorney's fees; and interest of six percent (6%) per annum on all the amounts
of damages reckoned from the finality of this decision.
45.) G.R. No. 175188               July 15, 2015

COMMISSIONER OF INTERNAL REVENUE, Petitioner,

vs.
LA TONDENA DISTILLERS, INC. (LTDI [now GINEBRA SAN MIGUEL], Respondent.

DECISION

DEL CASTILLO, J.:

The transfer of real property to a surviving corporation pursuant to a merger is not subject to Documentary Stamp
Tax (DST). 1

This Petition for Review on Certiorari  under Rule 45 of the Rules of Court assails the September 26, 2006
2

Decision  and the October 31, 2006 Resolution  of the Court of Tax Appeals (CTA) in C.T.A. EB No. 178.
3 4

Factual Antecedents

On September 17, 2001, respondent La Tondeña Distillers, Inc. entered into a Plan of Merger  with Sugarland 5

Beverage Corporation (SBC), SMC Juice, Inc. (SMCJI), and Metro Bottled Water Corporation (MBWC).  As a result 6

of the merger, the assets and liabilities of the absorbed corporations were transferred to respondent, the surviving
corporation.  Respondent later changed its corporate name to Ginebra San Miguel, Inc. (GSMI).
7 8

On September 26, 2001, respondent requested for a confirmation of the tax-free nature of the said merger from the
Bureau of Internal Revenue (BIR). 9

On November 5, 2001, the BIR issued a ruling stating that pursuant to Section 40(C)(2)  and (6)(b)  of the 1997
10 11

National Internal Revenue Code (NIRC), no gain or loss shall be recognized by the absorbed corporations as
transferors of all assets and liabilities.  However, the transfer of assets, such as real properties, shall be subject to
12

DST imposed under Section 196  of the NIRC.

13 14

Consequently, on various dates from October 31, 2001 to November 15, 2001, respondent paid to the BIR the
following DST, to wit:

Property Locations Total Assets DST Payments

A. Metro Bottled Water Corp.
General Trias, Cavite 326,508,953.00 15
4,897,635.00
Mandaue City, Cebu 14,078,381.00 211,185.00
Pavia, Iloilo 10,644,861.00 159,675.00
B. Sugarland Beverage Corp.
Navotas, Metro Manila 171,790,790.00 2,576,865.00
Imus, Cavite 218,114,261.00 3,272,175.00
Pine Street, Mandaluyong 201,562,148.00 3,023,445.00
Totals 942,729,393.00 14,140,980.00 16

On October 14, 2003, claiming that it is exempt from paying DST, respondent filed with petitioner Commissioner of
Internal Revenue (CIR) an administrative claim for tax refund or tax credit in the amount of 14,140,980.00,
representing the DST it allegedly erroneously paid on the occasion of the merger. 17

On the same day, respondent filed with the CTA a Petition for Review, docketed as C.T.A. Case No. 6796 and
raffled to the Second (2nd) Division of the CTA. 18
 Ruling of the Court of Tax Appeals Division

On January 6, 2006, the 2nd Division of the CTA rendered a Decision  finding respondent entitled to its claim for tax
19

refund or tax credit in the amount of 14,140,980.00, representing its erroneously paid DST for the taxable year
2001.  The 2nd Division of the CTA ruled that Section 196 of the NIRC does not apply because there is no
20

purchaser or buyer in the case of a merger.  Citing Section 80  of the Corporation Code of the Philippines, the 2nd
21 22

Division of the CTA explained that the assets of the absorbed corporations were not bought or purchased by
respondent but were transferred to and vested in respondent as an inherent legal consequence of the merger,
without any further act or deed.  It also noted that any doubts as to the tax-free nature of the merger had been
23

already removed by the subsequent enactment of Republic Act No. (RA) 9243,  which amended Section 199  of the
24 25

NIRC by specifically exempting from the payment of DST the transfer of property pursuant to a merger.  Aggrieved,
26

petitioner moved for reconsideration but the 2nd Division of the CTA denied the same in a Resolution dated April 4,
2006.27

Unfazed, petitioner elevated the matter to the CTA En Banc via a Petition for Review, docketed as C.T.A.EB No.
178.

Ruling of the Court of Tax Appeals En Banc

On September 26, 2006, the CTA En Banc rendered the assailed Decision, finding no reversible error on the part of
the 2nd Division of the CTA in granting respondent’s claim for tax refund or tax credit.  The CTA En Banc opined
28

that Section 196 of the NIRC does not apply to a merger as the properties subject of a merger are not sold, but are
merely absorbed by the surviving corporation.  In other words, the properties are transferred by operation of law,
29

without any further act or deed.30

Petitioner sought reconsideration of the assailed Decision.

On October 31, 2006, the CTA En Banc issued the assailed Resolution, denying petitioner’s motion for
reconsideration. 31

Issue

Hence, petitioner filed the instant Petition for Review on Certiorari raising the sole issue of whether the CTA En
Banc erred in ruling that respondent is exempt from payment of DST.  Petitioner’s Arguments
32

Petitioner posits that DST is levied on the exercise of the privilege to convey real property regardless of the
manner of conveyance.  Thus, it is imposed on all conveyances of realty, including realty transfer during a
33

corporate merger.  As to the subsequent enactment of RA 9243, petitioner claims that respondent cannot benefit
34

from it as laws apply prospectively.  Respondent’s Arguments

35

Respondent, on the other hand, contends that DST is imposed only on conveyances, deeds, instruments, or
writing, where realty sold shall be conveyed to a purchaser or buyer.  In this case, there is no purchaser or
36

buyer as a merger is neither a sale nor a liquidation of corporate property but a consolidation of properties,
powers, and facilities of the constituent companies. 37

Our Ruling

The Petition must fail.

In Commissioner of Internal Revenue v. Pilipinas Shell Petroleum Corporation,  the Supreme Court already ruled
38

that Section 196of the NIRC does not include the transfer of real property from one corporation to another pursuant
to a merger. It explained that:

[W]e do not find merit in petitioner’s contention that Section 196 covers all transfers and conveyances of real
property for a valuable consideration. A perusal of the subject provision would clearly show it pertains only to sale
transactions where real property is conveyed to a purchaser for a consideration. The phrase "granted, assigned,
transferred or otherwise conveyed" is qualified by the word "sold" which means that documentary stamp tax under
Section 196 is imposed on the transfer of realty by way of sale and does not apply to all conveyances of real
property. Indeed, as correctly noted by the respondent, the fact that Section 196 refers to words "sold", "purchaser"
and "consideration" undoubtedly leads to the conclusion that only sales of real property are contemplated therein.

Thus, petitioner obviously erred when it relied on the phrase "granted, assigned, transferred or otherwise conveyed"
in claiming that all conveyances of real property regardless of the manner of transfer are subject to documentary
stamp tax under Section 196. It is not proper to construe the meaning of a statute on the basis of one part. x x x

xxxx

It should be emphasized that in the instant case, the transfer of SPPC’s real property to respondent was pursuant to
their approved plan of merger.  In a merger of two existing corporations, one of the corporations survives and
1âwphi1

continues the business, while the other is dissolved, and all its rights, properties, and liabilities are acquired by the
surviving corporation. 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. Here, SPPC ceased to have any legal personality and respondent
PSPC stepped into everything that was SPPC’s, pursuant to the law and the terms of their Plan of Merger.

Pertinently, a merger of two corporations produces the following effects, among others:

Sec. 80. Effects of merger or consolidation. – x x x

xxxx

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 corporations, shall be taken and deemed to be
transferred to and vested in such surviving or consolidated corporation without further act or deed;

In a merger, the real properties are not deemed "sold" to the surviving corporation and the latter could not
be considered as "purchaser" of realty since the real properties subject of the merger were merely
absorbed by the surviving corporation by operation of law and these properties are deemed automatically
transferred to and vested in the surviving corporation without further act or deed. Therefore, the transfer of
real properties to the surviving corporation in pursuance of a merger is not subject to documentary stamp
tax. As stated at the outset, documentary stamp tax is imposed only on all conveyances, deeds,
instruments or writing where realty sold shall be conveyed to a purchaser or purchasers. The transfer of
SPPC’s real property to respondent was neither a sale nor was it a conveyance of real property for a consideration
contracted to be paid as contemplated under Section 196 of the Tax Code. Hence, Section 196 of the Tax Code is
inapplicable and respondent is not liable for documentary stamp tax.  (Emphasis in the original)
39

Following the doctrine of stare decisis, which dictates that when a court has reached a conclusion in one case, it
should be applied to those that follow if the facts are substantially the same, even though the parties may be
different,  we find that respondent is not liable for DST as the transfer of real properties from the absorbed
40

corporations to respondent was pursuant to a merger. And having complied with the provisions of Sections
204(C)  and 229  of the NIRC, we agree with the CTA that respondent is entitled to a refund of the DST it
41 42

erroneously paid on various dates between October 31, 2001 to November 15, 2001 in the total amount of
14,140,980.00.

Likewise without merit is petitioner’s contention that respondent cannot claim exemption under RA 9243 as this was
enacted only in 2004 or after respondent’s tax liability accrued. To be clear, respondent did not file its claim for tax
refund or tax credit based on the exemption found in RA 9243. Rather, it filed a claim for tax refund or tax credit on
the ground that Section 196 of the NIRC does not include the transfer of real property pursuant to a merger. In fact,
the ratio decidendi (or reason for the decision) in Pilipinas Shell Petroleum Corporation  was based on Section 196
43

of the NIRC, in relation to Section 80 of the Corporation Code, not RA 9243. In that case, RA 9243 was mentioned
only to emphasize that "the enactment of the said law now removes any doubt and had made clear that the transfer
of real properties as a consequence of merger or consolidation is not subject to [DST]." 44
All told, we find no error on the part of the CTA in granting respondent's claim for tax refund or tax credit in the
amount of ₱14,140,980.00, representing its erroneously paid DST for the taxable year 2001.

In closing, we must stress that taxes must not be imposed beyond what the law expressly and clearly declares as
tax laws must be construed strictly against the State and liberally in favor of the taxpayer. 45

WHEREFORE, the Petition is hereby DENIED. The assailed September 26, 2006 Decision and the October 31,
2006 Resolution of the Court of Tax Appeals in C.T.A. EB No. 178 are hereby AFFIRMED.